-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cp3p1+d9kbFfS/sxw88gD7/jUXFSLwroPw9qP3cGT2xmiU5qspiavlPCopOzF3oq 4PVO30jSe11Hl7tY4NkFbQ== 0000950130-98-005872.txt : 19990315 0000950130-98-005872.hdr.sgml : 19990315 ACCESSION NUMBER: 0000950130-98-005872 CONFORMED SUBMISSION TYPE: 10-12G PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19981211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFEPOINT HOSPITALS LLC CENTRAL INDEX KEY: 0001074772 STANDARD INDUSTRIAL CLASSIFICATION: STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G SEC ACT: SEC FILE NUMBER: 000-29818 FILM NUMBER: 98768447 BUSINESS ADDRESS: STREET 1: 4525 HARDING RD CITY: NASHVILLE STATE: TN ZIP: 37205 BUSINESS PHONE: 9727892732 MAIL ADDRESS: STREET 1: 4525 HARDING RD CITY: NASHVILLE STATE: TN ZIP: 37205 10-12B 1 FORM 10-12B AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 1998 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934 LIFEPOINT HOSPITALS LLC (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 62-1762163 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 4525 HARDING ROAD 37205 NASHVILLE, TENNESSEE (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (615) 344-2000 SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE COPIES OF ALL COMMUNICATIONS SHOULD BE SENT TO: MORTON A. PIERCE, ESQ. WILLIAM F. CARPENTER III, ESQ. DEWEY BALLANTINE LLP SENIOR VICE PRESIDENT 1301 AVENUE OF THE AMERICAS AND GENERAL COUNSEL NEW YORK, NEW YORK 10019-6092 LIFEPOINT HOSPITALS LLC (212) 259-8000 4525 HARDING ROAD NASHVILLE, TENNESSEE 37205 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- LIFEPOINT HOSPITALS LLC INFORMATION INCLUDED IN INFORMATION STATEMENT AND INCORPORATED IN FORM 10 BY REFERENCE CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10 ITEM 1. BUSINESS. The information required by this item is contained under the sections "Summary"; "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations"; "LifePoint Business"; and "LifePoint Hospitals, Inc. Index to Combined Financial Statements" in the Information Statement dated , 1999 annexed hereto as Exhibit 2.1 (the "Information Statement") and such sections are incorporated herein by reference. ITEM 2. FINANCIAL INFORMATION. The information required by this item is contained under the sections "Summary"; "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements"; "LifePoint Summary Financial Data"; and "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Information Statement and such sections are incorporated herein by reference. ITEM 3. PROPERTIES. The information required by this item is contained under the section "LifePoint Business--Properties" in the Information Statement and such section is incorporated herein by reference. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is contained under the section "LifePoint Security Ownership by Certain Beneficial Owners and Management" in the Information Statement and such section is incorporated herein by reference. ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS. The information required by this item is contained under the sections "LifePoint Management" and "LifePoint Description of Capital Stock--Limited Liability and Indemnification Provisions" in the Information Statement and such sections are incorporated herein by reference. ITEM 6. EXECUTIVE COMPENSATION. The information required by this item is contained under the section "LifePoint Management--Executive Compensation" in the Information Statement and such section is incorporated herein by reference. ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is contained under the sections "Summary"; "The Distribution"; and "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution" in the Information Statement and such sections are incorporated herein by reference. ITEM 8. LEGAL PROCEEDINGS. The information required by this item is contained under the section "LifePoint Business--Legal Proceedings" in the Information Statement and such section is incorporated herein by reference. 2 ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this item is contained under the sections "Summary"; "Risk Factors--Market Uncertainties With Respect to LifePoint Common Stock and Triad Common Stock"; "The Distribution--Market for LifePoint Common Stock and Triad Common Stock"; and "Dividend Policy--LifePoint"; in the Information Statement and such sections are incorporated herein by reference. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES. This item is not applicable. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED. The information required by this item is contained under the sections "Risk Factors--Anti-Takeover Provisions"; "LifePoint Description of Capital Stock"; and "The Distribution--Market for LifePoint Common Stock and Triad Common Stock" in the Information Statement and such sections are incorporated herein by reference. ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The information required by this item is contained under the section "LifePoint Description of Capital Stock--Limited Liability and Indemnification Provisions" in the Information Statement and such section is incorporated herein by reference. ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is contained under the sections "Summary"; "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements"; "LifePoint Selected Financial Data"; "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations"; and "LifePoint Hospitals, Inc. Index to Combined Financial Statements" in the Information Statement and such sections are incorporated herein by reference. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. This item is not applicable. ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS. (a) The information required by this item is contained under the section "LifePoint Hospitals, Inc. Index to Combined Financial Statements" in the Information Statement and such section is incorporated herein by reference. (b) The following documents are filed as exhibits hereto:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 Information Statement dated as of , 1999. 2.2** Form of Distribution Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 3.1 Form of Certificate of Incorporation of LifePoint Hospitals, Inc. to be in effect on the distribution date.
3
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.2 Form of By-Laws of LifePoint Hospitals, Inc. to be in effect on the distribution date. 4** Form of Rights Agreement, dated as of , 1999, between LifePoint Hospitals, Inc. and , as rights agent. 10.1** Form of Tax Sharing and Indemnification Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.2** Form of Benefits and Employment Matters Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.3** Form of Insurance Allocation and Administration Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.4** Form of Group Purchasing Member Agreement to be entered into by and between Columbia/HCA Healthcare Corporation and LifePoint Hospitals, Inc. 10.5** Form of Transitional Services Agreement to be entered into by and between Columbia/HCA Healthcare Corporation and LifePoint Hospitals, Inc. 10.6** Form of Computer and Data Processing Services Agreement to be entered into by and between Columbia Information Systems, Inc. and LifePoint Hospitals, Inc. 10.7** Form of Agreement to Share Telecommunications Services to be entered into by and between Columbia Information Systems, Inc. and LifePoint Hospitals, Inc. 10.8** Form of Sub-Lease Agreement to be entered into by and between LifePoint Hospitals, Inc. and Columbia/HCA Healthcare Corporation. 10.9* ** LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan. 10.10* ** LifePoint Hospitals, Inc. 1999 Annual Incentive Plan 10.11* ** LifePoint Hospitals, Inc. Executive Stock Purchase Plan 21** Subsidiaries of LifePoint Hospitals, Inc. as of the distribution date. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule. 27.3 Financial Data Schedule. 27.4 Financial Data Schedule.
- - -------- * Compensatory plan or arrangement. ** To be filed by amendment. 4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. LifePoint Hospitals LLC Date: December 11, 1998 /s/ William F. Carpenter III By: _________________________________ William F. Carpenter III Senior Vice President & General Counsel 5 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 Information Statement dated as of , 1999. 2.2** Form of Distribution Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 3.1 Form of Certificate of Incorporation of LifePoint Hospitals, Inc. to be in effect on the distribution date. 3.2 Form of By-Laws of LifePoint Hospitals, Inc. to be in effect on the distribution date. 4** Form of Rights Agreement, dated as of , 1999, between LifePoint Hospitals, Inc. and , as rights agent. 10.1** Form of Tax Sharing and Indemnification Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.2** Form of Benefits and Employment Matters Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.3** Form of Insurance Allocation and Administration Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.4** Form of Group Purchasing Member Agreement to be entered into by and between Columbia/HCA Healthcare Corporation and LifePoint Hospitals, Inc. 10.5** Form of Transitional Services Agreement to be entered into by and between Columbia/HCA Healthcare Corporation and LifePoint Hospitals, Inc. 10.6** Form of Computer and Data Processing Services Agreement to be entered into by and between Columbia Information Systems, Inc. and LifePoint Hospitals, Inc. 10.7** Form of Agreement to Share Telecommunications Services to be entered into by and between Columbia Information Systems, Inc. and LifePoint Hospitals, Inc. 10.8** Form of Sub-Lease Agreement to be entered into by and between LifePoint Hospitals, Inc. and Columbia/HCA Healthcare Corporation. 10.9* ** LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan. 10.10* ** LifePoint Hospitals, Inc. 1999 Annual Incentive Plan. 10.11* ** LifePoint Hospitals, Inc. Executive Stock Purchase Plan. 21** Subsidiaries of LifePoint Hospitals, Inc. as of the distribution date. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule. 27.3 Financial Data Schedule. 27.4 Financial Data Schedule.
- - -------- * Compensatory plan or arrangement. **To be filed by amendment. 6 EX-2.1 2 INFORMATION STATEMENT EXHIBIT 2.1 COLUMBIA/HCA HEALTHCARE CORPORATION ----------------------------- SPIN-OFFS OF LIFEPOINT HOSPITALS, INC. AND TRIAD HOSPITALS, INC. THROUGH A COMMON STOCK DISTRIBUTION ----------------------------- To the Stockholders of Columbia/HCA Healthcare Corporation: In November 1997, Columbia/HCA Healthcare Corporation reorganized its operations into five divisions. Columbia/HCA has now determined to establish two of those divisions, America Group and Pacific Group, as independent, publicly-traded companies. America's hospitals are located in non-urban areas where, in almost every case, America's hospital is the only hospital in the community. Approximately three-quarters of Pacific's hospitals are located in small cities, generally in the Southwestern United States, where Pacific's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Pacific's hospitals are located in larger urban areas typically characterized by a high rate of population growth. We believe that separating the America and Pacific Groups into two smaller, strategically focused public companies will have positive effects on the performance and profitability of the facilities in these groups by enabling more focused management attention, more effective operating strategies based on local market conditions, and compensation incentives for employees that are more closely tied to group performance. After the separation of the America and Pacific Groups, Columbia/HCA will focus its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks. The health care services businesses conducted by the America and Pacific Groups will be transferred to LifePoint Hospitals, Inc. and Triad Hospitals, Inc., respectively, each of which will be a newly formed Delaware holding company. Thereafter, the shares of common stock of LifePoint Hospitals, Inc. and of Triad Hospitals, Inc. will be distributed to the stockholders of Columbia/HCA on a pro rata basis. The distribution of the shares of common stock of LifePoint Hospitals, Inc. and Triad Hospitals, Inc. will be effective on , 1999. If you own Columbia/HCA common stock as of the close of business on , 1999, you will receive shares of LifePoint common stock and shares of Triad common stock for every shares of Columbia/HCA common stock that you own. You should receive these LifePoint and Triad shares in 1999. The distribution of shares of LifePoint common stock and Triad common stock is conditioned upon receiving a ruling from the Internal Revenue Service that, among other things, the distribution generally will be tax-free to Columbia/HCA and to Columbia/HCA's stockholders, except for any cash received instead of fractional shares. No Columbia/HCA stockholder action is required, and you do not need to surrender your shares of Columbia/HCA common stock to receive the shares of LifePoint common stock and Triad common stock. You will continue to hold the same number of shares of Columbia/HCA common stock after the distribution. We are seeking to list the LifePoint common stock and the Triad common stock on the New York Stock Exchange, and we expect that they will trade under the symbols " " and " ," respectively. This information statement contains detailed information about LifePoint, Triad and the distribution. We encourage you to read it carefully. Sincerely, Thomas F. Frist, Jr., M.D. Jack O. Bovender, Jr. Chairman of the Board and President and Chief Executive Officer Chief Operating Officer , 1999 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. + +REGISTRATION STATEMENTS RELATING TO THESE SECURITIES HAVE BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES WILL NOT BE ISSUED PRIOR + +TO THE TIME THE REGISTRATION STATEMENTS BECOME EFFECTIVE. THIS INFORMATION + +STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY + +OFFER TO BUY ANY SECURITIES OF COLUMBIA/HCA HEALTHCARE CORPORATION, LIFEPOINT + +HOSPITALS, INC. OR TRIAD HOSPITALS, INC. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION OR AMENDMENT, DATED DECEMBER 11, 1998 INFORMATION STATEMENT ------------ LIFEPOINT HOSPITALS, INC. TRIAD HOSPITALS, INC. COMMON STOCK COMMON STOCK ++++++++++++++++++++ + Consider + We have prepared this information statement to + carefully the + provide you with information regarding the pro rata + risk factors + distribution to Columbia/HCA Healthcare Corporation + beginning on + common and non-voting common stockholders of all of the + page 28 of this + shares of common stock of LifePoint Hospitals, Inc., + information + which will be a newly-formed holding company for the + statement. + America Group of Columbia/HCA, and Triad Hospitals, + + Inc., which will be a newly-formed holding company for + Stockholder + the Pacific Group of Columbia/HCA. + approval of the + + distribution of + The shares of LifePoint common stock and Triad common + LifePoint and + stock will be distributed on the effective date of the + Triad is not + distribution, which is , 1999, to holders of + required. We are + Columbia/HCA common stock at the close of business on + not asking you + the record date for the distribution, which is , + for a proxy and + 1999. + we request that + + you do not send + If you are a Columbia/HCA common stockholder at the + us a proxy. + close of business on the record date, you will receive + Also, you are + shares of LifePoint common stock and shares of + not required to + Triad common stock for every shares of Columbia/HCA + make any payment + common stock you hold. Certificates for the shares will + for the shares + be mailed on or about , 1999. You will receive a + of LifePoint + check for the cash equivalent of any fractional shares + common stock or + you otherwise would have received in the distribution. + Triad common + + stock. + If you have questions regarding the distribution, you + + may call National City Bank, Shareholder Services + This information + Group, telephone number (800) 622-6757, the + statement is not + distribution agent, or W. Mark Kimbrough, telephone + an offer to + number (615) 344-1199, Columbia/HCA's investor contact. + sell, or a + + solicitation of + + an offer to buy, + + any securities + + of Columbia/HCA, + + LifePoint or + + Triad. + ++++++++++++++++++++ No public market currently exists for either the LifePoint common stock or the Triad common stock. However, we are seeking to list the LifePoint common stock and the Triad common stock on the New York Stock Exchange. If the shares are accepted for listing on the NYSE, we expect that a "when-issued" market will develop on or shortly before the record date and regular trading will begin on the first business day after the effective date of the distribution. PROPOSED NEW YORK STOCK EXCHANGE TRADING SYMBOLS LIFEPOINT COMMON STOCK -- TRIAD COMMON STOCK -- NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE LIFEPOINT COMMON STOCK OR THE TRIAD COMMON STOCK, OR DETERMINED IF THIS INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We first mailed this information statement to Columbia/HCA stockholders on , 1999. TABLE OF CONTENTS Summary................................................................... 1 Introduction............................................................. 1 Questions and Answers About LifePoint, Triad and the Distribution........ 2 Key Terms of the Distribution............................................ 7 Information Regarding the Distribution, LifePoint and Triad.............. 9 Columbia/HCA Healthcare Corporation...................................... 10 LifePoint Hospitals, Inc. ............................................... 11 Triad Hospitals, Inc. ................................................... 13 Comparative Financial Highlights......................................... 15 LifePoint Summary Historical Financial Data............................... 16 LifePoint Unaudited Pro Forma Condensed Combined Financial Statements..... 17 LifePoint Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine Months Ended September 30, 1998............................. 18 LifePoint Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1997..................................... 19 LifePoint Unaudited Pro Forma Condensed Combined Balance Sheet............ 20 LifePoint Notes to Unaudited Pro Forma Condensed Combined Financial Statements............................................................... 21 Triad Summary Historical Financial Data................................... 22 Triad Unaudited Pro Forma Condensed Combined Financial Statements......... 23 Triad Unaudited Pro Forma Condensed Combined Statement of Operations for the Nine Months Ended September 30, 1998................................. 24 Triad Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1997......................................... 25 Triad Pro Forma Unaudited Condensed Combined Balance Sheet................ 26 Triad Notes to Unaudited Pro Forma Condensed Combined Financial Statements............................................................... 27 Risk Factors.............................................................. 28 Dependence on Physicians................................................. 28 Dependence on Key Personnel.............................................. 28 No Operating Histories as Independent Companies.......................... 28 Limits on Reimbursement; Health Care Reform Legislation.................. 28 Impact of Managed Care Organizations..................................... 29 Competition.............................................................. 29 Concentration of Operations.............................................. 30 Extensive Regulation..................................................... 30 Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and Triad................................................................... 32 Professional Liability Risks............................................. 33
Leverage and Debt Service Obligations.................................... 33 Absence of Dividends..................................................... 34 Tax Treatment of the Distribution........................................ 34 Holding Company Structure................................................ 34 Market Uncertainties With Respect to LifePoint Common Stock and Triad Common Stock............................................................ 35 Anti-Takeover Provisions................................................. 35 Year 2000 Compliance..................................................... 36 Reasons for Furnishing this Information Statement......................... 37 Forward-Looking Information............................................... 37 The Distribution.......................................................... 38 Background and Purposes of the Distribution.............................. 38 Manner of Effecting the Distribution..................................... 39 Results of the Distribution.............................................. 39 Certain Federal Income Tax Consequences.................................. 39 Regulatory Approvals..................................................... 40 Market for LifePoint Common Stock and Triad Common Stock................. 40 Conditions Precedent to the Distribution................................. 41 Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution............................................................. 42 Distribution Agreement................................................... 42 Tax Sharing and Indemnification Agreement................................ 44 Benefits and Employment Matters Agreement................................ 44 Insurance Allocation and Administration Agreement........................ 45 Computer and Data Processing Services Agreement; Year 2000 Agreement..... 46 Lease Agreements......................................................... 46 Transitional Services Agreement.......................................... 47 Other Agreements......................................................... 47 Dividend Policy........................................................... 47 LifePoint................................................................ 47 Triad.................................................................... 47 LifePoint Selected Financial Data......................................... 48 LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 49 Forward-Looking Statements............................................... 49 Investigations........................................................... 49 Results of Operations.................................................... 50 Liquidity and Capital Resources.......................................... 55 Impact of Year 2000 Computer Issues...................................... 55 Effects of Inflation and Changing Prices................................. 58 Health Care Reform....................................................... 58 Triad Selected Financial Data............................................. 59
-ii- Triad Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 60 Forward-Looking Statements............................................... 60 Investigations........................................................... 60 Results of Operations.................................................... 61 Liquidity and Capital Resources.......................................... 67 Impact of Year 2000 Computer Issues...................................... 67 Effects of Inflation and Changing Prices................................. 70 Health Care Reform....................................................... 70 LifePoint Business........................................................ 71 General.................................................................. 71 The Non-Urban Health Care Market......................................... 71 Business Strategy........................................................ 72 Sources of Revenue....................................................... 73 Hospital Utilization..................................................... 74 Competition.............................................................. 75 Employees and Medical Staff.............................................. 76 Properties............................................................... 77 LifePoint's Regulatory Compliance Program................................ 77 Legal Proceedings........................................................ 78 Triad Business............................................................ 79 General.................................................................. 79 Triad's Markets.......................................................... 80 Business Strategy........................................................ 81 Sources of Revenue....................................................... 81 Hospital Utilization..................................................... 82 Competition.............................................................. 83 Employees and Medical Staff.............................................. 85 Properties............................................................... 85 Triad Regulatory Compliance Program...................................... 87 Legal Proceedings........................................................ 87 Government and Other Sources of Reimbursement for LifePoint and Triad..... 88 Medicare................................................................. 88 Medicaid................................................................. 89 Annual Cost Reports...................................................... 90 Managed Care............................................................. 90 Commercial Insurance..................................................... 90 Regulation and Other Factors Affecting LifePoint and Triad................ 91 Licensure, Certification and Accreditation............................... 91 Certificates of Need..................................................... 91 State Rate Review........................................................ 91 Utilization Review....................................................... 91 Medicare Regulations and Fraud and Abuse................................. 91 Corporate Practice of Medicine........................................... 94 Health Care Reform....................................................... 94
Conversion Legislation.................................................... 94 Revenue Ruling 98-15...................................................... 95 Environmental Matters..................................................... 95 Insurance................................................................. 95 Governmental Investigation of Columbia/HCA and Related Litigation......... 95 LifePoint Management....................................................... 98 Directors................................................................. 98 Compensation of Directors................................................. 99 Executive Officers........................................................ 99 Executive Compensation.................................................... 101 LifePoint Compensation Arrangements....................................... 103 LifePoint Security Ownership by Certain Beneficial Owners and Management... 107 Triad Management........................................................... 109 Directors................................................................. 109 Compensation of Directors................................................. 110 Executive Officers........................................................ 110 Executive Compensation.................................................... 111 Triad Compensation Arrangements........................................... 113 Triad Security Ownership by Certain Beneficial Owners and Management....... 115 LifePoint Description of Capital Stock..................................... 117 Introduction.............................................................. 117 Authorized And Outstanding Capital Stock.................................. 117 LifePoint Common Stock; Delaware Anti-Takeover Provisions................. 117 LifePoint Preferred Stock................................................. 118 LifePoint Preferred Stock Purchase Rights................................. 118 Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws....... 120 Limited Liability and Indemnification Provisions.......................... 125 Triad Description of Capital Stock......................................... 126 Introduction.............................................................. 126 Authorized And Outstanding Capital Stock.................................. 126 Triad Common Stock; Delaware Anti-Takeover Provisions..................... 126 Triad Preferred Stock..................................................... 127 Triad Preferred Stock Purchase Rights..................................... 127 Certain Anti-Takeover Provisions--Triad Certificate and By-Laws........... 129 Limited Liability and Indemnification Provisions.......................... 134 Additional Information..................................................... 135 LifePoint Hospitals, Inc. and Subsidiaries Index to Financial Statements... F-1 Triad Hospitals, Inc. and Subsidiaries Index to Financial Statements....... F-1
-iii- SUMMARY This summary highlights selected information from this information statement, but does not contain all details concerning the distribution of the common stock of LifePoint and Triad to Columbia/HCA stockholders, including information that may be important to you. To better understand the distribution, and the businesses and financial position of LifePoint and Triad, you should carefully review this entire document. References in this document to "LifePoint" mean LifePoint Hospitals, Inc. and its subsidiaries and affiliates. References in this document to "Triad" mean Triad Hospitals, Inc. and its subsidiaries and affiliates. References in this document to "Columbia/HCA" mean Columbia/HCA Healthcare Corporation and its subsidiaries and affiliates. INTRODUCTION Columbia/HCA is the largest provider of health care services in the United States today, operating approximately 300 hospitals, as well as outpatient surgery centers, diagnostic centers, cardiac rehabilitation centers, physical therapy centers, radiation oncology centers, comprehensive outpatient rehabilitation centers, medical office buildings, physician practices and other health care programs. In November 1997, Columbia/HCA restructured its operations into five divisions, including the America Group and the Pacific Group. America's hospitals are located in non-urban areas where, in almost every case, America's hospital is the only hospital in the community. Approximately three-quarters of Pacific's hospitals are located in small cities, generally in the Southwestern United States, where Pacific's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Pacific's facilities are located in larger urban areas typically characterized by a high rate of population growth. Columbia/HCA has now determined to establish the America Group and the Pacific Group as two independent, publicly-traded companies. As of the distribution date, the health care services businesses conducted by the America and Pacific Groups of Columbia/HCA will have been transferred to LifePoint Hospitals, Inc. and Triad Hospitals, Inc., respectively, each of which will be a newly formed Delaware holding company. The shares of common stock of LifePoint Hospitals, Inc. and of Triad Hospitals, Inc. will be distributed to the stockholders of Columbia/HCA on a pro rata basis. The distribution of the shares of common stock of LifePoint Hospitals, Inc. and Triad Hospitals, Inc. will be effective on the distribution date, , 1999. Following the distribution, Columbia/HCA will focus its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks. Columbia/HCA management believes that separating LifePoint and Triad into two smaller, strategically focused public companies will provide the following benefits: . Implement Tailored Business Strategies. Columbia/HCA's management believes that, because of the different community characteristics and levels of network integration that exist in the LifePoint and Triad markets, the LifePoint and Triad business strategies need to be distinguished from each other and from those pursued in Columbia/HCA's core markets. As smaller companies, LifePoint and Triad will have more flexibility in responding to the needs of the communities in which they operate. . Increase Management Focus and Attention. The managements of LifePoint and Triad will be able to focus on making capital improvements to existing facilities in order to expand specialized services, invest in physician and executive recruitment and retention, and improve outreach programs and general health education initiatives. . Tie Compensation to Performance. Following the distribution, LifePoint and Triad will be able to more closely tie compensation incentives for their employees to the performance of their companies. Shortly after the distribution, each of LifePoint and Triad intends to establish for the benefit of its 1 employees an Employee Stock Ownership Plan (an "ESOP"), which, in the case of the LifePoint ESOP, will purchase a number of shares equal to 8.3% of the outstanding common stock of LifePoint and, in the case of the Triad ESOP, will purchase from Triad a number of shares equal to 9.0% of the outstanding common stock of Triad. These equity interests are expected to help LifePoint and Triad to attract and retain talented and effective management and to motivate employees throughout the organization. . Improve Access to Capital. The distribution will give each of LifePoint and Triad direct access to capital markets. As divisions of Columbia/HCA, LifePoint and Triad have competed with each other and with the other Columbia/HCA divisions for management attention, support resources, and capital to finance expansion and growth opportunities. As separate entities, with their own management structures, LifePoint and Triad will be better able to implement business strategies appropriate for their markets and to direct capital funding and expansion initiatives. . Increase Visibility to the Capital Markets. Following the distribution, the financial markets will be able to focus on the individual strengths of Columbia/HCA, LifePoint and Triad, and more accurately evaluate the performance of each distinct business compared to companies in the same or similar businesses. After the distribution, Columbia/HCA will retain responsibility for certain liabilities arising out of the pending governmental investigations of some of Columbia/HCA's business practices and for certain liabilities arising out of related stockholder and other legal proceedings currently pending against Columbia/HCA. See "Risk Factors--Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and Triad" beginning on page 32, and "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation" beginning on page 95. In general, Columbia/HCA also will be responsible for taxes relating to pre-distribution periods. This summary includes cross-references to other portions of this information statement to help you find more detailed information about the distribution, LifePoint and Triad. We encourage you to read the entire document. QUESTIONS AND ANSWERS ABOUT LIFEPOINT, TRIAD AND THE DISTRIBUTION WHAT ARE THE BUSINESSES After the distribution, LifePoint and Triad will OF LIFEPOINT AND TRIAD? continue to provide health care services, through hospitals and, in the case of Triad, outpatient surgery centers. LifePoint's hospitals are located in non-urban areas where, in almost every case, LifePoint's hospital is the only hospital in the community. LifePoint's hospitals are located in the States of Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. Approximately three-quarters of Triad's hospitals are located in small cities (generally with populations less than 150,000 residents) where Triad's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Triad's facilities are located in larger urban areas typically characterized by a high rate of population growth. Triad's hospitals are located in the States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Oregon and Texas. 2 WHY IS COLUMBIA/HCA Columbia/HCA believes that separating the America and ESTABLISHING THE Pacific Groups into two smaller, strategically BUSINESSES OF ITS focused public companies will allow them to implement AMERICA AND PACIFIC business strategies that are more tailored to their GROUPS AS SEPARATE, particular markets and to more closely tie PUBLICLY-TRADED compensation incentives for their employees to the COMPANIES? performance of each company. As separate companies, LifePoint and Triad are also expected to benefit from more focused management attention and improved access to the capital markets. After the distribution, Columbia/HCA will focus its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks. WHO WILL BE THE Scott L. Mercy will be the Chairman and Chief EXECUTIVE OFFICERS AND Executive Officer of LifePoint. Mr. Mercy has DIRECTORS OF LIFEPOINT extensive experience in the health care services AND TRIAD? business, most recently serving as President and Chief Executive Officer of America Service Group Inc., a publicly-traded provider of managed health care services to correctional facilities throughout the United States. Prior to joining America Service Group Inc. in April 1996, Mr. Mercy held senior financial positions with Columbia/HCA and with Hospital Corporation of America (which became a part of Columbia/HCA in February 1994). Mr. Mercy will be supported by a management team that will include James M. Fleetwood, Jr., who currently is the President of the America Group of Columbia/HCA and will serve as President and Chief Operating Officer of LifePoint, and other senior executives, some of whom are currently responsible for the operations of the America Group. See "LifePoint Management -- Executive Officers" beginning on page 99. The LifePoint Board of Directors will consist of persons, including Mr. Mercy, who will serve as Chairman. See "LifePoint Management--Directors" beginning on page 98. James D. Shelton, currently President of the Pacific Group of Columbia/HCA, will serve as President and Chief Executive Officer of Triad. Mr. Shelton has extensive experience in the health care services business and has been associated with Columbia/HCA since June 1994. Prior to joining Columbia/HCA, Mr. Shelton held senior executive positions with National Medical Enterprises, Inc. (now known as Tenet Healthcare Corporation). Mr. Shelton will be supported by a management team that will include many of the senior executives currently responsible for the operations of the Pacific Group. See "Triad Management--Executive Officers" beginning on page 110. The Triad Board of Directors will consist of persons, including , who will serve as Chairman. See "Triad Management--Directors" beginning on page 109. AFTER THE DISTRIBUTION, After the distribution, Columbia/HCA will no longer WILL LIFEPOINT AND own any LifePoint common stock or Triad common stock. TRIAD BE RELATED TO However, Columbia/HCA, LifePoint and Triad will enter COLUMBIA/HCA IN ANY into certain agreements to define the ongoing WAY? relationships between Columbia/HCA and each of LifePoint and 3 Triad after the distribution. These agreements also allocate responsibility for obligations arising prior to the distribution and for certain obligations that might arise in the future. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution" beginning on page 42 for a more complete discussion of these agreements. HOW MUCH DEBT WILL Columbia/HCA intends to arrange for $250 million in LIFEPOINT AND TRIAD debt financing prior to the distribution, pursuant to HAVE AFTER THE a -year term loan agreement with a syndicate of DISTRIBUTION? banks. This indebtedness will be assumed by LifePoint immediately prior to the distribution and is expected to be secured by certain of LifePoint's assets. Columbia/HCA also intends to arrange for $750 million in debt financing prior to the distribution, pursuant to a -year term loan agreement with a syndicate of banks. This indebtedness will be assumed by Triad immediately prior to the distribution and is expected to be secured by certain of Triad's assets. These debt agreements are expected to contain customary financial and other restrictive covenants (including restrictions on the payment of dividends, incurrences of indebtedness and sale of assets). Each of LifePoint and Triad also expects to enter into a revolving credit loan agreement providing for a commitment for revolving credit loans in an aggregate principal amount of up to $ million, in the case of LifePoint, and $ million, in the case of Triad. See "Risk Factors--Leverage and Debt Service Obligations" beginning on page 33, "LifePoint Unaudited Pro Forma Condensed Combined Balance Sheet" beginning on page 20, and "Triad Pro Forma Unaudited Condensed Combined Balance Sheet" beginning on page 26. WHAT ARE THE RISKS The businesses of LifePoint and Triad are subject to INVOLVED IN OWNING risks, among others, related to competition and to LIFEPOINT COMMON STOCK possible changes in regulation and legislation AND TRIAD COMMON STOCK? relating to the health care services industry, as well as risks relating to possible changes in the Medicare program which could further limit reimbursement for health care services. The separation of LifePoint and Triad from Columbia/HCA presents certain additional risks because neither LifePoint nor Triad has ever operated independently of Columbia/HCA; there is no existing market for either LifePoint common stock or Triad common stock (although we are seeking to list the LifePoint common stock and the Triad common stock on the New York Stock Exchange); and a large number of the shares distributed could be sold into the market at any given time. Each of LifePoint and Triad also have anti-takeover provisions in place that could discourage or make more expensive a takeover attempt that is opposed by its Board of Directors. Columbia/HCA is the subject of several government investigations of certain of its business practices and is also defendant in a number of lawsuits in respect of which liabilities could be asserted against LifePoint and Triad. Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of certain liabilities for such matters. Any failure by Columbia/HCA to satisfy its indemnification obligation in respect of such liabilities could have a material adverse effect on LifePoint and Triad. 4 See "Risk Factors" beginning on page 28 for a more complete discussion of certain matters which you should consider in respect of your ownership of LifePoint common stock and Triad common stock. WHAT DO I HAVE TO DO TO Nothing. No proxy or vote is necessary for the PARTICIPATE IN THE distribution. If you own Columbia/HCA common stock DISTRIBUTION? ("Columbia/HCA Common Stock") or Columbia/HCA Non- voting Common Stock ("Columbia/HCA Non-voting Stock," and together with Columbia/HCA Common Stock, "Columbia/HCA Stock") as of the close of business on the record date, , 1999, shares of LifePoint common stock and Triad common stock will be mailed to you or credited to your brokerage account in 1999. You do not need to mail in Columbia/HCA Stock certificates to receive LifePoint common stock and Triad common stock certificates. You will not receive new Columbia/HCA Stock certificates. EXPLAIN THE shares of LifePoint common stock and shares DISTRIBUTION RATIO. of Triad common stock will be distributed for every shares of Columbia/HCA Stock you own on the record date. For example, if you own 100 shares of Columbia/HCA Stock as of the close of business on the record date, you will receive shares of LifePoint common stock and shares of Triad common stock in the distribution. You will receive a check for the cash equivalent of any fractional shares you otherwise would have received in the distribution. IS THE DISTRIBUTION Columbia/HCA has applied for, and the distribution is TAXABLE FOR UNITED conditioned on Columbia/HCA receiving, a ruling from STATES FEDERAL INCOME the Internal Revenue Service that the distribution TAX PURPOSES? generally will be tax-free to Columbia/HCA and to Columbia/HCA stockholders. However, you may have to pay tax on a limited amount of gain arising from any cash you are paid in lieu of fractional shares of LifePoint common stock or Triad common stock. We expect that the tax ruling will provide that you should apportion your tax basis in Columbia/HCA Stock held immediately before the distribution among your Columbia/HCA Stock and the LifePoint common stock and Triad common stock you receive in the distribution. After the distribution, Columbia/HCA will send a letter to you that explains how to allocate your tax basis among these securities. See "Risk Factors--Tax Treatment of the Distribution" beginning on page 34, and "The Distribution--Certain Federal Income Tax Consequences" beginning on page 39, for more complete discussions of the United States Federal income tax consequences of the distribution to holders of Columbia/HCA Stock. WILL MY DIVIDENDS Columbia/HCA currently expects to continue paying its CHANGE? regular quarterly dividend of $.02 per share. The actual timing and amount of dividends declared by Columbia/HCA will depend on various factors and are subject to change at the discretion of the Columbia/HCA Board of Directors. Neither LifePoint nor Triad anticipates paying any cash dividends on its common stock in the foreseeable future. See "Dividend Policy" beginning on page 47. 5 WHERE WILL MY SHARES OF At present, there is no public market for either LIFEPOINT COMMON STOCK LifePoint common stock or Triad common stock. AND TRIAD COMMON STOCK LifePoint and Triad are seeking to list their common TRADE? stock on the NYSE. If the shares are accepted for listing, we expect that a "when-issued" trading market for LifePoint common stock and Triad common stock will develop on or shortly before the record date, and that "regular-way" trading will begin on , 1999. We explain these trading markets in more detail later in this Summary. Also, see "The Distribution--Market for LifePoint Common Stock and Triad Common Stock" beginning on page 40. WILL THE DISTRIBUTION After the distribution, the trading price of AFFECT THE TRADING Columbia/HCA Common Stock probably will be lower than PRICE OF MY the trading price immediately prior to the COLUMBIA/HCA COMMON distribution. Moreover, until the market has STOCK? evaluated the operations of Columbia/HCA without LifePoint and Triad, the trading price of Columbia/HCA Common Stock may fluctuate. The combined trading prices of Columbia/HCA Common Stock, LifePoint common stock and Triad common stock may not equal the trading price of Columbia/HCA Common Stock prior to the distribution. See "The Distribution-- Market for LifePoint Common Stock and Triad Common Stock" beginning on page 40. WILL SHARES TRADE ANY Yes. A temporary form of interim trading called when- DIFFERENTLY AS A RESULT issued trading is likely to develop for LifePoint OF THE DISTRIBUTION? common stock and Triad common stock on or shortly before the record date and to continue through the effective date of the distribution, which is , 1999. A when-issued listing can be identified by the "wi" letters next to the LifePoint common stock or the Triad common stock on the NYSE. If when-issued trading develops, you may buy or sell LifePoint common stock or Triad common stock in advance of the distribution date on a when-issued basis. During this time, Columbia/HCA Common Stock will continue to trade on a regular-way basis and also may trade on a when-issued basis, reflecting an assumed post- distribution value for Columbia/HCA Common Stock. Columbia/HCA Common Stock when-issued trading, if available, could begin on or shortly before the record date and continue through the distribution date. If this occurs, an additional listing for Columbia/HCA Common Stock, followed by the "wi" letters, will appear on the NYSE. When-issued trading occurs in order to develop an orderly market and trading price for LifePoint common stock and Triad common stock (and possibly Columbia/HCA Common Stock) after the distribution. There may be differences between the combined value of when-issued LifePoint common stock, Triad common stock and Columbia/HCA Common Stock as compared to the regular-way price of Columbia/HCA Common Stock during this period. If Columbia/HCA Common Stock when-issued trading is not available, the NYSE will require that shares of Columbia/HCA Common Stock that are sold or purchased from the period beginning on , 1999 and ending on the distribution date be accompanied by due-bills representing the LifePoint common stock and Triad common stock distributable with respect to such shares, and that during such period neither the Columbia/HCA Common Stock nor the due bills may be purchased or sold separately. 6 ARE ANY REGULATORY Prior to the distribution date, Columbia/HCA will APPROVALS REQUIRED FOR have provided appropriate notifications regarding the THE DISTRIBUTION? distribution to, and expects that it will have received all material approvals from, the Federal and state regulatory authorities having jurisdiction in respect of the distribution and related reorganization transactions. See "The Distribution-- Regulatory Approvals" beginning on page 40. WHAT WILL HAPPEN TO They will be treated the same as all other shares of SHARES OWNED THROUGH Columbia/HCA Stock. You will continue to own the THE COLUMBIA/HCA Columbia/HCA Common Stock that you owned through the HEALTHCARE CORPORATION Columbia/HCA Healthcare Corporation Stock Bonus Plan, STOCK BONUS PLAN, THE the Columbia/HCA Healthcare Corporation Salary COLUMBIA/HCA HEALTHCARE Deferral Plan and the San Leandro Retirement and CORPORATION SALARY Savings Plan prior to the distribution. In the DEFERRAL PLAN AND THE distribution, shares of LifePoint common stock and SAN LEANDRO RETIREMENT shares of Triad common stock for every shares AND SAVINGS PLAN? of Columbia/HCA Stock you own through the plans on the record date will be credited to your plan account. WHAT WILL HAPPEN TO Generally, vested Columbia/HCA employee stock options EXISTING EMPLOYEE STOCK (other than options that are "incentive stock OPTIONS TO PURCHASE options" under the Internal Revenue Code) will be COLUMBIA/HCA COMMON retained by employees of Columbia/HCA, LifePoint and STOCK? Triad and their exercise prices will be adjusted to reflect the distribution. In addition, each holder of such vested options will receive vested options to purchase the number of shares of LifePoint common stock and Triad common stock that he or she would have received in the distribution, as if his or her Columbia/HCA option had been exercised on the record date. Unvested employee stock options and incentive stock options (whether or not vested) held by employees of LifePoint and Triad will be cancelled and replaced with options to purchase the common stock of the employer of the holder. In the case of unvested options that are not incentive stock options, the exercise price of each replacement option will be set at the current fair market value and the number of shares covered by the replacement option will be fixed so as to preserve for the holder the economic value of the cancelled option. In the case of incentive stock options, the number of shares covered by, and the exercise price of, each replacement option will be fixed so as to preserve the aggregate exercise price of the cancelled option and the aggregate spread between exercise price and the fair market value of the cancelled option. KEY TERMS OF THE DISTRIBUTION NO STOCKHOLDER ACTION No action is required by Columbia/HCA stockholders to REQUIRED receive LifePoint common stock and Triad common stock in the distribution. You do not need to surrender Columbia/HCA Stock to receive LifePoint common stock and Triad common stock in the distribution. The number of shares of Columbia/HCA Stock you own will not change as a result of the distribution. 7 RECORD DATE If you are a holder of record of Columbia/HCA Stock as of the close of business on the record date ( , 1999), you will be entitled to receive LifePoint common stock and Triad common stock in the distribution. DISTRIBUTION RATIO You will receive shares of LifePoint common stock and shares of Triad common stock for every shares of Columbia/HCA Stock you own as of the close of business on , 1999. NO FRACTIONAL SHARES Fractional shares will not be distributed. Instead, WILL BE ISSUED they will be aggregated and sold in the public market by the distribution agent and the aggregate cash proceeds will be distributed equally to shareholders otherwise entitled to fractional interests. See "The Distribution--Manner of Effecting the Distribution" beginning on page 39. SHARES TO BE All of the LifePoint common stock and Triad common DISTRIBUTED stock will be distributed in the distribution. Based on the shares of Columbia/HCA Common Stock and 21,000,000 shares of Columbia/HCA Non-Voting Common Stock outstanding as of , 1999, shares of LifePoint common stock and shares of Triad common stock will be distributed. MAILING DATE The distribution agent will mail LifePoint common stock and Triad common stock certificates to Columbia/HCA stockholders on or about , 1999, which you should receive shortly thereafter. 8 INFORMATION REGARDING THE DISTRIBUTION, LIFEPOINT AND TRIAD Before the distribution, you should direct inquiries relating to the distribution to: National City Bank Columbia/HCA Healthcare Corporation Shareholder Services Group W. Mark Kimbrough P. O. Box 92301 Assistant Vice President and Investor Cleveland, Ohio 44193-0900 Contact (216) 476-8663 One Park Plaza (800) 622-6757 Nashville, Tennessee 37203 (615) 344-1199 (615) 344-2266 (facsimile) After the distribution, you should direct inquiries relating to an investment in LifePoint common stock to: LifePoint Hospitals, Inc. Investor Relations Department 4525 Harding Road Nashville, Tennessee 37205 (615) - After the distribution, you should direct inquiries relating to an investment in Triad common stock to: Triad Hospitals, Inc. Investor Relations Department 13455 Noel Road, 20th Floor Dallas, Texas 75240 (972) - After the distribution, the transfer agent and registrar for the LifePoint common stock and the Triad common stock will be: 9 COLUMBIA/HCA HEALTHCARE CORPORATION After the distribution, Columbia/HCA will continue to be one of the leading providers of health care services in the United States. After giving effect to the transfers of certain hospitals and other health care facilities to LifePoint and Triad immediately prior to the distribution, Columbia/HCA will operate 210 general, acute care hospitals, 10 psychiatric hospitals, and 82 outpatient surgery centers (including 23 hospitals and 5 outpatient surgery centers which are operated through 50/50 joint ventures that are managed by Columbia/HCA but are not consolidated for financial reporting purposes). Columbia/HCA's primary objective is to provide the communities it serves with a comprehensive array of quality health care services in the most cost effective manner possible. Columbia/HCA's general, acute care hospitals usually provide a full range of services commonly available in hospitals, such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Outpatient and ancillary health care services are provided by Columbia/HCA's general, acute care hospitals, as well as at free-standing facilities operated by Columbia/HCA, including outpatient surgery and diagnostic centers, rehabilitation facilities and other facilities. In addition, Columbia/HCA operates psychiatric hospitals which generally provide a full range of mental health care services in inpatient, partial hospitalization and outpatient settings. By establishing the America and Pacific Groups as separate companies, Columbia/HCA will be better able to focus its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks. 10 LIFEPOINT HOSPITALS, INC. LIFEPOINT'S FACILITIES LifePoint will continue to provide health care services through its hospitals after the distribution. As of September 30, 1998, the America Group (the assets of which will be transferred to LifePoint prior to the distribution) comprised 22 general, acute care hospitals, located in non-urban areas in the States of Alabama, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. America Group also owns a minority interest in one non-consolidated hospital in Florida accounted for using the equity method. This joint venture is building a replacement hospital and, upon completion, LifePoint is expected to hold a majority interest in the joint venture. In almost all of LifePoint's markets, LifePoint's hospital is the only hospital in the community. LifePoint's primary objective is to provide the communities it serves a comprehensive array of quality health care services in the most cost effective manner possible. LifePoint's general, acute care hospitals usually provide the range of medical and surgical services commonly available in hospitals in non- urban markets. These hospitals also provide diagnostic and emergency services, as well as outpatient and ancillary services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. RECENT OPERATING PERFORMANCE In recent periods, LifePoint has experienced declines in revenue and volume growth rates. For example, during the nine months ended September 30, 1998, LifePoint's revenues declined by 2.9%. During the same period, hospital admissions decreased by 1.3%, although equivalent admissions (a measure of combined inpatient and outpatient volume) increased by 0.4%. Management believes that the declines are primarily attributable to the shift to providing services on an outpatient basis, the increasing proportion of LifePoint's revenue being derived from fixed payment and higher discount sources, including Medicare, Medicaid and managed care plans and the impact of the government investigations of certain of Columbia/HCA's business practices and the related media coverage. Under the Federal Balanced Budget Act of 1997, levels of Medicare and Medicaid reimbursement have recently been reduced and will be further reduced as additional reductions are phased in over the next few years. For additional information regarding LifePoint's financial performance in recent periods, see the LifePoint consolidated financial statements included elsewhere herein and "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 49. See also "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements" beginning on page 21. BUSINESS STRATEGY LifePoint's strategic goals are centered around the unique patient and health care provider needs and opportunities in its non-urban markets. LifePoint intends to manage its hospitals aggressively to assure that they operate in accordance with the strategic objectives described below: . Develop Facility-Specific Strategies. LifePoint intends to monitor its facilities individually and to develop strategies designed to benefit individual facilities. By contrast, while LifePoint has been part of Columbia/HCA, Columbia/HCA's business strategies have been developed on a system-wide basis that did not emphasize individual facility strategies. . Expand Breadth of Service and Reduce Patient Outmigration. LifePoint intends to increase the scope of health care services available at its facilities, particularly in markets where significant outmigration is occurring, and to recruit physicians with a broader range of specialties. Management believes that this expansion of available treatments should help to encourage local residents in the non-urban markets that LifePoint serves to seek care at facilities within their communities. LifePoint believes its strong community focus should also assist in limiting patient outmigration. As an entity separate from Columbia/HCA, LifePoint will not have to compete with the Columbia/HCA facilities 11 located in larger, urban markets for management attention, support resources, and capital to finance expansion of the range of services offered at its hospitals. . Strengthen Physician Recruiting and Retention. LifePoint believes that the supply of physicians practicing in the non-urban markets it serves is limited, and that recruiting physicians in local communities is critical to increasing the quality of health care and the breadth of available services. As an independent company, LifePoint intends to take advantage of its more specific management focus to work more effectively with individual physicians and physician practices. Management believes that expansion of the range of available treatments at its hospitals should also assist in physician recruiting. In most of its markets, LifePoint will be able to take advantage of exemptions from certain restrictions on business association with physicians that are available in certain non-urban areas. . Retain and Develop Stable Management. LifePoint will focus its recruitment of managers and health care professionals on those who wish to live and practice in the communities in which LifePoint's hospitals are located. In the past, managers and health care professionals employed at LifePoint hospitals sometimes relocated to advance their careers elsewhere within the Columbia/HCA system. LifePoint expects that its ability to provide equity-based compensation linked to its performance should assist in management retention. Management believes that achieving long-term retention of executive teams at the hospitals will enhance medical staff relations and maintain continuity of relationships within the community. . Build Strong Community Relations. Management believes that it is important to LifePoint's success that its hospitals continue a high level of involvement in the communities they serve and continue to develop good relations with local governments and business leaders. LifePoint employees, particularly the executive teams at the hospitals, are expected to expend considerable effort on improving community relationships. . Improve Managed Care Position. As part of Columbia/HCA, LifePoint's facilities typically have been included in managed care contracts negotiated by Columbia/HCA on a system-wide basis. LifePoint believes that independence from Columbia/HCA will enable it over time to decrease the number of discount arrangements in which it participates and to negotiate contract terms that are generally more favorable for its facilities. LifePoint does not intend to enter into capitation arrangements in the future. . Acquire Other Hospitals. As part of its business strategy, LifePoint will seek to identify attractive acquisition candidates and may acquire additional hospitals in non-urban markets consistent with its strategy. In the past, Columbia/HCA has been reluctant to pursue acquisitions of such facilities since they were outside of Columbia/HCA's core markets. LifePoint will seek to acquire hospitals that are located in non-urban markets where the projected rate of population growth is above the national average. 12 TRIAD HOSPITALS, INC. TRIAD'S FACILITIES Triad will continue to provide health care services through its hospitals and outpatient surgery centers. As of September 30, 1998, the Pacific Group (the assets of which will be transferred to Triad prior to the distribution) comprised 40 general, acute care hospitals, 2 psychiatric hospitals, and 19 outpatient surgery centers, located in the States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Oregon and Texas (in addition, Pacific operates 1 hospital through a 50/50 joint venture that is not consolidated for financial reporting purposes). Approximately three-quarters of Triad's hospitals are located in small cities (generally with populations less than 150,000 residents) where Triad's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Triad's hospitals are located in larger urban areas typically characterized by a high rate of population growth. Triad currently intends to sell (or, in two cases, to transfer through long-term leases) nine of the general, acute care hospitals (one of which was sold as of December 1, 1998), one psychiatric hospital and certain of the outpatient surgery centers that the Pacific Group operated as of September 30, 1998. Approximately half of Triad's facilities are located in the States of Arizona and Texas. Triad's primary objective is to provide the communities it serves a comprehensive array of quality health care services in the most cost effective manner possible. Triad's general, acute care hospitals usually provide a full range of services commonly available in hospitals, such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. These hospitals also provide outpatient and ancillary health care services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. Outpatient services also are provided by surgery centers operated by Triad. In addition, certain of Triad's general, acute care hospitals have a limited number of licensed psychiatric beds. RECENT OPERATING PERFORMANCE In recent periods, Triad has experienced declines in revenue and volume growth rates. For example, during the nine months ended September 30, 1998, revenues (on a same facility basis) declined by 2.5%. During the same period, hospital admissions (on a same facility basis) decreased by 1.7%, although equivalent admissions (a measure of combined inpatient and outpatient volume) increased by 0.5%. Management believes that the declines are primarily attributable to the shift to providing services on an outpatient basis, the increasing proportion of Triad's revenue being derived from fixed payment and higher discount sources, including Medicare, Medicaid and managed care plans and the impact of the government investigations of certain of Columbia/HCA's business practices and the related media coverage. Under the Federal Balanced Budget Act of 1997, levels of Medicare and Medicaid reimbursement have recently been reduced and will be further reduced as additional reductions are phased in over the next few years. For additional information regarding Triad's financial performance in recent periods, see the Triad consolidated financial statements included elsewhere herein and "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 60. See also "Triad Unaudited Pro Forma Condensed Combined Financial Statements" beginning on page 23. BUSINESS STRATEGY Triad's strategic goals are designed to address the specific needs of its competitive environments. Triad's strategic objectives include the following: . Build on Population Growth in Western United States. Triad intends to establish itself as a strong competitor in the health care markets of the high-growth western states in which it operates. Triad 13 plans to construct new hospitals and may also seek to make acquisitions in select markets. As an independent company, Triad will be able to pursue sources of capital that were unavailable to it as a division of Columbia/HCA and to devote the required management attention to building and managing new facilities. . Introduce Select Specialty Services. In certain markets where the demographics indicate, Triad intends to introduce specialty services (e.g., women's health or orthopedic facilities) to help attract new patients to Triad facilities. . Join Local Managed Care Organizations. Triad facilities located in areas where there are other health care providers (e.g., tax-exempt hospitals) will seek to partner with those other providers and be included in their managed care networks. This ability to partner with local managed care networks will be a key to the success of those facilities which operate in high-managed care environments. . Work With Local Physicians. As an independent company, Triad intends to take advantage of the more specific management focus in each of its markets to work more effectively with individual physicians and physician practices, many of which management believes would prefer to deal with a company with Triad's strategic focus. In some of its markets, Triad also will be able to take advantage of exemptions from certain restrictions on business association with physicians that are available in some non-urban areas. . Retain and Develop Stable Management. Triad will focus its recruitment of managers and health care professionals on those who wish to live and practice in the communities in which Triad's hospitals are located. In the past, managers and health care professionals employed at Triad hospitals sometimes relocated to advance their careers elsewhere within the Columbia/HCA system. Triad believes that the stronger market focus resulting from its local partnering efforts will help attract needed managerial and health care talent to its hospitals, and that Triad's ability to provide equity-based compensation linked to its performance should assist in management retention. Management believes that achieving long-term retention of executive teams at the hospitals will enhance medical staff relations and maintain continuity of relationships with the community. 14 COMPARATIVE FINANCIAL HIGHLIGHTS The following table sets forth, for the nine months ended September 30, 1998 and for each of the years ended December 31, 1997 and December 31, 1996, revenues, operating income and total assets for each of LifePoint, Triad and, on a pro forma basis after giving effect to the distribution, Columbia/HCA. This pro forma data is presented for informational purposes only and is not necessarily indicative of the results of operations or financial position that any of such companies would have reported if they had operated independently during the periods presented (dollars in millions).
AS OF AND FOR THE YEAR AS OF AND FOR THE NINE ENDED DECEMBER 31, MONTHS ENDED ------------------------ SEPTEMBER 30, 1998 1997 1996 ----------------------- ----------- ----------- AMOUNT % AMOUNT % AMOUNT % ------------- --------- ------- --- ------- --- Columbia/HCA revenues...... $ 12,519 87% $16,542 88% $16,557 89% LifePoint revenues......... 366 3 490 3 467 2 Triad revenues............. 1,376 10 1,787 9 1,762 9 ------------- --------- ------- --- ------- --- $ 14,261 100% $18,819 100% $18,786 100% ============= ========= ======= === ======= === Columbia/HCA operating income(a)................. $ 2,206 93% $ 2,575 90% $ 3,792 90% LifePoint operating income (a)....................... 53 2 84 3 112 3 Triad operating income (a)....................... 120 5 192 7 310 7 ------------- --------- ------- --- ------- --- $ 2,379 100% $ 2,851 100% $ 4,214 100% ============= ========= ======= === ======= === Columbia/HCA total assets.. $ 18,096 90% $20,043 91% $19,206 91% LifePoint total assets..... 392 2 397 2 382 2 Triad total assets......... 1,520 8 1,562 7 1,528 7 ------------- --------- ------- --- ------- --- $ 20,008 100% $22,002 100% $21,116 100% ============= ========= ======= === ======= ===
- - -------- (a) Operating income is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, gains on sales of facilities, impairment of long-lived assets, restructuring of operations and investigation related costs, minority interests and income taxes. 15 LIFEPOINT SUMMARY HISTORICAL FINANCIAL DATA (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- 1998 1997 1996 1995 1994 ------------- ------- ------ ------ ------ SUMMARY OF OPERATIONS: Revenues....................... $366.4 $ 490.4 $466.6 $395.8 $350.1 Operating income (a)........... 53.0 84.1 111.7 82.4 66.3 Income from continuing operations (b)................ 5.6 15.2 39.6 25.6 14.4 Net income (b)................. 1.9 10.6 41.5 27.4 15.9 OPERATING DATA: Number of hospitals at end of period........................ 22 22 22 20 20 Number of licensed beds at end of period (c)................. 2,056 2,080 2,074 1,881 1,843 Weighted average licensed beds (d)........................... 2,070 2,078 2,060 1,862 1,783 Admissions (e)................. 45,005 60,487 59,381 54,549 52,681 Equivalent admissions (f)...... 79,704 105,973 99,701 88,915 81,708 Average length of stay (days) (g)........................... 4.4 4.4 4.7 4.8 4.9 Average daily census (h)....... 731 733 755 713 713 Occupancy rate (i)............. 35% 35% 37% 38% 40%
- - -------- (a) Operating income is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long-lived assets, minority interests and income taxes. (b) Includes charge related to impairment of long-lived assets of $4.8 million ($2.9 million after-tax) for the twelve months ended December 31, 1997. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Represents the average number of licensed beds weighted based on periods owned. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to LifePoint's hospitals. (f) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions is computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (g) Represents the average number of days admitted patients stay in LifePoint's hospitals. (h) Represents the average number of patients in LifePoint's hospital beds each day. (i) Represents the percentage of hospital licensed beds occupied by patients. 16 LIFEPOINT UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following Unaudited Pro Forma Condensed Combined Financial Statements of LifePoint are based on the historical combined financial statements, which reflect periods during which the businesses that will comprise LifePoint did not operate as a separate, independent company and certain estimates, assumptions and allocations were made in preparing such financial statements. Therefore such historical combined financial statements do not necessarily reflect the combined results of operations or financial position that would have existed had LifePoint been a separate, independent company. The Unaudited Pro Forma Condensed Combined Statements of Operations reflect the results of LifePoint's operations as if the distribution had occurred at the beginning of the respective periods presented. The Unaudited Pro Forma Condensed Combined Balance Sheet assumes that the distribution had occurred on September 30, 1998. The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the historical financial statements of LifePoint included elsewhere herein and the notes thereto. The pro forma condensed combined financial information is presented for informational purposes only and does not purport to reflect the results of operations or financial position of LifePoint or the results of operations or financial position that would have occurred had LifePoint been operated as a separate, independent company. 17 LIFEPOINT UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 (DOLLARS IN MILLIONS)
PRO FORMA PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- ------ Revenues...................................................................... $366.4 $366.4 Salaries and benefits......................................................... 158.1 158.1 Supplies...................................................................... 44.6 44.6 Other operating expenses...................................................... 82.4 82.4 Provision for doubtful accounts............................................... 28.3 28.3 Depreciation and amortization................................................. 20.5 20.5 Interest expense.............................................................. 13.9 3.0 (a) 16.9 Management fees............................................................... 6.9 6.9 ------ ----- ------ 354.7 3.0 357.7 ------ ----- ------ Income from continuing operations before minority interests and income taxes.. 11.7 (3.0) 8.7 Minority interests in earnings of consolidated entities....................... 1.7 1.7 ------ ----- ------ Income from continuing operations before income taxes......................... 10.0 (3.0) 7.0 Provision for income taxes.................................................... 4.4 (1.2)(b) 3.2 ------ ----- ------ Income from continuing operations............................................. $ 5.6 $(1.8) $ 3.8 ====== ===== ====== Diluted earnings per share (d)................................................ Shares used in computing diluted earnings per share (d).......................
