-----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, PexpD0cgb+ZUJ3NzxySRuYNiLkNvxI7zLd97IscNjVNscCvj1bzsrZniD7FBOuY9 0phNW2Ayt2tUOzWwmJN3tQ== 0000950144-02-003230.txt : 20020415 0000950144-02-003230.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950144-02-003230 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFEPOINT HOSPITALS INC CENTRAL INDEX KEY: 0001074772 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] IRS NUMBER: 522165845 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-29818 FILM NUMBER: 02595760 BUSINESS ADDRESS: STREET 1: 103 POWELL COURT STREET 2: SUITE 200 CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6153728500 MAIL ADDRESS: STREET 1: 4525 HARDING RD CITY: NASHVILLE STATE: TN ZIP: 37205 FORMER COMPANY: FORMER CONFORMED NAME: LIFEPOINT HOSPITALS LLC DATE OF NAME CHANGE: 19981207 10-K 1 g74862e10-k.txt LIFEPOINT HOSPITALS, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER: 0-29818 LIFEPOINT HOSPITALS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 52-2165845 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 103 POWELL COURT, SUITE 200 37027 BRENTWOOD, TENNESSEE (Zip Code) (Address Of Principal Executive Offices) (615) 372-8500 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Preferred Stock Purchase Rights (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] ================================================================================ ================================================================================ COMMISSION FILE NUMBER: 333-84755 ------------------------ LIFEPOINT HOSPITALS HOLDINGS, INC. (Exact Name of Registrant as Specified in its Charter) ------------------------ DELAWARE 52-2167869 (State of Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 103 POWELL COURT, SUITE 200 37027 BRENTWOOD, TENNESSEE (Zip Code) (Address of Principal Executive Offices) (615) 372-8500 (Registrant's Telephone Number, including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the shares of Common Stock (based upon the closing sale price of these shares on March 25, 2002) of LifePoint Hospitals, Inc. held by non-affiliates on March 25, 2002, was approximately $1,291,128,372. As of March 25, 2002, the number of outstanding shares of Common Stock of LifePoint Hospitals, Inc. was 39,385,416, and all of the shares of Common Stock of LifePoint Hospitals Holdings, Inc. were owned by LifePoint Hospitals, Inc. ================================================================================ DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive proxy statement for our annual meeting of stockholders to be held on May 14, 2002 are incorporated by reference into Part III of this report. PART I ITEM 1. BUSINESS GENERAL We operate 23 general, acute care hospitals with an aggregate of 2,197 licensed beds in growing, non-urban communities. In all but one of our communities, our hospital is the only provider of acute care hospital services. Our hospitals are located in Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. For the year ended December 31, 2001, we generated $619.4 million in net revenues and EBITDA of $131.4 million. We were formed as a division of HCA Inc. in November 1997 to operate general, acute care hospitals in non-urban communities. We became an independent, publicly-traded company on May 11, 1999 when HCA distributed all outstanding shares of our common stock to its stockholders. THE NON-URBAN HEALTHCARE MARKET We believe that growing, non-urban healthcare markets are attractive because of the following factors: - Less Competition. Non-urban communities have smaller populations with fewer hospitals and other healthcare service providers. We believe that the smaller populations and relative significance of the one or two acute care hospitals in these markets may discourage the entry of alternate non-hospital providers, including outpatient surgery centers, rehabilitation centers and diagnostic imaging centers. - More Favorable Payment Environment. The lower number of healthcare providers in non-urban markets limits the ability of managed care organizations to create price competition among local providers. Consequently, non-urban hospitals can often negotiate reimbursement rates with managed care plans that are more favorable, in general, than those available in urban markets. In addition, there is generally a lower level of managed care presence in non-urban markets than in urban markets. We believe that non-urban markets are less attractive to these payors because their limited size and diverse, non-national employer bases minimize the ability of managed care organizations to achieve economies of scale. We believe that marketing expenses incurred by managed care plans do not produce the level of return in non-urban markets that they do in urban markets. - Community Focus. We believe that non-urban areas generally view the local hospital as an integral part of the community. Therefore, we believe patients and physicians tend to be more loyal to the hospital. - Acquisition Opportunities. Currently, not-for-profit and governmental entities own most non-urban hospitals. These entities often have limited access to the capital needed to keep pace with advances in medical technology. In addition, these entities sometimes lack the management resources necessary to control hospital expenses, recruit and retain physicians, expand healthcare services and comply with increasingly complex reimbursement and managed care requirements. As a result, patients may migrate to, may be referred by local physicians to, or may be encouraged by managed care plans to travel to, hospitals in larger, urban markets. We believe that as a result of these pressures, many not-for-profit and governmental owners of non-urban hospitals who 2 wish to preserve the local availability of quality healthcare services are interested in selling or leasing these hospitals to companies, like us, that are committed to the local delivery of healthcare and that have greater access to capital and management resources. OPERATING PHILOSOPHY We are committed to operating general, acute care hospitals in growing, non-urban markets. As a result, we adhere to an operating philosophy that is focused on the unique patient and provider needs and opportunities in these communities. This philosophy includes a commitment to: - improving the quality and scope of available healthcare services; - providing physicians a positive environment in which to practice medicine, with access to necessary equipment and resources; - providing an outstanding work environment for employees; - recognizing and expanding the hospital's role as a community asset; and - continuing to improve each hospital's financial performance. BUSINESS STRATEGY We manage our hospitals in accordance with our operating philosophy and have developed the following strategies tailored for each of our markets: - Expand Breadth of Services and Attract Community Patients. We strive to increase revenues by improving the quality and broadening the scope of healthcare services available at our facilities, and to recruit physicians with a broader range of specialties. We have undertaken projects in the majority of our hospitals targeted at expanding or renovating specialty service facilities including the following:
Capital Expenditures Total ----------------------------------------------- Number of Project Estimated Expansion or Renovation Project Facilities Budget 1999 2000 2001 2002 - ------------------------------- ---------- ------- ---- ---- ---- --------- (Dollars in Millions) Operating room expansion................. 12 $44.2 $5.8 $6.4 $11.9 $13.3 MRI addition............................. 8 11.8 -- 3.0 4.1 5.0 CT scanner addition...................... 14 8.2 2.7 0.6 3.6 1.4 Emergency room expansion................. 6 20.4 0.4 1.7 0.7 4.7 Obstetric care addition.................. 2 6.1 4.5 1.4 -- -- Rehabilitation addition.................. 3 1.9 0.5 -- 0.5 2.9
We believe that our expansion of available treatments and our community focus will encourage residents in the non-urban markets that we serve to seek care locally at our facilities rather than at facilities outside the area. - Strengthen Physician Recruiting and Retention. We seek to increase our revenue by enhancing the quality of care available locally. We believe that recruiting physicians in local communities is critical to increasing the quality of healthcare and the breadth of available services at our facilities. Following the distribution of our stock from HCA, we recruited 70 physicians in 1999, including 42 specialists. In 2000, we recruited 80 physicians, including 49 specialists and in 2001 we recruited 57 physicians, including 41 specialists. Our physician recruitment program is currently focused primarily on 3 recruiting additional specialty care physicians. Our management is focused on working more effectively with individual physicians and physician practices. We believe that expansion of the range of available treatments at our hospitals should also assist in physician recruiting and contribute to the sense that our hospitals are community assets. - Improve Expense Management. We seek to control costs by, among other things, reducing labor costs by improving labor productivity and decreasing the use of contracted labor, controlling supply expenses through the use of a group purchasing organization and reducing uncollectible revenues. We have implemented cost control initiatives including adjusting staffing levels according to patient volumes, modifying supply purchases according to usage patterns and providing training to hospital staff in more efficient billing and collection processes. For the year ended December 31, 2001 compared to the year ended December 31, 2000, our total operating expenditures decreased as a percentage of revenue to 78.8% from 81.0%. We believe that as our company grows, we will likely benefit from our ability to spread fixed administrative costs over a larger base of operations. - Retain and Develop Stable Management. We seek to retain the executive teams at our hospitals to enhance medical staff relations and maintain continuity of relationships within the community. We make a commitment to the rural communities that we serve by focusing our recruitment of managers and healthcare professionals on those who wish to live and practice in the communities in which our hospitals are located. In addition, these hospital leaders are granted options under our employee stock option plan. - Improve Managed Care Position. We strive to improve our revenues from managed care plans by negotiating facility-specific contracts with these payors on terms appropriate for smaller, non-urban markets. Prior to the distribution of our common stock, our facilities typically were included in managed care contracts negotiated by HCA on a market wide basis emphasizing large urban facilities. Since the distribution we have negotiated contracts that are more appropriate for non-urban markets. In addition, our position as a significant provider of acute care services in our markets enables us to negotiate contract terms that are generally more favorable for our facilities and to decrease the levels of discount in the arrangements in which we participate. - Acquire Other Hospitals. We continue to pursue a disciplined acquisition strategy and seek to identify and acquire attractive hospitals in growing, non-urban markets that are the sole or significant market provider of healthcare services in the community. In 2001, we acquired two hospitals, Athens Regional Medical Center in Athens, Tennessee and Ville Platte Medical Center in Ville Platte, Louisiana. These transactions closed on October 1, 2001 and December 1, 2001, respectively. Each of these hospitals is located in areas where patients often travel outside of the community for healthcare services. By implementing our operating strategies, we believe that we can attract many of these patients that historically have sought care elsewhere. 4 We believe that our strategic goals align our interests with those of the local communities served by our hospitals. We believe that the following qualities enable us to successfully compete for acquisitions: - our commitment to maintaining the local availability of healthcare services; - our reputation for providing market-specific, high quality healthcare; - our focus on physician recruiting and retention; - our management's operating experience; - our access to financing; and - our ability to provide the necessary equipment and resources for physicians. OPERATIONS Our 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 including outpatient surgery, laboratory, rehabilitation, radiology, respiratory therapy and physical therapy. A board of trustees governs each of our hospitals. The board of trustees includes members of the hospital's medical staff as well as community leaders. The board establishes policies concerning medical, professional and ethical practices, monitors these practices, and is responsible for ensuring that these practices conform to established standards. We maintain quality assurance programs to support and monitor quality of care standards and to meet accreditation and regulatory requirements. We also monitor patient care evaluations and other quality of care assessment activities on a regular basis. Like most hospitals located in non-urban areas, our hospitals do not engage in extensive medical research and medical education programs. However, a number of our hospitals have an affiliation with medical schools, including the clinical rotation of medical students. In addition to providing capital resources, we make available a variety of management services to our healthcare facilities. These services include: - information and clinical systems; - accounting, financial, tax and reimbursement support; - legal support; - personnel management; - risk management; - corporate compliance; - construction oversight and management; - internal auditing; and - resource management. We participate, along with HCA, Triad Hospitals, Inc., Health Management Associates, Inc. and other companies, in a group purchasing organization which makes certain national supply and equipment contracts available to our facilities. 5 PROPERTIES The following table lists the hospitals owned, except as otherwise indicated, by us as of March 26, 2002:
FACILITY NAME CITY STATE LICENSED BEDS ------------- ---- ----- ------------- Andalusia Regional Hospital.................................... Andalusia AL 101 Bartow Memorial Hospital....................................... Bartow FL 56 Putnam Community Medical Center................................ Palatka FL 141 Western Plains Regional Hospital(1)............................ Dodge City KS 110 Georgetown Community Hospital.................................. Georgetown KY 75 Jackson Purchase Medical Center................................ Mayfield KY 107 Meadowview Regional Medical Center............................. Maysville KY 111 Bourbon Community Hospital..................................... Paris KY 58 Logan Memorial Hospital........................................ Russellville KY 92 Lake Cumberland Regional Hospital.............................. Somerset KY 227 Bluegrass Community Hospital(2)................................ Versailles KY 25 Ville Platte Medical Center.................................... Ville Platte LA 116 Athens Regional Medical Center................................. Athens TN 118 Smith County Memorial Hospital................................. Carthage TN 63 Crockett Hospital.............................................. Lawrenceburg TN 107 Livingston Regional Hospital................................... Livingston TN 122 Hillside Hospital.............................................. Pulaski TN 95 Emerald-Hodgson Hospital(3).................................... Sewanee TN 40 Southern Tennessee Medical Center.............................. Winchester TN 159 Castleview Hospital............................................ Price UT 84 Ashley Valley Medical Center................................... Vernal UT 39 Lander Valley Medical Center(4)................................ Lander WY 81 Riverton Memorial Hospital..................................... Riverton WY 70
- --------------------- (1) We operate and hold a 70% equity interest in a consolidated joint venture which owns and operates Western Plains Regional Hospital. (2) We lease Bluegrass Community Hospital from Woodford Healthcare, Inc., a Kentucky not-for-profit corporation, pursuant to a lease agreement that expires on December 31, 2002 unless extended by the parties. (3) We lease the real estate associated with Emerald-Hodgson Hospital from the University of the South, a Tennessee corporation, pursuant to a lease agreement that expires on May 7, 2020. (4) We lease the real estate associated with Lander Valley Medical Center from the City of Lander, Wyoming pursuant to a ground lease that expires on December 31, 2073. We operate medical office buildings in conjunction with many of our hospitals. These office buildings are primarily occupied by physicians who practice at our hospitals. Our headquarters are located in approximately 25,500 square feet of space in one office building in Brentwood, Tennessee. Our headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for our present needs. Our obligations under our bank credit facilities are secured by a pledge of substantially all of our assets, including first priority mortgages on each of our hospitals. 6 SERVICES AND UTILIZATION We believe that two important factors relating to the overall utilization of a hospital are the quality and market position of the hospital and the number, quality and specialties of physicians providing patient care within the facility. Generally, we believe that the ability of a hospital to meet the healthcare needs of its community is determined by the following: - breadth of services; - level of technology; and - emphasis on quality of care and convenience for patients and physicians. Other factors which impact utilization include: - the size of and growth in local population; - local economic conditions; - the availability of reimbursement programs such as Medicare and Medicaid; and - the ability to negotiate contracts with managed care organizations that are appropriate for non-urban markets. Utilization across the industry also is being affected by improved treatment protocols as a result of advances in medical technology and pharmacology. The following table contains operating statistics for our hospitals for each of the past five years ended December 31. Medical/surgical hospital operations are subject to seasonal fluctuations, including decreases in patient utilization during holiday periods and increases in patient utilization during the cold weather months.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1997 1998 1999 2000 2001 --------- -------- --------- -------- -------- Number of hospitals at end of period............. 22 23 23 20 23 Number of licensed beds at end of period(a)...... 2,080 2,169 2,169 1,963 2,197 Weighted average licensed beds(b)................ 2,078 2,127 2,169 2,056 2,011 Admissions(c).................................... 60,487 62,269 64,081 66,085 70,891 Equivalent admissions(d)......................... 105,126 110,029 114,321 119,812 129,163 Revenues per equivalent admission................ $ 4,638 $ 4,530 $ 4,507 $ 4,650 $ 4,796 Average length of stay (days)(e)................. 4.4 4.4 4.2 4.1 4.0 Emergency room visits(f)......................... N/A N/A 278,250 294,952 313,110 Outpatient surgeries(g).......................... N/A N/A 46,773 49,711 57,423 Total surgeries.................................. N/A N/A 63,854 68,012 77,465
- ------------------------ (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 our hospitals and is used by management and investors as a general measure of inpatient volume. (d) Equivalent admissions is used by management and investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions is computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (e) Represents the average number of days admitted patients stay in our hospitals. Average length of stay has declined due to the continuing pressures from managed care and other payors to restrict admissions and reduce the number of days that are covered by the payors for certain procedures, and by technological and pharmaceutical improvements. (f) Represents the total number of hospital-based emergency room visits. (g) Outpatient surgeries are those surgeries that do not require admission to our hospitals. 7 Our hospitals have experienced significant growth in outpatient care services compared to inpatient care services. Net outpatient revenues as a percentage of total patient revenues was 48.5% for the year ended December 31, 2001. We believe outpatient services provided at our hospitals have increased for two primary reasons. First, because of our ongoing recruiting efforts, many new physicians have admitting privileges to our hospitals. These new physicians tend to provide primarily outpatient care services until they become established in the community and develop a patient base. Once they become established in a community, inpatient admissions from physicians tend to increase. Second, improvements in technology and clinical practices and hospital payment changes by Medicare, insurance carriers and self-insured employers have also resulted in increased outpatient care services relative to inpatient care services. These hospital payment changes generally encourage the utilization of outpatient, rather than inpatient, services whenever possible, and shortened lengths of stay for inpatient care. In response to this increasing demand for outpatient care, we are reconfiguring some of our hospitals to more effectively accommodate outpatient services and restructuring existing surgical capacity in some of our hospitals to permit additional outpatient volume and a greater variety of outpatient services. SOURCES OF REVENUE Our hospitals receive 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 inpatient revenues, net outpatient revenues and total net revenues of our facilities from these sources during the periods specified below were as follows:
TOTAL NET REVENUES NET INPATIENT NET OUTPATIENT ------------------------------- REVENUES REVENUES YEARS ENDED -------------- ------------------ DECEMBER 31, YEAR ENDED YEAR ENDED ------------------------------- DECEMBER 31, DECEMBER 31, 1999 2000 2001 2001 2001 ------ ------ ------ ----- ----- Medicare.............. 34.8% 34.6% 34.2% 53.9% 14.5% Medicaid.............. 12.6 12.4 14.2 13.2 15.6 HMOs, PPOs and other private insurers.... 39.4 40.6 40.2 26.3 56.2 Self pay and other ... 13.2 12.4 11.4 6.6 13.7 ------ ------ ------ ----- ----- Total... 100.0% 100.0% 100.0% 100.0% 100.0% ====== ====== ====== ===== =====
Medicare provides hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid, a joint federal-state program that is administered by the states, provides hospital benefits to qualifying individuals who are unable to afford care. All of our 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 our hospitals offer discounts from established charges to certain large group purchasers of healthcare services, including private insurance companies, employers, HMOs, PPOs and other managed care plans. These discount programs often limit our ability to increase charges in response to increasing costs. In addition to government programs, our hospitals are reimbursed by private payors including HMOs, PPOs, private insurance companies, employers and individual private payors. Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for the services under Medicare, Medicaid, some private insurance plans, HMOs or PPOs, but are responsible for services not covered by these plans, exclusions, deductibles or 8 co-insurance features of their coverage. The amount of exclusions, deductibles and co-insurance has generally been increasing each year. COMPETITION The hospital industry is highly competitive. We compete with other hospitals and healthcare providers for patients. The competition among hospitals and other healthcare providers for patients has intensified in recent years. Our hospitals are located in growing, non-urban market areas. In 22 of our 23 communities, our hospitals face no direct competition within their communities because there are no other hospitals in their communities. However, these hospitals do face competition from hospitals outside of their communities, including hospitals in the market area and nearby urban areas that provide more complex services. These facilities are generally located in excess of 25 miles from our facilities. Patients in our primary service areas may travel to these other hospitals for a variety of reasons, including the need for services we do not offer or physician referrals. Some of these competing hospitals use equipment and services more specialized than those available at our hospitals. Patients who require services from these other hospitals may subsequently shift their preferences to those hospitals for services we do provide. In addition, some of the hospitals that compete with us are owned by tax-supported governmental agencies or not-for-profit entities supported by endowments and charitable contributions. These hospitals, in some instances, are not required to pay sales, property and income taxes. We also face competition from other specialized care providers, including outpatient surgery, orthopedic, oncology and diagnostic centers. State certificate of need 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. Of the eight states where we own hospitals, Alabama, Florida, Kentucky and Tennessee have certificate of need laws. The application process for approval of covered services, facilities, changes in operations and capital expenditures is, therefore, highly competitive in these states. The number and quality of the physicians on a hospital's staff is an important factor in a hospital's competitive advantage. Physicians decide whether a patient is admitted to the hospital and the procedures to be performed. We believe 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. Admitting physicians may be on the medical staffs of other hospitals in addition to those of our hospitals. As of December 31, 2001, there were approximately 1,550 physicians on staff at our hospitals. One element of our business strategy is expansion through the acquisition of acute care hospitals in growing, non-urban markets. The competition to acquire rural hospitals is significant. We intend to acquire, on a selective basis, hospitals that are similar to those we currently own and operate. EMPLOYEES AND MEDICAL STAFF At February 28, 2002, we had approximately 7,240 employees, including approximately 1,820 part-time employees. None of our employees are subject to collective bargaining agreements. We consider our employee relations to be good. While some of our hospitals experience union organizing activity from time to time, we do not expect these efforts to materially affect our future operations. Our hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate. Our 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 our hospitals, but admission to the staff must be approved by the hospital's medical staff and the appropriate governing board of the hospital in accordance with established credentialing criteria. With certain exceptions, physicians generally are not employees of our hospitals. However, we have conducted a physician practice management program pursuant to which some physicians provide 9 services in our hospitals by employment contract. We attempt to restructure or phase out these physician contracts as they come up for renewal and do not intend to expand this program in the future. GOVERNMENT REGULATION Overview. All participants in the healthcare industry are required to comply with extensive government regulation at the federal, state and local levels. Under these laws and regulations, hospitals must meet requirements to be licensed as hospitals and qualified to participate in government programs, including the Medicare and Medicaid programs. These requirements relate to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, hospital use, rate-setting, compliance with building codes, and environmental protection laws. There are also extensive regulations governing a hospital's participation in these government programs. If we fail to comply with applicable laws and regulations, we can be subject to criminal penalties and civil sanctions, our hospitals can lose their licenses and their ability to participate in these government programs. In addition, government regulations frequently change. When that happens, we may have to make changes in our facilities, equipment, personnel and services so that our hospitals remain licensed and qualified to participate in these programs. We believe that our hospitals are in substantial compliance with current federal, state and local regulations and standards. Hospitals are subject to periodic inspection by federal, state, and local authorities to determine their compliance with applicable regulations and requirements necessary for licensing and certification. All of our hospitals are licensed under appropriate state laws and are qualified to participate in Medicare and Medicaid programs. In addition, all of our hospitals are accredited by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). This accreditation indicates that a hospital satisfies the applicable health and administrative standards to participate in Medicare and Medicaid programs. Fraud and Abuse Laws. Participation in the Medicare program is heavily regulated by federal statute and regulation. If a hospital fails substantially to comply with the numerous federal laws governing a facility's activities, the hospital's participation in the Medicare program may be terminated and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare and/or Medicaid programs if it performs any of the following acts: - making claims to Medicare for services not provided or misrepresenting actual services provided in order to obtain higher payments; - paying money to induce the referral of patients or purchase of items or services where such items or services are reimbursable under a federal or state health program; or - failing to provide appropriate emergency medical screening services to any individual who comes to a hospital's emergency room or otherwise failing to properly treat and transfer emergency patients. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal healthcare program. HIPAA created civil penalties for conduct, including upcoding and billing for medically unnecessary goods or services. It established new enforcement mechanisms to combat fraud and abuse. These include a bounty system, where a portion of the payments recovered is returned to the government agencies, as well as a whistleblower program. This law also expanded the categories of persons that may be excluded from participation in federal and state healthcare programs. A provision of the Social Security Act, known as the "anti-kickback" statute, prohibits the payment, receipt, offer, or solicitation of money with the intent of generating referrals or orders for services or items covered by a federal or state healthcare program. Violations of the anti-kickback 10 statute may be punished by criminal and civil fines, exclusion from federal and state healthcare programs, and damages up to three times the total dollar amount involved. The Office of Inspector General of the Department of Health and Human Services is responsible for identifying fraud and abuse activities in government programs. In order to fulfill its duties, the Office of Inspector General performs audits, investigations, and inspections. In addition, it provides guidance to healthcare providers by identifying types of activities that could violate the anti-kickback statute. The Office of the Inspector General has identified the following incentive arrangements as potential violations: - payment of any incentive by a hospital each time a physician refers a patient to the hospital; - use of free or significantly discounted office space or equipment for physicians 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 including management and laboratory techniques; - guarantees which provide that if the physician's income fails to reach a predetermined level, the hospital will pay any portion of the remainder; - low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients to the hospital; - payment of the costs of a physician's travel and expenses for conferences; - payment of services which require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of the services rendered; or - purchasing goods or services from physicians at prices in excess of their fair market value. We have a variety of financial relationships with physicians who refer patients to our hospitals. Physician investors have an ownership interest in one of our hospitals. Physicians may also own our stock. We also have contracts with physicians providing for a variety of financial arrangements, including employment contracts, leases, independent contractor agreements, and professional service agreements. We provide financial incentives to recruit physicians to relocate to communities served by our hospitals. These incentives include minimum revenue guarantees and, in some cases, loans. The Office of Inspector General is authorized to publish regulations outlining activities and business relationships that would be deemed not to violate the anti-kickback statute. These regulations are known as "safe harbor" regulations. The failure of a particular activity to comply with the safe harbor regulations does not mean that the activity violates the anti-kickback statute. We believe that all of our business arrangements are in full compliance with the anti-kickback statute. We try to structure each of our arrangements, especially each of our business arrangements with physicians, to fit as closely as possible within an applicable safe harbor. However, not all of our business arrangements fit wholly within safe harbors, and so we cannot guarantee that these arrangements will not be scrutinized by government authorities, or if scrutinized, that they will be determined to be in compliance with the anti-kickback statute or other applicable laws. If that happened, we would be subject to criminal and civil penalties and/or possible exclusion from participating in Medicare, Medicaid, or other governmental healthcare programs. The Social Security Act also includes a provision commonly known as the "Stark law." This law prohibits physicians from referring Medicare and Medicaid patients to selected types of 11 healthcare entities in which they or any of their immediate family members have ownership or other financial interests. These types of referrals are commonly known as "self referrals." Sanctions for violating the Stark law include civil monetary penalties, assessments equal to twice the dollar value of each service, and exclusion from Medicare and Medicaid programs. There are ownership and compensation arrangement exceptions to the self-referral prohibition. One exception allows a physician to make a referral to a hospital if the physician owns an interest in the entire hospital, as opposed to an ownership interest in a department of the hospital. Another exception allows a physician to refer patients to a healthcare entity in which the physician has an ownership interest if the entity is located in a rural area, as defined in the statute. There are also exceptions for many of the customary financial arrangements between physicians and providers, including employment contracts, leases, and recruitment agreements. The federal government released regulations interpreting some, but not all, of the provisions included in the Stark law in January 2001, and the government has said it intends to release a second phase of final Stark regulations in the future. We have structured our financial arrangements with physicians to comply with the statutory exceptions included in the Stark law and subsequent regulations. However, the new Stark regulations may interpret provisions of this law in a manner different from the manner with which we have interpreted them. We cannot predict the effect these regulations will have on us. Many states in which we operate also have adopted, or are considering adopting, similar laws. Some of these state laws apply even if the payment for care does not come from the government. These statutes typically provide criminal and civil penalties. While there is little precedent for the interpretation or enforcement of these state laws, we have attempted to structure our financial relationships with physicians and others in light of these laws. However, if we are found to have violated these state laws, it could result in the imposition of criminal and civil penalties. Corporate Practice of Medicine and Fee-Splitting. Some states have laws that prohibit unlicensed persons or business entities, including corporations or business organizations that own hospitals, from employing physicians. Some states also have adopted laws that prohibit direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician's license, civil and criminal penalties and rescission of business arrangements. These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. We attempt to structure our arrangements with healthcare providers to comply with the relevant state laws and the few available regulatory interpretations. Emergency Medical Treatment and Active Labor Act. The Emergency Medical Treatment and Active Labor Act imposes requirements as to the care that must be provided to anyone who comes to facilities providing emergency medical services seeking care. Regulations have recently been adopted that expand the areas within a facility that must provide emergency screening and treatment to include provider-based outpatient departments. Sanctions for failing to fulfill these requirements include exclusion from participation in Medicare and Medicaid programs and civil money penalties. In addition, the law creates private civil remedies which enable an individual who suffers personal harm as a direct result of a violation of the law to sue the offending hospital for damages and equitable relief. A medical facility that suffers a financial loss as a direct result of another participating hospital's violation of the law also has a similar right. Although we believe we comply with the Emergency Medical Treatment and Active Labor Act, differing interpretations are applied by the regulatory agencies responsible for enforcement. Federal False Claims Act. Another trend in healthcare litigation is the use of the Federal False Claims Act. The Federal False Claims Act prohibits providers from knowingly submitting false claims for payment to the federal government. This law has been used not only by the U.S. government, but also by individuals who bring an action on behalf of the government under the law's "qui tam" or "whistleblower" provisions. When a private party brings a qui tam action under the Federal False Claims Act, the defendant will generally not be aware of the lawsuit until the government makes a determination whether it will intervene and take a lead in the litigation. 12 Civil liability under the Federal False Claims Act can be up to three times the actual damages sustained by the government plus civil penalties for each separate false claim. There are many potential bases for liability under the Federal False Claims Act. Although liability under the Federal False Claims Act arises when an entity knowingly submits a false claim for reimbursement to the federal government, the Federal False Claims Act defines the term "knowingly" broadly. Thus, although simple negligence generally will not give rise to liability under the Federal False Claims Act, submitting a claim with reckless disregard to its truth or falsity can constitute "knowingly" submitting a claim. Healthcare Reform. The healthcare industry 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 affect major changes in the healthcare system. Proposals that have been considered include cost controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, and mandatory health insurance coverage for employees. The costs of implementing some of these proposals would be financed, in part, by reductions in payments to healthcare providers under Medicare, Medicaid, and other government programs. Conversion Legislation. Many states have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have specific legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets. These legislative and administrative efforts primarily focus on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the not-for-profit seller. These reviews and, in some instances, approval processes can add additional time to the closing of a not-for-profit hospital acquisition. Future actions by state legislators or attorneys' general may seriously delay or even prevent our ability to acquire hospitals. Certificates of Need. The construction of new facilities, the acquisition or expansion of existing facilities and the addition of new services and expensive equipment at our facilities may be subject to state laws that require prior approval by state regulatory agencies. These certificate of need laws generally require that a state agency determine the public need and give approval prior to the construction or acquisition of facilities or the addition of new services. We operate hospitals in four states that have adopted certificate of need laws, Kentucky, Tennessee, Florida and Alabama. If we fail to obtain necessary state approval, we will not be able to expand our facilities, complete acquisitions or add new services in these states. Violation of these state laws may result in the imposition of civil sanctions or the revocation of hospital licenses. HIPAA Privacy and Security Requirements. The Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. On August 17, 2000, the Health Care Financing Administration, now called the Centers for Medicare and Medicaid Services ("CMS"), published final regulations establishing electronic data transmission standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically. Compliance with these regulations is required by October 16, 2003, although the government requires us to submit a plan by October 16, 2002 showing how we plan to meet the transactions standards. We cannot predict the impact that final regulations, when fully implemented, will have on us. The Administrative Simplification Provisions also require CMS to adopt standards to protect the security and privacy of health-related information. CMS proposed regulations containing security standards on August 12, 1998. These proposed security regulations have not been finalized, but as proposed, would require healthcare providers to implement organizational and technical practices to protect the security of electronically maintained or transmitted health-related information. In addition, CMS released final regulations containing privacy standards in December 2000. These privacy regulations are effective April 14, 2001, but compliance with these regulations is not required until April 2003. In addition, on March 27, 2002, CMS proposed additional changes to the privacy regulations to remove consent requirements which were anticipated to hinder access to care as well as clarify other provisions related to oral communications, parental access to their children's records and prohibit certain marketing without patient authorization. 