-----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, TkOBJqLg+Y7GxyviXVM1YafpWabFTmU9c/WNmo/mxkFAJlmyUpzUbXjI1hfU130c d12omiywfVDkjn/oVQIX+w== 0000950130-99-001413.txt : 19990316 0000950130-99-001413.hdr.sgml : 19990316 ACCESSION NUMBER: 0000950130-99-001413 CONFORMED SUBMISSION TYPE: 10-12G/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFEPOINT HOSPITALS LLC CENTRAL INDEX KEY: 0001074772 STANDARD INDUSTRIAL CLASSIFICATION: HOSPITAL & MEDICAL SERVICE PLANS [6324] IRS NUMBER: 621762163 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12G/A SEC ACT: SEC FILE NUMBER: 000-29818 FILM NUMBER: 99564534 BUSINESS ADDRESS: STREET 1: 4525 HARDING RD CITY: NASHVILLE STATE: TN ZIP: 37205 BUSINESS PHONE: 9727892732 MAIL ADDRESS: STREET 1: 4525 HARDING RD CITY: NASHVILLE STATE: TN ZIP: 37205 10-12G/A 1 AMENDMENT NO. 1 TO FORM 10 As filed with the Securities and Exchange Commission on March 15, 1999 File No. 0-29818 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10/A (Amendment No. 1) GENERAL FORM FOR REGISTRATION OF SECURITIES Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 LifePoint Hospitals LLC (Exact name of registrant as specified in its charter) Delaware 62-1762163 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4525 Harding Road 37205 Nashville, Tennessee (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code (615) 344-6261 Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: Title of each class Name of each exchange on which to be so registered each class is to be registered Common Stock, $.01 par value The Nasdaq National Market System Preferred Stock Purchase Rights The Nasdaq National Market System Copies of all communications should be sent to: Morton A. Pierce, Esq. William F. Carpenter III, Esq. Dewey Ballantine LLP Senior Vice President and General 1301 Avenue of the Americas Counsel New York, New York 10019-6092 LifePoint Hospitals LLC (212) 259-8000 4525 Harding Road Nashville, Tennessee 37205 (615) 344-6261 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LifePoint Hospitals LLC Information Included in Information Statement and Incorporated in Form 10 By Reference Cross-Reference Sheet Between Information Statement and Items of Form 10 Item 1. Business. The information required by this item is contained under the sections "Summary"; "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations"; "LifePoint Business"; and "LifePoint Hospitals, Inc. Index to Combined Financial Statements" in the Information Statement dated , 1999 annexed hereto as Exhibit 2.1 (the "Information Statement") and such sections are incorporated herein by reference. Item 2. Financial Information. The information required by this item is contained under the sections "Summary"; "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements"; "LifePoint Summary Financial Data"; and "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Information Statement and such sections are incorporated herein by reference. Item 3. Properties. The information required by this item is contained under the section "LifePoint Business--Properties" in the Information Statement and such section is incorporated herein by reference. Item 4. Security Ownership of Certain Beneficial Owners and Management. The information required by this item is contained under the section "LifePoint Security Ownership by Certain Beneficial Owners and Management" in the Information Statement and such section is incorporated herein by reference. Item 5. Directors and Executive Officers. The information required by this item is contained under the sections "LifePoint Management" and "LifePoint Description of Capital Stock--Limited Liability and Indemnification Provisions" in the Information Statement and such sections are incorporated herein by reference. Item 6. Executive Compensation. The information required by this item is contained under the section "LifePoint Management--Executive Compensation" in the Information Statement and such section is incorporated herein by reference. Item 7. Certain Relationships and Related Transactions. The information required by this item is contained under the sections "Summary"; "The Distribution"; and "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution" in the Information Statement and such sections are incorporated herein by reference. Item 8. Legal Proceedings. The information required by this item is contained under the section "LifePoint Business--Legal Proceedings" in the Information Statement and such section is incorporated herein by reference. 2 Item 9. Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters. The information required by this item is contained under the sections "Summary"; "Risk Factors--Market Uncertainties With Respect to LifePoint Common Stock and Triad Common Stock"; "The Distribution--Market for LifePoint Common Stock and Triad Common Stock"; and "Dividend Policy--LifePoint"; in the Information Statement and such sections are incorporated herein by reference. Item 10. Recent Sales of Unregistered Securities. This item is not applicable. Item 11. Description of Registrant's Securities to be Registered. The information required by this item is contained under the sections "Risk Factors--Anti-Takeover Provisions"; "LifePoint Description of Capital Stock"; and "The Distribution--Market for LifePoint Common Stock and Triad Common Stock" in the Information Statement and such sections are incorporated herein by reference. Item 12. Indemnification of Directors and Officers. The information required by this item is contained under the section "LifePoint Description of Capital Stock--Limited Liability and Indemnification Provisions" in the Information Statement and such section is incorporated herein by reference. Item 13. Financial Statements and Supplementary Data. The information required by this item is contained under the sections "Summary"; "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements"; "LifePoint Selected Financial Data"; "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations"; and "LifePoint Hospitals, Inc. Index to Combined Financial Statements" in the Information Statement and such sections are incorporated herein by reference. Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. This item is not applicable. Item 15. Financial Statements and Exhibits. (a) The information required by this item is contained under the section "LifePoint Hospitals, Inc. Index to Combined Financial Statements" in the Information Statement and such section is incorporated herein by reference. (b) The following documents are filed as exhibits hereto:
Exhibit Number Description ------- ----------- 2.1 Information Statement dated as of , 1999. 2.2 Form of Distribution Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 3.1+ Form of Certificate of Incorporation of LifePoint Hospitals, Inc. to be in effect on the distribution date.