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 18 LIFEPOINT UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN MILLIONS)
PRO FORMA PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- ------ Revenues....................................... $490.4 $490.4 Salaries and benefits.......................... 197.3 197.3 Supplies....................................... 55.4 55.4 Other operating expenses....................... 119.0 119.0 Provision for doubtful accounts................ 34.6 34.6 Depreciation and amortization.................. 27.6 27.6 Interest expense............................... 15.5 7.0 (a) 22.5 Management fees................................ 8.2 8.2 Impairment of long-lived assets................ 4.8 4.8 ------ ----- ------ 462.4 7.0 469.4 ------ ----- ------ Income from continuing operations before minority interests and income taxes........... 28.0 (7.0) 21.0 Minority interests in earnings of consolidated entities...................................... 2.2 2.2 ------ ----- ------ Income from continuing operations before income taxes......................................... 25.8 (7.0) 18.8 Provisions for income taxes.................... 10.6 (2.8)(b) 7.8 ------ ----- ------ Income from continuing operations.............. $ 15.2 $(4.2) $ 11.0 ====== ===== ====== Diluted earnings per share (d)................. Shares used in computing diluted earnings per share (d).....................................
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 19 LIFEPOINT UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SEPTEMBER 30, 1998 (DOLLARS IN MILLIONS)
PRO FORMA PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- ------- ASSETS ------ Current assets: Accounts receivable, net.................. $ 52.7 $ 52.7 Inventories............................... 13.4 13.4 Deferred taxes and other current assets... 15.6 15.6 ------- ------- 81.7 81.7 Property and equipment, at cost............. 463.2 463.2 Accumulated depreciation.................... (171.4) (171.4) ------- ------- 291.8 291.8 Intangible assets, net...................... 17.4 17.4 Other....................................... 1.4 1.4 ------- ------- $ 392.3 $ 392.3 ======= ======= LIABILITIES AND EQUITY ---------------------- Current liabilities: Accounts payable.......................... $ 12.0 $ 12.0 Accrued salaries.......................... 9.7 9.7 Other current liabilities................. 15.8 15.8 ------- ------- 37.5 37.5 Long-term debt.............................. .3 250.0 (c) 250.3 Deferred taxes and other liabilities........ 27.8 27.8 Minority interests in equity of consolidated entities................................... 6.2 6.2 Equity, investment by and advances from Columbia/HCA............................... 320.5 (250.0)(c) 70.5 ------- ------- ------- $ 392.3 $ - $ 392.3 ======= ======= =======
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 20 LIFEPOINT NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION The pro forma condensed combined financial statements reflect the combination of historical financial information of the facilities to be part of LifePoint. NOTE 2--PRO FORMA ADJUSTMENTS (a) To adjust interest expense to $16.9 million for the nine months ended September 30, 1998 and $22.5 million for the year ended December 31, 1997. The interest expense adjustment is based on replacing LifePoint's intercompany debt balances ($171.4 million at September 30, 1998 and $177.7 million at December 31, 1997, which will be eliminated) with external debt of $250.0 million at an assumed interest rate of 9%. (b) To adjust income tax expense for the estimated income tax provision related to the pro forma adjustments. (c) To adjust for estimated initial long-term debt of $250.0 million which will be assumed from Columbia/HCA. (d) Pro forma shares used to compute pro forma earnings per share was based upon million shares of LifePoint common stock adjusted for the dilutive effect of LifePoint stock options. The million shares reflected an estimate of the shares to be issued at the distribution date based on a distribution ratio of one share of LifePoint stock for every shares of Columbia/HCA Stock. 21 TRIAD SUMMARY HISTORICAL FINANCIAL DATA (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------- 1998 1997 1996 1995 1994 ------------- -------- -------- -------- -------- SUMMARY OF OPERATIONS: Revenues................ $1,376.4 $1,786.9 $1,762.1 $1,622.6 $1,326.7 Operating income (a).... 120.3 192.1 309.9 287.8 209.5 Income (loss) from continuing operations (b).................... (81.6) (27.0) 69.3 43.3 29.9 Net income (loss) (b)... (82.8) (27.3) 76.6 45.6 31.4 OPERATING DATA: Number of hospitals at end of period.......... 42 42 41 41 40 Number of licensed beds at end of period (c)... 7,007 6,863 6,592 6,186 5,920 Weighted average licensed beds (d)...... 6,929 6,621 6,590 6,160 5,496 Admissions (e).......... 144,805 189,080 187,211 176,392 151,522 Equivalent admissions (f).................... 232,846 298,935 289,990 266,705 217,131 Average length of stay (days) (g)............. 5.0 5.0 5.1 5.2 5.2 Average daily census (h).................... 2,659 2,587 2,603 2,521 2,170 Occupancy rate (i)...... 38% 39% 39% 41% 39%
- - -------- (a) Operating income is defined as income from continuing operations before depreciation and amortization, interest expense, management fees impairment of long-lived assets, minority interests and income taxes. (b) Includes charge related to impairment of long-lived assets of $71.0 million ($42.0 million after-tax) and $13.7 million ($8.2 million after-tax) for the nine months ended September 30, 1998 and the twelve months ended December 31, 1997, respectively. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Represents the average number of licensed beds weighted based on periods owned. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to Triad's hospitals. (f) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (g) Represents the average number of days admitted patients stay in Triad's hospitals. (h) Represents the average number of patients in Triad's hospital beds each day. (i) Represents the percentage of hospital licensed beds occupied by patients. 22 TRIAD UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following Unaudited Pro Forma Condensed Combined Financial Statements of Triad are based on the historical combined financial statements, which reflect periods during which the businesses that will comprise Triad did not operate as a separate, independent company and certain estimates, assumptions and allocations were made in preparing such financial statements. Therefore such historical combined financial statements do not necessarily reflect the combined results of operations or financial position that would have existed had Triad been a separate, independent company. The Unaudited Pro Forma Condensed Combined Statements of Operations reflect the results of Triad's operations as if the distribution and the divestitures of facilities that Triad intends to divest during the fourth quarter of 1998 and the first two quarters of 1999 had occurred at the beginning of the respective periods presented. The Unaudited Pro Forma Condensed Combined Balance Sheet assumes that the distribution and such divestitures had occurred on September 30, 1998. The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the historical financial statements of Triad included elsewhere herein and the notes thereto. The pro forma condensed combined financial information is presented for informational purposes only and does not purport to reflect the results of operations or financial position of Triad or the results of operations or financial position that would have occurred had Triad been operated as a separate, independent company. 23 TRIAD UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 (DOLLARS IN MILLIONS)
PRO FORMA PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- -------- Revenues................................... $1,376.4 $(242.5)(a) $1,133.9 Salaries and benefits...................... 610.4 (126.1)(a) 484.3 Supplies................................... 209.6 (33.9)(a) 175.7 Other operating expenses................... 305.9 (62.6)(a) 243.3 Provision for doubtful accounts............ 130.2 (31.1)(a) 99.1 Depreciation and amortization.............. 86.3 (11.7)(a) 74.6 Interest expense........................... 61.9 (17.4)(a) 50.6 6.1 (b) Management fees............................ 23.4 (3.0)(a) 20.4 Impairment of long-lived assets............ 71.0 (71.0)(a) - -------- ------- -------- 1,498.7 (350.7) 1,148.0 -------- ------- -------- Loss from continuing operations before minority interests and income tax benefit................................... (122.3) 108.2 (14.1) Minority interests in earnings of consolidated entities..................... 8.0 (0.4)(a) 7.6 Income tax benefit......................... (48.7) 40.6 (c) (8.1) -------- ------- -------- Loss from continuing operations............ $ (81.6) $ 68.0 $ (13.6) ======== ======= ======== Basic loss per share (e)................... Shares used in computing basic loss per share (e).................................
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 24 TRIAD UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN MILLIONS)
PRO FORMA PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- -------- Revenues................................... $1,786.9 $(274.9)(a) $1,512.0 Salaries and benefits...................... 748.8 (132.6)(a) 616.2 Supplies................................... 258.6 (36.0)(a) 222.6 Other operating expenses................... 425.0 (76.6)(a) 348.4 Provision for doubtful accounts............ 162.4 (30.2)(a) 132.2 Depreciation and amortization.............. 108.9 (13.1)(a) 95.8 Interest expense........................... 69.5 (15.5)(a) 67.5 13.5 (b) Management fees............................ 28.2 (4.1)(a) 24.1 Impairment of long-lived assets............ 13.7 - 13.7 -------- ------- -------- 1,815.1 (294.6) 1,520.5 -------- ------- -------- Loss from continuing operations before minority interests and income tax benefit................................... (28.2) 19.7 (8.5) Minority interests in earnings of consolidated entities..................... 11.5 (0.6)(a) 10.9 Income tax benefit......................... (12.7) 6.5 (c) (6.2) -------- ------- -------- Loss from continuing operations............ $ (27.0) $ 13.8 $ (13.2) ======== ======= ======== Basic loss per share (e)................... Shares used in computing basic loss per share (e).................................
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 25 TRIAD UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET SEPTEMBER 30, 1998 (DOLLARS IN MILLIONS)
PRO FORMA PRO HISTORICAL ADJUSTMENTS FORMA ---------- ----------- -------- ASSETS ------ Current assets: Accounts receivable, net................. $ 230.6 $ (44.5)(a) $ 186.1 Inventories.............................. 50.2 (8.5)(a) 41.7 Income taxes............................. 37.5 37.5 Other.................................... 24.8 (4.2)(a) 20.6 -------- ------- -------- 343.1 (57.2) 285.9 Property and equipment, at cost............ 1,525.0 (152.2)(a) 1,372.8 Accumulated depreciation................... (707.3) 73.4 (a) (633.9) -------- ------- -------- 817.7 (78.8) 738.9 Intangible assets, net..................... 308.4 (45.9)(a) 262.5 Other...................................... 50.7 (9.4)(a) 41.3 -------- ------- -------- $1,519.9 $(191.3) $1,328.6 ======== ======= ======== LIABILITIES AND EQUITY ---------------------- Current liabilities: Accounts payable......................... $ 55.9 $ (13.3)(a) $ 42.6 Accrued salaries......................... 39.0 (8.9)(a) 30.1 Other current liabilities................ 55.4 (10.2)(a) 45.2 -------- ------- -------- 150.3 (32.4) 117.9 Long-term debt............................. 13.9 736.1 (d) 750.0 Deferred taxes and other liabilities....... 54.3 54.3 Minority interests in equity of consolidated entities..................... 58.2 (4.7)(a) 53.5 Equity, investments by and advances from Columbia/HCA.............................. 1,243.2 (154.2)(a) 352.9 (736.1)(d) -------- ------- -------- $1,519.9 $(191.3) $1,328.6 ======== ======= ========
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 26 TRIAD NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS NOTE 1--BASIS OF PRESENTATION The pro forma condensed combined financial statements reflect the combination of historical financial information of the facilities to be part of Triad and the pro forma adjustments described in Note 2. NOTE 2--PRO FORMA ADJUSTMENTS (a) To eliminate the effect of the facilities that Triad expects to divest during the fourth quarter of 1998 and the first two quarters of 1999. (b) To adjust interest expense to $50.6 million for the nine months ended September 30, 1998 and $67.5 million for the year ended December 31, 1997. The interest expense adjustment is based on replacing Triad's intercompany debt balances ($736.1 million at September 30, 1998 and $649.3 million at December 31, 1997, which will be eliminated) with external debt of $750.0 million at an assumed interest rate of 9%. (c) To adjust income tax expense for the estimated impact of the pro forma adjustments. (d) To adjust for estimated initial long-term debt of $750.0 million which will be assumed from Columbia/HCA. (e) Pro forma shares used to compute pro forma loss per share was based upon million shares of common stock. The million shares reflected an estimate of the shares to be issued at the distribution date based on a distribution ratio of one share of Triad stock for every shares of Columbia/HCA stock. 27 RISK FACTORS Holders of shares of LifePoint common stock and Triad common stock should carefully consider all information contained in this information statement, especially the matters described or referred to in the following paragraphs. DEPENDENCE ON PHYSICIANS Since physicians generally direct the majority of hospital admissions, the success of LifePoint and Triad, in part, is dependent upon the number and quality of physicians on their hospitals' medical staffs, the admissions practices of such physicians and the maintenance of good relations with such physicians. Hospital physicians are generally not employees and, in many of the markets served by Triad, most physicians have admitting privileges at other hospitals. With regard to LifePoint, only a limited number of physicians practice in the non-urban communities in which LifePoint's hospitals are located. Consequently, the loss of physicians in these communities, the inability of LifePoint to recruit and retain physicians to these communities or the inability of LifePoint to maintain good relations with the physicians on its hospitals' staffs could have a material adverse effect on its business, financial condition or results of operations. The operations of LifePoint's hospitals could also be materially adversely affected by the shortage of nurses and certain other health care professionals in these communities. DEPENDENCE ON KEY PERSONNEL LifePoint is dependent upon the continued services and management experience of Scott L. Mercy, James M. Fleetwood, Jr., and other of its executive officers, and Triad is dependent upon the continued services and management experience of James D. Shelton and other of its executive officers. If Messrs. Mercy, Fleetwood or Shelton, or any of such other executive officers, were to resign their positions, the operating results of LifePoint or Triad, as the case may be, could be adversely affected. In addition, the success of each of LifePoint and Triad depends on its ability to attract and retain physicians at its hospitals and other facilities, on the ability of its officers and key employees to manage growth successfully and on its ability to attract and retain skilled employees. NO OPERATING HISTORIES AS INDEPENDENT COMPANIES LifePoint and Triad do not have operating histories as independent, publicly- traded companies and have historically relied on Columbia/HCA for various financial, administrative and managerial expertise relevant to the conduct of their businesses. After the distribution, LifePoint and Triad will maintain their own lines of credit and banking relationships, employ their own senior executives, perform their own administrative functions (except that Columbia/HCA will continue to provide certain support services to LifePoint and Triad on a contractual basis). The operations of the Pacific Group have not generated a profit in recent periods. Although the America Group has been profitable as part of Columbia/HCA, there can be no assurance that, as a stand- alone company, LifePoint's future results will be comparable to reported historical consolidated results before the distribution. See "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements," "Triad Unaudited Pro Forma Condensed Combined Financial Statements," and "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution." LIMITS ON REIMBURSEMENT; HEALTH CARE REFORM LEGISLATION A significant portion of the revenues of LifePoint and Triad are derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes. In recent years, fundamental changes in the Medicare and Medicaid programs (including the implementation of a prospective payment system ("PPS") for inpatient services at medical/surgical hospitals) have resulted in limitations on, and reduced levels of payment and reimbursement for, a substantial portion of hospital procedures and costs. The Federal Balanced Budget Act of 1997 (the "Balanced Budget Act"), which establishes a plan to balance 28 the Federal budget by fiscal year 2002, includes significant additional reductions in spending levels for the Medicare and Medicaid programs. These include, among others, payment reductions for inpatient and outpatient hospital services, establishment of a PPS for skilled nursing facilities and home health agencies under Medicare, and repeal of the Federal payment standard (the so- called "Boren Amendment") for hospitals and nursing facilities under Medicaid. A number of states also are considering legislation designed to reduce their Medicaid expenditures and to provide universal coverage and additional care, including enrolling Medicaid recipients in managed care programs and imposing additional taxes on hospitals to help finance or expand the states' Medicaid systems. In addition, private payers increasingly are attempting to control health care costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review and greater enrollment in managed care programs such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs"). LifePoint and Triad believe that hospital operating margins have been, and may continue to be, under significant pressure because of deterioration in pricing flexibility and payer mix, and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Among the proposals under consideration or already enacted are price controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, Medicare and Medicaid managed care programs and requirements that all businesses offer health insurance coverage to their employees. While LifePoint and Triad anticipate that the rate of increase in payments to hospitals will be reduced as a result of future Federal and state legislation, it is uncertain at this time what legislation on health care reform may ultimately be enacted or whether other changes in the administration or interpretation of governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. IMPACT OF MANAGED CARE ORGANIZATIONS During recent years, United States hospital occupancy rates have declined as a result of changing technology, changes in physician practice patterns from inpatient to outpatient treatment, changes in government regulation and reimbursement, and cost containment pressures. The competitive position of the hospitals of LifePoint and Triad also is affected by the increasing number of initiatives undertaken during the past several years by major purchasers of health care, including Federal and state governments, insurance companies and employers, to revise payment methodologies and monitor health care expenditures in order to contain health care costs. As a result of these initiatives, managed care organizations, which offer prepaid and discounted medical services packages, represent an increasing segment of health care payers, the effect of which has been to reduce hospital revenue growth nationwide. COMPETITION The health care business is highly competitive and competition among hospitals and other health care providers for patients has intensified in recent years. Approximately half of Triad's hospitals operate in geographic areas where they compete with at least one other hospital that provides most of the services offered by Triad's hospitals. Certain of these competing facilities offer services, including extensive medical research and medical education programs, which are not offered by Triad's facilities. Some of the hospitals that compete with Triad are owned by tax-supported governmental agencies or not-for-profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis and are exempt from sales, property and income taxes. In these markets, Triad also faces competition from other providers such as outpatient surgery and diagnostic centers. Almost all of LifePoint's hospitals and approximately half of Triad's hospitals operate in geographic areas where they are currently the sole provider of hospital services in their communities. While these hospitals face 29 less direct competition in their immediate service areas than would be expected in larger communities, they do face competition from other hospitals, including larger tertiary care centers. Although these competing hospitals may be as far as 30 to 50 miles away, patients in these LifePoint and Triad markets often migrate to, are referred by local physicians to, or are lured by incentives from managed care plans to travel to, such distant hospitals. One element of LifePoint's business strategy is expansion through the acquisition of acute care hospitals in growing non-urban markets. The competition to acquire non-urban hospitals is significant, and there can be no assurance that suitable acquisitions, for which other health care companies (including those with greater financial resources than LifePoint) may be competing, can be accomplished on terms favorable to LifePoint or that financing, if necessary, can be obtained for such acquisitions. CONCENTRATION OF OPERATIONS After the distribution, 6 of LifePoint's 22 general, acute care hospitals will be located in the Commonwealth of Kentucky, and 7 of LifePoint's 22 general, acute care hospitals will be located in the State of Tennessee. For the nine months ended September 30, 1998, 38.1% and 22.0% of LifePoint's revenue, and 49.0% and 10.8% of LifePoint's income from continuing operations before depreciation and amortization, interest expense, minority interests, and income taxes, were generated by LifePoint's Kentucky and Tennessee hospitals, respectively. Accordingly, any change in the current demographic, economic, competitive and regulatory conditions in Kentucky or Tennessee could have a material adverse effect on the business, financial condition and/or results of operations of LifePoint. After the distribution and certain intended divestitures (see "Triad-- Business"), 13 of Triad's remaining 32 hospitals will be located in the State of Texas, and 5 of Triad's remaining 32 hospitals will be located in the State of Arizona. Giving effect to such intended divestitures, for the nine months ended September 30, 1998, 41.4% and 23.6% of Triad's revenue, and 46.6% and 27.7% of Triad's income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long lived assets, minority interests, and income taxes, were generated by Triad's Texas and Arizona hospitals, respectively. Accordingly, any change in the current demographic, economic, competitive and regulatory conditions in Texas or Arizona could have a material adverse effect on the business, financial condition and/or results of operations of Triad. EXTENSIVE REGULATION The health care industry is subject to extensive Federal, state and local laws and regulations relating to licensure, conduct of operations, ownership of facilities, addition of facilities and services, and prices for services that are extremely complex and for which, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation. In particular, Medicare and Medicaid antifraud and abuse amendments, codified under Section 1128B(b) of the Social Security Act (the "Anti-Kickback Statute"), prohibit certain business practices and relationships related to items or services reimbursable under Medicare, Medicaid and other Federal health care programs, including the payment or receipt of remuneration to induce or arrange for the referral of patients whose care will be paid for by Medicaid or other governmental programs. Sanctions for violating the Anti- Kickback Statute include criminal penalties and civil sanctions, including civil money penalties and possible exclusion from government programs such as Medicare and Medicaid. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, the United States Department of Health and Human Services has issued regulations which describe some of the conduct and business relationships permissible under the Anti-Kickback Statute (the "Safe Harbors"). The fact that a given business arrangement does not fall within a Safe Harbor does not render the arrangement illegal. However, business arrangements of health care service providers that fail to satisfy the applicable Safe Harbor criteria risk scrutiny by enforcement authorities. Certain of the current arrangements of LifePoint and Triad with physicians do not qualify for the Safe Harbors. The Health Insurance Portability and Accountability Act of 1996, which became effective January 1, 1997, amends, among other things, Title XI (42 U.S.C. (S) 1301 et seq.) to broaden the scope of certain fraud and abuse laws to include all health care services, whether or not they are reimbursed under a Federal program, and 30 creates new enforcement mechanisms to combat fraud and abuse, including an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. Each of LifePoint and Triad provide financial incentives to recruit physicians into the communities served by its hospitals, including loans and minimum revenue guarantees. Although HHS has proposed a Safe Harbor for certain physician recruitment, no Safe Harbor for physician recruitment is currently in force. Each of LifePoint and Triad also enter into certain employment agreements, leases and other agreements with physicians. There can be no assurance that regulatory authorities who enforce the Anti-Kickback Statute will not determine that such physician recruiting activities or other physician arrangements violate the Anti-Kickback Statute or other Federal laws. Such a determination could subject LifePoint or Triad to liabilities under the Social Security Act, including criminal penalties, civil monetary penalties and/or exclusion from participation in Medicare, Medicaid or other Federal health care programs, any of which could have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. In addition, Section 1877 of the Social Security Act (commonly known as the "Stark Law") was amended, effective January 1, 1995, to significantly broaden the scope of prohibited referrals by physicians under the Medicare and Medicaid programs to providers of designated health services with which such physicians have ownership or certain other financial arrangements. Certain exceptions are available for employment agreements, leases, physician recruitment and certain other physician arrangements. Final implementing regulations have not yet been adopted, and there can be no assurance that the physician arrangements of LifePoint or Triad will be found to be in compliance with the Stark Law, as such law ultimately may be interpreted. Many states have adopted or are considering similar anti-kickback and physician self-referral legislation, some of which extends beyond the scope of the Federal law to prohibit the payment or receipt of remuneration for the referral of patients and physician self- referrals regardless of the source of the payment for the care. Both Federal and state government agencies have announced heightened and coordinated civil and criminal enforcement efforts. In addition, the Office of the Inspector General of the United States Department of Health and Human Services and the Department of Justice have from time to time established enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Current initiatives include a focus on hospital billing for outpatient charges associated with inpatient services, as well as hospital laboratory billing practices. Each of LifePoint and Triad is cooperating with the government agencies which are responsible for such initiatives where such initiatives involve their respective hospitals. Each of LifePoint and Triad exercises care in structuring its arrangements with physicians to comply in all material respects with these laws. It is possible, however, that government officials charged with responsibility for enforcing such laws could assert that LifePoint, Triad or certain transactions in which either of them is involved, are in violation of such laws. It is also possible that such laws ultimately could be interpreted by the courts in a manner inconsistent with the interpretations of LifePoint or Triad. Many states have enacted or are considering enacting laws affecting the conversion or sale of not-for-profit hospitals. These laws, in general, include provisions relating to state attorney general approval, advance notification and community involvement. In addition, state attorneys general in states without specific conversion legislation may exercise authority over these transactions based upon existing law. In many states there has been an increased interest in the oversight of not-for-profit conversions. The adoption of conversion legislation and the increased review of not-for-profit hospital conversions may limit the ability of LifePoint or Triad to acquire not-for- profit hospitals. Some states require prior approval for the purchase, construction and expansion of health care facilities, based upon a state's determination of need for additional or expanded health care facilities or services. Such determinations, embodied in Certificates of Need issued by governmental agencies with jurisdiction over health care facilities, may be required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and certain other matters. Five states in which LifePoint currently owns hospitals, Alabama, Florida, Georgia, Kentucky and Tennessee, and four states in which Triad currently owns hospitals, Alabama, 31 Oklahoma, Oregon and Missouri, require Certificates of Need. There can be no assurance that either LifePoint or Triad will be able to obtain required Certificates of Need in the future or that the failure to obtain any required Certificates of Need will not have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. The laws, rules and regulations described above are complex and subject to interpretation. In the event of a determination that either of LifePoint or Triad is in violation of such laws, rules or regulations, or if further changes in the regulatory framework occur, any such determination or changes could have a material adverse effect on business, financial condition or results of operations of LifePoint or Triad. See "Regulation and Other Factors Affecting LifePoint and Triad." COLUMBIA/HCA INVESTIGATIONS, LITIGATION; INDEMNIFICATION OF LIFEPOINT AND TRIAD Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is the subject of a formal order of investigation by the Securities and Exchange Commission. Columbia/HCA understands that the SEC investigation includes the anti-fraud, periodic reporting and internal accounting control provisions of the Federal securities laws. Columbia/HCA is a defendant in several qui tam actions brought by private parties on behalf of the United States of America, which have been unsealed and served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated the False Claims Act, 31 U.S.C. (S) 3729 et seq., for improper claims submitted to the government for reimbursement. The lawsuits seek three times the amount of damages caused to the United States by the submission of any Medicare or Medicaid false claims presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The government has intervened in one qui tam action. Columbia/HCA is aware of additional qui tam actions that remain under seal and believes that there may be other sealed qui tam cases of which it is unaware. Columbia/HCA is a defendant in a number of other suits, which allege, in general, improper and fraudulent billing, overcharging, coding and physician referrals, as well as other violations of law. Certain of the suits have been conditionally certified as class actions. See "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation." It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam and other actions, or whether any additional investigations or litigation will be commenced. If Columbia/HCA is found to have violated Federal or state laws relating to Medicare, Medicaid or similar programs, then Columbia/HCA could be subject to substantial monetary fines, civil and criminal penalties, and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui tam and other actions may be substantial, and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more of such actions. Any such sanctions or losses could have a material adverse effect on Columbia/HCA's financial position and results of operations. Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of certain liabilities arising out of or in connection with the foregoing matters. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement." If any of such indemnified liabilities were successfully asserted against either LifePoint or Triad, or any of their facilities, and Columbia/HCA failed to meet its indemnification obligations, then such liabilities could have a material adverse effect on the financial position and results of operations of LifePoint and/or Triad, as the case may be. 32 Columbia/HCA believes that the ongoing governmental investigations and related media coverage may be having a negative effect on Columbia/HCA's results of operations (which includes LifePoint and Triad for the periods prior to the distribution date which are presented herein). The extent to which LifePoint and Triad may or may not continue to be affected after the distribution by the ongoing investigations of Columbia/HCA, the initiation of additional investigations, if any, and the related media coverage cannot be predicted. It is possible that these matters could have a material adverse effect on the financial condition or results of operations of LifePoint or Triad in future periods. PROFESSIONAL LIABILITY RISKS As is typical in the health care industry, LifePoint and Triad are subject to claims and legal actions by patients and others in the ordinary course of business. Columbia/HCA, LifePoint and Triad intend to cooperate in the purchase of insurance coverage for professional and general liability risks for periods ending on or after the distribution date. Substantially all losses in periods prior to the distribution are insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Insurance Allocation and Administration Agreement." Because substantially all liability for professional and general liability claims incurred is insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA, and Columbia/HCA maintains the related reserve, no reserve for professional and general liability risks is recorded on the balance sheets of LifePoint and Triad. While the professional and general liability insurance coverage maintained for the LifePoint and Triad businesses has been adequate to provide for liability claims in the past, and the insurance coverage to be obtained for future periods is expected to be adequate for future claims, there can be no assurance that such insurance will be adequate. If actual payments of claims after the distribution with respect to professional and general liabilities exceed anticipated payments of claims, the results of operations and cash flow of LifePoint or Triad, as the case may be, could be adversely affected. LEVERAGE AND DEBT SERVICE OBLIGATIONS As of September 30, 1998, after giving pro forma effect to the distribution and LifePoint's assumption of debt in connection with the distribution, LifePoint's consolidated long-term debt would have been approximately $250 million. As of September 30, 1998, after giving pro forma effect to the distribution and Triad's assumption of debt in connection with the distribution, Triad's consolidated long-term debt would have been approximately $750 million. See "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements" and "Triad Unaudited Pro Forma Condensed Combined Financial Statements." While each of LifePoint and Triad believe that future operating cash flow, together with available financing arrangements, will be sufficient to fund their respective operating requirements, leverage and debt service requirements could have important consequences to holders of the LifePoint common stock and the Triad common stock, including the following: (i) such requirements may make LifePoint and Triad more vulnerable to economic downturns and to adverse changes in business conditions (e.g., further limitations on reimbursement under Medicare and Medicaid programs); (ii) either of LifePoint's or Triad's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (iii) a substantial portion of each of LifePoint's and Triad's cash flow from operations may have to be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available for operations; (iv) certain of the borrowings may be at variable rates of interest, which would make LifePoint and Triad vulnerable to increases in interest rates; and (v) the indebtedness to be assumed by each of LifePoint and Triad is expected to contain numerous financial and other restrictive covenants (including restrictions on payments of dividends, incurrences of indebtedness and sale of assets), the failure to comply with which may result in an event of default which, if not cured or waived, could cause such indebtedness to be declared immediately due and payable. Any substantial increase in LifePoint's or Triad's debt levels or the inability of either to borrow funds at favorable interest rates or to comply with the financial or other restrictive covenants could have a material adverse effect on the business, financial condition or results of operations of LifePoint and/or Triad. 33 ABSENCE OF DIVIDENDS Neither LifePoint nor Triad anticipates paying cash dividends in the foreseeable future. In addition, the terms of the debt to be assumed by LifePoint and Triad immediately prior to the distribution are expected to restrict the payment of cash dividends, and any future indebtedness incurred by LifePoint or Triad to refinance such debt, or to fund future growth, also may prohibit or limit their ability to pay dividends. See "Dividend Policy." TAX TREATMENT OF THE DISTRIBUTION The distribution is conditioned on Columbia/HCA receiving a ruling from the IRS concerning the United States Federal income tax consequences of the distribution. The tax ruling is expected to state that, because the distribution will qualify under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"), the distribution generally will be tax-free to Columbia/HCA and to Columbia/HCA's stockholders, except for any cash received instead of fractional shares. Nevertheless, the tax ruling will be based upon the accuracy of representations made by Columbia/HCA as to numerous factual matters and as to the intention to take (or to refrain from taking) certain future action. The inaccuracy of any of those factual representations or the failure to take the intended action (or the taking of actions which were represented would not be taken) could cause the IRS to revoke the tax ruling retroactively. If the distribution were not to qualify under Section 355 of the Code, then, in general, a corporate tax (which would be substantial) would be payable by the consolidated group of which Columbia/HCA is the common parent. Under the consolidated return rules, each member of the consolidated group (including LifePoint and Triad) would be jointly and severally liable for such tax liability. If the distribution did not qualify under Section 355 of the Code, the resulting tax liability would have a material adverse effect on the financial position, results of operations and cash flows of Columbia/HCA and, possibly, also of LifePoint and Triad. In addition, if the distribution did not qualify under Section 355 of the Code, then, depending on the circumstances, Columbia/HCA stockholders could be taxable on their receipt of shares of LifePoint and Triad common stock. See "The Distribution--Certain Federal Income Tax Consequences." Columbia/HCA, LifePoint and Triad will enter into a Tax Sharing and Indemnification Agreement, which will allocate tax liabilities among Columbia/HCA, LifePoint and Triad and address certain other tax matters such as responsibility for filing tax returns, control of and cooperation in tax litigation, and qualification of the distribution (and the restructuring that will precede the distribution) as tax-free transactions. Generally, Columbia/HCA will be responsible for taxes that are allocable to periods prior to the distribution date, and each of Columbia/HCA, LifePoint and Triad will be responsible for its own tax liabilities (including its allocable share of taxes shown on any consolidated, combined or other tax return filed by Columbia/HCA) for periods after the distribution date. The Tax Sharing and Indemnification Agreement will prohibit LifePoint and Triad from taking actions that could jeopardize the tax-free nature of the distribution or the restructuring that will precede the distribution, and will require LifePoint and Triad to indemnify each other and Columbia/HCA for any taxes or other losses that result from any such actions. HOLDING COMPANY STRUCTURE LifePoint and Triad will be holding companies and each will hold most of its assets at, and conduct most of its operations through, direct and indirect subsidiaries. As holding companies, the results of operations of LifePoint and Triad will depend on the results of operations of their subsidiaries. Moreover, LifePoint and Triad will be dependent on dividends or other intercompany transfers of funds from their subsidiaries to meet their debt service and other obligations. Claims of creditors of the subsidiaries of LifePoint and Triad, including trade creditors, will generally have priority as to the assets of such subsidiaries over the claims of LifePoint or Triad. See "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," and "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." 34 MARKET UNCERTAINTIES WITH RESPECT TO LIFEPOINT COMMON STOCK AND TRIAD COMMON STOCK There is no existing market for either the LifePoint common stock or the Triad common stock. Although LifePoint and Triad are seeking to list their common stock on the NYSE, there can be no assurance as to the trading prices for either security before or after the distribution date. Until the LifePoint common stock and the Triad common stock are fully distributed and orderly markets develop, the trading prices for such securities may fluctuate. Prices for the LifePoint common stock and Triad common stock will be determined in the trading markets and may be influenced by many factors, including the depth and liquidity of the market for such securities, investor perceptions of LifePoint, Triad and their respective businesses, the results of LifePoint and Triad, the dividend policies of LifePoint and Triad and general economic and market conditions. The LifePoint common stock and Triad common stock distributed to Columbia/HCA stockholders in the distribution generally will be freely transferable under the Securities Act of 1933, as amended (the "Securities Act"), and the sale of a substantial number of shares of LifePoint common stock or Triad common stock after the distribution could adversely affect the market price of the LifePoint common stock or Triad common stock, respectively. See "The Distribution--Market for LifePoint Common Stock and Triad Common Stock." ANTI-TAKEOVER PROVISIONS Certain provisions of the Certificate of Incorporation and By-Laws of each of LifePoint and Triad may have the effect of discouraging an acquisition of control not approved by its Board of Directors. These provisions include, for example, terms providing for: . the issuance of "blank check" preferred stock by the Board of Directors without stockholder approval; . higher stockholder voting requirements for certain transactions such as business combinations with certain related parties (i.e., a "fair price provision"); . a prohibition on taking actions by the written consent of stockholders; . restrictions on the persons eligible to call a special meeting of stockholders; . classification of the Board of Directors into three classes; and . the removal of directors only for cause and by a vote of 80% of the outstanding voting power. These provisions may also have the effect of discouraging third parties from making proposals involving an acquisition or change of control of LifePoint or Triad, although such proposals, if made, might be considered desirable by a majority of the stockholders of LifePoint or Triad, as the case may be. These provisions could further have the effect of making it more difficult for third parties to cause the replacement of the Board of Directors of LifePoint or Triad. These provisions have been designed to enable each of LifePoint and Triad to develop its businesses and foster its long-term growth without disruptions caused by the threat of a takeover not deemed by its Board of Directors to be in the best interests of the applicable company and its stockholders. Each of LifePoint and Triad also has adopted a stockholder rights plan. These stockholder rights plans are designed to protect stockholders in the event of an unsolicited offer and other takeover tactics which, in the opinion of the relevant Board of Directors, could impair its ability to represent stockholder interests. The provisions of these stockholder rights plans may render an unsolicited takeover of LifePoint or Triad, as applicable, more difficult or less likely to occur or might prevent such a takeover. Each of LifePoint and Triad will be subject to provisions of Delaware corporate law which may restrict certain business combination transactions. See "LifePoint Description of Capital Stock--LifePoint Common Stock; Delaware Anti-Takeover Provisions," "--LifePoint Preferred Stock Purchase Rights," and "--Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws"; and "Triad Description of Capital Stock--Triad Common Stock; Delaware Anti-Takeover Provisions," "--Triad Preferred Stock Purchase Rights," and "--Certain Anti- Takeover Provisions--Triad Certificate and By-Laws." Certain provisions in the Tax Sharing and Indemnification Agreement entered into among Columbia/HCA, LifePoint and Triad, which are intended to preserve the tax-free status of the distribution for Federal income 35 tax purposes, could discourage certain takeover proposals or make them more expensive. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Tax Sharing and Indemnification Agreement." YEAR 2000 COMPLIANCE Until 2006, LifePoint and Triad will continue to obtain most of their computer applications and support from Columbia Information Systems, Inc. ("CIS"), a wholly owned subsidiary of Columbia/HCA, pursuant to the Computer and Data Processing Services Agreement. CIS has represented that the software owned by CIS and provided to LifePoint and Triad will be Year 2000 ready on or before January 1, 2000, and that CIS will endeavor to address in a timely manner Year 2000 issues with respect to other software and hardware licensed to LifePoint and Triad under the Computer and Data Processing Services Agreement. CIS also has undertaken to examine and remediate the software systems and applications of LifePoint and Triad not obtained from Columbia/HCA and the non- information technology systems (e.g., vendor products, medical equipment and other related equipment with embedded chips) of LifePoint and Triad to ensure that they are Year 2000 ready. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Computer and Data Processing Services Agreement; Year 2000 Agreement." Any malfunctions in such systems, applications or equipment could have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. Neither LifePoint nor Triad is currently able to reasonably estimate the ultimate cost to be incurred by it for the assessment, remediation, upgrade, replacement and testing of its impacted information and non-information technology systems. LifePoint and Triad are dependent upon Columbia/HCA in substantially all respects for the Year 2000 readiness of their respective information technology and non-information technology systems; any failure by Columbia/HCA to adequately address such matters could have a material adverse effect on their businesses, financial conditions and/or results of operations. In addition, each of LifePoint and Triad has significant ongoing relationships with government agencies, third party payers, vendors, suppliers and others that may have computer systems with Year 2000 problems. The Health Care Financing Administration recently announced that, due to potential Year 2000 concerns, Medicare reimbursement updates for hospitals scheduled to take effect October 1, 1999 will be delayed until April 1, 2000, although reimbursement rates will be adjusted to replace revenues lost due to such delay. If the fiscal intermediaries and governmental agencies with which LifePoint and Triad transact business, and which are responsible for payment to LifePoint and Triad under the Medicare and Medicaid programs, other payers, or suppliers and vendors experience problems in Year 2000 readiness, that could have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. See "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of Year 2000 Computer Issues" and "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of Year 2000 Computer Issues." 36 REASONS FOR FURNISHING THIS INFORMATION STATEMENT This information statement is being furnished by Columbia/HCA solely to provide information to Columbia/HCA stockholders who will receive LifePoint common stock and Triad common stock in the distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any securities of Columbia/HCA, LifePoint, or Triad. Columbia/HCA, LifePoint and Triad believe that the information presented herein is accurate as of the date hereof. Changes will occur after the date hereof, and none of Columbia/HCA, LifePoint or Triad will update the information except to the extent required in the normal course of their respective public disclosure practices. FORWARD-LOOKING INFORMATION This information statement and other materials filed or to be filed by LifePoint or Triad with the SEC (as well as information included in oral statements or other written statements made, or to be made, by LifePoint or Triad) contain, or will contain, disclosures which are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements address, among other things, strategic objectives and the anticipated effects of the distribution. See "Summary--Introduction," "Summary--Questions and Answers About LifePoint, Triad and the Distribution," "Risk Factors," "The Distribution--Background and Purposes of the Distribution," "LifePoint Business--Business Strategy," "Triad Business--Business Strategy," "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations." These forward-looking statements are based on the current plans and expectations of LifePoint and Triad and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and the future financial condition and results of LifePoint and Triad. These factors include, but are not limited to, (i) the highly competitive nature of the health care business, (ii) the efforts of insurers, health care providers and others to contain health care costs, (iii) possible changes in the Medicare program that may further limit reimbursements to health care providers and insurers, (iv) changes in Federal, state or local regulation affecting the health care industry, (v) the possible enactment of Federal or state health care reform, (vi) the departure of key executive officers from LifePoint or Triad, (vii) claims and legal actions relating to professional liability, (viii) fluctuations in the market value of LifePoint common stock or Triad common stock, (ix) changes in accounting practices, (x) changes in general economic conditions, (xi) the complexity of integrated computer systems and the success and expense of the remediation efforts of Columbia/HCA, LifePoint, Triad and relevant third parties in achieving Year 2000 readiness, and (xii) other risk factors described above. As a consequence, current plans, anticipated actions and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of LifePoint or Triad. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented herein. 37 THE DISTRIBUTION BACKGROUND AND PURPOSES OF THE DISTRIBUTION Columbia/HCA is the largest provider of health care services in the United States today, operating approximately 300 hospitals, as well as outpatient surgery centers, diagnostic centers, cardiac rehabilitation centers, physical therapy centers, radiation oncology centers, comprehensive outpatient rehabilitation centers, medical office buildings, physician practices and other health care programs. In November 1997, Columbia/HCA restructured its operations into five divisions, including the America Group and the Pacific Group. America's hospitals are located in non-urban areas where, in almost all cases, America's hospital is the only hospital in the community. Approximately three-quarters of Pacific's hospitals are located in small cities, generally in the Southwestern United States, where Pacific's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Pacific's hospitals are located in larger urban areas typically characterized by a high rate of population growth. Following that restructuring, Columbia/HCA determined to concentrate its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks, and to reorganize the America Group and the Pacific Group as two independent, publicly-traded companies, LifePoint and Triad, respectively. Columbia/HCA management believes that separating the America and Pacific Groups into two smaller, strategically focused public companies will provide the following benefits: . Implement Tailored Business Strategies. Columbia/HCA's management believes that, because of the different community characteristics and levels of network integration that exist in the LifePoint and Triad markets, the LifePoint and Triad business strategies need to be distinguished from each other and from those pursued in Columbia/HCA's core markets. As smaller companies, LifePoint and Triad will have more flexibility in responding to the needs of the communities in which they operate. . Increase Management Focus and Attention. The managements of LifePoint and Triad will be able to focus on making capital improvements to existing facilities in order to expand specialized services, invest in physician and executive recruitment and retention, and improve outreach programs and general health education initiatives. . Tie Compensation to Performance. Following the distribution, LifePoint and Triad will be able to more closely tie compensation incentives for their employees to the performance of their companies. Each of LifePoint and Triad expects to establish for the benefit of its employees an Employee Stock Ownership Plan (an "ESOP"). Shortly after the distribution, the LifePoint ESOP will purchase a number of shares equal to 8.3% of the outstanding common stock of LifePoint and the Triad ESOP will purchase from Triad a number of shares equal to 9.0% of the outstanding common stock of Triad. These equity interests are expected to help LifePoint and Triad to attract and retain talented and effective management and to motivate employees throughout the organization. . Improve Access to Capital. The distribution will give each of LifePoint and Triad direct access to capital markets. As divisions of Columbia/HCA, the America and Pacific Groups competed with each other and with the other Columbia/HCA divisions for management attention, support resources, and capital to finance expansion and growth opportunities. As separate entities, with their own management structures, LifePoint and Triad will be better able to implement business strategies appropriate for their markets and to direct capital funding and expansion initiatives. . Increase Visibility to the Capital Markets. Following the distribution, the financial markets will be able to focus on the individual strengths of Columbia/HCA, LifePoint and Triad, and more accurately evaluate the performance of each distinct business compared to companies in the same or similar businesses. 38 MANNER OF EFFECTING THE DISTRIBUTION The general terms and conditions relating to the distribution are set forth in a Distribution Agreement among Columbia/HCA, LifePoint and Triad. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement." On the distribution date, Columbia/HCA will effect the distribution by delivering all of the outstanding shares of LifePoint common stock and Triad common stock to National City Bank, as distribution agent, for distribution to the holders of record of Columbia/HCA Stock at the close of business on the record date. The distribution will be made on the basis of shares of LifePoint common stock and shares of Triad common stock for every shares of Columbia/HCA Stock. The actual number of shares of LifePoint common stock and Triad common stock that will be distributed will depend on the number of shares of Columbia/HCA Stock outstanding on the record date. The shares of LifePoint common stock and Triad common stock will be fully paid and nonassessable, and the holders of such shares will not be entitled to preemptive rights. See "LifePoint Description of Capital Stock" and "Triad Description of Capital Stock." It is expected that certificates representing shares of LifePoint common stock and of Triad common stock will be mailed to Columbia/HCA stockholders on or about , 1999. Certificates or scrip representing fractional shares of LifePoint common stock or Triad common stock will not be issued to Columbia/HCA stockholders as part of the distribution. Instead, each holder of Columbia/HCA Stock who would otherwise be entitled to receive a fractional share will receive cash for such fractional interests. The distribution agent will, as soon as practicable after the distribution date, aggregate and sell all such fractional interests on the NYSE at then prevailing market prices and distribute the aggregate proceeds ratably to Columbia/HCA stockholders otherwise entitled to such fractional interests. Columbia/HCA will pay all brokers' fees and commissions in respect of such sale. See "The Distribution--Certain Federal Income Tax Consequences" for a discussion of the Federal income tax treatment of fractional share interests. RESULTS OF THE DISTRIBUTION After the distribution, LifePoint and Triad will be separate, independent publicly-traded companies. The number and identity of stockholders of LifePoint and Triad immediately after the distribution will be the same as the number and identity of stockholders of Columbia/HCA on the record date. Based on the number of record stockholders and the number of issued and outstanding shares of Columbia/HCA Stock as of the close of business on , 1999 and the distribution ratios of shares of LifePoint common stock and shares of Triad common stock for every shares of Columbia/HCA Stock, immediately after the distribution, LifePoint expects to have approximately 18,700 record holders, and approximately outstanding shares, of LifePoint common stock, and Triad expects to have approximately 18,700 record holders, and approximately outstanding shares, of Triad common stock. The actual number of shares of LifePoint common stock and Triad common stock that will be distributed will be determined as of the record date. The distribution will not affect the number of outstanding shares of Columbia/HCA Stock or the rights of Columbia/HCA stockholders. Each of LifePoint and Triad expects to establish for the benefit of its employees an Employee Stock Ownership Plan (an "ESOP"). Shortly after the distribution, the LifePoint ESOP is expected to purchase from LifePoint, at fair market value, a number of newly issued shares of LifePoint common stock equal to 8.3% of the outstanding shares of LifePoint common stock (approximately shares), and the Triad ESOP is expected to purchase from Triad, at fair market value, a number of newly issues shares of Triad common stock equal to 9.0% of the outstanding shares of Triad common stock (approximately shares). Each purchase will be financed by a loan that will be amortized over a period of not more than ten years, which loan will be guaranteed by LifePoint in the case of the LifePoint ESOP and by Triad in the case of the Triad ESOP. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The distribution is conditioned on Columbia/HCA receiving a tax ruling from the IRS to the effect, among other things, that, as the distribution will qualify as a tax-free distribution under Section 355 of the Code, for Federal income tax purposes: 39 . Columbia/HCA will not recognize gain or loss upon the distribution of the LifePoint common stock and the Triad common stock to Columbia/HCA's stockholders. . Columbia/HCA stockholders will not recognize any gain or loss (and will not be required to include any amount as income) as a result of their receipt of LifePoint common stock and Triad common stock in the distribution, except that stockholders that receive cash in lieu of fractional shares of LifePoint common stock or Triad common stock will recognize gain or loss equal to the difference between the cash received and the tax basis allocated to such fractional shares. Any gain or loss will be capital gain or loss if the fractional shares would have been held as a capital asset on the distribution date. . Columbia/HCA stockholders will apportion their tax basis in Columbia/HCA Stock among their Columbia/HCA Stock and the LifePoint common stock and the Triad common stock they receive in the distribution in accordance with the relative fair market values of these securities at the time of the distribution. . The holding period of the LifePoint common stock and Triad common stock received in the distribution will include the holding period of the Columbia/HCA Stock with respect to which the LifePoint common stock and Triad common stock will be distributed, provided that the Columbia/HCA Stock is held as a capital asset on the distribution date. The tax ruling will be based upon representations made by Columbia/HCA as to numerous factual matters and as to the intention to take (or to refrain from taking) certain future action. The inaccuracy of any of those factual representations or the failure to take the intended action (or the taking of actions which were represented would not be taken) could cause the IRS to revoke the tax ruling retroactively. In that event, the IRS might assert that the distribution was taxable. See "Risk Factors--Tax Treatment of the Distribution" and "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Tax Sharing and Indemnification Agreement." After the distribution, Columbia/HCA will send a letter to you that will explain how to allocate your tax basis among Columbia/HCA Stock, LifePoint common stock and Triad common stock. The foregoing is only a summary of certain United States Federal income tax consequences of the distribution under current law. It does not purport to cover all tax consequences and may not apply to stockholders who acquired their Columbia/HCA stock in connection with a grant of shares as compensation, who are not citizens or residents of the United States, or who are otherwise subject to special treatment under the Code. Each stockholder should consult his or her tax advisor as to the particular consequences of the distribution to such stockholder, including the application of state, local and foreign tax laws, and as to possible changes in tax laws that may affect the tax consequences described above. REGULATORY APPROVALS The distribution is subject to review and approvals by certain Federal agencies, state departments of insurance, state health planning and licensure agencies. Prior to the distribution date, Columbia/HCA will have provided appropriate notifications regarding the distribution to, and expects that all material approvals from or reviews of the regulatory authorities having jurisdiction in respect of the distribution and related reorganization transactions will have been received or completed, respectively. MARKET FOR LIFEPOINT COMMON STOCK AND TRIAD COMMON STOCK There is no existing market for LifePoint common stock or Triad common stock. LifePoint and Triad are seeking to list their common stock on the NYSE. If the shares are accepted for listing, a when-issued trading market for both LifePoint common stock and Triad common stock is expected to develop on or shortly before the record date. The term "when-issued" means that shares can be traded prior to the time certificates are 40 actually available or issued. There can be no assurance about the trading prices for LifePoint common stock and Triad common stock before or after the distribution date, and until the LifePoint common stock and Triad common stock are fully distributed and an orderly market develops, the trading prices for such securities may fluctuate. Prices for LifePoint common stock and Triad common stock will be determined in the trading markets and may be influenced by many factors, including the depth and liquidity of the market for such securities, developments affecting the businesses of LifePoint and Triad generally, the impact of the factors referred to in "Risk Factors," investor perceptions of LifePoint, Triad and their businesses, the results of LifePoint and Triad, the dividend policies of LifePoint and Triad, and general economic and market conditions. It is anticipated that LifePoint common stock will be traded on the NYSE under the symbol " ," and that Triad common stock will be traded on the NYSE under the symbol " ." Columbia/HCA Common Stock will continue to trade on a regular-way basis and may also trade on a when-issued basis, reflecting an assumed post-distribution value for Columbia/HCA Common Stock. Columbia/HCA Common Stock when-issued trading, if available, could last from shortly before the record date through the distribution date. If Columbia/HCA Common Stock when-issued trading is not available, the NYSE will require that shares of Columbia/HCA Common Stock that are sold or purchased from the period beginning on , 1999 and ending on the distribution date be accompanied by due-bills representing the LifePoint common stock and Triad common stock distributable with respect to such shares, and that during such period neither the Columbia/HCA Common Stock nor the due bills may be purchased or sold separately. The Transfer Agent and Registrar for the LifePoint common stock and Triad common stock will be . For certain information regarding options to purchase LifePoint common stock and Triad common stock that will be granted in connection with the distribution, see "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement-- Treatment of Columbia/HCA Common Stock Options"; "LifePoint Management-- LifePoint Compensation Arrangements--The LifePoint 1998 Long-Term Incentive Plan"; and "Triad Management--Triad Compensation Arrangements--The Triad 1998 Long-Term Incentive Plan." For certain information regarding the LifePoint ESOP and the Triad ESOP, see "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement--The LifePoint ESOP and the Triad ESOP." Shares of LifePoint common stock and Triad common stock distributed to Columbia/HCA stockholders in the distribution will be freely transferable under the Securities Act, except for shares of LifePoint common stock received by persons who may be deemed to be affiliates of LifePoint and shares of Triad common stock received by persons who may be deemed to be affiliates of Triad. Persons who may be deemed to be affiliates of LifePoint or Triad after the distribution generally include individuals or entities that control, are controlled by, or are under common control with, LifePoint or Triad, respectively, and may include certain officers and directors, or principal stockholders, of LifePoint or Triad, as applicable. After LifePoint and Triad become publicly-traded companies, securities held by persons who are their affiliates will be subject to resale restrictions under the Securities Act. Affiliates of LifePoint and Triad will be permitted to sell shares of the entity of which such persons are affiliates only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act. CONDITIONS PRECEDENT TO THE DISTRIBUTION It is expected that the distribution will be effective on the distribution date, , 1999, provided that, among other things: 1. the Registration Statements on Form 10 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), filed by each of LifePoint (the "LifePoint Form 10 Registration Statement") and Triad (the "Triad Form 10 Registration Statement") shall have been declared effective and no stop order relating to either Registration Statement shall be in effect; 41 2. all necessary permits, registrations and consents required under the securities or blue sky laws of states or other political subdivisions of the United States in connection with the distribution shall have been received or become effective; 3. the IRS tax ruling shall have been received and shall not have been revoked or modified in any material respect; 4. each of the LifePoint common stock and the Triad common stock shall have been approved for listing on the NYSE, subject to official notice of issuance; 5. the transfers of assets and liabilities to LifePoint and Triad required to constitute LifePoint and Triad as described herein shall have been completed; and 6. no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the distribution or any of the transactions related thereto (including the transfers of assets and liabilities contemplated by the Distribution Agreement) shall be in effect. The fulfillment or waiver of the foregoing conditions shall not create any obligation on the part of Columbia/HCA to effect the distribution, and the Columbia/HCA Board has reserved the right to amend, modify or abandon the distribution and the related transactions at any time prior to the distribution date. ARRANGEMENTS AMONG COLUMBIA/HCA, LIFEPOINT AND TRIAD RELATING TO THE DISTRIBUTION Immediately prior to the distribution, LifePoint and Triad will be wholly owned by Columbia/HCA and, until the distribution, the results of operations of the assets and entities that will constitute LifePoint and Triad will be included in Columbia/HCA's consolidated financial statements. After the distribution, Columbia/HCA will not have any ownership interest in either LifePoint or Triad, which will be independent, publicly-traded companies, although certain Columbia/HCA benefit plans will receive shares of LifePoint and Triad in the distribution. See "LifePoint Security Ownership by Certain Beneficial Owners and Management" and "Triad Security Ownership by Certain Beneficial Owners and Management." After the distribution, neither LifePoint nor Triad will have any ownership interest in the other. Immediately prior to the distribution, Columbia/HCA, LifePoint and Triad will enter into certain agreements to define their ongoing relationships after the distribution and to allocate tax, employee benefits and certain other liabilities and obligations arising from periods prior to the distribution date. These agreements are summarized below and have been filed as exhibits to the LifePoint Form 10 Registration Statement and/or the Triad Form 10 Registration Statement. The following descriptions include a summary of the material terms of these agreements but do not purport to be complete and are qualified in their entirety by reference to the filed agreements. DISTRIBUTION AGREEMENT Columbia/HCA, LifePoint and Triad will enter into the Distribution Agreement which will provide for, among other things, certain corporate transactions required to effect the distribution and other arrangements among Columbia/HCA, LifePoint and Triad subsequent to the distribution. The Distribution Agreement also sets forth the conditions to the distribution. See "The Distribution-- Conditions Precedent to the Distribution." Transfers of Assets to LifePoint and Triad The Distribution Agreement provides that Columbia/HCA will transfer all of its right, title and interest in the assets constituting the America Group business to LifePoint and all of its right, title and interest in the assets constituting the Pacific Group business to Triad. The Distribution Agreement further provides that each of LifePoint and Triad will take such action, if any, as may be necessary to transfer assets owned by it so that, upon completion of all asset transfers by Columbia/HCA, LifePoint and Triad, the assets constituting the America Group business are owned by LifePoint and the assets constituting the Pacific Group business are owned by Triad. 