13 The privacy regulations, including proposed modifications will extensively regulate the use and disclosure of individually identifiable health-related information and the patient's rights to his or her health information. The security regulations, as proposed, and the privacy regulations could impose significant costs on our facilities in order to comply with these standards. We cannot predict the final form that these regulations will take or the impact that final regulations, when fully implemented, will have on us. If we violate HIPAA, we are subject to monetary fines and penalties, criminal sanctions and civil causes of action. PAYMENT Medicare. Under the Medicare program, we are paid for inpatient and outpatient services performed by our hospitals. Payments for inpatient acute services are generally made pursuant to a prospective payment system, commonly known as "PPS." Under PPS, our hospitals are paid a prospectively determined amount for each hospital discharge based on the patient's diagnosis. Specifically, each discharge is assigned to a diagnosis related group, commonly known as a "DRG," based on the patient's condition and treatment during the relevant inpatient stay. This assignment also affects the prospectively determined capital rate paid with each DRG. Each DRG is assigned a payment rate that is prospectively set using national average costs per case for treating a patient for a particular diagnosis. DRG payments do not consider the actual costs incurred by a hospital in providing a particular inpatient service. However, DRG and capital payments are adjusted by a predetermined geographic adjustment factor assigned to the geographic area in which the hospital is located. In addition to DRG and capital payments, hospitals may qualify for "outlier" payments. Hospitals qualify for outlier payments when the relevant patient's treatment costs exceed a specified threshold. Hospitals qualify for disproportionate share payments when their percentage of low income patients exceed specified thresholds. Under the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, known as "BIPA," a majority of our hospitals qualify to receive disproportionate share payments. The DRG rates are adjusted by an update factor each federal fiscal year, which begins on October 1. The index used to adjust the diagnostic related group rates, known as the "hospital market basket index," gives consideration to the inflation experienced by hospitals in purchasing goods and services. For several years, however, the percentage increases in the diagnostic related group payments have been lower than the projected increase in the costs of goods and services purchased by hospitals. DRG rate increases were 0.0% for federal fiscal year 1998, 0.5% for federal fiscal year 1999, 1.1% for federal fiscal year 2000, 3.4% for federal fiscal year 2001 and 2.75% for federal fiscal year 2002. BIPA provides some relief to the low diagnostic related group increases mandated by the Balanced Budget Act. Under BIPA, the DRG rate is currently scheduled to equate to the hospital market basket minus 0.55% for federal fiscal year 2003. Outpatient services have traditionally been paid at the lower of customary charges or on a reasonable cost basis. The Balanced Budget Act established a PPS for outpatient hospital services that commenced on August 1, 2000. Outpatient services are assigned ambulatory payment classifications, which are readjusted no less than annually. Payment rates for 2002 will go into effect on April 1, 2002. The Balanced Budget Refinement Act of 1999 eliminated the anticipated average reduction of 5.7% for various Medicare outpatient payments under the Balanced Budget Act of 1997. Under the Balanced Budget Refinement Act of 1999, outpatient payment reductions for non-urban hospitals with 100 beds or less are mitigated through a "hold harmless" provision until December 31, 2003. Twelve of our hospitals qualify for this relief. Payment reductions under Medicare outpatient PPS of non-urban hospitals with greater than 100 beds and urban hospitals will be mitigated through a corridor reimbursement approach, where a percentage of such reductions will be reimbursed through December 31, 2003. Substantially all of our remaining hospitals qualify for relief under this provision. In addition, BIPA provides for a hospital market basket percentage increase for federal fiscal year 2003. 14 Prior to the implementation of the prospective payment systems, payments to exempt hospitals and units, such as inpatient psychiatric, rehabilitation and skilled nursing services, were based upon reasonable cost, subject to a cost per discharge target. The Balanced Budget Act established a PPS for Medicare skilled nursing facilities which commenced in July 1998, and was implemented progressively over a three year term. We have experienced reductions in payments for our skilled nursing services. However, BIPA requires increasing the current reimbursement amount for each resource utilization group component of the skilled nursing facility PPS by 16.7% for services furnished between April 1, 2001 and September 30, 2002. Additionally, BIPA increases the skilled nursing facility PPS update to the skilled nursing facility market basket minus 0.5% for fiscal years 2002 and 2003. The Balanced Budget Act mandated a PPS for inpatient rehabilitation hospital services. A PPS system for Medicare inpatient rehabilitation services is being phased in over two years beginning January 1, 2002. A PPS for inpatient psychiatric hospitals and exempt units has not yet been proposed. Most of the federal fiscal year 2003 factors are mandated by BIPA. These amounts could be changed if Congress enacts Medicare revisions later this year for federal fiscal year and calendar year 2003. As of December 31, 2001, we operated five inpatient psychiatric units, four inpatient rehabilitation units, nine hospital-based skilled nursing facility units, three rural health clinics, one home health agency, one comprehensive outpatient rehabilitation facility and twelve hospitals utilizing swing beds. The Balanced Budget Act also required the Department of Health and Human Services to establish a PPS for home health services. The Balanced Budget Act of 1997 put in place the interim payment system, commonly known as "IPS," until the home health PPS could be implemented. As of October 1, 2000, the home health PPS replaced IPS. We have experienced reductions in payments for our home health services and a decline in home health visits due to a reduction in benefits by reason of the Balanced Budget Act. However, the Balanced Budget Refinement Act delayed until one year following implementation of the PPS a 15.0% payment reduction that would have otherwise applied effective October 1, 2000. The BIPA further delays the one-time 15.0% payment reduction until October 1, 2002. Additionally, the BIPA increased the home health agency PPS annual update to 2.2% for services furnished between April 1, 2001 and September 30, 2001, and for a two year period beginning April 1, 2001, increased Medicare payments to 10.0% for home health services furnished in specified rural areas. We closed our sole home health agency during January 2002. Medicaid. Most state Medicaid payments are made under a PPS or under programs which negotiate payment levels with individual hospitals. Medicaid is currently funded jointly by state and federal governments. The federal government and many states are currently considering significantly reducing Medicaid funding, while at the same time expanding Medicaid benefits. This could adversely affect future levels of Medicaid payments received by our hospitals. Annual Cost Reports. Hospitals participating in the Medicare and some Medicaid programs, whether paid on a reasonable cost basis or under a PPS, are required to meet certain financial reporting requirements. Federal and, where applicable, state regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. Since implementation of outpatient PPS in August 2000, the filing of all Medicare cost reports have been postponed until certain government reports are issued. We anticipate filing several of these postponed cost reports during 2002. Because of the postponement, the magnitude of potential adjustments and changes in estimates is significantly greater at December 31, 2001 and for the year then ended than in recent years. Annual cost reports required under the Medicare and some Medicaid programs are subject to routine governmental audits. These audits may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs. Finalization of these audits often takes several years. Providers can appeal any final determination made in connection with an audit. 15 Commercial Insurance. Our hospitals provide services to individuals covered by private healthcare insurance. Private insurance carriers pay our hospitals or in some cases reimburse their policyholders based on the hospital's established charges and the coverage provided in the insurance policy. Commercial insurers are trying to limit the payments for hospital services by negotiating discounts. Reductions in payments for services provided by our hospitals to individuals covered by commercial insurers could adversely affect us. REGULATORY COMPLIANCE PROGRAM It is our policy to conduct our business with integrity and in compliance with the law. We have in place and continue to develop a corporate-wide compliance program, which focuses on all areas of regulatory compliance, including billing, reimbursement and cost reporting practices. This regulatory compliance program is intended to ensure that high standards of conduct are maintained in the operation of our business and to help ensure that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, we provide initial and periodic legal compliance and ethics training to every employee, review various areas of our operations, and develop and implement policies and procedures designed to foster compliance with the law. We regularly monitor our ongoing compliance efforts. The program also includes a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors or designated compliance officers in our hospitals. In December 2000, we entered into a corporate integrity agreement with the Office of Inspector General and agreed to maintain our compliance program in accordance with the corporate integrity agreement. Violations of the integrity agreement could subject us to substantial monetary penalties. The compliance measures and reporting and auditing requirements contained in the integrity agreement include: - continuing the duties and activities of our audit and compliance committee, corporate compliance officer, internal audit and compliance department, local ethics and compliance officers, corporate compliance committee and hospital compliance committees; - maintaining our written code of conduct, which sets out our commitment to full compliance with all statutes, regulations, and guidelines applicable to federal healthcare programs; - maintaining our written policies and procedures addressing the operation of our compliance program; - providing general training on the compliance policy; - providing specific training for the appropriate personnel on billing, coding and cost report issues; - having an independent third party conduct periodic audits of our facilities' inpatient DRG coding; - continuing our confidential disclosure program and compliance hotline to enable employees or others to disclose issues or questions regarding possible inappropriate policies or behavior; - enhancing our screening program to ensure that we do not hire or engage employees or contractors who have been sanctioned or excluded from participation in federal healthcare programs; 16 - reporting any material deficiency which resulted in an overpayment to us by a federal healthcare program; and - submitting annual reports to the Inspector General which describe in detail the operations of our corporate compliance program for the past year. ARRANGEMENTS RELATING TO THE DISTRIBUTION Immediately prior to HCA's distribution of our common stock, we entered into agreements with HCA to define our ongoing relationships after the distribution and to allocate tax, employee benefits and other liabilities and obligations arising from periods prior to the distribution date. Distribution Agreement. We entered into a distribution agreement with HCA and Triad which governed the corporate transactions required to effect the distribution and other arrangements between the parties after the distribution. The distribution agreement also allocated financial responsibility between the parties for liabilities arising out of the assets and entities that constitute our company, including liabilities arising out of the transfer of the assets and entities to us. HCA agreed in the distribution agreement to indemnify us for any losses arising from the pending governmental investigations of HCA's business practices prior to the date of the distribution and losses arising from legal proceedings, present or future, related to the investigation or actions engaged in prior to the distribution that relate to the investigation. Tax Sharing and Indemnification Agreement. We also entered into a tax sharing and indemnification agreement with HCA and Triad, which allocated tax liabilities among the parties and addressed other tax matters, including responsibility for filing tax returns, control of and cooperation in tax litigation, and qualification of the distribution as a tax-free transaction. Generally, HCA is responsible for taxes that are allocable to periods before the distribution date, and each of HCA, LifePoint and Triad is responsible for its own tax liabilities, including its allocable portion of taxes shown on any consolidated, combined or other tax return filed by HCA, for periods after the distribution date. The tax sharing and indemnification agreement prohibits us from taking actions that could jeopardize the tax treatment of the distribution or the restructuring that preceded the distribution, and requires us to indemnify HCA and Triad for any taxes or other losses that result from our actions. In connection with preserving the tax treatment of the distribution and the restructuring that preceded the distribution, we agreed to take certain actions that HCA may request and we made covenants, including covenants that, for a period of three years following the distribution, we will not authorize, undertake or facilitate any of the following without the consent of HCA: - issue additional stock or other equity instruments; - merge, dissolve, consolidate, redeem our securities or liquidate; - transfer or dispose of assets, other than the disposition of assets that were previously identified for divestiture; or - recapitalize or otherwise change our capital structure. Benefits and Employment Matters Agreement. We entered into a benefits and employment matters agreement with HCA and Triad, which allocated responsibilities for employee compensation, benefits, labor, benefit plan administration and certain other employment matters on and after the distribution date. Insurance Allocation and Administration Agreement. Before the distribution, HCA maintained various insurance policies for the benefit of the facilities that now make up our company. A wholly owned insurance subsidiary of HCA insures HCA against substantially all losses in periods 17 before the distribution. In addition, HCA maintains excess loss policies. We also entered into an insurance allocation and administration agreement with HCA that describes our continuing rights and obligations regarding insurance after the distribution date and that defines our relationship regarding insurance on HCA's property and our property. Computer and Data Processing Services Agreement. HCA's wholly owned subsidiary, HCA-Information Technology and Services, Inc. entered into a computer and data processing services agreement with us. HCA-Information Technology and Services, Inc. provides computer installation, support, training, maintenance, data processing and other related services to us under this agreement. HCA-Information Technology and Services, Inc. charges fees to us for services provided under this agreement. Other Agreements. HCA entered into agreements with us by which HCA shares telecommunications services with us under HCA's agreements with its telecommunications services provider and by which HCA makes account collection services available to us. We also participate, along with HCA, Triad and Health Management Associates, Inc. in a group purchasing organization which makes national supply and equipment contracts available to our facilities. ITEM 2. PROPERTIES Information with respect to our hospitals and our other properties can be found in Item 1 of this report under the caption, "Business - Properties." ITEM 3. LEGAL PROCEEDINGS General. We are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts, for wrongful restriction of or interference with physicians' staff privileges and employment related claims. In certain of these actions, plaintiffs request punitive or other damages against us that may not be covered by insurance. We are currently not a party to any proceeding which, in management's opinion, would have a material adverse effect on our business, financial condition or results of operations. Americans with Disabilities Act Claim. On January 12, 2001, Access Now, Inc., a disability rights organization, filed a class action lawsuit against each of our hospitals alleging non-compliance with the accessibility guidelines under the Americans with Disabilities Act. The lawsuit, filed in the United States District Court for the Eastern District of Tennessee does not seek any monetary damages but, instead, seeks only injunctive relief requiring facility modification, where necessary, to meet the ADA guidelines, along with attorneys' fees and costs. In January 2002, the District Court certified the class action and issued a scheduling order that requires the parties to complete discovery and inspection for approximately six facilities per year. We intend to vigorously defend the lawsuit, recognizing our obligation to correct any deficiencies in order to comply with the ADA. Governmental Investigation of HCA and Related Litigation. HCA is currently the subject of various federal and state investigations, qui tam actions, shareholder derivative and class action suits, patient/payor actions and general liability claims. HCA is also the subject of a formal order of investigation by the SEC. Based on our review of HCA's public filings, we understand that the SEC's investigation of HCA includes the anti-fraud, insider trading, periodic reporting and internal accounting control provisions of the federal securities laws. These investigations, actions and claims relate to HCA and its subsidiaries, including subsidiaries that, before our formation as an independent company, owned the facilities that we now own. HCA is a defendant in several qui tam actions, or actions brought by private parties, known as relators, on behalf of the United States of America, which have been unsealed and served on HCA. The actions allege, in general, that HCA and certain subsidiaries and/or affiliated partnerships violated the False Clams Act, 31 U.S.C. ss. 3729 et seq., for improper claims submitted to the 18 government for reimbursement. The lawsuits generally seek three times the amount of damages caused to the United States by the submission of any Medicare or Medicaid false claims presented by the defendants to the federal government, civil penalties of not less than $5,500 nor more than $11,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. HCA has disclosed that, on March 15, 2001, the Department of Justice filed a status report setting forth the government's decisions regarding intervention in existing qui tam actions against HCA and filed formal complaints for those suits in which the government has intervened. HCA stated that, of the original 30 qui tam actions, the Department of Justice remains active and has elected to intervene in eight actions. HCA has also disclosed that it 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. Based on our review of HCA's public filings, we understand that, in December 2000, HCA entered into a Plea Agreement with the Criminal Division of the Department of Justice and various U.S. Attorney's Offices (which we will refer to as the plea agreement) and a Civil and Administrative Settlement Agreement with the Civil Division of the Department of Justice (which we will refer to as the civil agreement). Based on our review of HCA's public filings, we understand that the agreements resolve all Federal criminal issues outstanding against HCA and certain issues involving Federal civil claims by or on behalf of the government against HCA relating to DRG coding, outpatient laboratory billing and home health issues. Pursuant to the plea agreement, HCA paid the government $95 million during the first quarter of 2001. The civil agreement was approved by the Federal District Court of the District of Columbia in August 2001. Pursuant to the civil agreement, HCA agreed to pay the government $745 million plus interest, which was paid in the third quarter of 2001. Based on our review of HCA's public filings, we understand that certain civil issues are not covered by the civil agreement and remain outstanding, including claims related to cost reports and physician relations issues. The plea agreement and the civil agreement relate only to conduct that was the subject of the federal investigations resolved in the agreements and do not resolve various qui tam actions filed by private parties against HCA, or pending state actions. On March 28, 2002, HCA announced that it reached an understanding with CMS to resolve all Medicare cost report, home office cost statement, and appeal issues between HCA and CMS. The understanding provides that HCA would pay CMS $250 million with respect to these matters. The resolution is subject to approval by the Department of Justice and execution of a definitive written agreement. HCA has agreed to indemnify us for any losses, other than consequential damages, arising from the pending governmental investigations of HCA's business practices prior to the date of the distribution and losses arising from legal proceedings, present or future, related to the investigation 19 or actions engaged in before the distribution that relate to the investigation. HCA has also agreed that, in the event that any hospital owned by us at the time of the spin-off is permanently excluded from participation in the Medicare and Medicaid programs as a result of the proceedings described above, then HCA will make a cash payment to us, in an amount (if positive) equal to five times the excluded hospital's 1998 income from continuing operations before depreciation and amortization, interest expense, management fees, minority interests and income taxes, as set forth on a schedule to the distribution agreement, less the net proceeds of the sale or other disposition of the excluded hospital. However, we could be held responsible for any claims that are not covered by the agreements reached with the Federal government or for which HCA is not required to, or fails to, indemnify us. In addition, should HCA be unable to fulfill its obligations with the Federal government, the Company could ultimately be held responsible specifically for any settlement related to the former HCA hospitals operated by the Company. If indemnified matters were asserted successfully against us or any of our facilities, and HCA failed to meet its indemnification obligations, then this event could have a material adverse effect on our business, financial condition, results of operations or prospects. The extent to which we may or may not continue to be affected by the ongoing investigations of HCA and the initiation of additional investigations, if any, cannot be predicted. These matters could have a material adverse effect on our business, financial condition, results of operations or prospects in future periods. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the stockholders during the fourth quarter ended December 31, 2001. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the Nasdaq National Market under the symbol "LPNT." The following table shows the range of high and low sales prices for our common stock for the periods indicated, as reported by the Nasdaq National Market.
High Low ------ ------ 2000 First Quarter.................................... $18.00 $12.25 Second Quarter................................... 23.56 15.50 Third Quarter.................................... 37.00 19.94 Fourth Quarter................................... 51.75 31.13 2001 First Quarter.................................... $50.36 $27.75 Second Quarter................................... 44.72 28.88 Third Quarter.................................... 47.84 38.37 Fourth Quarter................................... 44.85 27.53 2002 First Quarter (through March 25, 2002)........... $38.42 $29.67
On March 25, 2002, the last reported sales price for our common stock on the Nasdaq National Market was $35.74 per share. At March 25, 2002, there were 39,385,416 shares of our common stock held by 5,889 holders of record. We have never declared or paid dividends on our common stock. We intend to retain future earnings to finance the growth and development of our business and, accordingly, do not intend to declare or pay any dividends on the common stock in the foreseeable future. Our board of directors will evaluate our future earnings, results of operations, financial condition and capital requirements in determining whether to declare or pay cash dividends. Delaware law prohibits us from paying any dividends unless we have capital surplus or net profits available for this purpose. In addition, our credit facilities impose restrictions on our ability to pay dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 21 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table contains selected historical financial data for each of the years in the five year period ended December 31, 2001. You should read this table in conjunction with the consolidated financial statements and related notes included elsewhere in this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- 1997 1998 1999 2000 2001 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SUMMARY OF OPERATIONS: Revenues ......................................... $ 487.6 $ 498.4 $ 515.2 $ 557.1 $ 619.4 Salaries and benefits ............................ 196.6 220.8 217.4 224.2 243.2 Supplies ......................................... 55.0 62.0 64.2 67.0 78.2 Other operating expenses ......................... 119.5 117.2 117.3 118.1 120.8 Provision for doubtful accounts .................. 34.5 41.6 38.2 42.0 45.8 Depreciation and amortization .................... 27.4 28.3 31.4 34.1 34.7 Interest expense ................................. 15.4 19.1 23.4 30.7 18.1 Management fees .................................. 8.2 8.9 3.2 -- -- ESOP expense ..................................... -- -- 2.9 7.1 10.4 Impairment of long-lived assets .................. -- 26.1 25.4 (1.4) (0.5) ---------- ---------- ---------- ---------- ---------- 456.6 524.0 523.4 521.8 550.7 Income (loss) from continuing operations before minority interests, and income taxes .................................. 31.0 (25.6) (8.2) 35.3 68.7 Minority interests in earnings of consolidated entities ......................... 2.2 1.9 1.9 2.2 2.7 ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes ................ 28.8 (27.5) (10.1) 33.1 66.0 Provision (benefit) for income taxes ............. 11.7 (9.8) (2.7) 15.2 31.1 ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations(a) ................................. $ 17.1 $ (17.7) (7.4) $ 17.9 $ 33.3 ========== ========== ========== ========== ========== Net income (loss)(a) ............... $ 12.5 $ (21.8) $ (7.4) $ 17.9 $ 33.3 ========== ========== ========== ========== ========== Basic earnings (loss) per share: Income (loss) from continuing operations (a) ................................ $ 0.57 $ (0.59) $ (0.24) $ 0.57 $ 0.97 Net income (loss)(a) ........................... $ 0.41 $ (0.73) $ (0.24) $ 0.57 $ 0.93 Shares used in computing basic earnings(loss) per share (in millions) ....................... 30.0 30.0 30.5 31.6 35.7 Diluted earnings (loss) per share: Income (loss) from continuing operations (a) ............................... $ 0.57 $ (0.59) $ (0.24) $ 0.54 $ 0.94 Net income (loss)(a) ........................... $ 0.41 $ (0.73) $ (0.24) $ 0.54 $ 0.90 Shares used in computing diluted earnings(loss) per share (in millions) ........ 30.2 30.0 30.5 32.9 37.1 Cash dividends declared per common share ......................................... -- -- -- -- -- FINANCIAL POSITION (AS OF END OF YEAR): Assets ........................................... $ 397.9 $ 355.0 $ 421.6 $ 496.3 $ 554.3 Long-term debt, including amounts due within one year ............................... 1.6 0.6 260.2 289.4 150.0 Intercompany balances payable to HCA ............. 182.5 167.6 -- -- -- Working capital .................................. 41.1 26.9 42.2 65.4 82.7 OTHER OPERATING DATA: EBITDA(b) ........................................ $ 82.0 $ 56.8 $ 78.1 $ 105.8 $ 131.4 Capital expenditures ............................. 51.8 29.3 64.8 31.4 35.8 Number of hospitals at end of year ............... 22 23 23 20 23 Number of licensed beds at end of year(c) ....................................... 2,080 2,169 2,169 1,963 2,197 Weighted average licensed beds(d) ................ 2,078 2,127 2,169 2,056 2,011 Admissions(e) .................................... 60,487 62,269 64,081 66,085 70,891 Equivalent admissions(f) ......................... 105,126 110,029 114,321 119,812 129,163 Revenues per equivalent admission ................ $ 4,638 $ 4,530 $ 4,507 $ 4,650 $ 4,796 Average length of stay (days)(g) ................. 4.4 4.4 4.2 4.1 4.0 Emergency room visits(h) ......................... N/A N/A 278,250 294,952 313,110 Outpatient surgeries(i) .......................... N/A N/A 46,773 49,711 57,423 Total surgeries .................................. N/A N/A 63,854 68,012 77,465
- -------------------------------- 22 (a) Includes charges related to impairment of long-lived assets of $25.4 million ($16.2 million after-tax) and $26.1 million ($15.9 million after-tax) for the years ended December 31, 1999 and 1998, respectively, gain on impairment of long-lived assets of $0.5 million ($0.3 million after-tax), $1.4 million ($0.8 million after-tax) for the years ended December 31, 2001 and 2000, respectively and an extraordinary item of $1.6 million (net of $1.0 million of income taxes for the year ended December 31, 2001. (b) EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long-lived assets, ESOP expense, minority interests in earnings of consolidated entities, extraordinary items and income taxes. EBITDA is commonly used as an analytical indicator within the healthcare industry and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under accounting principles generally accepted in the United States, and the items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with accounting principles generally accepted in the United States and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Represents the average number of licensed beds weighted based on periods operated. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to our hospitals and is used by management and investors as a general measure of inpatient volume. (f) Equivalent admissions is used by management and investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions is computed by multiplying admissions (inpatient volume) by the sum gross inpatient revenue and gross outpatient revenue and then 23 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 our hospitals. Average length of stay has declined as a result of the continuing pressures from managed care and other payors to restrict admissions and reduce the number of days that are covered by the payors for certain procedures and by technological and pharmaceutical improvements. (h) Represents the total number of hospital based emergency room visits. (i) Outpatient surgeries are those surgeries that do not require admission to our hospitals. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read this discussion together with our consolidated historical financial statements and related notes included elsewhere in this report. OVERVIEW At December 31, 2001, we operated 23 general, acute care hospitals in the states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. For the year ended December 31, 2001, we generated $619.4 million in net revenues. FORWARD-LOOKING STATEMENTS This report and other materials we have filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by us, contain, or will contain, disclosures which are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations and future financial condition and results. These factors include, but are not limited to: - the highly competitive nature of the healthcare business including the competition to recruit general and specialized physicians; - the efforts of insurers, healthcare providers and others to contain healthcare costs; - possible changes in the Medicare program that may further limit reimbursements to healthcare providers and insurers; - the ability to attract and retain qualified management and personnel, including physicians, nurses and technicians, consistent with our expectations and targets; - changes in federal, state or local regulations affecting the healthcare industry; - the possible enactment of federal or state healthcare reform; - the possibility that any favorable governmental reimbursement changes will be delayed or abandoned due to the focus of Congress on the recent terrorist attacks and the resulting reallocation of governmental resources; - our ability to acquire hospitals on favorable terms and to successfully complete budgeted capital improvements of our existing facilities; 24 - liabilities and other claims asserted against us; - uncertainty associated with the HIPAA regulations; - the ability to enter into, renegotiate and renew payor arrangements on acceptable terms; - the availability and terms of capital to fund our business strategy; - the availability, cost and terms of insurance coverage; - implementation of our business strategy and development plans; - our ongoing efforts to monitor, maintain and comply with applicable laws, regulations, policies and procedures including those required by the corporate integrity agreement that we entered into with the government in December, 2000 and those that, if violated, could cause any of our facilities to lose its state license or its ability to receive payments under the Medicare, Medicaid and TRICARE programs; - the ability to increase patient volumes and control the costs of providing services and supply costs; - claims and legal actions relating to professional liabilities and other matters; - successful development (or license) of software and management information systems used for effective claims processing; - limitations placed on us to preserve the tax treatment of the distribution of our common stock from HCA; - fluctuations in the market value of our common stock and resulting costs to us to administer our ESOP; - changes in accounting practices; - changes in general economic conditions; and - other risk factors described in this report. 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 our company. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this report. RESULTS OF OPERATIONS Revenue/Volume Trends We anticipate our patient volumes and related revenues will continue to increase as a result of the following factors: - Expanding Service Offerings. We believe our efforts to improve the quality and broaden the scope of healthcare services available at our facilities will lead to increased patient volumes. Recruiting and retaining both general practitioners and specialists for our non-urban communities is a key to the success of these efforts. Between the date of the distribution of our stock from HCA and December 31, 2001, we recruited 207 physicians, 25 of which approximately 64% are specialists. Adding new physicians should help increase both inpatient and outpatient volumes which, in turn, should increase revenues. Continuing to add specialists should also allow us to grow by offering new services. In addition, increases in capital expenditures in our hospitals should increase local market share and help persuade patients to stay within their communities rather than leaving town for healthcare services. - Improving Managed Care Position. We believe we have been able to negotiate contract terms that are generally more favorable for our facilities than terms available in urban markets. - Aging U.S. Population. In general, the population of the United States and of the communities that we serve is aging. At the end of 2001, approximately 13% of the U.S. population was 65 years old or older compared to 11% of the population at the end of 1980. This aging trend is projected to continue so that by 2025, approximately 18% of the U.S. population is expected to be older than 65. Generally, the older population tends to use healthcare services more frequently than the younger population. - Medicare Rate Increases. The Medicare, Medicaid and SCHIP Benefit Improvement and Protection Act of 2000 was enacted in December 2000. Under BIPA, we have experienced Medicare rate increases that began in April 2001. Although we anticipate our patient volumes to increase, the resulting revenue will likely be offset in part by the following factors: - Revenues from Medicare, Medicaid and Managed Care Plans. We derive a significant portion of our business from Medicare, Medicaid and managed care plans. Admissions related to Medicare, Medicaid and managed care plan patients were 91.5% and 90.4% of total admissions for the years ended December 31, 2001 and 2000, respectively. These payors receive significant discounts. - Efforts to Reduce Payments. Other third-party payors also negotiate discounted fees rather than paying standard prices. In addition, an increasing proportion of our services are reimbursed under predetermined payment amounts regardless of the cost incurred. - Growth in Outpatient Services. We anticipate that the growth trend in outpatient services will continue. A number of procedures once performed only on an inpatient basis have been, and will likely continue to be, converted to outpatient procedures. This conversion has occurred through continuing advances in pharmaceutical and medical technologies and as a result of efforts made by payors to control costs. Generally, the payments we receive for outpatient procedures are less than those for similar procedures performed in an inpatient setting. Net outpatient revenues as a percentage of total patient revenues was 48.5% for the year ended December 31, 2001. Cost Containment We seek to control costs by, among other things, reducing labor costs by improving labor productivity and decreasing the use of contracted labor, controlling supply expenses through the use of a group purchasing organization and reducing uncollectible revenues. We have implemented cost control initiatives including adjusting staffing levels according to patient volumes, modifying supply purchases according to usage patterns and providing training to hospital staff in more efficient billing and collection processes. For the year ending December 31, 2001 compared to the year ended December 31, 2000, total operating expenses decreased as a percentage of revenue to 78.8% from 81.0%. We believe that as our company grows, we will likely benefit from our ability to spread fixed administrative costs over a larger base of operations. While we were able to control our costs during 2001 there is no guarantee that we can contain certain costs in 2002 and beyond. Due to the general shortage of nurses and technicians in the industry we may experience an increase in salaries and benefits expense as we may be forced to hire additional contract health professionals. In addition, the healthcare industry has recently experienced an increase in the cost of all insurance lines, especially professional and general liability insurance. We will mitigate a portion of these increases for fiscal 2002 by increasing our self-insured retention levels for professional and general liabilities. We currently have no information that would lead us to believe that this trend is only temporary in nature and thus there is no assurance that these costs will not have a material adverse affect on our future operating results. Pressure on payment levels, the increase in outpatient services and the large number of our patients who participate in managed care plans will present ongoing challenges for us. These challenges are exacerbated by our inability to control these trends and the associated risks. To maintain or improve operating margins in the future, we must, among other things, increase patient volumes while controlling the costs of providing services. If we are not able to achieve these improvements and the trend toward declining reimbursements and payments continues, results of operations and cash flow will deteriorate. IMPACT OF ACQUISITIONS Effective December 1, 2001, we acquired Ville Platte Medical Center in Ville Platte, Louisiana for approximately $11.0 million in cash, including working capital and the assumption of long-term liabilities of approximately $2.6 million. Pursuant to the asset purchase agreement, we also agreed to make certain capital improvements which, including the initial cash payment and liabilities assumed, is not required to exceed $25.0 million. The capital improvements must be completed by December 1, 2004. The allocation of the full purchase price had not been determined as of December 31, 2001. Unallocated purchase price of approximately $12.6 million is included in other long-term assets in the accompanying consolidated balance sheet as of December 31, 2001 pending final appraisal from a third party. Effective October 1, 2001, we acquired Athens Regional Medical Center in Athens, Tennessee for approximately $19.7 million in cash, including working capital. The purchase price is subject to adjustment pending the final working capital settlement. Effective April 1, 2001 we purchased a diagnostic imaging center in Palatka, Florida for $5.8 million in cash, including working capital. The funds used for the acquisition were obtained from the Company's available cash and proceeds from the sale of a facility and previously held in a Starker Trust which is included in deferred taxes and other current assets in the accompanying consolidated balance sheet as of December 31, 2000. Cost in excess of net assets acquired totaled $1.8 million and was amortized using a 30 year life. Effective January 2, 2001, we entered into a two-year lease to operate Bluegrass Community Hospital, a 25-bed critical access hospital located in Versailles, Kentucky, which the parties may mutually agree to extend. 26 Because of the relatively small number of hospitals we own, each hospital acquisition can materially affect our overall operating margin. We typically take a number of steps to lower operating costs when we acquire a hospital. The impact of our actions may be offset by other cost increases to expand services, strengthen medical staff and attract additional patients to our facilities. The benefits of our investments and of other activities to improve operating margins generally do not occur immediately. Consequently, the financial performance of a newly acquired hospital may adversely affect our overall operating margins in the short term. As we acquire additional hospitals, this effect should be mitigated by the expanded financial base of our existing hospitals and the allocation of corporate overhead among a larger number of hospitals. 27 OPERATING RESULTS SUMMARY The following tables present summaries of results of operations for the three months ended December 31, 2000 and 2001 and for the years ended December 31, 1999, 2000 and 2001 (dollars in millions):