3
Exhibit Number Description ------- ----------- 3.2+ Form of By-Laws of LifePoint Hospitals, Inc. to be in effect on the distribution date. 4.1** Form of Specimen Certificate for LifePoint Hospitals, Inc. Common Stock. 4.2** Form of Rights Agreement, dated as of , 1999, between LifePoint Hospitals, Inc. and , as rights agent. 10.1** Form of Tax Sharing and Indemnification Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.2** Form of Benefits and Employment Matters Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.3** Form of Insurance Allocation and Administration Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.4** Form of Group Purchasing Organization Participation Agreement. 10.5** Form of Transitional Services Agreement to be entered into by and between Columbia/HCA Healthcare Corporation and LifePoint Hospitals, Inc. 10.6** Form of Computer and Data Processing Services Agreement to be entered into by and between Columbia Information Systems, Inc. and LifePoint Hospitals, Inc. 10.7** Form of Agreement to Share Telecommunications Services to be entered into by and between Columbia Information Systems, Inc. and LifePoint Hospitals, Inc. 10.8** Form of Sub-Lease Agreement to be entered into by and between LifePoint Hospitals, Inc. and Columbia/HCA Healthcare Corporation. 10.9* ** LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan. 10.10* ** LifePoint Hospitals, Inc. 1999 Annual Incentive Plan. 10.11* ** LifePoint Hospitals, Inc. Executive Stock Purchase Plan. 10.12* ** LifePoint Hospitals, Inc. Outside Director's Stock and Incentive Compensation Plan. 10.13* ** LifePoint Hospitals, Inc. Management Stock Purchase Plan. 21** Subsidiaries of LifePoint Hospitals, Inc. as of the distribution date. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule. 27.3 Financial Data Schedule.
- -------- * Compensatory plan or arrangement. ** To be filed by amendment. +Previously filed. 4 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized. LifePoint Hospitals LLC /s/ William F. Carpenter III Date: March 12, 1999 By: _________________________________ William F. Carpenter III Senior Vice President & General Counsel 5 INDEX TO EXHIBITS
Exhibit Number Description ------- ----------- 2.1 Information Statement dated as of , 1999. 2.2 Form of Distribution Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 3.1+ Form of Certificate of Incorporation of LifePoint Hospitals, Inc. to be in effect on the distribution date. 3.2+ Form of By-Laws of LifePoint Hospitals, Inc. to be in effect on the distribution date. 4.1** Form of Specimen Certificate for LifePoint Hospitals, Inc. Common Stock. 4.2** Form of Rights Agreement, dated as of , 1999, between LifePoint Hospitals, Inc. and , as rights agent. 10.1** Form of Tax Sharing and Indemnification Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.2** Form of Benefits and Employment Matters Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.3** Form of Insurance Allocation and Administration Agreement to be entered into by and among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. 10.4** Form of Group Purchasing Organization Participation Agreement. 10.5** Form of Transitional Services Agreement to be entered into by and between Columbia/HCA Healthcare Corporation and LifePoint Hospitals, Inc. 10.6** Form of Computer and Data Processing Services Agreement to be entered into by and between Columbia Information Systems, Inc. and LifePoint Hospitals, Inc. 10.7** Form of Agreement to Share Telecommunications Services to be entered into by and between Columbia Information Systems, Inc. and LifePoint Hospitals, Inc. 10.8** Form of Sub-Lease Agreement to be entered into by and between LifePoint Hospitals, Inc. and Columbia/HCA Healthcare Corporation. 10.9* ** LifePoint Hospitals, Inc. 1998 Long-Term Incentive Plan. 10.10* ** LifePoint Hospitals, Inc. 1999 Annual Incentive Plan. 10.11* ** LifePoint Hospitals, Inc. Executive Stock Purchase Plan. 10.12* ** LifePoint Hospitals, Inc. Outside Directors' Stock and Incentive Compensation Plan. 10.13* ** LifePoint Hospitals, Inc. Management Stock Purchase Plan. 21** Subsidiaries of LifePoint Hospitals, Inc. as of the distribution date. 27.1 Financial Data Schedule. 27.2 Financial Data Schedule. 27.3 Financial Data Schedule.