42 Each party to the Distribution Agreement agrees to exercise its reasonable efforts to obtain promptly any necessary consents and approvals and to take such actions as may be reasonably necessary or desirable to carry out the purposes of the Distribution Agreement and the other agreements summarized below. In the event that any transfers contemplated by the Distribution Agreement are not effected on or prior to the distribution date, the parties agree to cooperate to effect such transfers as promptly as practicable following the distribution date, and pending any such transfers, to hold any asset not so transferred in trust for the use and benefit of the party entitled thereto (at the expense of the party entitled thereto), and to retain any liability not so transferred for the account of the party by whom such liability is to be assumed. All assets are being transferred without any representation or warranty, on an "as is-where is" basis and the relevant transferee bears the risk that any necessary consent to transfer is not obtained. Allocation of Financial Responsibility The Distribution Agreement provides for, among other things, assumptions of liabilities and cross-indemnities designed to allocate generally, effective as of the distribution date, financial responsibility for the liabilities arising out of or in connection with: . the assets and entities that will constitute LifePoint and its subsidiaries (including liabilities arising in respect of the transfer of such assets and entities to LifePoint), as well as the LifePoint Form 10 Registration Statement, to LifePoint; and . the assets and entities that will constitute Triad and its subsidiaries (including liabilities arising in respect of the transfer of such assets and entities to Triad), as well as the Triad Form 10 Registration Statement, to Triad. After the distribution, Columbia/HCA will retain responsibility for certain liabilities arising out of the pending governmental investigations of some of Columbia/HCA's business practices and for certain liabilities arising out of related stockholder and other legal proceedings currently pending against Columbia/HCA. See "Risk Factors--Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and Triad" and "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation." Prior to the distribution, Columbia/HCA, through its wholly owned insurance subsidiary and through third party carriers, maintained insurance for the businesses of LifePoint and Triad. The Distribution Agreement provides that Columbia/HCA also will be solely responsible for: . claims against LifePoint or Triad covered by an insurance policy maintained by Columbia/HCA (without regard to deductible amounts, coinsurance amounts and policy limits), which are based upon facts and circumstances occurring prior to the distribution date; . claims against LifePoint or Triad of professional liability or which would be covered by a standard policy of comprehensive general public liability and property insurance, directors' and officers' insurance or health care errors and omissions insurance (without regard to deductible amounts, coinsurance amounts or policy limits), which are based upon facts and circumstances occurring prior to the distribution date; and . workers' compensation claims against LifePoint or Triad if the underlying injury or condition was incurred before the distribution. Government Programs LifePoint and Triad will be responsible for the Medicare, Medicaid and Blue Cross cost reports, and associated receivables and payables, for their facilities, whether relating to periods prior to or after the distribution, but Columbia/HCA will retain the benefits and burdens of all group appeals relating to cost reporting periods ending on or prior to the distribution date. LifePoint and Triad will be responsible for their own cost report functions after the distribution date, as well as for any terminating cost reports required to be filed in respect of the distribution. 43 Other Matters Each of Columbia/HCA, LifePoint and Triad generally agrees to provide to the other parties reasonable access to certain corporate records and information reasonably requested by another party. Each of Columbia/HCA, LifePoint and Triad is generally required to maintain the confidentiality of confidential information it possesses regarding another party. The parties will endeavor to resolve any disputes which may arise through discussion among senior management of the affected parties. If such discussions do not succeed in resolving a disputed matter, the parties retain the right to commence a legal action. The Distribution Agreement also provides that, generally, the costs and expenses incurred through the distribution date in connection with the distribution are properly allocable to, and will be paid by, Columbia/HCA. Except as set forth in the Distribution Agreement or any related agreement, each party shall bear its own costs and expenses after the distribution. TAX SHARING AND INDEMNIFICATION AGREEMENT Columbia/HCA, LifePoint and Triad will enter into a Tax Sharing and Indemnification Agreement, which will allocate tax liabilities among Columbia/HCA, LifePoint and Triad and address certain other tax matters such as responsibility for filing tax returns, control of and cooperation in tax litigation, and qualification of the distribution (and the restructuring that will precede the distribution) as tax-free transactions. Generally, Columbia/HCA will be responsible for taxes that are allocable to periods prior to the distribution date, and each of Columbia/HCA, LifePoint and Triad will be responsible for its own tax liabilities (including its allocable share of taxes shown on any consolidated, combined or other tax return filed by Columbia/HCA) for periods after the distribution date. The Tax Sharing and Indemnification Agreement will prohibit LifePoint and Triad from taking actions that could jeopardize the tax-free nature of the distribution or the restructuring that will precede the distribution, and will require LifePoint and Triad to indemnify each other and Columbia/HCA for any taxes or other losses that result from any such actions. BENEFITS AND EMPLOYMENT MATTERS AGREEMENT Columbia/HCA, LifePoint and Triad will enter into a Benefits and Employment Matters Agreement, which allocates responsibilities for employee compensation, benefits, labor, benefit plan administration and certain other employment matters on and after the distribution date. General Allocation Each of LifePoint and Triad will assume responsibility as employer in respect of its employees from and after the distribution date. Subject to specific exceptions, Columbia/HCA will retain the liabilities in respect of former employees associated with the facilities and operations of LifePoint and Triad who terminated employment on or prior to the distribution date. Benefit plans established by LifePoint or Triad generally will recognize past service with Columbia/HCA. Defined Contribution and Welfare Benefit Plans The Benefits and Employment Matters Agreement provides that each of LifePoint and Triad will adopt new defined contribution plans for their respective employees, as well as for the respective former employees associated with the facilities and operations of LifePoint and Triad. Generally, assets of the current Columbia/HCA money purchase pension, stock bonus and salary deferral plans that are attributable to current and former employees of LifePoint and Triad will be transferred, effective immediately prior to the distribution date, to the new plans, and LifePoint and Triad thereafter will provide benefits under such plans to their current and former employees. Except for such transferred assets, Columbia/HCA will retain sole responsibility for all liabilities and obligations under the existing Columbia/HCA defined contribution plans. LifePoint and Triad will adopt welfare benefit plans for their employees that, as of the distribution date, will be substantially identical to the benefit plans of Columbia/HCA. Generally, Columbia/HCA will be 44 responsible for all liabilities and obligations relating to claims incurred or premiums owed in respect of welfare plans for periods prior to the distribution date and LifePoint or Triad, as appropriate, will assume such responsibility for periods thereafter with respect to their current or former employees. Through the end of 1999, Columbia/HCA will provide certain administrative and investment services in respect of the LifePoint and Triad welfare plans. LifePoint and Triad have agreed to indemnify Columbia/HCA and its agents in respect of the services performed for such plans, so long as Columbia/HCA and its agents shall have acted in good faith in performing such services. The LifePoint ESOP and the Triad ESOP Each of LifePoint and Triad expects to establish an ESOP. Shortly after the distribution, the LifePoint ESOP is expected to purchase from LifePoint, at fair market value, a number of newly issued shares of LifePoint common stock equal to 8.3% of the outstanding LifePoint common stock (approximately shares), and the Triad ESOP is expected to purchase from Triad, at fair market value, a number of newly issued shares of Triad common stock equal to 9.0% of the outstanding Triad common stock (approximately shares). Each purchase will be financed by a loan that will amortize over a period of not more than ten years, which loan will be guaranteed by LifePoint in the case of the LifePoint ESOP and by Triad in the case of the Triad ESOP. Treatment of Columbia/HCA Common Stock Options The Benefits and Employment Matters Agreement provides that each of LifePoint and Triad will establish new stock option plans, and that outstanding Columbia/HCA Common Stock options will be adjusted to reflect the distribution. The nature of the adjustment will depend on the type of option, as follows: . Incentive Stock Options: The option spread (whether positive or negative) at the distribution date with respect to each of the existing Columbia/HCA options intended to qualify as Incentive Stock Options under Section 422 of the Code ("ISOs") will be preserved by having each such ISO replaced entirely by an ISO issued by the appropriate post- distribution date employer. . Vested Nonqualified Stock Options: The option spread (whether positive or negative) at the distribution date with respect to each of the existing vested Columbia/HCA Nonqualified Stock Options will be preserved by (i) adjusting the exercise price of such Columbia/HCA options and (ii) having LifePoint and Triad issue additional vested Nonqualified Stock Options. This rule will apply regardless of which post-distribution date employer employs the optionee. . Non-Vested Nonqualified Stock Options: In the case of persons allocated to LifePoint and Triad, the aggregate Black-Scholes value of each non- vested Columbia/HCA Nonqualified Stock Option immediately prior to the date that Columbia/HCA begins to trade ex-dividend will be preserved through a Nonqualified Stock Option granted by LifePoint or Triad, as the case may be. With respect to the replacement Nonqualified Stock Options issued by LifePoint or Triad, the exercise price under each such replacement option will be equal to the closing price of the appropriate stock on the fifth day on which such stock is traded. See "LifePoint Management--LifePoint Compensation Arrangements--The LifePoint 1998 Long-Term Incentive Plan" and "Triad Management--Triad Compensation Arrangements--The Triad 1998 Long-Term Incentive Plan." INSURANCE ALLOCATION AND ADMINISTRATION AGREEMENT Columbia/HCA has maintained various insurance policies for the benefit and protection of its America Group and Pacific Group divisions. Substantially all losses in periods prior to the distribution are insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by 45 Columbia/HCA. In connection with the distribution, Columbia/HCA, LifePoint and Triad will enter into the Insurance Allocation and Administration Agreement to provide for their continuing rights and obligations in respect of such insurance after the distribution date and to define their relationship regarding the insurance on their respective properties. The Insurance Allocation and Administration Agreement provides that any claims against insurers outstanding on the distribution date will be for the benefit of the party who will own the asset which is the basis for the claim, or, in the case of a liability claim, which is the owner of the facility at which the activity which is the subject of the claim occurred. In addition, Columbia/HCA will pay to LifePoint or Triad, as the case may be, any portion of such a claim that is unpaid by an insurer to satisfy deductible, co-insurance or self-insurance amounts (unless such amounts were paid to or accounted for by the affected entity prior to the distribution date). Columbia/HCA, LifePoint and Triad will do all things necessary to ensure that all of the insurance policies which provide coverage to LifePoint and Triad remain available after the distribution date to the same extent they were available prior to the distribution date. Any retroactive rate adjustments for periods ending on or before the distribution date in respect of any such insurance policies will be paid or received by Columbia/HCA. Columbia/HCA, LifePoint and Triad will cooperate with each other in the purchase of insurance coverage for periods after the distribution date, although each retains the right to obtain separate insurance under certain circumstances. It is anticipated that LifePoint and Triad will purchase continuous coverage under extensions or renewals of existing, or new, policies issued by Health Care Indemnity, Inc., a subsidiary of Columbia/HCA. They also will endeavor to obtain coverage for claims incurred but not reported prior to the distribution date which would have been covered by the insurance policies existing at that time, if the policies obtained to cover periods after the distribution do not cover such claims. Columbia/HCA will bear the cost of any such additional coverage. Columbia/HCA will defend any claim made against two or more of the parties, if indemnification for the claim is available to LifePoint or Triad, as the case may be, under the Distribution Agreement. If indemnification under the Distribution Agreement is not available and there is no other agreement or indemnification in respect of such claim, the parties to the claim will jointly defend the claim and will attempt to agree upon an appropriate allocation of liability, subject to arbitration in the event the parties disagree. Columbia/HCA, or an affiliate of Columbia/HCA, will continue to administer all claims under the insurance policies in effect prior to the distribution date. In addition, Columbia/HCA, or an affiliate of Columbia/HCA, will administer claims under the new policies that will cover periods after the distribution date, for an interim period ending on , unless extended by agreement of the parties. COMPUTER AND DATA PROCESSING SERVICES AGREEMENT; YEAR 2000 AGREEMENT Columbia/HCA's wholly owned subsidiary Columbia Information Services, Inc. ("CIS"), will enter into separate Computer and Data Processing Services Agreements with each of LifePoint and Triad. Pursuant to this agreement, CIS will provide computer installation, support, training, maintenance, data processing and other related services to LifePoint and Triad. The initial term of each agreement will be seven years, which will be followed by a wind-down period of up to one year. CIS will charge fees to LifePoint and Triad for services provided under this agreement that are market competitive based on CIS's costs incurred in providing such services. CIS will also enter into separate agreements with each of LifePoint and Triad pursuant to which CIS will continue an ongoing program of inspecting medical equipment at each hospital to assure Year 2000 compliance. LifePoint and Triad will pay fees to CIS for services performed under the Year 2000 agreements in amounts equal to the costs incurred by CIS in providing such services. LEASE AGREEMENTS Columbia/HCA will enter into an agreement with LifePoint pursuant to which LifePoint will sub-lease from Columbia/HCA its principal executive offices (at the same price per square foot as is payable under the 46 existing Columbia/HCA lease). The LifePoint sub-lease will terminate on , 2001, but either party may terminate the sub-lease upon six months prior written notice. Columbia/HCA also will enter into an agreement with Triad, pursuant to which Triad will sub-lease from Columbia/HCA its principal executive offices (at the same price per square foot as is payable under the existing Columbia/HCA lease). The Triad sub-lease will terminate on November , 2003. TRANSITIONAL SERVICES AGREEMENT Columbia/HCA will enter into separate Transitional Services Agreements with each of LifePoint and Triad. Pursuant to this agreement, Columbia/HCA will continue to furnish various administrative services to LifePoint and Triad. These services will include support in various aspects of payroll processing and tax reporting for employees of LifePoint and Triad, real estate design and construction management, and legal, human resources, insurance and accounting matters. Each agreement will terminate on December 31, 2000, but may be terminated by LifePoint or Triad as to specific services before December 31, 2000. LifePoint and Triad will pay fees to Columbia/HCA for services provided in amounts equal to Columbia/HCA's costs incurred in providing such services. OTHER AGREEMENTS Columbia/HCA will enter into agreements with each of LifePoint and Triad whereby Columbia/HCA will share telecommunications services with LifePoint and Triad under Columbia/HCA's agreements with its telecommunications services provider and whereby Columbia/HCA will make certain account collection services available to LifePoint and Triad. Each of LifePoint and Triad will also participate, along with Columbia/HCA, in a group purchasing organization which will make certain national supply and equipment contracts available to their respective facilities. In addition, Columbia/HCA and LifePoint will enter into an agreement pursuant to which they will jointly own a corporate aircraft. LifePoint will reimburse Columbia/HCA for a portion of the cost of operating the aircraft proportionate to LifePoint's ownership interest. DIVIDEND POLICY LIFEPOINT LifePoint currently intends to retain its earnings for use in the operation and expansion of its business and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of the debt to be assumed by LifePoint immediately prior to the distribution are expected to restrict the payment of cash dividends by LifePoint. Any future determination to declare or pay cash dividends will be made by the LifePoint Board of Directors. The actual amount and timing of dividends, if any, will depend on LifePoint's financial condition, results of operations, business prospects, capital requirements, credit agreements and such other matters as the LifePoint Board of Directors may deem relevant. See "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." TRIAD Triad currently intends to retain its earnings for use in the operation and expansion of its business and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of the debt to be assumed by Triad immediately prior to the distribution are expected to restrict the payment of cash dividends by Triad. Any future determination to declare or pay cash dividends will be made by the Triad Board of Directors. The actual amount and timing of dividends, if any, will depend on Triad's financial condition, results of operations, business prospects, capital requirements, credit agreements and such other matters as the Triad Board of Directors may deem relevant. See "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 47 LIFEPOINT SELECTED FINANCIAL DATA (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- 1998 1997 1996 1995 1994 ------------- ------- ------ ------ ------ SUMMARY OF OPERATIONS: Revenues....................... $366.4 $ 490.4 $466.6 $395.8 $350.1 Operating income(a)............ 53.0 84.1 111.7 82.4 66.3 Income from continuing operations(b)................. 5.6 15.2 39.6 25.6 14.4 Net income(b).................. 1.9 10.6 41.5 27.4 15.9 FINANCIAL POSITION: Assets......................... $392.3 $ 397.0 $382.0 $324.5 $312.3 Long-term debt, including amounts due within one year... 0.4 1.6 1.6 2.1 1.7 OPERATING DATA: Number of hospitals at end of period........................ 22 22 22 20 20 Number of licensed beds at end of period(c).................. 2,056 2,080 2,074 1,881 1,843 Weighted average licensed beds(d)....................... 2,070 2,078 2,060 1,862 1,783 Admissions(e).................. 45,005 60,487 59,381 54,549 52,681 Equivalent admissions(f)....... 79,704 105,973 99,701 88,915 81,708 Average length of stay (days)(g)..................... 4.4 4.4 4.7 4.8 4.9 Average daily census(h)........ 731 733 755 713 713 Occupancy rate(i).............. 35% 35% 37% 38% 40%
- - -------- (a) Operating income is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long-lived assets, minority interests and income taxes. (b) Includes charge related to impairment of long-lived assets of $4.8 million ($2.9 million after-tax) for the twelve months ended December 31, 1997. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Represents the average number of licensed beds weighted based on periods owned. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to LifePoint's hospitals. (f) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (g) Represents the average number of days admitted patients stay in LifePoint's hospitals. (h) Represents the average number of patients in LifePoint's hospital beds each day. (i) Represents the percentage of hospital licensed beds occupied by patients. 48 LIFEPOINT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read together with the historical financial statements of LifePoint Hospitals, Inc. included elsewhere herein and the notes thereto and the information set forth under "LifePoint Selected Financial Data" and "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements" and the notes thereto. However, the historical financial statements of LifePoint Hospitals, Inc. may not be indicative of LifePoint's future performance, nor do they necessarily reflect what the financial position and results of operations of LifePoint would have been if it had operated as a separate, stand-alone entity during the periods covered. See "Risk Factors--No Operating Histories as Independent Companies." FORWARD-LOOKING STATEMENTS This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains disclosures which are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on the current plans and expectations of LifePoint and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and the future financial condition and results of LifePoint. These factors include, but are not limited to, (i) the highly competitive nature of the health care business, (ii) the efforts of insurers, health care providers and others to contain health care costs, (iii) possible changes in the Medicare program that may further limit reimbursements to health care providers and insurers, (iv) changes in Federal, state or local regulation affecting the health care industry, (v) the possible enactment of Federal or state health care reform, (vi) the departure of key executive officers from LifePoint, (vii) claims and legal actions relating to professional liability, (viii) fluctuations in the market value of LifePoint common stock, (ix) changes in accounting practices, (x) changes in general economic conditions, (xi) the complexity of integrated computer systems and the success and expense of the remediation efforts of Columbia/HCA, LifePoint and relevant third parties in achieving Year 2000 readiness, and (xii) other risk factors described above. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of LifePoint. You are cautioned not to unduly rely on such forward- looking statements when evaluating the information presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." INVESTIGATIONS Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is the subject of a formal order of investigation by the Securities and Exchange Commission. Columbia/HCA understands that the SEC investigation includes the anti-fraud, periodic reporting and internal accounting control provisions of the Federal securities laws. Management believes that the ongoing governmental investigations and related media coverage may be having a negative effect on Columbia/HCA's results of operations (which includes LifePoint for the periods prior to the distribution date which are presented herein). The extent to which LifePoint may or may not continue to be affected after the distribution by the ongoing investigations of Columbia/HCA, the initiation of additional investigations, if any, and the related media coverage cannot be predicted. It is possible that these matters could have a material adverse effect on the financial condition or results of operations of LifePoint in future periods. 49 Columbia/HCA has agreed to indemnify LifePoint in respect of certain liabilities arising out of or in connection with the foregoing matters and in respect of certain liabilities arising out of related stockholder and other legal proceedings currently pending against Columbia/HCA. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution-- Distribution Agreement." If any of such indemnified liabilities were successfully asserted against LifePoint, or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations, then such liabilities could have a material adverse effect on the financial position and results of operations of LifePoint. (See Note 3--Columbia/HCA Investigations, Litigation and Indemnification Rights and Note 11--Contingencies of the Notes to Combined Financial Statements of LifePoint included elsewhere herein). RESULTS OF OPERATIONS Revenue/Volume Trends During the nine months ended September 30, 1998, LifePoint has experienced declines in revenues and volume growth rates as well as operational deficiencies. Management believes three primary factors have contributed to these declines: the impact of the government investigation, the shift to providing services on an outpatient basis, and the trend toward discounting service pricing. Management believes that the impact of the ongoing governmental investigations of certain of Columbia/HCA's business practices and the related media coverage, combined with Columbia/HCA's restructuring of operations (including the distribution and the announced divestitures of several facilities), have created uncertainties with physicians, patients and payers in certain markets. See "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation." LifePoint's revenues continue to be affected by the trend toward certain services being performed more frequently on an outpatient basis. Growth in outpatient services is expected to continue in the health care industry as procedures performed on an inpatient basis are converted to outpatient procedures through continuing advances in pharmaceutical and medical technologies. The redirection of certain procedures to an outpatient basis is also influenced by pressures from payers to direct certain procedures from inpatient care to outpatient care. Outpatient revenues grew to 48.1% of net patient revenues for the nine months ended September 30, 1998 from 46.0% during the same period last year. LifePoint's revenues also continue to be affected by an increasing proportion of revenue being derived from fixed payment, higher discount sources, including Medicare, Medicaid and managed care plans. In addition, insurance companies, government programs (other than Medicare) and employers purchasing health care services for their employees are also negotiating discounted amounts that they will pay health care providers rather than paying standard prices. These purchasers then become discounted payers, similar to HMOs and PPOs, in virtually all markets and make it increasingly difficult for providers to maintain their historical revenue growth trends. LifePoint expects patient volumes from Medicare and Medicaid to continue to increase due to the general aging of the population and the expansion of state Medicaid programs. However, under the Federal Balanced Budget Act of 1997 (the "Balanced Budget Act"), LifePoint's reimbursement from the Medicare and Medicaid programs were reduced and will be further reduced as some reductions will be phased in over the next few years. Admissions related to Medicare, Medicaid and managed care plan patients were 88% and 86% of total admissions for the nine months ended September 30, 1998 and 1997, respectively. LifePoint's hospitals do not receive any revenues from capitation arrangements (prepaid health service agreements). Reductions in the rate of increase in Medicare and Medicaid reimbursement, increasing percentages of the patient volume being related to patients participating in managed care plans and continuing trends toward more services being performed on an outpatient basis are expected to present an ongoing challenge to LifePoint. To 50 maintain and improve its operating margins in future periods, LifePoint must increase patient volumes while controlling the costs of providing services. Management believes that the proper response to these challenges includes the delivery of a broad range of quality health care services to patients by assuring that physicians with appropriate specializations practice in the hospitals, that the appropriate equipment and range of specialized services are available within the hospitals, and that the hospitals are positioned as community assets. Operating Results Summary The following is a summary of results from continuing operations for the nine months ended September 30, 1998 and 1997 and the years ended December 31, 1997 and 1996 (dollars in millions):
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1997 1998 (UNAUDITED) -------------- ------------ AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- Revenues.......................................... $366.4 100.0 $377.4 100.0 Salaries and benefits............................. 158.1 43.1 144.3 38.2 Supplies.......................................... 44.6 12.2 40.9 10.8 Other operating expenses.......................... 82.4 22.6 84.6 22.5 Provision for doubtful accounts................... 28.3 7.7 22.9 6.1 Depreciation and amortization..................... 20.5 5.5 20.8 5.4 Interest expense.................................. 13.9 3.8 11.3 3.0 Management fees................................... 6.9 1.9 6.3 1.7 Impairment of long-lived assets................... - - - - ------ ----- ------ ----- 354.7 96.8 331.1 87.7 ------ ----- ------ ----- Income from continuing operations before minority interests and income taxes....................... 11.7 3.2 46.3 12.3 Minority interests in earnings of consolidated entities......................................... 1.7 0.5 1.2 0.3 ------ ----- ------ ----- Income from continuing operations before income taxes............................................ 10.0 2.7 45.1 12.0 Provision for income taxes........................ 4.4 1.2 18.5 5.0 ------ ----- ------ ----- Income from continuing operations................. $ 5.6 1.5 $ 26.6 7.0 ====== ===== ====== ===== % changes from prior year: Revenues........................................ (2.9)% Income from continuing operations before income taxes.......................................... (77.8) Income from continuing operations............... (78.9) Admissions (a).................................. (1.3) Equivalent admissions (b)....................... 0.4 Revenues per equivalent admission............... (3.2) Same facility % changes from prior year (c): Revenues........................................ (2.9) Admissions (a).................................. (1.3) Equivalent admissions (b)....................... 0.4 Revenues per equivalent admission............... (3.2)
51 Operating Results Summary (continued)
YEARS ENDED DECEMBER 31, -------------------------- 1997 1996 ------------- ------------ AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- Revenues..................... $490.4 100.0 $466.6 100.0 Salaries and benefits........ 197.3 40.2 175.9 37.7 Supplies..................... 55.4 11.3 51.2 11.0 Other operating expenses..... 119.0 24.3 99.8 21.4 Provision for doubtful accounts.................... 34.6 7.0 28.0 6.0 Depreciation and amortization................ 27.6 5.6 23.8 5.1 Interest expense............. 15.5 3.2 14.2 3.0 Management fees.............. 8.2 1.7 6.3 1.3 Impairment of long-lived assets...................... 4.8 1.0 - - ------ ----- ------ ----- 462.4 94.3 399.2 85.5 ------ ----- ------ ----- Income from continuing operations before minority interests and income taxes.... 28.0 5.7 67.4 14.5 Minority interests in earnings of consolidated entities.................... 2.2 0.4 1.3 0.3 ------ ----- ------ ----- Income from continuing operations before income taxes....................... 25.8 5.3 66.1 14.2 Provision for income taxes... 10.6 2.2 26.5 5.7 ------ ----- ------ ----- Income from continuing operations.................. $ 15.2 3.1 $ 39.6 8.5 ====== ===== ====== ===== % changes from prior year: Revenues................... 5.1% Income from continuing operations before income taxes..................... (61.0) Income from continuing operations................ (61.6) Admissions (a)............. 1.9 Equivalent admissions (b).. 6.3 Revenues per equivalent admission................. (1.1) Same facility % changes from prior year (c): Revenues................... 2.5 Admissions (a)............. 0.7 Equivalent admissions (b)..... 5.7 Revenues per equivalent admission................. (3.1)
- - -------- (a) Admissions represent the total number of patients admitted (in the facility for a period in excess of 23 hours) to LifePoint's hospitals. (b) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (c) "Same facility" information excludes the operations of hospitals and their related facilities which were either acquired or divested during the current and prior year. Reported amounts are the same as "same facility" for the nine months ended September 30, 1998 compared to September 30, 1997 because all the facilities have been owned for both periods. 52 Nine Months Ended September 30, 1998 and 1997 Revenues decreased 2.9% to $366.4 million in 1998 compared to $377.4 million in 1997. Inpatient admissions decreased 1.3%, equivalent admissions increased 0.4% and revenues per equivalent admission decreased 3.2% from prior year. The decline in revenues and revenues per equivalent admission was due to several factors, including decreases in Medicare reimbursement rates mandated by the Balanced Budget Act which became effective October 1, 1997 (such rates lowered 1998 revenues by approximately $5.0 million during 1998), continued increases in discounts from the growing number of managed care payers (managed care as a percentage of total admissions increased to 18.4% in 1998 compared to 16.7% in 1997) and delays experienced in obtaining Medicare cost report settlements (cost report filings and settlements resulted in favorable revenue adjustments of $2.0 million in 1998 compared to $6.0 million in 1997). Operating expenses increased as a percentage of revenues in every expense category. The primary reason for the increases, as a percentage of revenues, was LifePoint's inability to adjust expenses in line with the decreases experienced in volume and reimbursement trends. The level of management's attention being devoted to the governmental investigations, reactions by certain physicians and patients to the related negative media coverage and management changes at several levels and locations throughout LifePoint contributed to LifePoint's inability to implement changes to reduce operating expenses in response to the volume and revenue declines. Salaries and benefits, as a percentage of revenues, increased to 43.1% in 1998 from 38.2% in 1997. The increase was due to cost pressures on labor (salaries and benefits per equivalent admission increased 9.1% over last year) and a decline in productivity (man-hours per equivalent admission increased 3.1% over last year). Supply costs increased to 12.2% as a percentage of revenues in 1998 from 10.8% in 1997 primarily due to an 8.5% increase in cost of supplies per equivalent admission. The higher cost of supplies per equivalent admission resulted from significant increases in pharmaceutical costs and other increases in new product development costs and general inflation. Other operating expenses increased slightly as a percentage of revenues compared to last year. Other operating expenses consists primarily of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance and non-income taxes. Provision for doubtful accounts, as a percentage of revenues, increased to 7.7% in 1998 from 6.1% in 1997 due to internal factors such as computer information system conversions (including patient accounting systems) at various facilities and external factors such as payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles) and payer remittance slowdowns. The information system conversions hampered the business office billing functions and collection efforts in those facilities as some resources were directed to installing and converting systems and building new data files, rather than devoting full effort to billing and collecting receivables. LifePoint has experienced an increased occurrence of charge audits from certain payers due to the negative publicity surrounding the government investigations which have resulted in delays in the collection of receivables. The delays in collection resulted in an increase in receivables reserved under LifePoint's bad debt allowance policy. Interest expense increased to $13.9 million in 1998 from $11.3 million in 1997 primarily due to additional interest expense related to increases in cash advances from Columbia/HCA since December 1997. Provision for income taxes decreased as a percentage of revenues to 1.2% in 1998 from 5.0% in 1997 primarily due to the decline in pretax income. Net income from continuing operations declined 78.9% to $5.6 million in 1998 compared to $26.6 million in 1997 due to the decline in revenues and the increase in expenses previously discussed. Net income declined 93.4% to $1.9 million in 1998 compared to $28.7 in 1997. In addition to the decline in income from continuing 53 operations, LifePoint incurred a $3.7 million after-tax loss from its discontinued home health operations in 1998 compared to $2.7 million in after- tax income in 1997 primarily due to declines in Medicare reimbursement and home health visits. Years Ended December 31, 1997 and 1996 Revenues increased 5.1% to $490.4 million in 1997 compared to $466.6 million in 1996. Inpatient admissions increased 1.9%, equivalent admissions increased 6.3% and revenues per equivalent admission decreased 1.1% from prior year. The increase in revenues and equivalent admissions was primarily due to the acquisition of two hospitals during March and May of 1996. On a same facility basis, revenues increased 2.5%, admissions increased .7% and revenues per equivalent admission decreased 3.1%. The decline in revenues per equivalent admission was due in part to delays experienced in obtaining cost report settlements (cost reports resulted in favorable revenue adjustments of $3.3 million in 1997 compared to $10.6 million in 1996), decreases in Medicare rates of reimbursement mandated by the Balanced Budget Act which became effective October 1, 1997 (such rates lowered fourth quarter 1997 revenues by approximately $1.5 million) and increased discounts from the growing number of managed care payers (managed care as a percentage of total admissions increased to 16.7% in 1997 compared to 13.8% in 1996). Operating expenses increased as a percentage of revenues in every expense category primarily due to LifePoint's inability to control expenses. The level of management's attention being devoted to the governmental investigations during the fourth quarter of 1997, reactions by certain physicians and patients to the related negative media coverage and management changes at several levels and locations throughout LifePoint contributed to LifePoint's inability to control operating expenses. Salaries and benefits, as a percentage of revenues, increased to 40.2% in 1997 from 37.7% in 1996. The increase was primarily due to cost pressures on labor (salaries and benefits per equivalent admission increased 5.6% over last year). Other operating expenses increased to 24.3% as a percent of revenues in 1997 compared to 21.4% in 1996. Included in 1997 are costs associated with start-up activities which were previously capitalized and subsequently amortized. LifePoint changed its policy on accounting for start-up costs effective January 1, 1997, which resulted in approximately $4.6 million being recorded as other operating expenses for 1997, compared to such costs being capitalized and the related expense recorded as amortization expense during 1996. (See Note 7-- Accounting Change of the Notes to Combined Financial Statements of LifePoint included elsewhere herein). The increase was also due, in part, to small increases in various operating expense categories including contract services as a percentage of revenues. Provision for doubtful accounts, as a percentage of revenues, increased to 7.0% in 1997 from 6.0% in 1996 due to internal factors such as computer information system conversions (including patient accounting systems) at various facilities and external factors such as payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles) and payer remittance slowdowns. During 1997, LifePoint recorded a non-cash asset impairment charge of $4.8 million pre-tax ($2.9 million after-tax). The charge primarily relates to a surgery center identified to be sold which was reduced to fair value, based on estimated selling value. Provision for income taxes decreased as a percentage of revenues to 2.2% in 1997 from 5.7% in 1996 primarily due to the decline in pretax income. Net income from continuing operations declined 61.6% to $15.2 million compared to $39.6 million in 1996 due to the increases in expenses, including the charge for asset impairments, as discussed above. Net income declined 74.5% to $10.6 million in 1997 compared $41.5 million in 1996. In addition to the decline in income from continuing operations, LifePoint incurred a $4.0 million after-tax loss from its discontinued home 54 health operations in 1997 compared to $1.9 million in after-tax income in 1996. The 1997 loss includes a $3.4 million after-tax estimated loss on disposal of its home health operations. LIQUIDITY AND CAPITAL RESOURCES LifePoint has previously relied upon Columbia/HCA for liquidity and sources of capital to supplement any needs not met by operations. At September 30, 1998, LifePoint had working capital of $44.2 million. Cash provided by operating activities decreased to $26.0 million for the nine months ended September 30, 1998 from $28.7 million during the same period last year. The decrease was due to reduced income before non-cash charges and partially offset by higher growth in accounts receivable balances in the prior period. For the year ended December 31, 1997, cash provided by operating activities decreased to $47.9 million from $62.9 million for the year ended December 31, 1996. The decrease was primarily due to reduced income before non-cash charges and partially offset by a decline in working capital outflows during 1997 compared to the prior year. The decline in working capital outflows was primarily due to a higher growth in accounts receivable balances in the prior year partially offset by a growth in accounts payable in the same year. Cash used in investing activities decreased to $18.4 million for the nine months ended September 30, 1998 from $53.5 million during the same period last year. The decrease was primarily due to decreased purchases of property and equipment during the nine months ended September 30, 1998 and a $5.7 million equity investment in a joint venture during the same period last year. Cash used in investing activities was $51.6 million for the year ended December 31, 1997 compared to $57.1 million last year. Routine capital expenditures are expected to approximate $30.0 million for the year ended December 31, 1998. Management believes that its capital expenditure program is adequate to expand, improve and equip LifePoint's existing health care facilities. At September 30, 1998, there were projects under construction which had an estimated cost to complete and equip over the next few years of approximately $52 million (including the construction of a replacement hospital located in Florida that is estimated to cost approximately $32.0 million). In connection with the distribution, all of LifePoint's advances from Columbia/HCA will be eliminated, and LifePoint will assume $250 million of debt from Columbia/HCA. Management does not consider the sale of any assets to be necessary to repay LifePoint's indebtedness or to provide working capital. However, for other reasons, certain of LifePoint's hospitals may be sold in the future from time to time. Although LifePoint's indebtedness will be more substantial than was historically the case for its predecessor entities, management expects that operations and working capital facilities will provide sufficient liquidity for fiscal 1999. In connection with the distribution, LifePoint expects to enter into a revolving credit loan agreement providing for a commitment for revolving credit loans in an aggregate principal amount of $ million. Borrowings under the revolving credit facility will be available to fund working capital needs and to finance acquisitions. LifePoint does not expect to pay dividends on its common stock in the foreseeable future. IMPACT OF YEAR 2000 COMPUTER ISSUES Background and General Information The Year 2000 problem is the result of two potential malfunctions that could have an impact on Columbia/HCA's systems and equipment, including systems and equipment on which LifePoint relies. The first problem arises due to computers being programmed to use two rather than four digits to define the applicable 55 year. The second problem arises in embedded chips, where microchips and microcontrollers have been designed using two rather than four digits to define the applicable year. Certain of Columbia/HCA's computer programs, building infrastructure components (e.g., alarm systems and HVAC systems) and medical devices that are date sensitive, may recognize a date using "00" as the year 1900 rather than the year 2000. If uncorrected, the problem could result in computer system and program failures or equipment and medical device malfunctions that could result in a disruption of business operations or that could affect patient diagnosis and treatment. LifePoint obtains most of its information technology and information technology infrastructure systems from CIS pursuant to the Computer and Data Processing Services Agreement. CIS has represented that the software that is owned by CIS and provided to LifePoint will be Year 2000 ready on or before January 1, 2000, and that it will endeavor to address in a timely manner Year 2000 issues with respect to other software and hardware licensed to LifePoint under the Computer and Data Processing Services Agreement. In connection with its participation in Columbia/HCA's Year 2000 project, LifePoint has made and will continue to make certain investments in the software systems and applications not obtained from CIS and non-information technology systems (e.g., vendor products, medical equipment and other related equipment with embedded chips) to ensure that they are Year 2000 ready. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Computer and Data Processing Services Agreement; Year 2000 Agreement." Pursuant to the Computer and Data Processing Services Agreement, after the distribution, LifePoint will rely on CIS to provide virtually all of its computer support and information technology services. Pursuant to the Year 2000 Agreement, Columbia/HCA will continue its ongoing program to inspect medical equipment at LifePoint facilities for Year 2000 compliance. LifePoint is therefore dependent upon Columbia/HCA in substantially all respects for the Year 2000 readiness of its information technology and non-information technology systems. Any failure by Columbia/HCA to adequately address such matters could have a material adverse affect on the business, financial condition and/or results of operations of LifePoint. Columbia/HCA is utilizing both internal and external resources to manage and implement its Year 2000 program. With the assistance of such resources, Columbia/HCA has recently begun to develop contingency plans in the event that its Year 2000 efforts, or the Year 2000 efforts of third-parties upon which Columbia/HCA and LifePoint rely, are not accurately or timely completed. This development phase will continue through the end of 1998 with the implementation of contingency plans occurring in 1999. Information Technology Systems With respect to the information technology portions of Columbia/HCA's Year 2000 project, which address the inventory, assessment, remediation, testing and implementation of internally developed software, Columbia/HCA has identified various software applications that are being addressed on separate time lines. Columbia/HCA has begun remediating for all these software applications and is testing the software applications where remediation has been completed. Columbia/HCA has also completed the assessment of mission critical third party software (i.e., that software which is essential for day-to-day operations) and has developed testing and implementation plans with separate time lines. Columbia/HCA anticipates completing, in all material respects, remediation, testing and implementation for internally developed and mission critical third party software by June 1999. Columbia/HCA's efforts are currently on schedule in all material respects. With respect to the information technology infrastructure portion of Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor products (hardware, systems software, business software, and telecommunication equipment). Columbia/HCA has implemented a program to contact vendors, analyze information provided, and remediate, replace or otherwise address information technology products that pose a material Year 2000 Impact. Columbia/HCA anticipates completion, in all material respects, of the information technology infrastructure 56 portion of its program by June 1999. The information technology infrastructure portion of Columbia/HCA's Year 2000 project is currently on schedule in all material respects. Columbia/HCA presently believes that with modifications to existing software or the installation of upgraded software under the information technology infrastructure portion, the Year 2000 will not pose material operational problems for its computer systems. However, if such modifications or upgrades are not accomplished in a timely manner, Year 2000 related failures may present a material adverse impact on the operations of LifePoint. Contingency planning will be established and implemented in an effort to minimize any impact from Year 2000-related failures. Non-Information Technology Systems and Equipment With respect to the non-information technology infrastructure portion of Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor products, medical equipment and other related equipment with embedded chips. Columbia/HCA has implemented a program to contact vendors, analyze information provided, and remediate, replace or otherwise address devices or equipment that pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all material respects, of the non-information technology infrastructure portion of its program by June 1999. The non-information technology infrastructure portion of Columbia/HCA's Year 2000 project is currently on schedule in all material respects. Columbia/HCA is prioritizing its non-information technology infrastructure efforts by focusing on equipment and medical devices that will have a direct impact on patient safety and health. Columbia/HCA is directing the majority of its efforts to repair, replace, upgrade or otherwise address this equipment and these medical devices in order to minimize risk to patient safety and health. Columbia/HCA is relying on information that is being provided to it by equipment and medical device manufacturers regarding the Year 2000 readiness of their products. While Columbia/HCA is attempting to evaluate information provided by its present vendors, there can be no assurance that in all instances accurate information is being provided. Columbia/HCA also cannot in all instances guarantee that the repair, replacement or upgrade of all non- information technology infrastructure systems will occur on a timely basis. Contingency planning will be established and implemented in an effort to minimize any impact from Year 2000 related failures. Third-Party Payers and Intermediaries, and Suppliers Columbia/HCA has initiated communications with LifePoint's major third party payers and intermediaries, including government payers and intermediaries. LifePoint relies on these entities for accurate and timely reimbursement of claims, often through the use of electronic data interfaces. Columbia/HCA has not received assurances that these interfaces will be timely converted. Failure of these third party systems could have a material adverse affect on LifePoint's business, financial condition, or results of operations. Columbia/HCA also has initiated communications with LifePoint's mission critical suppliers and vendors (i.e. those suppliers and vendors whose products and services are essential for day-to-day operations) to assure their continued operation through the Year 2000. Columbia/HCA is continuing its efforts to obtain such assurances from all mission critical suppliers and vendors. The failure of these third parties could have a material adverse effect on the business, financial condition or results of operations of LifePoint, and/or the ability of LifePoint to provide health care services. Contingency planning will be established and implemented in an effort to minimize any impact from Year 2000-related failures. Costs and Expenses The Year 2000 project costs incurred by Columbia/HCA will have an impact on the Computer and Data Processing Services Agreement with LifePoint. LifePoint is not currently able to reasonably estimate the ultimate cost to be incurred by it for the assessment, remediation, upgrade, replacement and testing of its 57 impacted non-information technology systems. The majority of the costs related to the Year 2000 project will be expensed as incurred and are expected to be funded through operating cash flows. The successful completion of the project and completion dates for the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantees that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area and the ability to locate and correct all relevant computer codes and all medical equipment. EFFECTS OF INFLATION AND CHANGING PRICES Various federal, state and local laws have been enacted that, in certain cases, limit LifePoint's ability to increase prices. Revenues for acute care hospital services rendered to Medicare patients are established under a PPS. Total Medicare revenues approximated 37.9% during the nine months ended September 30, 1998, 39.7% and 40.9% for the years ended December 31, 1997 and 1996, respectively. Management believes that hospital industry operating margins have been, and may continue to be, under significant pressure because of deterioration in inpatient volumes, changes in payer mix, and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. Management expects that the average rate of increase in Medicare prospective payments will continue to decline slightly in 1999. In addition, as a result of increasing regulatory and competitive pressures, LifePoint's ability to maintain operating margins through price increases to non-Medicare patients is limited. HEALTH CARE REFORM In recent years, an increasing number of legislative proposals have been introduced or proposed to Congress and in some state legislatures that would significantly affect health care systems in LifePoint's markets. The cost of certain proposals would be funded in significant part by reduction in payments by government programs, including Medicare and Medicaid, to health care providers (similar to the reductions incurred as part of the Balanced Budget Act as previously discussed). While LifePoint is unable to predict which, if any, proposals for health care reform will be adopted, there can be no assurance that proposals adverse to the business of LifePoint will not be adopted. 58 TRIAD SELECTED FINANCIAL DATA (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------- 1998 1997 1996 1995 1994 ------------- -------- -------- -------- -------- SUMMARY OF OPERATIONS: Revenues................ $1,376.4 $1,786.9 $1,762.1 $1,622.6 $1,326.7 Operating income (a).... 120.3 192.1 309.9 287.8 209.5 Income (loss) from continuing operations (b).................... (81.6) (27.0) 69.3 43.3 29.9 Net income (loss) (b)... (82.8) (27.3) 76.6 45.6 31.4 FINANCIAL POSITION: Assets.................. $1,519.9 $1,562.1 $1,527.9 $1,425.7 $1,241.4 Long-term debt, including amounts due within one year........ 14.8 20.9 17.1 29.0 34.3 OPERATING DATA: Number of hospitals at end of period.......... 42 42 41 41 40 Number of licensed beds at end of period (c)... 7,007 6,863 6,592 6,186 5,920 Weighted average licensed beds (d)...... 6,929 6,621 6,590 6,160 5,496 Admissions (e).......... 144,805 189,080 187,211 176,392 151,522 Equivalent admissions (f).................... 232,846 298,935 289,990 266,705 217,131 Average length of stay (days) (g)............. 5.0 5.0 5.1 5.2 5.2 Average daily census (h).................... 2,659 2,587 2,603 2,521 2,170 Occupancy rate (i)...... 38% 39% 39% 41% 39%
- - -------- (a) Operating income is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long-lived assets, minority interests and income taxes. (b) Includes charge related to impairment of long-lived assets of $71.0 million ($42.0 million after-tax) and $13.7 million ($8.2 million after-tax) for the nine months ended September 30, 1998 and the twelve months ended December 31, 1997, respectively. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Represents the average number of licensed beds weighted based on periods owned. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to Triad's hospitals. (f) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (g) Represents the average number of days admitted patients stay in Triad's hospitals. (h) Represents the average number of patients in Triad's hospital beds each day. (i) Represents the percentage of hospital licensed beds occupied by patients. 59 TRIAD MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion should be read together with the historical financial statements of Triad Hospitals, Inc. included elsewhere herein and the notes thereto and the information set forth under "Triad Selected Financial Data" and "Triad Unaudited Pro Forma Condensed Combined Financial Statements" and the notes thereto. However, the historical financial statements of Triad Hospitals, Inc. may not be indicative of Triad's future performance, nor do they necessarily reflect what the financial position and results of operations of Triad would have been if it had operated as a separate, stand-alone entity during the periods covered. See "Risk Factors--No Operating Histories as Independent Companies." FORWARD-LOOKING STATEMENTS This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains disclosures which are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on the current plans and expectations of Triad and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and the future financial condition and results of Triad. These factors include, but are not limited to, (i) the highly competitive nature of the health care business, (ii) the efforts of insurers, health care providers and others to contain health care costs, (iii) possible changes in the Medicare program that may further limit reimbursements to health care providers and insurers, (iv) changes in Federal, state or local regulation affecting the health care industry, (v) the possible enactment of Federal or state health care reform, (vi) the departure of key executive officers from Triad, (vii) claims and legal actions relating to professional liability, (viii) fluctuations in the market value of Triad common stock, (ix) changes in accounting practices, (x) changes in general economic conditions, (xi) the complexity of integrated computer systems and the success and expense of the remediation efforts of Columbia/HCA, Triad and relevant third parties in achieving Year 2000 readiness, and (xii) other risk factors described above. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of Triad. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." INVESTIGATIONS Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is the subject of a formal order of investigation by the Securities and Exchange Commission. Columbia/HCA understands that the SEC investigation includes the anti-fraud, periodic reporting and internal accounting control provisions of the Federal securities laws. Management believes that the ongoing governmental investigations and related media coverage may be having a negative effect on Columbia/HCA's results of operations (which includes Triad for the periods prior to the distribution date which are presented herein). The extent to which Triad may or may not continue to be affected after the distribution by the ongoing investigations of Columbia/HCA, the initiation of additional investigations, if any, and the related media coverage cannot be predicted. It is possible that these matters could have a material adverse effect on the financial condition or results of operations of Triad in future periods. Columbia/HCA has agreed to indemnify Triad in respect of certain liabilities arising out of or in connection with the foregoing matters and in respect of certain liabilities arising out of related stockholder and 60 other legal proceedings currently pending against Columbia/HCA. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement." If any of such indemnified liabilities were successfully asserted against Triad, or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations, then such liabilities could have a material adverse effect on the financial position and results of operations of Triad. (See Note 3--Columbia/HCA Investigations, Litigation and Indemnification Rights and Note 11--Contingencies of the Notes to Combined Financial Statements of Triad included elsewhere herein). RESULTS OF OPERATIONS Revenue/Volume Trends During the nine months ended September 30, 1998, Triad has experienced declines in revenue and volume growth rates as well as operational deficiencies. Management believes three primary factors have contributed to these declines: the impact of the government investigation, the shift to providing services on an outpatient basis, and the trend toward discounting service pricing. Management believes that the impact of the ongoing governmental investigations of certain of Columbia/HCA's business practices and the related media coverage, combined with Columbia/HCA's restructuring of operations (including the distribution and the announced divestitures of several facilities), have created uncertainties with physicians, patients and payers in certain markets. See "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation." Triad's revenues continue to be affected by the trend toward certain services being performed more frequently on an outpatient basis. Growth in outpatient services is expected to continue in the health care industry as procedures performed on an inpatient basis are converted to outpatient procedures through continuing advances in pharmaceutical and medical technologies. The redirection of certain procedures to an outpatient basis is also influenced by pressures from payers to direct certain procedures from inpatient care to outpatient care. Outpatient revenues grew to 41.2% of net patient revenues for the nine months ended September 30, 1998 from 38.4% during the same period last year. Triad's revenues also continue to be affected by an increasing proportion of revenue being derived from fixed payment, higher discount sources, including Medicare, Medicaid and managed care plans. In addition, insurance companies, government programs (other than Medicare) and employers purchasing health care services for their employees are also negotiating discounted amounts that they will pay health care providers rather than paying standard prices. These purchasers then become discounted payers, similar to HMOs and PPOs, in virtually all markets and make it increasingly difficult for providers to maintain their historical growth trends. Triad expects patient volumes from Medicare and Medicaid to continue to increase due to the general aging of the population and expansion of state Medicaid programs. However, under the Federal Balanced Budget Act of 1997 (the "Balanced Budget Act"), Triad's reimbursement from the Medicare and Medicaid programs were reduced and will be further reduced as some reductions will be phased in over the next few years. Admissions related to Medicare, Medicaid and managed care plan patients were 87.4% and 86.2% of total admissions for the nine months ended September 30, 1998 and 1997, respectively. Revenues from capitation arrangements (prepaid health service agreements) are less than 1% of consolidated revenues. Reductions in the rate of increase in Medicare and Medicaid reimbursement, increasing percentages of the patient volume being related to patients participating in managed care plans and continuing trends toward more services being performed on an outpatient basis are expected to present an ongoing challenge to Triad. To maintain and improve its operating margins in future periods, Triad must increase patient volumes while controlling the costs of providing services. 61 Management believes that the proper response to these challenges includes the delivery of a broad range of quality health care services to physicians and patients with operating decisions being made by the local management teams and local physicians. Operating Results Summary The following is a summary of results from continuing operations for the nine months ended September 30, 1998 and 1997 and the years ended December 31, 1997 and 1996 (dollars in millions):
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1997 1998 (UNAUDITED) --------------- -------------- AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- Revenues....................................... $1,376.4 100.0 $1,363.0 100.0 Salaries and benefits.......................... 610.4 44.3 548.7 40.3 Supplies....................................... 209.6 15.2 189.6 13.9 Other operating expenses....................... 305.9 22.3 306.2 22.5 Provision for doubtful accounts................ 130.2 9.5 110.7 8.1 Depreciation and amortization.................. 86.3 6.3 80.8 5.9 Interest expense............................... 61.9 4.5 50.8 3.7 Management fees................................ 23.4 1.7 21.3 1.6 Impairment of long-lived assets................ 71.0 5.1 - - -------- ----- -------- ----- 1,498.7 108.9 1,308.1 96.0 -------- ----- -------- ----- Income (loss) from continuing operations before minority interests and income taxes........... (122.3) (8.9) 54.9 4.0 Minority interests in earnings of consolidated entities...................................... 8.0 0.6 9.4 0.7 -------- ----- -------- ----- Income (loss) from continuing operations before income taxes (benefit)........................ (130.3) (9.5) 45.5 3.3 Provision for income taxes (benefit)........... (48.7) (3.6) 14.6 1.0 -------- ----- -------- ----- Income (loss) from continuing operations....... $ (81.6) (5.9) $ 30.9 2.3 ======== ===== ======== ===== % changes from prior year: Revenues..................................... 1.0% Income (loss) from continuing operations before income taxes (benefit) and impairment of long-lived assets charge................. (230.3) Income (loss) from continuing operations..... (364.1) Admissions (a)............................... 2.8 Equivalent admissions (b).................... 4.7 Revenues per equivalent admission............ (3.6) Same facility % changes from prior year (c): Revenues..................................... (2.5) Admissions (a)............................... (1.7) Equivalent admissions (b).................... 0.5 Revenues per equivalent admission............ (2.9)
62 Operating Results Summary (continued)
YEARS ENDED DECEMBER 31, ------------------------------- 1997 1996 --------------- -------------- AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- Revenues....................................... $1,786.9 100.0 $1,762.1 100.0 Salaries and benefits.......................... 748.8 41.9 699.2 39.7 Supplies....................................... 258.6 14.5 246.5 14.0 Other operating expenses....................... 425.0 23.8 386.6 21.9 Provision for doubtful accounts................ 162.4 9.1 119.9 6.8 Depreciation and amortization.................. 108.9 6.1 99.0 5.6 Interest expense............................... 69.5 3.9 59.1 3.4 Management fees................................ 28.2 1.6 22.4 1.3 Impairment of long-lived assets................ 13.7 0.7 - - -------- ----- -------- ----- 1,815.1 101.6 1,632.7 92.7 -------- ----- -------- ----- Income (loss) from continuing operations before minority interests and income taxes (benefit)..................................... (28.2) (1.6) 129.4 7.3 Minority interests in earnings of consolidated entities...................................... 11.5 0.6 10.9 0.6 -------- ----- -------- ----- Income (loss) from continuing operations before income taxes (benefit)........................ (39.7) (2.2) 118.5 6.7 Provision for income taxes (benefit)........... (12.7) (0.7) 49.2 2.8 -------- ----- -------- ----- Income (loss) from continuing operations....... $ (27.0) (1.5) $ 69.3 3.9 ======== ===== ======== ===== % changes from prior year: Revenues..................................... 1.4% Income (loss) from continuing operations before income taxes (benefit) and impairment of long-lived assets charge................. (121.9) Income (loss) from continuing operations..... (139.0) Admissions (a)............................... 1.0 Equivalent admissions (b).................... 3.1 Revenues per equivalent admission............ (1.6) Same facility % changes from prior year (c): Revenues..................................... 0.6 Admissions (a)............................... 1.5 Equivalent admissions (b).................... 3.8 Revenues per equivalent admission............ (3.0)