THREE MONTHS ENDED DECEMBER 31, -------------------------------------------- 2000 2001 --------------------- ------------------- % OF % OF AMOUNT REVENUES AMOUNT REVENUES ------- -------- ------ -------- Revenues............................................ $ 142.5 100.0% $ 164.3 100.0% Salaries and benefits(a)............................ 56.0 39.2 64.2 39.1 Supplies(b)......................................... 16.9 11.8 20.8 12.7 Other operating expenses(c)......................... 29.3 20.6 32.3 19.6 Provision for doubtful accounts..................... 10.6 7.5 11.7 7.1 ------- ----- ------- ----- 112.8 79.1 129.0 78.5 ------- ----- ------- ----- EBITDA(d)........................................... 29.7 20.9 35.3 21.5 Depreciation and amortization....................... 8.8 6.2 9.9 6.2 Interest expense, net............................... 7.8 5.4 3.9 2.3 ESOP expense........................................ 2.7 1.9 2.4 1.4 ------- ----- ------- ----- Income before minority interests and income taxes... 10.4 7.4 19.1 11.6 Minority interests in earnings of consolidated entities.......................................... 0.4 0.4 0.8 0.5 ------- ----- ------- ----- Income before income taxes.......................... 10.0 7.0 18.3 11.1 Provision for income taxes.......................... 4.6 3.2 8.0 4.8 ------- ----- ------- ----- Net income.......................................... $ 5.4 3.8% $ 10.3 6.3% ======= ===== ======= ===== 2000 2001 ------------------------------- -------------------------- % CHANGES % CHANGES AMOUNT FROM PRIOR YEAR(j) AMOUNT FROM PRIOR YEAR --------- ------------------ --------- --------------- Consolidated: Revenues............................................ $ 142.5 11.9 $ 164.3 15.3 Admissions(e)....................................... 16,888 6.7 17,988 6.5 Equivalent admissions(f)............................ 29,732 4.5 33,461 12.5 Revenues per equivalent admission................... $ 4,793 7.0 $ 4,911 2.5 Outpatient factor(f)................................ 1.76 (1.7) 1.86 5.7 Emergency room visits(g)............................ 70,891 1.9 80,191 13.1 Outpatient surgeries(h)............................. 12,218 3.8 15,231 24.7 Total surgeries(h).................................. 16,939 4.8 20,540 21.3 Same hospital(i): Revenues............................................ $ 122.9 10.7 $ 133.7 8.7 Admissions(e)....................................... 14,219 2.2 14,736 3.6 Equivalent admissions(f)............................ 26,441 6.4 27,670 4.6 Revenues per equivalent admission................... $ 4,650 4.0 $ 4,830 3.9 Outpatient factor(f)................................ 1.86 3.9 1.88 1.1 Emergency room visits(g)............................ 59,505 2.8 62,806 5.5 Outpatient surgeries(h)............................. 11,141 3.6 12,931 16.1 Total surgeries(h).................................. 15,231 3.3 17,250 13.3
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 1999 2000 2001 --------------------- --------------------- --------------------- % OF % OF % OF AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES ------- -------- ------- -------- ------- -------- Revenues ............................................ $ 515.2 100.0% $ 557.1 100.0% $ 619.4 100.0% Salaries and benefits(a)............................. 217.4 42.2 224.2 40.2 243.2 39.3 Supplies(b).......................................... 64.2 12.5 67.0 12.0 78.2 12.6 Other operating expenses(c).......................... 117.3 22.7 118.1 21.3 120.8 19.5 Provision for doubtful accounts ..................... 38.2 7.4 42.0 7.5 45.8 7.4 ------- ------ ------- ------ ------- ------ 437.1 84.8 451.3 81.0 488.0 78.8 ------- ------ ------- ------ ------- ------ EBITDA(d) ........................................... 78.1 15.2 105.8 19.0 131.4 21.2 Depreciation and amortization ....................... 31.4 6.2 34.1 6.2 34.7 5.6 Interest expense, net ............................... 23.4 4.5 30.7 5.5 18.1 2.9 Management fees ..................................... 3.2 0.6 -- -- -- -- ESOP expense ........................................ 2.9 0.6 7.1 1.3 10.4 1.7 Impairment of long-lived assets ..................... 25.4 4.9 (1.4) (0.3) (0.5) (0.1) ------- ------ ------- ------ ------- ------ Income (loss) before minority interests, income taxes and extraordinary item ............... (8.2) (1.6) 35.3 6.3 68.7 11.1 Minority interests in earnings of consolidated entities ............................. 1.9 0.4 2.2 0.4 2.7 0.4 ------- ------ ------- ------ ------- ------ Income (loss) before income taxes and extraordinary item ............................... (10.1) (2.0) 33.1 5.9 66.0 10.7 Provision (benefit) for income taxes ................ (2.7) (0.6) 15.2 2.7 31.1 5.1 ------- ------ ------- ------ ------- ------ Income (loss) before extraordinary item ............................................. (7.4) (1.4) 17.9 3.2 34.9 5.6 Extraordinary loss on early retirement of bank debt, net ..................... -- -- -- -- ( 1.6) (0.2) ------- ------ ------- ------ ------- ------ Net income (loss) ................................... $ (7.4) (1.4)% $ 17.9 3.2% $ 33.3 5.4% ------- ------ ------- ------ ------- ------ 2000 2001 ------------------------------- -------------------------- % CHANGES % CHANGES AMOUNT FROM PRIOR YEAR(j) AMOUNT FROM PRIOR YEAR --------- ------------------ --------- --------------- Consolidated: Revenues............................................ $ 557.1 8.1 $ 619.4 11.2 Admissions(e)....................................... 66,085 3.1 70,891 7.3 Equivalent admissions(f)............................ 119,812 4.8 129,163 7.8 Revenues per equivalent admission................... $ 4,650 3.2 $ 4,796 3.1 Outpatient factor(f)................................ 1.82 2.2 1.83 0.5 Emergency room visits(g)............................ 294,952 6.0 313,110 6.2 Outpatient surgeries(h)............................. 49,711 6.3 57,423 15.5 Total surgeries(h).................................. 68,012 6.5 77,465 13.9 Same hospital(i): Revenues............................................ $ 483.4 8.8 $ 529.5 9.5 Admissions(e)....................................... 57,064 2.6 60,231 5.5 Equivalent admissions(f)............................ 106,082 6.5 113,054 6.6 Revenues per equivalent admission................... $ 4,557 2.2 $ 4,684 2.8 Outpatient factor(f)................................ 1.86 3.9 1.88 1.1 Emergency room visits(g)............................ 245,536 5.1 256,706 4.5 Outpatient surgeries(h)............................. 45,525 8.3 51,503 13.1 Total surgeries(h).................................. 61,713 8.2 68,513 11.0
- ----------------- (a) Represents our cost of salaries and benefits, including employee health benefits and workers compensation insurance, for all hospital and corporate employees and contract labor. (b) Includes our hospitals' costs for pharmaceuticals, blood, surgical instruments and all general supply items, including the cost of freight. (c) Consists primarily of contract services, physician recruitment, professional fees, repairs and maintenance, rents and leases, utilities, insurance, marketing and non-income taxes. (d) EBITDA is defined as income before depreciation and amortization, interest expense, management fees, impairment of long-lived assets, ESOP expense, minority interests in earnings of consolidated entities, extraordinary items and income taxes. EBITDA is commonly used as an analytical indicator within the healthcare industry and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under accounting principles generally accepted in the United States and the items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with accounting principles generally accepted in the United States and is susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to our hospitals and used by management and investors as a general measure of inpatient volume. (f) Management and investors use equivalent admissions as a general measure of combined inpatient and outpatient volume. We compute equivalent admissions 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 total number of hospital-based emergency room visits. (h) Outpatient surgeries are those surgeries that do not require admission to our hospitals. (i) Same hospital information excludes the operations of hospitals which we either acquired or divested during the years presented. The costs of corporate overhead are included in same hospital information. (j) The 2000 same hospital % changes from prior year are based on hospitals owned for all twelve months during 1999 and 2000. For the Three Months Ended December 31, 2001 and 2000 Revenues increased 15.3% to $164.3 million for the three months ended December 31, 2001 compared to $142.5 million for the three months ended December 31, 2000 primarily as a result of our acquisition of two hospitals during the three months ended December 31, 2001 and an 8.7% increase in same hospital revenues. The 8.7% increase in same hospital revenues resulted primarily from a 3.6% increase in same hospital inpatient admissions and a 4.6% increase in same hospital equivalent admissions. In addition, total surgeries, outpatient surgeries and emergency room visits increased 13.3%, 16.1% and 5.5%, respectively, on a same hospital basis for the three months ended December 31, 2001 over the same period last year. The growth in outpatient surgeries and emergency room visits increased our revenue; however, these outpatient revenues lower our growth in revenues per equivalent admission as revenues from outpatient services are generally lower than inpatient services. Revenues per equivalent admissions increased 3.9% on a same hospital basis for the three months ended December 31, 2001 compared to the three months ended December 31, 2000. Our total costs did not increase at the same rate as our revenues. The increase in volumes and revenues per equivalent admission contributed to the reduction of our total operating expenses as a percentage of revenues because we were able to spread our operating costs over an increased based of revenues. Salaries and benefits decreased as a percentage of revenues to 39.1% for the three months ended December 31, 2001 from 39.2% for the three months ended December 31, 2000 primarily as a result of improvements in labor productivity and an increase in revenues per equivalent admission. Man-hours per equivalent admission decreased 2.3% over the same period last year. The decrease in salaries and benefits as a percentage of revenues was partially offset by a 4.4% increase in salaries and benefits per man-hour for the three months ended December 31, 2001 compared to the three months ended December 31, 2000. On a same hospital basis, salaries and benefits decreased as a percentage of revenues to 38.2% for the three months ended December 31, 2001 from 38.5% over the same period last year. Supply costs increased as a percentage of revenues to 12.7% for the three months ended December 31, 2001 from 11.8% for the three months ended December 31, 2000. The cost of supplies per equivalent admission increased 9.5% primarily as a result of increases in the number of surgeries performed by us during the three months ended December 31, 2001 compared to the three months ended December 31, 2000 as supply costs incurred in connection with surgeries are higher than supply costs incurred for other procedures. Total surgeries increased 15.5% over the same period last year. In addition, the increase is partially due to increases in pharmaceutical costs and new product development costs as well as general inflation. On a same hospital basis, supply costs increased as a percentage of revenues to 12.6% for the three months ended December 31, 2001 from 11.7% over the same period last year. Other operating expenses decreased as a percentage of revenues to 19.6% for the three months ended December 31, 2001 from 20.6% for the three months ended December 31, 2000. The decrease was primarily the result of an increase in volumes and revenues per equivalent admission and a decrease in professional fees and contract services as a percentage of revenues. On a same hospital basis, other operating expenses decreased as a percentage of revenues to 20.0% for the three months ended December 31, 2001 from 21.3% over the same period last year. Provision for doubtful accounts decreased as a percentage of revenues to 7.1% for the three months ended December 31, 2001 from 7.5% for the three months ended December 31, 2000 primarily as a result of an improvement in collections. On a same hospital basis, provision for doubtful accounts decreased as a percentage of revenues to 5.8% for the three months ended December 31, 2001 from 6.1% over the same period last year. Depreciation and amortization expense increased to $9.9 million for the three months ended December 31, 2001 compared to $8.8 million for the three months ended December 31, 2000 primarily due to the hospitals we acquired during the three months ended December 31, 2001. Net interest expense decreased to $3.9 million for the three months ended December 31, 2001 from $7.8 million for the three months ended December 31, 2000. This decrease was primarily the result of our repayment of the remaining bank debt borrowings outstanding during the first half of 2001. ESOP expense decreased to $2.4 million for the three months ended December 31, 2001 from $2.7 million for the three months ended December 31, 2000. This decrease was primarily because of a lower average fair market value of our common stock for the three months ended December 31, 2001 compared to the same period last year. We recognize ESOP expense based on the average fair market value of the shares committed to be released during the period. Minority interests in earnings of consolidated entities increased to $0.8 million for the three months ended December 31, 2001 compared to $0.4 million for the three months ended December 31, 2000 primarily because of an increase in the pre-tax income of our non-wholly owned hospital. The provision for income taxes increased to $8.0 million for the three months ended December 31, 2001 compared to $4.6 million for the three months ended December 31, 2000 primarily as a result of higher pre-tax income for the three months ended December 31, 2001 compared to the three months ended December 31, 2000. Net income increased to $10.3 million for the three months ended December 31, 2001 compared to $5.4 million for the three months ended December 31, 2000 because of the reasons described above. For the Years Ended December 31, 2001 and 2000 Revenues increased 11.2% to $619.4 million for the year ended December 31, 2001 compared to $557.1 million for the year ended December 31, 2000 primarily as a result of a 7.8% increase in equivalent admissions, a 3.1% increase in revenues per equivalent admission. In addition, total surgeries, outpatient surgeries and emergency room visits increased 13.9%, 15.5% and 6.2% respectively for the year ended December 31, 2001 over the same period last year. The growth in outpatient surgeries and emergency room visits increased our revenue; however, these outpatient revenues lower our growth in revenues per equivalent admission as revenues from outpatient services are generally lower than inpatient services. On a same hospital basis, revenues increased 9.5% for the year ended December 31, 2001 compared to the same period last year. Our total costs did not increase at the same rate as our revenues. The increase in volumes and revenues per equivalent admission contributed to the reduction of our total operating expenses as a percentage of revenues because we were able to spread our operating costs over an increased base of revenues. Salaries and benefits decreased as a percentage of revenues to 39.3% for the year ended December 31, 2001 from 40.2% for the year ended December 31, 2000 primarily as a result of improvements in labor productivity and an increase in revenues per equivalent admission. Man-hours per equivalent admission decreased 5.0% over the same period last year. The decrease in salaries and benefits as a percentage of revenue was partially offset by a 5.9% increase in salaries and benefits per man-hour for the year ended December 31, 2001 compared to the year ended December 31, 2000. On a same hospital basis, salaries and benefits decreased as a percentage of revenues to 38.7% for the year ended December 31, 2001 from 39.3% over the same period last year. Supply costs increased as a percentage of revenues to 12.6% for the year ended December 31, 2001 from 12.0% for the year ended December 31, 2000. The cost of supplies per equivalent admission increased 8.2% primarily as a result of increases in the number of surgeries performed by us during the year ended December 31, 2001 compared to the year ended December 31, 2000 as supply costs incurred in connection with surgeries are higher than supply costs incurred for other procedures. In addition, the increase is partially due to increases in pharmaceutical costs and new product development costs as well as general inflation. On a same hospital basis, supply costs increased as a percentage of revenues to 12.6% for the year ended December 31, 2001 from 12.1% over the same period last year. Other operating expenses decreased as a percentage of revenues to 19.5% for the year ended December 31, 2001 from 21.3% for the year ended December 31, 2000. The decrease was primarily the result of an increase in volumes and revenues per equivalent admission as discussed above and a decrease in professional fees and contract services as a percentage of revenues. On a same hospital basis, other operating expenses decreased as a percentage of revenues to 19.5% for the year ended December 31, 2001 from 21.3% over the same period last year. Provision for doubtful accounts decreased slightly as a percentage of revenues to 7.4% for the year ended December 31, 2001 from 7.5% for the year ended December 31, 2000. On a same hospital basis, provision for doubtful accounts increased as a percentage of revenues to 6.6% for the year ended December 31, 2001 from 6.3% over the same period last year. Depreciation and amortization expense increased to $34.7 million for the year ended December 31, 2001 from $34.1 million for the year ended December 31, 2001 primarily due to the hospitals we acquired during fiscal 2000 and 2001 offset by the sale of five hospitals during fiscal 2000. Net interest expense decreased to $18.1 million for the year ended December 31, 2001 from $30.7 million for the year ended December 31, 2000. This decrease was primarily the result of our repayment of the remaining bank debt borrowings outstanding during April and May 2001. ESOP expense increased to $10.4 million for the year ended December 31, 2001 from $7.1 million for the year ended December 31, 2000. This increase was because of a higher average fair market value of our common stock for the year ended December 31, 2001 compared to the same period last year. We recognize ESOP expense based on the average fair market value of the shares committed to be released during the period. During the year ended December 31, 2001 and 2000, we recorded a $0.5 million and $1.4 million pre-tax gain, respectively, related to the favorable settlement on the sale of a facility on which we had previously recorded an impairment charge. Minority interests in earnings of consolidated entities increased to $2.7 million for the year ended December 31, 2001 compared to $2.2 million for the year ended December 31, 2000 primarily because of an increase in the pretax income of our non-wholly owned hospital. The provision for income taxes increased to $31.1 million for the year ended December 31, 2001 compared to $15.2 million for the year ended December 31, 2000 primarily as a result of higher pre-tax income for the year ended December 31, 2001 compared to the year ended December 31, 2000. These provisions reflect effective income tax rates of 47.4% for 2001 compared to 46.1% for 2000. The increase in the effective rate primarily resulted from the increase in the nondeductible portion of ESOP expense due to the higher average fair market value of the shares committed to be released during 2001 compared to 2000. The ESOP expense deductible for tax purposes is fixed at $3.2 million per year. In June 2001, we completed a $200 million, five-year amended and restated credit agreement with a syndicate of banks, which increased our available credit under our revolving credit agreement from $65 million to $200 million. Upon consummation of this amended and restated agreement, we wrote off $2.6 million of deferred loan costs related to our original credit agreement, which resulted in an extraordinary charge of $1.6 million, net of a tax benefit of $1.0 million. Net income increased to $33.3 million for the year ended December 31, 2001 compared to $17.9 million for the year ended December 31, 2000 because of the reasons described above. For the Years Ended December 31, 2000 and 1999 Revenues increased 8.1% to $557.1 million for the year ended December 31, 2000 compared to $515.2 million for the year ended December 31, 1999, primarily as a result of an 8.8% increase in same hospital revenues and our acquisition of two hospitals during fiscal 2000. Our sale of five hospitals during fiscal 2000 partially offset the increase in revenues. The 8.8% increase in same hospital revenues resulted primarily from a 2.6% increase in same hospital inpatient admissions and a 6.5% increase in same hospital equivalent admissions, adjusted to reflect combined inpatient and outpatient volume. 29 Our costs did not increase at the same rate as our revenue. The increase in volumes and revenues per equivalent admission contributed to the reduction of our operating expenses as a percent of revenue because we were able to spread our operating costs over an increased base of revenues. Salaries and benefits decreased as a percentage of revenues to 40.2% for the year ended December 31, 2000 from 42.2% for the year ended December 31, 1999 primarily as a result of improvements in labor productivity and an increase in revenues per equivalent admission, as discussed above. In addition, man-hours per equivalent admission decreased 5.4% over the same period last year. On a same hospital basis, salaries and benefits decreased as a percentage of revenues to 39.3% for the year ended December 31, 2000 from 40.5% over the same period last year. Supply costs decreased as a percentage of revenues to 12.0% for the year ended December 31, 2000 from 12.5% for the year ended December 31, 1999. The decrease related primarily to the increase in revenues per equivalent admission and a lower number of high intensity services provided during the year ended December 31, 2000 compared to the same period last year. On a same hospital basis, supply costs decreased as a percentage of revenues to 12.1% for the year ended December 31, 2000 from 12.3% over the same period last year. Other operating expenses decreased as a percentage of revenues to 21.3% for the year ended December 31, 2000 from 22.7% for the year ended December 31, 1999. The decrease was primarily the result of an increase in volumes and revenues per equivalent admission as discussed above and a decrease in contract services as a percentage of revenues. On a same hospital basis, other operating expenses decreased as a percentage of revenues to 21.3% for the year ended December 31, 2000 from 22.0% over the same period last year. Provision for doubtful accounts increased slightly as a percentage of revenues to 7.5% for the year ended December 31, 2000 from 7.4% for the year ended December 31, 1999. On a same hospital basis, provision for doubtful accounts decreased as a percentage of revenues to 6.3% for the year ended December 31, 2000 from 6.7% over the same period last year. Depreciation and amortization expense increased to $34.1 million for the year ended December 31, 2000 from $31.4 million for the year ended December 31, 1999 primarily due to the opening of a replacement facility in Bartow, Florida in December 1999 and the acquisition of two hospitals in fiscal 2000. This increase was partially offset by a decrease in depreciation and amortization expense related to the sale of hospitals during 2000. Interest expense increased to $30.7 million for the year ended December 31, 2000 from $23.4 million for the year ended December 31, 1999. This increase is primarily due to the interest expense we incurred on the debt obligations we assumed from HCA as a result of the distribution. The increase is also due to our increased borrowings to finance acquisitions and an increase in interest rates. For the year ended December 31, 1999, interest expense consisted of interest incurred on the net intercompany balance with HCA and approximately seven and a half months of interest expense on the debt obligations we assumed from HCA. Management fees incurred during 1999 represent fees allocated to us by HCA before the distribution. This amount represented allocations, using revenues as the allocation basis, of the corporate, general and administrative expenses of HCA. ESOP expense increased to $7.1 million for the year ended December 31, 2000 from $2.9 million for the year ended December 31, 1999. We established the ESOP in June 1999; therefore, only seven months of expense for the ESOP is reflected in the year ended December 31, 1999. The increase in ESOP expense is also due to a higher average fair market value of our common stock for the year ended December 31, 2000 compared to the same period last year. We recognize ESOP expense based on the average fair market value of the shares committed to be released during the period. 30 During the year ended December 31, 2000, we recorded a $1.4 million pre-tax gain related to the favorable settlement on the sale of a facility that we previously held for sale. During the year ended December 31, 1999, we recorded a $25.4 million impairment charge related to the three facilities we identified as held for sale during 1998. We sold the three hospital facilities held for sale during the year ended December 31, 2000. We recorded the impairment charge and the gain in the accompanying consolidated statements of operations as impairment of long-lived assets. For the year ended December 31, 2000 and 1999, these facilities had net revenues of $14.4 million and $42.6 million, EBITDA of $(1.0) million and $(0.7) million, admissions of 1,140 and 4,689 and equivalent admissions of 2,781 and 8,722, respectively. Minority interests in earnings of consolidated entities increased slightly to $2.2 million for the year ended December 31, 2000 from $1.9 million for the year ended December 31, 1999. The provision (benefit) for income taxes for the year ended December 31, 2000 was $15.2 million compared to $(2.7) million for the year ended December 31, 1999. These provisions reflect effective income tax rates of 46.1% for 2000 and 26.7% for 1999. The increase in the effective rate relates primarily to the impairment charge taken in the fourth quarter of 1999 as discussed above and also due to the increase in the nondeductible portion of ESOP expense due to the higher average fair market value of the shares committed to be released during 2000 compared to 1999. The ESOP expense deductible for tax purposes is fixed at $3.2 million per year. Net income (loss) increased to $17.9 million for the year ended December 31, 2000 compared to $(7.4) million for the year ended December 31, 1999 because of the reasons described above. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. As further discussed in Note 1 to the consolidated financial statements, in preparing our financial statements, we make estimates, judgements and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We believe that, of the accounting policies that are most important to the portrayal of our financial condition and results, the following accounting policies require our most difficult, subjective or complex estimates and assessments: (a) Allowance for Doubtful Accounts Our ability to collect outstanding receivables from third party payors is critical to our operating performance and cash flows. The primary collection risk lies with uninsured patient accounts and deductibles, co-payments or other amounts due from individual patients. Our allowance for doubtful accounts is estimated based primarily upon the age of patient accounts receivable, the patient's economic inability to pay and the effectiveness of our collection efforts. We routinely monitor our accounts receivable balances and utilize historical collection experience to support the basis for our estimates of the provision for doubtful accounts. Significant changes in payor mix or business office operations could have a significant impact on our results of operations and cash flows. (b) Allowance for Contractual Discounts We derive a significant portion of our revenues from Medicare, Medicaid and other payors that receive discounts from our standard charges. We must estimate the total amount of these discounts to prepare our financial statements. For the year ended December 31, 2001, Medicare, Medicaid and discounted plan patients accounted for 93.3% of our total gross revenues. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and are subject to interpretation and adjustment. We estimate the allowance for contractual discounts on a payor-specific basis given our interpretation of the applicable regulations or contract terms. However, the services authorized and provided, and the resulting reimbursement, are often subject to interpretation. These interpretations sometimes result in payments that differ from our estimates. Additionally, updated regulations and contract renegotiations occur frequently necessitating continual review and assessment of the estimation process by management. (c) Professional and General Liability Reserves Given the nature of our operating environment, we are subject to medical malpractice lawsuits and other claims. To mitigate a portion of this risk, we maintained insurance for individual malpractice claims exceeding $1 million for the years ended December 31, 2001, 2000 and 1999. For fiscal year 2002, we increased our deductible to $10 million to mitigate increases in the cost of professional and general liability insurance. Our reserves for professional and general liability risks are based upon historical claims data, demographic factors, severity factors and other actuarial assumptions. This estimate is discounted to its present value using rates of 6.0% and 5.0% at December 31, 2000 and 2001, respectively. The rate changed to 5.0% reflecting lower market rates experienced during 2001. The estimated accrual for professional and general liability claims could be significantly affected should current and future occurrences differ from historical claims trends. The estimation process is also complicated by the relatively short period of time in which we owned our health care facilities as occurrence data under previous ownership may not necessarily reflect occurrence data under our ownership. While we monitor current claims closely and consider outcomes when estimating our insurance accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in the estimates. Our reserve for professional and general liability risks was $8.9 million and $15.9 million at December 31, 2000 and 2001, respectively. Our total cost of professional and general liability coverage for the years ended December 31, 1999, 2000 and 2001, was approximately $7.1 million, $8.2 million and $11.4 million, respectively. The estimates, judgements and assumptions used by us under "Allowance for Doubtful Accounts," "Allowance for Contractual Discounts" and "Professional and General Liability Reserves" are, we believe, reasonable, but these involve inherent uncertainties as described above, which may or may not be controllable by management. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods. 31 LIQUIDITY AND CAPITAL RESOURCES Cash flows - Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Our cash and cash equivalents increased to $57.2 million at December 31, 2001, from $39.7 million at December 31, 2000. The increase is primarily from $114.1 million provided by operating activities offset in part by $68.3 million and $28.3 million used in investing and financing activities, respectively. Our working capital increased to $82.7 million at December 31, 2001 compared to $65.4 million at December 31, 2000, and our cash provided by operating activities increased to $114.1 million in 2001 from $83.4 million in 2000 resulting primarily from increased patient volumes and effective management of our working capital. Working capital was negatively impacted by increases in accounts payable and accrued salaries as a result of timing of payments. The use of our cash in investing activities decreased to $68.3 million in 2001 from $91.8 million in 2000, resulting primarily from smaller outlays of cash for acquisitions during 2001, compared to 2000 and $30.0 million in proceeds from the sale of hospitals during 2000. Capital expenditures, excluding acquisitions, increased to $35.8 million during 2001 compared to $31.4 million during 2000. At December 31, 2001, we had projects under construction that had an estimated additional cost to complete and equip of approximately $32.7 million. We anticipate that these projects will be completed over the next thirty-six months. We anticipate total capital expenditures in 2002 of approximately $65 million, excluding acquisitions. We anticipate funding these expenditures through cash provided by operating activities and borrowings under our revolving credit facility. In connection with our acquisition of Ville Platte Medical Center, we have committed to spend up to $25 million, including the purchase price, over the next three years, a portion of which is included in the anticipated 2002 capital expenditures. In response to the increasing demand for outpatient care, we are reconfiguring some of our hospitals to more effectively accommodate outpatient services and restructuring existing surgical capacity in some of our hospitals to permit additional outpatient volume and a greater variety of outpatient services. We used cash in financing activities of $28.3 million during 2001 compared to cash provided by financing activities of $35.6 million during 2000. We received $100.4 million from our public offering of common stock and we repaid $139.3 million of bank debt during 2001. In 2000, we borrowed $65.0 million to fund the acquisition of two hospitals and repaid $35.7 million of bank debt primarily from our proceeds from the sale of facilities. Cash flows - Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Our cash and cash equivalents increased to $39.7 million at December 31, 2000, from $12.5 million at December 31, 1999. The increase is primarily from $83.4 million and $35.6 million provided by operating and financing activities, respectively, offset in part by $91.8 million used in investing activities. Our working capital increased to $65.4 million at December 31, 2000 compared to $42.2 million at December 31, 1999, resulting primarily from increased patient volumes and effective management of our working capital. The increase in working capital was partially offset by increases in current maturities of long-term debt. Our cash provided by operating activities increased to $83.4 million in 2000 compared to $59.3 million in 1999. The increase resulted primarily from net income of $17.9 million in 2000 compared to a net loss of $7.4 million last year and receipt of an income tax refund of $4.4 million in 2000 compared to income tax payments of $15.4 million during 1999. The cash used in investing activities increased to $91.8 million during 2000 compared to $68.8 million in 1999. The increase resulted primarily from our two hospital acquisitions during fiscal 2000. The increase was partially offset by proceeds of $30.0 million from the sale of facilities and by decreased capital expenditures of $31.4 million during 2000 compared to $64.8 million in 1999 which included the construction of a replacement facility. Our cash provided by financing activities increased to $35.6 million in 2000 compared to $22.0 million in 1999. This increase resulted primarily from an increase in long-term debt to pay for acquisitions. Stock Offering and Debt Refinancing In March 2001, we received approximately $100.4 million in net proceeds from a public offering of 3,680,000 shares of our common stock. During 2001, we used the proceeds, along with available cash, to repay the $139.3 million in borrowings outstanding under our existing credit agreement. In June 2001, we completed a $200 million, five-year amended and restated credit agreement with a syndicate of lenders, which increased our available credit under the revolving credit facility from $65 million to $200 million. As of December 31, 2001, we had a $3.0 million letter of credit, which reduced the amount available under the revolving credit facility to $197.0 million. The revolving credit facility requires that we comply with various financial ratios and tests and contains covenants, including but not limited to restrictions on new indebtedness, the ability to merge or consolidate, asset sales, capital expenditures and dividends, for which we are in compliance as of December 31, 2001. The applicable interest rate under the 2001 Agreement is based on either LIBOR plus a margin ranging from 1.25% to 2.25% or prime plus a margin ranging from 0% to 0.5% both depending on the Company's consolidated total debt to consolidated EBITDA ratio for the most recent four quarters. The Company also pays a commitment fee ranging from 0.3% to 0.5% of the average daily unused balance. The applicable commitment fee rate is based on the Company's consolidated total debt to consolidated EBITDA ratio for the most recent four quarters. The interest rate under the 2001 agreement was 3.13% at December 31, 2001. The following table reflects a summary of our obligations and commitments outstanding at December 31, 2001.