- -------- * Compensatory plan or arrangement. **To be filed by amendment. +Previously filed. 6 EX-2.1 2 INFORMATION STATEMENT Exhibit 2.1 Columbia/HCA Healthcare Corporation ----------------------------- Spin-Offs of LifePoint Hospitals, Inc. and Triad Hospitals, Inc. Through a Common Stock Distribution ----------------------------- To the Stockholders of Columbia/HCA Healthcare Corporation: In November 1997, Columbia/HCA Healthcare Corporation reorganized its operations into five divisions. Columbia/HCA has now determined to establish two of those divisions, America Group and Pacific Group, as independent, publicly-traded companies. America's hospitals are located in non-urban areas where, in almost every case, America's hospital is the only hospital in the community. Approximately three-quarters of Pacific's hospitals are located in small cities, generally in the Southern, Western and Southwestern United States, where Pacific's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Pacific's hospitals are located in larger urban areas typically characterized by a high rate of population growth. We believe that separating the America and Pacific Groups into two smaller, strategically focused public companies will have positive effects on the performance and profitability of the facilities in these groups by enabling more focused management attention, more effective operating strategies based on local market conditions, and compensation incentives for employees that are more closely tied to group performance. After the separation of the America and Pacific Groups, Columbia/HCA will focus its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks. The health care services businesses conducted by the America and Pacific Groups will be transferred to LifePoint Hospitals, Inc. and Triad Hospitals, Inc., respectively, each of which will be a newly formed Delaware holding company. Thereafter, the shares of common stock of LifePoint Hospitals, Inc. and of Triad Hospitals, Inc. will be distributed to the stockholders of Columbia/HCA on a pro rata basis. The distribution of the shares of common stock of LifePoint Hospitals, Inc. and Triad Hospitals, Inc. will be effective on , 1999. If you own Columbia/HCA common stock as of the close of business on , 1999, you will receive shares of LifePoint common stock and shares of Triad common stock for every shares of Columbia/HCA common stock that you own. You should receive these LifePoint and Triad shares in 1999. The distribution of shares of LifePoint common stock and Triad common stock is conditioned upon receiving a ruling from the Internal Revenue Service that, among other things, the distribution generally will be tax-free to Columbia/HCA and to Columbia/HCA's stockholders, except for any cash received instead of fractional shares. No Columbia/HCA stockholder action is required, and you do not need to surrender your shares of Columbia/HCA common stock to receive the shares of LifePoint common stock and Triad common stock. You will continue to hold the same number of shares of Columbia/HCA common stock after the distribution. We intend to apply for a quotation of the LifePoint common stock and the Triad common stock on Nasdaq and we expect that they will trade under the symbols " " and " ," respectively. This information statement contains detailed information about LifePoint, Triad and the distribution. We encourage you to read it carefully. Sincerely, Thomas F. Frist, Jr., M.D. Jack O. Bovender, Jr. Chairman of the Board and President and Chief Executive Officer Chief Operating Officer , 1999 EXHIBIT 2.1 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +Information contained herein is subject to completion or amendment. + +Registration statements relating to these securities have been filed with the + +Securities and Exchange Commission. These securities will not be issued prior + +to the time the registration statements become effective. This information + +statement shall not constitute an offer to sell or the solicitation of any + +offer to buy any securities of Columbia/HCA Healthcare Corporation, LifePoint + +Hospitals, Inc. or Triad Hospitals, Inc. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION OR AMENDMENT, DATED MARCH 15, 1999 Information Statement ------------ LifePoint Hospitals, Inc. Triad Hospitals, Inc. Common Stock Common Stock We have prepared this information statement to Consider provide you with information regarding the pro rata carefully the distribution to Columbia/HCA Healthcare Corporation risk factors common and non-voting common stockholders of all of the beginning on shares of common stock of LifePoint Hospitals, Inc., page 26 of this which will be a newly-formed holding company for the information America Group of Columbia/HCA, and Triad Hospitals, statement. Inc., which will be a newly-formed holding company for the Pacific Group of Columbia/HCA. Stockholder approval of the The shares of LifePoint common stock and Triad common distribution of stock will be distributed on the effective date of the LifePoint and distribution, which is , 1999, to holders of Triad is not Columbia/HCA common stock at the close of business on required. We are the record date for the distribution, which is , not asking you 1999. for a proxy and we request that If you are a Columbia/HCA common stockholder at the you do not send close of business on the record date, you will receive us a proxy. shares of LifePoint common stock and shares of Also, you are Triad common stock for every shares of Columbia/HCA not required to common stock you hold. Certificates for the shares will make any payment be mailed on or about , 1999. You will receive a for the shares check for the cash equivalent of any fractional shares of LifePoint you otherwise would have received in the distribution. common stock or Triad common If you have questions regarding the distribution, you stock. may call National City Bank, Shareholder Services Group, telephone number (800) 622-6757, the This information distribution agent, or W. Mark Kimbrough, telephone statement is not number (615) 344-1199, Columbia/HCA's investor contact. an offer to sell, or a solicitation of an offer to buy, any securities of Columbia/HCA, LifePoint or Triad. No public market currently exists for either the LifePoint common stock or the Triad common stock. However, we intend to apply for a quotation of the LifePoint common stock and the Triad common stock on the Nasdaq National Market System. If the shares are accepted for quotation on Nasdaq, we expect that a "when-issued" market will develop on or shortly before the record date and regular trading will begin on the first business day after the effective date of the distribution. Proposed Nasdaq Trading Symbols LifePoint common stock -- Triad common stock -- Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the LifePoint common stock or the Triad common stock, or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense. We first mailed this information statement to Columbia/HCA stockholders on , 1999. TABLE OF CONTENTS Summary................................................................... 