- - -------- (a) Admissions represent the total number of patients admitted (in the facility for a period in excess of 23 hours) to Triad's hospitals. (b) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (c) "Same facility" information excludes the operations of hospitals and their related facilities which were either acquired or divested during the current and prior year. The facilities that Triad intends to divest will continue to be included in "same facility" until the date they are divested. 63 Nine Months Ended September 30, 1998 and 1997 Income (loss) from continuing operations before income taxes (benefit) and an impairment of long-lived assets charge of $71.0 million decreased 230.3% to a loss of $(59.3) million in 1998 from income of $45.5 million in 1997. The facilities that management has determined to divest as part of their plan to establish the structure for the future operations of Triad contributed significantly to the decline in results of operations. These facilities to be divested incurred losses from continuing operations before income taxes and the impairment charge of approximately $(43.7) million and approximately $(7.8) million for the nine months ended September 30, 1998 and 1997, respectively. Combined revenues increased by 1.0% to $1,376.4 million in 1998 compared to $1,363.0 million in 1997. Inpatient admissions increased 2.8% from a year ago and equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) increased 4.7%. The slight increase in revenues and the 4.7% increase in equivalent admissions resulted in a 3.6% decline in revenue per equivalent admission. On a same facility basis, revenues decreased 2.5%, admissions decreased 1.7% and equivalent admissions increased 0.5% from a year ago. The decline in revenues combined with an increase in equivalent admissions resulted in a decline in same facility revenue per equivalent admission of 2.9%. The decline in revenue per equivalent admission was due to several factors, including decreases in Medicare reimbursement rates mandated by the Balanced Budget Act which became effective October 1, 1997 (certain Balanced Budget Act provisions lowered 1998 revenues by approximately $15 million for the nine months), continued increases in discounts from the growing number of managed care payers (managed care as a percentage of total admissions increased to 31% in 1998 compared to 28% during 1997), and the announced divestitures of hospitals in certain markets. Operating expenses increased as a percentage of revenues in each expense category, except other operating expenses (which decreased 0.2% from 1997). The primary reason for the increases, as a percentage of revenues, in all the expense categories was the inability to adjust expenses in line with the decreases experienced in volume and reimbursement trends. The level of management's attention being devoted to the governmental investigations, reactions by certain physicians and patients to the related negative media coverage and management changes at several levels and locations throughout Triad have contributed to Triad's inability to implement changes to reduce operating expenses in response to the volume and revenue growth rate declines. Salaries and benefits, as a percentage of revenues, increased to 44.3% in 1998 from 40.3% in 1997. The increase was due to a 6.3% increase in salaries and benefits per equivalent admission and Triad's inability to adjust staffing levels to mitigate the declining revenue per equivalent admission (man-hours per equivalent admission increased 2.2% compared to last year). Supply costs increased as a percentage of revenues to 15.2% in 1998 from 13.9% in 1997 due to the 3.6% decline in net revenue per equivalent admission, while the cost of supplies per equivalent admission increased 5.6%, primarily due to increased costs of certain new technology items such as heart stents, spinal cages and certain pharmaceuticals which have a high physician preference. Other operating expenses (which includes contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance, marketing and non-income taxes) decreased as a percentage of revenues to 22.3% in 1998 from 22.5% in 1997. The decrease was due to small decreases in several of these expense categories as a percentage of revenues, including lower marketing costs being incurred due to the cancellation of a national branding campaign. Provision for doubtful accounts, as a percentage of revenues, increased to 9.5% in 1998 from 8.1% in 1997. The increase was due to internal factors such as information system conversions (including patient accounting systems) at certain facilities and a large increase in bad debt expense at the facilities to be divested (12.8% of revenues in 1998 compared to 9.9% of revenues in 1997), and external factors such as payer mix 64 shifts to managed care plans (resulting in increased amounts of patient co- payments and deductibles) and increases in claim audits and remittance denials from certain payers. Depreciation and amortization increased as a percentage of revenues to 6.3% in 1998 from 5.9% in 1997. The increase was primarily due to the decline in revenues (2.5% decline on a same-facility basis) and increased capital expenditures related to ancillary services (such as outpatient services) and information systems. Interest expense increased to $61.9 million in 1998 compared to $50.8 million in 1997, primarily as a result of an increase in the average balance of the investments by and advances from Columbia/HCA during 1998 compared to the same period in 1997. This was due, in part, to a $57.1 million decline in cash flows from operations. During 1998, Triad, as part of its strategic business plan, decided to divest certain of its facilities. The divestitures are expected to be completed through sales. The carrying value for these facilities expected to be sold was reduced to fair value, based upon estimated selling values, resulting in a pre- tax impairment charge of $71.0 million. (See Note 5--Impairment of Long-lived Assets in the Notes to Combined Financial Statements of Triad included elsewhere herein.) Minority interests declined 0.1% as a percentage of revenues from 1997 due to declines in income from Triad's joint ventures that include minority partners. Triad incurred a $(1.2) million net loss from operations of its discontinued home health businesses in 1998 compared to net income of $6.1 million during the prior year period. The loss is primarily due to revenue reductions related to Medicare rates of reimbursement for home health visits under the Balanced Budget Act and a decline in home health visits. Years Ended December 31, 1997 and 1996 Income (loss) from continuing operations before income taxes (benefit) and an impairment of long-lived assets charge of $13.7 million declined 121.9% to a loss of $(26.0) million in 1997 from income of $118.5 million in 1996. The facilities that Triad plans to divest contributed to the decline in profitability by incurring losses from continuing operations before income taxes (benefit) and the impairment charge of approximately $(33.9) million and approximately $(7.0) million for the years ended December 31, 1997 and 1996, respectively. Combined revenues increased 1.4% to $1,786.9 million in 1997 compared to $1,762.1 million in 1996. Inpatient admissions increased 1.0% and equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) increased 3.1%. On a same facility basis, revenues increased 0.6%, admissions increased 1.5% and equivalent admissions increased 3.8% from 1996. The lower growth rate in both reported and same-facility revenues, compared to the increases in equivalent admissions, resulted in declines in revenue per equivalent admission of 1.6% on a reported basis and 3.0% on a same facility basis. As previously discussed, the increase in outpatient volume (reflected by the increases in equivalent admissions) is primarily a result of the continuing trend of certain services, previously provided in an inpatient setting, being converted to an outpatient setting. The decline in revenue per equivalent admission was due to several factors including decreases in Medicare reimbursement rates mandated by the Balanced Budget Act which became effective October 1, 1997 (such rates lowered fourth quarter 1997 revenues by approximately $5 million), continued increases in discounts from the growing number of managed care payers (managed care as a percentage of total admissions increased to 28% in 1997 compared to 25% during 1996), delays experienced in obtaining Medicare cost report settlements (cost report filings and settlements results in favorable revenue adjustments of $1.9 million in 1997 compared to $33.6 million in 1996). 65 Operating expenses increased, as a percentage of revenues, in every expense category. The primary reason for the increases as a percentage of revenues in all expense categories was Triad's inability to adjust expenses in line with the decreases experienced in revenue and reimbursement trends. Management's attention to the governmental investigations, reactions by certain physicians and patients to the related negative media coverage and management changes at several levels and locations throughout Triad contributed to Triad's inability to implement changes to reduce operating expenses in response to the revenue and reimbursement rate declines. Salaries and benefits, as a percentage of revenues, increased to 41.9% in 1997 from 39.7% in 1996. The decline in revenues per equivalent admission was a primary factor in the increase. A 3.9% increase in salaries and benefits per equivalent admission resulted from the combined effect of man-hours per equivalent admission remaining constant, while labor cost per man-hour increased 3.3% and revenue per equivalent admission declined 1.6%. Supply costs increased as a percentage of revenues to 14.5% in 1997 from 14.0% in 1996 due to a decline in net revenue per equivalent admission while the cost of supplies per equivalent admission increased 1.8%. Other operating expenses (which includes professional fees, contract services, repairs and maintenance, rent, utilities, insurance, marketing and non-income taxes) increased as a percentage of revenues to 23.8% in 1997 from 21.9% in 1996. The increase was due to small increases in several of these expense categories as a percentage of revenues. Provision for doubtful accounts, as a percentage of revenues, increased to 9.1% in 1997 from 6.8% in 1996 due to internal factors such as continued computer information system conversions (including patient accounting systems) at various facilities and external factors such as payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles) and payer remittance slowdowns. The information system conversions hampered the business office billing functions and collection efforts in those facilities as some resources are directed to installing and converting systems and building new data files, rather than devoting full effort to billing and collecting receivables. Triad has experienced an increased occurrence of charge audits from certain payers due to the negative publicity surrounding the government investigations which have resulted in delays in the collection of receivables. The delays in collections resulted in an increase in receivables reserved under Triad's bad debt allowance policy. Depreciation and amortization increased as a percentage of revenues to 6.1% in 1997 from 5.6% in 1996, primarily due to the slowdown in revenue growth. Interest expense increased to $69.5 million in 1997 compared to $59.1 million in 1996, primarily as a result of an increase in the average balance of the investments by and advances from Columbia/HCA during 1997 compared to 1996. During the fourth quarter of 1997 Triad determined that the recorded values of certain long-lived assets related to certain surgery centers and physician practices were not deemed fully recoverable based upon the operating results trends and projected future cash flows. The recorded value for these surgery centers and physician practices was reduced to estimated fair value resulting in a pre-tax impairment charge of $13.7 million. Minority interests were 0.6% as a percentage of revenues both in 1997 and 1996. Triad earned $5.6 million net income from operations of its discontinued home health business in 1997 compared to net income of $7.3 million during 1996. The majority of the decline in income from operations of the discontinued home health businesses was due to revenue reductions related to Medicare rates of reimbursement for home health visits under the Balanced Budget Act. During 1997, Triad recorded a $3.0 million charge, net of tax benefits, on the expected divestiture of the home health businesses. 66 LIQUIDITY AND CAPITAL RESOURCES Triad has previously relied upon Columbia/HCA for liquidity and sources of capital to supplement any needs not met by operations. At September 30, 1998, Triad had working capital of $192.8 million. Cash provided by continuing operating activities decreased to $20.2 million for the nine months ended September 30, 1998 from $77.3 million during the same period in the previous year. The decrease was primarily due to reduced income before non-cash impairment charges from net income of $34.1 million for the nine months ended September 30, 1997 to a loss of $(11.8) million for the 1998 period. For the year ended December 31, 1997, cash provided by operating activities declined to $78.6 million from $173.8 million for the year ended December 31, 1996. The decrease was due to reduced income before non-cash charges in addition to decreases in cash related to working capital items. The increase in working capital outflows was primarily the result of reductions in accounts payable and accrued expenses compared to the prior year. Cash used by investing activities for the nine months ended September 30, 1998 was consistent with the levels used during the same period in 1997. For the year ended December 31, 1997, cash used in investing activities decreased to $153.2 million from $160.1 million in 1996. The decrease was due to reductions in cash used for the acquisition of health care entities and for investments in and advances to affiliates. These decreases were partially offset by an increase in the purchase of property and equipment. In connection with the distribution, all of Triad's advances from Columbia/HCA will be eliminated, and Triad will assume $750 million of debt from Columbia/HCA. Management does not consider the sale of any assets to be necessary to repay Triad's indebtedness or to provide working capital. However, for other reasons, certain of Triad's hospitals may be sold in the future from time to time. Although Triad's indebtedness will be more substantial than was historically the case for its predecessor entities, management expects that operations and working capital facilities will provide sufficient liquidity for fiscal 1999. In connection with the distribution, Triad expects to enter into a revolving credit loan agreement providing for a commitment for revolving credit loans in an aggregate principal amount of $ million. Borrowings under the revolving credit facility will be available to fund working capital needs and to finance acquisitions. Triad does not expect to pay dividends on its common stock in the foreseeable future. IMPACT OF YEAR 2000 COMPUTER ISSUES Background and General Information The Year 2000 problem is the result of two potential malfunctions that could have an impact on Columbia/HCA's systems and equipment including systems and equipment on which Triad relies. The first problem arises due to computers being programmed to use two rather than four digits to define the applicable year. The second problem arises in embedded chips, where microchips and microcontrollers have been designed using two rather than four digits to define the applicable year. Certain of Columbia/HCA's computer programs, building infrastructure components (e.g. alarm systems and HVAC systems) and medical devices that are date sensitive, may recognize a date using "00" as the year 1900 rather than the year 2000. If uncorrected, the problem could result in computer system and program failures or equipment and medical device malfunctions that could result in a disruption of business operations or that could affect patient diagnosis and treatment. Triad obtains most of its information technology and information technology infrastructure systems from CIS pursuant to the Computer and Data Processing Services Agreement. CIS has represented that the software 67 that is owned by CIS and provided to Triad will be Year 2000 ready on or before January 1, 2000, and that it will endeavor to address in a timely manner Year 2000 issues with respect to other software and hardware licensed to Triad under the Computer and Data Processing Services Agreement. In connection with its participation in Columbia/HCA's Year 2000 project, Triad has made and will continue to make certain investments in the software systems and applications not obtained from CIS and non-information technology systems (e.g., vendor products, medical equipment and other related equipment with embedded chips) to ensure that they are Year 2000 ready. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Computer and Data Processing Services Agreement; Year 2000 Agreement." Pursuant to the Computer and Data Processing Services Agreement, after the distribution, Triad will rely on CIS to provide virtually all of its computer support and information technology services. Pursuant to the Year 2000 Agreement, Columbia/HCA will continue its ongoing program to inspect medical equipment at Triad facilities for Year 2000 compliance. Triad is therefore dependent upon Columbia/HCA in substantially all respects for the Year 2000 readiness of its information technology and non-information technology systems. Any failure by Columbia/HCA to adequately address such matters could have a material adverse affect on the business, financial condition and/or results of operations of Triad. Columbia/HCA is utilizing both internal and external resources to manage and implement its Year 2000 program. With the assistance of such resources, Columbia/HCA has recently begun to develop contingency plans in the event that its Year 2000 efforts, or the Year 2000 efforts of third-parties upon which Columbia/HCA and Triad rely, are not accurately or timely completed. This development phase will continue through the end of 1998 with the implementation of contingency plans occurring in 1999. Information Technology Systems With respect to the information technology portions of Columbia/HCA's Year 2000 project, which address the inventory, assessment, remediation, testing and implementation of internally developed software, Columbia/HCA has identified various software applications that are being addressed on separate time lines. Columbia/HCA has begun remediating for all these software applications and is testing the software applications where remediation has been completed. Columbia/HCA has also completed the assessment of mission critical third party software (i.e., that software which is essential for day to day operations) and has developed testing and implementation plans with separate time lines. Columbia/HCA anticipates completing, in all material respects, remediation, testing and implementation for internally developed and mission critical third party software by June 1999. Columbia/HCA's efforts are currently on schedule in all material respects. With respect to the information technology infrastructure portion of Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor products (hardware, systems software, business software, and telecommunication equipment). Columbia/HCA has implemented a program to contact vendors, analyze information provided, and remediate, replace or otherwise address information technology products that pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all material respects, of the information technology infrastructure portion of its program by June 1999. The information technology infrastructure portion of Columbia/HCA's Year 2000 project is currently on schedule in all material respects. Columbia/HCA presently believes that with modifications to existing software or the installation of upgraded software under the information technology infrastructure portion, the Year 2000 will not pose material operational problems for its computer systems. However, if such modifications or upgrades are not accomplished in a timely manner, Year 2000-related failures may present a material adverse impact on the operations of Triad. Contingency planning will be established and implemented in an effort to minimize any impact from Year 2000-related failures. 68 Non-Information Technology Systems and Equipment With respect to the non-information technology infrastructure portion of Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor products, medical equipment and other related equipment with embedded chips. Columbia/HCA has implemented a program to contact vendors, analyze information provided, and remediate, replace or otherwise address devices or equipment that pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all material respects, of the non-information technology infrastructure portion of its program by June 1999. The non-information technology infrastructure portion of Columbia/HCA's Year 2000 project is currently on schedule in all material respects. Columbia/HCA is prioritizing its non-information technology infrastructure efforts by focusing on equipment and medical devices that will have a direct impact on patient safety and health. Columbia/HCA is directing the majority of its efforts to repair, replace, upgrade or otherwise address this equipment and these medical devices in order to minimize risk to patient safety and health. Columbia/HCA is relying on information that is being provided to it by equipment and medical device manufacturers regarding the Year 2000 readiness of their products. While Columbia/HCA is attempting to evaluate information provided by its present vendors, there can be no assurance that in all instances accurate information is being provided. Columbia/HCA also cannot in all instances guarantee that the repair, replacement or upgrade of all non- information technology infrastructure systems will occur on a timely basis. Contingency planning will be established and implemented in an effort to minimize any impact from Year 2000-related failures. Third-Party Payers and Intermediaries, and Suppliers Columbia/HCA has initiated communications with Triad's major third party payers and intermediaries, including government payers and intermediaries. Triad relies on these entities for accurate and timely reimbursement of claims, often through the use of electronic data interfaces. Columbia/HCA has not received assurances that these interfaces will be timely converted. Failure of these third party systems could have a material adverse affect on Triad's business, financial condition, or results of operations. Columbia/HCA also has initiated communications with its mission critical suppliers and vendors (i.e., those suppliers and vendors whose products and services are essential for day- to-day operations) to assure their continued operation through the Year 2000. Columbia/HCA is continuing its efforts to obtain such assurances from all mission critical suppliers and vendors. The failure of these third parties could have a material impact on the business, financial condition or results of operations of Triad and/or the ability of Triad to provide health care services. Contingency planning will be established and implemented in an effort to minimize any impact from Year 2000 related failures. Costs and Expenses The Year 2000 project costs incurred by Columbia/HCA will have an impact on the Computer and Data Processing Services Agreement with Triad. Triad is not currently able to reasonably estimate the ultimate cost to be incurred by it for the assessment, remediation, upgrade, replacement and testing of its impacted non-information technology systems. The majority of the costs related to the Year 2000 project will be expensed as incurred and are expected to be funded through operating cash flows. The successful completion of the project and completion dates for the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantees that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area and the ability to locate and correct all relevant computer codes and all medical equipment. 69 EFFECTS OF INFLATION AND CHANGING PRICES Various federal, state and local laws have been enacted that, in certain cases, limit Triad's ability to increase prices. Revenues for acute care hospital services rendered to Medicare patients are established under the federal government's prospective payment system. Total Medicare revenues approximated 36.5% in 1998, 37.2% in 1997 and 37.9% in 1996. Management believes that hospital industry operating margins have been, and may continue to be, under significant pressure because of deterioration in inpatient volumes, changes in payer mix and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. Management expects that the average rate of increase in Medicare prospective payments will continue to decline slightly in 1999. In addition, as a result of increasing regulatory and competitive pressures, Triad's ability to maintain operating margins through price increases to non-Medicare patients is limited. HEALTH CARE REFORM In recent years, an increasing number of legislative proposals have been introduced or proposed to Congress and in some state legislatures that would significantly affect health care systems in Triad's markets. The cost of certain proposals would be funded in significant part by reduction in payments by government programs, including Medicare and Medicaid, to health care providers (similar to the reductions incurred as part of the Balanced Budget Act as previously discussed). While Triad is unable to predict which, if any, proposals for health care reform will be adopted, there can be no assurance that proposals adverse to the business of Triad will not be adopted. 70 LIFEPOINT BUSINESS GENERAL LifePoint will be organized as a Delaware corporation in 1999 to serve as the public holding company for the America Group of Columbia/HCA. LifePoint's principal executive offices are located at 4525 Harding Road, Suite 300, Nashville, Tennessee 37205 (telephone number (615) - ). After the distribution, LifePoint will continue to provide health care services through its hospitals. As of September 30, 1998, the America Group (the assets of which will be transferred to LifePoint prior to the distribution) comprised 22 general, acute care hospitals located in non-urban areas in the States of Alabama, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. LifePoint will also own a minority interest in one non-consolidated hospital in Florida accounted for using the equity method. This joint venture is building a replacement hospital and, upon completion, LifePoint is expected to hold a majority interest in the joint venture. In almost all markets that LifePoint serves, its hospital is the only hospital in the community. LifePoint's primary objective is to provide the communities it serves a comprehensive array of quality health care services in the most cost effective manner possible. LifePoint's general, acute care hospitals usually provide the range of medical and surgical services commonly available in hospitals in non- urban markets. These hospitals also provide diagnostic and emergency services, as well as outpatient and ancillary services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. Each of LifePoint's hospitals is governed by a board of trustees, which includes members of the hospital's medical staff. The board of trustees establishes policies concerning medical, professional and ethical practices, monitors such practices, and is responsible for ensuring that these practices conform to established standards. LifePoint maintains quality assurance programs to support and monitor quality of care standards and to meet accreditation and regulatory requirements. Patient care evaluations and other quality of care assessment activities are monitored on a continuing basis. Like most hospitals located in non-urban areas, LifePoint's hospitals do not engage in extensive medical research and medical education programs. However, certain of LifePoint's hospitals have an affiliation with medical schools, including the clinical rotation of medical students. In addition to providing capital resources, LifePoint will make available a variety of management services to its health care facilities. These services will include information systems; ethics and compliance programs; national supply and equipment purchasing and leasing contracts; accounting, financial and clinical systems; governmental reimbursement assistance; legal support; personnel management and internal audit; access to regional managed care networks; and resource management. Some of these services initially will be provided through transitional arrangements made with Columbia/HCA. LifePoint also will participate, along with Columbia/HCA and Triad, in a group purchasing organization which will make certain national supply and equipment contracts available to LifePoint's facilities. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution" and "--Other Agreements." THE NON-URBAN HEALTH CARE MARKET LifePoint believes that growing, non-urban health care markets are attractive to health care service providers as a result of favorable demographic and economic trends. All of LifePoint's facilities are located in non-urban markets. Twenty-one of LifePoint's twenty-two hospitals are the only acute-care hospitals in their respective communities, and the remaining hospital is one of only two hospitals in its community. Because non-urban service areas have smaller populations, there are generally fewer hospitals and other health care service providers in each community, resulting in less direct competition for hospital-based services. 71 Management believes that the smaller populations and relative dominance of the one or two acute care hospitals in these markets also limit the entry of alternate non-hospital providers, such as outpatient surgery centers or rehabilitation or diagnostic imaging centers, as well as managed care plans. There is generally a lower level of managed care payer penetration in LifePoint's markets than there is in urban markets. In addition, LifePoint believes that non-urban communities are generally characterized by a high level of patient and physician loyalty that fosters cooperative relationships among the local hospital, physicians and patients. As a result, the local hospital is viewed as a key part of the local community. Although the characteristics of the non-urban health care market present a number of opportunities, LifePoint believes that hospitals in such markets have been under considerable pressure. The not-for-profit and governmental entities that typically own and operate these hospitals may have limited access to the capital required to keep pace with advances in medical technology and to make needed capital improvements. Non-urban hospitals also frequently lack the management resources necessary to control hospital expenses, recruit physicians, expand health care services and comply with increasingly complex reimbursement and managed care requirements. The increasingly dynamic and complex health care regulatory environment compounds these pressures. Collectively, these factors frequently lead to poor operating performance, a decline in the breadth of services offered, dissatisfaction by community physicians and residents, and the perception of sub-par quality of care in the community. As a result, patients migrate to, are referred by local physicians to, or are lured by incentives from managed care plans to travel to, hospitals in larger, urban markets which may be as far as 30 to 50 miles away. Patient outmigration further increases the financial pressure on non-urban physicians and hospitals, thereby further limiting their ability to address the issues which have led to this outmigration. LifePoint believes that as a result of these pressures, not-for-profit and governmental owners of non-urban hospitals who wish to preserve the local availability of quality health care services have sought to sell or lease these hospitals to companies, like LifePoint, that have the access to capital and management resources which can better serve the community and are committed to the local delivery of health care. BUSINESS STRATEGY LifePoint business strategy is centered upon the unique patient and health care provider needs and opportunities in its non-urban markets. LifePoint intends to manage its facilities aggressively to assure that they operate in accordance with the strategic objectives described below: . Develop Facility-Specific Strategies. LifePoint monitors facilities individually and develops strategies designed to benefit individual facilities. By contrast, while LifePoint has been part of Columbia/HCA, Columbia/HCA's business strategies have been developed on a system-wide basis that did not emphasize individual facility strategies. . Expand Breadth of Service and Reduce Patient Outmigration. LifePoint intends to increase the scope of health care services available at its facilities, particularly in markets where significant outmigration is occurring, and to recruit physicians with a broader range of specialties. Management believes that this expansion of available treatments should help to encourage local residents in the non-urban markets that LifePoint serves to seek care at facilities within their communities. LifePoint believes its strong community focus should also assist in limiting patient outmigration. As an entity separate from Columbia/HCA, LifePoint will not have to compete with the Columbia/HCA facilities located in larger, urban markets for management attention, support resources, and capital to finance expansion of the range of services offered at its hospitals. . Strengthen Physician Recruiting and Retention. LifePoint believes that the supply of physicians practicing in the non-urban markets it serves is limited, and that recruiting physicians in local communities is critical to increasing the quality of health care and the breadth of available services. As an independent company, LifePoint intends to take advantage of its more specific management focus to work more effectively with individual physicians and physician practices. Management believes that expansion of the range of available treatments at its hospitals should also assist in physician recruiting. In most of its markets, LifePoint will be able to take advantage of exemptions from certain restrictions on business association with physicians that are available in certain non-urban areas. 72 . Retain and Develop Stable Management. LifePoint will focus its recruitment of managers and health care professionals on those who wish to live and practice in the communities in which LifePoint's hospitals are located. In the past, managers and health care professionals employed at LifePoint hospitals sometimes relocated to advance their careers elsewhere within the Columbia/HCA system. LifePoint expects that its ability to provide equity-based compensation linked to its performance should assist in management retention. Management believes that achieving long-term retention of executive teams at the hospitals will enhance medical staff relations and maintain continuity of relationships within the community. . Build Strong Community Relations. Management believes that it is important to LifePoint's success that its hospitals continue a high level of involvement in the communities they serve and continue to develop good relations with local governments and business leaders. LifePoint employees, particularly the executive teams at the hospitals, are expected to expend considerable effort on improving community relationships. . Improve Managed Care Position. As part of Columbia/HCA, LifePoint's facilities typically have been included in managed care contracts negotiated by Columbia/HCA on a system-wide basis. LifePoint believes that independence from Columbia/HCA will enable it over time to decrease the number of discount arrangements in which it participates and to negotiate contract terms that are generally more favorable for its facilities. LifePoint does not intend to enter into capitation arrangements in the future. . Acquire Other Hospitals. As part of its business strategy, LifePoint will seek to identify attractive acquisition candidates and may acquire additional hospitals in non-urban markets consistent with its strategy. In the past, Columbia/HCA has been reluctant to pursue acquisitions of such facilities since they were outside of Columbia/HCA's core markets. LifePoint will seek to acquire hospitals that are located in non-urban markets where the projected rate of population growth is above the national average. SOURCES OF REVENUE Hospital revenues depend upon inpatient occupancy levels, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary significantly depending on the type of service (e.g., medical/surgical, intensive care or psychiatric) and the geographic location of the hospital. LifePoint receives payment for patient services from the Federal government primarily under the Medicare program, state governments under their respective Medicaid programs, HMOs, PPOs and other private insurers, as well as directly from patients. The approximate percentages of net patient revenues from continuing operations of LifePoint's facilities from such sources during the periods specified below were as follows:
YEARS ENDED NINE MONTHS DECEMBER ENDED 31, SEPTEMBER 30, ------------ 1998 1997 1996 ------------- ----- ----- Medicare....................................... 37.9% 39.7% 40.9% Medicaid....................................... 11.3% 11.2% 11.5% Other sources.................................. 50.8% 49.1% 47.6% ----- ----- ----- Total........................................ 100.0% 100.0% 100.0% ===== ===== =====
Medicare is a Federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a Federal-state program administered by the states which provides hospital benefits to qualifying individuals who are unable to afford care. All of LifePoint's hospitals are certified as providers of Medicare and Medicaid services. Amounts received under the Medicare and Medicaid programs are generally significantly less than the hospital's customary charges for the services provided. 73 To attract additional volume, most of LifePoint's hospitals offer discounts from established charges to certain large group purchasers of health care services, including private insurance companies, employers, HMOs, PPOs and other managed care plans. These discount programs limit LifePoint's ability to increase charges in response to increasing costs. See "LifePoint Business-- Competition." Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, HMOs or PPOs, but are responsible for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Collection of amounts due from individuals is typically more difficult than from governmental or business payers. For more information on the reimbursement programs on which LifePoint's revenues are dependent, see "Government and Other Sources of Reimbursement for LifePoint and Triad." HOSPITAL UTILIZATION LifePoint believes that the two most important factors relating to the overall utilization of a hospital are the quality and market position of the hospital and the number, quality and specialties of physicians providing patient care within the facility. Generally, LifePoint believes that the ability of a hospital to meet the health care needs of its community is determined by its breadth of services, level of technology, emphasis on quality of care and convenience for patients and physicians. Other factors which impact utilization include the growth in local population, local economic conditions, market penetration of managed care programs and the availability of reimbursement programs such as Medicare and Medicaid. The following table sets forth certain operating statistics for consolidated hospitals owned by LifePoint for the nine months ended September 30, 1998 and for each of the four preceding years ended December 31. Medical/surgical hospital operations are subject to certain seasonal fluctuations, including decreases in patient utilization during holiday periods and increases in the cold weather months.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------------- 1998 1997 1996 1995 1994 ------------- ------- ------ ------ ------ Number of hospitals at end of period........................ 22 22 22 20 20 Number of licensed beds at end of period (a)................. 2,056 2,080 2,074 1,881 1,843 Weighted average licensed beds (b)........................... 2,070 2,078 2,060 1,862 1,783 Admissions (c)................. 45,005 60,487 59,381 54,549 52,681 Equivalent admissions (d)...... 79,704 105,973 99,701 88,915 81,708 Average length of stay (days) (e)........................... 4.4 4.4 4.7 4.8 4.9 Average daily census (f)....... 731 733 755 713 713 Occupancy rate (g)............. 35% 35% 37% 38% 40%
- - -------- (a) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (b) Represents the average number of licensed beds weighted based on periods owned. (c) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to LifePoint's hospitals. (d) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (e) Represents the average number of days admitted patients stay in LifePoint's hospitals. (f) Represents the average number of patients in LifePoint's hospital beds each day. (g) Represents the percentage of hospital licensed beds occupied by patients. 74 LifePoint's hospitals have experienced significant shifts from inpatient to outpatient care as well as decreases in average lengths of inpatient stay, primarily as a result of improvements in clinical practices and hospital payment changes by Medicare, insurance carriers and self-insured employers. These hospital payment changes generally encourage the utilization of outpatient, rather than inpatient, services whenever possible, and shortened lengths of stay for inpatient care. Another factor affecting hospital utilization levels is improved treatment protocols as a result of advances in medical technology and pharmacology. COMPETITION The primary bases of competition among hospitals in non-urban markets are the quality and scope of medical services, strength of referral network, location and, to a lesser extent, price. Generally, LifePoint serves markets in which its hospital is the only hospital in the community. Therefore, most of LifePoint's hospitals face less competition in their immediate patient service areas than would be expected in larger communities. While LifePoint's hospitals are generally the primary provider of health care services in their respective communities, its hospitals face competition from hospitals in nearby communities, including larger tertiary care centers and, in some cases, other non-urban hospitals. Some of the hospitals that compete with LifePoint are owned by tax-supported governmental agencies or by not-for-profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis. One of the most significant factors in the competitive position of a hospital is the number and quality of physicians affiliated with the hospital. Although physicians may at any time terminate their affiliation with a hospital operated by LifePoint, LifePoint's hospitals seek to retain physicians of varied specialties on the hospitals' medical staffs and to attract other qualified physicians. LifePoint believes that physicians refer patients to a hospital primarily on the basis of the quality of services it renders to patients and physicians, the quality of other physicians on the medical staff, the location of the hospital and the quality of the hospital's facilities, equipment and employees. Accordingly, LifePoint strives to maintain high ethical and professional standards and quality facilities, equipment, employees and services for physicians and their patients. Another factor in the competitive position of a hospital is management's ability to negotiate service contracts with purchasers of group health care services. HMOs and PPOs attempt to direct and control the use of hospital services through managed care programs and to obtain discounts from hospitals' established charges. In addition, employers and traditional health insurers are increasingly interested in containing costs through negotiations with hospitals for managed care programs and discounts from established charges. Generally, hospitals compete for service contracts with group health care service purchasers on the basis of market reputation, geographic location, quality and range of services, quality of the medical staff, convenience and price. The importance of obtaining contracts with managed care organizations varies from market to market, depending on the market strength of such organizations. Managed care contracts generally are less important in the non-urban markets served by LifePoint than they are in urban and suburban markets where there is typically a higher level of managed care penetration. State certificate of need ("CON") laws, which place limitations on a hospital's ability to expand hospital services and add new equipment, also may have the effect of restricting competition. The application process for approval of covered services, facilities, changes in operations and capital expenditures is, therefore, highly competitive. In those states which have no CON laws or which set relatively high thresholds before expenditures become reviewable by state authorities, competition in the form of new services, facilities and capital spending is more prevalent. LifePoint has not experienced, and does not expect to experience, any material adverse effects from state CON requirements or from the imposition, elimination or relaxation of such requirements. See "Regulation and Other Factors Affecting LifePoint and Triad." LifePoint, and the health care industry as a whole, face the challenge of continuing to provide quality patient care while dealing with rising costs, strong competition for patients and a general reduction of reimbursement rates by both private and government payers. As both private and government payers reduce the scope of what may be reimbursed and reduce reimbursement levels for what is covered, Federal and state 75 efforts to reform the health care system may further impact reimbursement rates. Changes in medical technology, existing and future legislation, regulations and interpretations and competitive contracting for provider services by private and government payers may require changes in LifePoint's facilities, equipment, personnel, rates and/or services in the future. The hospital industry and LifePoint's hospitals continue to have significant unused capacity. Inpatient utilization, average lengths of stay and average occupancy rates continue to be negatively affected by payer-required pre- admission authorization, utilization review, and payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Admissions constraints, payer pressures and increased competition are expected to continue. LifePoint will endeavor to meet these challenges by expanding its facilities' outpatient services, offering discounts to private payer groups, upgrading facilities and equipment, and offering new programs and services. One element of LifePoint's business strategy is expansion through the acquisition of acute care hospitals in growing non-urban markets. The competition to acquire non-urban hospitals is significant, and there can be no assurance that suitable acquisitions, for which other health care companies (including those with greater financial resources than LifePoint) may be competing, can be accomplished on terms favorable to LifePoint or that financing, if necessary, can be obtained for such acquisitions. LifePoint believes that often the acquiror will be selected for a variety of reasons and not exclusively on the basis of price. LifePoint believes that its strategic goals align its interests with those of the local communities served by its hospitals. LifePoint believes that its commitment to maintaining the local availability of health care services, together with LifePoint's reputation for providing market-specific, high quality health care, its focus on physician recruiting and retention, its management's operating experience, and its direct access to capital will enable LifePoint to compete successfully for acquisitions. EMPLOYEES AND MEDICAL STAFF At September 30, 1998, LifePoint had approximately 8,100 employees, including approximately 2,250 part-time employees. No LifePoint employees are subject to collective bargaining agreements. LifePoint considers its employee relations to be good. While some of LifePoint's hospitals experience union organizing activity from time to time, LifePoint does not expect such efforts to materially affect its future operations. LifePoint's hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate. There can be no assurance as to future availability and cost of qualified medical personnel. LifePoint's hospitals are staffed by licensed physicians who have been admitted to the medical staff of individual hospitals. Any licensed physician may apply to be admitted to the medical staff of any of LifePoint's hospitals, but admission to the staff must be approved by the hospital's medical staff and the appropriate governing board of the hospital in accordance with established credentialling criteria. With certain exceptions, physicians generally are not employees of LifePoint's hospitals. However, LifePoint has conducted a physician practice management program pursuant to which some physicians provide services in LifePoint's hospitals by contract. After the distribution, LifePoint intends to limit the scope of its physician practice management program. 76 PROPERTIES The following table lists the hospitals owned or operated by the America Group of Columbia/HCA (the assets of which will be transferred to LifePoint prior to the distribution) as of September 30, 1998:
LICENSED FACILITY NAME CITY STATE BEDS - - ------------- ---- ----- -------- Andalusia Regional Hospital Andalusia AL 101 Bartow Memorial Hospital (1) Bartow FL 56 Barrow Medical Center Winder GA 60 Western Plains Regional Hospital (2) Dodge City KS 110 Halstead Hospital Halstead KS 177 Georgetown Community Hospital Georgetown KY 75 Pine Lake Regional Hospital Mayfield KY 106 Meadowview Regional Medical Center Maysville KY 111 Bourbon Community Hospital Paris KY 58 Logan Memorial Hospital Russellville KY 100 Lake Cumberland Regional Hospital Somerset KY 227 Riverview Medical Center Gonzales LA 104 Springhill Medical Center Springhill LA 63 Smith County Memorial Hospital Carthage TN 63 Trinity Hospital Erin TN 40 Crockett General Hospital Lawrenceburg TN 107 Livingston Regional Hospital Livingston TN 116 Hillside Hospital Pulaski TN 95 Emerald-Hodgson Hospital Sewanee TN 24 Southern Tennessee Medical Center Winchester TN 126 Castleview Hospital Price UT 84 Ashley Valley Medical Center Vernal UT 39 Riverton Memorial Hospital Riverton WY 70
- - -------- (1) The America Group currently manages and holds a minority equity interest in a non-consolidated joint venture that is building a replacement hospital for the Bartow Memorial Hospital. Upon completion of construction, which is scheduled to occur during 2000, LifePoint is expected to hold a majority of the equity in this joint venture and operate the replacement hospital. LifePoint's total cost for this project is projected to be approximately $32 million. (2) The America Group operates and holds a majority equity interest in a consolidated joint venture which owns and operates Western Plains Regional Hospital. Medical office buildings also are operated in conjunction with its hospitals. These office buildings are primarily occupied by physicians who practice at LifePoint's hospitals. LifePoint's headquarters are located in approximately 17,280 square feet of space in one office building in Nashville, Tennessee. After the distribution date, LifePoint will sub-lease this space from Columbia/HCA. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Lease Agreements." LifePoint's headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for LifePoint's present needs. LIFEPOINT'S REGULATORY COMPLIANCE PROGRAM It is LifePoint's policy that its business be conducted with integrity and in compliance with the law. LifePoint is developing a corporate-wide compliance program, which will focus on all areas of regulatory 77 compliance, including physician recruitment, reimbursement and cost reporting practices, and laboratory operations. This regulatory compliance program is intended to assure that high standards of conduct are maintained in the operation of LifePoint's business and to help assure that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, LifePoint will provide initial and periodic legal compliance and ethics training to every employee, review various areas of LifePoint's operations, and develop and implement policies and procedures designed to foster compliance with the law. LifePoint will regularly monitor its ongoing compliance efforts. The program also will include a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors or designated compliance officers in the LifePoint's hospitals. LEGAL PROCEEDINGS LifePoint is, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts or for wrongful restriction of or interference with physician's staff privileges. In certain of these actions, plaintiffs request punitive or other damages that may not be covered by insurance. LifePoint is currently not a party to any such proceeding which, in management's opinion, would have a material adverse effect on LifePoint's business, financial condition or results of operations. 78 TRIAD BUSINESS GENERAL Triad will be organized as a Delaware corporation in 1999 to serve as the public holding company for the Pacific Group of Columbia/HCA. Triad's principal executive offices are located at 13455 Noel Road, 20th Floor, Dallas, Texas 75240 (telephone number (972) - ). After the distribution, Triad will continue to provide health care services through its hospitals and outpatient surgery centers. As of September 30, 1998, the Pacific Group (the assets of which will be transferred to Triad prior to the distribution) comprised 40 general, acute care hospitals, two psychiatric hospitals, and 19 outpatient surgery centers, located in the States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Oregon and Texas (in addition, Triad operates one hospital through a 50/50 joint venture that is not consolidated for financial reporting purposes). Triad currently intends to sell (or, in two cases, to transfer through long- term leases) nine of its general, acute care hospitals (one of which has been sold as of December 1, 1998), one psychiatric hospital, and certain of the outpatient surgery centers that it operated as of September 30, 1998. Approximately three-quarters of the Triad hospitals as of September 30, 1998 were located in small cities (generally with populations less than 150,000 residents), where Triad's hospital was usually either the only hospital or one of two hospitals in the community. The remainder of Triad's hospitals were located in larger urban areas. Approximately half of Triad's facilities are located in the States of Arizona and Texas. Triad's primary objective is to provide the communities it serves a comprehensive array of quality health care services in the most cost effective manner possible. Triad's general, acute care hospitals usually provide a full range of services commonly available in hospitals, such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. These hospitals also provide outpatient and ancillary health care services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. Outpatient services also are provided by surgery centers operated by Triad. In addition to the two psychiatric hospitals currently operated by Triad (one of which Triad intends to sell), certain of Triad's general, acute care hospitals have a limited number of licensed psychiatric beds. Each of Triad's hospitals is governed by a board of trustees, which includes members of the hospital's medical staff. The board of trustees establishes policies concerning the medical, professional and ethical practices, monitors such practices, and is responsible for ensuring that these practices conform to established standards. Triad maintains quality assurance programs to support and monitor quality of care standards and to meet accreditation and regulatory requirements. Patient care evaluations and other quality of care assessment activities are monitored on a continuing basis. Like most hospitals located in areas with similar demographics, Triad's hospitals do not engage in extensive medical research and medical education programs. However, certain of Triad's hospitals have an affiliation with medical schools, including the clinical rotation of medical students. In addition to providing capital resources, Triad will make available a variety of management services to its health care facilities. These services will include ethics and compliance programs; national supply and equipment purchasing and leasing contracts; accounting, financial and clinical systems; governmental reimbursement assistance; information systems; legal support; personnel management and internal audit; access to regional managed care networks; and resource management. Some of these services initially will be provided through transitional arrangements made with Columbia/HCA. Triad also will participate, along with Columbia/HCA and LifePoint, in a group purchasing organization which will make certain national supply and equipment contracts available to Triad's facilities. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to Distribution" and "--Other Agreements." 79 TRIAD'S MARKETS Most of Triad's facilities are located in two distinct markets in the Southwestern United States. Approximately three-quarters of the hospitals operated by Triad as of September 30, 1998 were located in small cities (generally with populations less than 150,000 residents), where Triad's hospital was usually either the only hospital or one of two hospitals. The remainder of Triad's hospitals were located in nine larger urban areas. The urban areas where Triad operates are typically characterized by a high rate of population growth (e.g., Phoenix and Tucson, Arizona). Approximately half of Triad's facilities are located in the States of Arizona and Texas. Small Cities Triad believes that the small cities of the Southwestern United States are attractive to health care service providers as a result of favorable demographic and economic trends. Twenty-eight of the forty general, acute care hospitals that Triad operated as of September 30, 1998 were located in these markets. Of these hospitals, 23 hospitals are located in communities where they currently are the sole hospital or one of only two hospitals. After completion of the planned divestitures described above, 19 of Triad's 31 remaining general, acute care hospitals will be located in communities where they currently are the sole hospital or one of only two hospitals. The small cities where Triad's hospitals are located typically are not near any major metropolitan markets. While Triad's hospitals located in the small cities of the Southwest are more likely to face direct competition than facilities located in smaller non-urban markets, that competition usually is limited to a single competitor in the relevant market. Triad believes that the smaller populations and relative dominance of the one or two acute care hospitals in these markets also limit the entry of alternate non-hospital providers, such as outpatient surgery centers or rehabilitation or diagnostic imaging centers, as well as managed care plans. Triad believes that it is the largest provider of health care services in these markets and that it is uniquely positioned to build on population growth in these areas. Larger Urban Markets Twelve of the forty general, acute care hospitals that Triad operated as of September 30, 1998 were located in larger urban markets of the Southwestern United States, and after completion of the planned divestitures described above, eight of Triad's thirty-one remaining general, acute care hospitals will be located in such urban markets. Triad intends to selectively pursue expansion in certain fast growing urban markets. In addition to the direct competition Triad faces from other health care providers in its markets, there are higher levels of managed care penetration, which create significant downward pressure on revenues. 80 BUSINESS STRATEGY Triad's business strategies are designed to address the specific needs of its competitive environments. Triad's strategic objectives include the following: . Build on Population Growth in Western United States. Triad intends to establish itself as a strong competitor in the health care markets of the high-growth western states in which it operates. Triad plans to construct new hospitals and may also seek to make acquisitions in select markets. As an independent company, Triad will be able to pursue sources of capital that were unavailable to it as a division of Columbia/HCA and to devote the required management attention to building and managing new facilities. . Introduce Select Specialty Services. In certain markets where the demographics indicate, Triad intends to introduce specialty services (e.g., women's health or orthopedic facilities) to help attract new patients to Triad facilities. . Join Local Managed Care Organizations. Triad facilities located in areas where there are other health care providers (e.g., tax-exempt hospitals) will seek to partner with those other providers and be included in their managed care networks. This ability to partner with local managed care networks will be a key to the success of those facilities which operate in high-managed care environments. . Work With Local Physicians. As an independent company, Triad intends to take advantage of the more specific management focus in each of its markets to work more effectively with individual physicians and physician practices, many of which management believes would prefer to deal with a company with Triad's strategic focus. In some of its markets, Triad also will be able to take advantage of exemptions from certain restrictions on business association with physicians that are available in some non-urban areas. . Retain and Develop Stable Management. Triad will focus its recruitment of managers and health care professionals on those who wish to live and practice in the communities in which Triad's hospitals are located. In the past, managers and health care professionals employed at Triad hospitals sometimes relocated to advance their careers elsewhere within the Columbia/HCA system. Triad believes that the stronger market focus resulting from its local partnering efforts will help attract needed managerial and health care talent to its hospitals, and that Triad's ability to provide equity-based compensation linked to its performance should assist in management retention. Management believes that achieving long-term retention of executive teams at the hospitals will enhance medical staff relations and maintain continuity of relationships with the community. SOURCES OF REVENUE Hospital revenues depend upon inpatient occupancy levels, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary significantly depending on the type of service (e.g., medical/surgical, intensive care or psychiatric) and the geographic location of the hospital. Triad has experienced an increase in the percentage of patient revenues attributable to outpatient services. This increase is primarily the result of advances in technology (which allow more services to be provided on an outpatient basis) and increased pressures from Medicare, Medicaid, HMOs, PPOs, employers and insurers to reduce hospital stays and provide services, where possible, on a less expensive outpatient basis. 81 Triad receives payment for patient services from the Federal government primarily under the Medicare program, state governments under their respective Medicaid programs, HMOs, PPOs and other private insurers as well as directly from patients. The approximate percentages of net patient revenues from continuing operations of Triad's facilities from such sources during the periods specified below were as follows:
YEARS ENDED DECEMBER NINE MONTHS ENDED 31, SEPTEMBER 30, ------------ 1998 1997 1996 ----------------- ----- ----- Medicare................................... 36.5% 37.2% 37.9% Medicaid................................... 6.0% 5.9% 6.9% Other sources.............................. 57.5% 56.9% 55.2% ----- ----- ----- Total.................................... 100.0% 100.0% 100.0% ===== ===== =====
Medicare is a Federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a Federal-state program administered by the states which provides hospital benefits to qualifying individuals who are unable to afford care. All of Triad's hospitals are certified as providers of Medicare and Medicaid services. Amounts received under the Medicare and Medicaid programs are generally significantly less than the hospital's customary charges for the services provided. To attract additional volume, most of Triad's hospitals offer discounts from established charges to certain large group purchasers of health care services, including private insurance companies, employers, HMOs, PPOs and other managed care plans. These discount programs limit Triad's ability to increase charges in response to increasing costs. See "--Competition." Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, HMOs or PPOs, but are responsible to for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Collection of amounts due from individuals is typically more difficult than from governmental or business payers. For more information on the reimbursement programs on which Triad's revenues are dependent, see "Government and Other Sources of Reimbursement for LifePoint and Triad." HOSPITAL UTILIZATION Triad believes that the two most important factors relating to the overall utilization of a hospital are the quality and market position of the hospital and the number, quality and specialities of physicians providing patient care within the facility. Generally, Triad believes that the ability of a hospital to meet the health care needs of its community is determined by its breadth of services, level of technology, emphasis on quality of care and convenience for patients and physicians. Other factors which impact utilization include the growth in local population, local economic conditions, market penetration of managed care programs and the availability of reimbursement programs such as Medicare and Medicaid. 82 The following table sets forth certain operating statistics for hospitals owned by Triad for the nine months ended September 30, 1998 and for each of the four preceding years ended December 31. Medical/surgical hospital operations are subject to certain seasonal fluctuations, including decreases in patient utilization during holiday periods and increases in the cold weather months.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ---------------------------------- 1998 1997 1996 1995 1994 ----------------- ------- ------- ------- ------- Number of hospitals at end of period.......... 42 42 41 41 40 Number of licensed beds at end of period (a)... 7,007 6,863 6,592 6,186 5,920 Weighted average licensed beds (b)...... 6,929 6,621 6,590 6,160 5,496 Admissions (c).......... 144,805 189,080 187,211 176,392 151,522 Equivalent admissions (d).................... 232,846 298,935 289,990 266,705 217,131 Average length of stay (days) (e)............. 5.0 5.0 5.1 5.2 5.2 Average daily census (f).................... 2,659 2,587 2,603 2,521 2,170 Occupancy rate (g)...... 38% 39% 39% 41% 39%
- - -------- (a) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (b) Represents the average number of licensed beds weighted based on periods owned. (c) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to Triad's hospitals. (d) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (e) Represents the average number of days admitted patients stay in Triad's hospitals. (f) Represents the average number of patients in Triad's hospital beds each day. (g) Represents the percentage of hospital licensed beds occupied by patients. Triad's hospitals have experienced significant shifts from inpatient to outpatient care as well as decreases in average lengths of inpatient stay, primarily as a result of improvements in clinical practices and hospital payment changes by Medicare, insurance carriers, and self-insured employers. These hospital payment changes generally encourage the utilization of outpatient, rather than inpatient, services whenever possible, and shortened lengths of stay for inpatient care. Another factor affecting hospital utilization levels is improved treatment protocols as a result of advances in medical technology and pharmacology. COMPETITION The competition among hospitals and other health care providers has intensified in recent years as hospital occupancy rates have declined. Triad's strategies are designed, and management believes that its hospitals are positioned, to be competitive under these changing circumstances. Of the hospitals operated by Triad as of September 30, 1998, approximately half were located in geographic areas where they competed with at least one other hospital providing most of the services offered by Triad's hospital. Additionally, in the past several years, the number of freestanding outpatient surgery and diagnostic centers in the geographic areas in which Triad operates has increased significantly. As a result, Triad's hospitals operate in an increasingly competitive environment. The rates charged by Triad's hospitals are intended to be competitive with those charged by other local hospitals for similar services. In some cases, competing hospitals are more established than Triad's hospitals. Certain of these competing facilities, particularly in Triad's urban markets, offer services, including extensive medical research and medical education programs, which are not offered by Triad's facilities. In addition, in certain of the urban markets 83 where Triad operates, there are large teaching hospitals which provide highly specialized facilities, equipment and services which may not be available at Triad's hospitals. Also, some of the hospitals that compete with Triad's facilities are owned by tax-supported governmental agencies or by not-for- profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis. The remainder of the hospitals operated by Triad as of September 30, 1998 were located in geographic areas where they were the only hospital in the community. These hospitals generally face less competition in their immediate patient service areas than would be expected in larger communities, and there is usually a lower level of managed care penetration in these areas than there would be in larger urban markets. While these Triad hospitals are generally the primary provider of hospital services in their respective communities, they face competition from larger tertiary care centers. Although these competitive hospitals may be as far as 30 to 50 miles away, patients often migrate to, are referred by local physicians to, or are lured by incentives from managed care plans to travel to, such distant hospitals. One of the most significant factors in the competitive position of a hospital is the number and quality of physicians affiliated with the hospital. Although physicians may at any time terminate their affiliation with a hospital operated by Triad, Triad's hospitals seek to retain physicians of varied specialties on the hospitals' medical staffs and to attract other qualified physicians. Triad believes that physicians refer patients to a hospital primarily on the basis of the quality of services it renders to patients and physicians, the quality of other physicians on the medical staff, the location of the hospital and the quality of the hospital's facilities, equipment and employees. Accordingly, Triad strives to maintain high ethical and professional standards and quality facilities, equipment, employees and services for physicians and their patients. Another major factor in the competitive position of a hospital is management's ability to negotiate service contracts with purchasers of group health care services. HMOs and PPOs attempt to direct and control the use of hospital services through managed care programs and to obtain discounts from hospitals' established charges. In addition, employers and traditional health insurers are increasingly interested in containing costs through negotiations with hospitals for managed care programs and discounts from established charges. Generally, hospitals compete for service contracts with group health care service purchasers on the basis of price, market reputation, geographic location, quality and range of services, quality of the medical staff and convenience. The importance of obtaining contracts with managed care organizations varies from market to market depending on the market strength of such organizations. State CON laws, which place limitations on a hospital's ability to expand hospital services and add new equipment, may also have the effect of restricting competition. The application process for approval of covered services, facilities, changes in operations and capital expenditures is, therefore, highly competitive. In those states which have no CON laws or which set relatively high thresholds before expenditures become reviewable by state authorities, competition in the form of new services, facilities and capital spending is more prevalent. Triad has not experienced, and does not expect to experience, any material adverse effects from state CON requirements or from the imposition, elimination or relaxation of such requirements. See "Regulation and Other Factors Affecting LifePoint and Triad." Triad, and the health care industry as a whole, face the challenge of continuing to provide quality patient care while dealing with rising costs, strong competition for patients and a general reduction of reimbursement rates by both private and government payers. As both private and government payers reduce the scope of what may be reimbursed and reduce reimbursement levels for what is covered, Federal and state efforts to reform the health care system may further impact reimbursement rates. Changes in medical technology, existing and future legislation, regulations and interpretations and competitive contracting for provider services by private and government payers may require changes in Triad's facilities, equipment, personnel, rates and/or services in the future. 84 The hospital industry and Triad's hospitals continue to have significant unused capacity. Inpatient utilization, average lengths of stay and average occupancy rates continue to be negatively affected by payer-required pre- admission authorization, utilization review, and payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Admissions constraints, payer pressures and increased competition are expected to continue. Triad endeavors to meet these challenges by expanding many of its facilities to include outpatient centers, offering discounts to private payer groups, upgrading facilities and equipment, and offering new programs and services. EMPLOYEES AND MEDICAL STAFF At September 30, 1998, Triad had approximately 28,300 employees, including approximately 9,100 part-time employees . Employees at two hospitals are currently represented by a labor union. Triad considers its employee relations to be satisfactory. While Triad's non-union hospitals experience union organizational activity from time to time, Triad does not expect such efforts to materially affect its future operations. Triad's hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate. There can be no assurance as to future availability and cost of qualified medical personnel. Triad's hospitals are staffed by licensed physicians who have been admitted to the medical staff of individual hospitals. With certain exceptions, physicians generally are not employees of Triad's hospitals. However, some physicians provide services in Triad's hospitals under contracts, which generally describe a term of service, provide and establish the duties and obligations of such physicians, require the maintenance of certain performance criteria and fix compensation for such services. Any licensed physician may apply to be admitted to the medical staff of any of Triad's hospitals, but admission to the staff must be approved by the hospital's medical staff and the appropriate governing board of the hospital in accordance with established credentialling criteria. Members of the medical staffs of Triad's hospitals located in areas where there are other hospitals often also serve on the medical staffs of other hospitals and may terminate their affiliation with a hospital at any time. PROPERTIES The following table lists the hospitals owned or operated by the Pacific Group of Columbia/HCA (the assets of which will be transferred to Triad prior to the distribution) as of September 30, 1998. As described in the notes to the table, as of December 1, 1998, the Pacific Group had sold one of the general, acute care hospitals, and currently intends to sell or transfer through long- term leases an additional eight of the general, acute care hospitals and one of its psychiatric hospitals.