PAYMENTS DUE BY PERIOD LESS THAN CONTRACTUAL CASH OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS - ---------------------------- ------ --------- --------- --------- ------------- (in millions) Long-term debt $150.0 $ -- $ -- $ -- $150.0 Lease obligations(a) 15.3 3.9 5.3 2.5 3.6 Other long-term obligations 0.1 -- 0.1 -- -- ------ ---- ----- ---- ------ Subtotal $165.4 $3.9 $ 5.4 $2.5 $153.6
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD LESS THAN OTHER COMMERCIAL COMMITMENTS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS - ---------------------------- ------ --------- --------- --------- ------------- (in millions) Guarantees of surety bonds $ 9.3 $ 9.3 $ -- $ -- $ -- Letters of credit 3.0 3.0 -- -- -- Capital expenditure commitments 11.4 1.0 10.4 -- -- Physician commitments 10.9 9.5 1.4 -- -- ------ ----- ----- ---- ------ Subtotal $ 34.6 $22.8 $11.8 $ -- $ -- ------ ----- ----- ---- ------ Total obligations and commitments $200.0 $26.7 $17.2 $2.5 $153.6 ====== ===== ===== ==== ======
(a) Includes capital and operating lease obligations; capital lease obligations are not material. We are in compliance with all covenants or other requirements set forth in our credit agreements or indentures. Further, these agreements do not contain provisions that would accelerate the maturity dates of our debt upon a downgrade in our credit rating. However, a downgrade in our credit rating could adversely affect our ability to renew existing, or obtain access to new credit facilities in the future and could increase the cost of such facilities. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We do not consider the sale of any assets to be necessary to repay our indebtedness or to provide working capital. However, for other reasons, we may sell facilities in the future from time to time. Our management anticipates that operations and amounts available under our revolving credit facility will provide sufficient liquidity for the next twelve months. 32 Our business plan contemplates the acquisition of additional hospitals and we continuously review potential acquisitions. These acquisitions may, however, require additional financing. We continually evaluate opportunities to sell additional equity or debt securities, obtain credit facilities from lenders, or restructure our long-term debt for strategic reasons or to further strengthen our financial position. We may, from time to time in the future, acquire senior subordinated notes in the open market. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. We do not expect to pay dividends on our common stock in the foreseeable future. MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS Our interest expense is sensitive to changes in the general level of interest rates. We do not currently use derivatives to alter the interest rate characteristics of our debt instruments. With respect to our interest-bearing liabilities, all of our long-term debt at December 31, 2001 is subject to a fixed interest rate of 10.75%. The fair value of our total long-term debt was approximately $166.5 million at December 31, 2001. We determined the fair value using the quoted market price at December 31, 2001. Since all of our long-term debt at December 31, 2001 is subject to a fixed interest rate we did not estimate changes to our interest expense or fair value of long-term debt based on a hypothetical increase in interest rates. As discussed above, we do have a $200 million revolving credit facility that is subject to variable interest rates; however, at December 31, 2001, the only amount reducing the revolving credit facility is a $3.0 million letter of credit. In the event we increase our amount outstanding under the revolving credit facility and there is a change in interest rates of significant magnitude, management would expect to take actions intended to further mitigate its exposure to such change. For further information, see the discussion above of our long-term debt. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets, (the "Statements"). These Statements make significant changes to the accounting for business combinations, goodwill and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS 141 was effective for transactions completed subsequent to June 30, 2001. The application of SFAS 141 did not have a material effect on our results of operations or financial position. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, we are required to adopt SFAS 142 effective January 1, 2002. Application of the non-amortization provisions of SFAS 142 for goodwill would have resulted in an increase in pretax income of approximately $1.7 million ($0.8 million, after-tax or $0.02 per diluted share) for the year ended December 31, 2001. Pursuant to SFAS 142, we will complete our transition impairment tests of goodwill during the second quarter of 2002 anticipating no impairment and will perform our initial annual impairment test later in 2002. SFAS 143, Accounting for Asset Retirement Obligations, was issued in August 2001 by the FASB and is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. SFAS 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated retirement costs. SFAS 143 applies to all entities and to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. We do not expect SFAS 143 to have a material effect on our results of operations or financial position. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 removes goodwill from its scope and clarified other implementation issues related to SFAS 121. SFAS 144 also provides a single framework for evaluating long-lived assets to be disposed of by sale. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years and, generally, are to be applied prospectively. We do not expect SFAS 144 to have a material effect on our results of operations or financial position. 33 INFLATION The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when shortages in marketplaces occur. In addition, suppliers and insurers pass along rising costs to us in the form of higher prices. Our ability to pass on these increased costs is limited because of increasing regulatory and competitive pressures as discussed above. In the event we experience inflationary pressures, results of operations may be materially affected. HEALTHCARE REFORM In recent years, an increasing number of legislative proposals have been introduced or proposed to Congress and in some state legislatures. While we are unable to predict which, if any, proposals for healthcare reform will be adopted, there can be no assurance that proposals adverse to our business will not be adopted. UNFILED MEDICARE COST REPORTS Hospitals participating in the Medicare and some Medicaid programs, whether paid on a reasonable cost basis or under a PPS, are required to meet certain financial reporting requirements. Federal and, where applicable, state regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. Since implementation of outpatient PPS in August 2000, the filing of all Medicare cost reports have been postponed until certain government reports are issued. We anticipate filing several of these postponed cost reports during 2002. Because of the postponement, the magnitude of potential adjustments and changes in estimates is significantly greater at December 31, 2001 and for the year then ended than in recent years. RELATED PARTY TRANSACTIONS We adopted the Executive Stock Purchase Plan in 1999, in which 1,000,000 shares of our Common Stock were reserved and subsequently issued. The Executive Stock Purchase Plan grants a right to specified executives to purchase shares of Common Stock from us. We loaned each participant in the plan 100% of the purchase price of our Common Stock at the fair value based on the date of purchase (approximately $10.2 million), on a full recourse basis at interest rates ranging from 5.2% to 5.3%. The loans are reflected as notes receivable for shares sold to employees in our consolidated statements of stockholders' equity. As of December 31, 2001, approximately $4.5 million of such loans have been paid under the Executive Stock Purchase Plan. 34 RISK FACTORS Our revenues may decline if federal or state programs reduce our Medicare or Medicaid payments or managed care companies reduce our reimbursements. For the year ended December 31, 2001, we derived 48.4% of our revenues from the Medicare and Medicaid programs. In recent years, federal and state governments made significant changes in the Medicare and Medicaid programs. These changes have decreased the amounts of money we receive for our services to patients who participate in these programs. In recent years, Congress and some state legislatures have introduced an increasing number of other proposals to make major changes in the healthcare system. Medicare-reimbursed, hospital-outpatient services converted to a prospective payment system on August 1, 2000. This system creates limitations on levels of payment for a substantial portion of hospital outpatient procedures. Future federal and state legislation may further reduce the payments we receive for our services. A number of states have adopted legislation designed to reduce their Medicaid expenditures and to provide universal coverage and additional care to their residents. Some states propose to enroll Medicaid recipients in managed care programs and impose additional taxes on hospitals to help finance or expand the states' Medicaid systems. In addition, insurance and managed care companies and other third parties from whom we receive payment for our services increasingly attempt to control healthcare costs by requiring that hospitals discount their fees in exchange for exclusive or preferred participation in their benefit plans. We believe that this trend may continue and may reduce the payments we receive for our services. We may be subjected to allegations that we failed to comply with governmental regulation which could result in sanctions that reduce our revenue and profitability. All participants in the healthcare industry are required to comply with many laws and regulations at the federal, state and local government levels. These laws and regulations require that hospitals meet various requirements, including those relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, billing and cost reports, payment for services and supplies, maintenance of adequate records, privacy, compliance with building codes and environmental protection. These laws often contain safe harbor provisions which describe some of the conduct and business relationships that are immune from prosecution. Not all of our business arrangements fit wholly within safe harbors. This does not automatically render our arrangements illegal. However, we may be subject to scrutiny by enforcement authorities. If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate our hospitals and our ability to participate in the Medicare, Medicaid and other federal and state healthcare programs. 35 Significant media and public attention recently has focused on the hospital industry due to ongoing investigations related to referrals, cost reporting and billing practices, laboratory and home healthcare services and physician ownership and joint ventures involving hospitals. 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 United States Department of Justice periodically establish enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Recent initiatives include a focus on hospital billing practices. In public statements, governmental authorities have taken positions on issues for which little official interpretation was previously available. Some of these positions appear to be inconsistent with common practices within the industry and which have not previously been challenged in this manner. Moreover, some government investigations that have in the past been conducted under the civil provisions of federal law are now being conducted as criminal investigations under the Medicare fraud and abuse laws. The laws and regulations that we must comply with are complex and subject to change. In the future, different interpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. We may be subjected to actions brought by individuals on the government's behalf under the False Claims Act's "qui tam" or whistleblower provisions. Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the Federal government. Defendants determined to be liable under the False Claims Act may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. Liability often arises when an entity knowingly submits a false claim for reimbursement to the Federal government. The False Claims Act defines the term "knowingly" broadly. Thus, although simple negligence will not give rise to liability under the False Claims Act, submitting a claim with reckless disregard to its truth or falsity constitutes a "knowing" submission under the False Claims Act and, therefore, will qualify for liability. In some cases, whistleblowers or the Federal government have taken the position that providers who allegedly have violated other statutes, such as the anti-kickback statute and the Stark Law, have thereby submitted false claims under the False Claims Act. In addition, a number of states have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court. If we fail to effectively recruit and retain physicians and nurses our ability to deliver healthcare services efficiently will suffer. Physicians generally direct the majority of hospital admissions. Our success, in part, depends on the number and quality of physicians on our hospitals' medical staffs, the admissions practices of these physicians and the maintenance of good relations with these physicians. We generally do not employ physicians. Only a limited number of physicians practice in the non-urban communities where our hospitals are located. Our primary method of adding or expanding medical services is the recruitment of new physicians into our communities. The success of our recruiting efforts depends on several factors. In general, there is a shortage of specialty care physicians. We face intense competition in the recruitment of specialists because of the difficulty convincing these individuals of the benefits of practicing in a rural community. Physicians are concerned with the patient volume in rural hospitals and whether the volume will allow them to generate income comparable to that which they would generate in an urban setting. If the trend in the United States over the last several years to move out of cities and into more rural areas changes and the growth rate in the rural communities where our hospitals operate slows, then we could experience difficulty attracting physicians to practice in our communities. There is generally a shortage of nurses. Our hospitals may be forced to hire expensive contract nurses if they are unable to recruit and retain nurses. The shortage of nurses may affect our hospitals' ability to deliver healthcare services efficiently. Our revenue is heavily concentrated in Kentucky and Tennessee, which makes us particularly sensitive to regulatory and economic changes in those states. Our revenue is particularly sensitive to regulatory and economic changes in the states of Kentucky and Tennessee. As of December 31, 2001, we operated 23 hospitals with seven located in the Commonwealth of Kentucky and seven located in the State of Tennessee. Based on those 23 hospitals, we generated 39.2% of our revenue from our Kentucky hospitals (including 4.3% from state-sponsored Medicaid programs) and 22.3% from our Tennessee hospitals (including 3.3% from state-sponsored TennCare programs) for the year ended December 31, 2001. Managed care organizations that participate in the Medicaid programs of Tennessee and Kentucky have been placed in receivership or encountered other financial difficulties. Other managed care organizations in the states in which we derive significant revenue may encounter similar difficulties in paying claims in the future. 36 We may have difficulty acquiring hospitals on favorable terms, avoiding unknown or contingent liabilities of acquired hospitals and, because of regulatory scrutiny, acquiring nonprofit entities. One element of our business strategy is expansion through the acquisition of acute care hospitals in growing, non-urban markets. We face significant competition to acquire other attractive, rural hospitals. We may not find suitable acquisitions on favorable terms. We also may incur or assume additional indebtedness as a result of the consummation of any acquisitions. In addition, in order to ensure the tax-free treatment of the distribution of our stock from HCA, our ability to issue stock as consideration for acquisitions is limited. Our failure to acquire non-urban hospitals consistent with our growth plans could prevent us from increasing our revenues. We also may acquire businesses with unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations. We have policies to conform the practices of acquired facilities to our standards and applicable law and generally will seek indemnification from prospective sellers covering these matters. We may, however, incur material liabilities for past activities of acquired businesses. In recent years, the legislatures and attorneys general of several states have become more interested in sales of hospitals by not-for-profit entities. This heightened scrutiny may increase the cost and difficulty, or prevent our completion, of transactions with not-for-profit organizations in the future. Certificate of need laws may prohibit or limit any future expansion by us in states with these laws. Some states require prior approval for the purchase, construction and expansion of health care facilities, based on a state's determination of need for additional or expanded health care facilities or services. Four states in which we currently own hospitals, Alabama, Florida, Kentucky and Tennessee, require a certificate of need for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and certain other matters. We may not be able to obtain certificates of need required for expansion activities in the future. If we fail to obtain any required certificate of need, our ability to operate or expand operations in these states could be impaired. Our ability to increase our indebtedness and become substantially leveraged may limit our ability to successfully run our business. At December 31, 2001, our consolidated long-term debt equaled approximately $150.0 million. We also may draw on a revolving credit commitment of up to $200 million under our bank credit agreement. In addition, we have the ability to incur additional debt, subject to limitations imposed by our credit agreement and the indenture governing the notes issued by our subsidiary, LifePoint Hospitals Holdings, Inc. Our leverage and debt service requirements could have important consequences to our stockholders, including the following: - make us more vulnerable to economic downturns and to adverse changes in business conditions, such as further limitations on reimbursement under Medicare and Medicaid programs; - limit our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes; - require us to dedicate a substantial portion of our cash flow from operations to the payment of principal and interest on our indebtedness, reducing the funds available for our operations; - make us vulnerable to increases in interest rates because some of our borrowings are at variable rates of interest; and 37 - require us to pay the indebtedness immediately if we default on any of the numerous financial and other restrictive covenants, including restrictions on our payments of dividends, incurrences of indebtedness and sale of assets. Any substantial increase in our debt levels could also affect our ability to borrow funds at favorable interest rates and our future operating cash flow. Federal and state investigations of HCA could subject our hospitals and operations to increased governmental scrutiny. HCA is currently the subject of various federal and state investigations, qui tam actions, shareholder derivative and class action suits, patient/payor actions and general liability claims. HCA is also the subject of a formal order of investigation by the SEC. Based on the Company's review of HCA's public filings, the Company understands that the SEC's investigation of HCA includes the anti-fraud, insider trading, periodic reporting and internal accounting control provisions of the federal securities laws. These investigations, actions and claims relate to HCA and its subsidiaries, including subsidiaries that, before the Company's formation as an independent company, owned the facilities the Company now owns. HCA is a defendant in several qui tam actions, or actions brought by private parties, known as relators, on behalf of the United States of America, which have been unsealed and served on HCA. The actions allege, in general, that HCA and certain subsidiaries and/or affiliated partnerships violated the False Clams Act, 31 U.S.C. ss. 3729 et seq., for improper claims submitted to the government for reimbursement. The lawsuits generally seek three times the amount of damages caused to the United States by the submission of any Medicare or Medicaid false claims presented by the defendants to the federal government, civil penalties of not less than $5,500 nor more than $11,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. HCA has disclosed that, on March 15, 2001, the Department of Justice filed a status report setting forth the government's decisions regarding intervention in existing qui tam actions against HCA and filed formal complains for those suits in which the government has intervened. HCA stated that, of the original 30 qui tam actions, the Department of Justice remains active and has elected to intervene in eight actions. HCA has also disclosed that it 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. Based on our review of HCA's public filings, we understand that, in December 2000, HCA entered into a Plea Agreement with the Criminal Division of the Department of Justice and various U.S. Attorney's Offices (which we will refer to as the plea agreement) and a Civil and Administrative Settlement Agreement with the Civil Division of the Department of Justice (which we will refer to as the civil agreement). Based on our review of HCA's public filings, we understand that the agreements resolve all Federal criminal issues outstanding against HCA and certain issues involving Federal civil claims by or on behalf of the government against HCA relating to diagnosis related group, or DRG, coding, outpatient laboratory billing and home health issues. Pursuant to the plea agreement, HCA paid the government $95 million during the first quarter of 2001. The civil agreement was approved by the Federal District Court of the District of Columbia in August 2001. Pursuant to the civil agreement, HCA agreed to pay the government $745 million plus interest, which was paid in the third quarter of 2001. Based on our review of HCA's public filings, we understand that certain civil issues are not covered by the civil agreement and remain outstanding, including claims related to costs reports and physician relations issues. The plea agreement and the civil agreement announced in December 2000 relate only to conduct that was the subject of the federal investigations resolved in the agreements and do not resolve various qui tam actions filed by private parties against HCA, or pending state actions. On March 28, 2002, HCA announced that it reached an understanding with CMS to resolve all Medicare cost report, home office cost statement, and appeal issues between HCA and CMS. The understanding provides that HCA would pay CMS $250 million with respect to these matters. The resolution is subject to approval by the Department of Justice and execution of a definitive written agreement. 38 HCA has agreed to indemnify the Company for any losses, other than consequential damages, arising from the pending governmental investigations of HCA's business practices prior to the date of the distribution and losses arising from legal proceedings, present or future, related to the investigation or actions engaged in before the distribution that relate to the investigation. HCA has also agreed that, in the event that any hospital owned by the Company at the time of the spin-off is permanently excluded from participation in the Medicare and Medicaid programs as a result of the proceedings described above, then HCA will make a cash payment to the Company, in an amount (if positive) equal to five times the excluded hospital's 1998 income from continuing operations before depreciation and amortization, interest expense, management fees, minority interests and income taxes, as set forth on a schedule to the distribution agreement, less the net proceeds of the sale or other disposition of the excluded hospital. However, the Company could be held responsible for any claims that are not covered by the agreements reached with the Federal government or for which HCA is not required to, or fails to, indemnify the Company. If indemnified matters were asserted successfully against the company or any of the Company's facilities, and HCA failed to meet its indemnification obligations, then this event could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. The extent to which the Company may or may not continue to be affected by the ongoing investigations of HCA and the initiation of additional investigations, if any, cannot be predicted. These matters could have a material adverse effect on the Company's business, financial condition, results of operations or prospects in future periods. We depend significantly on key personnel, and the loss of one or more senior or local management personnel could limit our ability to execute our business strategy. We depend on the continued services and management experience of Kenneth C. Donahey and our other executive officers. If Mr. Donahey or any of our other executive officers resign their positions or otherwise are unable to serve, our management expertise and ability to deliver healthcare services efficiently could be weakened. In addition, if we fail to attract and retain managers at our hospitals and related facilities our operations will suffer. Other hospitals provide similar services, which may raise the level of competition faced by our hospitals. 39 Competition among hospitals and other healthcare providers for patients has intensified in recent years. All but one of our hospitals operate in geographic areas where we are currently the sole provider of hospital services in these communities. While our hospitals face less direct competition in our immediate service areas, we do compete with other hospitals, including larger tertiary care centers. Although these competing hospitals may be in excess of 30 to 50 miles away from our facilities, patients in these markets may migrate to, may be referred by local physicians to, or may be lured by incentives from managed care plans to travel to these distant hospitals. Some of these competing hospitals use equipment and services more specialized than those available at our hospitals. In addition, some of the hospitals that compete with us are owned by tax-supported governmental agencies or not-for-profit entities supported by endowments and charitable contributions. These hospitals can make capital expenditures without paying sales, property and income taxes. We also face competition from other specialized care providers, including outpatient surgery, orthopedic, oncology and diagnostic centers. We have limited operating history as an independent company. Prior to May 11, 1999, we operated as the America Group division of HCA. Accordingly, we do not have a long operating history as an independent, publicly-traded company. Before the distribution of our stock from HCA, we historically relied on HCA for various financial, administrative and managerial expertise relevant to the conduct of our business. HCA continues to provide some support services to us on a contractual basis. We did not generate a profit for 1999. Although we generated a profit in 2000 and 2001, we may not have net profits in the future. See "Business -- Arrangements Relating to the Distribution" for more information regarding our arrangements with HCA and see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for factors that could affect our ability to generate profits. If our access to HCA's information systems is restricted or we are not able to integrate changes to our existing information systems, our operations could suffer. Our business depends significantly on effective information systems to process clinical and financial information. Information systems require an ongoing commitment of significant resources to maintain and enhance existing systems and develop new systems in order to keep pace with continuing changes in information processing technology. We rely heavily on HCA for information systems. Under a contract with an initial term that will expire on May 11, 2006, HCA provides financial, clinical, patient accounting and network information services to us. If our access to these systems is limited in the future or if HCA develops systems more appropriate for the urban healthcare market and not suited for our hospitals, our operations could suffer. In addition, as new information systems are developed, we must integrate them into our existing systems. Evolving industry and regulatory standards, including the Health Insurance Portability and Accountability Act of 1996, commonly known as "HIPAA," may require changes to our information systems. We may not be able to integrate new systems or changes required to our existing systems in the future effectively. If we fail to comply with our corporate integrity agreement, we could be required to pay significant monetary penalties. In December 2000, we entered into a corporate integrity agreement with the Office of Inspector General. Under this agreement, we have an affirmative obligation to report violations of applicable laws and regulations. This obligation could result in greater scrutiny of us by regulatory authorities. Complying with our corporate integrity agreement will require additional efforts and costs. Our failure to comply with the terms of the corporate integrity agreement could subject us to significant monetary penalties. If we become subject to malpractice and related legal claims, we could be required to pay significant damages. 40 In recent years, physicians, hospitals and other healthcare providers have become subject to an increasing number of legal actions alleging malpractice or related legal theories. Many of these actions involve large claims and significant defense costs. To protect ourselves from the cost of these claims, we generally maintain professional malpractice liability insurance and general liability insurance coverage in amounts and with deductibles that we believe to be appropriate for our operations. However, our insurance coverage may not cover all claims against us or continue to be available at a reasonable cost for us to maintain adequate levels of insurance. We could incur substantial liability if the distribution of our stock from HCA were to be taxable. On March 30, 1999, HCA received a private letter ruling from the Internal Revenue Service concerning the United States federal income tax consequences of the distribution by HCA of our common stock and the common stock of Triad Hospitals, Inc., a publicly-traded company comprising the former Pacific Group of HCA, and the restructuring transactions that preceded the distribution. The private letter ruling provides that the distribution generally was tax-free to HCA and HCA's stockholders, except for any cash received instead of fractional shares. The IRS has issued additional private letter rulings that supplement its March 30, 1999 ruling stating that certain transactions occurring after the distribution do not adversely affect the private letter rulings previously issued by the IRS. The March 30, 1999 ruling and the supplemental rulings are based on the accuracy of representations as to numerous factual matters and as to certain intentions of HCA, Triad and LifePoint. The inaccuracy of any of those representations could cause the IRS to revoke all or part of any of the rulings retroactively. If the distribution were to fail to qualify for tax-free treatment, then, in general, additional corporate tax, which would be substantial, would be payable by the consolidated group of which HCA is the common parent. Each member of HCA's consolidated group at the time of the distribution, including LifePoint, would be jointly and severally liable for this tax liability. In addition, LifePoint entered into a tax sharing and indemnification agreement with HCA and Triad, which prohibits LifePoint from taking actions that could jeopardize the tax treatment of either the distribution or the restructuring transactions that preceded the distribution, and requires LifePoint to indemnify HCA and Triad for any taxes or other losses that result from LifePoint's actions, which amounts could be substantial. If LifePoint were required to make any indemnity payments or otherwise were liable for additional taxes relating to the distribution, LifePoint's financial position and results of operations could be materially adversely affected. We depend on dividends and other intercompany transfers of funds to meet our financial obligations. We are a holding company and hold most of our assets and conduct most of our operations through direct and indirect subsidiaries. As a holding company, our results of operations depend on the results of operations of our subsidiaries. Moreover, we depend on dividends and other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations, including payment of principal and interest on the senior subordinated notes issued by our subsidiary, LifePoint Hospitals Holdings, Inc. The ability of our subsidiaries to pay dividends or make other payments or advances will depend on their operating results and will be subject to applicable laws and restrictions contained in agreements governing indebtedness of these subsidiaries. Our anti-takeover provisions may discourage acquisitions of control even though our stockholders may consider these proposals desirable. Provisions in our certificate of incorporation and bylaws may have the effect of discouraging an acquisition of control not approved by our board of directors. These provisions include: - the issuance of "blank check" preferred stock by the board of directors without stockholder approval; 41 - higher stockholder voting requirements for some transactions, including business combinations with 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 our acquisition or change of control, although a proposal, if made, might be considered desirable by a majority of our stockholders. These provisions could further have the effect of making it more difficult for third parties to cause the replacement of our board of directors. We have also adopted a stockholder rights plan. This stockholder rights plan is designed to protect stockholders in the event of an unsolicited offer and other takeover tactics which, in the opinion of the board of directors, could impair our ability to represent stockholder interests. The provisions of this stockholder rights plan may render an unsolicited takeover more difficult or might prevent a takeover. Provisions of the tax sharing and indemnification agreement that are intended to preserve the tax-free status of the distribution could also discourage takeover proposals or make them more expensive. See "Business -- Arrangements Relating to the Distribution." We are subject to provisions of Delaware corporate law which may also restrict some business combination transactions. Delaware law may further discourage, delay or prevent someone from acquiring or merging with us. We have never paid and have no current plans to pay a dividend on our common shares. We have never paid a cash dividend and we do not anticipate paying any cash dividends in the foreseeable future. Our senior credit facility also restricts the payment of cash dividends. If we incur any future indebtedness to refinance our existing indebtedness or to fund our future growth, our ability to pay dividends may be further restricted by the terms of this indebtedness. Our stock price has been and may continue to be volatile. The trading price of our common stock has been and may continue to be subject to wide fluctuations. Our stock price may fluctuate in response to a number of events and factors, including: - quarterly variations in operating results; - changes in financial estimates and recommendations by securities analysts; - the operating and stock price performance of other companies that investors may deem comparable; and - news reports relating to trends in our markets. Broad market and industry fluctuations may adversely affect the price of our common stock, regardless of our operating performance. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 42 Information with respect to this Item is contained in Item 7 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Market Risks Associated with Financial Instruments." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this Item is contained in our consolidated financial statements beginning with the Index on Page F-1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS AND KEY EMPLOYEES Information with respect to our executive officers is incorporated by reference to the information contained under the caption "Executive Compensation - -- Executive Officers of the Company" included in our proxy statement relating to our annual meeting of stockholders to be held on May 14, 2002. DIRECTORS Information with respect to our directors is incorporated by reference to the information contained under the caption "Election of Directors" included in our proxy statement relating to our annual meeting of stockholders to be held on May 14, 2002. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information contained under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" included in our proxy statement relating to our annual meeting of stockholders to be held on May 14, 2002. ITEM 11. EXECUTIVE COMPENSATION The information required in this Item is set forth under the heading "Executive Compensation" included in our proxy statement relating to our annual meeting of stockholders to be held on May 14, 2002, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the information contained under the caption "Voting Securities and Principal Holders Thereof" included in our proxy statement relating to our annual meeting of stockholders to be held on May 14, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the information contained under the caption "Certain Transactions" included in our proxy statement relating to our annual meeting of stockholders to be held on May 14, 2002. 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to Consolidated Financial Statements, Financial Statement Schedules and Exhibits: (1) CONSOLIDATED FINANCIAL STATEMENTS: See Item 8 in this report. The consolidated financial statements required to be included in Part II, Item 8, are indexed on Page F-1 and submitted as a separate section of this report. (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES: All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes in this report. (3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 2.1 - Distribution Agreement dated May 11, 1999 by and among Columbia/HCA, Triad Hospitals, Inc. and LifePoint Hospitals, Inc.(a) 3.1 - Certificate of Incorporation of LifePoint Hospitals (a) 3.2 - Bylaws of LifePoint Hospitals (a) 3.3 - Certificate of Incorporation of LifePoint Holdings (b) 3.4 - Bylaws of LifePoint Holdings (b) 4.1 - Form of Specimen Certificate for LifePoint Hospitals Common Stock (c) 4.2 - Indenture (including form of 10 3/4% Senior Subordinated Notes due 2009) dated as of May 11, 1999, between HealthTrust, Inc. -- The Hospital Company and Citibank N.A. as Trustee (a) 4.3 - Form of 10 3/4% Senior Subordinated Notes due 2009 (filed as part of Exhibit 4.2) 4.4 - Registration Rights Agreement dated as of May 11, 1999 between HealthTrust and the Initial Purchasers named therein (a) 4.5 - LifePoint Assumption Agreement dated May 11, 1999 between HealthTrust and LifePoint Hospitals (a) 4.6 - Holdings Assumption Agreement dated May 11, 1999 between LifePoint Hospitals and LifePoint Holdings (a) 4.7 - Guarantor Assumption Agreements dated May 11, 1999 between LifePoint Holdings and the Guarantors signatory thereto (a) 4.8 - Rights Agreement dated as of May 11, 1999 between the Company and National City Bank as Rights Agent (a)
45 10.1 - Tax Sharing and Indemnification Agreement, dated May 11, 1999, by and among Columbia/HCA, LifePoint Hospitals and Triad Hospitals (a) 10.2 - Benefits and Employment Matters Agreement, dated May 11, 1999 by and among Columbia/HCA, LifePoint Hospitals and Triad Hospitals (a) 10.3 - Insurance Allocation and Administration Agreement, dated May 11, 1999, by and among Columbia/HCA, LifePoint Hospitals and Triad Hospitals (a) 10.4 - Transitional Services Agreement dated May 11, 1999 by and between Columbia/HCA and LifePoint Hospitals (a) 10.5 - Computer and Data Processing Services Agreement dated May, 11, 1999 by and between Columbia Information Systems, Inc. and LifePoint Hospitals (a) 10.6 - Agreement to Share Telecommunications Services dated May 11, 1999 by and between Columbia Information Systems, Inc. and LifePoint Hospitals (a) 10.7 - Lease Agreement dated as of November 22, 1999 by and between LifePoint Hospitals and W. Fred Williams, Trustee for the Benefit of Highwoods/Tennessee Holdings, L.P. (d) 10.8 - LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan (a) 10.9 - Amendment to LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan (e) 10.10 - Second Amendment to LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan (e) 10.11 - LifePoint Hospitals, Inc. Executive Stock Purchase Plan (a) 10.12 - Form of Share Purchase Loan and Note Agreement between LifePoint Hospitals and certain executive officers in connection with purchases of Common Stock pursuant to the Executive Stock Purchase Plan (d) 10.13 - LifePoint Hospitals, Inc. Management Stock Purchase Plan (a) 10.14 - LifePoint Hospitals, Inc. Outside Directors Stock and Incentive Compensation Plan (a) 10.15 - Amended and Restated Credit Agreement, dated as of June 19, 2001, among LifePoint Hospitals Holdings, Inc., as borrower, Fleet National Bank as administrative agent and as swingline lender, the financial institutions or entities from time to time which are parties to the Credit Agreement as lenders, Bank of America, N.A. and Deutsche Banc Alex. Brown Inc., as co-syndication agents, and Credit Lyonnais New York Branch and SunTrust Bank, as co-documentation agents (f) 10.16 - Corporate Integrity Agreement dated as of December 21, 2000 by and between the Office of the Inspector General of the Department of Health and Human Services and LifePoint Hospitals (g) 10.17 - LifePoint Hospitals, Inc. Employee Stock Purchase Plan 10.18 - Employment Agreement of Kenneth C. Donahey 21.1 - List of the Subsidiaries of LifePoint Hospitals 21.2 - List of the Subsidiaries of LifePoint Holdings 23.1 - Consent of Ernst & Young LLP