1 Introduction............................................................. 1 Questions and Answers About LifePoint, Triad and the Distribution........ 2 Key Terms of the Distribution............................................ 7 Information Regarding the Distribution, LifePoint and Triad.............. 9 Columbia/HCA Healthcare Corporation...................................... 10 LifePoint Hospitals, Inc. ............................................... 11 Triad Hospitals, Inc. ................................................... 13 Comparative Financial Highlights......................................... 15 LifePoint Summary Historical Financial Data............................... 16 LifePoint Unaudited Pro Forma Condensed Combined Financial Statements..... 17 LifePoint Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1998..................................... 18 LifePoint Unaudited Pro Forma Condensed Combined Balance Sheet............ 19 LifePoint Notes to Unaudited Pro Forma Condensed Combined Financial Statements............................................................... 20 Triad Summary Historical Financial Data................................... 21 Triad Unaudited Pro Forma Condensed Combined Financial Statements......... 22 Triad Unaudited Pro Forma Condensed Combined Statement of Operations for the Year Ended December 31, 1998......................................... 23 Triad Unaudited Pro Forma Condensed Combined Balance Sheet................ 24 Triad Notes to Unaudited Pro Forma Condensed Combined Financial Statements............................................................... 25 Risk Factors.............................................................. 26 Dependence on Physicians................................................. 26 Dependence on Key Personnel.............................................. 26 No Operating Histories as Independent Companies.......................... 26 Limits on Reimbursement; Health Care Reform Legislation.................. 26 Impact of Managed Care Organizations..................................... 27 Competition.............................................................. 27 Concentration of Operations.............................................. 28 Extensive Regulation..................................................... 28 Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and Triad................................................................... 30 Professional Liability Risks............................................. 31 Leverage and Debt Service Obligations.................................... 31 Absence of Dividends..................................................... 32 Tax Treatment of the Distribution........................................ 32 Holding Company Structure................................................ 32 Market Uncertainties With Respect to LifePoint Common Stock and Triad Common Stock............................................................ 33
Anti-Takeover Provisions................................................. 33 Year 2000 Compliance..................................................... 34 Reasons for Furnishing this Information Statement......................... 35 Forward-Looking Information............................................... 35 The Distribution.......................................................... 36 Background and Purposes of the Distribution.............................. 36 Manner of Effecting the Distribution..................................... 37 Results of the Distribution.............................................. 37 Material Federal Income Tax Consequences................................. 38 Regulatory Approvals..................................................... 39 Market for LifePoint Common Stock and Triad Common Stock................. 39 Conditions Precedent to the Distribution................................. 40 Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution............................................................. 40 Distribution Agreement................................................... 40 Tax Sharing and Indemnification Agreement................................ 42 Benefits and Employment Matters Agreement................................ 42 Insurance Allocation and Administration Agreement........................ 44 Computer and Data Processing Services Agreement.......................... 45 Lease Agreements......................................................... 45 Transitional Services Agreement.......................................... 45 Other Agreements......................................................... 45 Dividend Policy........................................................... 46 LifePoint................................................................ 46 Triad.................................................................... 46 LifePoint Selected Financial Data......................................... 47 LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 49 Overview.................................................................. 49 Forward-Looking Statements............................................... 49 Investigations........................................................... 49 Results of Operations.................................................... 50 Liquidity and Capital Resources.......................................... 55 Impact of Year 2000 Computer Issues...................................... 56 Effects of Inflation and Changing Prices................................. 59 Health Care Reform....................................................... 59 Triad Selected Financial Data............................................. 60 Triad Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 61 Overview.................................................................. 61 Forward-Looking Statements............................................... 61 Investigations........................................................... 61