LICENSED FACILITY NAME CITY STATE BEDS - - ------------- ---- ----- -------- Crestwood Medical Center Huntsville AL 120 DeQueen Regional Medical Center DeQueen AR 122 Medical Center of South Arkansas (1) El Dorado AR 360 Medical Park Hospital Hope AR 91 Medical Center--Phoenix Phoenix AZ 290 Paradise Valley Hospital Phoenix AZ 143 El Dorado Hospital Tucson AZ 166 Northwest Medical Center Tucson AZ 174 Paradise Valley Psychiatric Services Scottsdale AZ 19 San Leandro Hospital San Leandro CA 136 West Anaheim Community Hospital Anaheim CA 219 Healdsburg General Hospital Healdsburg CA** 43 Huntington Beach Hospital Huntington Beach CA 134 Mission Bay Hospital San Diego CA 128
85
LICENSED FACILITY NAME CITY STATE BEDS - - ------------- ---- ----- -------- Palm Drive Hospital Sebastopol CA* 49 Bethany Medical Center Kansas City KS* 415 Overland Park Regional Medical Center Overland Park KS* 360 Women & Children's Hospital Lake Charles LA 80 Independence Regional Health Center Independence MO* 366 Research Psychiatric Center (2) Kansas City MO* 100 Medical Center of Carlsbad Carlsbad NM 135 Lea Regional Medical Center Hobbs NM 250 Claremore Regional Hospital Claremore OK 89 Wagoner Community Hospital (3) Wagoner OK 100 Doctors Hospital-Tulsa Tulsa OK* 199 Tulsa Regional Medical Center Tulsa OK* 462 Willamette Valley Medical Center McMinnville OR 80 Douglas Medical Center Roseburg OR 118 Alice Physicians and Surgeons Hospital Alice TX 131 Brownwood Regional Medical Center (3) Brownwood TX 218 College Station Medical Center College Station TX 119 Navarro Regional Hospital Corsicana TX 168 Doctors Hospital of Laredo Laredo TX 117 Longview Regional Medical Center Longview TX 164 Woodland Heights Medical Center Lufkin TX 127 Medical Center of Pampa Pampa TX 107 San Angelo Community Medical Center San Angelo TX 165 Community Medical Center Sherman Sherman TX 160 Medical Center at Terrell (3) Terrell TX 130 Detar Hospital Victoria TX 217 Gulf Coast Medical Center Wharton TX 161 Beaumont Medical and Surgical Center Beaumont TX* 366 Silsbee Doctors Hospital Silsbee TX* 69
- - -------- * Indicates facility held for sale. ** Indicates facility sold as of December 1, 1998. (1) The Pacific Group holds a fifty percent equity interest in a non- consolidated joint venture which owns and operates the Medical Center of South Arkansas. (2) The Pacific Group holds a sixty percent equity interest in a consolidated joint venture which owns and operates the Research Psychiatric Center. (3) The Pacific Group currently leases each of these hospitals pursuant to long-term leases which provide that it has the exclusive right to use and control the hospital operations. The Pacific Group holds an equity interest in a joint venture that is building a new hospital in South Tulsa, Oklahoma, which will be operated by Triad. Upon completion of this project, which is scheduled for July 1999, Triad's equity interest will be fifty percent and its total investment is expected to be approximately $40 million. In addition to the hospitals listed in the table above and the hospital under construction in South Tulsa, Oklahoma, as of September 30, 1998, the Pacific Group operated nineteen outpatient surgery centers, certain of which Triad currently intends to sell. Medical office buildings also are operated in conjunction with its hospitals. These office buildings are primarily occupied by physicians who practice at Triad's hospitals. 86 Triad's headquarters are located in approximately 45,000 square feet of space in one office building in Dallas, Texas. After the distribution date, Triad will sub-lease this space from Columbia/HCA. See "Arrangements Among Columbia/HCA, LifePoint and Triad relating to the Distribution--Lease Agreements." Triad's headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for Triad's present needs. TRIAD'S REGULATORY COMPLIANCE PROGRAM It is Triad's policy that its business be conducted with integrity and in compliance with the law. Triad is developing a corporate-wide compliance program, which will focus on all areas of regulatory compliance, including physician recruitment, reimbursement and cost reporting practices, and laboratory operations. This regulatory compliance program is intended to assure that high standards of conduct are maintained in the operation of Triad's business and to help assure that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, Triad will provide initial and periodic legal compliance and ethics training to every employee, review various areas of Triad's operations, and develop and implement policies and procedures designed to foster compliance with the law. Triad will regularly monitor its ongoing compliance efforts. The program also will include a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors or designated compliance officers in Triad's hospitals. LEGAL PROCEEDINGS Triad is, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts or for wrongful restriction of or interference with physician's staff privileges. In certain of these actions, plaintiffs request punitive or other damages that may not be covered by insurance. Triad is currently not a party to any such proceeding which, in management's opinion, would have a material adverse effect on Triad's business, financial condition or results of operations. 87 GOVERNMENT AND OTHER SOURCES OF REIMBURSEMENT FOR LIFEPOINT AND TRIAD Medicare. Under the Medicare program, LifePoint and Triad hospitals receive reimbursement under a prospective payment system ("PPS") for inpatient hospital services. Psychiatric, long-term care, rehabilitation, specially designated children's hospitals and certain designated cancer research hospitals, as well as psychiatric or rehabilitation units that are distinct parts of a hospital and meet Health Care Financing Administration criteria for exemption, are currently exempt from PPS and are reimbursed on a cost-based system, subject to certain cost limits (known as TEFRA limits). Under the PPS, fixed payment amounts per inpatient discharge are established based on the patient's assigned diagnosis related group ("DRG"). DRGs classify treatments for illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. DRG rates have been established for each hospital participating in the Medicare program and are based upon a statistically normal distribution of severity. When treatments for certain patients fall well outside the normal distribution, providers receive additional payments. DRG payments do not consider a specific hospital's costs, but are adjusted for area wage differentials. The DRG payments do not include reimbursement for capital costs, which are reimbursed separately. DRG rates are updated and re-calibrated annually and have been affected by several recent Federal enactments. The index used to adjust the DRG rates gives consideration to the inflation experienced by hospitals (and entities outside of the health care industry) in purchasing goods and services ("market basket"). However, for several years the percentage increases to the DRG rates have been lower than the percentage increases in the costs of goods and services purchased by hospitals. The DRG rates are adjusted each Federal fiscal year, which begins on October 1. The historical DRG rate increases were 1.1%, 1.5% and 2.0% for Federal fiscal years 1995, 1996 and 1997, respectively. For Federal fiscal year 1998, there was no increase. The budgeted updates for Federal fiscal years 1999 through 2002 are market basket minus 1.9%, 1.8%, 1.1% and 1.1%, respectively. LifePoint and Triad anticipate that future legislation may decrease the future rate of increase for DRG payments, but neither is able to predict the amount of the reduction. Medicare reimburses general, acute care hospitals' capital costs separately from DRG payments. Outpatient services provided at general, acute care hospitals typically are reimbursed by Medicare at the lower of customary charges or approximately 82% of actual cost, subject to additional limits on the reimbursement of certain outpatient services. The Balanced Budget Act, enacted August 5, 1997, contains provisions that effect outpatient hospital services, including a requirement that HCFA adopt a prospective payment system for outpatient hospital services to begin January 1, 1999. However, implementation of the PPS will be delayed because of Year 2000 systems concerns. The outpatient PPS will be implemented as soon as possible after January 1, 2000. At such time as the PPS is implemented, the rates will be based on the rates that would have been in effect January 1, 1999, updated by the rate of increase in the hospital market basket minus one percentage point. Neither LifePoint nor Triad is able to predict the effect, if any, that the new payment system will have on its financial results. After the fee schedule is established for this new system, the fee schedule is to be updated by the market basket minus 1.0% for each of Federal fiscal years 2000 through 2002. Similarly, therapy services will be converted to a fee schedule on January 1, 1999, and payments for non-hospital- based therapy services will be subject to limits on payment. The Balanced Budget Act mandates a prospective payment system for skilled nursing facility services for Medicare cost reporting periods commencing after June 30, 1998, hospital outpatient services beginning January 1, 1999, home health services for Medicare cost reporting periods beginning after September 30, 1999, and inpatient rehabilitation hospital services for Medicare cost reporting periods beginning after September 30, 2000. Prior to the commencement of the prospective payment systems, payment constraints will be applied to PPS- exempt hospitals and units for Medicare cost reporting periods beginning on or after October 1, 1997. For the period ended September 30, 1998, LifePoint had 48 units that were reimbursed under this methodology, and Triad had 126 units that were reimbursed under this methodology. 88 Payments to PPS-exempt hospitals and units, (i.e., inpatient psychiatric, rehabilitation and long-term hospital services), are based upon reasonable cost, subject to a cost per discharge target. These limits are updated annually by a market basket index. For Federal fiscal year 1995, 1996 and 1997, the market basket rate of increase was 3.7%, 3.4%, and 2.5% respectively. For Federal fiscal year 1998, there was no increase. For Federal fiscal year 1999, the market basket index is projected to be 2.4%. Furthermore, limits have been established for the cost per discharge target at the 75th percentile for each category of PPS-exempt hospitals and hospital units, i.e., psychiatric, rehabilitation and long-term hospitals. For Federal fiscal year 1998, these limits were $10,547, $19,250, and $37,688 per discharge, respectively. For Federal fiscal year 1999, these limits are $10,737, $19,962 and $38,393 per discharge, respectively. In addition, the cost per discharge for new hospitals/hospital units cannot exceed 110% of the national median target rate for hospitals in the same category. For Federal fiscal year 1998, these amounts were $8,517, $16,738, and $18,947 per discharge for psychiatric, rehabilitation and long-term hospital services, respectively. For Federal fiscal year 1999, these amounts are $8,686, $17,077 and $22,010 per discharge, respectively. Skilled nursing facilities have historically been reimbursed by Medicare on the basis of actual costs, subject to certain limits. The Balanced Budget Act requires the establishment of a prospective payment system for Medicare skilled nursing facilities under which facilities will be paid a Federal per diem rate for virtually all covered services. The new payment system will be phased in over three cost reporting periods, starting with cost reporting periods beginning on or after July 1, 1998. The law also institutes consolidated billing for skilled nursing facility services, under which payments for most non-physician Part B services for beneficiaries no longer eligible for Part A skilled nursing facility care will be made to the facility, regardless of whether the item or service was furnished by the facility, by others under arrangement, or under any other contracting or consulting arrangement. Consolidated billing is being implemented on a transition basis, effective for items or services furnished on or after July 1, 1998 or January 1, 1999 at the election of the provider. The Balanced Budget Act also requires United States Department of Health and Human Services ("HHS") to establish a PPS for home health services, to be implemented beginning October 1, 1999. Prior to implementation, the Balanced Budget Act establishes certain interim payment reforms for cost reporting periods beginning on or after October 1, 1997, including reduced home health limits, reduced per visit costs limits, and agency-specific per beneficiary annual limits on an agency's costs. Currently, physicians are paid by Medicare on a fee for service basis. However, physicians working in rural health clinics, such as those maintained by LifePoint and Triad, are reimbursed at cost, but such reimbursement is subject to a limit on payments if the rural health clinic is not based at a rural hospital with less than 50 beds. Medicare has special payment provisions for "sole community hospitals." A sole community hospital is generally the only hospital in at least a 35-mile radius. Five of LifePoint's facilities and six of Triad's facilities qualify as sole community hospitals under Medicare regulations. Special payment provisions related to sole community hospitals include a higher DRG rate, which is based on a blend of hospital-specific costs and the national DRG rate, and a 90% payment "floor" for capital costs which guarantees the sole community hospital capital reimbursement equal to 90% of capital cost. In addition, the CHAMPUS program has special payment provisions for hospitals recognized as sole community hospitals for Medicare purposes. Medicaid. Most state Medicaid payments are made under a prospective payment system or under programs which negotiate payment levels with individual hospitals. Medicaid reimbursement is often less than a hospital's cost of services. Medicaid is currently funded approximately 50% by the states and 50% by the Federal government. The Federal government and many states are currently considering significant reductions in the level of Medicaid funding while at the same time expanding Medicaid benefits, which could adversely affect future levels of Medicaid reimbursement received by the hospitals of LifePoint and Triad. On November 27, 1991, Congress enacted the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991, which limit the amount of voluntary contributions and provider-specific taxes that can be used by states to fund Medicaid and require the use of broad-based taxes for such funding. As a result of enactment of these amendments, certain states in which LifePoint and Triad operate have adopted broad-based 89 provider taxes to fund their Medicaid programs. The impact of these new taxes upon LifePoint and Triad has not been materially adverse. However, neither LifePoint nor Triad can predict whether any additional broad-based provider taxes will be adopted by the states in which it operates and, accordingly, neither is able to assess the effect of such additional taxes on its results of operations or financial position. Annual Cost Reports. Review of previously submitted annual cost reports and the cost report preparation process are areas included in the ongoing government investigations of Columbia/HCA. It is too early to predict the outcome of these investigations, but if LifePoint or Triad, or any of their facilities, were found to be in violation of Federal or state laws relating to Medicare, Medicaid or similar programs, they could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on the financial position and results of operations of LifePoint or Triad, as the case may be. Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of any liabilities arising out of such government investigations. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement," "Risk Factors-- Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and Triad," and "Regulation and Other Factors Affecting LifePoint and Triad-- Governmental Investigation of Columbia/HCA and Related Litigation." Annual cost reports required under the Medicare and Medicaid programs are subject to routine audits, which may result in adjustments to the amounts ultimately determined to be due to LifePoint and Triad under these reimbursement programs. These audits often require several years to reach the final determination of amounts earned under the programs. Providers also have rights of appeal, and it is common to contest issues raised in audits of prior years' reports. Columbia/HCA, LifePoint and Triad have agreed that any recovery for pending group appeal issues will belong to Columbia/HCA. Each of LifePoint and Triad believes that adequate provision has been made in its financial statements for any material retroactive adjustments that might result from such audits and that final resolution of the contested issues will not have a material adverse effect upon its results of operations or financial position. Managed Care. Pressures to control the cost of health care have resulted in increases to the percentage of admissions and net revenues attributable to managed care payers. The percentage of LifePoint's admissions attributable to managed care payers increased from 16.7% for the nine months ended September 30, 1997 to 18.4% for the comparable period in 1998 and the percentage of LifePoint's net revenue from continuing operations attributable to managed care payers increased from 15.3% for the nine months ended September 30, 1997 to 19.4% for the comparable period in 1998. The percentage of Triad's admissions attributable to managed care payers increased from 27.5% for the nine months ended September 30, 1997 to 30.6% for the comparable period in 1998 and the percentage of Triad's net revenue from continuing operations attributable to managed care payers increased from 24.3% for the nine months ended September 30, 1997 to 24.8% for the comparable period in 1998. LifePoint and Triad expect that the trend toward increasing percentages related to managed care payers will continue in the future. LifePoint and Triad generally receive lower payments from managed care payers than from traditional commercial/indemnity insurers; however, as part of their business strategy, LifePoint and Triad intend to take steps to improve their managed care positions, see "LifePoint Business--Business Strategy" and "Triad Business--Business Strategy." Commercial Insurance. The hospitals of LifePoint and of Triad provide services to individuals covered by private health care insurance. Private insurance carriers make direct payments to such hospitals or, in some cases, reimburse their policy holders, based upon the particular hospital's established charges and the particular coverage provided in the insurance policy. Commercial insurers are continuing efforts to limit the costs of hospital services by adopting discounted payment mechanisms, including prospective payment or DRG based payment systems, for more inpatient and outpatient services. To the extent that such efforts are successful and reduce the insurers' reimbursement to hospitals for the costs of providing services to their beneficiaries, such reduced levels of reimbursement may have a negative impact on the operating results of the hospitals of LifePoint and of Triad. 90 REGULATION AND OTHER FACTORS AFFECTING LIFEPOINT AND TRIAD Licensure, Certification and Accreditation. Health care facility construction and operation is subject to Federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. All of the health care facilities of LifePoint and Triad are properly licensed under appropriate state laws. All of the general, acute care hospitals of LifePoint and Triad are certified under the Medicare program and are accredited by the Joint Commission on Accreditation of Healthcare Organizations, the effect of which is to permit the facilities to participate in the Medicare and Medicaid programs. Certain of the psychiatric hospitals of Triad do not participate in these programs. Should any facility lose its accreditation by this Joint Commission, or otherwise lose its certification under the Medicare program, the facility would be unable to receive reimbursement from the Medicare and Medicaid programs. The facilities of LifePoint and Triad are in substantial compliance with current applicable Federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, it may be necessary for LifePoint and Triad to effect changes in their facilities, equipment, personnel and services. Certificates of Need. The construction of new facilities, the acquisition of existing facilities, and the addition of new beds or services may be subject to review by state regulatory agencies under a CON program. Each of LifePoint and Triad will operate some hospitals in states that require approval under a CON program. Such laws generally require appropriate state agency determination of public need and approval prior to the addition of beds or services or certain other capital expenditures. Failure to obtain necessary state approval can result in the inability to expand facilities, complete an acquisition or change ownership. Further, violation may result in the imposition of civil sanctions or the revocation of a facility's license. State Rate Review. Some states in which LifePoint or Triad will own hospitals have adopted legislation mandating rate or budget review for hospitals or have adopted taxes on hospital revenues, assessments or licensure fees to fund indigent health care within the state. In the aggregate, state rate or budget review and indigent tax provisions have not materially adversely affected the results of operations of either LifePoint or Triad. Neither LifePoint nor Triad is able to predict whether any additional state rate or budget review or indigent tax provisions will be adopted and, accordingly, neither is able to assess the effect thereof on its results of operations or financial condition. Utilization Review. Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards, are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by peer review organizations, which review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of DRG classifications and the appropriateness of cases of extraordinary length of stay or cost. Peer review organizations may deny payment for services provided, may assess fines and also have the authority to recommend to the HHS that a provider which is in substantial noncompliance with the standards of the peer review organization be excluded from participation in the Medicare program. Utilization review is also a requirement of most non- governmental managed care organizations. Medicare Regulations and Fraud and Abuse. Participation in the Medicare program is heavily regulated by Federal statute and regulation. If a hospital provider fails substantially to comply with the numerous conditions of participation in the Medicare program or performs certain prohibited acts, such hospital's participation in the Medicare program may be terminated or civil or criminal penalties may be imposed upon it under certain provisions of the Social Security Act. Prohibited acts include: . making false claims to Medicare for services not rendered or misrepresenting actual services rendered in order to obtain higher reimbursement; 91 . paying remuneration to induce Medicare referrals (so called "fraud and abuse" which is prohibited by the "anti-kickback" provisions of the Social Security Act); . failing to stabilize all individuals who come to its emergency room who have an "emergency medical condition," whether or not the individual is eligible for Medicare; . transferring any stabilized patient to another health care facility before the other facility has agreed to the transfer of the patient, if the other facility does not have sufficient room and staff to treat the patient, without the patient's emergency department medical records, or without appropriate life support equipment; and . transferring any unstabilized patient (except those transferred at the patient's request or with physician certification that the medical risks from the transfer are less harmful than continued treatment at the transferring facility). Moreover, HHS and the courts have interpreted the Anti-Kickback Statute broadly to include the intentional offer, payment, solicitation or receipt of anything of value if one purpose of the payment is to induce the referral of Medicare business. Health care providers generally are concerned that many relatively innocuous, or even beneficial, commercial arrangements with their physicians (or others that may provide referrals) may technically violate this strict interpretation of the Anti-Kickback Statute. In 1976, Congress established the Office of Inspector General ("OIG") at HHS to identify and eliminate fraud, abuse and waste in HHS programs and to promote efficiency and economy in HHS departmental operations. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to health care providers on ways to engage in legitimate business practices and avoid scrutiny under the fraud and abuse statutes, the OIG has from time to time issued "fraud alerts" identifying features of transactions, which, if present, may indicate that the transaction violates the Anti-Kickback Statute. The OIG has identified the following incentive arrangements as potential violations: . payment of any sort of incentive by the hospital each time a physician refers a patient to the hospital; . the use of free or significantly discounted office space or equipment (in facilities usually located close to the hospital); . provision of free or significantly discounted billing, nursing or other staff services; . free training for a physician's office staff in areas such as management techniques and laboratory techniques; . guarantees which provide that, if the physician's income fails to reach a predetermined level, the hospital will supplement the remainder up to a certain amount; . low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients (or some number of patients) to the hospital; . payment of the costs of a physician's travel and expenses for conferences; . coverage on the hospital's group health insurance plans at an inappropriately low cost to the physician; or . payment for services (which may include consultations at the hospital) which require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of services rendered. The OIG has encouraged persons having information about hospitals who offer the above types of incentives to physicians to report such information to the OIG. In July 1991, the OIG issued final regulations outlining certain "safe harbors" for practices, which, although potentially capable of inducing prohibited referrals of business under Medicare or state health programs, would not be subject to enforcement action under the Anti-Kickback Statute. The practices protected 92 by the regulations include certain physician joint venture transactions, rental of space and equipment, personnel services and management contracts, sales of physician practices, referral services, warranties, discounts, payments to employees, group purchasing organizations and waivers of beneficiary deductibles and co-payments. Section 1877 of the Social Security Act (commonly known as the "Stark Law") prohibits referrals of Medicare and Medicaid patients by physicians to entities with which the physician has a financial relationship and which provide certain "designated health services" which are reimbursable by Medicare or Medicaid. "Designated health services" include, among other things, clinical laboratory services, physical and occupational therapy services, radiology services, durable medical equipment, home health, and inpatient and outpatient hospital services. Sanctions for violating the Stark Law include civil money penalties up to $15,000 per prohibited service provided, assessments equal to twice the dollar value of each such service provided and exclusion from the Medicare and Medicaid programs. There are certain exceptions to the self-referral prohibition, including an exception if the physician has an ownership interest in the entire hospital. Proposed regulations implementing the Stark Law, as amended, have not been implemented. In addition, a physician may have an ownership interest in and refer patients to an entity providing designated health services if the entity is located in a rural area. The requirements of the "rural provider" exception are that (i) the provider is located in an area that is not considered a metropolitan statistical area, and (ii) at least 75 percent of the patients served by the facility reside in a rural area. Neither LifePoint nor Triad can predict the final form that such regulations will take or the effect that the Stark Law or the regulations promulgated thereunder will have on LifePoint and Triad. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), which became effective January 1, 1997, amends, among other things, Title XI (42 U.S.C. (S) 1301 et seq.) to broaden the scope of certain fraud and abuse laws to include all health care services, whether or not they are reimbursed under a Federal program, and creates new enforcement mechanisms to combat fraud and abuse, including an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. Under HIPAA, health care fraud, now defined as knowingly and willfully executing or attempting to execute a "scheme or device" to defraud any health care benefit program, is made a Federal criminal offense. In addition, for the first time, Federal enforcement officials will have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed health care fraud, even if the investor, officer or employee had no knowledge of the fraud. HIPAA also establishes a new violation for the payment of inducements to Medicare or Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner. The Balanced Budget Act also expands numerous health care fraud provisions. Each of LifePoint and Triad provide financial incentives to recruit physicians into the communities served by its hospitals, including loans and minimum revenue guarantees. Although HHS has proposed a Safe Harbor for certain physician recruitment, no Safe Harbor for physician recruitment is currently in force. Each of LifePoint and Triad also enter into certain employment agreements, leases and other agreements with physicians. Although each of LifePoint and Triad believes that its arrangements with physicians comply with current law, there can be no assurance that regulatory authorities who enforce the Anti-Kickback Statute will not determine that such physician recruiting activities or other physician arrangements violate the Anti-Kickback Statute or other Federal laws. Such a determination could subject LifePoint or Triad to liabilities under the Social Security Act, including criminal penalties, civil monetary penalties and/or exclusion from participation in Medicare, Medicaid or other Federal health care programs, any of which could have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect these arrangements. There is increasing scrutiny by law enforcement authorities, the HHS, OIG, the courts and Congress of arrangements between health care providers and potential referral sources to ensure that the 93 arrangements are not designed as a mechanism to exchange remuneration for patient care referrals and opportunities. Investigators have also demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purpose of payments between health care providers and potential referral sources. The Social Security Act also imposes criminal and civil penalties for making false claims to Medicare and Medicaid for services not rendered or for misrepresenting actual services rendered in order to obtain higher reimbursement. Like the Anti-Kickback Statute, this statute is very broad. Careful and accurate coding of claims for reimbursement must be performed to avoid liability under the false claims statutes. Many states in which LifePoint or Triad will operate also have adopted, or are considering adopting, laws that prohibit payments to physicians for patient referrals with statutory language similar to the Anti-Kickback Statute, some of which apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties as well as loss of licensure. Many states also have passed legislation similar to the Stark Law, but also with broader effect, since the state legislation applies regardless of the source of payment for care. Little precedent exists for the interpretation or enforcement of these state laws. The Federal Medicaid regulations also prohibit fraudulent and abusive practices and authorize the exclusion from such program of providers in violation of such regulations. Corporate Practice of Medicine. Some of the states in which LifePoint and Triad will operate have laws that prohibit corporations and other entities from employing physicians or that prohibit certain direct and indirect payments or fee-splitting arrangements between health care providers. In addition, some states restrict certain business relationships between physicians and pharmacies. Possible sanctions for violation of these restrictions include loss of a physicians's license and civil and criminal penalties. These statutes vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. Although each of LifePoint and Triad exercises care in an effort to structure its arrangements with health care providers to comply with the relevant state statutes, and each believes such arrangements comply with applicable laws in all material respects, there can be no assurance that governmental officials charged with responsibility for enforcing these laws will not assert that LifePoint or Triad, or certain transactions in which either of them is involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with the interpretations of LifePoint or Triad. Health Care Reform. Health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Among the proposals under consideration are cost controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, and requirements that all businesses offer health insurance coverage to their employees. The costs of certain proposals would be funded in significant part by reductions in payments by governmental programs, including Medicare and Medicaid, to health care providers such as hospitals. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. Conversion Legislation. Many states have enacted or are considering enacting laws affecting the conversion or sale of not-for-profit hospitals. These laws, in general, include provisions relating to attorney general approval, advance notification and community involvement. In addition, state attorneys general in states without specific conversion legislation may exercise authority over these transactions based upon existing law. In many states there has been an increased interest in the oversight of not-for-profit conversions. The adoption of conversion legislation and the increased review of not-for-profit hospital conversions may limit the ability of LifePoint or Triad to acquire not-for- profit hospitals. 94 Revenue Ruling 98-15. During March 1998, the IRS issued guidance regarding the tax consequences of joint ventures between for-profit and not-for-profit hospitals. Neither LifePoint nor Triad has determined the impact of the tax ruling on its existing joint ventures, or the development of future ventures, and is consulting with its joint venture partners and tax advisers to develop an appropriate course of action. The tax ruling could limit joint venture development with not-for-profit hospitals, require the restructuring of certain existing joint ventures with not-for-profits and influence the exercise of "put agreements" (that require the purchase of the partner's interest in the joint venture) by certain existing joint venture partners. Environmental Matters. LifePoint and Triad are subject to various Federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Neither LifePoint nor Triad expects that it will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect its capital expenditures, earnings or competitive position. Insurance. As is typical in the health care industry, LifePoint and Triad are subject to claims and legal actions by patients in the ordinary course of business. To cover these claims, LifePoint and Triad maintain professional malpractice liability insurance and general liability insurance in amounts which each believes to be sufficient for its operations, although some claims may exceed the scope of the coverage in effect. Each of LifePoint and Triad also maintains umbrella coverage. At various times in the past, the cost of malpractice and other liability insurance has risen significantly. Therefore, there can be no assurance that such insurance will continue to be available at reasonable prices which will allow LifePoint and Triad to maintain adequate levels of coverage. Substantially all losses in periods prior to the distribution are insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA. Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of claims covered by such insurance policies, claims which would be covered by a standard policy of comprehensive general public liability and property insurance, directors' and officers' insurance or health care errors and omissions insurance and workers compensation claims arising prior to the distribution. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement" and "--Insurance Allocation and Administration Agreement." Because substantially all liability for general and professional liability claims incurred is insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA, and Columbia/HCA maintains the related reserve, no reserve for general and professional liability risks is recorded on the balance sheets of LifePoint and Triad. Any losses incurred in excess of amounts maintained under such insurance will be funded from working capital. There can be no assurance that the cash flow of LifePoint and Triad will be adequate to provide for professional and general liability claims in the future. If payments for general and professional liabilities exceed anticipated losses, the results of operations and financial condition of LifePoint or Triad, as the case may be, could be adversely affected. Governmental Investigation of Columbia/HCA and Related Litigation. In March 1997, various facilities of Columbia/HCA's El Paso, Texas operations were searched by Federal authorities pursuant to search warrants, and government agents removed various records and documents. In February 1998, an additional warrant was executed and a single computer was seized. In July 1997, various Columbia/HCA affiliated facilities and offices were searched pursuant to search warrants. During July, September and November 1997, Columbia/HCA also was served with subpoenas requesting records and documents related to laboratory billing and DRG coding in various states and home health operations in various jurisdictions, including but not limited to, Florida. In January 1998, Columbia/HCA received a subpoena which requested records and documents relating to physician relationships. The United States District Court for the Middle District of Florida, in Fort Myers, issued an indictment against three employees of a subsidiary of Columbia/HCA in July 1997. The indictment relates to the alleged false characterization of interest payments on certain debt resulting in Medicare and CHAMPUS overpayments since 1986 to Columbia Fawcett Memorial Hospital, a Port Charlotte, Florida hospital that was acquired by 95 Columbia/HCA in 1992. Columbia/HCA has been served with subpoenas for various records and documents. In July 1998, a fourth employee of a subsidiary of Columbia/HCA was indicted by a superseding indictment. Several hospital facilities affiliated with Columbia/HCA in various states have received individual Federal and/or state government inquiries, both informal and formal, requesting information related to reimbursement from government programs. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the scope of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA also is the subject of a formal order of investigation by the SEC. Columbia/HCA understands that the investigation includes the anti-fraud, periodic reporting and internal accounting control provisions of the Federal securities laws. Columbia/HCA is a defendant in several qui tam actions brought by private parties on behalf of the United States of America, which have been unsealed and served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated the False Claims Act, 31 U.S.C. (S) 3729 et seq., for improper claims submitted to the government for reimbursement. The lawsuits seek damages of three times the amount of all Medicare or Medicaid claims (involving false claims) presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The government has intervened in one qui tam action. Columbia/HCA is aware of additional qui tam actions that remain under seal and believes that there may be other sealed qui tam cases of which it is unaware. Since April 8, 1997, numerous Federal securities class action and derivative lawsuits have been brought against Columbia/HCA and a number of its current and former directors, officers and employees. On October 10, 1997, all of the securities class action claims were consolidated into a single-captioned case which seeks the certification of a class of persons or entities who acquired Columbia/HCA's common stock from April 9, 1994 to September 9, 1997. The lawsuit alleges, among other things, that the defendants committed violations of the Federal securities laws by materially inflating Columbia/HCA's revenues and earnings through a number of practices, including upcoding, maintaining reserve cost reports, disseminating false and misleading statements, cost shifting, illegal reimbursements, improper billing, unbundling, and violating various Medicare laws. The lawsuit seeks compensatory damages, costs, and expenses. On October 10, 1997, all of the derivative law claims were consolidated into a single-captioned case. The lawsuit alleges, among other things, derivative claims against the individual defendants that they intentionally or negligently breached their fiduciary duties to Columbia/HCA by authorizing, permitting, or failing to prevent Columbia/HCA from engaging in various schemes to improperly increase revenue, upcoding, improper cost reporting, improper referrals, improper acquisition practices, and overbilling. In addition, the lawsuit asserts a derivative claim against some of the individual defendants for breaching their fiduciary duties by engaging in insider trading. The lawsuit seeks restitution, damages, recoupment of fines or penalties paid by Columbia/HCA, restitution and pre-judgment interest against the alleged insider trading defendants, and costs and disbursements. In addition, the lawsuit seeks orders prohibiting Columbia/HCA from paying individual defendants employment benefits, terminating all improper business relationships with individual defendants, and requiring Columbia/HCA to implement effective corporate governance and internal control mechanisms designed to monitor compliance with Federal and state laws and ensure reports to the Board of material violations of law. Several derivative actions have been filed in state court by certain purported stockholders of Columbia/HCA against certain of Columbia/HCA's current and former officers and directors alleging breach of fiduciary duty and failure to take reasonable steps to ensure that Columbia/HCA did not engage in illegal practices which exposed Columbia/HCA to significant damages. 96 A suit filed on November 7, 1997 against Columbia/HCA and certain members of the retirement committee, alleges violations of the Employee Retirement Income Security Act of 1974. The suit alleges Columbia/HCA breached its fiduciary duty to participants in Columbia/HCA's Stock Bonus Plan, fraudulently concealed information from the public and fraudulently inflated Columbia/HCA's stock price through billing fraud, over charges, inaccurate medical cost reports and illegal kickbacks for physician referrals. Columbia/HCA also is a defendant in a number of Federal and state courts actions filed by patients and/or payers, alleging, in general, improper and fraudulent billing, overcharging, coding and physician referrals, as well as other violations of law. Certain of the lawsuits have been conditionally certified as class actions and others are purported class actions. It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam, stockholder derivative and class action lawsuits, or whether any additional investigations or litigation will be commenced. If Columbia/HCA is found to have violated Federal or state laws relating to Medicare, Medicaid or similar programs, then Columbia/HCA could be subject to substantial monetary fines, civil and criminal penalties, and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui tam, stockholder derivative and class action lawsuits may be substantial and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more of such lawsuits. Any such sanctions or losses could have a material adverse effect on Columbia/HCA's financial position and results of operations. Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of certain liabilities arising out of or in connection with the foregoing matters. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement." If any of such indemnified liabilities were successfully asserted against either LifePoint or Triad, or any of their facilities, and Columbia/HCA failed to meet its indemnification obligations, then such liabilities could have a material adverse effect on the financial position and results of operations of LifePoint and/or Triad, as the case may be. 97 LIFEPOINT MANAGEMENT DIRECTORS On the distribution date, the directors of LifePoint will be the persons named below.
PRINCIPAL OCCUPATION OR EMPLOYMENT NAME AGE FOR PAST FIVE YEARS ---- --- ---------------------------------- Scott L. Mercy.. 37 Chairman and Chief Executive Officer, LifePoint, as of the distribution date and, since September 1, 1998, the America Group of Columbia/HCA; President and Chief Executive Officer of America Service Group, Inc. (health care services for correctional facilities) from 1996 through September 1, 1998; Senior Vice President--Financial Operations of Columbia/HCA Healthcare Corporation (health care services) from 1994 through 1995; Vice President--Financial Operations and Director--Financial Operations Support of Hospital Corporation of America (health care services), prior thereto. [Director]...... [Director]...... [Director]...... [Director]...... [Director]...... [Director]......
The LifePoint Certificate provides that the LifePoint Board of Directors will be divided into three classes, with the classes to be as nearly equal in number as possible. Of the initial LifePoint directors following the distribution, one-third will continue to serve until the 2000 Annual Meeting of Stockholders, one-third will continue to serve until the 2001 Annual Meeting of Stockholders, and one-third will continue to serve until the 2002 Annual Meeting of Stockholders. Of the initial directors, , and will serve until the 2000 Annual Meeting of Stockholders; , and will serve until the 2001 Annual Meeting of Stockholders; and , and will serve until the 2002 Annual Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one class of directors will be elected each year for a three-year term. See "LifePoint Description of Capital Stock--Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws--Classified Board of Directors." The LifePoint Board of Directors will have a number of standing committees, including an Executive Committee, an Audit Committee and a Compensation Committee. The Executive Committee may exercise certain powers of the Board of Directors regarding the management and direction of the business and affairs of LifePoint when the Board of Directors is not in session. All action taken by the Executive Committee is reported to and reviewed by the LifePoint Board of Directors. The Executive Committee also will screen candidates to be nominated for election to the LifePoint Board of Directors by the stockholders or chosen to fill newly created directorships or vacancies on the LifePoint Board of Directors. The members of the Executive Committee will be , , and , with serving as Chair. The Audit Committee of the LifePoint Board of Directors will review and make reports and recommendations to the Board of Directors with respect to the selection of the independent auditors of LifePoint and its subsidiaries, the arrangements for and the scope of the audits to be performed by them and the internal audit activities, accounting procedures and controls of LifePoint, and will review the annual consolidated financial statements of LifePoint. The members of the Audit Committee will be , and , with serving as Chair. 98 The Compensation Committee of the LifePoint Board of Directors will be responsible for approving compensation arrangements for executive management of LifePoint, reviewing compensation plans relating to officers, grants of options and other benefits under LifePoint's employee benefit plans and reviewing generally LifePoint's employee compensation policy. The members of the Compensation Committee will be , and , with serving as Chair. COMPENSATION OF DIRECTORS The annual retainer for outside directors who are neither officers nor employees of LifePoint ("Non-Employee Directors") will be $18,000 (payable in the form of deferred LifePoint common stock units, payout of which, at the election of the director, may be deferred for two years or until the end of such director's term of office), and the Board meeting fee will be $1,500 per meeting. Committee members will receive a fee of $1,000 per meeting payable only for attendance at committee meetings not held in conjunction with a meeting of the LifePoint Board of Directors. Directors also are reimbursed for expenses incurred relating to attendance at meetings. Each Non-Employee Director (and, after the distribution, each newly elected Non-Employee Director) will receive an option to acquire shares of LifePoint common stock (exercisable at the fair market value of LifePoint common stock on the grant date) for a number of shares having an aggregate value as of the grant date equal to two times the Non-Employee Director's annual retainer fee. Each Non- Employee Director also will receive an initial grant of an option, and following each annual meeting of stockholders beginning in 2000 an option, to acquire shares of LifePoint common stock (exercisable at the fair market value of LifePoint common stock on the grant date) for a number of shares having an aggregate value as of the grant date equal to the Non-Employee Director's annual retainer fee then in effect. Such options will become exercisable as to one-third of such shares on each of the first three anniversaries of the date of grant. EXECUTIVE OFFICERS On the distribution date, the executive officers of LifePoint will be as follows:
NAME AGE POSITION AND PROFESSIONAL EXPERIENCE ---- --- ------------------------------------ Scott L. Mercy............ 37 Chairman and Chief Executive Officer, LifePoint, as of the distribution date and, since September 1, 1998, the America Group of Columbia/HCA; President and Chief Executive Officer of America Service Group, Inc. (health care services for correctional facilities) from 1996 through September 1, 1998; Senior Vice President--Financial Operations of Columbia/HCA Healthcare Corporation (health care services) from 1994 through 1995; Vice President-- Financial Operations and Director--Financial Operations Support of Hospital Corporation of America (health care services), prior thereto. James M. Fleetwood, Jr. .. 51 President and Chief Operating Officer of LifePoint, as of the distribution date, and since January 1, 1998, President, the America Group of Columbia/HCA; President--Florida Group of Columbia/HCA from May 1996 to January 1, 1998; President of the North Florida Division of Columbia/HCA from April 1995 to May 1996; Regional Vice President of Healthtrust, Inc.--The Hospital Company (health care services), prior thereto. William F. Carpenter III.. 44 Senior Vice President and General Counsel, LifePoint, as of the distribution date, and since November 16, 1998, General Counsel, the America Group of Columbia/HCA; Member, Waller Lansden Dortch & Davis, PLLC (law firm), prior to December 31, 1998.
99
NAME AGE POSITION AND PROFESSIONAL EXPERIENCE ---- --- ------------------------------------ Kenneth C. Donahey.. 48 Senior Vice President and Chief Financial Officer, LifePoint, as of the distribution date, and since November 5, 1998, Chief Financial Officer, the America Group of Columbia/HCA; Senior Vice President and Controller, Columbia/HCA from April 1995 through November 4, 1998; Senior Vice President and Controller, Healthtrust--The Hospital Company, prior thereto. Neil D. Hemphill.... 45 Senior Vice President of Administration and Human Resources, LifePoint, as of the distribution date and, since September 1, 1998, Senior Vice President of Administration and Human Resources, the America Group of Columbia/HCA; Senior Vice President of Human Resources, Columbia/HCA from February 1994 to September 1, 1998; Vice President of Human Resources, Columbia Healthcare Corporation, prior thereto. William Gracey...... 45 Division President, LifePoint, as of the distribution date and, since July 1998, Division President, the America Group of Columbia/HCA; President of Operations Support for the Atlantic Group of Columbia/HCA from January 1998 through June 1998; Division President, Columbia/HCA from September 1995 to December 1997; Chief Operating Officer of the Pacific Division of Columbia/HCA from February 1995 to September 1995; Chief Executive Officer of other facilities of Hospital Corporation of America (health care services), prior thereto. Dan Slipkovich...... 41 Division President, LifePoint, as of the distribution date; and since October 1998, Division President of the America Group of Columbia/HCA; Chief Financial Officer of the America Group of Columbia/HCA, January 1998 to October 1998; Chief Financial Officer and Vice President of the Florida Group of Columbia/HCA from July 1996 to January 1998; Chief Financial Officer and Vice President of the North Florida Division of Columbia/HCA from April 1995 to July 1996; Regional Assistant Vice President of Healthtrust Inc.--The Hospital Company, prior thereto.
100 EXECUTIVE COMPENSATION The information under this heading relates to the compensation paid by Columbia/HCA to the Chief Executive Officer of LifePoint and the four individuals who will be executive officers of LifePoint as of the distribution date and who were, based on such compensation, the most highly compensated LifePoint executive officers for the year ended December 31, 1997. All cash compensation was paid by Columbia/HCA and all stock compensation was in the form of Columbia/HCA Common Stock or options to purchase shares of Columbia/HCA Common Stock. The principal positions listed in the table are those that will be held by such persons as of the distribution date. For information regarding certain future compensation arrangements which have been established for LifePoint as an independent, publicly-traded company, see "--LifePoint Compensation Arrangements." LIFEPOINT SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION -------------------------------- -------------------------- SECURITIES OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER NAME AND PRINCIPAL BONUS COMPENSATION STOCK OPTIONS/SARS COMPENSATION POSITION YEAR SALARY ($) ($)(2) ($)(3) AWARDS ($)(4) (#)(5) ($)(6) ------------------ ---- ---------- -------- ------------ ------------- ------------ ------------ Scott L. Mercy.......... 1997 $ -- -- -- -- -- -- Chairman and Chief Executive Officer (1) James M. Fleetwood, Jr. ................... 1997 $350,000 $175,000 $8,333 $ -- 340,000 $ 8,439 President and Chief Operating Officer Kenneth C. Donahey...... 1997 $275,000 -- -- $183,369 290,000 $15,903 Senior Vice President and Controller William Gracey.......... 1997 $210,000 $105,000 -- -- 72,000 $12,084 Division President Dan Slipkovich.......... 1997 $191,500 $ 95,750 -- -- 125,000 $13,530 Division President
- - -------- (1) Mr. Mercy became employed by Columbia/HCA in September 1998 and therefore received no compensation in 1997. (2) Reflects bonus earned during the fiscal year. In some instances, all or a portion of the bonus was paid during the following fiscal year. Each of the Executive officers identified in the table had the option to take all or part of their bonus in shares of Columbia/HCA restricted stock at a 25% discount from the fair market value at the time of grant, which is reflected in the Restricted Stock Awards column. (3) Perquisites and other personal benefits did not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus for any executive officer identified in the table. Other compensation consists principally of relocation expenses. (4) Represents fair market value on the date of grant of shares of Columbia/HCA restricted stock granted in lieu of all or a portion of a cash bonus. (5) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA granted options at two separate times in 1997. The 1997 regular grant was issued in February 1997. A special grant was issued in November 1997 to help ensure the retention and motivation of key executives, including each of the executive officers identified in the table, at the time Columbia/HCA was reorganizing. On average, the size of the November 1997 grant is two times a competitive median long-term grant for a two year period (1998-99). (6) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and Investment Plan, Money Purchase Plan and Stock Bonus Plan. 101 COLUMBIA/HCA OPTION GRANTS IN 1997 The following table provides information on grants of options to purchase shares of Columbia/HCA Common Stock made during 1997 to the persons named in the LifePoint Summary Compensation Table. For a discussion of the treatment of such options and certain replacement grants of options to purchase shares of LifePoint common stock, see "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement-- Treatment of Columbia/HCA Common Stock Options." OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED ANNUAL NUMBER OF TOTAL RATES OF SECURITIES OPTIONS/SARS STOCK PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM (5) SARS/OPTIONS EMPLOYEES BASE PRICE EXPIRATION ------------------------ NAME GRANTED (#) (2) IN FISCAL YEAR ($/SH)(3)(4) DATE 5% ($) 10% ($) - - ---- --------------- -------------- ------------ ---------- ----------- ------------ Scott L. Mercy (1)...... -- -- -- -- -- -- James M. Fleetwood, Jr..................... 90,000 $39.88 2/3/07 $2,257,229 $ 5,720,260 250,000 1.54% $28.19 11/3/07 $4,431,741 $ 11,230,903 Kenneth C. Donahey...... 40,000 $39.88 2/3/07 $1,003,213 $ 2,542,337 250,000 1.35% $28.19 11/3/07 $4,431,741 $ 11,230,903 William Gracey.......... 22,000 $39.88 2/3/07 $ 551,767 $ 1,398,286 50,000 0.34% $28.19 11/3/07 $ 886,427 $ 2,246,380 Dan Slipkovich.......... 25,000 -- $39.88 2/3/07 $ 627,008 $ 1,598,961 100,000 0.58% $28.19 11/3/07 $1,772,854 $ 4,492,760
- - -------- (1) Mr. Mercy became employed by Columbia/HCA in September 1998 and therefore received no compensation in 1997. (2) Options to acquire Columbia/HCA Common Stock. Columbia/HCA granted options at two separate times in 1997. The 1997 regular grant was issued in February 1997. A special grant was issued in November 1997 to help ensure the retention and motivation of key executives at the time Columbia/HCA was reorganizing. (3) The option exercise price may be paid in shares of Columbia/HCA Common Stock owned by the executive officer, in cash, or a combination thereof. (4) The ten-year options become exercisable with respect to 25% of the shares covered thereby on the second, third, fourth and fifth anniversary dates following the date of grant. The exercise price is an amount equal to the fair market value of the Columbia/HCA Common Stock on the date of the grant. (5) The potential realizable value portion of the foregoing table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation on the Columbia/HCA Common Stock over the term of the options. These amounts do not take into account provisions of the options relating to termination of the option following termination of employment, non- transferability or vesting over periods of up to five years. 102 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE- UNEXERCISED OPTIONS/SARS AT MONEY OPTIONS/SARS AT FISCAL SHARES FISCAL YEAR-END (#) YEAR-END($) (2) ACQUIRED ON VALUE ------------------------------ -------------------------------- NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - - ---- ------------ ----------- ------------- -------------- --------------- --------------- Scott L. Mercy (1)...... 0 $ 0 7,500 -- $ 221,105 $ 0 James M. Fleetwood, Jr..................... 0 0 111,120 416,875 1,765,102 386,797 Kenneth C. Donahey...... 0 0 139,484 368,750 2,102,432 414,219 William Gracey.......... 15,750 259,328 10,312 105,938 35,647 132,322 Dan Slipkovich.......... 0 0 26,651 147,500 414,986 158,375
- - -------- (1) Mr. Mercy became employed by Columbia/HCA in September 1998 and therefore received no compensation in 1997. (2) The closing price for the Columbia/HCA Common Stock, as reported by the NYSE, on December 31, 1997 was $29.625. Value is calculated on the basis of the difference between the option exercise price and 29.625, multiplied by the number of shares of Columbia/HCA Common Stock underlying the option. LIFEPOINT COMPENSATION ARRANGEMENTS BENEFITS AND EMPLOYMENT MATTERS AGREEMENT In connection with the distribution, Columbia/HCA, LifePoint and Triad will enter into the Benefits and Employment Matters Agreement, which allocates responsibilities for employee compensation, benefits, labor, benefit plan administration and certain other employment matters on and after the distribution date. Among other things, the Benefits and Employment Matters Agreement generally provides for grants to LifePoint employees of options to purchase shares of LifePoint common stock and Triad common stock in respect of vested options to purchase Columbia/HCA Common Stock (other than incentive stock options) and in replacement of non-vested options and incentive stock options (whether or not vested) to purchase Columbia/HCA Common Stock. The Benefits and Employment Matters Agreement also provides for the establishment of certain of the benefit plans described in this section. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement." THE LIFEPOINT 1998 LONG-TERM INCENTIVE PLAN The LifePoint 1998 Long-Term Incentive Plan has been adopted by the Board of Directors of Columbia/HCA in contemplation of the distribution. Reservation of Shares. Under the LifePoint Long-Term Incentive Plan, 7,000,000 shares of LifePoint common stock will be reserved for issuance. The shares of LifePoint common stock to be issued will be made available from authorized but unissued shares of LifePoint common stock or issued shares that have been reacquired by LifePoint. If any shares of LifePoint common stock that are the subject of an award are not issued and cease to be issuable for any reason, such shares will no longer be charged against the maximum share limitations and may again be made subject to awards. In the event of certain corporate reorganizations, recapitalizations, or other specified corporate transactions affecting LifePoint or the LifePoint common stock, proportionate adjustments may be made to the number of shares available for grant, as well as the other maximum share limitations, under the LifePoint Long-Term Incentive Plan, and the number of shares and prices under outstanding awards. Duration. The LifePoint Long-Term Incentive Plan has a term of 10 years, subject to earlier termination or amendment by the LifePoint Board of Directors. 103 Administration. Beginning with the first meeting of the LifePoint Board of Directors, the LifePoint Long-Term Incentive Plan will be administered by the Compensation Committee of the LifePoint Board of Directors. Subject to the limitations set forth in the LifePoint Long-Term Incentive Plan, the LifePoint Compensation Committee has the authority to determine the persons to whom awards are granted, the types of awards to be granted, the time at which awards will be granted, the number of shares, units or other rights subject to each award, the exercise, base or purchase price of an award (if any), the time or times at which the award will become vested, exercisable or payable, and the duration of the award. Eligibility. All employees of LifePoint and its subsidiaries and, in the case of awards other than incentive stock options, any consultant or independent contractor providing services to LifePoint or a subsidiary, will be eligible to be granted awards under the LifePoint Long-Term Incentive Plan, as selected from time to time by the LifePoint Compensation Committee in its sole discretion. Types of Awards. The LifePoint Long-Term Incentive Plan authorizes the grant of the following types of awards: . Stock Options (nonqualified and incentive stock options). The maximum number of shares that may be covered under options granted to any individual in any calendar year is 700,000 shares. The exercise price of an option may be determined by the LifePoint Compensation Committee, provided that the exercise price per share of an option may not be less than the fair market value of a share of LifePoint common stock on the date of grant. The value of LifePoint common stock (determined at the time of grant) that may be subject to incentive stock options that become exercisable by an employee in any one year is limited to $100,000. The maximum term of any stock option will be ten years from the date of grant. The LifePoint Compensation Committee is to determine the extent to which an option will become and/or remain exercisable in the event of termination of employment or service of a participant under various circumstances, including retirement, death or disability, subject to certain limitations for incentive stock options. An option may be exercised in whole or in part at any time during the term thereof by written notice to LifePoint, together with payment of the aggregate exercise price of the option. In addition to the exercise price, the participant must pay LifePoint in cash or, at the LifePoint Compensation Committee's discretion, in LifePoint common stock, the full amount of all applicable income tax and employment tax amounts required to be withheld in connection with the exercise of the option. . Stock Appreciation Rights. A stock appreciation right may be granted either in tandem with an option or without a related option. A stock appreciation right entitles the holder, upon exercise, to receive a payment based on the difference between the base price of the stock appreciation right (which may not be less than the fair market value of a share of LifePoint common stock on the date of grant) and the fair market value of a share of LifePoint common stock on the date of exercise, multiplied by the number of shares as to which such stock appreciation right is being exercised. The maximum term of a stock appreciation right will be 10 years from the date of grant. No more than 700,000 shares of LifePoint common stock may be subject to stock appreciation rights granted to any one participant during any calendar year. Stock appreciation rights are payable, in the discretion of the LifePoint Compensation Committee, in cash, in shares of LifePoint common stock, or in a combination of cash and shares of LifePoint common stock. . Performance Awards. Performance awards are units denominated on the date of grant either in shares of LifePoint common stock ("performance shares") or in specified dollar amounts ("performance units"). Performance awards are payable upon the achievement of performance criteria established by the LifePoint Compensation Committee at the beginning of the applicable performance period. At the time of grant, the Compensation Committee establishes the number of units, the duration of the performance period or periods, the applicable performance criteria, and, in the case of performance units, the target unit value or range of unit values for the performance awards. At the end of the performance period, the Compensation Committee determines the payment to be made, based on the extent to which the performance goals have been achieved. Performance awards are payable, in the 104 discretion of the LifePoint Compensation Committee, in cash, in shares of LifePoint common stock, or in a combination of cash and shares of LifePoint common stock. The maximum amount of compensation that may be payable to a participant during any one calendar year with respect to a performance unit shall be $4.2 million. The maximum number of performance shares granted to a participant during any one calendar year shall be 280,000 performance shares. . Phantom Stock. An award of phantom stock gives the participant the right to receive payment at the end of a fixed vesting period based on the value of a share of LifePoint common stock at the time of vesting. Phantom stock units are subject to such restrictions and conditions to payment as the LifePoint Compensation Committee determines are appropriate. An award of phantom stock may be granted, at the discretion of the LifePoint Compensation Committee, together with an award of dividend equivalent rights for the same number of shares covered thereby. Phantom stock awards are payable, in the discretion of the LifePoint Compensation Committee, in cash, in shares of LifePoint common stock having an equivalent fair market value on the applicable vesting dates, or in a combination thereof. . Restricted Stock Awards. An award of restricted stock represents shares of LifePoint common stock that are issued subject to such restrictions on transfer and incidents of ownership, and such forfeiture conditions, as the LifePoint Compensation Committee deems appropriate. The restrictions imposed upon an award of restricted stock will lapse in accordance with the vesting requirements specified by the LifePoint Compensation Committee in the award agreement. Such vesting requirements may be based on the continued employment of the participant for a specified time period or on the attainment of specified business goals or performance criteria established by the LifePoint Compensation Committee. The LifePoint Compensation Committee may, in connection with an award of restricted stock, require the payment of a specified purchase price. Subject to the transfer restrictions and forfeiture restrictions relating to the restricted stock award, the participant will have the rights of a stockholder of LifePoint, including all voting and dividend rights, during the restriction period, unless the LifePoint Compensation Committee determines otherwise at the time of the grant. The maximum number of shares of common stock that may be subject to a restricted stock award granted to a participant during any one calendar year shall be 280,000 shares. . Dividend Equivalents. Dividend equivalent awards entitle the holder to a right to receive cash payments determined by reference to dividends declared on the LifePoint common stock during the term of the award, which will not exceed 10 years from the date of grant. Dividend equivalent awards may be granted on a stand-alone basis or in tandem with other awards under the LifePoint Long-Term Incentive Plan. Dividend equivalent awards are payable in cash or in shares of LifePoint common stock, as determined by the LifePoint Compensation Committee. Change-In-Control. The LifePoint Compensation Committee may, in an award agreement, provide for the effect of a change-in-control (as defined in the LifePoint Long-Term Incentive Plan) on the award. Such provisions may include the acceleration of an award's vesting or extension of the time for exercise, the elimination or modification of performance or other conditions, the cash settlement of an award or other adjustments that the LifePoint Compensation Committee considers appropriate. LIFEPOINT EXECUTIVE STOCK PURCHASE PLAN The LifePoint Executive Stock Purchase Plan will be adopted by LifePoint, and approved by the Columbia/HCA Board of Directors (as the sole shareholder of LifePoint common Stock), prior to the distribution date. Reservation of Shares. Under the LifePoint Executive Stock Purchase Plan, shares of LifePoint common stock will be reserved for issuance pursuant to all rights granted under the plan. The shares of LifePoint common stock to be issued will be made available from authorized but unissued shares of LifePoint common stock or issued shares that have been reacquired by LifePoint. To the extent that any right to 105 purchase Lifepoint common stock granted under the plan is forfeited, cancelled, or otherwise terminated, the shares of LifePoint common stock covered thereunder will no longer be charged against the maximum share limitation and may again be made subject to rights granted under the plan. Duration. The LifePoint Executive Stock Purchase Plan will have a term of 10 years, subject to earlier termination or amendment by the LifePoint Board of Directors. Administration. The LifePoint Executive Stock Purchase Plan will be administered by the Compensation Committee of the LifePoint Board of Directors. Subject to limitations to be set forth in the LifePoint Executive Stock Purchase Plan, the Compensation Committee will have the authority to determine the persons to whom rights are granted, the time at which rights will be granted, the number of shares that may be purchased under a right, the date or period during which such right may be exercised and all other terms of the right. With the consent of the affected participant, the Compensation Committee will have the authority to cancel and replace outstanding rights previously granted with new rights for the same or a different number of shares and to amend the terms of any outstanding right. Eligibility. All executive employees of LifePoint and its subsidiaries will be eligible to receive rights under the Lifepoint Executive Stock Purchase Plan; however, no person will be granted more than one right. Initial Grants. The LifePoint Executive Stock Purchase Plan will specifically provide for initial grants of rights to certain executive officers. These rights are to be exercised on the fifth day on which LifePoint's common stock is traded. Exercise of Rights. A right will be exercised by written notice to LifePoint on or prior to a specified exercise date. Such written notice will be an agreement by the participant to pay the full purchase price of the LifePoint common stock by means of a purchase loan, except to the extent the notice is accompanied by a cash payment. Purchase Loan. LifePoint will loan each participant 100% of the purchase price of LifePoint common stock acquired by the participant under a right, on a full recourse basis, to the extent the participant does not elect to pay the purchase price in cash. The loan will be secured by the shares purchased. Interest will be paid upon the loan's maturity or upon the loan's prepayment and will accrue at the applicable Federal rate, compounded semi-annually. However, if the participant's employment terminates for cause or the participant voluntarily terminates employment (other than for a good reason) within three years of purchasing the shares, in addition to any amounts otherwise due under the loan (including accrued interest), the participant will be required to pay LifePoint the additional interest that would have been payable in respect of the loan, if the regular interest rate on such purchase loan had been the prime rate, and interest thereon at such rate to the actual date of payment. Loan Maturity and Repayment. A loan will mature upon the earlier of (i) the fifth anniversary following the purchase of the shares, (ii) termination of the participant's employment for any reason, or (iii) bankruptcy of the participant. Within 120 days following the loan's maturity, the participant will be required to pay LifePoint the full amount remaining due on the loan, including all unpaid accrued interest. Loan Prepayments. The loan may be prepaid, in whole or in part, at any time. At any time following the earlier of (i) the second anniversary following the purchase of the shares, or (ii) a change in control, such shares may, at the participant's election, be sold to repay the loan. Any cash dividends received on the purchased shares prior to payment of the full amount due on such loan, net of assumed Federal, state and local income taxes, will be used to prepay the loan. Transfer Restrictions. A participant will not be entitled to delivery of the stock certificates representing the shares purchased and none of such shares may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of (except by will or the applicable laws of descent and distribution) until 106 the later of (i) full repayment of the purchase price and accrued interest (and any additional amount that may be due under the LifePoint Executive Stock Purchase Plan), and (ii) the earlier of (1) the third anniversary of the date the shares were purchased, (2) the participant's termination of employment or bankruptcy, and (3) a change in control. However, such shares may be sold to pay the loan at maturity, or to voluntarily prepay such loan at any time after the earlier of (i) the second anniversary of the date the shares were purchased, or (ii) a change in control. Death or Disability Benefit. In the event of termination of employment because of death or disability, where the amount remaining due on the loan (including accrued interest) is greater than the fair market value of the shares purchased, as of the date of such death or disability, LifePoint will pay a death or disability benefit equal to the amount of such payment remaining due over the shares' fair market value as of the date of such death or disability. LIFEPOINT EMPLOYEE STOCK OWNERSHIP PLAN LifePoint expects to establish for the benefit of its employees a leveraged Employee Stock Ownership Plan (the "LifePoint ESOP") which, shortly after the distribution, will purchase newly issued shares of LifePoint common stock from LifePoint in an amount equal to 8.3% of the outstanding shares of LifePoint. Such shares will be purchased using the proceeds of a loan to be made to the LifePoint ESOP and guaranteed by LifePoint. Initially, all such shares will be held in a suspense account under the LifePoint ESOP. LifePoint will contribute annually to the LifePoint ESOP the funds required to repay the ESOP loan. As the ESOP loan is repaid, shares will be released from the suspense account and will be allocated to accounts established for participants under the LifePoint ESOP. The loan will be repaid over a 10 year period. Generally, each employee of LifePoint and its participating subsidiaries will participate in the LifePoint ESOP as of the first January 1 after his or her date of hire. Each participant in the LifePoint ESOP will be fully vested in his accounts after completion of seven years of service with LifePoint (including any pre- distribution service with Columbia/HCA and its affiliates). LIFEPOINT SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Immediately prior to the distribution, Columbia/HCA will own beneficially and of record approximately shares of LifePoint common stock, representing 100% of the shares of capital stock of LifePoint expected to be issued and outstanding immediately after the distribution. Columbia/HCA will have sole voting and sole investment power with respect to the shares owned by it. After the completion of the distribution, none of the outstanding shares of LifePoint common stock will be owned by Columbia/HCA. The following table sets forth the projected beneficial ownership of LifePoint common stock as of the distribution date of Columbia/HCA sponsored benefit plans (which collectively are projected to own 5% or more of such class of securities); certain persons LifePoint believes will become the beneficial owners of 5% or more of such class of securities; each of the persons who will be an LifePoint director as of the distribution date; each of the executive officers named in the Summary Compensation Table; and all of the persons who will be LifePoint directors and executive officers as of the distribution date as a group. The ownership information presented below: . is based on Columbia/HCA's knowledge of the beneficial ownership of Columbia/HCA Stock as of , 1998; . reflects the distribution ratio of shares of LifePoint common stock for every shares of Columbia/HCA Stock outstanding on the record date; . reflects the options to purchase LifePoint common stock to be granted and the Employee Stock Ownership Plan that LifePoint expects to establish in accordance with the Benefits and Employment Matters Agreement; and . assumes no change in beneficial ownership of Columbia/HCA Capital Stock between , 1998 and the record date. 107
NUMBER OF NAME OF BENEFICIAL OWNER SHARES(1)(2) PERCENT - - ------------------------ ------------ ------- The Columbia/HCA Healthcare Corporation Stock Bonus Plan (3)..................................................... 4.2% The Columbia/HCA Healthcare Corporation Salary Deferral Plan (3)................................................ 3.2% The San Leandro Retirement and Savings Plan (3).......... * FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson (4)..................................................... 8.4% Wellington Management Company, LLP (5)................... 6.4% Scott L. Mercy........................................... * [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... James M. Fleetwood....................................... * Kenneth C. Donahey....................................... * William Gracey........................................... * Dan Slipkovich........................................... * All Directors and Executive Officers as a Group ( persons)................................................
- - -------- * Less than one percent. (1) Unless otherwise indicated, each stockholder shown on the table has sole voting and investment power with respect to the shares beneficially owned. The number of shares shown does not include the interest of certain persons in shares held by family members in their own right. (2) Each named person or group is deemed to be the beneficial owner of securities which may be acquired within 60 days through the exercise or conversion of options, warrants and rights, if any, and such securities are deemed to be outstanding for the purpose of computing the percentage beneficially owned by such person or group. Such securities are not deemed to be outstanding for the purpose of computing the percentage beneficially owned by any other person or group. Accordingly, the indicated number of shares includes shares issuable upon conversion of convertible securities or upon exercise of options (including employee stock options) held by such person or group. (3) The address of the Columbia/HCA Healthcare Corporation Stock Bonus Plan, the Columbia/HCA Salary Deferral Plan and the San Leandro Retirement and Savings Plan is One Park Plaza, Nashville, Tennessee 37203. Such shares are beneficially owned by employees participating in such benefit plans and voted at the direction of Columbia/HCA's Retirement Committee which is composed of certain Columbia/HCA officers. (4) The ownership given for FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson is based on information contained in the Schedule 13G dated October 9, 1998, filed with the SEC by FMR Corp. in respect of its beneficial ownership of Columbia/HCA Common Stock. The address of FMR Corp is 82 Devonshire Street, Boston, Massachusetts 02109. (5) The ownership given for Wellington Management Company, LLP is based on information contained in the Schedule 13G dated January 27, 1998, filed with the SEC by Wellington Management Company, LLP in respect of its beneficial ownership of Columbia/HCA Common Stock. The address of Wellington Management Company, LLP is 75 State Street, Boston, Massachusetts 02109. 108 TRIAD MANAGEMENT DIRECTORS On the distribution date, the directors of Triad will be the persons named below.
NAME AGE PRINCIPAL OCCUPATION OR EMPLOYMENT FOR PAST FIVE YEARS ---- --- ------------------------------------------------------ James D. Shelton.. 45 President and Chief Executive Officer of Triad, as of the distribution date; and since January 1, 1998, President, the Triad Group of Columbia/HCA; President--Central Group of Columbia/HCA from June 1994 until January 1, 1998; Executive Vice President of the Central Division of National Medical Enterprises, Inc. (presently called Tenet Healthcare Corporation) (health care services) from May 1993 to June 1994; Senior Vice President of Operations of National Medical Enterprises, Inc., prior thereto. [Director]........ [Director]........ [Director]........ [Director]........ [Director]........ [Director]........ [Director]........