- ------------ 46 (a) Incorporated by reference from exhibits to LifePoint Hospitals' Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 0-29818. (b) Incorporated by reference from exhibits to LifePoint Holdings' Annual Report on Form 10-K for the year ended December 31, 1999, File No. 333-84755. (c) Incorporated by reference from exhibits to LifePoint Hospitals' Registration Statement on Form 10 under the Securities Exchange Act of 1934, as amended, File No. 0-29818. (d) Incorporated by reference from exhibits to LifePoint Hospitals' Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-29818. (e) Incorporated by reference from exhibits to LifePoint Hospitals' Registration Statement on Form S-8 under the Securities Act of 1933, File No. 333-66378. (f) Incorporated by reference from exhibits to LifePoint Hospitals' Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 000-29818. (g) Incorporated by reference from exhibits to LifePoint Hospitals' Annual Report on Form 10-K for the year ended December 31, 2000, File No. 000-29818. 47 MANAGEMENT COMPENSATION PLANS AND ARRANGEMENTS The following is a list of all executive compensation plans and arrangements filed as exhibits to this annual report on Form 10-K: 1. LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan, as amended (filed as Exhibits 10.8, 10.9 and 10.10) 2. LifePoint Hospitals, Inc. Executive Stock Purchase Plan (filed as Exhibit 10.11) 3. Form of Share Purchase Loan and Note Agreement between LifePoint Hospitals and certain executive officers in connection with purchases of Common Stock pursuant to the Executive Stock Purchase Plan (filed as Exhibit 10.12) 4. LifePoint Hospitals, Inc. Management Stock Purchase Plan (filed as Exhibit 10.13) 5. LifePoint Hospitals, Inc. Outside Directors Stock and Incentive Compensation Plan (filed as Exhibit 10.14) 6. LifePoint Hospital's Inc. Employee Stock Purchase Plan (filed as Exhibit 10.17) (b) Reports on Form 8-K On October 1, 2001, we furnished a Current Report on Form 8-K pursuant to Item 9 to report our participation in the Raymond James & Associates Healthcare Conference held on October 1 through October 2 of 2001. On October 2, 2001, we furnished a Current Report on Form 8-K pursuant to Item 9 announcing that we, through a subsidiary, acquired Athens Regional Medical Center. On October 16, 2001, we furnished a Current Report on Form 8-K pursuant to Item 9 to provide information about the release of our third quarter earnings and the related conference call. On October 23, 2001, we furnished a Current Report on Form 8-K pursuant to Item 9 regarding the press release we issued on October 22, 2001 announcing our third quarter financial results. On December 3, 2001, we furnished a Current Report on Form 8-K pursuant to Item 9 announcing our acquisition of Ville Platte Medical Center. 48 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors....................................................................................... F-2 Consolidated Statements of Operations -- for the years ended December 31, 1999, 2000 and 2001....................... F-3 Consolidated Balance Sheets -- December 31, 2000 and 2001............................................................ F-4 Consolidated Statements of Cash Flows -- for the years ended December 31, 1999, 2000 and 2001........................ F-5 Consolidated Statements of Stockholders' Equity -- for the years ended December 31, 1999, 2000 and 2001............. F-6 Notes to Consolidated Financial Statements........................................................................... F-7
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders LifePoint Hospitals, Inc. We have audited the accompanying consolidated balance sheets of LifePoint Hospitals, Inc. as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the management of LifePoint Hospitals, Inc. (the "Company"). Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LifePoint Hospitals, Inc. at December 31, 2000 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Nashville, Tennessee January 31, 2002 F-2 LIFEPOINT HOSPITALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1999 2000 2001 -------- -------- -------- Revenues ...................................................................... $ 515.2 $ 557.1 $ 619.4 Salaries and benefits ......................................................... 217.4 224.2 243.2 Supplies ...................................................................... 64.2 67.0 78.2 Other operating expenses ...................................................... 117.3 118.1 120.8 Provision for doubtful accounts ............................................... 38.2 42.0 45.8 Depreciation and amortization ................................................. 31.4 34.1 34.7 Interest expense, net ......................................................... 23.4 30.7 18.1 Management fees ............................................................... 3.2 -- -- ESOP expense .................................................................. 2.9 7.1 10.4 Impairment of (gain on) long-lived assets ..................................... 25.4 (1.4) (0.5) -------- -------- -------- 523.4 521.8 550.7 -------- -------- -------- Income (loss) before minority interests, income taxes, and extraordinary item . (8.2) 35.3 68.7 Minority interests in earnings of consolidated entities ....................... 1.9 2.2 2.7 -------- -------- -------- Income (loss) before income taxes and extraordinary item ...................... (10.1) 33.1 66.0 Provision (benefit) for income taxes .......................................... (2.7) 15.2 31.1 -------- -------- -------- Income (loss) before extraordinary item ....................................... (7.4) 17.9 34.9 Extraordinary loss on early retirement of debt, net of tax benefit of $1.0 ... -- -- (1.6) -------- -------- -------- Net income (loss) ........................................................ $ (7.4) $ 17.9 $ 33.3 ======== ======== ======== Basic earnings (loss) per share: Income (loss) before extraordinary item ..................................... $ (0.24) $ 0.57 $ 0.97 Extraordinary loss on early retirement of debt .............................. -- -- (0.04) -------- -------- -------- Net income (loss) ........................................................ $ (0.24) $ 0.57 $ 0.93 ======== ======== ======== Diluted earnings (loss) per share: Income (loss) before extraordinary item ..................................... $ (0.24) $ 0.54 $ 0.94 Extraordinary loss on early retirement of debt .............................. -- -- (0.04) -------- -------- -------- Net income (loss) ........................................................ $ (0.24) $ 0.54 $ 0.90 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 LIFEPOINT HOSPITALS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 2001 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
2000 2001 ------- ------- ASSETS Current assets: Cash and cash equivalents ........................................................................ $ 39.7 $ 57.2 Accounts receivable, less allowances for doubtful accounts of $52.3 and $59.0 at December 31, 2000 and 2001, respectively .................................................... 50.0 56.7 Inventories ...................................................................................... 13.9 16.3 Deferred taxes and other current assets .......................................................... 22.2 18.7 ------- ------- 125.8 148.9 Property and equipment: Land ............................................................................................. 8.7 10.7 Buildings and improvements ....................................................................... 236.9 262.0 Equipment ........................................................................................ 244.9 263.4 Construction in progress (estimated cost to complete and equip after December 31, 2001 -- $32.7) . 9.4 7.2 ------- ------- 499.9 543.3 Accumulated depreciation ........................................................................... (183.4) (204.9) ------- ------- 316.5 338.4 Deferred loan costs, net ........................................................................... 9.0 7.1 Goodwill, net ...................................................................................... 44.7 47.1 Other .............................................................................................. 0.3 12.8 ------- ------- $ 496.3 $ 554.3 ======= ======= LIABILITIES AND EQUITY Current liabilities: Accounts payable ................................................................................. $ 16.1 $ 19.0 Accrued salaries ................................................................................. 13.8 18.6 Other current liabilities ........................................................................ 11.1 10.7 Estimated third-party payor settlements .......................................................... 8.3 17.9 Current maturities of long-term debt ............................................................. 11.1 -- ------- ------- 60.4 66.2 Long-term debt ..................................................................................... 278.3 150.0 Deferred taxes ..................................................................................... 15.2 21.0 Professional liability risks and other liabilities ................................................. 9.4 16.9 Minority interests in equity of consolidated entities .............................................. 4.6 5.2 Stockholders' equity: Preferred stock, $.01 par value; 10,000,000 shares authorized; no shares issued .................. -- -- Common stock, $.01 par value; 90,000,000 shares authorized; 34,709,504 shares and 39,276,745 shares issued and outstanding at December 31, 2000 and 2001, respectively ................... 0.3 0.4 Capital in excess of par value ................................................................... 156.5 285.0 Unearned ESOP compensation ....................................................................... (25.7) (22.5) Notes receivable for shares sold to employees .................................................... (7.2) (5.7) Retained earnings ................................................................................ 4.5 37.8 ------- ------- 128.4 295.0 ------- ------- $ 496.3 $ 554.3 ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-4 LIFEPOINT HOSPITALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (DOLLARS IN MILLIONS)
1999 2000 2001 ------- ------- ------- Cash flows from operating activities: Net income (loss) ...................................................................... $ (7.4) $ 17.9 $ 33.3 Adjustments to reconcile net income (loss) to net cash provided by operating activities: ESOP expense ...................................................................... 2.9 7.1 10.4 Depreciation and amortization ..................................................... 31.4 34.1 34.7 Minority interests in earnings of consolidated entities ........................... 1.9 2.2 2.7 Deferred income taxes (benefit) ................................................... (13.8) 13.6 6.9 Reserve for professional liability risk ........................................... 3.4 5.4 7.0 Loss (gain) on impairment of long-lived assets .................................... 25.4 (1.4) (0.5) Extraordinary loss on early retirement of bank debt ............................... -- -- 2.6 Tax benefit from stock option exercises ........................................... -- 6.4 8.1 Increase (decrease) in cash from operating assets and liabilities, net of effects from acquisitions and divestitures: Accounts receivable ............................................................ 7.2 2.1 (1.0) Inventories and other current assets ........................................... (1.1) (1.7) (0.6) Accounts payable and accrued expenses .......................................... 7.1 (11.4) 2.8 Income taxes payable ........................................................... (0.3) (0.2) (3.5) Estimated third-party payor settlements ........................................ 1.2 7.1 9.6 Other ............................................................................. 1.4 2.2 1.6 ------- ------- ------- Net cash provided by operating activities ...................................... 59.3 83.4 114.1 ------- ------- ------- Cash flows from investing activities: Purchases of property and equipment, net ............................................... (64.8) (31.4) (35.8) Purchases of facilities, net of cash acquired .......................................... -- (82.4) (36.5) Proceeds from sale of facilities ....................................................... -- 30.0 0.5 Other .................................................................................. (4.0) (8.0) 3.5 ------- ------- ------- Net cash used in investing activities .......................................... (68.8) (91.8) (68.3) ------- ------- ------- Cash flows from financing activities: Proceeds from stock offering, net ...................................................... -- -- 100.4 Proceeds from bank debt borrowings ..................................................... -- 65.0 -- Repayments of bank debt ................................................................ -- (35.7) (139.3) Proceeds from exercise of stock options ................................................ -- 7.2 12.2 Increase in intercompany balances with HCA, net ........................................ 22.4 -- -- Other .................................................................................. (0.4) (0.9) (1.6) ------- ------- ------- Net cash provided by (used in) financing activities ............................ 22.0 35.6 (28.3) ------- ------- ------- Change in cash and cash equivalents ...................................................... 12.5 27.2 17.5 Cash and cash equivalents at beginning of year ........................................... -- 12.5 39.7 ------- ------- ------- Cash and cash equivalents at end of year ................................................. $ 12.5 $ 39.7 $ 57.2 ======= ======= ======= Supplemental disclosure of cash flow information: Interest payments ...................................................................... $ 21.2 $ 29.4 $ 20.8 Income taxes paid (received), net ...................................................... $ 15.4 $ (4.4) $ 18.4 Capitalized interest ................................................................... $ 1.0 $ 0.3 $ 0.7 Supplemental non-cash financing activities: Assumption of debt from HCA ............................................................ $ 260.0 $ -- $ -- Elimination of intercompany amounts payable to HCA ..................................... $ 224.9 $ -- $ --
The accompanying notes are an integral part of the consolidated financial statements. F-5 LIFEPOINT HOSPITALS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001 (DOLLARS AND SHARES IN MILLIONS)
NOTES CAPITAL RECEIVABLE IN FOR COMMON STOCK EXCESS OF EQUITY, UNEARNED SHARES ------------ PAR INVESTMENTS ESOP SOLD TO SHARES AMOUNT VALUE BY HCA COMPENSATION EMPLOYEES ------ ------ ----- ------ ------------ --------- Balance at December 31, 1998 ............ $ $ $ 118.7 $ $ Net income before spin-off ............ 6.0 Stock issued in connection with: Executive Stock Purchase Plan ....... 1.0 10.2 (10.2) Employee Stock Ownership Plan ....... 2.8 32.1 (32.1) Issuance of stock options .......... 1.6 ESOP compensation earned .............. (0.3) 3.2 Assumption of debt from HCA ........... (260.0) Elimination of intercompany debt to HCA 229.9 Spin-off capitalization ............... 29.9 0.3 124.4 (124.7) Net loss after spin-off ............... -------- -------- -------- -------- -------- -------- Balance at December 31, 1999 ............ 33.7 0.3 137.9 -- (28.9) (10.2) Net income ............................ ESOP compensation earned .............. 3.9 3.2 Exercise of stock options, including tax benefits and other............... 1.0 17.1 Stock issued in connection with Management Stock Purchase Plan....... 0.7 Payment on Executive Stock Purchase Plan........................ (3.1) 3.0 -------- -------- -------- -------- -------- -------- Balance at December 31, 2000 ............ 34.7 0.3 156.5 -- (25.7) (7.2) Net income ............................ ESOP compensation earned .............. 7.2 3.2 Exercise of stock options, including tax benefits and other............... 0.9 20.5 Stock issued in connection with Management Stock Purchase Plan....... 0.5 Payment on Executive Stock Purchase Plan........................ 1.5 Issuance of common stock from offering 3.7 0.1 100.3 -------- -------- -------- -------- -------- -------- Balance at December 31, 2001 ............ 39.3 $ 0.4 $ 285.0 $ -- $ (22.5) $ (5.7) ======== ======== ======== ======== ======== ========
RETAINED EARNINGS (ACCUMULATED DEFICIT) TOTAL -------- ----- Balance at December 31, 1998 ............ $ $ 118.7 Net income before spin-off ............ 6.0 Stock issued in connection with: Executive Stock Purchase Plan ....... -- Employee Stock Ownership Plan ....... -- Issuance of stock options .......... 1.6 ESOP compensation earned .............. 2.9 Assumption of debt from HCA ........... (260.0) Elimination of intercompany debt to HCA 229.9 Spin-off capitalization ............... -- Net loss after spin-off ............... (13.4) (13.4) -------- -------- Balance at December 31, 1999 ............ (13.4) 85.7 Net income ............................ 17.9 17.9 ESOP compensation earned .............. 7.1 Exercise of stock options, including tax benefits and other............... 17.1 Stock issued in connection with Management Stock Purchase Plan....... 0.7 Payment on Executive Stock Purchase Plan........................ (0.1) -------- -------- Balance at December 31, 2000 ............ 4.5 128.4 Net income ............................ 33.3 33.3 ESOP compensation earned .............. 10.4 Exercise of stock options, including tax benefits and other............... 20.5 Stock issued in connection with Management Stock Purchase Plan....... 0.5 Payment on Executive Stock Purchase Plan........................ 1.5 Issuance of common stock from offering 100.4 -------- -------- Balance at December 31, 2001 ............ $ 37.8 $ 295.0 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-6 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 NOTE 1 -- ORGANIZATION AND ACCOUNTING POLICIES Organization On May 11, 1999, HCA, Inc. ("HCA") completed the spin-off of its operations comprising the America Group to its stockholders by distributing all outstanding shares of LifePoint Hospitals, Inc. (the "Distribution"). LifePoint Hospitals, Inc., together with its subsidiaries, as appropriate, is hereinafter referred to as the "Company." A description of the Distribution and certain transactions with HCA is included in Note 2. At December 31, 2001, the Company was comprised of 23 general, acute care hospitals and related health care entities. The entities are located in non-urban areas in the states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and all subsidiaries and entities controlled by the Company through the Company's direct or indirect ownership of a majority interest and exclusive rights granted to the Company as the sole general partner of such entities. All significant intercompany accounts and transactions within the Company have been eliminated in consolidation. Critical Accounting Policies and Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, the Company evaluates its estimates, including those related to bad debts, contractual discounts and professional and general liability reserves. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. (a) Allowance for Doubtful Accounts The Company's ability to collect outstanding receivables from third party payors is critical to its operating performance and cash flows. The primary collection risk lies with uninsured patient accounts and deductibles, co-payments or other amounts due from individual patients. The Company estimates the allowance for doubtful accounts based primarily upon the age of patient accounts receivable, the patient's economic inability to pay and the effectiveness of its collection efforts. The Company routinely monitors its accounts receivable balances and utilizes historical collection experience to support the basis for its estimates of the provision for doubtful accounts. Significant changes in payor mix or business office operations could have a significant impact on the Company's results of operations and cash flows. (b) Allowance for Contractual Discounts The Company derives a significant portion of its revenues from Medicare, Medicaid and other payors that receive discounts from our standard charges. We must estimate the total amount of these discounts to prepare our financial statements. For the year ended December 31, 2001, Medicare, Medicaid and discounted plan patients accounted for 93.3% of total gross revenues. The Medicare and Medicaid regulations and various managed care contracts under which these discounts must be calculated are complex and are subject to interpretation and adjustment. The Company estimates the allowance for contractual discounts on a payor-specific basis given its F-7 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) interpretation of the applicable regulations or contract terms. However, the services authorized and provided and resulting reimbursement, are often subject to interpretation. These interpretations sometimes result in payments that differ from the Company's estimates. Additionally, updated regulations and contract renegotiations occur frequently necessitating continual review and assessment of the estimation process by management. (c) Professional and General Liability Reserves Given the nature of the Company's operating environment, we are subject to medical malpractice lawsuits and other claims. To mitigate a portion of this risk, the Company maintained insurance for individual malpractice claims exceeding $1 million for the years ended December 31, 1999, 2000 and 2001. For fiscal year 2002, the Company increased its deductible to $10 million to mitigate increases in the cost of professional and general liability insurance. Our reserves for professional and general liability risks are based upon historical claims data, demographic considerations, severity factors and other actuarial assumptions calculated by a third party. This estimate is discounted to its present value using rates of 6.0% and 5.0% at December 31, 2000 and 2001, respectively. The rate changed to 5.0% reflecting lower market rates experienced during 2001. The estimated accrual for professional and general liability claims could be significantly affected should current and future claims differ from historical trends. The estimation process is also complicated by the relatively short period of time in which the Company owned its health care facilities as occurrence data under previous ownership may not necessarily reflect occurrence data under its ownership. While management monitors current claims closely and considers outcomes when estimating its insurance accruals, the complexity of the claims and wide range of potential outcomes often hampers timely adjustments to the assumptions used in the estimates. The reserve for professional and general liability risks was $8.9 million and $15.9 million at December 31, 2000 and 2001, respectively. The total cost of professional and general liability coverage for the years ended December 31, 1999, 2000 and 2001, was approximately $7.1 million, $8.2 million and $11.4 million, respectively. F-8 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Use of Estimates The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Fair Value of Financial Instruments The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable approximate fair value. The carrying value of the Notes was $150.0 million at December 31, 2001. The fair value of the Notes was $166.5 million at December 31, 2001, based on the quoted market price at December 31, 2001. Revenues The Company's health care facilities have entered into agreements with third-party payors, 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 the time the healthcare services are provided at estimated amounts due from patients and third-party payors. Settlements under reimbursement agreements with third-party payors are estimated and recorded in the period the related services are rendered and are adjusted in future periods as final settlements are determined. The net adjustments to estimated settlements resulted in increases to revenues of $0.7 million, $3.2 million and $2.0 million, for the years ended December 31, 1999, 2000 and 2001, respectively. Management believes that adequate provisions have been made for adjustments that may result from final determination of amounts earned under these programs. HCA retains sole responsibility for, and will be entitled to, any Medicare, Medicaid or cost-based Blue Cross settlements relating to cost reporting periods ending on or prior to the Distribution. F-9 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Laws and regulations governing Medicare and Medicaid programs are complex and subject to interpretation. In addition, since implementation of outpatient PPS in August 2000, the filing of all Medicare cost reports have been postponed until certain government reports are issued. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on the Company's financial statements. Compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties and exclusion from the Medicare and Medicaid programs. The Company provides care without charge to patients who are financially unable to pay for the health care services they receive. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenues. The Company's revenue is particularly sensitive to regulatory and economic changes in the states of Kentucky and Tennessee. As of December 31, 2001, the Company operated 23 hospitals with seven located in the Commonwealth of Kentucky and seven located in the State of Tennessee. Based on those 23 hospitals, the Company generated 39.2% of its revenue from its Kentucky hospitals (including 4.3% from state-sponsored Medicaid programs) and 22.3% from its Tennessee hospitals (including 3.3% from the state-sponsored TennCare program) for the year ended December 31, 2001. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand and marketable securities with original maturities of three months or less. The Company places its cash in financial institutions that are federally insured and limits the amount of credit exposure with any one institution. Accounts Receivable and Allowance for Doubtful Accounts The Company receives payment for services rendered from federal and state agencies (under the Medicare, Medicaid and TRICARE programs), managed care health plans, commercial insurance companies, employers and patients. During the years ended December 31, 1999, 2000 and 2001, approximately 47.4%, 47.0% and 48.4%, respectively, of the Company's revenues related to patients participating in the Medicare and Medicaid programs. Management recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there are significant credit risks associated with these government agencies. Management does not believe that there are any other significant concentrations of revenues from any particular payor that would subject it to any significant credit risks in the collection of its accounts receivable. A summary of activity in the Company's allowance 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 --------- -------- ---------- --------- Allowance for doubtful accounts: Year ended December 31, 1999 . $ 48.3 $ 38.2 $ (36.2) $ 50.3 Year ended December 31, 2000 . 50.3 42.0 (40.0) 52.3 Year ended December 31, 2001 . 52.3 45.8 (39.1) 59.0
Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Long-Lived Assets (a) Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increased capacities or extend useful lives are capitalized. Depreciation is computed by applying the straight-line method over the estimated useful lives of buildings and improvements (10 to 40 years) and equipment (3 to 10 years). Depreciation expense was $30.6 million, $32.8 million and $33.0 million for the years ended December 31, 1999, 2000, and 2001, respectively. (b) Goodwill and Intangible Assets Goodwill is amortized using the straight-line method, generally over periods ranging from 30 to 40 years for hospital acquisitions. The Company's goodwill is net of accumulated amortization of $8.7 million and $10.4 million as of December 31, 2000 and 2001, respectively. Intangible assets relate to non-compete agreements and are amortized over the terms of the agreements. The Company had intangible assets of $0.2 million with accumulated amortization of $0.1 million at December 31, 2000 and 2001 and is included in other long-term assets in the accompanying consolidated balance sheets. F-10 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) When events, circumstances and operating results indicate that the carrying values of certain long-lived assets and the related identifiable intangible assets might be impaired, the Company prepares projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts are not expected to be recoverable, such amounts are reduced to estimated fair value. Fair value is estimated based upon internal evaluations of each asset that include quantitative analyses of net revenue and cash flows, reviews of recent sales of similar assets and market responses based upon discussions with and offers received from potential buyers. Income Taxes As part of the process of preparing the Company's consolidated financial statements, management is required to estimate the Company's income taxes in each of the jurisdictions in which it operates. This process involves the Company estimating its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation expense, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance sheet. The Company must then assess the likelihood that the Company's deferred tax assets will be recovered from future taxable income and to the extent it believes that recovery is not likely, the Company must establish a valuation allowance. To the extent the Company establishes a valuation allowance or increase this allowance in a period, the company must include an expense within the tax provision in the statement of operations. Physician Recruiting Costs Physician recruiting costs are expensed when incurred and are included in other operating expenses in the accompanying consolidated statements of operations. Physician recruiting expenses were $6.5 million, $8.9 million and $6.4 million for the years ended December 31, 1999, 2000 and 2001, respectively. Management Fees For the period prior to the Distribution in 1999, HCA incurred various corporate general and administrative expenses. These corporate overhead expenses were allocated to the Company based on net revenues. In the opinion of HCA's management, this allocation method was reasonable. Stock Based Compensation The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company recognizes no compensation expense for grants when the exercise price equals or exceeds the market price of the underlying stock on the date of grant. Earnings Per Share Earnings per share ("EPS") is based on the weighted average number of common shares outstanding and dilutive stock options and restricted shares, adjusted for the shares issued to the LifePoint Employee Stock Ownership Plan (the "ESOP"). As the ESOP shares are committed to be released, the shares become outstanding for earnings per share calculations. Recently Issued Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets, (the "Statements"). These Statements make significant changes to the accounting for business combinations, goodwill and intangible assets. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. In addition, it further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS 141 was effective for transactions completed subsequent to June 30, 2001. The application of SFAS 141 did not have a material effect on the Company's results of operations or financial position. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed at least annually for impairment. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS 142 effective January 1, 2002. Application of the non-amortization provisions of SFAS 142 for goodwill would have resulted in an increase in pretax income of approximately $1.7 million ($0.8 million, after-tax or $0.02 per diluted share) for the year ended December 31, 2001. Pursuant to SFAS 142, the Company will complete its transition impairment tests of goodwill during the second quarter of 2002 anticipating no impairment and will perform its initial annual impairment test later in 2002. F-11 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) SFAS 143, Accounting for Asset Retirement Obligations, was issued in August 2001 by the FASB and is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. SFAS 143 establishes accounting standards for recognition and measurement of a liability for an asset retirement obligation and the associated retirement costs. SFAS 143 applies to all entities and to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. The Company does not expect SFAS 143 to have a material effect on its results of operations or financial position. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"), which supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 removes goodwill from its scope and clarified other implementation issues related to SFAS 121. SFAS 144 also provides a single framework for evaluating long-lived assets to be disposed of by sale. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years and, generally, are to be applied prospectively. The Company does not expect SFAS 144 to have a material effect on its results of operations or financial position. NOTE 2 -- THE DISTRIBUTION AND TRANSACTIONS WITH HCA As a result of the Distribution, the Company became an independent, publicly-traded company. Owners of HCA Common Stock received one share of the Company's Common Stock for every 19 shares of HCA Common Stock held which resulted in approximately 29.9 million shares of the Company's Common Stock outstanding immediately after the Distribution. After the Distribution, HCA had no ownership in the Company. Immediately after the Distribution, however, certain HCA benefit plans received shares of the Company on behalf of HCA employees. In connection with the Distribution, all intercompany amounts payable by the Company to HCA were eliminated and the Company assumed certain indebtedness from HCA. In addition, the Company entered into various agreements with HCA which are intended to facilitate orderly changes for both companies in a way which would be minimally disruptive to each entity. These agreements provide certain indemnities to the parties, and provide for the allocation of tax and other assets, liabilities, and obligations arising from periods prior to the Distribution. In connection with the Distribution, HCA received a ruling from the Internal Revenue Service (the "IRS") to the effect, among other things, that the Distribution would qualify as a tax-free transaction under Section 355 of the Internal Revenue Code of 1986, as amended. Such a ruling, while generally binding upon the IRS, is subject to certain factual representations and assumptions provided by HCA. The Company has agreed to certain restrictions on its future actions to provide further assurances that the Distribution will qualify as tax-free. Restrictions include, among other things, limitations on the liquidation, merger or consolidation with another company, certain issuances and redemptions of the Company's Common Stock and the sale or other disposition of assets. If the Company fails to abide by such restrictions and, as a result, the Distribution fails to qualify as a tax-free transaction, the Company will be obligated to indemnify HCA for any resulting liability, which could have a material adverse effect on the Company's financial position and results of operations. NOTE 3 -- HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS HCA is currently the subject of various federal and state investigations, qui tam actions, shareholder derivative and class action suits, patient/payor actions and general liability claims. HCA is also the subject of a formal order of investigation by the SEC. Based on the Company's review of HCA's public filings, the Company understands that the SEC's investigation of HCA includes the anti-fraud, insider trading, periodic reporting and internal accounting control provisions of the federal securities laws. These investigations, actions and claims relate to HCA and its subsidiaries, including subsidiaries that, before the Company's formation as an independent company, owned the facilities the Company now owns. HCA is a defendant in several qui tam actions, or actions brought by private parties, known as relators, on behalf of the United States of America, which have been unsealed and served on HCA. The actions allege, in general, that HCA and certain subsidiaries and/or affiliated partnerships violated the False Clams Act, 31 U.S.C. ss. 3729 et seq., for improper claims submitted to the F-12 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) government for reimbursement. The lawsuits generally seek three times the amount of damages caused to the United States by the submission of any Medicare or Medicaid false claims presented by the defendants to the federal government, civil penalties of not less than $5,500 nor more than $11,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. HCA has disclosed that, on March 15, 2001, the Department of Justice filed a status report setting forth the government's decisions regarding intervention in existing qui tam actions against HCA and filed formal complaints for those suits in which the government has intervened. HCA stated that, of the original 30 qui tam actions, the Department of Justice remains active and has elected to intervene in eight actions. HCA has also disclosed that it 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. Based on the Company's review of HCA's public filings, the Company understands that, in December 2000, HCA entered into a Plea Agreement with the Criminal Division of the Department of Justice and various U.S. Attorney's Offices (which the Company will refer to as the plea agreement) and a Civil and Administrative Settlement Agreement with the Civil Division of the Department of Justice (which the Company will refer to as the civil agreement). Based on the Company's review of HCA's public filings, the Company understands that the agreements resolve all Federal criminal issues outstanding against HCA and certain issues involving Federal civil claims by or on behalf of the government against HCA relating to diagnosis related group, or DRG, coding, outpatient laboratory billing and home health issues. Pursuant to the plea agreement, HCA paid the government $95 million during the first quarter of 2001. The civil agreement was approved by the Federal District Court of the District of Columbia in August 2001. Pursuant to the civil agreement, HCA agreed to pay the government $745 million plus interest, which was paid in the third quarter of 2001. Based on the Company's review of HCA's public filings, the Company understands that certain civil issues are not covered by the civil agreement and remain outstanding, including claims related to costs reports and physician relations issues. The plea agreement and the civil agreement announced in December 2000 relate only to conduct that was the subject of the federal investigations resolved in the agreements and do not resolve various qui tam actions filed by private parties against HCA, or pending state actions. HCA has agreed to indemnify the Company for any losses, other than consequential damages, arising from the pending governmental investigations of HCA's business practices prior to the date of the distribution and losses arising from legal proceedings, present or future, related to the investigation or actions engaged in before the distribution that relate to the investigation. HCA has also agreed that, in the event that any hospital owned by the Company at the time of the spin-off is permanently excluded from participation in the Medicare and Medicaid programs as a result of the proceedings described above, then HCA will make a cash payment to the Company, in an amount (if positive) equal to five times the excluded hospital's 1998 income from continuing operations before depreciation and amortization, interest expense, management fees, minority interests and income taxes, as set forth on a schedule to the distribution agreement, less the net proceeds of the sale or other disposition of the excluded hospital. However, the Company could be held responsible for any claims that are not covered by the agreements reached with the Federal government or for which HCA is not required to, or fails to, indemnify the Company. If indemnified matters were asserted successfully against the Company or any of the Company's facilities, and HCA failed to meet its indemnification obligations, then this event could have a material adverse effect on the Company's business, financial condition, results of operations or prospects. The extent to which the Company may or may not continue to be affected by the ongoing investigations of HCA and the initiation of additional investigations, if any, cannot be predicted. These matters could have a material adverse effect on the Company's business, financial condition, results of operations or prospects in future periods. NOTE 4 -- IMPACT OF ACQUISITIONS, DIVESTITURES AND IMPAIRMENT OF LONG-LIVED ASSETS Acquisitions -- 2001 Effective December 1, 2001, the Company acquired Ville Platte Medical Center in Ville Platte, Louisiana for approximately $11.0 million in cash, including working capital and the assumption of long-term liabilities of approximately $2.6 million. Pursuant to the asset purchase agreement, the Company also agreed to make certain capital improvements which, including the initial cash payment and liabilities assumed, is not required to exceed $25.0 million. The capital improvements must be completed by December 1, 2004. The allocation of the full purchase price had not been determined as of December 31, 2001. Unallocated purchase price of approximately $12.6 million is included in other long-term assets in the accompanying consolidated balance sheet as of December 31, 2001 pending final appraisal from a third party. Effective October 1, 2001, the Company acquired Athens Regional Medical Center in Athens, Tennessee for approximately $19.7 million in cash, including working capital. The purchase price is subject to adjustment pending the final working capital settlement. Effective April 1, 2001 the Company purchased a diagnostic imaging center in Palatka, Florida for $5.8 million in cash, including working capital. The funds used for the acquisition were obtained from the Company's available cash and $5.7 million in proceeds from the sale of a facility and previously held in a Starker Trust which is included in deferred taxes and other current assets in the accompanying consolidated balance sheet as of December 31, 2000. Cost in excess of net assets acquired totaled $1.8 million and was amortized using a 30 year life. Effective January 2, 2001, the Company entered into a two-year lease to operate Bluegrass Community Hospital, a 25-bed critical access hospital located in Versailles, Kentucky, which the parties may mutually agree to extend. Acquisitions -- 2000 Effective July 1, 2000, the Company acquired Lander Valley Medical Center in Lander, Wyoming for a purchase price of $33.0 million in cash, including working capital. Cost in excess of net assets acquired totaled $9.8 million and was amortized using a 40 year life. Effective June 16, 2000, the Company acquired Putnam Community Medical Center in Palatka, Florida for approximately $49.4 million in cash, including working capital. Cost in excess of net assets acquired totaled $22.8 million and was amortized using a 40 year life. F-13 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Allocation of Purchase Price The foregoing acquisitions were accounted for using the purchase method of accounting. The purchase prices of these transactions were allocated to the assets acquired and liabilities assumed based upon their respective fair values and are subject to change during the twelve month period subsequent to the acquisition date. The following table summarizes the allocation of the aggregate purchase price of the acquisitions for the years ended December 31, 2000 and 2001 (in millions):