-ii- Results of Operations...................................................... 62 Liquidity and Capital Resources............................................ 68 Impact of Year 2000 Computer Issues........................................ 68 Effects of Inflation and Changing Prices................................... 71 Health Care Reform......................................................... 71 LifePoint Business.......................................................... 72 General.................................................................... 72 The Non-Urban Health Care Market........................................... 72 Business Strategy.......................................................... 72 Operations................................................................. 74 Services and Utilization................................................... 74 Sources of Revenue......................................................... 76 Competition................................................................ 76 Properties................................................................. 78 Employees and Medical Staff................................................ 78 LifePoint's Regulatory Compliance Program.................................. 79 Legal Proceedings.......................................................... 79 Triad Business.............................................................. 80 General.................................................................... 80 Triad's Markets............................................................ 80 Business Strategy.......................................................... 81 Operations................................................................. 82 Services and Utilization.................................................... 82 Sources of Revenue.......................................................... 84 Competition................................................................ 84 Properties................................................................. 86 Employees and Medical Staff................................................ 87 Triad Regulatory Compliance Program........................................ 87 Legal Proceedings.......................................................... 88 Government and Other Sources of Reimbursement for LifePoint and Triad....... 89 Medicare................................................................... 89 Medicaid................................................................... 90 Annual Cost Reports........................................................ 91 Managed Care............................................................... 91 Commercial Insurance....................................................... 91 Regulation and Other Factors Affecting LifePoint and Triad.................. 92 Licensure, Certification and Accreditation................................. 92 Certificates of Need....................................................... 92 State Rate Review.......................................................... 92 Utilization Review......................................................... 92 Medicare Regulations and Fraud and Abuse................................... 92 Corporate Practice of Medicine............................................. 95 Health Care Reform......................................................... 95 Conversion Legislation..................................................... 95 Revenue Ruling 98-15....................................................... 96 Environmental Matters...................................................... 96 Insurance.................................................................. 96
Governmental Investigation of Columbia/HCA and Related Litigation......... 96 LifePoint Management....................................................... 99 Directors................................................................. 99 Compensation of Directors................................................. 100 Executive Officers........................................................ 100 Executive Compensation.................................................... 102 LifePoint Compensation Arrangements....................................... 103 The LifePoint Management Stock Purchase Plan............................... 107 LifePoint Security Ownership by Certain Beneficial Owners and Management... 109 Triad Management........................................................... 111 Directors................................................................. 111 Compensation of Directors................................................. 112 Executive Officers........................................................ 112 Executive Compensation.................................................... 113 Triad Compensation Arrangements........................................... 116 The Triad Management Stock Purchase Plan................................... 119 Triad Security Ownership by Certain Beneficial Owners and Management....... 121 LifePoint Description of Capital Stock..................................... 123 Introduction.............................................................. 123 Authorized And Outstanding Capital Stock.................................. 123 LifePoint Common Stock; Delaware Anti-Takeover Provisions................. 123 LifePoint Preferred Stock................................................. 124 LifePoint Preferred Stock Purchase Rights................................. 124 Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws....... 126 Limited Liability and Indemnification Provisions.......................... 131 Triad Description of Capital Stock......................................... 132 Introduction.............................................................. 132 Authorized And Outstanding Capital Stock.................................. 132 Triad Common Stock; Delaware Anti-Takeover Provisions..................... 132 Triad Preferred Stock..................................................... 133 Triad Preferred Stock Purchase Rights..................................... 133 Certain Anti-Takeover Provisions--Triad Certificate and By-Laws........... 135 Limited Liability and Indemnification Provisions.......................... 140 Additional Information..................................................... 141 LifePoint Hospitals, Inc. and Subsidiaries Index to Financial Statements... F-1 Triad Hospitals, Inc. and Subsidiaries Index to Financial Statements....... F-1
-iii- Summary This summary highlights selected information from this information statement, but does not contain all details concerning the distribution of the common stock of LifePoint and Triad to Columbia/HCA stockholders, including information that may be important to you. To better understand the distribution, and the businesses and financial position of LifePoint and Triad, you should carefully review this entire document. References in this document to "LifePoint" mean LifePoint Hospitals, Inc. and its subsidiaries and affiliates. References in this document to "Triad" mean Triad Hospitals, Inc. and its subsidiaries and affiliates. References in this document to "Columbia/HCA" mean Columbia/HCA Healthcare Corporation and its subsidiaries and affiliates. Introduction Columbia/HCA is the largest provider of health care services in the United States today, operating approximately 300 hospitals, as well as outpatient surgery centers, diagnostic centers, cardiac rehabilitation centers, physical therapy centers, radiation oncology centers, comprehensive outpatient rehabilitation centers, medical office buildings, physician practices and other health care programs. In November 1997, Columbia/HCA restructured its operations