The Triad Certificate provides that the Triad Board of Directors will be divided into three classes, with the classes to be as nearly equal in number as possible, and that, of the initial Triad directors following the distribution, one-third will continue to serve until the 2000 Annual Meeting of Stockholders, one-third will continue to serve until the 2001 Annual Meeting of Stockholders, and one-third will continue to serve until the 2002 Annual Meeting of Stockholders. Of the initial directors, , , and will serve until the 2000 Annual Meeting of Stockholders; , and will serve until the 2001 Annual Meeting of Stockholders; and , , and will serve until the 2002 Annual Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one class of directors will be elected each year for a three-year term. See "Triad Description of Capital Stock--Certain Anti-Takeover Provisions--Triad Certificate and By-Laws--Classified Board of Directors." The Triad Board of Directors will have a number of standing committees, including an Executive Committee, an Audit Committee, and a Compensation Committee. The Triad Board of Directors will not have a standing nominating committee, but rather will act as a committee of the whole to screen candidates to be nominated for election thereto by the stockholders or chosen to fill newly created directorships or vacancies on the Triad Board of Directors. The Executive Committee may exercise certain powers of the Board of Directors regarding the management and direction of the business and affairs of Triad when the Board of Directors is not in session. All action taken by the Executive Committee is reported to and reviewed by the Triad Board of Directors. The members of the Executive Committee will be , , and , with serving as Chair. The Audit Committee of the Triad Board of Directors will review and make reports and recommendations to the Board of Directors with respect to the selection of the independent auditors of Triad and its subsidiaries, the arrangements for and the scope of the audits to be performed by them and the internal audit activities, accounting procedures and controls of Triad, and will review the annual consolidated financial statements of Triad. The members of the Audit Committee will be , and , with serving as Chair. The Compensation Committee of the Triad Board of Directors will be responsible for approving compensation arrangements for executive management of Triad, reviewing compensation plans relating to 109 officers, grants of options and other benefits under Triad's employee benefit plans and reviewing generally Triad's employee compensation policy. The members of the Compensation Committee will be , , and , with serving as Chair. COMPENSATION OF DIRECTORS The annual retainer for Non-Employee Directors (other than the Chairman) will be $ (payable in the form of restricted shares of Triad common stock), and the Board meeting fee will be $ per meeting. The annual retainer for the Chairman of the Board of Directors will be $ (80% of which will be payable in the form of restricted shares of Triad common stock, with the balance payable in cash). Except for the Chairman of the Board, who will receive $ per committee meeting (whether or not serving as committee chairperson), committee chairpersons will receive $ per meeting, and other committee members will receive a fee of $ per meeting, in each case payable only for attendance at committee meetings not held in conjunction with a meeting of the Triad Board of Directors. Directors also are reimbursed for expenses incurred relating to attendance at meetings. EXECUTIVE OFFICERS On the distribution date, the executive officers of Triad will be as follows:
NAME AGE POSITION AND PROFESSIONAL EXPERIENCE ---- --- ------------------------------------ James D. Shelton....... 45 President and Chief Executive Officer of Triad, as of the distribution date; and since January 1, 1998, President, the Pacific Group of Columbia/HCA; President--Central Group of Columbia/HCA from June 1994 until January 1, 1998; Executive Vice President of the Central Division of National Medical Enterprises, Inc. (presently called Tenet Healthcare Corporation) (health care services) from May 1993 to June 1994; Senior Vice President of Operations of National Medical Enterprises, Inc., prior thereto. Michael J. Parsons..... 43 Chief Operating Officer and Treasurer of Triad, as of the distribution date; and since January 1, 1998, Chief Operating Officer, the Pacific Group of Columbia/HCA; Chief Financial Officer--Central Group of Columbia/HCA from July 1994 until January 1, 1998; Chief Financial Officer of the Central Group of National Medical Enterprises, Inc. prior thereto. Donald P. Fay.......... 55 Senior Vice President and General Counsel of Triad, as of the distribution date; and since January 1, 1998, Senior Vice President, the Pacific Group of Columbia/HCA; Vice President--Legal, Columbia/HCA from February 1994 through December 1997 ; Senior Counsel, Columbia/HCA, prior thereto. Christopher A. Holden.. 34 Senior Vice President of Triad, as of the distribution date; and since January 1, 1998, the Pacific Group of Columbia/HCA; President, West Texas Division of the Central Group of Columbia/HCA from September 1997 until January 1, 1998; Vice President of Administration for the Central Group of Columbia/HCA from August 1994 until September 1997; Assistant Vice President--Administration of the Central Group of National Medical Enterprises, Inc. prior thereto. Nicholas J. Marzocco... 44 Senior Vice President of Triad, as of the distribution date; and since January 1, 1998, President--East Division, the Pacific Group of Columbia/HCA; Chief Operating Officer of the Louisiana Division of Columbia/HCA from September 1996 until January 1, 1998; Chief Executive Officer of North Shore Regional Medical Center (a 310-bed hospital owned by National Medical Enterprises, Inc. and located in Slidell, Louisiana) prior thereto.
110 EXECUTIVE COMPENSATION The information under this heading relates to the compensation paid by Columbia/HCA to the Chief Executive Officer of Triad and the four individuals who will be executive officers of Triad as of the distribution date and who were, based on such compensation, the most highly compensated Triad executive officers for the year ended December 31, 1997. All cash compensation was paid by Columbia/HCA and all stock compensation was in the form of Columbia/HCA Common Stock or options to purchase shares of Columbia/HCA Common Stock. The principal positions listed in the table are those that will be held by such persons as of the distribution date. For information regarding certain future compensation arrangements which have been established for Triad as an independent, publicly-traded company, see "--Triad Compensation Arrangements." TRIAD SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION --------------------------------- ------------------------- SECURITIES OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER SALARY COMPENSATION STOCK OPTIONS/SARS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) BONUS($)(2) ($)(3) AWARDS($)(4) (#)(5) ($)(6) --------------------------- ---- -------- ----------- ------------ ------------ ------------ ------------ James D. Shelton (1)......... 1997 $415,000 $ 41,500 -- $221,400 350,000 $7,629 President and 1996 350,000 35,000 -- 187,000 82,500 7,214 Chief Executive Officer 1995 325,000 32,000 -- 165,000 60,000 7,248 Michael J. Parsons........... 1997 $225,000 $ 56,250 -- $ 75,000 135,000 $7,629 Senior Vice President, Chief Operating Officer and Treasurer Nicholas J. Marzocco......... 1997 $207,000 $103,500 $31,158 -- 64,000 $7,004 Senior Vice President Christopher A. Holden........ 1997 $195,000 $ 42,840 $28,950 -- 60,000 $6,373 Senior Vice President Donald P. Fay................ 1997 $178,000 $ 62,300 -- -- 12,000 $8,438 Senior Vice President and General Counsel
- - -------- (1) Pursuant to SEC rules, includes information for years prior to 1997 because Mr. Shelton's compensation during those periods was previously included in public disclosure by Columbia/HCA. (2) Reflects bonus earned during the fiscal year. In some instances, all or a portion of the bonus was paid during the following fiscal year. Each of the executive officers identified in the table, except for Messrs. Holden and Fay, had the option to take all or part of their bonus in shares of Columbia/HCA restricted stock at a 25% discount from the fair market value at the time of grant, which is reflected in the Restricted Stock Awards column. (3) Perquisites and other personal benefits did not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus for any executive officer identified in the table. Other compensation consists principally of relocation expenses. (4) Represents the fair market value on the date of grant of shares of Columbia/HCA restricted stock granted in lieu of all or a portion of a cash bonus. (5) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA granted options at two separate times in 1997. The 1997 regular grant was issued in February 1997. A special grant was issued in November 1997 to help ensure the retention and motivation of key executives, including Messrs. Shelton, Parsons, Marzocco and Holden, at the time Columbia/HCA was reorganizing. On average, the size of the November 1997 grant is two times a competitive median long-term grant for a two-year period (1998-99). (6) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and Investment Plan, Money Purchase Plan and Stock Bonus Plan. 111 COLUMBIA/HCA OPTION GRANTS IN 1997 The following table provides information on grants of options to purchase shares of Columbia/HCA Common Stock made during 1997 to the persons named in the Triad Summary Compensation Table. For a discussion of the treatment of such options and certain replacement grants of options to purchase shares of Triad common stock, see "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement-- Treatment of Columbia/HCA Common Stock Options." OPTION/SAR GRANTS IN LAST FISCAL YEAR
PERCENT OF POTENTIAL REALIZABLE TOTAL VALUE AT ASSUMED ANNUAL NUMBER OF OPTIONS/SARS RATES OF SECURITIES GRANTED TO STOCK PRICE APPRECIATION UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM (4) SARS/OPTIONS IN FISCAL BASE PRICE EXPIRATION ------------------------ NAME GRANTED (#) (1) YEAR ($/SH)(2)(3) DATE 5% ($) 10% ($) - - ---- --------------- ------------ ------------ ---------- ----------- ------------ James D. Shelton........ 100,000 $39.88 2/3/07 $2,507,717 $ 6,355,048 250,000 1.58% $28.19 11/3/07 $4,431,741 $11,230,903 Michael J. Parsons...... 35,000 $39.88 2/3/07 $ 877,811 $ 2,224,545 100,000 0.63% $28.19 11/3/07 $1,772,854 $ 4,492,760 Nicholas J. Marzocco.... 14,000 $39.88 2/3/07 $ 351,124 $ 889,818 50,000 0.30% $28.19 11/3/07 $ 886,427 $ 2,246,380 Christopher A. Holden... 10,000 $39.88 2/3/07 $ 250,803 $ 635,000 50,000 0.28% $28.19 11/3/07 $ 886,427 $ 2,246,380 Donald P. Fay........... 12,000 0.06% $39.88 2/3/07 $ 300,964 $ 762,701
- - -------- (1) Options to acquire Columbia/HCA Common Stock. Columbia/HCA granted options at two separate times in 1997. The 1997 regular grant was issued in February 1997. A special grant was issued in November 1997 to help ensure the retention and motivation of key executives at the time Columbia/HCA was reorganizing. (2) The option exercise price may be paid in shares of Columbia/HCA Common Stock owned by the executive officer, in cash, or a combination thereof. (3) The ten-year options become exercisable with respect to 25% of the shares covered thereby on the second, third, fourth and fifth anniversary dates following the date of grant. The exercise price was equal to the fair market value of the Columbia/HCA Common Stock on the date of the grant. (4) The potential realizable value portion of the foregoing table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation on the Columbia/HCA Common Stock over the term of the options. These amounts do not take into account provisions of the options relating to termination of the option following termination of employment, non- transferability or vesting over periods of up to five years. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE- UNEXERCISED OPTIONS/SARS AT MONEY OPTIONS/SARS AT FISCAL SHARES FISCAL YEAR-END (#) YEAR-END ($)(1) ACQUIRED ON VALUE ----------------------------------- -------------------------------- NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ------------ ------------ --------------- ---------------- -------------- --------------- James D. Shelton........ 0 $ 0 37,500 500,000 $ 117,188 $ 562,813 Michael J. Parsons...... 0 0 16,875 199,125 51,328 227,421 Nicholas J. Marzocco.... 0 0 0 79,000 0 71,875 Christopher A. Holden... 0 0 1,140 75,420 3,277 81,707 Donald P. Fay........... 15,000 461,250 15,000 48,000 54,375 75,937
- - -------- (1) The closing price for the Columbia/HCA Common Stock, as reported by the NYSE, on December 31, 1997 was $29.625. Value is calculated on the basis of the difference between the option exercise price and 29.625, multiplied by the number of shares of Columbia/HCA Common Stock underlying the option. 112 TRIAD COMPENSATION ARRANGEMENTS BENEFITS AND EMPLOYMENT MATTERS AGREEMENT In connection with the distribution, Columbia/HCA, LifePoint and Triad will enter into the Benefits and Employment Matters Agreement, which allocates responsibilities for employee compensation, benefits, labor, benefit plan administration and certain other employment matters on and after the distribution date. Among other things, the Benefits and Employment Matters Agreement generally provides for grants Triad employees of options to purchase shares of LifePoint Common Stock and Triad common stock in respect of vested options to purchase Columbia/HCA Common Stock (other than incentive stock options) and in replacement of non-vested options and incentive stock options (whether or not vested) to purchase Columbia/HCA Common Stock. The Benefits and Employment Matters Agreement also provides for the establishment of certain of the benefit plans described in this section. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement." THE TRIAD 1998 LONG-TERM INCENTIVE PLAN The Triad 1998 Long-Term Incentive Plan will be adopted by the Board of Directors of Columbia/HCA in contemplation of the distribution. Reservation of Shares. Under the Triad Long-Term Incentive Plan, shares of Triad common stock will be reserved for issuance. The shares of Triad common stock to be issued will be made available from authorized but unissued shares of Triad common stock or issued shares that have been reacquired by Triad. If any shares of Triad common stock that are the subject of an award are not issued and cease to be issuable for any reason, such shares will no longer be charged against the maximum share limitations and may again be made subject to awards. In the event of certain corporate reorganizations, recapitalizations, or other specified corporate transactions affecting Triad or the Triad common stock, proportionate adjustments may be made to the number of shares available for grant, as well as the other maximum share limitations, under the Triad Long-Term Incentive Plan, and the number of shares and prices under outstanding awards. Duration. The Triad Long-Term Incentive Plan will have a term of 10 years, subject to earlier termination or amendment by the Triad Board of Directors. Administration. Beginning with the first meeting of the Triad Board of Directors, the Triad Long-Term Incentive Plan will be administered by the Compensation Committee of the Triad Board of Directors. Subject to the limitations set forth in the Triad Long-Term Incentive Plan, the Triad Compensation Committee has the authority to determine the persons to whom awards are granted, the types of awards to be granted, the time at which awards will be granted, the number of shares, units or other rights subject to each award, the exercise, base or purchase price of an award (if any), the time or times at which the award will become vested, exercisable or payable, and the duration of the award. Eligibility. All employees of Triad and its subsidiaries and, in the case of awards other than incentive stock options, any consultant or independent contractor providing services to Triad or a subsidiary, will be eligible to be granted awards under the Triad Long-Term Incentive Plan, as selected from time to time by the Triad Compensation Committee in its sole discretion. Types of Awards. The Triad Long-Term Incentive Plan will authorize the grant of the following types of awards: . Stock Options (nonqualified and incentive stock options). The maximum number of shares that may be covered under options granted to any individual in any calendar year is shares. The exercise price of an option may be determined by the Triad Compensation Committee, provided that the exercise price per share of an option may not be less than the fair market value of a share of Triad common stock on the date of grant. The value of Triad common stock (determined at the time 113 of grant) that may be subject to incentive stock options that become exercisable by an employee in any one year is limited to $100,000. The maximum term of any stock option will be ten years from the date of grant. The Triad Compensation Committee is to determine the extent to which an option will become and/or remain exercisable in the event of termination of employment or service of a participant under various circumstances, including retirement, death or disability, subject to certain limitations for incentive stock options. An option may be exercised in whole or in part at any time during the term thereof by written notice to Triad, together with payment of the aggregate exercise price of the option. In addition to the exercise price, the participant must pay Triad in cash or, at the Triad Compensation Committee's discretion, in Triad common stock, the full amount of all applicable income tax and employment tax amounts required to be withheld in connection with the exercise of the option. . Stock Appreciation Rights. A stock appreciation right may be granted either in tandem with an option or without a related option. A stock appreciation right entitles the holder, upon exercise, to receive a payment based on the difference between the base price of the stock appreciation right (which may not be less than the fair market value of a share of Triad common stock on the date of grant) and the fair market value of a share of Triad common stock on the date of exercise, multiplied by the number of shares as to which such stock appreciation right is being exercised. The maximum term of a stock appreciation right will be 10 years from the date of grant. No more than shares of Triad common stock may be subject to stock appreciation rights granted to any one participant during any calendar year. Stock appreciation rights are payable, in the discretion of the Triad Compensation Committee, in cash, in shares of Triad common stock, or in a combination of cash and shares of Triad common stock . Performance Awards. Performance awards are units denominated on the date of grant either in shares of Triad common stock ("performance shares") or in specified dollar amounts ("performance units"). Performance awards are payable upon the achievement of performance criteria established by the Triad Compensation Committee at the beginning of the applicable performance period. At the time of grant, the Compensation Committee establishes the number of units, the duration of the performance period or periods, the applicable performance criteria, and, in the case of performance units, the target unit value or range of unit values for the performance awards. At the end of the performance period, the Compensation Committee determines the payment to be made, based on the extent to which the performance goals have been achieved. Performance awards are payable, in the discretion of the Triad Compensation Committee, in cash, in shares of Triad common stock, or in a combination of cash and shares of Triad common stock. The maximum amount of compensation that may be payable to a participant during any one calendar year with respect to a performance unit shall be $ . The maximum number of performance shares granted to a participant during any one calendar year shall be performance shares. . Phantom Stock. An award of phantom stock gives the participant the right to receive payment at the end of a fixed vesting period based on the value of a share of Triad common stock at the time of vesting. Phantom stock units are subject to such restrictions and conditions to payment as the Triad Compensation Committee determines are appropriate. An award of phantom stock may be granted, at the discretion of the Triad Compensation Committee, together with an award of dividend equivalent rights for the same number of shares covered thereby. Phantom stock awards are payable, in the discretion of the Triad Compensation Committee, in cash, in shares of Triad common stock having an equivalent fair market value on the applicable vesting dates, or in a combination thereof. . Restricted Stock Awards. An award of restricted stock represents shares of Triad common stock that are issued subject to such restrictions on transfer and incidents of ownership, and such forfeiture conditions, as the Triad Compensation Committee deems appropriate. The restrictions imposed upon an award of restricted stock will lapse in accordance with the vesting requirements specified by the Triad Compensation Committee in the award agreement. Such vesting requirements may be based on the continued employment of the participant for a specified time period or on the attainment of 114 specified business goals or performance criteria established by the Triad Compensation Committee. The Triad Compensation Committee may, in connection with an award of restricted stock, require the payment of a specified purchase price. Subject to the transfer restrictions and forfeiture restrictions relating to the restricted stock award, the participant will have the rights of a stockholder of Triad, including all voting and dividend rights, during the restriction period, unless the Triad Compensation Committee determines otherwise at the time of the grant. The maximum number of shares of common stock that may be subject to a restricted stock award granted to a participant during any one calendar year shall be shares. . Dividend Equivalents. Dividend equivalent awards entitle the holder to a right to receive cash payments determined by reference to dividends declared on the Triad common stock during the term of the award, which will not exceed 10 years from the date of grant. Dividend equivalent awards may be granted on a stand-alone basis or in tandem with other awards under the Triad Long-Term Incentive Plan. Dividend equivalent awards are payable in cash or in shares of Triad common stock, as determined by the Triad Compensation Committee. Change-In-Control. The Triad Compensation Committee may, in an award agreement, provide for the effect of a change-in-control (as defined in the Triad Long-Term Incentive Plan) on the award. Such provisions may include the acceleration of an award's vesting or extension of the time for exercise, the elimination or modification of performance or other conditions, the cash settlement of an award or other adjustments that the Triad Compensation Committee considers appropriate. TRIAD EMPLOYEE STOCK OWNERSHIP PLAN Triad expects to establish for the benefit of its employees a leveraged Employee Stock Ownership Plan (the "Triad ESOP") which, shortly after the distribution, will purchase newly issued shares of Triad common stock from Triad in an amount equal to 9.0% of the outstanding shares of Triad. Such shares will be purchased using the proceeds of a loan to be made to the Triad ESOP and guaranteed by Triad. Initially, all such shares will be held in a suspense account under the Triad ESOP. Triad will contribute annually to the Triad ESOP the funds required to repay the ESOP loan. As the ESOP loan is repaid, shares will be released from the suspense account and will be allocated to accounts established for participants under the Triad ESOP. The loan will be repaid over a 10 year period. Generally, each employee of Triad and its participating subsidiaries will participate in the Triad ESOP as of the first January 1 after his or her date of hire. Each participant in the Triad ESOP will be fully vested in his accounts after completion of seven years of service with Triad (including any pre-distribution service with Columbia/HCA and its affiliates). TRIAD SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Immediately prior to the distribution, Columbia/HCA will own beneficially and of record approximately shares of Triad common stock, representing 100% of the shares of capital stock of Triad expected to be issued and outstanding immediately after the distribution. Columbia/HCA will have sole voting and sole investment power with respect to the shares owned by it. After the completion of the distribution none of the outstanding shares of Triad common stock will be owned by Columbia/HCA. The following table sets forth the projected beneficial ownership of Triad common stock as of the distribution date of Columbia/HCA sponsored benefit plans (which collectively are projected to own 5% or more of such class of securities); certain persons Triad believes will become the beneficial owners of 5% or more of such class of securities; each of the persons who will be a Triad director as of the distribution date; each of the executive officers named in the Summary Compensation Table; and all of the persons who will be Triad directors and executive officers as of the distribution date as a group. The ownership information presented below: . is based on Columbia/HCA's knowledge of the beneficial ownership of Columbia/HCA Stock as of , 1998; 115 . reflects the distribution ratio of shares of Triad common stock for every shares of Columbia/HCA Stock outstanding on the record date; . reflects the options to purchase Triad common stock to be granted and the Employee Stock Ownership Plan Triad expects to establish in accordance with the Benefits and Employment Matters Agreement; and . assumes no change in beneficial ownership of Columbia/HCA Stock between , 1998 and the record date.
NUMBER OF NAME OF BENEFICIAL OWNER SHARES(1)(2) PERCENT - - ------------------------ ------------ ------- The Columbia/HCA Healthcare Corporation Stock Bonus Plan (3)..................................................... 4.2% The Columbia/HCA Healthcare Corporation Salary Deferral Plan (3)................................................ 3.2% The San Leandro Retirement and Savings Plan (3).......... * FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson (4)..................................................... 8.4% Wellington Management Company, LLP (5)................... 6.4% James D. Shelton......................................... * [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... Michael J. Parsons....................................... * Nicholas J. Marzocco..................................... * Christopher A. Holden.................................... * Donald P. Fay............................................ * All Directors and Executive Officers as a Group ( persons)................................................
- - -------- * Less than one percent. (1) Unless otherwise indicated, each stockholder shown on the table has sole voting and investment power with respect to the shares beneficially owned. The number of shares shown does not include the interest of certain persons in shares held by family members in their own right. (2) Each named person or group is deemed to be the beneficial owner of securities which may be acquired within 60 days through the exercise or conversion of options, warrants and rights, if any, and such securities are deemed to be outstanding for the purpose of computing the percentage beneficially owned by such person or group. Such securities are not deemed to be outstanding for the purpose of computing the percentage beneficially owned by any other person or group. Accordingly, the indicated number of shares includes shares issuable upon conversion of convertible securities or upon exercise of options (including employee stock options) held by such person or group. (3) The address of the Columbia/HCA Healthcare Corporation Stock Bonus Plan, the Columbia/HCA Salary Deferral Plan and the San Leandro Retirement and Savings Plan is One Park Plaza, Nashville, Tennessee 37203. Such shares are beneficially owned by employees participating in such benefit plans and voted at the direction of Columbia/HCA's Retirement Committee which is composed of certain Columbia/HCA officers. (4) The ownership given for FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson is based on information contained in the Schedule 13G dated October 9, 1998, filed with the SEC by FMR Corp. in respect of its beneficial ownership of Columbia/HCA Common Stock. The address of FMR Corp is 82 Devonshire Street, Boston, Massachusetts 02109. (5) The ownership given for Wellington Management Company, LLP is based on information contained in the Schedule 13G dated January 27, 1998, filed with the SEC by Wellington Management Company, LLP in respect of its beneficial ownership of Columbia/HCA Common Stock. The address of Wellington Management Company, LLP is 75 State Street, Boston, Massachusetts 02109. 116 LIFEPOINT DESCRIPTION OF CAPITAL STOCK INTRODUCTION LifePoint presently expects to have the following capital stock authorization and terms and anti-takeover provisions in place on the distribution date. AUTHORIZED AND OUTSTANDING CAPITAL STOCK LifePoint's authorized capital stock consists of shares of LifePoint common stock, par value $.01 per share, and authorized shares of preferred stock, par value $.01 per share. After the completion of the distribution, there are expected to be approximately shares of LifePoint common stock outstanding held of record by approximately 18,700 persons, excluding shares of LifePoint common stock issuable upon the exercise of LifePoint stock options granted pursuant to the LifePoint Corporation 1999 Stock Option Plan in connection with the distribution. See "The Distribution--Results of the Distribution," and "LifePoint Management--LifePoint Compensation Arrangements--The LifePoint 1998 Long-Term Incentive Plan." LIFEPOINT COMMON STOCK; DELAWARE ANTI-TAKEOVER PROVISIONS The holders of LifePoint common stock are entitled to one vote for each share on all matters voted on by the stockholders, and are not entitled to cumulate votes for the election of directors. Subject to any preferences that may be applicable to any outstanding LifePoint preferred stock, the holders of LifePoint common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the LifePoint Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of LifePoint, the holders of shares of LifePoint common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of LifePoint preferred stock, if any, then outstanding. Holders of LifePoint common stock have no preemptive, conversion or other subscription rights, and there are no redemption or sinking fund provisions applicable to the LifePoint common stock. LifePoint is subject to the provisions of Section 203 of the Delaware General Corporation Law (the "Delaware Law"). Subject to certain exceptions, Section 203 of the Delaware Law prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the time of the transaction in which the person became an interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. A "business combination" includes a merger, consolidation, sale or other disposition of assets having an aggregate value in excess of 10% of either the aggregate market value of the consolidated assets of the corporation or the aggregate market value of all the outstanding stock of the corporation, and certain transactions that would increase the interested stockholder's proportionate share ownership in the corporation or which provide the interested stockholder with a financial benefit. These restrictions do not apply where: . the business combination or the transaction in which the stockholder becomes interested is approved by the corporation's board of directors prior to the time the interested stockholder acquired its shares; . the interested stockholder acquired at least 85% of the outstanding voting stock of the corporation in the transaction in which the stockholder became an interested stockholder excluding, for purposes of determining the number of shares outstanding, shares owned by persons who are directors as well as officers and by employee stock plans in which participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or 117 . the business combination is approved by the board of directors and the affirmative vote of two-thirds of the outstanding voting stock not owned by the interested stockholder at an annual or special meeting. The business combinations provisions of Section 203 of the Delaware Law may have the effect of deterring merger proposals, tender offers or other attempts to effect changes in control of LifePoint that are not negotiated with and approved by the LifePoint Board of Directors. LIFEPOINT PREFERRED STOCK The LifePoint Certificate of Incorporation (the "LifePoint Certificate") provides that LifePoint may issue up to shares of LifePoint preferred stock. The LifePoint Board of Directors has the authority to issue LifePoint preferred stock in one or more series and to fix for each such series the voting powers, full, limited or none, and the designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereon, and the number of shares constituting any series and the designations of such series, without any further vote or action by the stockholders of LifePoint. Because the terms of the LifePoint preferred stock may be fixed by the LifePoint Board of Directors without stockholder action, the LifePoint preferred stock could be issued quickly with terms calculated to defeat a proposed takeover of LifePoint or to make the removal of management of LifePoint more difficult. Under certain circumstances, this could have the effect of decreasing the market price of the LifePoint common stock. In connection with the stockholder rights plan adopted by LifePoint, the LifePoint Certificate provides for the issuance of a series of shares of LifePoint preferred stock designated as the Series A Junior Participating Preferred Stock, par value $.01 per share (the "LifePoint Series A Preferred Stock"). For a description of the terms of the LifePoint Series A Preferred Stock, see "--LifePoint Preferred Stock Purchase Rights." LIFEPOINT PREFERRED STOCK PURCHASE RIGHTS LifePoint has adopted a stockholders' rights plan, pursuant to which each outstanding share of LifePoint common stock is accompanied by one preferred stock purchase right (a "LifePoint Right," and collectively, the "LifePoint Rights") (in all cases, unless and until the LifePoint Rights expire or are redeemed or an LifePoint Rights Distribution Date (as defined below) occurs). Each LifePoint Right entitles the registered holder to purchase from LifePoint one one-thousandth of a share of LifePoint Series A Preferred Stock at a price of $ per one one-thousandth of a share, subject to adjustment. The description and terms of the LifePoint Rights are set forth in a Rights Agreement, dated as of 1999 (the "LifePoint Rights Agreement") between LifePoint and as Rights Agent (the "LifePoint Rights Agent"). Each share of LifePoint Series A Preferred Stock will be entitled, when, as and if declared, to a preferential quarterly dividend payment in an amount equal to the greater of $10 or 1,000 times the aggregate of all dividends declared per share of LifePoint common stock. In the event of liquidation, dissolution or winding up of LifePoint, the holders of LifePoint Series A Preferred Stock will be entitled to a minimum preferential liquidation payment equal to $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, but will be entitled to an aggregate payment of 1,000 times the payment made per share of LifePoint common stock. Each share of LifePoint Series A Preferred Stock will entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of LifePoint. In the event of any consolidation, merger, combination or other transaction in which shares of LifePoint common stock are exchanged, each share of LifePoint Series A Preferred Stock will be entitled to receive 1,000 times the aggregate amount of stock, securities, cash and/or other property (payable in kind) as the case may be, into which or for which each share of LifePoint common stock is changed or exchanged. The rights of LifePoint Series A Preferred Stock as to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary anti-dilution provisions. 118 Initially, the LifePoint Rights will be attached to all LifePoint common stock certificates and no separate LifePoint Rights certificates will be issued. Separate certificates evidencing the LifePoint Rights ("LifePoint Right Certificates") will be mailed to holders of record of the LifePoint common stock as of the close of business on the earlier to occur of (1) the tenth day after a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding LifePoint common stock, or (2) such date as may be determined by action of the Board of Directors of LifePoint following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding LifePoint common stock (the earlier of such dates being the "LifePoint Rights Distribution Date"). Prior to the time that a person would otherwise become an Acquiring Person, however, the Board of Directors may determine that such person shall not be an Acquiring Person for purposes of the LifePoint Rights Agreement. The LifePoint Rights Agreement provides that, until the LifePoint Rights Distribution Date (or earlier redemption or expiration of the LifePoint Rights): . the LifePoint Rights will be transferred with and only with the certificates for LifePoint common stock, . new LifePoint common stock certificates issued after the record date upon transfer or new issuance of LifePoint common stock will contain a notation incorporating the LifePoint Rights Agreement by reference, and . the surrender for transfer of any certificates for LifePoint common stock outstanding as of the record date also will constitute the transfer of the LifePoint Rights associated with the LifePoint common stock represented by such certificate. The LifePoint Rights are not exercisable until the LifePoint Rights Distribution Date. The LifePoint Rights will expire on , 2009, unless the expiration date is extended or unless the LifePoint Rights are earlier redeemed or exchanged by LifePoint, in each case, as described below. If a person or group becomes an Acquiring Person, each holder of an LifePoint Right will thereafter have the right to receive, upon exercise, LifePoint common stock (or, in certain circumstances, LifePoint Series A Preferred Stock or other similar securities of LifePoint) having a value equal to two times the exercise price of the LifePoint Right. Notwithstanding any of the foregoing, following the existence of an Acquiring Person, all LifePoint Rights that are, or (under certain circumstances specified in the LifePoint Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. In the event that LifePoint is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a LifePoint Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the LifePoint Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the LifePoint Right. At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding shares of LifePoint common stock, the Board of Directors may exchange the LifePoint Rights (other than LifePoint Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of LifePoint common stock or one one-thousandth of a share of LifePoint Series A Preferred Stock (or of a share of a class or series of LifePoint's preferred stock having equivalent rights, preferences and privileges), as the case may be, per LifePoint Right (subject to adjustment). At any time prior to the existence of an Acquiring Person, the Board of Directors of LifePoint may redeem the LifePoint Rights, in whole but not in part, at a redemption price of $.01 per LifePoint Right. The 119 redemption of the LifePoint Rights may be made effective at such time and on such basis with such conditions as the Board of Directors, in its sole discretion, may establish. Immediately upon any redemption of the LifePoint Rights, the right to exercise the LifePoint Rights will terminate and the only right of the holders of LifePoint Rights will be to receive the redemption price. The terms of the LifePoint Rights may be amended by the Board of Directors of LifePoint without the consent of the holders of the LifePoint Rights, except that from and after the existence of an Acquiring Person no such amendment may adversely affect the interests of the holders of the LifePoint Rights (other than the Acquiring Person). The number of outstanding LifePoint Rights and the number of one one- thousandths of a share of LifePoint Series A Preferred Stock issuable upon exercise of each LifePoint Right are subject to adjustment under certain circumstances. Until a LifePoint Right is exercised, the holder thereof, as such, will have no rights as a stockholder of LifePoint, including, without limitation, the right to vote or to receive dividends. The LifePoint Rights have certain anti-takeover effects. The LifePoint Rights will cause substantial dilution to a person or group that attempts to acquire LifePoint on terms not determined by the Board of Directors to be in the best interests of all stockholders. The LifePoint Rights should not interfere with any merger or other business combination approved by the Board of Directors since (subject to the limitations described above) the LifePoint Rights may be redeemed by LifePoint at $.01 per LifePoint Right prior to the time a person or group has become an Acquiring Person. CERTAIN ANTI-TAKEOVER PROVISIONS--LIFEPOINT CERTIFICATE AND BY-LAWS Certain provisions of the LifePoint Certificate and the LifePoint By-Laws may have the effect, either alone or in combination with each other, of making more difficult or discouraging a tender offer, takeover attempt or change in control that is opposed by LifePoint's Board of Directors but that a stockholder might consider to be in its best interest. LifePoint believes that such provisions are necessary to enable LifePoint to develop its business in a manner that will foster its long-term growth without disruption caused by the threat of a takeover not deemed by the LifePoint Board of Directors to be in the best interests of LifePoint and its stockholders. These provisions are summarized in the following paragraphs. Classified Board of Directors. The Delaware Law provides that a corporation's board of directors may be divided into various classes with staggered terms of office. The LifePoint Certificate provides that the LifePoint Board of Directors is divided into three classes of directors, with the classes to be as nearly equal in number as reasonably possible. The Board consists of the persons referred to in "LifePoint Management-- Directors." The LifePoint Certificate provides that of the initial directors of LifePoint, one-third will continue to serve until the 2000 Annual Meeting of Stockholders, one-third will continue to serve until the 2001 Annual Meeting of Stockholders, and one-third will continue to serve until the 2002 Annual Meeting of Stockholders. Of the initial directors, Messrs. and will serve until the 2000 Annual Meeting of Stockholders; Messrs. , and will serve until the 2001 Annual Meeting of Stockholders; and Messrs. , and will serve until the 2002 Annual Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one class of directors will be elected each year for a three-year term. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of the LifePoint Board of Directors. At least two annual meetings of stockholders, instead of one, generally will be required to effect a change in a majority of the Board of Directors. Such a delay may help ensure that LifePoint's directors, if confronted by a holder attempting to force a proxy contest, a tender or exchange offer, or an extraordinary corporate transaction, would have sufficient time to review the proposal as well as any available alternatives to the proposal and to act in what they believe to be the best interest of the stockholders. The classification provisions will apply to every election of directors, however, regardless of 120 whether a change in the composition of the Board would be beneficial to LifePoint and its stockholders and whether or not a majority of LifePoint's stockholders believe that such a change would be desirable. The classification provisions also could have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of LifePoint, even though such an attempt might be beneficial to LifePoint and its stockholders. The classification of the Board could thus increase the likelihood that incumbent directors will retain their positions. In addition, because the classification provisions may discourage accumulations of large blocks of the LifePoint common stock by purchasers whose objective is to take control of LifePoint and remove a majority of the Board, the classification of the Board could tend to reduce the likelihood of fluctuations in the market price of the LifePoint common stock that might result from accumulations of large blocks for such a purpose. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of LifePoint common stock at a higher market price than might otherwise be the case. Number of Directors; Removal of Directors; Vacancies. The LifePoint Certificate provides that the number of directors will be fixed from time to time by action of not less than a majority of the LifePoint Board of Directors then in office, but in no event shall the number of directors be less than three nor more than 15. As of the distribution date, the number of directors of LifePoint will be seven. The LifePoint Certificate provides that any vacancies (including newly-created directorships) will be filled only by the affirmative vote of a majority of the remaining directors, whether or not they constitute a quorum of directors. Directors appointed to fill vacancies created by the resignation or termination of a director will serve the remainder of the term of the resigning or terminated director. Accordingly, the LifePoint Board of Directors could prevent any stockholder from enlarging the LifePoint Board of Directors and filling the new directorships with such stockholder's own nominees. Under the Delaware Law, unless provided in the certificate of incorporation, directors serving on a classified board may be removed by the stockholders only for cause. The LifePoint Certificate provides that directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors, voting as a single class (without a separate vote of the holders of the LifePoint preferred stock unless required pursuant to the terms of any series of LifePoint preferred stock). Business Conducted at Meetings; Director Nominations. The By-Laws provide that nominations of persons for election to the LifePoint Board and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (a) pursuant to LifePoint's notice with respect to such meeting, (b) by or at the direction of the LifePoint Board or (c) by any stockholder of record of LifePoint who was a stockholder of record at the time of the giving of the notice required by the By-Laws, described below, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in the By-Laws. For nominations or other business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of LifePoint, such business must be a proper matter for stockholder action under the Delaware Law and, if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, solicits or participates in the solicitation of proxies in support of such proposal or nomination, the stockholder must have timely indicated such stockholder's, or such beneficial owner's, intention to do so. To be timely, a stockholder's notice must be delivered to the Secretary at the principal executive offices of LifePoint not less than 90 days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed more than 60 days after such anniversary date, notice by the stockholder to be timely must be delivered not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. The notice must include: . certain information as to each person whom the stockholder proposes to nominate for election or reelection as a director and such person's written consent to serve as a director if elected; 121 . as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and . certain information as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, including whether either such stockholder or beneficial owner intends to solicit or participate in the solicitation of proxies in favor of such proposal or nominee or nominees. In the event that the number of directors to be elected to the LifePoint Board is increased and there is not a public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by LifePoint at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice will be timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of LifePoint not later than the close of business on the 10th day following the day on which such public announcement is first made by LifePoint. If the officer of LifePoint or other person presiding at a meeting determines that a person was not nominated, or other business was not brought before the meeting, in accordance with these advance notice provisions, such person will not be eligible for election as a director or such business will not be conducted at such meeting, as the case may be. By requiring advance notice of nominations by stockholders, the LifePoint Board of Directors has an appropriate opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the LifePoint Board of Directors, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, annual meetings of stockholders may be conducted in a more orderly manner and, to the extent deemed necessary or desirable by the LifePoint Board of Directors, the LifePoint Board of Directors has an appropriate opportunity to inform stockholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the LifePoint Board of Directors' position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although the LifePoint By-Laws do not give the LifePoint Board of Directors any power to approve or disapprove stockholder nominations of the election of directors or proposals for action, the foregoing provisions may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to LifePoint and its stockholders. No Stockholder Action by Written Consent; Stockholder Action at Meetings. The LifePoint Certificate provides that stockholder action can be taken only at an annual or special meeting of stockholders and prohibits stockholder action by written consent in lieu of a meeting. The LifePoint Certificate also provides that special meetings of stockholders can be called only by the Chairman of the Board or the Chief Executive Officer of LifePoint, in either of their discretion or at the written request of a majority of the LifePoint Board of Directors. Stockholders are not permitted to call a special meeting or to require that the LifePoint Board of Directors call a special meeting of stockholders. The business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting pursuant to the notice of meeting given by LifePoint. The provisions of the LifePoint Certificate prohibiting stockholder action by written consent may have the effect of delaying consideration of a stockholder proposal until the next annual meeting of stockholders. These provisions would also prevent the holders of a majority of the outstanding shares of voting stock of LifePoint from unilaterally using the written consent procedure to take stockholder action. Moreover, a stockholder could 122 not force stockholder consideration of a proposal opposed by the Chairman of the Board, the Chief Executive Officer and a majority of the LifePoint Board of Directors by calling a special meeting of stockholders prior to the time the Chairman of the Board, the Chief Executive Officer or a majority of the LifePoint Board of Directors believes such consideration to be appropriate. Fair Price Provision. The LifePoint Certificate contains a "fair price" provision, requiring that, in addition to any other vote required by the LifePoint Certificate or the Delaware Law, certain "business combination" transactions with a "related person" will be subject to the affirmative vote of the holders of not less than 85% of the voting power of all of the outstanding shares of voting stock of LifePoint held by stockholders other than the related person. The 85% voting requirement will not be applicable if either: 1. The business combination is approved by the Board of Directors of LifePoint by the affirmative vote of at least 66 2/3% of the "continuing directors," or 2. All of the following conditions are satisfied: . the aggregate amount of cash and the fair market value of the property, securities or other consideration to be received per share of capital stock of LifePoint in the business combination by the holders of capital stock of LifePoint, other than the related person involved in the business combination, will not be less than the highest of (1) the highest per share price (including brokerage commissions, soliciting dealers' fees, and dealer-manager compensation, and with appropriate adjustments for recapitalizations, stock splits, stock dividends and like transactions and distributions) paid by such related person in acquiring any of its holdings of such class or series of capital stock, (2) the highest per share "market value" of such class or series of capital stock within the twelve-month period immediately preceding the date the proposal for such business combination was first publicly announced, or (3) the book value per share of such class or series of capital stock, determined in accordance with generally accepted accounting principles, as of the last day of the month immediately preceding the date the proposal for such business combination was first publicly announced; . the consideration to be received in such business combination by holders of capital stock other than the related person involved will, except to the extent that a stockholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the related person in acquiring capital stock already owned by it; provided, however, that if the related person has paid for capital stock with varying forms of consideration, the form of consideration for shares of capital stock acquired in the business combination by the related person must either be cash or the form used to acquire the largest number of shares of capital stock previously acquired by it; and . a proxy statement responsive to the requirements of the Exchange Act is mailed to the stockholders of LifePoint for the purpose of soliciting stockholder approval of such business combination and contains (1) any recommendations as to the advisability (or inadvisability) of the business combination which the continuing directors may choose to state and (2) the opinion of a reputable investment banking firm selected by the continuing directors as to the fairness of the terms of such business combination, from a financial point of view, to the public stockholders (other than the related person) of LifePoint. For the purpose of the fair price provision included in the LifePoint Certificate, certain terms are defined as follows. "Business Combination" means: . any merger or consolidation of LifePoint or a subsidiary with a related person; . any sale, lease, exchange, mortgage, pledge, transfer or other disposition other than in the ordinary course of business to or with a related person of any assets of LifePoint or a subsidiary having an aggregate fair market value of $25,000,000 or more; 123 . the issuance or transfer by LifePoint of any shares of voting stock of LifePoint or securities convertible into or exercisable for such shares (other than by way of pro rata distribution to all stockholders) to a related person; . any recapitalization, merger or consolidation that would have the effect of increasing the voting power of a related person; . the adoption of any plan or proposal for the liquidation or dissolution of LifePoint or a subsidiary proposed, directly or indirectly, by or on behalf of a related person; . any merger or consolidation of LifePoint with another person proposed, directly or indirectly, by or on behalf of a related person, unless the entity surviving or resulting from such merger or consolidation has a provision in its certificate or articles of incorporation, charter or similar governing instrument which is substantially identical to the fair price provisions of the LifePoint Certificate; or . any agreement, contract or other arrangement or understanding providing, directly or indirectly, for any of the foregoing transactions. "Related Person" means any individual, partnership, corporation, trust or other person which together with its "affiliates" and "associates," as defined in Rule 12b-2 under the Exchange Act as in effect on , 1999, and together with any other individual, partnership, corporation, trust or other person with which it or they have any agreement, contract or other arrangement or understanding with respect to acquiring, holding, voting or disposing of shares of voting stock of LifePoint, "beneficially owns" (within the meaning of Rule 13d-3 under the Exchange Act on said date) an aggregate of 10% or more of the voting power of all of the outstanding shares of voting stock of LifePoint. A related person, its affiliates and associates and all such other individuals, partnerships, corporations and other persons with whom it or they have any such agreement, contract or other arrangement or understanding, are deemed a single related person for purposes of this provision; provided, however, that the members of the LifePoint Board of Directors shall not be deemed to be associates or otherwise to constitute a Related Person solely by reason of their board membership. A person who is a related person (1) as of the time any definitive agreement relating to a business combination is entered into, (2) as of the record date for the determination of stockholders entitled to notice of and to vote on a business combination or (3) immediately prior to the consummation of a business combination, shall be deemed a related person for purposes of this provision. "Continuing Director" means any member of the LifePoint Board of Directors who is not an affiliate or associate of the related person and was a member of the LifePoint Board of Directors prior to the time that such person became a related person, and any successor of a continuing director who is unaffiliated with such related person and is recommended to succeed a continuing director by a majority of the continuing directors. "Market Value" means the average of the high-bid and low-asked quoted sales price on the date in question (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) of a share on the NYSE Composite Tape, or, if the shares are not listed or admitted to trading on such exchange, on the principal United States securities exchange registered under the Exchange Act on which the shares are listed or admitted to trading, or, if the shares are not listed or admitted to trading on any such exchange, the mean between the closing high-bid and the low-asked quotations with respect to a share on such date as quoted on NASDAQ, or any similar system then in use, or, if no such quotations are available, the fair market value on such date of a share as at least 66 2/3% of the continuing directors shall determine. The fair price provision included in the LifePoint Certificate is intended to ensure that all stockholders of LifePoint receive equal treatment in the event of a tender or exchange offer and to protect stockholders of LifePoint against coercive or two-tiered takeover bids. Notwithstanding the foregoing, the provision could also have the effect of discouraging a third party from making a tender or exchange offer for LifePoint, even though such an offer might be beneficial to LifePoint and its stockholders. Amendment of the LifePoint Certificate and By-laws. The LifePoint Certificate contains provisions requiring the affirmative vote of the holders of a least 80% of the voting power of all of the outstanding shares 124 of voting stock of LifePoint to amend certain provisions of the LifePoint Certificate (including the provisions discussed above relating to directors, action by written consent, special stockholder meetings and advance notice of stockholder nominations and stockholder proposals) or to amend any provision of the LifePoint By-laws. An amendment of the fair price provision included in the LifePoint Certificate requires the approval of 66 2/3% of the directors of LifePoint then in office and the affirmative vote of 85% of the voting power of all of the outstanding shares of voting stock of LifePoint held by stockholders other than any related person, unless the amendment is approved by 66 2/3% of the continuing directors. These provisions make it more difficult for stockholders to make changes in the LifePoint Certificate and the LifePoint By- laws, including changes designed to facilitate the exercise of control over LifePoint. Other Constituencies. In addition to any other considerations which the LifePoint Board of Directors may lawfully take into account, in determining whether to take or to refrain from taking corporate action on any matter, including proposing any matter to the stockholders of LifePoint, the Board may consider the effects, both short-term and long-term, of such action on the interests of the employees, associates, associated physicians, distributors, patients or other customers, suppliers or creditors of LifePoint, and the communities in which LifePoint owns or leases property or conducts business. LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS The LifePoint Certificate eliminates to the fullest extent now or hereafter permitted by the Delaware Law, liability of a director to LifePoint or its stockholders for monetary damages for any action taken, or failure to take any action, as a director, except for liability: . for any breach of the director's duty of loyalty to LifePoint or its stockholders; . for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . under Section 174 of the Delaware Law, relating to prohibited dividends, distributions and repurchases or redemptions of stock; or . for any transaction for which the director derives an improper personal benefit. This provision is intended to afford directors additional protection from, and limit their potential liability for, suits alleging a breach of duty by a director. LifePoint believes this provision will assist it in maintaining and securing the services of directors who are not employees of LifePoint. As a result of the inclusion of this provision, stockholders may be unable to recover monetary damages from directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions, such as an injunction or rescission based on a director's breach of the duty of care; as a practical matter, equitable remedies may not be available (e.g., after a transaction has already been effected). If equitable remedies are found not to be available to stockholders for any particular case, stockholders may not have any effective remedy against the challenged conduct. Section 145 of the Delaware Law permits indemnification of directors, officers, agents and controlling persons of a corporation under certain conditions and subject to certain limitations. Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director, officer or agent of the corporation or another enterprise if serving at the request of the corporation. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner such person reasonably believed to be in or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. In the case of an action by or in the right of LifePoint, no 125 indemnification may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of LifePoint has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. The LifePoint Certificate contains provisions for indemnification of directors, officers, employees and agents to the fullest extent permitted by Section 145 and Delaware law which, in general, presently requires that the individual act in good faith and in a manner he or she reasonably believed to be in or not opposed to LifePoint's best interests and, in the case of any criminal proceedings, that the individual has no reason to believe his or her conduct was unlawful. The LifePoint Certificate also permits LifePoint to purchase insurance and LifePoint has purchased and maintains insurance on behalf of LifePoint directors, officers, employees and agents against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not LifePoint would have the power to indemnify such person against such liability under the foregoing provisions of the LifePoint Certificate. TRIAD DESCRIPTION OF CAPITAL STOCK INTRODUCTION Triad presently expects to have the following capital stock authorization and terms and anti-takeover provisions in place on the distribution date. AUTHORIZED AND OUTSTANDING CAPITAL STOCK Triad's authorized capital stock consists of authorized shares of Triad common stock, par value $.01 per share, and authorized shares of preferred stock, par value $.01 per share. After the completion of the distribution, there are expected to be approximately shares of Triad common stock outstanding held of record by approximately 18,700 persons, excluding shares of Triad common stock issuable upon the exercise of Triad stock options granted pursuant to the Triad Corporation 1999 Stock Option Plan in connection with the distribution. See "The Distribution--Results of the Distribution" and "Triad Management--Triad Compensation Arrangements--The Triad 1998 Long-Term Incentive Plan." TRIAD COMMON STOCK; DELAWARE ANTI-TAKEOVER PROVISIONS The holders of Triad common stock are entitled to one vote for each share on all matters voted on by the stockholders, and are not entitled to cumulate votes for the election of directors. Subject to any preferences that may be applicable to any outstanding Triad preferred stock, the holders of Triad common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Triad Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of Triad, the holders of shares of Triad common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Triad preferred stock, if any, then outstanding. Holders of Triad common stock have no preemptive, conversion or other subscription rights, and there are no redemption or sinking fund provisions applicable to the Triad common stock. Triad is subject to the provisions of Section 203 of the Delaware Law. Subject to certain exceptions, Section 203 of the Delaware Law prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the time of the transaction in which the person became an interested stockholder. Subject to certain exceptions, an "interested stockholder" 126 is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. A "business combination" includes a merger, consolidation, sale or other disposition of assets having an aggregate value in excess of 10% of either the aggregate market value of the consolidated assets of the corporation or the aggregate market value of all the outstanding stock of the corporation, and certain transactions that would increase the interested stockholder's proportionate share ownership in the corporation or which provide the interested stockholder with a financial benefit. These restrictions do not apply where: . the business combination or the transaction in which the stockholder becomes interested is approved by the corporation's board of directors prior to the time the interested stockholder acquired its shares; . the interested stockholder acquired at least 85% of the outstanding voting stock of the corporation in the transaction in which the stockholder became an interested stockholder excluding, for purposes of determining the number of shares outstanding, shares owned by persons who are directors as well as officers and by employee stock plans in which participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . the business combination is approved by the board of directors and the affirmative vote of two-thirds of the outstanding voting stock not owned by the interested stockholder at an annual or special meeting. The business combinations provisions of Section 203 of the Delaware Law may have the effect of deterring merger proposals, tender offers or other attempts to effect changes in control of Triad that are not negotiated with and approved by the Triad Board of Directors. TRIAD PREFERRED STOCK The Triad Certificate of Incorporation (the "Triad Certificate") provides that Triad may issue up to shares of Triad preferred stock. The Triad Board of Directors has the authority to issue Triad preferred stock in one or more series and to fix for each such series the voting powers, full, limited or none, and the designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereon, and the number of shares constituting any series and the designations of such series, without any further vote or action by the stockholders of Triad. Because the terms of the Triad preferred stock may be fixed by the Triad Board of Directors without stockholder action, the Triad preferred stock could be issued quickly with terms calculated to defeat a proposed takeover of Triad or to make the removal of management of Triad more difficult. Under certain circumstances, this could have the effect of decreasing the market price of the Triad common stock. In connection with the stockholder rights plan adopted by Triad, the Triad Certificate provides for the issuance of a series of shares of Triad preferred stock designated as the Series A Junior Participating Preferred Stock, par value $.01 per share (the "Triad Series A Preferred Stock"). For a description of the terms of the Triad Series A Preferred Stock, see "--Triad Preferred Stock Purchase Rights." TRIAD PREFERRED STOCK PURCHASE RIGHTS Triad has adopted a stockholders' rights plan, pursuant to which each outstanding share of Triad common stock is accompanied by one preferred stock purchase right (a "Triad Right," and collectively, the "Triad Rights") (in all cases, unless and until the Triad Rights expire or are redeemed or a Triad Rights Distribution Date (as defined below) occurs). Each Triad Right entitles the registered holder to purchase from Triad one one-thousandth of a share of Triad Series A Preferred Stock at a price of $ per one one-thousandth of a share, subject to adjustment. The description and terms of the Triad Rights are set forth in a Rights Agreement, dated as of 1999 (the "Triad Rights Agreement") between Triad and as Rights Agent (the "Triad Rights Agent"). Each share of Triad Series A Preferred Stock will be entitled, when, as and if declared, to a preferential quarterly dividend payment in an amount equal to the greater of $10 or 1,000 times the aggregate of all 127 dividends declared per share of Triad common stock. In the event of liquidation, dissolution or winding up of Triad, the holders of Triad Series A Preferred Stock will be entitled to a minimum preferential liquidation payment equal to $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, but will be entitled to an aggregate payment of 1,000 times the payment made per share of Triad common stock. Each share of Triad Series A Preferred Stock will entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of Triad. In the event of any consolidation, merger, combination or other transaction in which shares of Triad common stock are exchanged, each share of Triad Series A Preferred Stock will be entitled to receive 1,000 times the aggregate amount of stock, securities, cash and/or other property (payable in kind) as the case may be, into which or for which each share of Triad common stock is changed or exchanged. The rights of Triad Series A Preferred Stock as to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary anti-dilution provisions. Initially, the Triad Rights will be attached to all Triad common stock certificates and no separate Triad Rights certificates will be issued. Separate certificates evidencing the Triad Rights ("Triad Right Certificates") will be mailed to holders of record of the Triad common stock as of the close of business on the earlier to occur of (1) the tenth day after a public announcement that an Acquiring Person has acquired beneficial ownership of 15% or more of the outstanding Triad common stock or (2) such date as may be determined by action of the Board of Directors of Triad following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding Triad common stock (the earlier of such dates being the "Triad Rights Distribution Date"). Prior to the time that a person would otherwise become an Acquiring Person, however, the Board of Directors may determine that such person shall not be an Acquiring Person for purposes of the Triad Rights Agreement. The Triad Rights Agreement provides that, until the Triad Rights Distribution Date (or earlier redemption or expiration of the Triad Rights): . the Triad Rights will be transferred with and only with the certificates for Triad common stock, . new Triad common stock certificates issued after the record date upon transfer or new issuance of Triad common stock will contain a notation incorporating the Triad Rights Agreement by reference, and . the surrender for transfer of any certificates for Triad common stock outstanding as of the record date also will constitute the transfer of the Triad Rights associated with the Triad common stock represented by such certificate. The Triad Rights are not exercisable until the Triad Rights Distribution Date. The Triad Rights will expire on , 2009, unless the expiration date is extended or unless the Triad Rights are earlier redeemed or exchanged by Triad, in each case, as described below. If a person or group becomes an Acquiring Person, each holder of a Triad Right will thereafter have the right to receive, upon exercise, Triad common stock (or, in certain circumstances, Triad Series A Preferred Stock or other similar securities of Triad) having a value equal to two times the exercise price of the Triad Right. Notwithstanding any of the foregoing, following the existence of an Acquiring Person, all Triad Rights that are, or (under certain circumstances specified in the Triad Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. In the event that Triad is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a Triad Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Triad Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Triad Right. 