2000 2001 -------- -------- Net cash used for acquisitions ................... $ 82.4 $ 36.5 Fair value of assets acquired .................... (52.5) (28.1) Liabilities assumed .............................. 2.7 6.0 -------- -------- Cost in excess of net assets acquired and unallocated purchase price ..................... $ 32.6 $ 14.4 ======== ========
Divestitures and Impairment of Long-lived Assets Sale of Hospitals previously identified as Held for Sale The Company sold Halstead Hospital, Trinity Hospital and Barrow Medical Center in three separate transactions during 2000. The sale of these three hospitals resulted in no gain or loss to the Company as they were previously written down to net realizable value during 1998 and 1999. The three hospitals were identified as held for sale during the fourth quarter of 1998 when management determined the facilities were not compatible with the Company's operating plans based upon management's review of all facilities, and giving consideration to current and expected market conditions and the current and expected capital needs in each market. The carrying value immediately before the impairment charge of the long-lived assets was $47.2 million. During the fourth quarter of 1998, the carrying value of these hospitals was reduced to fair value, based on estimates of selling values and verbal discussions with potential buyers at that time, for a total non-cash charge of $24.8 million (comprised of $24.3 million of tangible assets and $0.5 million of intangible assets). The adjusted carrying values of these assets as of December 31, 1998 was based on management's estimates at that time. In addition, the Company subsequently received a non-binding offer from a potential buyer to purchase all three hospitals in March of 1999 for amounts approximating the adjusted carrying values. The above-mentioned offer for these three hospitals was rescinded in July 1999. Due to management's subsequent unsuccessful attempts to find a buyer as well as the deterioration of market conditions at these facilities throughout the remainder of 1999, the Company recorded an additional non-cash charge of $25.4 million during the fourth quarter of 1999. The charge was comprised of $22.4 million in further impairment charges to write down the remaining tangible assets to new estimated net realizable values and $3.0 million for the estimated selling and closing costs which the Company, at that time, believed had a high probability of occurring due to a lack of interested buyers with available financing. The estimated net realizable values were reduced significantly since there were no interested buyers at that time and the closing of a hospital in a rural market would likely result in real estate with little or no value. During 2000, the hospitals were subsequently sold for little or no consideration. Below is a summary of each hospital sold that was previously listed as held for sale. Effective February 1, 2000, the Company sold Trinity Hospital in exchange for a promissory note (subsequently renegotiated) of approximately $2.4 million, due in 2002. The note was fully reserved upon issuance due to the uncertainty of the buyer's ability to make payments on the note. During 2000 and 2001, the Company received approximately $1.4 million and $0.5 million, respectively, from the buyer as payments in full and recognized these payments as an "Impairment (gain) on long-lived assets" on the accompanying consolidated statements of operations. Effective April 1, 2000, the Company sold Halstead Hospital in exchange for a promissory note of approximately $1.5 million, due in 60 equal monthly installments. The Company fully reserved the note upon issuance due to the uncertainty of the buyers ability to make payments on the note. No gain or loss was associated with this sale. Effective September 1, 2000, the Company sold Barrow Medical Center in exchange for approximately $2.2 million in cash, that equated to the value of the hospital's working capital. No gain or loss was associated with this sale. For the years ended December 31, 1999 and 2000, the three facilities held for sale had net revenues of $42.6 million and $14.4 million and a loss before income taxes and impairment charges of approximately $3.8 million and $2.3 million, respectively. Sale of Springhill Medical Center Effective November 17, 2000, the Company sold Springhill Medical Center in Springhill, Louisiana for approximately $5.7 million in cash. There was an immaterial gain associated with the sale. Sale of Riverview Medical Center Effective August 1, 2000, the Company sold Riverview Medical Center in Gonzales, Louisiana for approximately $20.7 million in cash. The proceeds from the transaction and the Company's available cash were used to pay down bank borrowings. There was no gain or loss associated with the sale. Other For the years ended December 31, 1999 and 2000, the five facilities that were sold during 2000 had net revenues of $71.1 million and $35.6 million and a loss before income taxes and impairment charges of approximately $9.5 million and $3.6 million, respectively. The operating results of all acquisitions and divestitures have been consolidated in the accompanying consolidated statements of operations for the periods subsequent to acquisition and for the periods prior to sale, respectively. Pro forma Results of Operations The following unaudited pro forma results of operations give effect to the operations of the hospitals acquired and sold during the years ended December 31, 1999, 2000 and 2001 as if the respective transactions had occurred as of the first day of the fiscal year immediately preceding the year of the acquisitions and divestitures (in millions, except per share data):
YEAR ENDED DECEMBER 31, ------------ 1999 2000 2001 -------- -------- -------- Revenues ............................. $ 513.2 $ 602.5 $ 657.8 ======== ======== ======== Income before extraordinary item ..... $ 15.3 $ 19.1 $ 34.8 ======== ======== ======== Net income ........................... $ 15.3 $ 19.1 $ 33.2 ======== ======== ======== Basic earnings per share: Income before extraordinary item ... $ 0.50 $ 0.61 $ 0.97 ======== ======== ======== Net income ......................... $ 0.50 $ 0.61 $ 0.93 ======== ======== ======== Diluted earnings per share: Income before extraordinary item ... $ 0.50 $ 0.58 $ 0.93 ======== ======== ======== Net income ......................... $ 0.50 $ 0.58 $ 0.89 ======== ======== ========
The pro forma results of operations do not purport to represent what the Company's results of operations would have been had such transactions occurred at the beginning of the periods presented or to project the Company's results of operations in any future period. F-14 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 5 -- INCOME TAXES The provision (benefit) for income taxes for the years ended December 31, 1999, 2000 and 2001, consists of the following (dollars in millions):
1999 2000 2001 -------- -------- -------- Current: Federal ............................ $ 9.6 $ -- $ 21.8 State .............................. 1.5 1.6 1.4 -------- -------- -------- 11.1 1.6 23.2 Deferred: Federal ............................ (13.3) 13.5 5.6 State .............................. (1.6) (0.1) (0.1) -------- -------- -------- (14.9) 13.4 5.5 Increase in Valuation allowance ...... 1.1 0.2 1.4 -------- -------- -------- Total ................................ $ (2.7) $ 15.2 $ 30.1 ======== ======== ========
The increases in the valuation allowance are primarily the result of state net operating loss carryforwards that management believes may not be fully utilized because of the uncertainty regarding the Company's ability to generate taxable income in certain states. Various subsidiaries have state net operating loss carryforwards of approximately $60.3 million (primarily in the states of Florida and Tennessee) with expiration dates through the year 2021. The Company generated a federal net operating loss of approximately $8.4 million for the year ended December 31, 2000 which was fully utilized in the year 2001. A reconciliation of the statutory federal income tax rate to the Company's effective income tax rate on income (loss) before income taxes for the years ended December 31, 1999, 2000 and 2001, follows:
1999 2000 2001 ------ ------ ------ Federal statutory rate .............................. 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 10.6 2.6 3.7 ESOP ................................................ -- 4.4 4.8 Non-deductible intangible assets .................... (3.0) 1.3 0.5 Valuation allowance ................................. (10.8) 0.9 0.4 Other items, net .................................... (5.1) 1.9 3.0 ------ ------ ------ Effective income tax rate ........................... 26.7% 46.1% 47.4% ====== ====== ======
F-15 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Deferred income taxes result from temporary differences in the recognition of assets, liabilities, revenues and expenses for financial accounting and tax purposes. Sources of these differences and the related tax effects are as follows (dollars in millions):
2000 2001 -------- -------- Deferred tax liabilities: Depreciation and fixed asset basis differences ... $ (21.7) $ (34.2) Other ............................................ (1.9) (4.0) Prepaid Expenses ................................. -- (2.2) -------- -------- Total deferred tax liabilities ................. (23.6) (40.4) -------- -------- Deferred tax assets: Provision for doubtful accounts .................. 6.0 16.9 Employee compensation ............................ 3.0 2.6 Professional liability ........................... 3.8 6.3 Other ............................................ 5.4 3.7 -------- -------- Total deferred tax assets ...................... 18.2 29.5 Valuation allowance ................................ (1.3) (2.7) -------- -------- Net deferred tax assets .......................... 16.9 26.8 -------- -------- Net deferred tax assets (liabilities) ............ $ (6.7) $ (13.6) ======== ========
The balance sheet classification of deferred income tax assets (liabilities) is as follows (dollars in millions):
2000 2001 -------- -------- Current .................................... $ 8.5 $ 7.4 Long-term .................................. (15.2) (21.0) -------- -------- Total .................................... $ (6.7) $ (13.6) ======== ========
The Company had a net income tax receivable of $3.3 million and $6.8 million as of December 31, 2000 and 2001, respectively and is included in deferred taxes and other current assets in the accompanying consolidated balance sheets. HCA and the Company entered into a tax sharing and indemnification agreement. Under the agreement, HCA maintains full control and absolute discretion with regard to any combined or consolidated tax filings for periods prior to the Distribution. In addition, the agreement provides that HCA will generally be responsible for all taxes that are allocable to periods prior to the Distribution and HCA and the Company will each be responsible for its own tax liabilities for periods after the Distribution. For the periods prior to the Distribution, HCA filed consolidated federal and state income tax returns which included all of its eligible subsidiaries, including the Company. The provisions for income taxes (benefits) in the consolidated statements of operations for periods prior to the Distribution were computed on a separate return basis (i.e., assuming the Company had not been included in a consolidated income tax return with HCA). All income tax payments for these periods were made by the Company through HCA. The agreement does not have an impact on the realization of deferred tax assets or the payment of deferred tax liabilities of the Company except to the extent that the temporary differences give rise to such deferred tax assets and liabilities after the Distribution and are adjusted as a result of final tax settlements after the Distribution. In the event of such adjustments, the tax sharing and indemnification agreement provides for certain payments between HCA and the Company as appropriate. F-16 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 6 -- LONG-TERM DEBT Long-term debt consists of the following (in millions):
DECEMBER 31, ------------ 2000 2001 -------- -------- Bank Facilities ............................... $ 139.3 $ -- Senior Subordinated Notes ..................... 150.0 150.0 Other debt .................................... 0.1 -- -------- -------- 289.4 150.0 Less current maturities ....................... (11.1) -- -------- -------- $ 278.3 $ 150.0 ======== ========
Maturities of long-term debt at December 31, 2001 are as follows (in millions):
2002-2006 ................................................... $ -- Thereafter .................................................. 150.0 -------- $ 150.0 ========
Bank Credit Agreement In March 2001, the Company received approximately $100.4 million in net proceeds from a public offering of 3,680,000 shares of common stock. During 2001, the Company used the proceeds, along with available cash, to repay the $139.3 million in borrowings outstanding under its existing bank credit agreement. In June 2001, the Company completed a $200 million, five-year amended and restated credit agreement (the "2001 Agreement") with a syndicate of lenders, which increased its available credit under the revolving credit agreement from $65 million to $200 million. As of December 31, 2001, the Company had a $3.0 million letter of credit which reduced the amount available under the 2001 Agreement to $197.0 million. The applicable interest rate under the 2001 Agreement is based on either LIBOR plus a margin ranging from 1.25% to 2.25% or prime plus a margin ranging from 0% to 0.5% both depending on the Company's consolidated total debt to consolidated EBITDA ratio for the most recent four quarters. The Company also pays a commitment fee ranging from 0.3% to 0.5% of the average daily unused balance. The applicable commitment fee rate is based on the Company's consolidated total debt to consolidated EBITDA ratio for the most recent four quarters. The interest rate under the 2001 Agreement was 3.13% at December 31, 2001. Obligations under the 2001 Agreement are guaranteed by all of the Company's current and future subsidiaries and are secured by substantially all of the assets of the Company and its subsidiaries and the stock of the Company's subsidiaries. The 2001 Agreement requires that the Company comply with various financial ratios and tests and contains covenants, including but not limited to restrictions on new indebtedness, the ability to merge or consolidate, asset sales, capital expenditures and dividends, for which the Company is in compliance as of December 31, 2001. F-17 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Senior Subordinated Notes On May 11, 1999, the Company assumed from HCA $150 million in Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at 10.75%. In November 1999, in a registered exchange offer, the Company issued a like aggregate principal amount of notes in exchange for these notes (the "Notes"). Interest is payable semi-annually on May 15 and November 15. The Notes are unsecured obligations and are subordinated in right of payment to all existing and future senior indebtedness. The Company may redeem the Notes, in whole or in part, at any time on or after May 15, 2004 at redemption prices ranging from 105.375% to 100.0%, plus accrued and unpaid interest. Additionally, at any time prior to May 15, 2002, the Company may redeem up to 35% of the principal amount of the Notes with the net cash proceeds of one or more sales of its capital stock at a redemption price of 110.75% plus accrued and unpaid interest to the redemption date; provided that at least 65% of the aggregate principal amount of the notes originally issued remains outstanding after such redemption and the redemption occurs within 60 days of closing of such sale of capital stock. The indenture pursuant to which the Notes were made contains certain covenants, including but not limited to restrictions on new indebtedness, the ability to merge or consolidate, asset sales, capital expenditures and dividends. The Notes are guaranteed jointly and severally on a full and unconditional basis by all of the Company's operating subsidiaries ("Subsidiary Guarantors"). The Company is a holding company with no operations apart from its ownership of the Subsidiary Guarantors. The aggregate assets, liabilities, equity and earnings of the Subsidiary Guarantors are substantially equivalent to the total assets, liabilities, equity and earnings of the Company and its subsidiaries on a consolidated basis. At December 31, 2001, all but one of the Subsidiary Guarantors were wholly owned and fully and unconditionally guaranteed the Notes. Separate financial statements and other disclosures of the wholly owned Subsidiary Guarantors are not presented because management believes that such separate financial statements and disclosures would not provide additional material information to investors. The Company's only non-wholly owned Subsidiary, Dodge City Healthcare Group, L.P. is consolidated and all of its assets, liabilities, equity and earnings of this entity fully and unconditionally, jointly and severally guarantee the Notes. The Company owns approximately 70% of the partnership interests in this mostly owned Subsidiary Guarantor. Deferred Loan Costs The Company incurred loan costs of approximately $10.7 million, $0.8 million and $1.9 million during 1999, 2000 and 2001, respectively. The Company capitalized such costs and is amortizing these costs to interest expense over the terms of the related debt (5 years for the 2001 Agreement and 10 years for the Notes). The interest expense related to deferred loan cost amortization was approximately $0.9 million, $1.6 million and $1.2 million during 1999, 2000 and 2001, respectively. Upon consummation of the 2001 Agreement, the Company wrote off $2.6 million of net deferred loan costs related to its original credit agreement, which resulted in an extraordinary charge of $1.6 million, net of a tax benefit of $1.0 million. F-18 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 7 -- STOCKHOLDERS' EQUITY Preferred Stock The certificate of incorporation provides that up to 10,000,000 shares of preferred stock, of which 90,000 shares have been designated as Series A Junior Participating Preferred Stock, par value $.01 per share, may be issued. The board of directors has the authority to issue preferred stock in one or more series and to fix for each 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 on the stock, and the number of shares constituting any series and the designations of this series, without any further vote or action by the stockholders. Because the terms of the preferred stock may be fixed by the board of directors without stockholder action, the preferred stock could be issued quickly with terms calculated to defeat a proposed takeover or to make the removal of our management more difficult. Preferred Stock Purchase Rights Pursuant to a stockholders' rights plan, each outstanding share of common stock is accompanied by one preferred stock purchase right. Each right entitles the registered holder to purchase one one-thousandth of a share of Series A preferred stock at a price of $35 per one one-thousandth of a share, subject to adjustment. Each share of 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 common stock. In the event of liquidation, dissolution or winding up, the holders of 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 on the stock, 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 common stock. The rights are not exercisable until the rights distribution date as defined in the stockholders' rights plan. The rights will expire on May 7, 2009, unless the expiration date is extended or unless the rights are earlier redeemed or exchanged. The rights have certain anti-takeover effects. The rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not determined by the board of directors to be in the best interests of all stockholders. The rights should not interfere with any merger or other business combination approved by the board of directors. Common Stock Holders of common stock are entitled to one vote for each share held of record on all matters on which stockholders may vote. There are no preemptive, conversion, redemption or sinking fund provisions applicable to our common stock. In the event of liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in the assets available for distribution, subject to any prior rights of any holders of preferred stock then outstanding. In March 2001, the Company completed its public offering of 3,680,00 shares of common stock at an offering price of $29.00 per share. The net proceeds from the offering of approximately $100.4 million were used to reduce debt. ESOP Compensation In connection with the Distribution, the Company established the ESOP, a defined contribution retirement plan which covers substantially all employees. The ESOP purchased from the Company approximately 8.3% of the Company's Common Stock at fair market value (approximately 2.8 million shares at $11.50 per share). The purchase was primarily financed by the ESOP issuing a promissory note to the Company, which will be repaid annually in equal installments over a 10-year period beginning December 31, 1999. The Company makes contributions to the ESOP which the ESOP uses to repay the loan. The Company's stock acquired by the ESOP is held in a suspense account and will be allocated to participants at market value from the suspense account as the loan is repaid. The loan to the ESOP is recorded as unearned ESOP compensation in the accompanying consolidated balance sheets. Reductions are made to unearned ESOP compensation as shares are committed to be released to participants at cost. Shares are deemed to be committed to be released ratably during each period as the employees perform services. Shares are allocated ratably to employee accounts over a period of 10 years (1999 through 2008). ESOP expense is recognized using the average market price of shares committed to be released to participants during the accounting period with any difference between the average market price and the cost being charged or credited to capital in excess of par value. As the shares are committed to be released, the shares become outstanding for earnings per share calculations. The non-cash ESOP expense was $2.9 million, $7.1 million and $10.4 million for the years ended December 31, 1999, 2000 and 2001, respectively. The ESOP expense tax deduction is fixed at $3.2 million per year. F-19 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The ESOP shares as of December 31, 2001 were as follows: Allocated shares 663,010 Shares committed to be released 176,006 Unreleased shares 1,957,703 --------------- Total ESOP shares 2,796,719 =============== Fair value of unreleased shares $ 66.6 million ===============
Prior to the Distribution, the Company participated in HCA's defined contribution retirement plans, which covered substantially all employees. Benefits were determined primarily as a percentage of a participant's earned income and were vested over specific periods of employee service. Certain plans also required the Company to make matching contributions at certain percentages. Amounts approximately equal to expense for these plans were funded annually. After the Distribution, the Company no longer participated in these plans. Executive Stock Purchase Plan The Company adopted the Executive Stock Purchase Plan in 1999, in which 1,000,000 shares of the Company's Common Stock were reserved and subsequently issued. The Executive Stock Purchase Plan grants a right to specified executives of the Company to purchase shares of Common Stock from the Company. The Company loaned each participant in the plan 100% of the purchase price of the Company's Common Stock at the fair value based on the date of purchase (approximately $10.2 million), on a full recourse basis at interest rates ranging from 5.2% to 5.3%. The loans are reflected as notes receivable for shares sold to employees in the accompanying consolidated statements of stockholders' equity. As of December 31, 2001, approximately $4.5 million of such loans have been paid under the Executive Stock Purchase Plan. Management Stock Purchase Plan In addition, the Company has a Management Stock Purchase Plan which provides to certain designated employees an opportunity to purchase restricted shares of its Common Stock at a discount through payroll deductions over six month intervals. Shares of Common Stock reserved for this plan were 250,000 at December 31, 2001. Approximately 79,000 and 21,000 restricted shares were issued to employees during the years ended December 31, 2000 and 2001, respectively, under this plan. Such shares are subject to a three year vesting period. Stock Options 1998 Long-Term Incentive Plan In connection with the Distribution, the Company adopted the 1998 Long-Term Incentive Plan, for which 5,425,000 shares of the Company's Common Stock have been reserved for issuance. An amendment to the 1998 Long-Term Incentive Plan providing for an increase in the number of shares of common stock available for issuance from 5,425,000 to 7,125,000 was approved by the Company's stockholders in May 2001. The 1998 Long-Term Incentive Plan authorizes the grant of stock options, stock appreciation rights and other stock based awards to officers and employees of the Company. On the Distribution Date, approximately 591,900 stock options were granted under this plan, relating to pre-existing vested HCA options. These options were granted at various prices, were exercisable on the date of grant, and expire at various dates not to exceed 10 years. Options to purchase an additional 3,490,000, 260,700 and 1,133,300 shares were granted to the Company's employees during the years ended December 31, 1999, 2000 and 2001, respectively, under this plan with an exercise price of the fair market value on the date of grant. These options are exercisable beginning in part from the date of grant to five years after the date of grant. All options granted under this plan expire in 10 years from the date of grant. The Company also granted 340,000 options to HCA executives in 1999 with an exercise price of the fair market value on the date of grant. These options were exercisable on the date of grant and HCA paid the Company $1.6 million in exchange for the issuance of these options, based on a Black-Scholes Valuation Model. The payment received from HCA was accounted for as a reduction of compensation expense otherwise recorded upon issuance of the options. In addition, the Company granted an option to purchase 50,000 shares of the Company's Common Stock to The LifePoint Community Foundation in 1999. The exercise price of the stock option was equal to the fair value on the date of grant. F-20 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Outside Directors Plan The Company also adopted an Outside Directors Plan for which 175,000 shares of the Company's Common Stock have been reserved for issuance. Approximately 20,000, 37,700 and 12,500 options were granted under such plan to non-employee directors during the years ended December 31, 1999, 2000 and 2001, respectively. These options are exercisable beginning in part from the date of grant to three years after the date of grant and expire 10 years after grant. Summary Presented below is a summary of stock option activity for 1999, 2000 and 2001:
STOCK OPTION PRICE WEIGHTED AVERAGE OPTIONS PER SHARE EXERCISE PRICE --------- ------------ -------------- Balances, December 31, 1998.......................... -- $ -- $ -- Conversion of HCA options.......................... 591,900 0.07-18.38 12.12 Granted............................................ 3,900,000 7.63-12.00 10.62 Exercised.......................................... (9,300) 0.18-12.33 9.01 Cancelled.......................................... (71,200) 0.18-18.38 12.63 --------- ------------ ---------- Balances, December 31, 1999.......................... 4,411,400 0.07-18.38 10.79 Granted............................................ 298,400 17.25-39.69 22.06 Exercised.......................................... (1,268,800) 0.07-18.38 10.80 Cancelled.......................................... (101,300) 0.18-19.88 12.75 --------- ------------ ---------- Balances, December 31, 2000.......................... 3,339,700 0.07-39.69 11.73 Granted............................................ 1,145,800 31.39-46.19 37.58 Exercised.......................................... (873,800) 0.18-37.13 13.96 Cancelled.......................................... (172,600) 0.18-39.69 20.62 --------- ------------ ---------- Balances, December 31, 2001.......................... 3,439,100 0.07-46.19 19.33 ========= ============ ==========
At December 31, 2001, there were approximately 1,709,000 options available for grant. The following table summarizes information regarding the options outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------ ----------------------- WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE EXERCISE PRICES AT 12/31/01 LIFE PRICE 12/31/01 PRICE ---------------------- ----------- ----------- -------- ----------- -------- $ 0.07 to $ 8.76 63,100 1 $ 4.26 63,100 $ 4.26 5.56 to 10.99 5,500 2 7.61 5,500 7.61 11.87 54,300 3 11.87 54,300 11.87 12.22 to 14.98 58,200 4 12.48 58,200 12.48 14.16 to 17.73 84,000 5 16.08 84,000 16.08 17.11 to 18.38 22,800 6 18.35 22,800 18.35 15.64 1,400 7 15.64 1,400 15.64 7.63 to 12.00 1,946,100 8 10.55 1,017,700 10.47 17.25 to 39.69 174,400 9 21.42 64,500 23.99 31.39 to 46.19 1,029,300 10 37.63 -- -- ----------- ----------- -------- ---------- ------ 3,439,100 1,371,500 =========== ==========
If the Company had measured compensation cost for the stock options granted during 1999, 2000 and 2001 under the fair value based method prescribed by SFAS No. 123, the net income (loss) would have been changed to the pro forma amounts set forth below (dollars in millions, except per share amounts):
1999 2000 2001 ---- ---- ---- Net income (loss): As reported .............................................................. $ (7.4) $ 17.9 $ 33.3 Pro forma ................................................................ (8.1) 16.6 28.8 Basic earnings (loss) per share: As reported .............................................................. $ (0.24) $ 0.57 $ 0.93 Pro forma ................................................................ (0.26) 0.52 0.81 Diluted earnings (loss) per share: As reported .............................................................. $ (0.24) $ 0.54 $ 0.90 Pro forma ................................................................ (0.26) 0.50 0.78
The effect of applying SFAS No. 123 for providing pro forma disclosure is not likely to be representative of the effect on reported net income for future years. F-21 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) The per share weighted-average fair value of stock options granted (including conversion of HCA options in 1999) during 1999, 2000 and 2001 was $3.73, $9.22 and $15.25, respectively, on the date of grant using a Black-Scholes option pricing model, assuming no expected dividends and the following weighted average assumptions:
1999 2000 2001 ---- ---- ---- Risk free interest rate ................................................... 5.90% 6.16% 4.51% Expected life, in years ................................................... 4.7 3.8 4.0 Expected volatility ....................................................... 35.0% 45.0% 45.0%
NOTE 8 -- COMMITMENTS AND CONTINGENCIES Significant Legal Proceedings Various lawsuits, claims and legal proceedings have been and are expected to be instituted or asserted against HCA and the Company, including those relating to shareholder derivative and class action complaints; purported class action lawsuits filed by patients and payors alleging, in general, improper and fraudulent billing, coding and physician referrals, as well as other violations of law; certain qui tam or "whistleblower" actions alleging, in general, unlawful claims for reimbursement or unlawful payments to physicians for the referral of patients, as well as other violations and litigation matters. While the amounts claimed may be substantial, the ultimate liability cannot be determined or reasonably estimated at this time due to the considerable uncertainties that exist. Therefore, it is possible that the Company's results of operations, financial position and liquidity in a particular period could be materially, adversely affected upon the resolution of certain of these contingencies. On January 12, 2001, Access Now, Inc., a disability rights organization, filed a class action lawsuit against each of the Company's hospitals alleging non-compliance with the accessibility guidelines under the Americans with Disabilities Act (the "ADA"). The lawsuit, filed in the United States District Court for the Eastern District of Tennessee, seeks injunctive relief requiring facility modification, where necessary, to meet the Americans with Disabilities Act guidelines, along with attorneys fees and costs. In January 2002, the District Court certified the class action and issued a scheduling order that requires the parties to complete discovery and inspection for approximately six facilities per year. The Company intends to vigorously defend the lawsuit, recognizing the Company's obligation to correct any deficiencies in order to comply with the ADA. F-22 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Corporate Integrity Agreement In December 2000, the Company entered into a corporate integrity agreement with the Office of Inspector General and agreed to maintain its compliance program in accordance with the corporate integrity agreement. Complying with the compliance measures and reporting and auditing requirements of the corporate integrity agreement will require additional efforts and costs. Failure to comply with the terms of the corporate integrity agreement could subject the Company to significant monetary penalties. General Liability Claims The Company is, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts, for wrongful restriction of, or interference with physicians' staff privileges and employment related claims. In certain of these actions, plaintiffs request punitive or other damages against the Company which may not be covered by insurance. The Company is currently not a party to any proceeding which, in management's opinion, would have a material adverse effect on the Company's business, financial condition or results of operations. Physician Commitments The Company has committed to provide certain financial assistance pursuant to recruiting agreements with various physicians practicing in the communities it serves. In consideration for a physician relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, the Company may loan certain amounts of money to a physician, normally over a period of one year, to assist in establishing his or her practice. The Company has committed to advance amounts of approximately $10.9 million at December 31, 2001. The actual amount of such commitments to be subsequently advanced to physicians often depends upon the financial results of a physician's private practice during the guaranteed period. Generally, amounts advanced under the recruiting agreements may be forgiven prorata over a period of 48 months contingent upon the physician continuing to practice in the respective community. Acquisitions The Company has acquired and will continue to acquire businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company institutes policies designed to conform practices to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines. Leases The Company leases real estate properties, buildings and equipment under cancelable and non-cancelable leases. Rental expense for the years ended December 31, 1999, 2000 and 2001 was $7.0 million, $7.1 million and $6.9 million, respectively. Future minimum operating lease payments are as follows at December 31, 2001 (in millions): 2002 ....................................... $ 3.9 2003 ....................................... 2.9 2004 ....................................... 2.4 2005 ....................................... 1.4 2006 ....................................... 1.1 Thereafter ................................. 3.6 ----- Total minimum payments .................. $15.3 =====
NOTE 9 -- OTHER CURRENT LIABILITIES A summary of other current liabilities as of December 31 is as follows (in millions):
2000 2001 ------- ------- Employee benefit plan ............................................................ $ 3.2 $ 1.0 Accrued interest related to long-term debt ....................................... 2.6 2.0 Taxes, other than income ......................................................... 0.3 0.4 Other ............................................................................ 5.0 7.3 ------- ------- $ 11.1 $ 10.7 ======= =======
F-23 NOTE 10 -- EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (dollars and shares in millions, except per share amounts):
1999 2000 2001 ---- ---- ---- Numerator (a): Income (loss) before extraordinary item .................................. $ (7.4) $ 17.9 $ 34.9 Extraordinary loss on early retirement of debt, net of tax benefit of $1.0 .................................................................. -- -- ( 1.6) ------ ------ ------ Net Income (loss) ........................................................ $ (7.4) $ 17.9 $ 33.3 ====== ====== ====== Denominator: Share reconciliation: Shares used for basic earnings (loss) per share .......................... 30.5 31.6 35.7 Effect of dilutive securities (b): Stock options and other ............................................. -- 1.3 1.4 ------ ------ ------ Shares used for diluted earnings (loss) per share ........................ 30.5 32.9 37.1 ====== ====== ====== Basic earnings (loss) per share: Income (loss) before extraordinary item .................................. $(0.24) $ 0.57 $ 0.97 Extraordinary loss on early retirement of debt ........................... -- -- (0.04) ------ ------ ------ Net income (loss) ........................................................ $(0.24) $ 0.57 $ 0.93 ====== ====== ====== Diluted earnings (loss) per share: Income (loss) before extraordinary item .................................. $(0.24) $ 0.54 $ 0.94 Extraordinary loss on early retirement of debt ........................... -- -- (0.04) ------ ------ ------ Net income (loss) ........................................................ $(0.24) $ 0.54 $ 0.90 ====== ====== ======
- ---------- (a) Amount is used for both basic and diluted earnings (loss) per share computations since there is no earnings effect related to the dilutive securities. (b) The dilutive effect of approximately 0.1 million shares, related to stock options, for the year ended December 31, 1999, was not included in the computation of diluted loss per share because to do so would have been antidilutive for that period. F-24 NOTE 11 -- UNAUDITED QUARTERLY FINANCIAL INFORMATION The quarterly interim financial information shown below has been prepared by the Company's management and is unaudited. It should be read in conjunction with the audited consolidated financial statements appearing herein (dollars in millions, except per share amounts).
2000 ------------------------------------------------------------- FIRST SECOND THIRD FOURTH ------- ------- --------- ------- Revenues ................. $ 136.0 $ 133.3 $ 145.3 $ 142.5 Net income ............... 4.0 3.7 4.8(a) 5.4 Basic earnings per share . 0.13 0.12 0.15(a) 0.17 Diluted earnings per share 0.13 0.11 0.14(a) 0.16
2001 ---------------------------------------------------------------- FIRST SECOND THIRD FOURTH ---------- ---------- ------- ------- Revenues ................. $ 154.3 $ 151.6 $ 149.2 $ 164.3 Net income ............... 8.6(b) 6.9(c) 7.5 10.3 Basic earnings per share . 0.26(b) 0.19(c) 0.20 0.28 Diluted earnings per share 0.25(b) 0.18(c) 0.20 0.27