into five divisions, including the America Group and the Pacific Group. America's hospitals are located in non-urban areas where, in almost every case, America's hospital is the only hospital in the community. Approximately three-quarters of Pacific's hospitals are located in small cities, generally in the Southern, Western and Southwestern United States, where Pacific's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Pacific's facilities are located in larger urban areas typically characterized by a high rate of population growth. Columbia/HCA has now determined to establish the America Group and the Pacific Group as two independent, publicly-traded companies. As of the distribution date, the health care services businesses conducted by the America and Pacific Groups of Columbia/HCA will have been transferred to LifePoint Hospitals, Inc. and Triad Hospitals, Inc., respectively, each of which will be a newly formed Delaware holding company. The shares of common stock of LifePoint Hospitals, Inc. and of Triad Hospitals, Inc. will be distributed to the stockholders of Columbia/HCA on a pro rata basis. The distribution of the shares of common stock of LifePoint Hospitals, Inc. and Triad Hospitals, Inc. will be effective on the distribution date, , 1999. Following the distribution, Columbia/HCA will focus its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks. Columbia/HCA management believes that separating LifePoint and Triad into two smaller, strategically focused public companies will provide the following benefits: . Implement Tailored Business Strategies. Columbia/HCA's management believes that, because of the different community characteristics and levels of network integration that exist in the LifePoint and Triad markets, the LifePoint and Triad business strategies need to be distinguished from each other and from those pursued in Columbia/HCA's core markets. As smaller companies, LifePoint and Triad will have more flexibility in responding to the needs of the communities in which they operate. . Increase Management Focus and Attention. The managements of LifePoint and Triad will be able to focus on making capital improvements to existing facilities in order to expand specialized services, invest in physician and executive recruitment and retention, and improve outreach programs and general health education initiatives. 1 . Tie Compensation to Performance. Following the distribution, LifePoint and Triad will be able to more closely tie compensation incentives for their employees to the performance of their companies. Each of LifePoint and Triad intends to establish for the benefit of its employees an Employee Stock Ownership Plan (an "ESOP"), which shortly after the distribution, in the case of the LifePoint ESOP, will purchase a number of shares equal to 8.3% of the outstanding common stock of LifePoint and, in the case of the Triad ESOP, will purchase a number of shares equal to 9.0% of the outstanding common stock of Triad. These equity interests are expected to help LifePoint and Triad to attract and retain talented and effective management and to motivate employees throughout the organization. . Improve Access to Capital. The distribution will give each of LifePoint and Triad direct access to capital markets. As divisions of Columbia/HCA, LifePoint and Triad have competed with each other and with the other Columbia/HCA divisions for management attention, support resources, and capital to finance expansion and growth opportunities. As separate entities, with their own management structures, LifePoint and Triad will be better able to implement business strategies appropriate for their markets and to direct capital funding and expansion initiatives. . Increase Visibility to the Capital Markets. Following the distribution, the financial markets will be able to focus on the individual strengths of Columbia/HCA, LifePoint and Triad, and more accurately evaluate the performance of each distinct business compared to companies in the same or similar businesses. After the distribution, Columbia/HCA will retain responsibility for liabilities arising out of the pending governmental investigations of some of Columbia/HCA's business practices and for liabilities arising out of related stockholder and other legal proceedings currently pending against Columbia/HCA. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement" beginning on page 40, "Risk Factors-- Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and Triad" beginning on page 30, and "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation" beginning on page 96. In general, Columbia/HCA also will be responsible for taxes relating to pre-distribution periods. This summary includes cross-references to other portions of this information statement to help you find more detailed information about the distribution, LifePoint and Triad. We encourage you to read the entire document. Questions and Answers About LifePoint, Triad and the Distribution What are the businesses of LifePoint and Triad? After the distribution, LifePoint and Triad will continue to provide health care services, through hospitals and, in the case of Triad, outpatient surgery centers. LifePoint's hospitals are located in non-urban areas where, in almost every case, LifePoint's hospital is the only hospital in the community. LifePoint's hospitals are located in the States of Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. Approximately three-quarters of Triad's hospitals are located in small cities (generally with populations less than 150,000 residents and located more than 60 miles from a major urban center) where Triad's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Triad's facilities are located in larger urban areas typically characterized by a high rate of population growth. Triad's hospitals are located in the States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Oregon and Texas. 