128 At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding shares of Triad common stock, the Board of Directors may exchange the Triad Rights (other than Triad Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of Triad common stock or one one-thousandth of a share of Triad Series A Preferred Stock (or of a share of a class or series of Triad's preferred stock having equivalent rights, preferences and privileges), as the case may be, per Triad Right (subject to adjustment). At any time prior to the existence of an Acquiring Person, the Board of Directors of Triad may redeem the Triad Rights, in whole but not in part, at a redemption price of $.01 per Triad Right. The redemption of the Triad Rights may be made effective at such time and on such basis with such conditions as the Board of Directors, in its sole discretion, may establish. Immediately upon any redemption of the Triad Rights, the right to exercise the Triad Rights will terminate and the only right of the holders of Triad Rights will be to receive the redemption price. The terms of the Triad Rights may be amended by the Board of Directors of Triad without the consent of the holders of the Triad Rights, except that from and after the existence of an Acquiring Person no such amendment may adversely affect the interests of the holders of the Triad Rights (other than the Acquiring Person). The number of outstanding Triad Rights and the number of one one-thousandths of a share of Triad Series A Preferred Stock issuable upon exercise of each Triad Right are subject to adjustment under certain circumstances. Until a Triad Right is exercised, the holder thereof, as such, will have no rights as a stockholder of Triad, including, without limitation, the right to vote or to receive dividends. The Triad Rights have certain anti-takeover effects. The Triad Rights will cause substantial dilution to a person or group that attempts to acquire Triad on terms not determined by the Board of Directors to be in the best interests of all stockholders. The Triad Rights should not interfere with any merger or other business combination approved by the Board of Directors since (subject to the limitations described above) the Triad Rights may be redeemed by Triad at $.01 per Triad Right prior to the time a person or group has become an Acquiring Person. CERTAIN ANTI-TAKEOVER PROVISIONS--TRIAD CERTIFICATE AND BY-LAWS Certain provisions of the Triad Certificate and the By-Laws may have the effect, either alone or in combination with each other, of making more difficult or discouraging a tender offer, takeover attempt or change in control that is opposed by Triad's Board of Directors but that a stockholder might consider to be in its best interest. Triad believes that such provisions are necessary to enable Triad to develop its business in a manner that will foster its long-term growth without disruption caused by the threat of a takeover not deemed by the Triad Board of Directors to be in the best interests of Triad and its stockholders. These provisions are summarized in the following paragraphs. Classified Board of Directors. The Delaware Law provides that a corporation's board of directors may be divided into various classes with staggered terms of office. The Triad Certificate provides that the Triad Board of Directors is divided into three classes of directors, with the classes to be as nearly equal in number as reasonably possible. The Board consists of the persons referred to in "Triad Management--Directors." The Triad Certificate provides that of the initial directors of Triad, one-third will continue to serve until the 2000 Annual Meeting of Stockholders, one-third will continue to serve until the 2001 Annual Meeting of Stockholders, and one-third will continue to serve until the 2002 Annual Meeting of Stockholders. Of the initial directors, Messrs. , , and will serve until the 2000 Annual Meeting of Stockholders; Messrs. , and will serve until the 2001 Annual Meeting of Stockholders; and Messrs. 129 , , and will serve until the 2002 Annual Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one class of directors will be elected each year for a three-year term. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of the Triad Board of Directors. At least two annual meetings of stockholders, instead of one, generally will be required to effect a change in a majority of the Board of Directors. Such a delay may help ensure that Triad's directors, if confronted by a holder attempting to force a proxy contest, a tender or exchange offer, or an extraordinary corporate transaction, would have sufficient time to review the proposal as well as any available alternatives to the proposal and to act in what they believe to be the best interest of the stockholders. The classification provisions will apply to every election of directors, however, regardless of whether a change in the composition of the Board would be beneficial to Triad and its stockholders and whether or not a majority of Triad's stockholders believe that such a change would be desirable. The classification provisions also could have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of Triad, even though such an attempt might be beneficial to Triad and its stockholders. The classification of the Board could thus increase the likelihood that incumbent directors will retain their positions. In addition, because the classification provisions may discourage accumulations of large blocks of the Triad common stock by purchasers whose objective is to take control of Triad and remove a majority of the Board, the classification of the Board could tend to reduce the likelihood of fluctuations in the market price of the Triad common stock that might result from accumulations of large blocks for such a purpose. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of Triad common stock at a higher market price than might otherwise be the case. Number of Directors; Removal of Directors; Vacancies. The Triad Certificate provides that the number of directors will be fixed from time to time by action of not less than a majority of the Triad Board of Directors then in office, but in no event shall the number of directors be less than three nor more than 15. As of the distribution date, the number of directors of Triad will be [nine/ten]. The Triad Certificate provides that any vacancies (including newly- created directorships) will be filled only by the affirmative vote of a majority of the remaining directors, whether or not they constitute a quorum of directors. Directors appointed to fill vacancies created by the resignation or termination of a director will serve the remainder of the term of the resigning or terminated director. Accordingly, the Triad Board of Directors could prevent any stockholder from enlarging the Triad Board of Directors and filling the new directorships with such stockholder's own nominees. Under the Delaware Law, unless provided in the certificate of incorporation, directors serving on a classified board may be removed by the stockholders only for cause. The Triad Certificate provides that directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors, voting as a single class (without a separate vote of the holders of the Triad preferred stock unless required pursuant to the terms of any series of Triad preferred stock). Business Conducted at Meetings; Director Nominations. The By-Laws provide that nominations of persons for election to the Triad Board and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (a) pursuant to Triad's notice with respect to such meeting, (b) by or at the direction of the Triad Board or (c) by any stockholder of record of Triad who was a stockholder of record at the time of the giving of the notice required by the By-Laws, described below, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in the By-Laws. For nominations or other business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of Triad, such business must be a proper matter for stockholder action under the Delaware Law and, if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, solicits or participates in the solicitation of proxies in support of such proposal or nomination, the stockholder must have timely indicated such stockholder's, or such beneficial owner's, intention to do so. To be timely, a stockholder's notice must be delivered to the Secretary at the 130 principal executive offices of Triad not less than 90 days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed more than 60 days after such anniversary date, notice by the stockholder to be timely must be delivered not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. The notice must include: . certain information as to each person whom the stockholder proposes to nominate for election or reelection as a director and such person's written consent to serve as a director if elected; . as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and . certain information as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, including whether either such stockholder or beneficial owner intends to solicit or participate in the solicitation of proxies in favor of such proposal or nominee or nominees. In the event that the number of directors to be elected to the Triad Board is increased and there is not a public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by Triad at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice will be timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of Triad not later than the close of business on the 10th day following the day on which such public announcement is first made by Triad. If the officer of Triad or other person presiding at a meeting determines that a person was not nominated, or other business was not brought before the meeting, in accordance with these advance notice provisions, such person will not be eligible for election as a director or such business will not be conducted at such meeting, as the case may be. By requiring advance notice of nominations by stockholders, the Triad Board of Directors has an appropriate opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Triad Board of Directors, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, annual meetings of stockholders may be conducted in a more orderly manner and, to the extent deemed necessary or desirable by the Triad Board of Directors, the Triad Board of Directors has an appropriate opportunity to inform stockholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the Triad Board of Directors' position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although the Triad By-laws do not give the Triad Board of Directors any power to approve or disapprove stockholder nominations of the election of directors or proposals for action, the foregoing provisions may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to Triad and its stockholders. No Stockholder Action by Written Consent; Stockholder Action at Meetings. The Triad Certificate provides that stockholder action can be taken only at an annual or special meeting of stockholders and prohibits stockholder action by written consent in lieu of a meeting. The Triad Certificate also provides that special meetings of stockholders can be called only by the Chairman of the Board or the Chief Executive Officer of Triad, in either of their discretion or at the written request of a majority of the Triad Board of Directors. 131 Stockholders are not permitted to call a special meeting or to require that the Triad Board of Directors call a special meeting of stockholders. The business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting pursuant to the notice of meeting given by Triad. The provisions of the Triad Certificate prohibiting stockholder action by written consent may have the effect of delaying consideration of a stockholder proposal until the next annual meeting of stockholders. These provisions would also prevent the holders of a majority of the outstanding shares of voting stock of Triad from unilaterally using the written consent procedure to take stockholder action. Moreover, a stockholder could not force stockholder consideration of a proposal opposed by the Chairman of the Board, the Chief Executive Officer and a majority of the Triad Board of Directors by calling a special meeting of stockholders prior to the time the Chairman of the Board, the Chief Executive Officer or a majority of the Triad Board of Directors believes such consideration to be appropriate. Fair Price Provision. The Triad Certificate contains a "fair price" provision, requiring that, in addition to any other vote required by the Triad Certificate or the Delaware Law, certain "business combination" transactions with a "related person" will be subject to the affirmative vote of the holders of not less than 85% of the voting power of all of the outstanding shares of voting stock of Triad held by stockholders other than the related person. The 85% voting requirement will not be applicable if either: 1. The business combination is approved by the Board of Directors of Triad by the affirmative vote of at least 66 2/3% of the "continuing directors," or 2. All of the following conditions are satisfied: . the aggregate amount of cash and the fair market value of the property, securities or other consideration to be received per share of capital stock of Triad in the business combination by the holders of capital stock of Triad, other than the related person involved in the business combination, will not be less than the highest of (1) the highest per share price (including brokerage commissions, soliciting dealers' fees, and dealer-manager compensation, and with appropriate adjustments for recapitalizations, stock splits, stock dividends and like transactions and distributions) paid by such related person in acquiring any of its holdings of such class or series of capital stock, (2) the highest per share "market value" of such class or series of capital stock within the twelve-month period immediately preceding the date the proposal for such business combination was first publicly announced, or (3) the book value per share of such class or series of capital stock, determined in accordance with generally accepted accounting principles, as of the last day of the month immediately preceding the date the proposal for such business combination was first publicly announced; . the consideration to be received in such business combination by holders of capital stock other than the related person involved will, except to the extent that a stockholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the related person in acquiring capital stock already owned by it; provided, however, that if the related person has paid for capital stock with varying forms of consideration, the form of consideration for shares of capital stock acquired in the business combination by the related person must either be cash or the form used to acquire the largest number of shares of capital stock previously acquired by it; and . a proxy statement responsive to the requirements of the Exchange Act is mailed to the stockholders of Triad for the purpose of soliciting stockholder approval of such business combination and contains (1) any recommendations as to the advisability (or inadvisability) of the business combination which the continuing directors may choose to state and (2) the opinion of a reputable investment banking firm selected by the continuing directors as to the fairness of the terms of such business combination, from a financial point of view, to the public stockholders (other than the related person) of Triad. 132 For the purpose of the fair price provision included in the Triad Certificate, certain terms are defined as follows. "Business Combination" means: . any merger or consolidation of Triad or a subsidiary with a related person; . any sale, lease, exchange, mortgage, pledge, transfer or other disposition other than in the ordinary course of business to or with a related person of any assets of Triad or a subsidiary having an aggregate fair market value of $25,000,000 or more; . the issuance or transfer by Triad of any shares of voting stock of Triad or securities convertible into or exercisable for such shares (other than by way of pro rata distribution to all stockholders) to a related person; . any recapitalization, merger or consolidation that would have the effect of increasing the voting power of a related person; . the adoption of any plan or proposal for the liquidation or dissolution of Triad or a subsidiary proposed, directly or indirectly, by or on behalf of a related person; . any merger or consolidation of Triad with another person proposed, directly or indirectly, by or on behalf of a related person, unless the entity surviving or resulting from such merger or consolidation has a provision in its certificate or articles of incorporation, charter or similar governing instrument which is substantially identical to the fair price provisions of the Triad Certificate; or . any agreement, contract or other arrangement or understanding providing, directly or indirectly, for any of the foregoing transactions. "Related Person" means any individual, partnership, corporation, trust or other person which together with its "affiliates" and "associates," as defined in Rule 12b-2 under the Exchange Act as in effect on , 1999, and together with any other individual, partnership, corporation, trust or other person with which it or they have any agreement, contract or other arrangement or understanding with respect to acquiring, holding, voting or disposing of shares of voting stock of Triad, "beneficially owns" (within the meaning of Rule 13d-3 under the Exchange Act on said date) an aggregate of 10% or more of the voting power of all of the outstanding shares of voting stock of Triad. A related person, its affiliates and associates and all such other individuals, partnerships, corporations and other persons with whom it or they have any such agreement, contract or other arrangement or understanding, are deemed a single related person for purposes of this provision; provided, however, that the members of the Triad Board of Directors shall not be deemed to be associates or otherwise to constitute a Related Person solely by reason of their board membership. A person who is a related person (1) as of the time any definitive agreement relating to a business combination is entered into, (2) as of the record date for the determination of stockholders entitled to notice of and to vote on a business combination or (3) immediately prior to the consummation of a business combination, shall be deemed a related person for purposes of this provision. "Continuing Director" means any member of the Triad Board of Directors who is not an affiliate or associate of the related person and was a member of the Triad Board of Directors prior to the time that such person became a related person, and any successor of a continuing director who is unaffiliated with such related person and is recommended to succeed a continuing director by a majority of the continuing directors. "Market Value" means the average of the high-bid and low-asked quoted sales price on the date in question (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) of a share on the NYSE Composite Tape, or, if the shares are not listed or admitted to trading on such exchange, on the principal United States securities exchange registered under the Exchange Act on which the shares are listed or admitted to trading, or, if the shares are not listed or admitted to trading on any such exchange, the mean between the closing high-bid and the low-asked quotations with respect to a share on such date as quoted on NASDAQ, or any similar system then in use, or, if no such quotations are available, the fair market value on such date of a share as at least 66 2/3% of the continuing directors shall determine. 133 The fair price provision included in the Triad Certificate is intended to ensure that all stockholders of Triad receive equal treatment in the event of a tender or exchange offer and to protect stockholders of Triad against coercive or two-tiered takeover bids. Notwithstanding the foregoing, the provision could also have the effect of discouraging a third party from making a tender or exchange offer for Triad, even though such an offer might be beneficial to Triad and its stockholders. Amendment of the Triad Certificate and By-laws. The Triad Certificate contains provisions requiring the affirmative vote of the holders of a least 80% of the voting power of all of the outstanding shares of voting stock of Triad to amend certain provisions of the Triad Certificate (including the provisions discussed above relating to directors, action by written consent, special stockholder meetings and advance notice of stockholder nominations and stockholder proposals) or to amend any provision of the Triad By-laws. An amendment of the fair price provision included in the Triad Certificate requires the approval of 66 2/3% of the directors of Triad then in office and the affirmative vote of 85% of the voting power of all of the outstanding shares of voting stock of Triad held by stockholders other than any related person, unless the amendment is approved by 66 2/3% of the continuing directors. These provisions make it more difficult for stockholders to make changes in the Triad Certificate and the Triad By-laws, including changes designed to facilitate the exercise of control over Triad. Other Constituencies. In addition to any other considerations which the Triad Board of Directors may lawfully take into account, in determining whether to take or to refrain from taking corporate action on any matter, including proposing any matter to the stockholders of Triad, the Board may consider the effects, both short-term and long-term, of such action on the interests of the employees, associates, associated physicians, distributors, patients or other customers, suppliers or creditors of Triad, and the communities in which Triad owns or leases property or conducts business. LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS The Triad Certificate eliminates to the fullest extent now or hereafter permitted by the Delaware Law, liability of a director to Triad or its stockholders for monetary damages for any action taken, or failure to take any action, as a director, except for liability: . for any breach of the director's duty of loyalty to Triad or its stockholders; . for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . under Section 174 of the Delaware Law, relating to prohibited dividends, distributions and repurchases or redemptions of stock; or . for any transaction for which the director derives an improper personal benefit. This provision is intended to afford directors additional protection from, and limit their potential liability for, suits alleging a breach of duty by a director. Triad believes this provision will assist it in maintaining and securing the services of directors who are not employees of Triad. As a result of the inclusion of this provision, stockholders may be unable to recover monetary damages from directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions, such as an injunction or rescission based on a director's breach of the duty of care; as a practical matter, equitable remedies may not be available (e.g., after a transaction has already been effected). If equitable remedies are found not to be available to stockholders for any particular case, stockholders may not have any effective remedy against the challenged conduct. Section 145 of the Delaware Law permits indemnification of directors, officers, agents and controlling persons of a corporation under certain conditions and subject to certain limitations. Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or 134 investigative, by reason of the fact that such person is or was a director, officer or agent of the corporation or another enterprise if serving at the request of the corporation. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner such person reasonably believed to be in or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. In the case of an action by or in the right of Triad, no indemnification may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of Triad has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. The Triad Certificate contains provisions for indemnification of directors, officers, employees and agents to the fullest extent permitted by Section 145 and Delaware law which, in general, presently requires that the individual act in good faith and in a manner he or she reasonably believed to be in or not opposed to Triad's best interests and, in the case of any criminal proceedings, that the individual has no reason to believe his or her conduct was unlawful. The Triad Certificate also permits Triad to purchase insurance and Triad has purchased and maintains insurance on behalf of Triad directors, officers, employees and agents against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not Triad would have the power to indemnify such person against such liability under the foregoing provisions of the Triad Certificate. ADDITIONAL INFORMATION LifePoint has filed with the SEC a Registration Statement on Form 10 under the Exchange Act with respect to the shares of LifePoint common stock and associated LifePoint Rights to be received by Columbia/HCA stockholders in the distribution, and Triad has filed with the SEC a Registration Statement on Form 10 under the Exchange Act with respect to the shares of Triad common stock and associated Triad Rights to be received by Columbia/HCA stockholders in the distribution. This information statement does not contain all of the information set forth in the LifePoint Form 10 Registration Statement or the Triad Form 10 Registration Statement and (in each case) the exhibits and schedules relating thereto. Statements made in this information statement as to the contents of any contract, agreement, instrument or other document are not necessarily complete, and in each instance we refer you to the copy of the contract, agreement, instrument or document filed as an exhibit to the LifePoint Form 10 Registration Statement and the Triad Form 10 Registration Statement; each such statement is qualified in all respects by reference to such documents and the exhibits and schedules thereto. For further information, we refer you to the LifePoint Form 10 Registration Statement and the Triad Form 10 Registration Statement and the exhibits and schedules relating thereto, which are on file at the offices of the SEC and may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC in New York (Seven World Trade Center, Suite 1300, New York, New York 10048) and Chicago (500 West Madison Street, Suite 1400, Chicago, Illinois 60661). The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Such material may also be inspected at the offices of the NYSE (20 Broad Street, New York, New York 10005) or accessed electronically by means of the SEC's home page on the World Wide Web (http://www.sec.gov). 135 Following the distribution, each of LifePoint and Triad will be required to comply with the reporting requirements of the Exchange Act and will file annual, quarterly and other reports with the SEC. LifePoint and Triad also will be subject to the proxy solicitation requirements of the Exchange Act and, accordingly, will furnish audited financial statements to their respective stockholders in connection with their annual meetings of stockholders. You should rely only on the information contained in this information statement and other documents referred to in this information statement. Columbia/HCA, LifePoint and Triad have not authorized anyone to provide you with information that is different. 136 INDEX TO FINANCIAL STATEMENTS LIFEPOINT HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS Report of Independent Auditors................................. F-2 Combined Statements of Income--for the nine months ended September 30, 1998 and 1997, and for the years ended December 31, 1997 and 1996............................................. F-3 Combined Balance Sheets--September 30, 1998 and December 31, 1997.......................................................... F-4 Combined Statements of Equity--for the nine months ended September 30, 1998 and 1997, and for the years ended December 31, 1997 and 1996............................................. F-5 Combined Statements of Cash Flows--for the nine months ended September 30, 1998 and 1997, and for the years ended December 31, 1997 and 1996............................................. F-6 Notes to Combined Financial Statements......................... F-7 thru F-16
TRIAD HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS Report of Independent Auditors................................ F-17 Combined Statements of Operations for the nine months ended September 30, 1998 and 1997 and the years ended December 31, 1997 and 1996................................................ F-18 Combined Balance Sheets, September 30, 1998 and December 31, 1997......................................................... F-19 Combined Statements of Equity for the nine months ended September 30, 1998 and 1997 and the years ended December 31, 1997 and 1996................................................ F-20 Combined Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 and the years ended December 31, 1997 and 1996................................................ F-21 Notes to combined Financial Statements........................ F-22 thru F-31
Explanatory Note: The historical combined financial statements presented herein are those of the America Group and the Pacific Group of Columbia/HCA Healthcare Corporation. Prior to the distribution date, the assets and liabilities of the America Group will be contributed to LifePoint Hospitals, Inc., a newly-formed Delaware holding company and the assets and liabilities of the Pacific Group will be contributed to Triad Hospitals, Inc., a newly-formed Delaware holding company. On the distribution date, the assets and liabilities of the America Group will constitute substantially all of the assets and liabilities of LifePoint Hospitals, Inc. and the assets and liabilities of the Pacific Group will constitute substantially all of the assets and liabilities of Triad Hospitals, Inc. F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders Columbia/HCA Healthcare Corporation We have audited the accompanying combined balance sheets of the net assets and operations to be contributed to LifePoint Hospitals, Inc. (see Note 1) as of September 30, 1998 and December 31, 1997 and the related combined statements of income, equity and cash flows for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the net assets and operations to be contributed to LifePoint Hospitals, Inc. (see Note 1) at September 30, 1998 and December 31, 1997 and the combined results of their operations and their cash flows for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles. As explained in Note 7 to the combined financial statements, effective January 1, 1997, the Company changed its method of accounting for start-up costs. Ernst & Young LLP Nashville, Tennessee November 25, 1998 F-2 LIFEPOINT HOSPITALS, INC. COMBINED STATEMENTS OF INCOME (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------ -------------- 1998 1997 1997 1996 ------ ---------- ------ ------ (UNAUDITED -NOTE 13) Revenues..................................... $366.4 $377.4 $490.4 $466.6 Salaries and benefits........................ 158.1 144.3 197.3 175.9 Supplies..................................... 44.6 40.9 55.4 51.2 Other operating expenses..................... 82.4 84.6 119.0 99.8 Provision for doubtful accounts.............. 28.3 22.9 34.6 28.0 Depreciation and amortization................ 20.5 20.8 27.6 23.8 Interest expense............................. 13.9 11.3 15.5 14.2 Management fees.............................. 6.9 6.3 8.2 6.3 Impairment of long-lived assets.............. - - 4.8 - ------ ------ ------ ------ 354.7 331.1 462.4 399.2 ------ ------ ------ ------ Income from continuing operations before minority interests and income taxes......... 11.7 46.3 28.0 67.4 Minority interests in earnings of consolidated entities....................... 1.7 1.2 2.2 1.3 ------ ------ ------ ------ Income from continuing operations before income taxes................................ 10.0 45.1 25.8 66.1 Provision for income taxes................... 4.4 18.5 10.6 26.5 ------ ------ ------ ------ Income from continuing operations............ 5.6 26.6 15.2 39.6 Discontinued operations: Income (loss) from operations, net of income taxes (benefits) of ($2.3) and $1.7 for the nine months ended September 30, 1998 and 1997 and ($.4) and $1.2 for years ended December 31, 1997 and 1996, respectively.............................. (3.7) 2.7 (.6) 1.9 Estimated loss on disposal of certain discontinued businesses, net of income tax benefit of $2.4........................... - - (3.4) - Cumulative effect of accounting change, net of income tax benefit of $0.4............. - (.6) (.6) - ------ ------ ------ ------ Net income............................... $ 1.9 $ 28.7 $ 10.6 $ 41.5 ====== ====== ====== ======
The accompanying notes are an integral part of the combined financial statements. F-3 LIFEPOINT HOSPITALS, INC. COMBINED BALANCE SHEETS (DOLLARS IN MILLIONS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ ASSETS ------ Current assets: Accounts receivable, less allowances for doubtful accounts of $42.6 at September 30, 1998 and $37.5 at December 31, 1997......................................... $ 52.7 $ 53.4 Inventories....................................... 13.4 13.0 Deferred taxes and other current assets........... 15.6 13.3 ------- ------- 81.7 79.7 Property and equipment, at cost: Land.............................................. 7.6 7.6 Buildings......................................... 225.1 224.2 Equipment......................................... 215.0 200.6 Construction in progress (estimated cost to complete and equip after September 30, 1998-- $52.0)........................................... 15.5 10.7 ------- ------- 463.2 443.1 Accumulated depreciation............................ (171.4) (155.6) ------- ------- 291.8 287.5 Intangible assets, net of accumulated amortization of $4.2 at September 30, 1998 and $2.8 at December 31, 1997........................................... 17.4 19.4 Other............................................... 1.4 10.4 ------- ------- $ 392.3 $ 397.0 ======= ======= LIABILITIES AND EQUITY ---------------------- Current liabilities: Accounts payable.................................. $ 12.0 $ 15.4 Accrued salaries.................................. 9.7 11.7 Other current liabilities......................... 15.8 11.1 ------- ------- 37.5 38.2 Long-term debt...................................... .3 1.4 Deferred taxes and other liabilities................ 27.8 26.0 Minority interests in equity of consolidated entities........................................... 6.2 6.4 Equity, investment by and advances from Columbia/HCA....................................... 320.5 325.0 ------- ------- $ 392.3 $ 397.0 ======= =======
The accompanying notes are an integral part of the combined financial statements. F-4 LIFEPOINT HOSPITALS, INC. COMBINED STATEMENTS OF EQUITY (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------ ------------- --- 1998 1997 1997 1996 ------ ---------- ------ ------ (UNAUDITED -NOTE 13) Equity at beginning of period............ $325.0 $310.6 $310.6 $274.4 Net income............................. 1.9 28.7 10.6 41.5 Investments by and advances from Columbia/HCA, net..................... (6.4) 24.9 3.8 (5.3) ------ ------ ------ ------ Equity at end of period.................. $320.5 $364.2 $325.0 $310.6 ====== ====== ====== ======
The accompanying notes are an integral part of the combined financial statements. F-5 LIFEPOINT HOSPITALS, INC. COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------ -------------- 1998 1997 1997 1996 ------ ---------- ------ ------ (UNAUDITED -NOTE 13) Cash flows from operating activities: Net income................................ $ 1.9 $ 28.7 $ 10.6 $ 41.5 Adjustments to reconcile net income to net cash provided by continuing operating activities: Provision for doubtful accounts......... 28.3 22.9 34.6 28.0 Depreciation and amortization........... 20.5 20.8 27.6 23.8 Deferred income taxes................... (1.8) - 2.2 13.5 Impairment of long-lived assets......... - - 4.8 - Loss (income) from discontinued operations............................. 3.7 (2.7) 4.0 (1.9) Cumulative effect of accounting change.. - .6 .6 - Increase (decrease) in cash from operating assets and liabilities: Accounts receivable................... (27.6) (41.2) (38.0) (46.5) Inventories and other assets.......... .4 (.3) .1 (3.8) Accounts payable and accrued expenses............................. (.6) .5 - 7.3 Other................................... 1.2 (.6) 1.4 1.0 ------ ------ ------ ------ Net cash provided by operating activities........................... 26.0 28.7 47.9 62.9 Cash flows from investing activities: Purchase of property and equipment........ (24.8) (40.1) (52.0) (53.6) Investments in and advances to affiliates............................... .1 (5.7) (6.0) - Other..................................... 6.3 (7.7) 6.4 (3.5) ------ ------ ------ ------ Net cash used in investing activities........................... (18.4) (53.5) (51.6) (57.1) Cash flows from financing activities: Repayment of long-term debt, net.......... (1.2) (.1) (.1) (.5) Transfers of debt from Columbia/HCA, net.. (6.4) 24.9 3.8 (5.3) ------ ------ ------ ------ Net cash provided by (used in) financing activities................. (7.6) 24.8 3.7 (5.8) ------ ------ ------ ------ Change in cash and cash equivalents......... $ - $ - $ - $ - ====== ====== ====== ====== Interest payments........................... $ 13.9 $ 11.3 $ 15.5 $ 14.2 Income tax payments, net of refunds......... $ 6.2 $ 18.5 $ 8.4 $ 13.0
The accompanying notes are an integral part of the combined financial statements. F-6 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1--COLUMBIA/HCA'S PROPOSED SPIN-OFF OF AMERICA CORPORATION In 1998, the Board of Directors of Columbia/HCA Healthcare Corporation ("Columbia/HCA") approved in principle the spin-off of its operations comprising the America Group to its shareholders (the "Distribution") as an independent, publicly-traded company. The America Group and the independent, publicly-traded company to which its assets and liabilities will be contributed are hereinafter referred to as "LifePoint Hospitals, Inc." or LifePoint." The Distribution is subject to obtaining a tax ruling by the Internal Revenue Service ("IRS") that would allow it to be tax-free to Columbia/HCA and its shareholders, various regulatory approvals and approval of a definitive plan by Columbia/HCA's Board of Directors. LifePoint is comprised of 22 general, acute care hospitals and related health care entities. LifePoint also owns a minority interest in one non-consolidated hospital accounted for using the equity method. The entities are located in non-urban areas in the states of Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. The accompanying financial statements, prepared on the basis of historical cost to Columbia/HCA, represent the combined financial position, results of operations and cash flows of LifePoint. In connection with the Distribution, all intercompany amounts payable by LifePoint to Columbia/HCA will be eliminated, and LifePoint will assume certain indebtedness from Columbia/HCA. In addition, LifePoint will enter into various agreements with Columbia/HCA which are intended to facilitate orderly changes for both companies in a way which would be minimally disruptive to each entity. The Combined Financial Statements included herein may not necessarily be indicative of the results of operations, financial position and cash flows of LifePoint in the future or had it operated as a separate, independent company during the periods presented. The combined financial statements included herein do not reflect any changes that may occur in the financing and operations of LifePoint as a result of the Distribution. NOTE 2--ACCOUNTING POLICIES Principles of Combination The combined financial statements include the accounts of LifePoint and all affiliated subsidiaries and entities controlled by LifePoint. Significant intercompany transactions within LifePoint have been eliminated. Investments in entities which LifePoint does not control, but in which it has a substantial ownership interest and can exercise significant influence, are accounted for using the equity method. The preparation of the combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Equity Equity represents the net investment in and advances to LifePoint by Columbia/HCA. It includes common stock, additional paid-in-capital, net earnings and net intercompany balances with Columbia/HCA. Intercompany balances represent the net excess of funds transferred to or paid on behalf of LifePoint over funds transferred to the centralized cash management account of Columbia/HCA. Generally, this balance is increased by cash transfers from and payments of debt made by Columbia/HCA, construction project additions paid by Columbia/HCA, and certain fees and services provided by Columbia/HCA, including information systems services and other operating expenses, such as payroll, interest, insurance and income taxes. Generally, the balance is decreased through daily cash deposits by LifePoint to the account. LifePoint is charged interest on the intercompany balances at various rates ranging from 6% to 10% and the interest computations are based on the outstanding balance at month end. F-7 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--ACCOUNTING POLICIES (CONTINUED) Revenues LifePoint's health care facilities have entered into agreements with third- party payers, including government programs and managed care health plans, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Revenues are recorded at estimated amounts due from patients and third-party payers for the health care services provided. Settlements under reimbursement agreements with third-party payers are estimated and recorded in the period the related services are rendered and are adjusted in future periods as final settlements are determined. The adjustments to estimated settlements resulted in increases to revenues of $2.0 million, $3.3 million and $10.6 million in the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996, respectively. Management believes that adequate provisions have been made for adjustments that may result from final determination of amounts earned under these programs. LifePoint provides care without charge to patients who are financially unable to pay for the health care services they receive. Because LifePoint does not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. Accounts Receivable LifePoint receives payment for services rendered from federal and state agencies (under the Medicare, Medicaid and CHAMPUS programs), managed care health plans, commercial insurance companies, employers and patients. During the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996, approximately 37.9%, 39.7% and 40.9%, respectively, of LifePoint's revenues related to patients participating in the Medicare program. LifePoint recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there are significant credit risks associated with these government agencies. LifePoint does not believe that there are any other significant concentrations of revenues from any particular payer that would subject it to any significant credit risks in the collection of its accounts receivable. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Long-Lived Assets PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized. Depreciation expense, computed using the straight-line method, was $19.1 million for the nine months ended September 30, 1998 and $25.1 million and $21.9 million for the years ended December 31, 1997 and 1996, respectively. Buildings and improvements are depreciated over estimated useful lives ranging generally from 10 to 40 years. Estimated useful lives of equipment vary generally from 3 to 10 years. INTANGIBLE ASSETS Intangible assets consist primarily of costs in excess of the fair value of identifiable net assets of acquired entities and are amortized using the straight-line method, generally over periods ranging from 30 to 40 years F-8 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--ACCOUNTING POLICIES (CONTINUED) for hospital acquisitions and periods ranging from 5 to 20 years for physician practice and clinic acquisitions. Noncompete agreements and debt issuance costs are amortized based upon the terms of the respective contracts or loans. When events, circumstances and operating results indicate that the carrying values of certain long-lived assets and the related identifiable intangible assets might be impaired, LifePoint prepares projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts are not expected to be recoverable, such amounts are reduced to estimated fair value. Income Taxes Columbia/HCA files consolidated Federal and state income tax returns which includes all of its eligible subsidiaries, including LifePoint. The provisions for income taxes in the combined statements of income for all periods presented have been computed on a separate return basis (i.e., assuming LifePoint had not been included in a consolidated income tax return with Columbia/HCA). All income tax payments are made by LifePoint through Columbia/HCA. The net deferred tax liability results principally from certain revenue and expense items recognized for tax purposes in years other than the year in which they are reflected in the financial statements. General and Professional Liability Risks Columbia/HCA assumes the liability for all general and professional liability claims incurred and maintains the related reserve. Accordingly, no reserve for general and professional liability risks is recorded on the accompanying combined balance sheets. The cost of general and professional liability coverage is allocated by Columbia/HCA's captive insurance company to LifePoint based on actuarially determined estimates. The cost for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996 was approximately $5.0 million, $6.1 million and $5.6 million, respectively. LifePoint participates in a self-insured program for workers' compensation and health insurance administered by Columbia/HCA. The cost was approximately $1.6 million for the nine months ended September 30, 1998 and $2.1 million for both years ended December 31, 1997 and 1996. Management Fees Columbia/HCA incurs various corporate general and administrative expenses. These corporate overhead expenses are allocated to LifePoint based on revenues. In the opinion of management, this allocation method is reasonable. The management fees allocated to LifePoint are not necessarily indicative of the expenses that would have been incurred if LifePoint had been a separate, independent entity and had otherwise managed these functions. Subsequent to the Distribution, LifePoint will be required to manage these functions and will be responsible for the expenses associated with the management of a separate public corporation. F-9 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--ACCOUNTING POLICIES (CONTINUED) Disclosures about Segments of an Enterprise In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore, LifePoint will adopt the new requirements in the annual report following the Distribution. The identification of the reportable operating segments has not been determined by management at this time. Disclosures of Derivative Instruments In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. Because of LifePoint's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of LifePoint. NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is a defendant in several qui tam actions brought by private parties on behalf of the United States of America, which have been unsealed and served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated the False Claims Act for improper claims submitted to the government for reimbursement. The lawsuits seek damages of three times the amount of all Medicare or Medicaid claims (involving false claims) presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. On October 5, 1998, the United States Department of Justice announced that the Federal government had joined a qui tam action originally filed in 1993 in which Columbia/HCA is a defendant. The government has not intervened in the other qui tam actions unsealed to date. Columbia/HCA is aware of additional qui tam actions that remain under seal and believes that there are other sealed qui tam cases of which it is unaware. Columbia/HCA is a defendant in a number of other suits, which allege, in general, improper and fraudulent billing, overcharging, coding and physician referrals, as well as other violations of law. Certain of the suits have been conditionally certified as class actions. It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam and other actions, or whether any additional investigations or litigation will be commenced. If Columbia/HCA is found to have violated Federal or state laws relating to Medicare, Medicaid or similar programs, Columbia/HCA could be subject to substantial monetary fines, civil and criminal penalties, and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui tam and other actions may be F-10 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS (CONTINUED) substantial, and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more of such actions. Any such sanctions or losses could have a material adverse effect on Columbia/HCA's financial position and results of operations. Columbia/HCA has agreed to indemnify LifePoint in respect of certain liabilities arising out of or in connection with the foregoing matters. If any such indemnified liabilities were successfully asserted against LifePoint or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations, then such liabilities could have a material adverse effect on the financial position and results of LifePoint (See Note 11--Contingencies). NOTE 4--INCOME TAXES Provision for income taxes consists of the following (dollars in millions):
NINE MONTHS YEARS ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------- 1998 1997 1996 ------------- ------ ------ Current: Federal.................................... $ 5.2 $ 7.1 $ 11.0 State...................................... 1.0 1.3 2.0 Deferred: Federal.................................... (1.5) 1.9 11.5 State...................................... (0.3) 0.3 2.0 ----- ------ ------ $ 4.4 $ 10.6 $ 26.5 ===== ====== ====== A reconciliation of the federal statutory rate to the effective income tax rate follows: NINE MONTHS YEARS ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------- 1998 1997 1996 ------------- ------ ------ Federal statutory rate....................... 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit..................................... 4.4 4.1 4.0 Non-deductible intangible assets............. 3.3 1.5 0.8 Other items, net............................. 1.4 0.5 0.4 ----- ------ ------ Effective income tax rate.................... 44.1% 41.1% 40.2% ===== ====== ======
A summary of the items comprising the deferred tax assets and liabilities follows (dollars in millions):
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ------------------ ------------------ ASSETS LIABILITIES ASSETS LIABILITIES ------ ----------- ------ ----------- Depreciation and fixed asset basis differences........................ $30.6 $29.3 Doubtful accounts................... $ 9.1 $ 5.7 Compensation........................ 2.0 2.3 Other............................... 4.6 0.9 4.3 0.6 ----- ----- ----- ----- $15.7 $31.5 $12.3 $29.9 ===== ===== ===== =====
F-11 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--INCOME TAXES (CONTINUED) Current deferred income tax assets totaled $11.4 million and $8.3 million at September 30, 1998 and December 31, 1997, respectively. Noncurrent deferred income tax liabilities totaled $27.2 million and $25.9 million at September 30, 1998 and December 31, 1997, respectively. Columbia/HCA and LifePoint will enter into a tax sharing and indemnification agreement which will provide that Columbia/HCA will generally be responsible for all taxes that are allocable to periods prior to the distribution date and Columbia/HCA and LifePoint will each be responsible for its own tax liabilities for periods after the distribution date. NOTE 5--IMPAIRMENT OF LONG-LIVED ASSETS LifePoint adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121") during the first quarter of 1996. SFAS 121 addresses accounting for the impairment of long-lived assets and long-lived assets to be disposed of, certain identifiable intangibles and goodwill related to those assets, and provides guidance for recognizing and measuring impairment losses. The statement requires that the carrying amount of impaired assets be reduced to fair value. During the fourth quarter of 1997, LifePoint decided to sell a surgery center that was identified as not compatible with LifePoint's operating plans. The carrying value of the surgery center was reduced to fair value, based on estimated selling value, for a total non-cash charge of $4.8 million. LifePoint expects to complete the sale during the fourth quarter of 1998 or the first half of 1999. The impairment charges did not have a significant impact on LifePoint's cash flows and are not expected to significantly impact cash flows or operating results in future periods. NOTE 6--DISCONTINUED OPERATIONS In August 1997, the management of Columbia/HCA and LifePoint implemented plans to sell its home health care businesses. Accordingly, the operating results and net assets (liabilities) of LifePoint's home health care businesses to be disposed of have been segregated from continuing operations. These businesses are presented as discontinued operations on separate line items in the combined financial statements. During 1997, LifePoint recorded an estimated after-tax loss on disposal of $3.4 million which is reflected in "Discontinued Operations" on the combined statements of income. LifePoint anticipates that sales of these businesses will be completed during the fourth quarter of 1998 and the first half of 1999. Revenues of the home health businesses to be disposed of were approximately $18.0 million for the nine months ended September 30, 1998 and $54.7 million and $52.5 million for the years ended December 31, 1997 and 1996, respectively. NOTE 7--ACCOUNTING CHANGE During 1997, LifePoint changed its method of accounting for start-up costs. The change involved expensing these costs as incurred, rather than capitalizing and subsequently amortizing such costs. LifePoint believes the new method is preferable due to certain changes in business strategy and reviews of emerging accounting guidance on accounting for similar (i.e., start-up, software system training and process reengineering) costs. The change in accounting principle resulted in the write-off of the costs capitalized as of January 1, 1997. The cumulative effect of the write-off, which totals $0.6 million (net of tax benefit), has been expensed and reflected in the statement of income for the year ended December 31, 1997 and the nine months ended September 30, 1997 (unaudited). Had the new method been used in the past, the pro forma effect on prior years F-12 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 7--ACCOUNTING CHANGE (CONTINUED) would have primarily affected 1996 (such costs incurred for periods prior to 1996 are considered immaterial to operations for those periods). The pro forma effect on the years ended December 31, 1997 and 1996 follows (dollars in millions):
1997 1996 ------------------ ------------------ AS AS REPORTED PRO FORMA REPORTED PRO FORMA -------- --------- -------- --------- Income from continuing operations.... $15.2 $15.2 $39.6 $39.0 Net income........................... $10.6 $11.2 $41.5 $40.9
NOTE 8--LONG TERM DEBT Long-term debt consists of various notes payable to third parties with an average life of 6 years and rates averaging 9%. Current portion of long-term debt totaled $0.1 million and $0.2 million at September 30, 1998 and December 31, 1997, respectively, and is included in other current liabilities on the Combined Balance Sheets. In connection with the Distribution, all intercompany amounts payable by LifePoint to Columbia/HCA (included in "Equity, investments by and advances from Columbia/HCA" on the Combined Financial Statements) will be eliminated, and LifePoint will assume certain indebtedness from Columbia/HCA. NOTE 9--STOCK BENEFIT PLANS LifePoint employees have participated in the Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan (the "1992 Plan"). Under the 1992 Plan, stock options are generally granted at no less than the market price on the date of grant. Options are exercisable in whole or in part beginning two to five years after the grant and ending ten years after the grant. The total number of options granted to LifePoint employees under Columbia/HCA's stock option plan was approximately 159,300 in the nine months ended September 30, 1998, approximately 1,287,900 in 1997 and approximately 347,700 in 1996. Immediately following the Distribution, nonvested Columbia/HCA stock options held by LifePoint employees will be cancelled and replaced with LifePoint stock option awards. LifePoint stock options will be granted in amounts such that the fair value will be equal to that of the cancelled nonvested Columbia/HCA stock options. The vested Columbia/HCA stock options held by LifePoint employees will be converted into a combination of LifePoint, Triad Hospitals, Inc. and Columbia/HCA stock options in a manner that preserves the pre-spin-off intrinsic value and the pre-spin-off ratio of the exercise prices to the underlying market value of the related common stock. At September 30, 1998 there were approximately 2,422,200 Columbia/HCA stock options held by LifePoint employees. That amount includes an aggregate of approximately 1,867,100 million options that are subject to replacement with LifePoint stock option awards. LifePoint cannot currently determine the number of shares of its common stock that will be subject to substitute awards after the Distribution. LifePoint has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, but continues to measure stock-based compensation cost in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. Accordingly, no compensation cost has been recognized for LifePoint's stock benefit plans. If LifePoint had measured compensation cost for the Columbia/HCA stock options granted to its employees in the nine F-13 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--STOCK BENEFIT PLANS (CONTINUED) months ended September 30, 1998 and the years 1997 and 1996 under the fair value based method prescribed by SFAS 123, the net income would have been changed to the pro forma amounts set forth below:
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED ------------- SEPTEMBER 30, 1998 1997 1996 ------------------ ------ ------ Net Income Reported.................................. $1.9 $ 10.6 $ 41.5 Pro forma................................. $0.8 $ 9.8 $ 41.2
The fair values of Columbia/HCA stock options granted to LifePoint employees used to compute pro forma net income disclosures were estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions used by Columbia/HCA:
1998 1997 1996 ------- ------- ------- Risk free interest rate.............................. 4.26% 5.61% 5.81% Expected life........................................ 6 years 6 years 6 years Expected volatility.................................. 23.90% 23.90% 23.90% Expected dividend yield.............................. .28% .23% .19%
The weighted-average fair values of Columbia/HCA stock options granted to LifePoint employees during the nine months ended September 30, 1998 and the years ended 1997 and 1996 were $8.49, $11.22 and $13.49 per option, respectively. The pro forma amounts above are not necessarily representative of the effects of stock-based awards on future pro forma net income because (1) future grants of employee stock options by management may not be comparable to awards made to employees while LifePoint was a part of Columbia/HCA, (2) the assumptions used to compute the fair value of any stock option awards will be specific to LifePoint and therefore may not be comparable to the Columbia/HCA assumptions used and (3) they exclude the pro forma compensation expense related to unvested stock options granted before 1996. NOTE 10--EMPLOYEE RETIREMENT PLANS LifePoint participates in Columbia/HCA's defined contribution employee benefit plans, which cover substantially all employees. Benefits are determined primarily as a percentage of a participant's earned income and are vested over specific periods of employee service. Certain plans also require LifePoint to make matching contributions at certain percentages. The cost of these plans was $4.4 million for the nine months ended September 30, 1998 and $5.5 million and $4.4 million for the years ended December 31, 1997 and 1996, respectively. Amounts approximately equal to expense for these plans are funded annually. NOTE 11--CONTINGENCIES Significant Legal Proceedings Various lawsuits, claims and legal proceedings have been and are expected to be instituted or asserted against Columbia/HCA and LifePoint, including those relating to shareholder derivative and class action complaints; purported class action lawsuits filed by patients and payers alleging, in general, improper and fraudulent billing, coding and physician referrals, as well as other violations of law; certain qui tam or "whistleblower" actions alleging, in general, unlawful claims for reimbursement or unlawful payments to physicians for the referral of F-14 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 11--CONTINGENCIES (CONTINUED) patients, as well as other violations and litigation matters. While the amounts claimed may be substantial, the ultimate liability cannot be determined or reasonably estimated at this time due to the considerable uncertainties that exist. Therefore, it is possible that Columbia/HCA's and LifePoint's results of operations, financial position and liquidity in a particular period could be materially, adversely affected upon the resolution of certain of these contingencies. (See Note 3--Columbia/HCA Investigations, Litigation and Indemnification Rights, for a description of the ongoing government investigations and Columbia/HCA's obligations to indemnify LifePoint in respect of certain liabilities relating thereto.) General Liability Claims LifePoint is subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians staff privileges. In certain of these actions the claimants have asked for punitive damages against LifePoint, which are usually not covered by insurance. It is management's opinion that the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on LifePoint's results of operations or financial position. NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS A summary of other current liabilities follows (in millions):
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Employee benefit plans............................ $10.0 $ 5.7 Taxes other than income........................... 4.9 3.2 Other............................................. 0.9 2.2 ----- ----- $15.8 $11.1 ===== =====
A summary of activity in LifePoint's allowances for doubtful accounts follows (in millions):
ADDITIONS ACCOUNTS BALANCES AT CHARGED TO WRITTEN OFF, BALANCE BEGINNING COSTS AND NET OF AT END OF PERIOD EXPENSES RECOVERIES OF PERIOD ----------- ---------- ------------ --------- Allowances for doubtful accounts: Year ended December 31, 1996...................... $12.7 $28.0 $(11.1) $29.6 Year ended December 31, 1997...................... 29.6 34.6 (26.7) 37.5 Nine months ended September 30, 1998.................. 37.5 28.3 (23.2) 42.6
F-15 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 13--UNAUDITED INTERIM FINANCIAL INFORMATION The statements of income and changes in cash flows for the nine months ended September 30, 1997 and the quarterly financial information shown below (interim financial information) have been prepared by LifePoint and are unaudited. The interim financial information includes all adjustments consisting of only normal recurring adjustments necessary for a fair statement of the results of the interim periods. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted from the interim financial information. The interim financial information should be read in conjunction with the audited combined financial statements appearing herein.