- ---------- (a) During the third quarter of 2000, the Company recorded a $1.4 million pretax gain ($0.8 million after tax) related to a previously impaired asset. (b) During the first quarter of 2001, the Company recorded a $0.5 million pretax gain ($0.3 million after tax) related to a previously impaired asset. (c) During the second quarter of 2001, the Company incurred a $2.6 million extraordinary charge ($1.6 million after tax benefit) related to the write off of deferred loan costs in connection with the Company's amended and restated credit agreement. F-25 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) NOTE 12 -- FINANCIAL INFORMATION FOR THE COMPANY AND ITS SUBSIDIARIES The Company conducts substantially all of its business through its subsidiaries. Presented below is summarized condensed consolidating financial information for the Company and its subsidiaries as of December 31, 2000 and 2001, and for the years ended December 31, 1999, 2000 and 2001, segregating the parent company, the issuer of the Notes (LifePoint Hospitals Holdings, Inc.), the combined wholly owned Subsidiary Guarantors, the mostly owned Subsidiary Guarantor and eliminations. LIFEPOINT HOSPITALS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN MILLIONS)
WHOLLY OWNED MOSTLY OWNED ISSUER OF SUBSIDIARY SUBSIDIARY CONSOLIDATED PARENT NOTES GUARANTORS GUARANTOR ELIMINATIONS TOTAL ------ ----- ---------- --------- ------------ ----- Revenues ............................... $ -- $ -- $482.5 $ 32.7 $ -- $515.2 Salaries and benefits .................. -- -- 206.2 11.2 -- 217.4 Supplies ............................... -- -- 60.0 4.2 -- 64.2 Other operating expenses ............... 0.2 -- 112.3 4.8 -- 117.3 Provision for doubtful accounts ........ -- -- 35.4 2.8 -- 38.2 Depreciation and amortization .......... -- -- 29.7 1.7 -- 31.4 Interest expense ....................... -- 17.7 5.1 0.6 -- 23.4 Management fees ........................ -- -- 2.5 0.7 -- 3.2 ESOP expense ........................... -- -- 2.9 -- -- 2.9 Impairment of long-lived assets ........ -- -- 25.4 -- -- 25.4 Equity in earnings of affiliates ....... 7.3 (7.0) -- -- (0.3) -- ------- ------ ------ ------ ------ ------ 7.5 10.7 479.5 26.0 (0.3) 523.4 ------- ------ ------ ------ ------ ------ Income (loss) before minority interests and income taxes ........... (7.5) (10.7) 3.0 6.7 0.3 (8.2) Minority interests in earnings of consolidated entities ............. -- 1.9 -- -- -- 1.9 ------- ------ ------ ------ ------ ------ Income (loss) before income taxes ...... (7.5) (12.6) 3.0 6.7 0.3 (10.1) Provision (benefit) for income taxes ... (0.1) (5.3) 2.7 -- -- (2.7) ------- ------ ------ ------ ------ ------ Net income (loss) ................. $ (7.4) $ (7.3) $ 0.3 $ 6.7 $ 0.3 $ (7.4) ======= ====== ====== ====== ====== ======
F-26 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) LIFEPOINT HOSPITALS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN MILLIONS)
WHOLLY OWNED MOSTLY OWNED ISSUER OF SUBSIDIARY SUBSIDIARY CONSOLIDATED PARENT NOTES GUARANTORS GUARANTOR ELIMINATIONS TOTAL ------ ------- --------- ------ ------ --------- Revenues ............................... $ -- $ -- $524.9 $ 32.2 $ -- $557.1 Salaries and benefits .................. -- -- 213.9 10.3 -- 224.2 Supplies ............................... -- -- 62.8 4.2 -- 67.0 Other operating expenses ............... -- -- 113.1 5.0 -- 118.1 Provision for doubtful accounts ........ -- -- 39.4 2.6 -- 42.0 Depreciation and amortization .......... -- -- 32.4 1.7 -- 34.1 Interest expense ....................... -- 30.9 (0.5) 0.3 -- 30.7 Management fees ........................ -- -- (0.6) 0.6 -- -- ESOP expense ........................... -- -- 6.8 0.3 -- 7.1 Gain on previously impaired assets ..... -- -- (1.4) -- -- (1.4) Equity in earnings of affiliates ....... (17.9) (38.8) -- -- 56.7 -- ------ ------- --------- ------ ------ --------- (17.9) (7.9) 465.9 25.0 56.7 521.8 ------ ------- --------- ------ ------ --------- Income (loss) before minority interests and income taxes ..................... 17.9 7.9 59.0 7.2 (56.7) 35.3 Minority interests in earnings of consolidated entities ................ -- 2.2 -- -- -- 2.2 ------ ------- --------- ------ ------ --------- Income (loss) before income taxes ...... 17.9 5.7 59.0 7.2 (56.7) 33.1 Provision (benefit) for income taxes ... -- (12.2) 27.4 -- -- 15.2 ------ ------- --------- ------ ------ --------- Net income (loss) ................. $ 17.9 $ 17.9 $ 31.6 $ 7.2 $(56.7) $ 17.9 ====== ======= ========= ====== ====== =========
F-27 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) LIFEPOINT HOSPITALS, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 (IN MILLIONS)
WHOLLY OWNED MOSTLY OWNED ISSUER OF SUBSIDIARY SUBSIDIARY CONSOLIDATED PARENT NOTES GUARANTORS GUARANTOR ELIMINATIONS TOTAL ------ ----- ---------- --------- ------------ ----- Revenues ............................... $ -- $ -- $587.0 $ 32.4 $ -- $619.4 Salaries and benefits .................. -- -- 233.0 10.2 -- 243.2 Supplies ............................... -- -- 73.9 4.3 -- 78.2 Other operating expenses ............... -- -- 116.3 4.5 -- 120.8 Provision for doubtful accounts ........ -- -- 43.9 1.9 -- 45.8 Depreciation and amortization .......... -- -- 33.0 1.7 -- 34.7 Interest expense, net .................. -- 12.2 6.1 (0.2) -- 18.1 Management fees ........................ -- -- (0.6) 0.6 -- -- ESOP expense ........................... -- -- 9.9 0.5 -- 10.4 Gain on previously impaired assets ..... -- -- (0.5) -- -- (0.5) Equity in earnings of affiliates ....... (33.3) (47.0) -- -- 80.3 -- ------ ------ --------- ------- ------- ----- (33.3) (34.8) 515.0 23.5 80.3 550.7 ------ ------ --------- ------- ------- ----- Income (loss) before minority interests, income taxes and extraordinary item .. 33.3 34.8 72.0 8.9 (80.3) 68.7 Minority interests in earnings of consolidated entities ................ -- 2.7 -- -- -- 2.7 ------ ------ --------- ------- ------- ----- Income (loss) before income taxes and extraordinary item.................... 33.3 32.1 72.0 8.9 (80.3) 66.0 Provision (benefit) for income taxes ... -- (2.8) 33.9 -- -- 31.1 ------ ------ --------- ------- ------- ----- Income (loss) before extraordinary item . 33.3 34.9 38.1 8.9 (80.3) 34.9 Extraordinary loss on early retirement of debt, net ............................ -- 1.6 -- -- -- 1.6 ------ ------ --------- ------- ------- ------ Net income (loss) ................. $ 33.3 $ 33.3 $ 38.1 $ 8.9 $(80.3) $ 33.3 ====== ====== ========= ======= ======= ======
F-28 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) LIFEPOINT HOSPITALS, INC. CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000 (IN MILLIONS)
WHOLLY OWNED MOSTLY OWNED ISSUER OF SUBSIDIARY SUBSIDIARY CONSOLIDATED PARENT NOTES GUARANTORS GUARANTOR ELIMINATIONS TOTAL ------ ----- ---------- --------- ------------ ----- ASSETS Current assets: Cash and cash equivalents ............ $ -- $ -- $ 39.7 $ -- $ -- $ 39.7 Accounts receivable, net ............. -- -- 44.7 5.3 -- 50.0 Inventories .......................... -- -- 12.9 1.0 -- 13.9 Deferred taxes and other current assets -- -- 22.1 0.1 -- 22.2 -------- -------- -------- -------- -------- -------- -- -- 119.4 6.4 -- 125.8 Property and equipment: Land ................................. -- -- 8.4 0.3 -- 8.7 Buildings and improvements ........... -- -- 227.0 9.9 -- 236.9 Equipment ............................ -- -- 234.4 10.5 -- 244.9 Construction in progress ............. -- -- 9.4 -- -- 9.4 -------- -------- -------- -------- -------- -------- -- -- 479.2 20.7 -- 499.9 Accumulated depreciation ............... -- -- (170.9) (12.5) -- (183.4) -------- -------- -------- -------- -------- -------- -- -- 308.3 8.2 -- 316.5 Net investment in and advances to subsidiaries ......................... 128.4 401.5 -- -- (529.9) -- Deferred loan costs, net ............... -- 9.0 -- -- -- 9.0 Goodwill, net .......................... -- -- 34.5 10.2 -- 44.7 Other .................................. -- 0.1 0.2 -- -- 0.3 -------- -------- -------- -------- -------- -------- $ 128.4 $ 410.6 $ 462.4 $ 24.8 $ (529.9) $ 496.3 ======== ======== ======== ======== ======== ======== LIABILITIES AND EQUITY Current liabilities: Accounts payable ..................... $ -- $ -- $ 15.6 $ 0.5 $ -- $ 16.1 Accrued salaries ..................... -- -- 13.8 -- -- 13.8 Other current liabilities ............ -- 2.6 8.2 0.3 -- 11.1 Estimated third-party payor settlements ........................ -- -- 8.3 -- -- 8.3 Current maturities of long-term debt . -- 11.0 0.1 -- -- 11.1 -------- -------- -------- -------- -------- -------- -- 13.6 46.0 0.8 -- 60.4 Intercompany balances to affiliates .... -- (14.3) 6.4 7.9 -- -- Long-term debt ......................... -- 278.3 -- -- -- 278.3 Deferred taxes ......................... -- -- 15.2 -- -- 15.2 Professional liability risks and other liabilities ................ -- -- 9.4 -- -- 9.4 Minority interests in equity of consolidated entities ............. -- 4.6 -- -- -- 4.6 Stockholders' equity ................... 128.4 128.4 385.4 16.1 (529.9) 128.4 -------- -------- -------- -------- -------- -------- $ 128.4 $ 410.6 $ 462.4 $ 24.8 $ (529.9) $ 496.3 ======== ======== ======== ======== ======== ========
F-29 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) LIFEPOINT HOSPITALS, INC. CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001 (IN MILLIONS)
WHOLLY OWNED MOSTLY OWNED ISSUER OF SUBSIDIARY SUBSIDIARY CONSOLIDATED PARENT NOTES GUARANTORS GUARANTOR ELIMINATIONS TOTAL ------ ----- ---------- --------- ------------ ----- ASSETS Current assets: Cash and cash equivalents ............ $ -- $ -- $ 57.2 $ -- $ -- $ 57.2 Accounts receivable, net ............. -- -- 51.7 5.0 -- 56.7 Inventories .......................... -- -- 15.3 1.0 -- 16.3 Deferred taxes and other current assets -- -- 18.6 0.1 -- 18.7 ------ ------ -------- ------ ------ ------ -- -- 142.8 6.1 -- 148.9 Property and equipment: Land ................................. -- -- 10.4 0.3 -- 10.7 Buildings and improvements ........... -- -- 252.1 9.9 -- 262.0 Equipment ............................ -- -- 252.4 11.0 -- 263.4 Construction in progress ............. -- -- 7.2 -- -- 7.2 ------ ------ -------- ------ ------ ------ -- -- 522.1 21.2 -- 543.3 Accumulated depreciation ............... -- -- (191.6) (13.3) -- (204.9) ------ ------ -------- ------ ------ ------ -- -- 330.5 7.9 -- 338.4 Net investment in and advances to subsidiaries ....................... 295.0 480.9 -- -- (775.9) -- Deferred loan costs, net ............. -- 7.1 -- -- -- 7.1 Goodwill, net ........................ -- -- 37.2 9.9 -- 47.1 Other ................................ -- -- 12.8 -- -- 12.8 ------ ------ -------- ------ ------ ------ $295.0 $488.0 $523.3 $ 23.9 $(775.9) $554.3 ====== ====== ======== ====== ====== ====== LIABILITIES AND EQUITY Current liabilities: Accounts payable ..................... $ -- $ -- $ 18.3 $ 0.7 $ -- $ 19.0 Accrued salaries ..................... -- -- 18.6 -- -- 18.6 Other current liabilities ............ -- 2.0 8.4 0.3 -- 10.7 Estimated third-party payor settlements -- -- 17.8 0.1 -- 17.9 ------ ------ -------- ------ ------ ------ -- 2.0 63.1 1.1 -- 66.2 Intercompany balances to affiliates .... -- 35.8 (39.7) 3.9 -- -- Long-term debt ......................... -- 150.0 -- -- -- 150.0 Deferred taxes ......................... -- -- 21.0 -- -- 21.0 Professional liability risks and other liabilities ................ -- -- 16.9 -- -- 16.9 Minority interests in equity of consolidated entities ............. -- 5.2 -- -- -- 5.2 Stockholders' equity ................... 295.0 295.0 462.0 18.9 (775.9) 295.0 ------ ------ -------- ------ ------ ------ $295.0 $488.0 $523.3 $ 23.9 $(775.9) $554.3 ====== ====== ======== ====== ====== ======
F-30 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) LIFEPOINT HOSPITALS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN MILLIONS)
WHOLLY OWNED MOSTLY OWNED ISSUER OF SUBSIDIARY SUBSIDIARY CONSOLIDATED PARENT NOTES GUARANTORS GUARANTOR ELIMINATIONS TOTAL ------ ----- ---------- --------- ------------ ----- Cash flows from operating activities: Net income (loss) .................... $(7.4) $(7.3) $ 0.3 $ 6.7 $ 0.3 $(7.4) Adjustments to reconcile net income (loss) to net cash provided by operating activities: ESOP expense ....................... -- -- 2.9 -- -- 2.9 Equity in earnings of affiliates ... 7.3 (7.0) -- -- (0.3) -- Depreciation and amortization ...... -- -- 29.7 1.7 -- 31.4 Minority interests in earnings of consolidated entities ............ -- 1.9 -- -- -- 1.9 Deferred income taxes (benefit)..... -- -- (13.8) -- -- (13.8) Reserve for professional liability risk -- -- 3.4 -- -- 3.4 Impairment of long-lived assets .... -- -- 25.4 -- -- 25.4 Increase (decrease) in cash from operating assets and liabilities: Accounts receivable ........... -- -- 6.7 0.5 -- 7.2 Inventories and other current assets -- -- (0.8) (0.3) -- (1.1) Accounts payable and accrued expenses -- 17.7 (10.3) (0.3) -- 7.1 Income taxes payable .......... -- -- (0.3) -- -- (0.3) Estimated third-party payor settlements ................. -- -- 1.2 -- -- 1.2 Other .............................. 0.1 1.8 (0.5) -- -- 1.4 ------ ------ -------- ------ ------ ------ Net cash provided by operating activities .................... -- 7.1 43.9 8.3 -- 59.3 Cash flows from investing activities: Purchases of property and equipment, net -- -- (63.6) (1.2) -- (64.8) Other ................................ -- -- (4.0) -- -- (4.0) ------ ------ -------- ------ ------ ------ Net cash used in investing activities -- -- (67.6) (1.2) -- (68.8) Cash flows from financing activities: Distributions ........................ -- -- 6.0 (6.0) -- -- Increase (decrease) in intercompany balances with affiliates, net ...... -- (7.1) 7.9 (0.8) -- -- Increase (decrease) in intercompany balances with HCA, net ........... -- -- 22.4 -- -- 22.4 Other ................................ -- -- (0.1) (0.3) -- (0.4) ------ ------ -------- ------ ------ ------ Net cash (used in) provided by financing activities ........ -- (7.1) 36.2 (7.1) -- 22.0 ------ ------ -------- ------ ------ ------ Change in cash and cash equivalents .... -- -- 12.5 -- -- 12.5 Cash and cash equivalents at beginning of year .............................. -- -- -- -- -- -- ------ ------ -------- ------ ------ ------ Cash and cash equivalents at end of year $ -- $ -- $12.5 $ -- $ -- $12.5 ====== ====== ======== ====== ====== ======
F-31 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) LIFEPOINT HOSPITALS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN MILLIONS)
WHOLLY OWNED MOSTLY OWNED ISSUER OF SUBSIDIARY SUBSIDIARY CONSOLIDATED PARENT NOTES GUARANTORS GUARANTOR ELIMINATIONS TOTAL ------ ----- ---------- --------- ------------ ----- Cash flows from operating activities: Net income (loss) ........................... $17.9 $17.9 $31.6 $ 7.2 $(56.7) $17.9 Adjustments to reconcile net income (loss) to net cash provided by operating activities: ESOP expense .............................. -- -- 6.8 0.3 -- 7.1 Equity in earnings of affiliates ......... (17.9) (38.8) -- -- 56.7 -- Depreciation and amortization ............. -- -- 32.4 1.7 -- 34.1 Minority interests in earnings of consolidated entities ................... -- 2.2 -- -- -- 2.2 Deferred income taxes (benefit) ........... -- -- 13.6 -- -- 13.6 Reserve for professional liability risk ... -- -- 5.4 -- -- 5.4 Gain on previously impaired assets ........ -- -- (1.4) -- -- (1.4) Tax benefit from stock option exercises ... -- -- 6.4 -- -- 6.4 Increase (decrease) in cash from operating assets and liabilities, net of effects from acquisitions and divestitures: Accounts receivable .................. -- -- 2.1 -- -- 2.1 Inventories and other current assets . -- -- (1.9) 0.2 -- (1.7) Accounts payable and accrued expenses -- 0.1 (11.4) (0.1) -- (11.4) Income taxes payable ................. -- -- (0.2) -- -- (0.2) Estimated third-party payor settlements -- -- 7.1 -- -- 7.1 Other ..................................... -- 0.5 1.7 -- -- 2.2 ------ ----- ------ ---- ------ ----- Net cash (used in) provided by operating activities ............ -- (18.1) 92.2 9.3 -- 83.4 Cash flows from investing activities: Purchases of property and equipment, net .... -- -- (31.1) (0.3) -- (31.4) Purchases of facilities, net of cash acquired -- -- (82.4) -- -- (82.4) Proceeds from sale of facilities ............ -- -- 30.0 -- -- 30.0 Other ....................................... -- (2.0) (6.0) -- -- (8.0) ------ ----- ------ ---- ------ ----- Net cash used in investing activities ......................... -- (2.0) (89.5) (0.3) -- (91.8) Cash flows from financing activities: Proceeds from bank debt borrowings .......... -- 65.0 -- -- -- 65.0 Repayments of bank debt ..................... -- (35.7) -- -- -- (35.7) Distributions ............................... -- -- 6.6 (6.6) -- -- Proceeds from exercise of stock options ..... -- 7.2 -- -- 7.2 Increase (decrease) in intercompany balances with affiliates, net ............. -- (8.3) 10.7 (2.4) -- -- Other ....................................... -- (0.9) -- -- -- (0.9) ------ ----- ------ ---- ------ ----- Net cash provided by (used in) financing activities ............ -- 20.1 24.5 (9.0) -- 35.6 ------ ----- ------ ---- ------ ----- Change in cash and cash equivalents ........... -- -- 27.2 -- -- 27.2 Cash and cash equivalents at beginning of year ..................................... -- -- 12.5 -- -- 12.5 ------ ----- ------ ---- ------ ----- Cash and cash equivalents at end of year ...... $ -- $ -- $39.7 $ -- $ -- $39.7 ====== ===== ====== ===== ====== =====
F-32 LIFEPOINT HOSPITALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) LIFEPOINT HOSPITALS, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2001 (IN MILLIONS)
WHOLLY OWNED MOSTLY OWNED ISSUER OF SUBSIDIARY SUBSIDIARY CONSOLIDATED PARENT NOTES GUARANTORS GUARANTOR ELIMINATIONS TOTAL ------ ----- ---------- --------- ------------ ----- Cash flows from operating activities: Net income (loss) ........................... $ 33.3 $ 33.3 $ 38.1 $ 8.9 $(80.3) $ 33.3 Adjustments to reconcile net income (loss) to net cash provided by operating activities: ESOP expense .............................. -- -- 9.9 0.5 -- 10.4 Equity in earnings of affiliates ......... (33.3) (47.0) -- -- 80.3 -- Depreciation and amortization ............. -- -- 33.0 1.7 -- 34.7 Minority interests in earnings of consolidated entities ................... -- 2.7 -- -- -- 2.7 Deferred income taxes (benefit) ........... -- -- 6.9 -- -- 6.9 Reserve for professional liability risk .. -- -- 7.0 -- -- 7.0 Gain on previously impaired assets ........ -- -- (0.5) -- -- (0.5) Extraordinary loss on early retirement of bank debt .............................. -- 2.6 -- -- -- 2.6 Tax benefit from stock option exercises ... -- -- 8.1 -- -- 8.1 Increase (decrease) in cash from operating assets and liabilities, net of effects from acquisitions and divestitures: Accounts receivable .................. -- -- (1.3) 0.3 -- (1.0) Inventories and other current assets . -- -- (0.6) -- -- (0.6) Accounts payable and accrued expenses -- (0.6) 3.2 0.2 -- 2.8 Income taxes payable ................. -- -- (3.5) -- -- (3.5) Estimated third-party payor settlements -- -- 9.5 0.1 -- 9.6 Other ..................................... -- 1.7 (0.1) -- -- 1.6 ------ ----- ------ ------ ----- ------ Net cash (used in) provided by operating activities ............ -- (7.3) 109.7 11.7 -- 114.1 Cash flows from investing activities: Purchases of property and equipment, net .... -- -- (34.7) (1.1) -- (35.8) Purchases of facilities, net of cash acquired -- -- (36.5) -- -- (36.5) Proceeds from sale of facilities ............ -- -- 0.5 -- -- 0.5 Other ....................................... -- (2.1) 5.6 -- -- 3.5 ------ ----- ------ ------ ----- ------ Net cash used in investing activities ......................... -- (2.1) (65.1) (1.1) -- (68.3) Cash flows from financing activities: Proceeds from stock offering, net ........... -- 100.4 -- -- -- 100.4 Repayments of bank debt ..................... -- (139.3) -- -- -- (139.3) Distributions ............................... -- -- 6.6 (6.6) -- -- Proceeds from exercise of stock options ..... -- -- 12.2 -- -- 12.2 Increase (decrease) in intercompany balances with affiliates, net ............. -- 49.9 (45.9) (4.0) -- -- Other ....................................... -- (1.6) -- -- -- (1.6) ------ ----- ------ ------ ----- ------ Net cash provided by (used in) financing activities ............ -- 9.4 (27.1) (10.6) -- (28.3) ------ ----- ------ ------ ----- ------ Change in cash and cash equivalents ........... -- -- 17.5 -- -- 17.5 Cash and cash equivalents at beginning of year ..................................... -- -- 39.7 -- -- 39.7 ------ ----- ------ ------ ----- ------ Cash and cash equivalents at end of year ...... $ -- $ -- $ 57.2 $ -- $ -- $ 57.2 ====== ====== ====== ====== ====== ======
F-33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brentwood, State of Tennessee, on March 27, 2002. LifePoint Hospitals, Inc. By: /s/ Kenneth C. Donahey ------------------------------------------- Kenneth C. Donahey Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
NAME TITLE DATE ---- ----- ---- Chairman, Chief Executive March 27, 2002 /s/ Kenneth C.Donahey Officer and President - ---------------------------------- (Principal Executive Officer) Kenneth C. Donahey /s/ Michael J. Culotta Senior Vice President and Chief March 27, 2002 - ---------------------------------- Financial Officer (Principal Michael J. Culotta Financial and Accounting Officer) /s/ Ricki Tigert Helfer Director March 27, 2002 - ---------------------------------- Ricki Tigert Helfer /s/ John E. Maupin, Jr., D.D.S. Director March 27, 2002 - ---------------------------------- John E. Maupin, Jr., D.D.S. /s/ DeWitt Ezell, Jr. Director March 27, 2002 - ---------------------------------- DeWitt Ezell, Jr. /s/ William V. Lapham Director March 27, 2002 - ---------------------------------- William V. Lapham /s/ Richard H. Evans Director March 27, 2002 - ---------------------------------- Richard H. Evans
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brentwood, State of Tennessee, on March 27, 2002. LifePoint Hospitals Holdings, Inc. By: /s/ Kenneth C. Donahey --------------------------------------------- Kenneth C. Donahey Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the date indicated.
NAME TITLE DATE ---- ----- ---- Chairman, Chief Executive March 27, 2002 /s/ Kenneth C. Donahey Officer and President - ---------------------------------- (Principal Executive Officer) Kenneth C. Donahey /s/ Michael J. Culotta Senior Vice President and March 27, 2002 - ---------------------------------- Chief Financial Officer (Principal Michael J. Culotta Financial and Accounting Officer)
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - -------------- ----------------------- 2.1 -- Distribution Agreement dated May 11, 1999 by and among Columbia/HCA, Triad Hospitals, Inc. and LifePoint Hospitals, Inc.(a) 3.1 -- Certificate of Incorporation of LifePoint Hospitals(a) 3.2 -- Bylaws of LifePoint Hospitals(a) 3.3 -- Certificate of Incorporation of LifePoint Holdings(b) 3.4 -- Bylaws of LifePoint Holdings(b) 4.1 -- Form of Specimen Certificate for LifePoint Hospitals Common Stock(c) 4.2 -- Indenture (including form of 10 3/4% Senior Subordinated Notes due 2009) dated as of May 11, 1999, between HealthTrust, Inc. -- The Hospital Company and Citibank N.A. as Trustee(a) 4.3 -- Form of 10 3/4% Senior Subordinated Notes due 2009 (filed as part of Exhibit 4.2) 4.4 -- Registration Rights Agreement dated as of May 11, 1999 between HealthTrust and the Initial Purchasers named therein(a) 4.5 -- LifePoint Assumption Agreement dated May 11, 1999 between HealthTrust and LifePoint Hospitals(a) 4.6 -- Holdings Assumption Agreement dated May 11, 1999 between LifePoint Hospitals and LifePoint Holdings(a) 4.7 -- Guarantor Assumption Agreements dated May 11, 1999 between LifePoint Holdings and the Guarantors signatory thereto(a) 4.8 -- Rights Agreement dated as of May 11, 1999 between the Company and National City Bank as Rights Agent(a) 10.1 -- Tax Sharing and Indemnification Agreement, dated May 11, 1999, by and among Columbia/HCA, LifePoint Hospitals and Triad Hospitals(a) 10.2 -- Benefits and Employment Matters Agreement, dated May 11, 1999 by and among Columbia/HCA, LifePoint Hospitals and Triad Hospitals(a) 10.3 -- Insurance Allocation and Administration Agreement, dated May 11, 1999, by and among Columbia/HCA, LifePoint Hospitals and Triad Hospitals(a) 10.4 -- Transitional Services Agreement dated May 11, 1999 by and between Columbia/HCA and LifePoint Hospitals (a) 10.5 -- Computer and Data Processing Services Agreement dated May, 11, 1999 by and between Columbia Information Systems, Inc. and LifePoint Hospitals(a) 10.6 -- Agreement to Share Telecommunications Services dated May 11, 1999 by and between Columbia Information Systems, Inc. and LifePoint Hospitals(a) 10.7 -- Lease Agreement dated as of November 22, 1999 by and between LifePoint Hospitals and W. Fred Williams, Trustee for the Benefit of Highwoods/Tennessee Holdings, L.P.(d)
10.8 -- LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan(a) 10.9 -- Amendment to LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan(e) 10.10 -- Second Amendment to LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan(e) 10.11 -- LifePoint Hospitals, Inc. Executive Stock Purchase Plan(a) 10.12 -- Form of Share Purchase Loan and Note Agreement between LifePoint Hospitals and certain executive officers in connection with purchases of Common Stock pursuant to the Executive Stock Purchase Plan(d) 10.13 -- LifePoint Hospitals, Inc. Management Stock Purchase Plan(a) 10.14 -- LifePoint Hospitals, Inc. Outside Directors Stock and Incentive Compensation Plan(a) 10.15 -- Amended and Restated Credit Agreement, dated as of June 19, 2001, among LifePoint Hospitals Holdings, Inc., as borrower, Fleet National Bank as administrative agent and as swingline lender, the financial institutions or entities from time to time which are parties to the Credit Agreement as lenders, Bank of America, N.A. and Deutsche Banc Alex. Brown Inc., as co-syndication agents, and Credit Lyonnais New York Branch and SunTrust Bank, as co-documentation agents(f) 10.16 -- Corporate Integrity Agreement dated as of December 21, 2000 by and between the Office of the Inspector General of the Department of Health and Human Services and LifePoint Hospitals(g) 10.17 -- LifePoint Hospitals, Inc. Employee Stock Purchase Plan 10.18 -- Employment Agreement of Kenneth C. Donahey 21.1 -- List of the Subsidiaries of LifePoint Hospitals 21.2 -- List of the Subsidiaries of LifePoint Holdings 23.1 -- Consent of Ernst & Young LLP
(a) Incorporated by reference from exhibits to LifePoint Hospitals' Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 0-29818. (b) Incorporated by reference from exhibits to LifePoint Holdings' Annual Report on Form 10-K for the year ended December 31, 1999, File No. 333-84755. (c) Incorporated by reference from exhibits to LifePoint Hospitals' Registration Statement on Form 10 under the Securities Exchange Act of 1934, as amended, File No. 0-29818. (d) Incorporated by reference from exhibits to LifePoint Hospitals' Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-29818. (e) Incorporated by reference from exhibits to LifePoint Hospitals' Registration Statement on Form S-8 under the Securities Act of 1933, File No. 333-66378. (f) Incorporated by reference from exhibits to LifePoint Hospitals' Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 000-29818. (g) Incorporated by reference from exhibits to LifePoint Hospitals' Annual Report on Form 10-K for the year ended December 31, 2000, File No. 000-29818. EX-10.17 3 g74862ex10-17.txt EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.17 LifePoint Hospitals, Inc. Employee Stock Purchase Plan Preamble WHEREAS, LifePoint Hospitals, Inc. (the "Company") desires to establish a plan through which employees of the Company and its affiliates may purchase from the Company shares of its common stock; and WHEREAS, the Company intends that the plan be an "employee stock purchase plan" within the meaning of section 423 of the Internal Revenue Code of 1986, and has designed the plan to conform to the provisions of Rule 16b-3 of the Exchange Act; NOW, THEREFORE, the Company hereby establishes the LifePoint Hospitals, Inc. Employee Stock Purchase Plan (the "Plan"), effective January 1, 2002, to provide an option to purchase the common stock of the Company to eligible employees, as described herein. Article I. Purpose of Plan The purpose of the Plan is to secure for the Company and its shareholders the benefits of the incentive inherent in the ownership of the Company's common stock by present and future employees of the Company and its Affiliates. Article II. Definitions. 2.1 Affiliate. A business entity that is: (a) controlled by the Company and is (i) a "parent corporation," as defined in section 424(e) of the Code, (ii) a "subsidiary corporation," as defined in section 424(f) of the Code, or (iii) a limited liability company or other entity whose employees are deemed to be employed by a "parent corporation" or "subsidiary corporation" because either (1) such entity is disregarded pursuant to Treasury Regulation ss. 301.7701-2(a) or (2) such entity has elected to be taxed as a corporation under federal tax procedures; and (b) designated to be an Affiliate by the Company pursuant to Section 5.3. 2.2 Agreement. An agreement between a Participant and the Company or an Affiliate through which the Participant elects to exercise the Options granted to him hereunder and authorizes payment of the Option exercise price. 2.3 Board. The board of directors of the Company. 2.4 Code. The Internal Revenue Code of 1986, as amended. 2.5 Committee. The committee designated by the Board as the "compensation committee" or is otherwise designated by the Board to administer the Plan. 2.6 Company. LifePoint Hospitals, Inc. and its successors and assigns. 2.7 Compensation. An employee's regular salary earned during an Exercise Period from employment with the Company or one of its Affiliates. Compensation shall not include overtime pay, bonuses, commissions and amounts subject to taxation under section 83 of the Code. Compensation shall include amounts elected under a salary reduction agreement pursuant to a plan described in 1 section 125 of the Code or a deferred compensation plan, and amounts excluded from taxable income under section 402(g) of the Code. 2.8 Eligible Employee. An employee of the Company or an Affiliate, except for the following: (a) An employee who has been employed by the Company or Affiliate for less than three months. (b) An employee whose customary employment is 20 hours or less per week. (c) An employee whose customary employment is for five months or less in a calendar year. (d) An employee who would own more than 5% of the total combined voting power of all classes of stock of the Company or an Affiliate at the time such employee would be granted an Option. For the purpose of determining if an employee owns more than 5% of such stock, he shall be deemed to own (i) any stock owned (directly or indirectly) by or for his brothers and sisters (whether by whole or half blood), spouse, ancestors or lineal descendants, (ii) any stock owned (directly or indirectly) by or for a corporation, partnership, estate or trust of which such individual is a shareholder, partner or beneficiary in proportion to his interest in such corporation, partnership, estate or trust, and (iii) any stock the individual may purchase under an outstanding stock option. 2.9 Exchange Act. The Securities Exchange Act of 1934, as amended. 2.10 Exercise Date. The last day of an Exercise Period. 2.11 Exercise Period. The six-month period during which an Eligible Employee may elect to exercise an Option and make payment through payroll deduction, pursuant to Article 3. Each Exercise Period shall begin with each successive Grant Date and expire on the Exercise Date that is in the six-month period that includes such Grant Date. 2.12 Fair Market Value. On any given date, Fair Market Value shall be the applicable description below (unless, where appropriate, the Committee determines in good faith the fair market value of the Stock to be otherwise): (a) If the Stock is traded on a trading exchange (e.g., the New York Stock Exchange) or is reported on the Nasdaq National Market System or another Nasdaq automated quotation system or the OTC Bulletin Board System, Fair Market Value shall be determined by reference to the price of the Stock on such exchange or system with respect to the date for which Fair Market Value is being determined. (b) If the Stock is not traded on a recognized exchange or automated trading system, Fair Market Value shall be the value determined in good faith by the Committee or the Board. 2.13 Grant Date. The first Grant Date shall be January 1, 2002. Thereafter, a new Grant Date shall occur each succeeding July 1st and January 1st. 2.14 Option. The right that is granted hereunder to a Participant to purchase from the Company a stated number of shares of Stock at the exercise price specified in Article III. 2.15 Participant. An Eligible Employee who has elected to exercise an Option and participate in the Plan in accordance with Article 3. 2 2.16 Payroll Account. A bookkeeping account to which is added the amounts withheld on behalf of each Participant under regular payroll deductions authorized by Participants hereunder, and reduced by amounts due to the Company to pay the exercise price of Options exercised hereunder. 2.17 Plan. The LifePoint Hospitals, Inc. Employee Stock Purchase Plan. 2.18 Stock. The common stock of the Company. Article III. Grant And Exercise Of Options. 3.1 General Conditions. On each Grant Date, each employee who is an Eligible Employee on such date shall, without further action of the Committee, be granted an Option to purchase a number of whole shares Stock that, in the aggregate, have an exercise price (described in Section 3.1(a)) that is not more than 10% of his Compensation during the Exercise Period; provided further that no Eligible Employee may be granted an Option which permits his rights to purchase Stock under the Plan and all other employee stock purchase plans (described in section 423(b) of the Code) of the Company and its Affiliates to accrue at a rate that exceeds $25,000 of Fair Market Value of such Stock (determined on the date that the Option is granted) for each calendar year in which such Option is outstanding at any time. Each Option grant is subject to the following terms and conditions: (a) The exercise price of each Option shall be 85% of Fair Market Value of each share of Stock that is subject to the Option, based on the Stock's Fair Market Value that is determined on the Grant Date or, if less, on the Exercise Date. (b) Each Option, or portion thereof, that is not exercised during an Exercise Period shall expire at the end of the Exercise Period in which the Option was granted, unless it expires sooner pursuant to Section 3.1(c). (c) Each Option that has not yet expired pursuant to Section 3.1(b) shall expire on the date that the Eligible Employee terminates employment with the Company and all of its Affiliates or revokes his election pursuant to Section 3.9; provided, however, if termination is due to the death or disability (as determined by the Committee) of the Eligible Employee, the Option will not expire unless the Participant (or his personal representative) elects to revoke his election pursuant to Section 3.9. (d) A right to purchase Stock which has accrued under one Option granted hereunder may not be carried over to any other Option. (e) Each Participant must utilize the securities brokerage firm selected by the Company or the Committee for holding shares of Stock purchased hereunder and for transacting all dispositions of such Stock. By electing to exercise an Option granted hereunder, an Eligible Employee expressly consents to the administrative arrangement established by the Company or Committee with such securities brokerage firm. 3.2 Right to Exercise. An Option shall be exercisable on the last day of the Exercise Period that includes the Grant Date on which the Option was granted. An Eligible Employee must exercise an Option while he is an employee of the Company or an Affiliate or within the periods that are specified herein after termination of employment. 3.3 Method of Exercise. To exercise an Option, an Eligible Employee shall execute an Agreement in the form and manner prescribed by the Committee, and shall pay the exercise price in the manner described in Section 3.4. 3 3.4 Payment of Exercise Price. An Eligible Employee who desires to exercise an Option must timely execute an Agreement in the form and manner prescribed by the Committee prior to the applicable Exercise Period. The Agreement shall provide for authorization of deductions from the Eligible Employee's regular payroll that is credited to a Payroll Account. Amounts credited to a Participant's Payroll Account shall be accumulated and reserved for payment of the exercise price of Options granted hereunder. (a) An Agreement to begin participation in the Plan must be executed by the Participant within the time prescribed by the Committee prior to the Exercise Period for which it is to be effective. If the Agreement is not timely executed, it shall take effect upon the next following Exercise Period. An Agreement to participate may be modified at any time prior to the applicable Exercise Period. (b) Except for a revocation described in Section 3.9, a Participant may not modify his election to participate in the Plan during an Exercise Period for which the election is effective. Otherwise, any modification must be made by timely providing the Committee written notice in the form prescribed by the Committee. Such modification shall be effective for the first Exercise Period administratively feasible following such written notice or, if later, the date specified in the notice. (c) Each Participant's election specified under an Agreement shall remain in effect (as last modified) for successive Exercise Periods until modified or revoked by the Participant in accordance with this Article III. 3.5 Issuance of Stock. The Company shall issue whole shares of Stock to a Participant, unless the Participant timely revoked an election to exercise the Option pursuant to Section 3.9, as follows: (a) The Company shall determine the number of whole shares of Stock to be issued to each Participant for each Exercise Period by dividing the balance of such Participant's Payroll Account by the applicable exercise price of the Option. (b) The Company shall deduct from a Participant's Payroll Account the amount necessary to purchase the greatest number of whole shares of Stock that can be acquired under the applicable Option. (c) Any amounts remaining in the Payroll Account after deducting the exercise price for whole shares of Stock shall be refunded to the Participant as soon as administratively feasible following the Exercise Date. (d) A Participant who has made contributions to a Payroll Account and has revoked his election to exercise an Option under the terms of Section 3.9 may obtain a refund of the amounts held in his Payroll Account by requesting such payment in the time and manner specified by the Committee. A Participant who has terminated employment shall be paid any amounts remaining in his Payroll Account after the expiration of all Options hereunder. 3.6 Nontransferability. Any Option granted under this Plan shall not be transferable except by will or by the laws of descent and distribution. Only the Participant to whom an Option is granted may exercise such Option, unless he is deceased. No right or interest of a Participant in any Option shall be liable for, or subject to, any lien, obligation or liability of such Participant. 3.7 Shareholder Rights. No Participant shall have any rights as a stockholder with respect to shares subject to his Option prior to the time that such Option is exercised. 3.8 Issuance and Delivery of Shares. Shares of Stock issued pursuant to the exercise of Options hereunder shall be delivered to the brokerage firm selected by the Committee to be held on 4 account for each Participant as soon as administratively feasible after a Participant exercises an Option hereunder and executes any applicable shareholder agreement that the Company requires at the time of exercise. 3.9 Revocation of Election. A Participant may revoke the election to exercise an Option by giving written notification of such revocation to the Committee in a timely manner prior to the end of the applicable Exercise Period. After revocation, the Participant may not thereafter commence participation until the following Grant Date. Article IV. Stock Subject To Plan. 4.1 Source of Shares. Upon the exercise of an Option, the Company shall deliver to the Participant authorized but unissued shares of Stock or shares of Stock held in treasury. 4.2 Maximum Number of Shares. The maximum aggregate number of shares of Stock that may be issued pursuant to the exercise of Options is 100,000, subject to increases and adjustments as provided in Article 6. 4.3 Forfeitures. If an Option is terminated, in whole or in part, the number of shares of Stock allocated to such Option or portion thereof may be reallocated to other Options to be granted under this Plan. Article V. Administration Of The Plan. 5.1 General Authority. The Plan shall be administered by the Committee. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. No member of the Committee shall be liable for any act done in good faith with respect to this Plan or any Agreement or Option. The Company shall bear all expenses of Plan administration. The Committee or its delegate has full and absolute discretionary authority to make determinations regarding Options hereunder. Any such determinations shall be conclusive and binding on all persons. In addition to all other authority vested with the Committee under the Plan, the Committee shall have complete discretionary authority to: (a) Interpret and construe all provisions of this Plan; (b) Prescribe the form of any Agreement and notice and manner for executing or giving the same; (c) Adopt, amend, and rescind rules for Plan administration; and (d) Make all determinations it deems advisable for the administration of this Plan. 5.2 Persons Subject to Section 16(b). Notwithstanding anything in the Plan to the contrary, the Board, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are members of the Committee subject to Section 16(b) of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants. 5.3 Designation of Affiliates. The Company may from time to time designate an entity it controls to be a participating entity in the Plan in a manner that is consistent with Treasury Regulation ss. 1.423-2(c)(4). Each entity that is so designated shall be an Affiliate for purposes of this Plan. Such designation shall be evidenced by the express inclusion of the entity as an Affiliate within Section 2.1, the intentional act of the Company or the Committee to communicate in writing the grant of Options hereunder to employees of an entity, or such other written document that is 5 intended to evidence such designation. The Company or Committee may rescind the designation of an entity as an Affiliate by adopting a writing that is intended to evidence such rescission. Article VI. Adjustment Upon Corporate Changes. 