2 Why is Columbia/HCA Columbia/HCA believes that separating the America and establishing the Pacific Groups into two smaller, strategically businesses of its focused public companies will allow them to implement America and Pacific business strategies that are more tailored to their Groups as separate, particular markets and to more closely tie publicly-traded compensation incentives for their employees to the companies? performance of each company. As separate companies, LifePoint and Triad are also expected to benefit from more focused management attention and improved access to the capital markets. After the distribution, Columbia/HCA will focus its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks. Who will be the executive officers and Scott L. Mercy will be the Chairman and Chief directors of LifePoint Executive Officer of LifePoint. Mr. Mercy has and Triad? extensive experience in the health care services business, most recently serving as President and Chief Executive Officer of America Service Group Inc., a publicly-traded provider of managed health care services to correctional facilities throughout the United States. Prior to joining America Service Group Inc. in April 1996, Mr. Mercy held senior financial positions with Columbia/HCA and with Hospital Corporation of America (which became a part of Columbia/HCA in February 1994). Mr. Mercy will be supported by a management team that will include James M. Fleetwood, Jr., who currently is the President of the America Group of Columbia/HCA and will serve as President and Chief Operating Officer of LifePoint, and other senior executives, some of whom are currently responsible for the operations of the America Group. See "LifePoint Management -- Executive Officers" beginning on page 100. The LifePoint Board of Directors will consist of persons, including Mr. Mercy, who will serve as Chairman. See "LifePoint Management--Directors" beginning on page 99. James D. Shelton, currently President of the Pacific Group of Columbia/HCA, will serve as Chairman, President and Chief Executive Officer of Triad. Mr. Shelton has extensive experience in the health care services business and has been associated with Columbia/HCA since June 1994. Prior to joining Columbia/HCA, Mr. Shelton held senior executive positions with National Medical Enterprises, Inc. (now known as Tenet Healthcare Corporation). Mr. Shelton will be supported by a management team that will include many of the senior executives currently responsible for the operations of the Pacific Group. See "Triad Management--Executive Officers" beginning on page 112. The Triad Board of Directors will consist of persons, including Mr. Shelton, who will serve as Chairman. See "Triad Management--Directors" beginning on page 111. After the distribution, After the distribution, Columbia/HCA will no longer will LifePoint and own any LifePoint common stock or Triad common stock. Triad be related to However, Columbia/HCA, LifePoint and Triad will enter Columbia/HCA in any into certain agreements to define the ongoing way? relationships between Columbia/HCA and each of LifePoint and 3 Triad after the distribution. These agreements also allocate responsibility for obligations arising prior to the distribution and for certain obligations that might arise in the future. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution" beginning on page 40 for a more complete discussion of these agreements. How much debt will LifePoint and Triad Columbia/HCA intends to arrange for $250 million in have after the debt financing, which will be assumed by LifePoint distribution? prior to the distribution and is expected to consist of a $ million, -year term loan agreement with a syndicate of banks, and $ million of % Senior Subordinated Notes due 2009. The $ million term loan indebtedness is expected to be secured by certain of LifePoint's assets. Columbia/HCA also intends to arrange for $700 million in debt financing, which will be assumed by Triad prior to the distribution, and is expected to consist of a $ million, -year term loan agreement with a syndicate of banks, and $ million of % Senior Subordinated Notes due 2009. The $ million term loan indebtedness is expected to be secured by certain of Triad's assets. The LifePoint and Triad debt agreements are expected to contain customary financial and other restrictive covenants (including restrictions on the payment of dividends, incurrences of indebtedness and sale of assets). Each of LifePoint and Triad also expects to enter into a revolving credit loan agreement providing for a commitment for revolving credit loans in an aggregate principal amount of up to $ million, in the case of LifePoint, and $ million, in the case of Triad. See "Risk Factors--Leverage and Debt Service Obligations" beginning on page 31, "LifePoint Unaudited Pro Forma Condensed Combined Balance Sheet" beginning on page 19, and "Triad Pro Forma Unaudited Condensed Combined Balance Sheet" beginning on page 24. What are the risks involved in owning The businesses of LifePoint and Triad are subject to LifePoint common stock risks, among others, related to competition and to and Triad common stock? possible changes in regulation and legislation relating to the health care services industry, as well as risks relating to possible changes in the Medicare program which could further limit reimbursement for health care services. The separation of LifePoint and Triad from Columbia/HCA presents certain additional risks because neither LifePoint nor Triad has ever operated independently of Columbia/HCA; there is no existing market for either LifePoint common stock or Triad common stock (although we intend to apply for quotation of the LifePoint common stock and the Triad common stock on the Nasdaq National Market System); and a large number of the shares distributed could be sold into the market at any given time. Each of LifePoint and Triad also have anti-takeover provisions in place that could discourage or make more expensive a takeover attempt that is opposed by its Board of Directors. Columbia/HCA is the subject of several government investigations of certain of its business practices and is also defendant in a number of lawsuits in respect of which liabilities could be asserted against LifePoint and Triad. Columbia/HCA has agreed to indemnify LifePoint and Triad 4 in respect of liabilities arising from such matters. Any failure by Columbia/HCA to satisfy its indemnification obligation in respect of such liabilities could have a material adverse effect on LifePoint and Triad. See "Risk Factors" beginning on page 26 for a more complete discussion of certain matters which you should consider in respect of your ownership of LifePoint common stock and Triad common stock. What do I have to do to Nothing. No proxy or vote is necessary for the participate in the distribution. If you own Columbia/HCA common stock distribution? ("Columbia/HCA Common Stock") or Columbia/HCA Non- voting Common Stock ("Columbia/HCA Non-voting Stock," and together with Columbia/HCA Common Stock, "Columbia/HCA Stock") as of the close of business on the record date, , 1999, shares of LifePoint common stock and Triad common stock will be mailed to you or credited to your brokerage account in 1999. You do not need to mail in Columbia/HCA Stock certificates to receive LifePoint common stock and Triad common stock certificates. You will not receive new Columbia/HCA Stock certificates. Explain the distribution ratio. shares of LifePoint common stock and shares of Triad common stock will be distributed for every shares of Columbia/HCA Stock you own on the record date. For example, if you own 100 shares of Columbia/HCA Stock as of the close of business on the record date, you will receive shares of LifePoint common stock and shares of Triad common stock in the distribution. You will receive a check for the cash equivalent of any fractional shares you otherwise would have received in the distribution. Is the distribution taxable for