1998 (IN MILLIONS) ---------------------- FIRST SECOND THIRD ------ ------ ------ Revenues................................... $125.6 $120.1 $120.7 Net income (loss): Income (loss) from continuing opera- tions................................... $ 3.3 $ 2.5 $ (.2) Loss from discontinued operations........ (2.1) (.8) (.8) ------ ------ ------ Net income (loss)...................... $ 1.2 $ 1.7 $ (1.0) ====== ====== ====== 1997 (IN MILLIONS) ------------------------------ FIRST SECOND THIRD FOURTH ------ ------ ------ ------ Revenues................................... $131.3 $129.1 $117.0 $113.0 Net income (loss): Income (loss) from continuing operations (a)..................................... $ 14.4 $ 12.6 $ (.4) $(11.4) Income (loss) from discontinued opera- tions (b)............................... .8 1.0 .9 (6.7) Cumulative effect of accounting change... (.6) - - - ------ ------ ------ ------ Net income (loss)...................... $ 14.6 $ 13.6 $ .5 $(18.1) ====== ====== ====== ======
- - -------- (a) Fourth quarter results include a $4.8 million pre-tax charge ($2.9 million after-tax) related to the impairment of certain long-lived assets. (See Note 5 of the Notes to Combined Financial Statements). (b) Fourth quarter results include $3.4 million of after-tax charges related to the estimated loss on disposal of discontinued business (see Note 6 of the Notes To Combined Financial Statements). F-16 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders Columbia/HCA Healthcare Corporation We have audited the accompanying combined balance sheets of the net assets and operations to be contributed to Triad Hospitals, Inc. (see Note 1) as of September 30, 1998 and December 31, 1997 and the related combined statements of operations, equity and cash flows for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the net assets and operations to be contributed to Triad Hospitals, Inc. (see Note 1) at September 30, 1998 and December 31, 1997 and the combined results of their operations and their cash flows for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996 in conformity with generally accepted accounting principles. As explained in Note 7 to the combined financial statements, effective January 1, 1997, the Company changed its method of accounting for start-up costs. Ernst & Young LLP Nashville, Tennessee November 25, 1998 F-17 TRIAD HOSPITALS, INC. COMBINED STATEMENTS OF OPERATIONS (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, -------------------- ------------------ 1998 1997 1997 1996 -------- ---------- -------- -------- (UNAUDITED -NOTE 13) Revenues............................... $1,376.4 $1,363.0 $1,786.9 $1,762.1 Salaries and benefits.................. 610.4 548.7 748.8 699.2 Supplies............................... 209.6 189.6 258.6 246.5 Other operating expenses............... 305.9 306.2 425.0 386.6 Provision for doubtful accounts........ 130.2 110.7 162.4 119.9 Depreciation and amortization.......... 86.3 80.8 108.9 99.0 Interest expense....................... 61.9 50.8 69.5 59.1 Management fees........................ 23.4 21.3 28.2 22.4 Impairment of long-lived assets........ 71.0 - 13.7 - -------- -------- -------- -------- 1,498.7 1,308.1 1,815.1 1,632.7 -------- -------- -------- -------- Income (loss) from continuing operations before minority interests and income taxes...................... (122.3) 54.9 (28.2) 129.4 Minority interests in earnings of consolidated entities................. 8.0 9.4 11.5 10.9 -------- -------- -------- -------- Income (loss) from continuing operations before income taxes (benefit)............................. (130.3) 45.5 (39.7) 118.5 Provision for income taxes (benefit)... (48.7) 14.6 (12.7) 49.2 -------- -------- -------- -------- Income (loss) from continuing operations............................ (81.6) 30.9 (27.0) 69.3 Discontinued operations: Income (loss) from operations, net of income taxes (benefit) of $(0.4) and $3.9 for the nine months ended September 30, 1998 and 1997 and $3.8 and $4.7 for the years ended December 31, 1997 and 1996, respectively........................ (1.2) 6.1 5.6 7.3 Estimated loss on disposal, net of income tax benefit of $2.1.......... - - (3.0) - Cumulative effect of accounting change, net of income tax benefit of $1.9..... - (2.9) (2.9) - -------- -------- -------- -------- Net income (loss).................. $ (82.8) $ 34.1 $ (27.3) $ 76.6 ======== ======== ======== ========
The accompanying notes are an integral part of the combined financial statements. F-18 TRIAD HOSPITALS, INC. COMBINED BALANCE SHEETS (DOLLARS IN MILLIONS)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ ASSETS ------ Current assets: Accounts receivable, less allowances for doubtful accounts of $165.5 at September 30, 1998 and $153.3 at December 31, 1997...................... $ 230.6 $ 216.7 Inventories....................................... 50.2 49.9 Income taxes...................................... 37.5 34.9 Other............................................. 24.8 26.1 -------- -------- 343.1 327.6 Property and equipment, at cost: Land.............................................. 86.7 87.6 Buildings......................................... 633.7 695.4 Equipment......................................... 731.2 683.5 Construction in progress (estimated cost to complete and equip after September 30, 1998-- $163.0).......................................... 73.4 50.9 -------- -------- 1,525.0 1,517.4 Accumulated depreciation............................ (707.3) (636.3) -------- -------- 817.7 881.1 Intangible assets, net of accumulated amortization of $51.4 at September 30, 1998 and $43.4 at December 31, 1997.................................. 308.4 299.6 Investment in equity of affiliates.................. 28.7 21.6 Other............................................... 22.0 32.2 -------- -------- $1,519.9 $1,562.1 ======== ======== LIABILITIES AND EQUITY ---------------------- Current liabilities: Accounts payable.................................. $ 55.9 $ 72.5 Accrued salaries.................................. 39.0 44.9 Other current liabilities......................... 55.4 40.8 -------- -------- 150.3 158.2 Long-term debt...................................... 13.9 19.8 Deferred taxes and other liabilities................ 54.3 83.7 Minority interests in equity of consolidated entities........................................... 58.2 62.1 Equity, investments by and advances from Columbia/HCA....................................... 1,243.2 1,238.3 -------- -------- $1,519.9 $1,562.1 ======== ========
The accompanying notes are an integral part of the combined financial statements. F-19 TRIAD HOSPITALS, INC. COMBINED STATEMENTS OF EQUITY (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, -------------------- ------------------ 1998 1997 1997 1996 -------- ---------- -------- -------- (UNAUDITED -NOTE 13) Equity at beginning of period......... $1,238.3 $1,194.8 $1,194.8 $1,120.0 Net income (loss)................... (82.8) 34.1 (27.3) 76.6 Investments by and advances from Columbia/HCA, net.................. 87.7 27.8 70.8 (1.8) -------- -------- -------- -------- Equity at end of period............... $1,243.2 $1,256.7 $1,238.3 $1,194.8 ======== ======== ======== ========
The accompanying notes are an integral part of the combined financial statements. F-20 TRIAD HOSPITALS, INC. COMBINED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
NINE MONTHS ENDED YEARS ENDED SEPTEMBER 30, DECEMBER 31, ------------------- ---------------- 1998 1997 1997 1996 ------- ---------- ------- ------- (UNAUDITED -NOTE 13) Cash flows from continuing operating activities: Net income (loss)...................... $ (82.8) $ 34.1 $ (27.3) $ 76.6 Adjustments to reconcile net income (loss) to net cash provided by continuing operating activities: Provision for doubtful accounts...... 130.2 110.7 162.4 119.9 Depreciation and amortization........ 86.3 80.8 108.9 99.0 Deferred income taxes (benefit)...... (30.8) 0.9 (11.8) 2.1 Write-down of long-lived assets...... 71.0 - 13.7 - Loss (income) from discontinued operations.......................... 1.2 (6.1) (2.6) (7.3) Cumulative effect of accounting change.............................. - 2.9 2.9 - Increase (decrease) in cash from operating assets and liabilities: Accounts receivable................ (144.1) (120.1) (154.7) (154.6) Inventories and other assets....... 0.9 (9.6) (4.4) (1.7) Accounts payable and other current liabilities....................... (7.7) (14.9) (7.1) 31.9 Other................................ (4.0) (1.4) (1.4) 7.9 ------- ------- ------- ------- Net cash provided by continuing operating activities.............. 20.2 77.3 78.6 173.8 ------- ------- ------- ------- Cash flows from investing activities: Purchase of property and equipment..... (85.2) (92.3) (156.7) (119.9) Investment in and advances to affiliates............................ (7.2) (2.0) (2.5) (19.1) Other.................................. (9.6) (9.7) 6.0 (21.1) ------- ------- ------- ------- Net cash used in investing activities.......................... (102.0) (104.0) (153.2) (160.1) ------- ------- ------- ------- Cash flows from financing activities: Increase (decrease) in long-term debt, net................................... (5.9) (1.1) 3.8 (11.9) Increase (decrease) in investments by and advances from Columbia/HCA, net... 87.7 27.8 70.8 (1.8) ------- ------- ------- ------- Net cash provided by (used in) financing activities................ 81.8 26.7 74.6 (13.7) ------- ------- ------- ------- Change in cash and cash equivalents...... $ - $ - $ - $ - ======= ======= ======= ======= Interest payments........................ $ 62.0 $ 51.0 $ 69.6 $ 59.3 Income tax payments (refunds), net....... $ (18.3) $ 16.7 $ (1.1) $ 53.9
The accompanying notes are an integral part of the combined financial statements. F-21 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1--COLUMBIA/HCA'S PROPOSED SPIN-OFF OF PACIFIC CORPORATION In 1998, the Board of Directors of Columbia/HCA Healthcare Corporation ("Columbia/HCA") approved in principle the spin-off of its operations comprising the Pacific Group to its shareholders (the "Distribution") as an independent, publicly-traded company. The Pacific Group and the independent, publicly-traded company to which its assets and liabilities will be contributed are hereinafter referred to as "Triad Hospitals, Inc." or "Triad." The Distribution is subject to obtaining a tax ruling by the Internal Revenue Service ("IRS") that would allow it to be tax-free to Columbia/HCA and its shareholders, various regulatory approvals and approval of a definitive plan by Columbia/HCA's Board of Directors. Triad is comprised of 43 hospitals (including an investment in one hospital that is accounted for using the equity method), 19 free-standing surgery centers and related health care entities located in eleven western, southwestern and southeastern states. The accompanying financial statements, prepared on the basis of historical cost to Columbia/HCA, represent the combined financial position, results of operations and cash flows of Triad. In connection with the Distribution, all intercompany amounts payable by Triad to Columbia/HCA will be eliminated, and Triad will assume certain indebtedness from Columbia/HCA. In addition, Triad will enter into various agreements with Columbia/HCA which are intended to facilitate orderly changes for both companies in a way which will be minimally disruptive to each entity. The combined financial statements included herein may not necessarily be indicative of the results of operations, financial position and cash flows of Triad in the future or had it operated as a separate, independent company during the periods presented. The combined financial statements included herein do not reflect any changes that may occur in the financing and operations of Triad as a result of the Distribution. NOTE 2--ACCOUNTING POLICIES Principles of Combination The combined financial statements include the accounts of Triad and all affiliated subsidiaries and entities controlled by Triad. Significant intercompany transactions within Triad have been eliminated. Investments in entities which Triad does not control, but in which it has a substantial ownership interest and can exercise significant influence, are accounted for using the equity method. The preparation of the combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Equity Equity represents the net investment in and advances to Triad by Columbia/HCA. It includes common stock, additional paid-in-capital, net earnings and net intercompany balances with Columbia/HCA. Intercompany balances represent the net excess of funds transferred to or paid on behalf of Triad over funds transferred to the centralized cash management account of Columbia/HCA. Generally, this balance is increased by cash transfers from and payments of debt made by Columbia/HCA, construction project additions paid by Columbia/HCA, and certain fees and services provided by Columbia/HCA, including information systems services and other operating expenses, such as payroll, interest, insurance and income taxes. Generally, the balance is decreased through daily cash deposits by Triad to the account. Triad is charged interest on the intercompany balances at various rates ranging from 6% to 10% and the interest computations are based on the outstanding balance at each month end. F-22 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--ACCOUNTING POLICIES (CONTINUED) Revenues Triad's health care facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Revenues are recorded at estimated amounts due from patients and third-party payers for the health care services provided. Settlements under reimbursement agreements with third-party payers are estimated and recorded in the period the related services are rendered and are adjusted in future periods as final settlements are determined. The adjustments to estimated settlements resulted in increases to revenues of $8.5 million, $1.9 million and $33.6 million in the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996, respectively. Management believes that adequate provisions have been made for adjustments that may result from final determination of amounts earned under these programs. Triad provides care without charge to patients who are financially unable to pay for the health care services they receive. Because Triad does not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. Accounts Receivable Triad receives payment for services rendered from federal and state agencies (under the Medicare, Medicaid and CHAMPUS programs), managed care health plans, commercial insurance companies, employers and patients. During the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996, approximately 36.5%, 37.2% and 37.9%, respectively, of Triad's revenues related to patients participating in the Medicare program. Triad recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there are significant credit risks associated with these government agencies. Triad does not believe that there are any other significant concentrations of revenues from any particular payer that would subject it to any significant credit risks in the collection of its accounts receivable. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Long-Lived Assets PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized. Depreciation expense, computed using the straight-line method, was $78.3 million for the nine months ended September 30, 1998 and $96.4 million and $88.0 million for the years ended December 31, 1997 and 1996, respectively. Buildings and improvements are depreciated over estimated useful lives ranging generally from 10 to 40 years. Estimated useful lives of equipment vary generally from 3 to 10 years. INTANGIBLE ASSETS Intangible assets consist primarily of costs in excess of the fair value of identifiable net assets of acquired entities and are amortized using the straight-line method, generally over periods ranging from 30 to 40 years for F-23 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--ACCOUNTING POLICIES (CONTINUED) hospital acquisitions and periods ranging from 5 to 20 years for physician practice and clinic acquisitions. Noncompete agreements and debt issuance costs are amortized based upon the terms of the respective contracts or loans. When events, circumstances and operating results indicate that the carrying values of certain long-lived assets and the related identifiable intangible assets might be impaired, Triad prepares projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts are not expected to be recoverable, such amounts are reduced to estimated fair value. Income Taxes Columbia/HCA files consolidated federal and state income tax returns which includes all of its eligible subsidiaries, including Triad. The provisions for income taxes in the combined statements of operations for all periods presented have been computed on a separate return basis (i.e., assuming Triad had not been included in a consolidated income tax return with Columbia/HCA). All income tax payments are made by Triad through Columbia/HCA. The net deferred tax liability results principally from certain revenue and expense items recognized for tax purposes in years other than the year in which they are reflected in the combined financial statements. General and Professional Liability Risks Columbia/HCA assumes the liability for all general and professional liability claims incurred and maintains the related reserve. Accordingly, no reserve for general and professional liability risks is recorded on the accompanying combined balance sheets. The cost of general and professional liability coverage is allocated by Columbia/HCA's captive insurance company to Triad based on actuarially determined estimates. The cost for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996 was approximately $23.8 million, $25.3 million and $23.8 million, respectively. Triad participates in a self-insured program for workers' compensation and health insurance administered by Columbia/HCA. The cost for the nine months ended September 30, 1998 and the years ended December 31, 1997 and 1996 was approximately $6.9 million, $9.6 million and $8.4 million, respectively. Management Fees Columbia/HCA incurs various corporate general and administrative expenses. These corporate overhead expenses are allocated to Triad based on net revenues. In the opinion of management, this allocation method is reasonable. The management fees allocated to Triad are not necessarily indicative of the expenses that would have been incurred if Triad had been a separate, independent entity and had otherwise managed these functions. Subsequent to the Distribution, Triad will be required to manage these functions and will be responsible for the expenses associated with the management of a separate public corporation. Disclosures about Segments of an Enterprise In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). F-24 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 2--ACCOUNTING POLICIES (CONTINUED) SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore, Triad will adopt the new requirements in the annual report following the Distribution. The identification of the reportable operating segments has not been determined by management at this time. Disclosures of Derivative Instruments In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. Because of Triad's minimal use of derivatives, management does not anticipate that the adoption of the new statement will have a significant effect on earnings or the financial position of Triad. NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is a defendant in several qui tam actions brought by private parties on behalf of the United States of America, which have been unsealed and served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated the False Claims Act for improper claims submitted to the government for reimbursement. The lawsuits seek damages of three times the amount of all Medicare or Medicaid claims (involving false claims) presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. On October 5, 1998, the United States Department of Justice announced that the Federal government had joined a qui tam action originally filed in 1993 in which Columbia/HCA is a defendant. The government has not intervened in the other qui tam actions unsealed to date. Columbia/HCA is aware of additional qui tam actions that remain under seal and believes that there are other sealed qui tam cases of which it is unaware. Columbia/HCA is a defendant in a number of other suits, which allege, in general, improper and fraudulent billing, overcharging, coding and physician referrals, as well as other violations of law. Certain of the suits have been conditionally certified as class actions. It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam and other actions, or whether any additional investigations or litigation will be commenced. If Columbia/HCA is found to have violated Federal or state laws relating to Medicare, Medicaid or similar programs, Columbia/HCA could be subject to substantial monetary fines, civil and criminal penalties, and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui tam and other actions may be substantial, and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more of such actions. Any such sanctions or losses could have a material adverse effect on Columbia/HCA's financial position and results of operations. F-25 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS (CONTINUED) Columbia/HCA has agreed to indemnify Triad in respect of certain liabilities arising out of or in connection with the foregoing matters. If any such indemnified liabilities were successfully asserted against Triad or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations, then such liabilities could have a material adverse effect on the financial position and results of Triad (See Note 11--Contingencies). NOTE 4--INCOME TAXES Provision for income taxes (benefit) consists of the following (dollars in millions):
NINE MONTHS YEARS ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------- 1998 1997 1996 ------------- ------ ----- Current: Federal.................................... $(15.1) $ (0.7) $39.7 State...................................... (2.8) (0.2) 7.4 Deferred: Federal.................................... (26.1) (10.0) 1.8 State...................................... (4.7) (1.8) 0.3 ------ ------ ----- $(48.7) $(12.7) $49.2 ====== ====== ===== A reconciliation of the federal statutory rate to the effective income tax rate follows: NINE MONTHS YEARS ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------- 1998 1997 1996 ------------- ------ ----- Federal statutory rate....................... 35.0 % 35.0 % 35.0% State income taxes, net of federal income tax benefit..................................... 3.7 3.0 4.3 Non-deductible intangible assets............. (1.1) (5.2) 2.2 Other items, net............................. (0.2) (0.9) 0.4 ------ ------ ----- Effective income tax rate.................... 37.4 % 31.9 % 41.9% ====== ====== =====
A summary of the items comprising the deferred tax assets and liabilities follows (dollars in millions):
DECEMBER 31, SEPTEMBER 30, 1998 1997 ------------------ ------------------ ASSETS LIABILITIES ASSETS LIABILITIES ------ ----------- ------ ----------- Depreciation and fixed asset basis differences........................ $ - $48.1 $ - $76.6 Doubtful accounts................... 29.9 - 26.1 - Compensation........................ 8.8 - 10.1 - Other............................... 2.6 8.2 3.9 9.3 ----- ----- ----- ----- $41.3 $56.3 $40.1 $85.9 ===== ===== ===== =====
F-26 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--INCOME TAXES (CONTINUED) Deferred income taxes of $37.5 million and $34.9 million at September 30, 1998 and December 31, 1997, respectively, are included in current assets. Noncurrent deferred income tax liabilities totaled $52.5 million and $80.7 million at September 30, 1998 and December 31, 1997, respectively. At September 30, 1998, state net operating loss carryforwards (expiring in years 1999 through 2003) available to offset future taxable income approximated $24.0 million. Utilization of net operating loss carryforwards in any one year may be limited and, in certain cases, result in a reduction of intangible assets. Net deferred tax assets related to such carryforwards are not significant. Columbia/HCA and Triad will enter into a tax sharing and indemnification agreement which will provide that Columbia/HCA will generally be responsible for all taxes that are allocable to periods prior to the distribution date and Columbia/HCA and Triad will each be responsible for its own tax liabilities for periods after the distribution date. NOTE 5--IMPAIRMENT OF LONG-LIVED ASSETS Triad adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of ("SFAS 121"), during the first quarter of 1996. SFAS 121 addresses accounting for the impairment of long-lived assets and long-lived assets to be disposed of, certain identifiable intangibles and goodwill related to those assets, and provides guidance for recognizing and measuring impairment losses. The statement requires that the carrying amount of impaired assets be reduced to fair value. During the third quarter of 1998 Triad decided to sell certain hospital facilities and surgery centers that were identified as not compatible with Triad's operating plans. The carrying value of the long-lived assets related to certain of these facilities (seven hospital facilities and one surgery center), of approximately $171.4 million, was reduced to fair value, based on estimates of selling values, for a total non-cash charge of $71.0 million. For the nine months ended September 30, 1998, these facilities to be divested had net revenues of approximately $242.5 million and incurred a loss from continuing operations before income tax benefit and the asset impairment charge of approximately $(43.7) million. Triad expects to complete the majority of these sales during the fourth quarter of 1998 and the first half of 1999. Triad recorded, during the fourth quarter of 1997, an impairment loss of approximately $13.7 million related to the write-off of intangibles and other long-lived assets of certain surgery centers and physician practices where the recorded asset values were not deemed to be fully recoverable based upon the operating results trends and projected future cash flows. These assets are now recorded at estimated fair value. The impairment charges did not have a significant impact on Triad's cash flows and are not expected to significantly impact cash flows for future periods. As a result of the write-downs, depreciation and amortization expense related to these assets will decrease in future periods. In the aggregate, the net effect of the change in depreciation and amortization expense is not expected to have a material effect on operating results for future periods. NOTE 6--DISCONTINUED OPERATIONS During the third quarter of 1997, Columbia/HCA and Triad implemented plans to sell their home health businesses. As a result of the plans to divest these businesses, the combined financial statements reflect the results of operations and net assets of the home health businesses to be disposed of as discontinued operations. F-27 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 6--DISCONTINUED OPERATIONS (CONTINUED) Revenues of the home health businesses to be disposed of were approximately $39.8 million for the nine months ended September 30, 1998, and $82.1 million and $89.0 million for the years ended December 31, 1997 and 1996, respectively. Triad anticipates that sales of these home health businesses will be completed during the fourth quarter of 1998 and the first half of 1999. The estimated, after-tax loss expected to be incurred upon the sale of these businesses of $3.0 million was recorded during the fourth quarter of 1997 and is presented in the "Discontinued operations" section of the combined statements of operations. NOTE 7--ACCOUNTING CHANGE During 1997, Triad changed its method of accounting for start-up costs. The change involved expensing these costs as incurred, rather than capitalizing and subsequently amortizing such costs. Triad believes the new method is preferable due to certain changes in business strategy and reviews of emerging accounting guidance on accounting for similar (i.e., start-up, software system training and process reengineering) costs. The change in accounting principle resulted in the write-off of the costs capitalized as of January 1, 1997. The cumulative effect of the write-off, which totals $2.9 million (net of tax benefit), has been expensed and reflected in the statements of operations for the year ended December 31, 1997 and the nine months ended September 30, 1997 (Unaudited). Had the new method been used in the past, the pro forma effect on prior years would have primarily affected 1996 (such costs incurred for periods prior to 1996 are considered immaterial to operations for those periods). The pro forma effect on the years ended December 31, 1997 and 1996 follows (dollars in millions):
1997 1996 ------------------ ------------------ AS AS REPORTED PRO FORMA REPORTED PRO FORMA -------- --------- -------- --------- Income (loss) from continuing operations......................... $(27.0) $(27.0) $69.3 $66.4 Net income (loss)................... $(27.3) $(24.4) $76.6 $73.7
NOTE 8--LONG TERM DEBT A summary of long-term debt follows (including related interest rates at September 30, 1998), (dollars in millions):
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Total debt, average life of 5 years (rates averaging 5.6%)............................... $14.8 $20.9 Less amounts due within one year............... 0.9 1.1 ----- ----- $13.9 $19.8 ===== =====
In connection with the Distribution, all amounts payable by Triad to Columbia/HCA (included in "Equity, investments by and advances from Columbia/HCA" on the Combined Financial Statements) will be eliminated, and Triad will assume certain indebtedness from Columbia/HCA. NOTE 9--STOCK BENEFIT PLANS Triad employees have participated in the Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan (the "1992 Plan"). Under the 1992 Plan, stock options are generally granted at no less than the market F-28 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--STOCK BENEFIT PLANS (CONTINUED) price on the date of grant. Options are exercisable in whole or in part beginning two to five years after the grant and ending ten years after the grant. The total number of options granted to Triad employees under Columbia/HCA's option plan was approximately 0.4 million in the nine months ended September 30, 1998, approximately 1.2 million in 1997 and approximately 0.6 million in 1996. Immediately following the Distribution, nonvested Columbia/HCA stock options held by Triad employees will be cancelled and replaced with Triad stock option awards. Triad stock options will be granted in amounts such that the fair value will be equal to that of the cancelled nonvested Columbia/HCA stock options. The vested Columbia/HCA stock options held by Triad employees will be converted into a combination of Triad, Life Point Hospitals Inc. and Columbia/HCA stock options in a manner that preserves the pre-spin-off intrinsic value and the pre-spin-off ratio of the exercise prices to the underlying market value of the related common stock. At September 30, 1998 there were approximately 2.8 million Columbia/HCA stock options held by Triad employees. That amount includes an aggregate of approximately 2.3 million options that are subject to replacement with Triad stock option awards. Triad cannot currently determine the number of shares of its common stock that will be subject to substitute awards after the Distribution. Triad has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, but continues to measure stock-based compensation cost in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. If Triad had measured compensation cost for the Columbia/HCA stock options granted to its employees in the nine months ended September 30, 1998 and the years 1997 and 1996 under the fair value based method prescribed by SFAS 123, the net income (loss) would have been changed to the pro forma amounts set forth below (dollars in millions):
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 1996 ----------------- ------ ----- Net income (loss) Reported................................... $(82.8) $(27.3) $76.6 Pro forma.................................. $(84.2) $(28.6) $76.2
The fair values of Columbia/HCA stock options granted to Triad employees used to compute pro forma net income disclosures were estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions used by Columbia/HCA:
1998 1997 1996 ------- ------- ------- Risk free interest rate.............................. 4.26% 5.61% 5.81% Expected life........................................ 6 years 6 years 6 years Expected volatility.................................. 23.90% 23.90% 23.90% Expected dividend yield.............................. .28% .23% .19%
The weighted-average fair values of Columbia/HCA stock options granted to Triad employees during the nine months ended September 30, 1998 and the years ended 1997 and 1996 were $ 8.49, $12.20 and $13.36 per option, respectively. The pro forma amounts above are not necessarily representative of the effects of stock-based awards on future pro forma net income because (1) future grants of employee stock options by management may not be comparable to awards made to employees while Triad was a part of Columbia/HCA, (2) the assumptions used F-29 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9--STOCK BENEFIT PLANS (CONTINUED) to compute the fair value of any stock option awards will be specific to Triad and therefore may not be comparable to the Columbia/HCA assumptions used and (3) they exclude the pro forma compensation expense related to unvested stock options granted before 1996. NOTE 10--RETIREMENT PLANS Triad participates in Columbia/HCA's defined contribution retirement plans, which cover substantially all employees. Benefits are determined primarily as a percentage of a participant's earned income and are vested over specific periods of employee service. Retirement plan expense was $18.3 million for the nine months ended September 30, 1998 and $20.9 million and $17.7 million for the years ended December 31, 1997 and 1996, respectively. Amounts approximately equal to retirement plan expense are funded annually. NOTE 11--CONTINGENCIES Significant Legal Proceedings Various lawsuits, claims and legal proceedings have been and are expected to be instituted or asserted against Columbia/HCA and Triad, including those relating to shareholder derivative and class action complaints; purported class action lawsuits filed by patients and payers alleging, in general, improper and fraudulent billing, coding and physician referrals, as well as other violations of law; certain qui tam or "whistleblower" actions alleging, in general, unlawful claims for reimbursement or unlawful payments to physicians for the referral of patients, as well as other violations and litigation matters. While the amounts claimed may be substantial, the ultimate liability cannot be determined or reasonably estimated at this time due to the considerable uncertainties that exist. Therefore, it is possible that Columbia/HCA's and Triad's results of operations, financial position and liquidity in a particular period could be materially, adversely affected upon the resolution of certain of these contingencies. (See Note 3--Columbia/HCA Investigations, Litigation and Indemnification Rights, for a description of the ongoing government investigations and Columbia/HCA's obligations to indemnify Triad in respect of certain liabilities relating thereto). General Liability Claims Triad is subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians staff privileges. In certain of these actions the claimants have asked for punitive damages against Triad, which are usually not covered by insurance. It is management's opinion that the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on Triad's results of operations or financial position. NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS A summary of other current liabilities follows (in millions):
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------- ------------ Employee benefit plans............................ $37.6 $20.8 Taxes, other than income.......................... 13.8 9.1 Other............................................. 4.0 10.9 ----- ----- $55.4 $40.8 ===== =====
F-30 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS (CONTINUED) A summary of activity in Triad's allowances for doubtful accounts follows (in millions):
ACCOUNTS BALANCES AT ADDITIONS WRITTEN OFF, BALANCES BEGINNING CHARGED TO NET OF AT END OF PERIOD EXPENSE RECOVERIES OF PERIOD ----------- ---------- ------------ --------- Allowances for doubtful accounts: Year ended December 31, 1996...................... $ 62.1 119.9 $ (74.7) $107.3 Year ended December 31, 1997...................... 107.3 162.4 (116.4) 153.3 Nine months ended September 30, 1998.................. 153.3 130.2 (118.0) 165.5
NOTE 13--UNAUDITED INTERIM FINANCIAL INFORMATION The statement of operations and changes in cash flows for the nine months ended September 30, 1997 (interim financial statements) have been prepared by Triad and are unaudited. The interim financial statements have been prepared in conformity with the accounting principles applied in the audited combined financials for the nine months ended September 30, 1998. In the opinion of management, the interim financial information includes all material adjustments necessary for a fair presentation. The interim financial statements should be read in conjunction with the audited combined financial statements appearing herein. Quarterly results of operations information follows (in millions):
1998 ---------------------- FIRST SECOND THIRD ------ ------ ------ Revenues............................. $470.7 $456.7 $449.0 Net loss............................. $ (9.5) $(13.3) $(60.0)(a) 1997 --------------------------------- FIRST SECOND THIRD FOURTH ------ ------ ------ ------ Revenues............................. $478.6 $461.5 $422.9 $423.9 Net income (loss): Income (loss) before accounting change............................ $ 26.8 $ 18.8 $ (8.5) $(61.5)(b) Cumulative effect of accounting change............................ (2.9) - - - ------ ------ ------ ------ Net income (loss)................ $ 23.9 $ 18.8 $ (8.5) $(61.5) ====== ====== ====== ======
- - -------- (a) During the third quarter of 1998, Triad recorded a $71.0 million pretax charge related to the impairment of certain long-lived assets (See Note 5-- Impairment of Long-lived Assets). (b) During the fourth quarter of 1997, Triad recorded a $13.7 million pretax charge related to the impairment of certain long-lived assets (See Note 5-- Impairment of Long-lived Assets). F-31 EX-3.1 3 CERTIFICATE OF INCORPORATION LIFEPOINT HOSPITALS INC ================================================================================ EXHIBIT 3.1 CERTIFICATE OF INCORPORATION OF LIFEPOINT HOSPITALS, INC. ______________ DELAWARE ================================================================================ CERTIFICATE OF INCORPORATION OF LIFEPOINT HOSPITALS, INC. FIRST: The name of the Corporation is LifePoint Hospitals, Inc. SECOND: The address of the Corporation's registered office in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle, Delaware 19805. The name of its registered agent at such address is Corporation Service Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. FOURTH: The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue is ________ Million (________) shares, divided into two classes of which ________ Million (________) shares, par value $.01 per share, shall be designated Preferred Stock, and ________ Million (________) shares, par value $.01 per share, shall be designated Common Stock. A. Preferred Stock 1. Issuance. The Board of Directors is expressly authorized, -------- subject to limitations prescribed by law, to provide for the issuance of shares of Preferred Stock in one or more series, to establish the number of shares to be included in each such series, and to fix the designations, powers, preferences, and rights of the shares of each such series, and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of at least 80% of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, without a separate vote of the holders of the Preferred Stock, unless a vote of any such holders is required pursuant to the terms of any such series of Preferred Stock. 2. Series A Junior Participating Preferred Stock. ---------------------------------------------- Section 1. Designation and Amount. ________ million ---------------------- (________) shares of the Preferred Stock of the Corporation shall be designated as "Series A Junior Participating Preferred Stock," par value $.01 per share (the "Series A Preferred Stock"). The number of shares of such series of Preferred Stock may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of such series of Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. -1- Section 2. Dividends and Distributions. ---------------------------- (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section 2 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in -2- which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. The holders of shares of Series A ------------- Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein, in a resolution or resolutions adopted by the Board of Directors providing for the issuance of a series of Preferred Stock or any similar stock (a "Certificate of Designation"), or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation entitled to vote generally in the election of directors shall vote together as a single class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as otherwise provided herein, or by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. -3- Section 4. Certain Restrictions. --------------------- (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 of paragraph A of this Article Fourth are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock, and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided, however, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (both as to dividends and upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred ----------------- Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein or in any Certificate of Designation providing for the issuance of a series of Preferred Stock or any similar stock or as otherwise required by law. -4- Section 6. Liquidation, Dissolution or Winding Up. Upon any -------------------------------------- liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided, however, that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock, and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation, Merger, etc. In case the Corporation -------------------------- shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the -5- denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 8. No Redemption. The shares of Series A Preferred Stock ------------- shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank, with ---- respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. Section 10. Amendment. This Certificate of Incorporation shall --------- not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. B. Common Stock. Section 1. Dividends. Subject to the preferential rights, if --------- any, of the holders of any series of Preferred Stock then outstanding, the holders of the Common Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, dividends payable either in cash, in property or in shares of Common Stock or other securities of the Corporation. Section 2. Voting Rights. Subject to the rights, if any, of the ------------- holders of any series of Preferred Stock then outstanding, and except as otherwise required by law, the holders of the Common Stock shall exclusively possess all voting power, and at every annual or special meeting of stockholders of the Corporation, each holder of Common Stock shall be entitled to one vote, in person or by proxy, for each share of Common Stock standing in such holder's name on the books of the Corporation. Section 3. Liquidation, Dissolution or Winding Up. Upon any ----------- voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of the Common Stock shall be entitled to share ratably in all assets of the Corporation available for distribution to its stockholders, subject to the preferential rights, if any, of the holders of any series of Preferred Stock then outstanding. FIFTH: The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The Board of Directors may exercise all such authority and powers of the Corporation and do all such lawful acts and things as are not by statute or this Certificate of Incorporation directed or required to be exercised or done by the stockholders. A. Number of Directors. The number of directors of the Corporation (exclusive of directors to be elected by the holders of one or more series of the Preferred Stock of -6- the Corporation which may be outstanding, voting separately as a series or class) shall be fixed from time to time by action of not less than a majority of the members of the Board of Directors then in office, but in no event shall such number of directors of the Corporation be less than three nor more than fifteen. Unless changed by the Board of Directors pursuant hereto, the number of directors shall be seven. B. Classes. The directors, other than those who may be elected by the holders of any series of Preferred Stock under specified circumstances, shall be divided with respect to the time for which they severally hold office, into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the 2000 annual meeting of stockholders, the term of office of the second class to expire at the 2001 annual meeting of stockholders and the term of office of the third class to expire at the 2002 annual meeting of stockholders. At each annual meeting of stockholders, commencing with the 2000 annual meeting, (i) directors shall be elected to succeed those directors whose terms expire for a term of office to expire at the third succeeding annual meeting of stockholders after their election, and (ii) if authorized by a resolution of the Board of Directors, directors may be elected to fill any vacancy in the Board of Directors, regardless of how such vacancy was created. Directors need not be stockholders. All directors shall hold office until the expiration of the term for which elected and until their successors are elected, except in the case of the death, resignation, disqualification or removal of any director. C. Stockholder Nomination of Director Candidates and Introduction of Business. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the By-Laws of the Corporation. D. Vacancies. Subject to the rights, if any, of the holders of any series of Preferred Stock then outstanding, and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, disqualification or removal may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires or, in the case of newly created directorships, shall hold office until such time as determined by the directors electing such new director (in a manner consistent with paragraph B of this Article Fifth). No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. E. Removal. Subject to the rights, if any, of the holders of any series of Preferred Stock then outstanding, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. -7- SIXTH: Subject to the rights, if any, of the holders of any series of Preferred Stock then outstanding, no action required to be taken or which may be taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting, and the power of the stockholders to consent in writing, without a meeting, to the taking of any action, including (without limitation) the power of stockholders to adopt or amend the By-Laws of the Corporation by written consent, is hereby specifically denied. SEVENTH: Special meetings of the stockholders of the Corporation may be called only by (a) the Chairman of the Board of Directors, if one shall have been elected or (b) the Chief Executive Officer of the Corporation, and, in addition, a special meeting shall be called by the Chairman of the Board or the Chief Executive Officer at the request in writing of a majority of the Board of Directors. The ability of the stockholders to call a special meeting is hereby specifically denied. EIGHTH: In furtherance and not in limitation of the powers conferred upon it by the laws of the State of Delaware, the Board of Directors shall have the power to adopt, amend, alter or repeal the By-Laws of the Corporation. The Corporation's By-Laws may also be adopted, amended, altered or repealed by the affirmative vote of the holders of at least 80% of the voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. NINTH: Elections of directors need not be by written ballot unless the By- Laws of the Corporation shall otherwise provide. TENTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that the foregoing shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law as so amended. Any repeal or modification of this Article Tenth shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. ELEVENTH: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of the Delaware General Corporation Law or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of the Delaware General Corporation Law, -8- order a meeting of the creditors or class of creditors, or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which said application has been made, be binding on all the creditors or class of creditors, or on all of the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. TWELFTH: A. As used in this Article Twelfth, the following terms shall have the meanings set forth below: "Business Combination" shall mean (a) any merger or consolidation of the Corporation or a Subsidiary with a Related Person, (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition other than in the ordinary course of business to or with a Related Person of any assets of the Corporation or a Subsidiary having an aggregate fair market value of [$25,000,000] or more, (c) the issuance or transfer by the Corporation of any shares of Voting Stock or securities convertible into or exercisable for such shares (other than by way of pro rata distribution to all stockholders) to a Related Person, (d) any recapitalization, merger or consolidation that would have the effect of increasing the voting power of a Related Person, (e) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation or a Subsidiary proposed, directly or indirectly, by or on behalf of a Related Person, (f) any merger or consolidation of the Corporation with another Person proposed, directly or indirectly, by or on behalf of a Related Person unless the entity surviving or resulting from such merger or consolidation has a provision in its certificate or articles of incorporation, charter or similar governing instrument which is substantially identical to this Article Twelfth or (g) any agreement, contract or other arrangement or understanding providing, directly or indirectly, for any of the transactions described in clauses (a) through (f) above. "Related Person" shall mean any individual, partnership, corporation, trust or other Person which, together with its "affiliates" and "associates," as defined in Rule 12b-2 under the Exchange Act as in effect on ________ __, 1999, and together with any other individual, partnership, corporation, trust or other Person with which it or they have any agreement, contract or other arrangement or understanding with respect to acquiring, holding, voting or disposing of Voting Stock, "beneficially owns" (within the meaning of Rule 13d-3 under the Exchange Act on said date) an aggregate of 10% or more of the outstanding Voting Stock. A Related Person, its affiliates and associates and all such other individuals, partnerships, corporations and other Persons with whom it or they have any such agreement, contract or other arrangement or understanding, shall be deemed a single Related Person for purposes of this Article Twelfth; provided, however, that the members of the Board of Directors of the Corporation shall not be deemed to be associates or otherwise to constitute a Related Person solely by reason of their board membership. A person who is a Related Person as of (i) the time any definitive -9- agreement relating to a Business Combination is entered into, (ii) the record date for the determination of stockholders entitled to notice of and to vote on a Business Combination or (iii) immediately prior to the consummation of a Business Combination, shall be deemed a Related Person for purposes of this Article Twelfth. "Continuing Director" shall mean any member of the Board of Directors of the Corporation who is not an "affiliate" or "associate" of the Related Person and was a member of the Board of Directors prior to the time that such Related Person became a Related Person, and any successor of a Continuing Director who is unaffiliated with such Related Person and is recommended to succeed a Continuing Director by a majority of the Continuing Directors. "Person" shall mean any individual, firm, corporation or other entity. "Subsidiary" shall mean with respect to any Person, (i) any corporation in which such Person, directly or indirectly, owns or controls, at the time of determination, at least a majority in interest of the outstanding voting stock (having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not stock of any other class or classes of such corporation shall have or might have voting power by reason of the occurrence of a contingency); or (ii) any non-corporate entity in which such Person either (a) directly or indirectly, at the time of determination, has at least a majority ownership interest, or (b) at the date of determination, is a general partner or an entity performing similar functions (for example, manager of a limited liability company or a trustee of a trust). "Voting Stock" shall mean any shares of the Corporation entitled to vote generally in the election of directors. "Entire Board of Directors" shall mean the total number of directors which the Corporation would have if there were no vacancies. "Market Value" shall mean the average of the high- and low-quoted sales price on the date in question (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) of a share on the Composite Tape for the New York Stock Exchange Listed Stocks, or, if the shares are not listed or admitted to trading on such exchange, on the principal United States securities exchange registered under the Exchange Act on which the shares are listed or admitted to trading, or, if the shares are not listed or admitted to trading on any such exchange, the mean between the closing high-bid and low-asked quotations with respect to a share on such date as quoted on the National Association of Securities Dealers Automated Quotations System, or similar system then in use, or, if no such quotations are available, the fair market value on such date of a share as at least 66 2/3% of the Continuing Directors shall determine. B. In addition to any other vote required by this Certificate of Incorporation or the Delaware General Corporation Law, the affirmative vote of the holders of not less than 85% of the outstanding Voting Stock held by stockholders other than a Related Person by or with whom or on whose behalf, directly or indirectly, a Business -10- Combination is proposed, voting as a single class, shall be required for the approval or authorization of such Business Combination; provided, however, that the 85% voting requirement shall not be applicable and such Business Combination may be approved by the vote required by law or by any other provision of this Certificate of Incorporation if either: 1. The Business Combination is approved by the Board of Directors of the Corporation by the affirmative vote of at least 66 2/3% of the Continuing Directors, or 2. All of the following conditions are satisfied: (A) The aggregate amount of cash and the fair market value of the property, securities or other consideration to be received per share of capital stock of the Corporation in the Business Combination by the holders of capital stock of the Corporation, other than the Related Person involved in the Business Combination, shall not be less than the highest of (i) the highest per share price (including brokerage commissions, soliciting dealers' fees, and dealer-management compensation, and with appropriate adjustments for recapitalizations, stock splits, stock dividends and like transactions and distributions) paid by such Related Person in acquiring any of its holdings of such class or series of capital stock, (ii) the highest per share Market Value of such class or series of capital stock within the twelve-month period immediately preceding the date the proposal for such Business Combination was first publicly announced or (iii) the book value per share of such class or series of capital stock, determined in accordance with generally accepted accounting principles, as of the last day of the month immediately preceding the date the proposal for such Business Combination was first publicly announced; (B) The consideration to be received in such Business Combination by holders of capital stock other than the Related Person involved shall, except to the extent that a stockholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the Related Person in acquiring capital stock already owned by it, provided, however, that if the Related Person has paid for capital stock with varying forms of consideration, the form of consideration for shares of capital stock acquired in the Business Combination by the Related Person shall either be cash or the form used to acquire the largest number of shares of capital stock previously acquired by it; and (C) A proxy statement responsive to the requirements of the Exchange Act and regulations promulgated thereunder, whether or not the Corporation is then subject to such requirements, shall be mailed to the stockholders of the Corporation for the purpose of soliciting stockholder approval of such Business Combination and shall contain at the front thereof, in a prominent place, (i) any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors may choose to state and (ii) the opinion of a reputable investment banking firm selected by the Continuing Directors as to the fairness of the terms of such Business Combination, from a -11- financial point of view, to the stockholders (other than the Related Person) of the Corporation. C. A Related Person shall be deemed for purposes of this Article Twelfth to have acquired a share of the Corporation at the time when such Related Person became the beneficial owner thereof (as such term is defined in paragraph A of this Article Twelfth). With respect to shares owned by affiliates, associates and other Persons whose ownership is attributed to a Related Person, if the price paid by such Related Person for such shares is not determinable, the price so paid shall be deemed to be the higher of (i) the price paid upon acquisition thereof by the affiliate, associate or other Person or (ii) the Market Value of the shares in question at the time when the Related Person became the beneficial owner thereof. For purposes of this Article Twelfth, in the event of a Business Combination upon consummation of which the Corporation would be the surviving corporation or would continue to exist (unless it is provided, contemplated or intended that as part of such Business Combination a plan of liquidation or dissolution of the Corporation will be effected), the term "other consideration to be received" in paragraph B.2.(A) of this Article Twelfth shall include (without limitation) common stock or other capital stock of the Corporation retained by stockholders of the Corporation (other than Related Persons who are parties to such Business Combination). Nothing contained in this Article Twelfth shall be construed to relieve any Related Person from any fiduciary obligation imposed by law. D. Notwithstanding any other provision of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that a lesser percentage may be permitted by law), any amendment, addition, alteration, change or repeal of this Article Twelfth, or any other amendment of this Certificate of Incorporation or the By-Laws of the Corporation inconsistent with or modifying or permitting circumvention of this Article Twelfth, must first be proposed by the Board of Directors of the Corporation, upon the affirmative vote of at least 66 2/3% of the directors then in office at a duly constituted meeting of the Board of Directors called for such purpose, and thereafter approved by the affirmative vote of the holders of not less than 85% of the then outstanding Voting Stock held by stockholders other than a Related Person by or with whom or on whose behalf, directly or indirectly, a Business Combination is proposed, voting as a single class; provided, however, that this paragraph D shall not apply to, and such 85% vote shall not be required for, any such amendment, addition, alteration, change or repeal recommended to stockholders of the Corporation by the affirmative vote of not less than 66 2/3% of the Continuing Directors. For the purposes of this paragraph D only, if at the time when any such amendment, addition, alteration, change or repeal is under consideration there is no proposed Business Combination, the term "Continuing Directors" shall mean the Entire Board of Directors. THIRTEENTH: The Board of Directors, each committee of the Board of Directors and each individual director, in discharging their respective duties under applicable law and this Certificate of Incorporation and in determining what they each believe to be in the best interests -12- of the Corporation and its stockholders, may consider the effects, both short- term and long-term, of any action or proposed action taken or to be taken by the Corporation, the Board of Directors or any committee of the Board on the interests of (i) the employees, associates, associated physicians, distributors, patients or other customers, suppliers or creditors of the Corporation and its subsidiaries and (ii) the communities in which the Corporation and its subsidiaries own or lease property or conduct business, all to the extent that the Board of Directors, any committee of the Board of Directors or any individual director deems pertinent under the circumstances (including the possibility that the interests of the Corporation may best be served by the continued independence of the Corporation); provided, however, that the provisions of this Article Thirteenth shall not limit in any way the right of the Board of Directors to consider any other lawful factors in making its determinations, including, without limitation, the effects, both short-term and long-term, of any action or proposed action on the Corporation or its stockholders directly; and provided further, that this Article Thirteenth shall be deemed solely to grant discretionary authority to the Board of Directors, each committee of the Board of Directors and each individual director and shall not be deemed to provide to any specific constituency any right to be considered. FOURTEENTH: Each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in an actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "Proceeding"), by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "Indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as such a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the full extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), or by other applicable law as then in effect, against all expense, liability and loss (including attorneys' fees, judgments, fines, excise taxes under the Employee Retirement Income Security Act of 1974, as amended from time to time ("ERISA"), penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such Indemnitee in connection therewith. A. Procedure. Any indemnification under this Article Fourteenth (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Indemnitee is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, as the same exists or hereafter may be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment). Such determination shall be made (a) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding (the "Disinterested Directors"), or (b) -13- if such a quorum of Disinterested Directors is not obtainable, or, even if obtainable, a quorum of Disinterested Directors so directs, by independent legal counsel in a written opinion, or (c) by the stockholders. B. Advances For Expenses. Costs, charges and expenses (including attorneys' fees) incurred by a director or officer of the Corporation in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay all amounts so advanced in the event that it shall ultimately be determined that such director or officer is not entitled to be indemnified by the Corporation as authorized in this Article Fourteenth. Such costs, charges and expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the majority of the Disinterested Directors deems appropriate. The majority of the Disinterested Directors may, in the manner set forth above, and upon approval of such Indemnitee, authorize the Corporation's counsel to represent such person, in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. C. Procedure for Indemnification. Any indemnification or advance of costs, charges and expenses under this Article Fourteenth, shall be made promptly, and in any event within 60 days upon the written request of the Indemnitee. The right to indemnification or advances as granted by this Article Fourteenth, shall be enforceable by the Indemnitee in any court of competent jurisdiction, if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such Indemnitee's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under this Article Fourteenth, where the required undertaking, if any, has been received by the Corporation) that the Indemnitee has not met the standard of conduct set forth in the Delaware General Corporation Law, as the same exists or hereafter may be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the Indemnitee is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, as the same exists or hereafter may be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights that said law permitted the Corporation to provide prior to such amendment), nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel and its stockholders) that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. -14- D. Other Rights; Continuation of Right to Indemnification. The indemnification and advancement of expenses provided by this Article Fourteenth shall not be deemed exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any law, by- law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office or while employed by or acting as agent for the Corporation, and shall continue as to a person who has ceased to be a director, officer, employee or agent, and shall inure to the benefit of the estate, heirs, executors and administrators of such person. All rights to indemnification under this Article Fourteenth, shall be deemed to be a contract between the Corporation and each director, officer, employee or agent of the Corporation who serves or served in such capacity at any time while this Article Fourteenth, is in effect. Any repeal or modification of this Article Fourteenth, or any repeal or modification of relevant provisions of the Delaware General Corporation Law or any other applicable laws shall not in any way diminish any rights to indemnification of such director, officer, employee or agent or the obligations of the Corporation arising hereunder with respect to any action, suit or proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such modification or repeal. For the purposes of this Article Fourteenth, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director, officer, employee or agent of such a constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article Fourteenth, with respect to the resulting or surviving corporation, as he would if he or she had served the resulting or surviving corporation in the same capacity. E. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her or on his or her behalf in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this Article Fourteenth; provided, however, that such insurance is available on acceptable terms, which determination shall be made by a vote of a majority of the Board of Directors. F. Savings Clause. If this Article Fourteenth, or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each person entitled to indemnification under paragraph A of this Article Fourteenth, as to all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes, penalties and amounts to be paid in settlement) actually and reasonably incurred or suffered by such person and for which indemnification is available to such person pursuant to this Article Fourteenth, to the full extent permitted by any applicable portion of this Article Fourteenth, that shall not have been invalidated and to the full extent permitted by applicable law. -15- FIFTEENTH: In furtherance and not in limitation of the powers conferred by law or in this Certificate of Incorporation, the Board of Directors (and any committee of the Board of Directors) is expressly authorized, to the extent permitted by law, to take such action or actions as the Board or such committee may determine to be reasonably necessary or desirable to (A) encourage any person to enter into negotiations with the Board of Directors and management of the Corporation with respect to any transaction which may result in a change in control of the Corporation which is proposed or initiated by such person or (B) contest or oppose any such transaction which the Board of Directors or such committee determines to be unfair, abusive or otherwise undesirable with respect to the Corporation and its business, assets or properties or the stockholders of the Corporation, including, without limitation, the adoption of such plans or the issuance of such rights, options, capital stock, notes, debentures or other evidences of indebtedness or other securities of the Corporation, which rights, options, capital stock, notes, evidences of indebtedness and other securities (i) may be exchangeable for or convertible into cash or other securities on such terms and conditions as may be determined by the Board or such committee and (ii) may provide for the treatment of any holder or class of holders thereof designated by the Board of Directors or any such committee in respect of the terms, conditions, provisions and rights of such securities which is different from, and unequal to, the terms, conditions, provisions and rights applicable to all other holders thereof. SIXTEENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, and to add or adopt new provisions, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. In addition to any affirmative vote required by applicable law or any other provision of this Certificate of Incorporation or specified in any agreement, and in addition to any voting rights granted to or held by the holders of any series of Preferred Stock, the affirmative vote of the holders of not less than 80% of the voting power of all securities of the Corporation entitled to vote generally in the election of directors shall be required to amend, alter, change or repeal, or to add or adopt any provisions inconsistent with, Articles Fifth, Sixth, Seventh, Eight, Tenth, Eleventh, Thirteenth, Fourteenth, Fifteenth and Sixteenth of this Certificate of Incorporation. SEVENTEENTH: The name and mailing address of the incorporator is Frank R. Adams, Esq., Dewey Ballantine LLP, 1301 Avenue of the Americas, New York, New York 10019. IN WITNESS WHEREOF, the undersigned incorporator hereby acknowledges that the foregoing certificate of incorporation is his act and deed and that the facts stated therein are true on this __ day of ________, 1999. By: ---------------------------- Frank R. Adams Incorporator -16- EX-3.2 4 BY-LAWS OF LIFEPOINT HOSPITALS INC ================================================================================ EXHIBIT 3.2 BY-LAWS OF LIFEPOINT HOSPITALS, INC. ______________ DELAWARE ================================================================================ ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office of the Corporation shall be within the State of Delaware in the City of Wilmington, County of New Castle. SECTION 2. OTHER OFFICES. The Corporation may also have an office or offices other than said registered office at such place or places, either within or without the State of Delaware, as the Board of Directors shall from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE OF MEETINGS. All meetings of the stockholders for the election of directors or for any other purpose shall be held at any such place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of meeting or in a duly executed waiver thereof. SECTION 2. ANNUAL MEETING. The annual meeting of stockholders shall be held at such date and time as shall be designated from time to time by the Board of Directors and stated in the notice of meeting or in a duly executed waiver thereof. At such annual meeting, the stockholders shall elect, by a plurality vote, members of a Board of Directors and transact such other business as may properly be brought before the meeting. SECTION 3. SPECIAL MEETINGS. Special meetings of the stockholders of the Corporation may be called only by (a) the Chairman of the Board of Directors, if one shall have been elected or (b) the Chief Executive Officer of the Corporation, and, in addition, a special meeting shall be called by the Chairman of the Board or the Chief Executive Officer at the request in writing of a majority of the Board of Directors. The ability of the stockholders to call a special meeting is hereby specifically denied. -1- SECTION 4. NOTICE OF MEETINGS. Except as otherwise expressly required by statute, written notice of each annual and special meeting of stockholders stating the date, place and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given to each stockholder of record entitled to vote thereat not less than ten nor more than sixty days before the date of the meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Notice shall be given personally or by mail and, if by mail, shall be sent in a postage prepaid envelope, addressed to the stockholder at the address appearing on the records of the Corporation. Notice by mail shall be deemed given at the time when the same shall be deposited in the United States mail, postage prepaid. Notice of any meeting shall not be required to be to any person who attends such meeting, except when such person attends the meeting in person or by proxy for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, or who, either before or after the meeting, shall submit a signed written waiver of notice, in person or by proxy. Neither the business to be transacted at, nor the purpose of, an annual or special meeting of stockholders need be specified in any written waiver of notice. SECTION 5. LIST OF STOCKHOLDERS. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city, town or village where the meeting is to be held, which place shall be specified in the notice of meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 6. QUORUM. The holders of a majority of the voting power of the issued and outstanding stock of the Corporation entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of stockholders, except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented by proxy at any meeting of stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented by proxy. At such adjourned meeting at which a quorum shall be present or represented by proxy, any business may be transacted which might have been transacted at the meeting as originally called. If the adjournment is for more than thirty days, or, if -2- after adjournment a new record date is set, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 7. ORGANIZATION. At each meeting of stockholders, the Chairman of the Board, if one shall have been elected, or, in his or her absence or if one shall not have been elected, the Chief Executive Officer, shall act as chairman of the meeting. The Secretary or, in his or her absence or inability to act, the person whom the chairman of the meeting shall appoint secretary of the meeting, shall act as secretary of the meeting and keep the minutes thereof. SECTION 8. ORDER OF BUSINESS. The order of business at all meetings of the stockholders shall be as determined by the chairman of the meeting, SECTION 9. VOTING. Except as otherwise provided by statute or the Certificate of Incorporation, each stockholder of the Corporation shall be entitled at each meeting of stockholders to one vote for each share of capital stock of the Corporation standing in his or her name on the record of stockholders of the Corporation: (a) on the date fixed pursuant to the provisions of Section 7 of Article V of these By-Laws as the record date for the determination of the stockholders who shall be entitled to notice of and to vote at such meeting; or (b) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice thereof shall be given. Each stockholder entitled to vote at any meeting of stockholders may authorize another person or persons to act for him or her by a proxy signed by such stockholder or his or her attorney-in-fact, but no proxy shall be voted after three years from its date, unless the proxy provides for a longer period. Any such proxy shall be delivered to the secretary of the meeting at or prior to the time designated in the order of business for so delivering such proxies. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this paragraph may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. When a quorum is present at any meeting, the vote of the holders of a majority of the voting power of the issued and outstanding stock of the Corporation entitled to vote thereon, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute or of the Certificate of Incorporation or of these By-Laws, a different -3- vote is required, in which case such express provision shall, govern and control the decision of such question. Unless required by statute, or determined by the chairman of the meeting to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his or her proxy, and shall state the number of shares voted. SECTION 10. INSPECTORS. The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof and make a written report thereof. If any of the inspectors so appointed shall fail to appear or shall be unable to act, the chairman of the meeting shall appoint one or more inspectors. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his or her ability. The inspectors shall ascertain the number of shares of capital stock of the Corporation outstanding and the voting power of each, determine the number of shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors and certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. No director or candidate for the office of director shall act as an inspector of an election of directors, or assist an inspector in the performance of such duties. Inspectors need not be stockholders. SECTION 11. NOMINATIONS AND STOCKHOLDER BUSINESS. Nominations of persons for election to the Board of Directors and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (a) pursuant to the Corporation's notice with respect to such meeting, (b) by or at the direction of the Board of Directors or (c) by any stockholder of record of the Corporation who was a stockholder of record at the time of the giving of the notice provided for in this Section 11 who is entitled to vote at the meeting and who has complied with the notice procedures set forth in this Section 11. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to this Section 11, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation, such business must be a proper matter for stockholder action under the Delaware General Corporation Law and, if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, solicits or participates in the solicitation of proxies in support of such proposal or nomination, the stockholder must have timely indicated such stockholder's, or such beneficial owner's, intention to do so as hereinafter provided. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than 90 days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that if the date -4- of the annual meeting is advanced more than 30 days prior to or delayed more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person as would be required to be disclosed in solicitations of proxies for the election of such nominees as directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such person's written consent to serve as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner, (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) whether either such stockholder or beneficial owner intends to solicit or participate in the solicitation of proxies in favor of such proposal or nominee or nominees. Notwithstanding anything in this Section 11 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of record of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 11 who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 11. Nominations by stockholders of persons for election to the Board of Directors may be made at such a special meeting of stockholders if the stockholder's notice required by this Section 11 shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. -5- Only persons nominated in accordance with the procedures set forth in this section shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 11. The officer of the Corporation or other person presiding over the meeting shall have the power and the duty to determine whether a nomination or any business proposed to be brought before the meeting has been made in compliance with the procedures set forth in this Section 11 and, if any proposed nomination or business is not in compliance with this Section 11, to declare that such defective proposed business or nomination shall not be presented for stockholder action at the meeting and shall be disregarded. For purposes of this section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or a comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. Notwithstanding the foregoing provisions of this section, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. SECTION 12. ADJOURNMENTS. Any meeting of stockholders may be adjourned from time to time, whether or not a quorum is present, by the affirmative vote of a majority of the votes present and entitled to be cast at the meeting, or by the officer of the Corporation presiding over the meeting, or by the Board of Directors. ARTICLE III BOARD OF DIRECTORS SECTION 1. PLACE OF MEETINGS. Meetings of the Board of Directors shall be held at such place or places, within or without the State of Delaware, as the Board of Directors may from time to time determine or as shall be specified in the notice of any such meeting. SECTION 2. ANNUAL MEETING. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held -6- at such other time or place (within or without the State of Delaware) as shall be specified in a notice thereof given as hereinafter provided in Section 5 of this Article III. SECTION 3. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors may fix. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day (unless the Chairman of the Board determines otherwise). Notice of regular meetings of the Board of Directors need not be given except as otherwise required by statute or these By-Laws. SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, if one shall have been elected, by two or more directors of the Corporation or by the Chief Executive Officer. SECTION 5. NOTICE OF MEETINGS. Notice of each special meeting of the Board of Directors (and of each regular meeting for which notice shall be required) shall be given by the Secretary as hereinafter provided in this Section 5, in which notice shall be stated the time and place of the meeting. Except as otherwise required by these By-Laws, such notice need not state the purposes of such meeting. Notice of each such meeting shall be sent to each director, addressed to such director at his or her residence or usual place of business, by telegraph, cable, telex, telecopier or other similar means, or be delivered to him or her personally or be given to him or her by telephone or other similar means, at least two hours before the time at which such meeting is to be held. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting, except when he or she shall attend for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. SECTION 6. QUORUM AND MANNER OF ACTING. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, and, except as otherwise expressly required by statute, the Certificate of Incorporation or these By-Laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum at any meeting of the Board of Directors, a majority of the directors present thereat may adjourn such meeting to another time and place. Notice of the time and place of any such adjourned meeting shall be given to all of the directors unless such time and place were announced at the meeting at which the adjournment was taken, in which case such notice shall only be given to the directors who were not present thereat. At any adjourned meeting at which a quorum is present, any business may be transacted which might have -7- been transacted at the meeting as originally called. The directors shall act only as a Board and the individual directors shall have no power as such. SECTION 7. ORGANIZATION. At each meeting of the Board of Directors, the Chairman of the Board, if one shall have been elected, or, in the absence of the Chairman of the Board or if one shall not have been elected, another director chosen by a majority of the directors present, shall act as chairman of the meeting and preside thereat. The Secretary or, in his or her absence or if one shall not have been elected, any person appointed by the chairman of the meeting, shall act as secretary of the meeting and keep the minutes thereof. SECTION 8. RESIGNATIONS. Any director of the Corporation may resign at any time by giving written notice of his or her resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt by the Corporation. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 9. COMPENSATION. The Board of Directors shall have authority to fix the compensation, including fees and reimbursement of expenses, of directors for services to the Corporation in any capacity. SECTION 10. COMMITTEES. The Board of Directors may, by resolution passed by a majority of the entire Board of Directors, designate one or more committees, including an executive committee, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In addition, in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Except to the extent restricted by statute or the Certificate of Incorporation, each such committee, to the extent provided in the resolution creating it, shall have and may exercise all the powers and authority of the Board of Directors. Each such committee shall serve at the pleasure of the Board of Directors and have such name as may be determined from time to time by resolution adopted by the Board of Directors. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors. -8- SECTION 11. ACTION BY CONSENT. Unless restricted by the Certificate of Incorporation, any action required or permitted to be taken by the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of the proceedings of the Board of Directors or such committee, as the case may be. SECTION 12. TELEPHONIC MEETINGS. Any one or more members of the Board of Directors or any committee thereof may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation by such means shall constitute presence in person at a meeting. SECTION 13. MANDATORY RETIREMENT POLICY FOR DIRECTORS. No person shall be nominated to a term of office on the Board of Directors who has attained the age of 70 or more before the first day of the proposed term of office. ARTICLE IV OFFICERS SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the Corporation shall be elected by the Board of Directors and shall include the Chairman of the Board, the Chief Executive Officer (who also shall be the President), one or more Vice Presidents (including Senior or Executive Vice Presidents or other classifications of Vice Presidents), the Secretary and the Treasurer. If the Board of Directors wishes, it may also elect other officers (including one or more Assistant Treasurers and one or more Assistant Secretaries) as may be necessary or desirable for the business of the Corporation. Any two or more offices may be held by the same person, and no officer except the Chairman of the Board need be a director. Each officer shall hold office until his or her successor shall have been duly elected and shall have qualified, or until his or her death, or until he or she shall have resigned or have been removed or disqualified, as hereinafter provided in these By-Laws. SECTION 2. RESIGNATION AND REMOVAL. Any officer of the Corporation may resign at any time by giving written notice of his or her resignation to the Corporation. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon receipt by the Corporation. Unless otherwise specified therein, the acceptance of any such resignation shall not be necessary to make it effective. -9- Any officer of the Corporation may be removed, either with or without cause, at any time, by the Board of Directors at any meeting thereof. SECTION 3. VACANCIES. The Board of Directors may fill any vacancy occurring in any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each successor shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified, or until his earlier death, resignation or removal. SECTION 4. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be elected from among the members of the Board. If present, he or she shall preside at all meetings of the Board of Directors and stockholders. He or she shall advise and counsel with the Chief Executive Officer, and in his or her absence with other executives of the Corporation, and shall perform such other duties as may from time to time be assigned to him or her by the Board of Directors. SECTION 5. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer also shall serve as the President and, subject to the Board of Directors, he or she shall have general executive charge, management, and control of the properties and operations of the Corporation in the ordinary course of its business, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. If the Board of Directors has not elected a Chairman or in the absence or inability to act of the Chairman of the Board, the Chief Executive Officer shall exercise all of the powers and discharge all of the duties of the Chairman of the Board. SECTION 6. VICE PRESIDENT. Each Vice President shall perform all such duties as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. At the request of the Chief Executive Officer or in his or her absence or in the event of his or her inability or refusal to act, the Vice President, or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors (or if there be no such determination, then the Vice Presidents in the order of their election), shall perform the duties of the Chief Executive Officer, and, when so acting, shall have the powers of and be subject to the restrictions placed upon the Chief Executive Officer. SECTION 7. TREASURER. The Treasurer shall: (a) have charge and custody of, and be responsible for, all the funds and securities of the Corporation; -10- (b) keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation; (c) deposit all moneys and other valuables to the credit of the Corporation in such depositaries as may be designated by the Board of Directors or pursuant to its direction; (d) receive, and give receipts for, moneys due and payable to the Corporation from any source whatsoever; (e) disburse the funds of the Corporation and supervise the investment of its funds, taking proper vouchers therefor; (f) render to the Board of Directors, whenever the Board of Directors may require, an account of the financial condition of the Corporation; and (g) in general, perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. SECTION 8. SECRETARY. The Secretary shall (a) keep or cause to be kept in one or more books provided for the purpose, the minutes of all meetings of the Board of Directors, the committees of the Board of Directors and the stockholders; (b) see that all notices are duly given in accordance with the provisions of these By-Laws and as required by law; (c) be custodian of the records and the seal of the Corporation and affix and attest the seal to all certificates for shares of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and affix and attest the seal to all other documents to be executed on behalf of the Corporation under its seal; (d) see that the books, reports, statements, certificates and other documents and records required by law to be kept and filed are properly kept and filed; and (e) in general, perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him or her by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. In the absence of the Secretary at any meeting of the Board of Directors, a committee of the Board of Directors or the stockholders, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. -11- SECTION 9. ASSISTANT TREASURER. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as from time to time may be assigned by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the Treasurer. SECTION 10. ASSISTANT SECRETARY. The Assistant Secretary, or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties as from time to time may be assigned by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the Secretary. SECTION 11. OFFICERS' BONDS OR OTHER SECURITY. If required by the Board of Directors, any officer of the Corporation shall give a bond or other security for the faithful performance of his or her duties, in such amount and with such surety as the Board of Directors may require. SECTION 12. COMPENSATION. The compensation of the officers of the Corporation for their services as such officers shall be fixed from time to time by the Board of Directors. An officer of the Corporation shall not be prevented from receiving compensation by reason of the fact that he or she is also a director of the Corporation. ARTICLE V STOCK CERTIFICATES AND THEIR TRANSFER SECTION 1. STOCK CERTIFICATES. Every holder of stock in the Corporation shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chairman of the Board, the Chief Executive Officer or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him or her in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights shall be set forth in full or summarized on the face or back of -12- the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the Delaware General Corporation Law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, a statement that the Corporation will furnish without charge to each stockholder who so requests the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences or rights. SECTION 2. FACSIMILE SIGNATURES. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he, she or it were such officer, transfer agent or registrar at the date of issue. SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate or certificates, or his or her legal representative, to give the Corporation a bond in such sum as it may direct sufficient to indemnify it against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. SECTION 4. TRANSFERS OF STOCK. Upon surrender to the Corporation or the transfer agent of a Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record a transaction upon its records; provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. SECTION 5. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. -13- SECTION 6. REGULATIONS. The Board of Directors may make such additional rules and regulations, not inconsistent with these By-Laws, as it may deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation. SECTION 7. FIXING THE RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may, in its discretion, fix a new record date for the adjourned meeting. SECTION 8. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments a person registered on its records as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. SECTION 9. LEGENDS. The Board of Directors shall have the power and authority to provide that certificates representing shares of stock bear such legends as the Board of Directors deems appropriate to assure that the Corporation does not become liable for violations of Federal or state securities laws or other applicable law. ARTICLE VI GENERAL PROVISIONS SECTION 1. DIVIDENDS. Subject to the provisions of applicable law and the Certificate of Incorporation, dividends upon the shares of capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting of the Board of Directors. Dividends may be paid in cash, in property or in shares of stock of the Corporation, unless otherwise provided by statute or the Certificate of Incorporation. -14- SECTION 2. RESERVES. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors may, from time to time, in its absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors may think conducive to the interests of the Corporation. The Board of Directors may modify or abolish any such reserve in the manner in which it was created. SECTION 3. SEAL. The seal of the Corporation shall be in such form as shall be approved by the Board of Directors. SECTION 4. FISCAL YEAR. The fiscal year of the Corporation shall end on December 31 of each year; provided, however that such fiscal year may be changed by resolution of the Board of Directors. SECTION 5. CHECKS, NOTES, DRAFTS, ETC. All checks, notes, drafts or other orders for the payment of money of the Corporation shall be signed, endorsed or accepted in the name of the Corporation by such officer, officers, person or persons as from time to time may be designated by the Board of Directors or by an officer or officers authorized by the Board of Directors to make such designation. SECTION 6. EXECUTION OF CONTRACTS, DEEDS, ETC. The Board of Directors may authorize any officer or officers, agent or agents, in the name and on behalf of the Corporation to enter into or execute and deliver all deeds, bonds, mortgages, contracts and other obligations or instruments, and such authority may be general or confined to specific instances. The attestation to such execution by the Secretary of the Corporation shall not be necessary to constitute such deed, bond, mortgage, contract or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the Board of Directors authorizing such execution expressly state that such attestation is necessary. SECTION 7. VOTING OF STOCK IN OTHER CORPORATIONS. Unless otherwise provided by resolution of the Board of Directors, the Chairman of the Board, the Chief Executive Officer or any Vice President, from time to time may (or may appoint one or more attorneys or agents to) cast the votes which the Corporation may be entitled to cast as a shareholder or otherwise in another corporation, any of whose shares or securities may be held by the Corporation, at meetings of the holders of the shares or other securities of such other corporation. In the event one or -15- more attorneys or agents are appointed, the Chairman of the Board or the Chief Executive Officer may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent. The Chairman of the Board or the Chief Executive Officer may, or may instruct the attorneys or agents appointed to, execute or cause to be executed in the name and on behalf of the Corporation and under its seal or otherwise, such written proxies, consents, waivers or other instruments as may be necessary or proper in the circumstances. SECTION 8. SEVERABILITY. Any determination that any provision of these By-Laws is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-Laws. SECTION 9. CERTIFICATE OF INCORPORATION. All references in these By-Laws to the Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the Corporation, as amended and in effect from time to time. ARTICLE VII AMENDMENTS SECTION 1. BY THE BOARD OF DIRECTORS. If the Certificate of Incorporation so provides, these By-Laws may be altered, amended or repealed or new By-Laws may be adopted by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. SECTION 2. BY THE STOCKHOLDERS. These By-Laws, including this Section 2 of this Article VII, may be altered, amended or repealed or new By-Laws may be adopted by the affirmative vote of the holders of at least 80% of the voting power of all shares of the Corporation entitled to vote generally in the election of directors, voting together as a single class. -16- EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 0 0 95 42 13 82 463 171 392 38 0 0 0 0 321 392 0 366 0 203 82 28 14 10 4 6 (4) 0 0 2 0 0
EX-27.2 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 0 0 96 28 13 98 432 150 435 39 1 0 0 0 364 435 0 377 0 185 85 23 11 45 19 27 3 0 (1) 29 0 0
EX-27.3 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 0 0 91 53 13 80 443 155 397 38 1 0 0 0 325 397 0 490 0 253 119 35 16 26 11 15 (4) 0 (1) 11 0 0
EX-27.4 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 80 30 13 79 395 135 382 38 1 0 0 0 311 382 0 467 0 227 100 28 14 66 26 40 2 0 0 42 0 0
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