6.1 Adjustments to Shares. The maximum number and kind of shares of stock with respect to which Options hereunder may be granted and which are the subject of outstanding Options shall be adjusted by way of increase or decrease as the Committee determines (in its sole discretion) to be appropriate, in the event that: (a) the Company or an Affiliate effects one or more stock dividends, stock splits, reverse stock splits, subdivisions, consolidations or other similar events; (b) the Company or an Affiliate engages in a transaction to which section 424 of the Code applies; or (c) there occurs any other event which in the judgment of the Committee necessitates such action. Provided, however, that if an event described in paragraph (a) or (b) occurs, the Committee shall make adjustments to the limits on Options and on the award of Options specified hereunder that are proportionate to the modifications of the Stock that are on account of such corporate changes. 6.2 Substitution of Options on Merger or Acquisition. The Committee may grant Options in substitution for stock awards, stock options, stock appreciation rights or similar awards held by an individual who becomes an employee of the Company or an Affiliate in connection with a transaction to which section 424(a) of the Code applies. The terms of such substituted Options shall be determined by the Committee in its sole discretion, subject only to the limitations of Article 4. 6.3 No Preemptive Rights. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services rendered, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, outstanding Options. 6.4 Fractional Shares. Only whole shares of Stock may be acquired through the exercise of an Option. The Company will return to each Participant's Payroll Account any amount tendered in the exercise of an Option remaining after the maximum number of whole shares have been purchased. Article VII. Legal Compliance Conditions. 7.1 General. No Option shall be exercisable, no Stock shall be issued, no certificates for shares of Stock shall be delivered, and no payment shall be made under this Plan except in compliance with all federal and state laws and regulations (including, without limitation, withholding tax requirements), federal and state securities laws and regulations and the rules of all national securities exchanges or self-regulatory organizations on which the Company's shares may be listed. The Company shall have the right to rely on an opinion of its counsel as to such compliance. No Option shall be exercisable, no Stock shall be issued, no certificate for shares shall be delivered and no payment shall be made under this Plan until the Company has obtained such consent or approval as the Committee may deem advisable from any regulatory bodies having jurisdiction over such matters. 7.2 Stock Holding Periods. In order for tax treatment under section 421(a) of the Code to apply to Stock acquired hereunder, the Participant is generally required to hold such shares of Stock 6 for two years after the Grant Date of an Option through which shares of Stock were acquired and for one year after the transfer of Stock to the Participant. A person holding Stock acquired hereunder who disposes of shares prior to the expiration of such holding periods shall notify the Company of such disposition in writing. 7.3 Stock Legends. Any certificate issued to evidence shares of Stock for which an Option is exercised may bear such legends and statements as the Company or Committee may deem advisable to assure compliance with federal and state laws and regulations. Such legends and statements may include, but are not limited to, restrictions on transfer prior to the expiration of the holding periods described in Section 7.2. 7.4 Representations by Participants. As a condition to the exercise of an Option, the Company may require a Participant to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares. At the option of the Company, a stop transfer order against any shares of stock may be placed on the official stock books and records of the Company, and a legend indicating that the stock may not be pledged, sold or otherwise transferred unless an opinion of counsel was provided (concurred in by counsel for the Company) and stating that such transfer is not in violation of any applicable law or regulation may be stamped on the stock certificate in order to assure exemption from registration. The Committee may also require such other action or agreement by the Participants as may from time to time be necessary to comply with the federal and state securities laws. This provision shall not obligate the Company or any Affiliate to undertake registration of options or stock hereunder. Article VIII. General Provisions. 8.1 Effect on Employment. Neither the adoption of this Plan, its operation, nor any documents describing or referring to this Plan (or any part thereof) shall confer upon any employee any right to continue in the employ of the Company or an Affiliate or in any way affect any right and power of the Company or an Affiliate to terminate the employment of any employee at any time with or without assigning a reason therefor. 8.2 Unfunded Plan. The Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under this Plan. Any liability of the Company to any person with respect to any grant under this Plan shall be based solely upon contractual obligations that may be created hereunder. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 8.3 Rules of Construction. Headings are given to the articles and sections of this Plan solely as a convenience to facilitate reference. The masculine gender when used herein refers to both masculine and feminine. The reference to any statute, regulation or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. 8.4 Governing Law. The internal laws of the State of Tennessee shall apply to all matters arising under this Plan, to the extent that federal law does not apply. 8.5 Compliance With Section 16 of the Exchange Act. With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provision of this Plan or action by Committee fails to so comply, it shall be deemed null and void to the extent permitted by law and deemed advisable by the Committee. 8.6 Amendment. The Board may amend or terminate this Plan at any time; provided, however, an amendment that would have a material adverse effect on the rights of a Participant under an outstanding Option is not valid with respect to such Option without the Participant's 7 consent, except as necessary for Options to maintain qualification under the Code; and provided further that, to the extent that such approval is required for compliance with Rule 16b-3 of the Exchange Act, the provisions of the Plan relating to the number of shares granted to persons subject to section 16(b) of the Exchange Act, the timing of such grants and the determination of the exercise price shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, or the rules thereunder. Provided further that the shareholders of the Company must, within 12 months before of after the adoption thereof, approve any amendment that increases the number of shares of Stock in the aggregate which may be issued pursuant to Options granted under the Plan. 8.7 Effective Date of Plan. This Plan shall be effective and Options may be granted under this Plan on January 1, 2002, provided that no Option will be effective or exercisable unless and until this Plan is approved by shareholders of the Company in a manner that satisfies Treasury Regulation ss. 1.423-2 within 12 months of the date that the Board took action to adopt the Plan. All Options granted under the Plan will become void immediately following the 12-month anniversary of the date the Board adopted the Plan if such approval by shareholders has not yet been obtained. IN WITNESS WHEREOF, the undersigned officer has executed this Plan on this the day of , 2002. LIFEPOINT HOSPITALS, INC. By: -------------------------------------- Its: ------------------------------------- 8 EX-10.18 4 g74862ex10-18.txt EMPLOYMENT AGREEMENT OF KENNETH C. DONAHEY Exhibit 10.18 CHAIRMAN & CEO EMPLOYMENT AGREEMENT TABLE OF CONTENTS TERMS AND CONDITIONS OF EMPLOYMENT......................................................................... 1 COMPENSATION............................................................................................... 2 TERM AND TERMINATION OF EMPLOYMENT......................................................................... 4 COMPENSATION UPON TERMINATION OF EMPLOYMENT................................................................ 4 TAX WITHHOLDING............................................................................................ 8 RESTRICTIVE COVENANTS...................................................................................... 8 SUCCESSORS................................................................................................. 11 NOTICES.................................................................................................... 12 GOVERNING LAW.............................................................................................. 12 ENTIRE AGREEMENT........................................................................................... 12 SEVERABILITY............................................................................................... 12 NO ASSIGNMENT BY EXECUTIVE; BINDING EFFECT................................................................. 13 HEADINGS................................................................................................... 13 DEFINITIONS................................................................................................ 13 COUNTERPARTS............................................................................................... 18
EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") dated as of June 25, 2001 (the "Effective Date"), between LifePoint CSGP, LLC, a Delaware limited liability company ("LifePoint" or the "Company") and Kenneth C. Donahey (the "Executive"). W I T N E S S E T H: WHEREAS, LifePoint desires to secure the services of the Executive as its Chairman of the Board of Directors and Chief Executive Officer, on the terms and conditions set forth herein; and WHEREAS, the Executive is willing to serve LifePoint as the Chairman of the Board of Directors, a member of such Board and Chief Executive Officer of LifePoint Hospitals, Inc. on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby covenant and agree as follows: 1. TERMS AND CONDITIONS OF EMPLOYMENT (a) Employment. LifePoint hereby agrees to employ the Executive and the Executive hereby agrees to remain in the employ of LifePoint on and subject to the terms and conditions of this Agreement. 1 (b) Positions, Duties and Responsibilities. The Executive at all times shall serve as, and with the title, office, and authority of, the Chief Executive Officer of LifePoint, reporting directly to the Board of Directors of LifePoint (the "Board of Directors" or "Board") as well as serving as a member of the Board and as the Chairman of the Board. LifePoint shall use its best efforts to take such action as may be required to maintain the Executive's status as such. (c) Full-Time Employment. The Executive agrees to devote substantially all of his professional working time and attention to the benefit of LifePoint under the terms of this Agreement; provided, however, that nothing in this Agreement is intended nor shall be construed as limiting or restricting the Executive's right to engage in any activity that is unrelated to his position specified in paragraph (b) above, including, without limitation, managing private, passive investments, engaging in church, community, and civic activities and other activities approved by the Board, and serving as a director or a member of an advisory committee of any corporation or other entity on which the Executive is serving as of the Effective Date or any other corporation or entity that is not in competition with LifePoint, provided that such activities do not impinge in any material way upon the requirement that the Executive devote substantially all of his professional working time and attention to the Company and perform the duties of his position specified in paragraph (b) above. 2. COMPENSATION In consideration of the services rendered by the Executive during the Agreement Term (as defined below), LifePoint shall (except as otherwise provided in item (iii) of paragraph (b) below), pay or provide the Executive with the compensation and benefits set forth below. 2 (a) Salary. The Executive shall be paid a base salary (the "Base Salary") equal to $520,000 per annum, payable in bi-weekly installments. The Executive's Base Salary shall be reviewed not less than once each calendar year by the Compensation Committee of the Board of Directors of LifePoint and may be increased, but not decreased, in such Compensation Committee's sole and absolute discretion. (b) Annual Bonus. Effective for calendar year 2001, and continuing for each subsequent calendar year ending during the Agreement Term, the Executive shall be entitled to receive a bonus (an "Annual Bonus") based on the extent to which LifePoint achieves or exceeds its target performance goals for the relevant calendar year (the "Annual Targets"). Such Annual Bonus for any calendar year shall equal 75% of the Executive's Base Salary (as in effect on the last day of such year) if LifePoint shall achieve but not exceed the applicable Annual Targets and shall exceed 75% of such Base Salary if LifePoint shall exceed the applicable Annual Targets, but in no event shall such Annual Bonus exceed 100% of such Base Salary. The establishment of Annual Targets for each calendar year, the adjustment to be made in the Annual Bonus in the event of attainment of specified percentages of such Annual Targets, and the method for determining the achievement of such Annual Targets shall be established by the Compensation Committee of the LifePoint Board of Directors in consultation with the Executive. (c) Benefits. The Executive, as of any date, shall be entitled to participate in the benefit plans offered at such time at a level which is no less than commensurate with the benefit level offered generally to other senior executives at such time. 3 3. TERM AND TERMINATION OF EMPLOYMENT (a) Term. The term of this Agreement shall commence on the Effective Date and shall end on the third anniversary of the Effective Date (the "Agreement Term"); provided, however, that the Agreement Term shall be automatically extended for an additional year on the second anniversary of the Effective Date and on each succeeding anniversary of the Effective Date, unless written notice of non-extension is provided by LifePoint or the Executive to the other party at least 90 days prior to the applicable anniversary. (b) Termination of Employment. Nothing in this Agreement shall be construed to prevent the Executive from voluntarily terminating his employment with LifePoint at any time or to prevent LifePoint from terminating the Executive's employment at any time. Upon such termination, the provisions of Section 4 shall apply. 4. COMPENSATION UPON TERMINATION OF EMPLOYMENT. If the Executive's employment with LifePoint is terminated during the Agreement Term, the Executive shall be entitled to the following in full satisfaction of his rights under this Agreement, notwithstanding anything elsewhere in this Agreement: (a) Involuntary Termination Without Cause or Termination for Good Reason. In the event the Executive's employment is terminated by the Company other than for Cause, death, or Disability, or is terminated by the Executive for Good Reason, the Company shall pay the Executive, and provide him with, the following: (i) His earned but unpaid Base Salary through the date of termination, any earned but unpaid bonus under Section 2(b) for the calendar year that ended prior to the 4 date of termination and amounts due to the Executive from the Company as of the date of termination, all of which amounts shall be paid in a lump sum no later than fifteen (15) days after the date the Executive's employment terminates, and any payments, rights and benefits due as of the date of termination under the terms of all employee benefit plans and programs (in which he was a participant) in accordance with the terms of such plans and programs (collectively the "Accrued Rights"). (ii) Continued monthly payments at an annual rate of 100% of the Base Salary from the date of such termination until the second anniversary of such termination (the "Cut-Off Date"). (iii) 75% of Base Salary (based on his Base Salary at the time of his termination) for each calendar year or fraction of a calendar year in the period from the first day of the calendar year in which such termination occurs through the Cut-Off Date, with the amount payable hereunder for the calendar year in which the Cut-Off Date occurs to be prorated (based on calendar days), all of which amounts shall be paid in a lump sum no later than fifteen (15) days after the date the Executive's employment terminates. (iv) His Insurance Coverage. (b) Voluntary Termination; Termination for Cause. In the event the Executive voluntarily terminates his employment hereunder or is terminated by the Company for Cause, the Company shall pay the Executive, and provide him with, any Accrued Rights. (c) Disability; Death. In the event the Executive's employment is terminated by reason of the Executive's death, or the Board of Directors determines in good faith that the 5 Executive is Disabled, the Company shall pay, and provide the Executive (or his legal representative) with, the following: (i) His Accrued Rights. (ii) Continued monthly payments at an annual rate of 100% of his then Base Salary from the date of such termination until the Cut-Off Date. (iii) 75% of his Base Salary (based in each case on the Base Salary at the time of his termination) for each calendar year or fraction of a calendar year in the period from the first day of the calendar year in which such termination occurs through the Cut-Off Date, with the amount payable hereunder for the calendar year in which the Cut-Off Date occurs to be prorated (based on calendar days) and with the amount payable hereunder for any calendar year to be payable as promptly as practicable after the close of such calendar year. (iv) His Insurance Coverage (if he is Disabled). For purposes of this Agreement, "Disability" shall mean the inability of the Executive, after reasonable accommodation, to perform the duties required hereunder for a period equal to or in excess of the waiting period under the Company's long term disability insurance policy, as determined in good faith by the Board of Directors. (d) Termination after Agreement Term. If the Executive's employment with the Company is terminated upon or following the close of the Agreement Term, he shall be entitled to the following in full satisfaction of his rights under this Agreement, notwithstanding anything elsewhere in this Agreement: 6 (i) His Accrued Rights. (ii) If his employment terminates in the calendar year in which the Agreement Term ends and is not for Cause, 75% of his Base Salary prorated (based on calendar days) for the portion of such calendar year prior to the close of the Agreement Term (based on the Base Salary on the last day of the Agreement Term), all of which amounts shall be paid in a lump sum no later than fifteen (15) days after the date his employment terminates. (e) Stock Options. Any options covering shares of Common Stock held by the Executive at the time of the Executive's termination of employment shall be exercisable on or after the date of such termination in accordance with their terms. (f) Taxes. If there is a determination that the payments and other benefits called for under this Agreement, in combination with any other payments or benefits to or for the benefit of the Executive from LifePoint or any predecessor or successor organization, will result in the Executive's being subject to an excise tax under Section 4999 of the Code and/or if such an excise tax is assessed against the Executive as a result of such payments or other benefits, LifePoint shall make a Gross Up Payment (as defined in this Section 4(f)) to or on behalf of the Executive as and when such determination(s) and assessment(s), as appropriate, are made, provided the Executive takes such action as LifePoint reasonably requests under the circumstances to mitigate or challenge, or to mitigate and challenge, such tax and LifePoint complies with its obligations described below in this Section 4(f). A "Gross Up Payment" means a payment to or on behalf of the Executive which shall be sufficient to pay (i) any such excise tax in full, (ii) any federal, state and local income tax and 7 social security and other employment tax on the payment made to pay the Executive's excise tax as well as any additional excise tax on such payment and (iii) any interest or penalties assessed by the Internal Revenue Service on the Executive if such interest or penalties are attributable to LifePoint's failure to comply with its obligations under this Section 4(f) or applicable law. Any determination under this Section 4(f) by LifePoint or LifePoint's accountants shall be made in accordance with Section 280G of the Code and any applicable related regulations (whether proposed, temporary or final) and any related Internal Revenue Service rulings and any related case law and, if LifePoint reasonably requests that the Executive take action to mitigate or challenge, or to mitigate and challenge, any such tax or assessment and the Executive complies with such request, LifePoint shall provide Executive with such information and such expert advice and assistance from LifePoint's accountants, lawyers and other advisors as he may reasonably request and shall pay for all expenses incurred in effecting such compliance and any related fines, penalties, interest and other assessments. 5. TAX WITHHOLDING All compensation payable pursuant to this Agreement shall be subject to reduction by all applicable withholding, social security and other federal, state and local taxes and deductions. 6. RESTRICTIVE COVENANTS (a) Confidentiality/Trade Secrets. The Executive acknowledges that his position with the Company will be one of the highest trust and confidence, both by reason of his position and by reason of his access to and contact with the trade secrets and confidential and proprietary business information of the Company and all of its Affiliates (which term as used in this 8 Agreement shall include, any person, corporation, partnership, general partner or other entity that directly, or indirectly through one or more intermediaries, controls or is controlled by or is under common control with the Company), both during the term of this Agreement and thereafter. The Executive covenants and agrees as follows: (i) Protection. That he shall at all times use his best efforts and exercise diligence to protect and safeguard the trade secrets and confidential and proprietary information of the Company and its Affiliates, including, without limitation, the identity of their patients or customers (including third-party payers of any kind or nature) and suppliers, their arrangements with their patients or customers and suppliers, and their technical data, records, compilations of information, processes, computer software, and specifications relating to their patients or customers, suppliers, products and services. (ii) Nondisclosure. That he shall not at any time disclose any of such trade secrets and confidential and proprietary information, except as Executive reasonably decides may be required in the course of his employment with the Company under Section 1 hereof or as may be required by law. (iii) Nonusage. That he shall not at any time use, directly or indirectly, for his own benefit or for the benefit of another, any of such trade secrets and confidential and proprietary information. The covenants contained in this Section 6(a) shall not be applicable to any information which is in the public domain, other than as a result of action by the Executive in violation of this Section 6(a), or which was obtained from sources other than the Company or its Affiliates who are not under a duty of nondisclosure. All files, records, documents, drawings, 9 specifications, computer software, memoranda, notes, or other documents relating to the business of the Company and its Affiliates, whether prepared by the Executive or otherwise coming into his possession, shall be the exclusive property of the Company and its Affiliates and shall be delivered to the Company or its Affiliates as appropriate, and not retained by the Executive, upon termination of his employment for any reason whatsoever. (b) Non-Competition. The Executive covenants and agrees that, so long as he is employed by the Company, and for a period of two years following his termination of employment for Good Reason or his voluntary termination under Section 4(b), the Executive shall not, without the prior written consent of the Company, directly or indirectly, as an employee, company, agent, principal, proprietor, partner, ten percent (10% or more) stockholder, consultant, director, or corporate officer, engage in any business that is in competition with the hospitals owned by the Company at the time of termination. (c) Modification. If the scope of any of the restrictions contained in this Section 6 is too broad to permit enforcement of such restrictions to their full extent, then such restrictions shall be enforced to the maximum extent permitted by law, and the Executive hereby consents and agrees that such scope may be modified accordingly in any proceeding brought to enforce such restrictions. (d) Remedies for Breach of Restrictive Covenants. The covenants set forth in this Section 6 shall continue to be binding upon the Executive notwithstanding the termination of his employment with the Company for any reason whatsoever. Such covenants shall be deemed and construed as separate agreements independent of any other provision of this Agreement. The existence of any claim or cause of action by the Executive against the Company or any of its 10 Affiliates, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company or any of its Affiliates of any or all of such covenants. It is expressly agreed that the remedy at law for the breach of any such covenant is inadequate and that temporary and permanent injunctive relief shall be available to prevent the breach or any threatened breach thereof, without the necessity of proof of actual damages and without the necessity of posting a bond, cash or otherwise. 7. SUCCESSORS (a) This Agreement shall be binding upon and shall inure to the benefit of LifePoint, its successors and assigns and any person, firm, corporation or other entity which succeeds to all or substantially all of the business, assets or property of LifePoint in accordance with Section 7. Any successor to LifePoint shall be treated the same as LifePoint under this Agreement. LifePoint will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business, assets or property of such company, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that such company would be required to perform it if no such succession had taken place. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts are due and payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid to the legal representatives of the Executive's estate. 11 8. NOTICES Any notice, demand, or communication required, permitted or desired to be given hereunder must be in writing to be effective, and shall be deemed effectively given when personally delivered or mailed by prepaid certified mail, return receipt requested, addressed as follows: If to the Executive: Kenneth C. Donahey 5101 Country Club Drive Brentwood, TN 37027 If to LifePoint: LifePoint Hospitals, Inc. 103 Powell Court, Suite 200 Brentwood, TN 37027 Attn: Senior Vice President, Human Resources 9. GOVERNING LAW This Agreement has been executed and delivered and shall be interpreted, construed, and enforced in accordance with the laws of the State of Tennessee. 10. ENTIRE AGREEMENT This Agreement shall constitute the entire agreement of the parties hereto and may not be amended except in writing signed by all of the parties hereto. No oral statements or prior written materials not specifically incorporated herein shall be of any force or effect. 11. SEVERABILITY In the event any provision of this Agreement is held to be unenforceable or void for any reason, the remainder of this Agreement shall be unaffected and shall remain in full force and effect in accordance with its terms. 12 12. NO ASSIGNMENT BY EXECUTIVE; BINDING EFFECT The Executive shall not assign this Agreement to any other party or parties without the prior written consent of LifePoint. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. 13. HEADINGS The headings used herein are for convenience only and do not limit the contents of this Agreement. 14. DEFINITIONS (a) For purposes of this Agreement, "Cause" shall mean: (i) The conviction of the Executive of a felony under the laws of the United States or any state thereof, whether or not appeal is taken, as determined by the Board of Directors in good faith. (ii) The conviction of the Executive for a violation of criminal law involving the Company and its business that materially damages the Company as determined by the Board of Directors in good faith. (iii) The willful misconduct of the Executive, or the willful or continued failure by the Executive (except in the case of a Disability as provided in Section 4(c) hereof) to substantially perform his duties hereunder, in either case which has a material adverse effect on the Company as determined by the Board of Directors in good faith. 13 (iv) The willful fraud or material dishonesty of the Executive in connection with his performance of his duties to the Company and involving the finances of the Company as determined by the Board of Directors in good faith. (v) Executive's repeated use of alcohol in a manner which in the opinion of the Board of Directors materially impairs the ability of the Executive to effectively perform the Executive's duties and obligations under this Agreement, or the illegal use, possession, or sale of, or impaired performance due to the illegal use of, controlled substances. (vi) a violation of the Company's policies on sexual or other illegal harassment of a Company employee by the Executive as determined by the Board of Directors in good faith. In no event, however, shall the Executive's employment be considered to have been terminated for "Cause" under this Agreement unless and until the Executive receives written notice from the Board of Directors stating in detail the acts or omissions constituting Cause and the Executive has the opportunity to cure to the Board of Directors' satisfaction any such acts or omissions, in the case of (iii), (v) or (vi) above, within 30 days of the Executive's receipt of such notice. The foregoing shall not limit the right of the Board of Directors to suspend the Executive from his day-to-day responsibilities with the Board of Directors pending the completion of such notice and cure procedures. (b) For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent with the Executive's position (including the loss of any of his titles or position as Chairman of the Board, a member of the Board and Chief Executive 14 Officer, and any other status, offices, titles or reporting relationships), authority, duties or responsibilities as contemplated by Section 1 hereof, any adverse change in the Executive's reporting responsibilities, or any action by LifePoint that results in a diminution in such position, authority, duties or responsibilities, but excluding for these purposes an isolated and insubstantial action not taken in bad faith and which is remedied by LifePoint promptly after receipt of notice thereof given by the Executive; (ii) any diminution in Executive's total compensation in violation of Section 2; (iii) the relocation, without the consent of the Executive, of LifePoint's principal executive offices or the offices of the Executive to a location more than 40 miles from Nashville, Tennessee, (iv) a termination of Executive's employment for any reason (other than his death) within twelve months after a Change in Control, or (v) any breach under Section 7 of this Agreement. (c) For purposes of this Agreement, "Change in Control" shall mean: (i) An acquisition (other than directly from LifePoint) of any voting securities of LifePoint (the "Voting Securities") by any "Person" (as the term Person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) LifePoint or (B) any corporation or 15 other Person of which a majority of its voting power or its equity securities or equity interest is owned directly or indirectly by LifePoint (a "Subsidiary") or (ii) LifePoint or any Subsidiary. (ii) The individuals who are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election or nomination for election by LifePoint's stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if (1) such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the 1934 Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest or (2) such individual was designated by a Person who has entered into an agreement with LifePoint to effect a transaction described in clause (i) or (iii) of this Section 14(c); or (iii) The consummation, after approval by stockholders of LifePoint, of: (A) merger, consolidation or reorganization involving LifePoint unless (1) The stockholders of LifePoint, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least seventy-five percent (75%) of the combined voting power of the outstanding 16 Voting Securities of the corporation resulting from such merger or consolidation or reorganization or its parent corporation (the "Surviving Corporation") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorganization; (2) The individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of the board of directors of the Surviving Corporation; and (3) No Person (other than LifePoint, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by LifePoint, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization, had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Voting Securities) has Beneficial Ownership of twenty percent (20%) or more of the combined voting power of the Surviving Corporations then outstanding Voting Securities. (B) A complete liquidation or dissolution of LifePoint; or (C) An agreement for the sale or other disposition of all or substantially all of the assets of LifePoint to any Person (other than a transfer to a Subsidiary). 17 Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by LifePoint which, by reducing the number of Voting Securities outstanding, increased the proportional number of shares Beneficially Owned by the Subject Person; provided, however, if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by LifePoint, and after such share acquisition by LifePoint, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. 15. COUNTERPARTS This Agreement may be executed in counterparts, each of which will deem to be an original, but all of which together will constitute one in the same Agreement. IN WITNESS WHEREOF, LifePoint and the Executive have executed this Agreement as of the date first above written. -------------------------------------------- EXECUTIVE LIFEPOINT CSGP, LLC -------------------------------------------- 18 EX-21.1 5 g74862ex21-1.txt SUBSIDIARIES OF LIFEPOINT HOSPITALS, INC. EXHIBIT 21.1 SUBSIDIARIES OF LIFEPOINT HOSPITALS, INC.: America Group Offices, LLC America Management Companies, LLC AMG -- Crockett, LLC AMG - Hilcrest, LLC AMG - Hillside, LLC AMG - Livingston, LLC AMG - Logan, LLC AMG - Southern Tennessee, LLC AMG - Trinity, LLC Ashley Valley Medical Center, LLC Ashley Valley Physician Practice, LLC Athens Physician Practice, LLC Athens Regional Medical Center, LLC Barrow Medical Center, LLC Bartow Healthcare Partner, Inc. Bartow Healthcare System Ltd. Bartow Memorial Limited Partner, LLC Bourbon Community Hospital, LLC Bourbon Physician Practice, LLC Buffalo Trace Radiation Oncology Associates, LLC Castleview Hospital, LLC Castleview Medical, LLC Castleview Physician Practice, LLC Community Hospital of Andalusia, Inc. Community Medical, LLC Crockett Hospital, LLC Crockett PHO, LLC Dodge City Healthcare Group, LP (70%) Dodge City Healthcare Partner, Inc. Georgetown Community Hospital, LLC Georgetown Rehabilitation, LLC Halstead Hospital, LLC HCK Logan Memorial, LLC HDP Andalusia, LLC HDP Georgetown, LLC Hillside Hospital, LLC HST Physician Practice, LLC HTI Georgetown, LLC HTI PineLake, LLC Integrated Physician Services, LLC Kansas Healthcare Management Company, Inc. Kansas Healthcare Management Services, LLC Kentucky Hospital, LLC Kentucky Medserv, LLC Kentucky MSO, LLC Kentucky Physician Services, Inc. Lake Cumberland Regional Hospital, LLC Lake Cumberland Regional Physician Hospital Organization, LLC Lake Cumberland Surgery Center, LP Lander Valley Medical Center, LLC LHSC, LLC LifePoint Asset Management Company, Inc. LifePoint Corporate Services, General Partnership LifePoint CSGP, LLC LifePoint CSLP, LLC LifePoint Holdings 2, LLC LifePoint Holdings 3, Inc. LifePoint Hospitals Holdings, Inc. LifePoint Medical Group - Hillside, Inc. LifePoint of GAGP, LLC LifePoint of Georgia, Limited Partnership LifePoint of Kentucky, LLC LifePoint of Lake Cumberland, LLC LifePoint RC, Inc. Livingston Regional Hospital, LLC Logan Medical, LLC Logan Memorial Hospital, LLC Logan Physician Practice, LLC Meadowview Physician Practice, LLC Meadowview Regional Medical Center, LLC Meadowview Rights, LLC PineLake Physician Practice, LLC PineLake Regional Hospital, LLC Poitras Practice, LLC Putnam Community Medical Center, LLC Putnam Diagnostic Imaging Center, LLC R. Kendall Brown Practice, LLC Riverton Memorial Hospital, LLC Riverton Physician Practices, LLC Riverview Medical Center, LLC Select Healthcare, LLC Siletchnik Practice, LLC Smith County Memorial Hospital, LLC Somerset Surgery Partner, LLC Southern Tennessee EMS, LLC Southern Tennessee Medical Center, LLC Southern Tennessee PHO, LLC Springhill Medical Center, LLC Springhill MOB, LLC Springhill Physician Practice, LLC THM Physician Practice, LLC Ville Platte Medical Center, LLC Western Plains Regional Hospital, LLC Woodford Hospital, LLC EX-21.2 6 g74862ex21-2.txt SUBSIDIARIES OF LIFEPOINT HOSPITALS HOLDINGS, INC. EXHIBIT 21.2 SUBSIDIARIES OF LIFEPOINT HOSPITALS HOLDINGS, INC.: America Group Offices, LLC America Management Companies, LLC AMG - Crockett, LLC AMG - Hilcrest, LLC AMG - Hillside, LLC AMG - Livingston, LLC AMG - Logan, LLC AMG - Southern Tennessee, LLC AMG - Trinity, LLC Ashley Valley Medical Center, LLC Ashley Valley Physician Practice, LLC Athens Physician Practice, LLC Athens Regional Medical Center, LLC Barrow Medical Center, LLC Bartow Healthcare Partner, Inc. Bartow Healthcare System Ltd. Bartow Memorial Limited Partner, LLC Bourbon Community Hospital, LLC Bourbon Physician Practice, LLC Buffalo Trace Radiation Oncology Associates, LLC Castleview Hospital, LLC Castleview Medical, LLC Castleview Physician Practice, LLC Community Hospital of Andalusia, Inc. Community Medical, LLC Crockett Hospital, LLC Crockett PHO, LLC Dodge City Healthcare Group, LP (70%) Dodge City Healthcare Partner, Inc. Georgetown Community Hospital, LLC Georgetown Rehabilitation, LLC Halstead Hospital, LLC HCK Logan Memorial, LLC HDP Andalusia, LLC HDP Georgetown, LLC Hillside Hospital, LLC HST Physician Practice, LLC HTI Georgetown, LLC HTI PineLake, LLC Integrated Physician Services, LLC Kansas Healthcare Management Company, Inc. Kansas Healthcare Management Services, LLC Kentucky Hospital, LLC Kentucky Medserv, LLC Kentucky MSO, LLC Kentucky Physician Services, Inc. Lake Cumberland Regional Hospital, LLC Lake Cumberland Regional Physician Hospital Organization, LLC Lake Cumberland Surgery Center, LP Lander Valley Medical Center, LLC LHSC, LLC LifePoint Asset Management Company, Inc. LifePoint Corporate Services, General Partnership LifePoint CSGP, LLC LifePoint CSLP, LLC LifePoint Holdings 2, LLC LifePoint Holdings 3, Inc. LifePoint Medical Group - Hillside, Inc. LifePoint of GAGP, LLC LifePoint of Georgia, Limited Partnership LifePoint of Kentucky, LLC LifePoint of Lake Cumberland, LLC LifePoint RC, Inc. Livingston Regional Hospital, LLC Logan Medical, LLC Logan Memorial Hospital, LLC Logan Physician Practice, LLC Meadowview Physician Practice, LLC Meadowview Regional Medical Center, LLC Meadowview Rights, LLC PineLake Physician Practice, LLC PineLake Regional Hospital, LLC Poitras Practice, LLC Putnam Community Medical Center, LLC Putnam Diagnostic Imaging Center, LLC R. Kendall Brown Practice, LLC Riverton Memorial Hospital, LLC Riverton Physician Practices, LLC Riverview Medical Center, LLC Select Healthcare, LLC Siletchnik Practice, LLC Smith County Memorial Hospital, LLC Somerset Surgery Partner, LLC Southern Tennessee EMS, LLC Southern Tennessee Medical Center, LLC Southern Tennessee PHO, LLC Springhill Medical Center, LLC Springhill MOB, LLC Springhill Physician Practice, LLC THM Physician Practice, LLC Ville Platte Medical Center, LLC Western Plains Regional Hospital, LLC Woodford Hospital, LLC EX-23.1 7 g74862ex23-1.txt CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of our report dated January 31, 2002, with respect to the consolidated financial statements of LifePoint Hospitals, Inc. included in the LifePoint Hospitals, Inc. Annual Report (Form 10-K) for the year ended December 31, 2001 (i) Form S-8 No. 333-78221 pertaining to the LifePoint Hospitals, Inc. Retirement Plan; (ii) Form S-8 No. 333-78187 pertaining to the LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan; (iii) Form S-8 No. 333-78185 pertaining to the LifePoint Hospitals, Inc. Management Stock Purchase Plan and LifePoint Hospitals, Inc. Outside Director's Stock and Incentive Compensation Plan; (iv) Form S-3 No. 333-42634, pertaining to LifePoint Hospitals, Inc.; (v) Form S-8 No. 333-63140 pertaining to the LifePoint Hospitals, Inc. 1998 Long Term Incentive Plan, as amended and (vi) Form S-8 No. 333-66378 pertaining to the LifePoint Hospitals, Inc. Executive Stock Purchase Plan. /s/ Ernst & Young LLP Nashville, Tennessee March 26, 2002 -----END PRIVACY-ENHANCED MESSAGE-----