United Columbia/HCA has applied for, and does not intend to States Federal income proceed with the distribution unless it receives, a tax purposes? ruling from the Internal Revenue Service that, among other things, the distribution generally will be tax- free to Columbia/HCA and to Columbia/HCA stockholders. However, you may have to pay tax on a limited amount of gain arising from any cash you are paid in lieu of fractional shares of LifePoint common stock or Triad common stock. We expect that the tax ruling will provide that you should apportion your tax basis in Columbia/HCA Stock held immediately before the distribution among your Columbia/HCA Stock and the LifePoint common stock and Triad common stock you receive in the distribution. After the distribution, Columbia/HCA will send a letter to you that explains how to allocate your tax basis among these securities. See "Risk Factors--Tax Treatment of the Distribution" beginning on page 32, and "The Distribution--Material Federal Income Tax Consequences" beginning on page 38, for more complete discussions of the United States Federal income tax consequences of the distribution to holders of Columbia/HCA Stock. Will my dividends Columbia/HCA currently expects to continue paying its change? regular quarterly dividend of $.02 per share. The actual timing and amount of dividends declared by Columbia/HCA will depend on various factors and are 5 subject to change at the discretion of the Columbia/HCA Board of Directors. Neither LifePoint nor Triad anticipates paying any cash dividends on its common stock in the foreseeable future. In addition, the terms of LifePoint's and Triad's debt agreements are expected to restrict the payment of cash dividends. See "Dividend Policy" beginning on page 46. Where will my shares of LifePoint common stock At present, there is no public market for either and Triad common stock LifePoint common stock or Triad common stock. trade? LifePoint and Triad intend to apply for quotation of their common stock on Nasdaq. If the shares are accepted for quotation, we expect that a "when- issued" trading market for LifePoint common stock and Triad common stock will develop on or shortly before the record date, and that "regular-way" trading will begin on , 1999. Also, see "The Distribution-- Market for LifePoint Common Stock and Triad Common Stock" beginning on page 39. Will the distribution affect the trading After the distribution, Columbia/HCA Common Stock price of my will continue to be listed for trading on the New Columbia/HCA Common York Stock Exchange. As a result of the distribution, Stock? the trading price of Columbia/HCA Common Stock likely will be lower than the trading price immediately prior to the distribution. Moreover, until the market has evaluated the operations of Columbia/HCA without LifePoint and Triad, the trading price of Columbia/HCA Common Stock may fluctuate. The combined trading prices of Columbia/HCA Common Stock, LifePoint common stock and Triad common stock may not equal the trading price of Columbia/HCA Common Stock prior to the distribution. See "The Distribution-- Market for LifePoint Common Stock and Triad Common Stock" beginning on page 39. Are any regulatory approvals required for Prior to the distribution date, Columbia/HCA will the distribution? have provided appropriate notifications regarding the distribution to, and expects that it will have received all material approvals from, the Federal and state regulatory authorities having jurisdiction in respect of the distribution and related reorganization transactions. See "The Distribution-- Regulatory Approvals" beginning on page 39. What will happen to shares owned through They will be treated the same as all other shares of the Columbia/HCA Columbia/HCA Stock. You will continue to own the Healthcare Corporation Columbia/HCA Common Stock that you owned through the Stock Bonus Plan, the Columbia/HCA Healthcare Corporation Stock Bonus Plan, Columbia/HCA Healthcare the Columbia/HCA Healthcare Corporation Salary Corporation Salary Deferral Plan and the San Leandro Retirement and Deferral Plan and the Savings Plan prior to the distribution. In the case San Leandro Retirement of employees of LifePoint and Triad, such shares will and Savings Plan? be owned through successor defined contribution plans established by LifePoint and Triad. In the distribution, shares of LifePoint common stock and shares of Triad common stock for every shares of Columbia/HCA Stock you own through the plans on the record date will be credited to your account under the relevant plan. The various tax-qualified plans of Columbia/HCA, LifePoint and Triad may thereafter engage in sales and/or exchange of non- employer securities. 6 What will happen to existing employee stock Generally, vested Columbia/HCA employee stock options options to purchase (other than options that are "incentive stock Columbia/HCA Common options" under the Internal Revenue Code) will be Stock? retained by employees of Columbia/HCA, LifePoint and Triad and their exercise prices will be adjusted to reflect the distribution. In addition, each holder of such vested options will receive vested options to purchase the number of shares of LifePoint common stock and Triad common stock that he or she would have received in the distribution, as if his or her Columbia/HCA option had been exercised on the record date. Similar adjustments will be made with respect to vested Columbia/HCA stock options held by non- employee directors. In the case of vested employee stock options to acquire a small number of shares, however, a cash-out payment may be made or alternatively such options may be adjusted in a manner that preserves the pre-distribution value of such options. Unvested employee stock options held by employees of LifePoint and Triad will be cancelled and LifePoint and Triad may, in their discretion, grant unvested employee stock options to their respective employees. In the case of unvested employee stock options held by Columbia/HCA employees, the exercise price will be adjusted to reflect the distribution. Unvested options to acquire LifePoint and Triad stock will also be issued to certain employees of Columbia/HCA. Incentive stock options held by employees of LifePoint and Triad will be cancelled and replaced with options to purchase the common stock of the employer of the holder. The number of shares covered by, and the exercise price of, each replacement option will be fixed so as to preserve the aggregate exercise price of the cancelled option and the aggregate spread between exercise price and the fair market value of the cancelled option. Key Terms of the Distribution No Stockholder Action No action is required by Columbia/HCA stockholders to Required receive LifePoint common stock and Triad common stock in the distribution. You do not need to surrender Columbia/HCA Stock to receive LifePoint common stock and Triad common stock in the distribution. The number of shares of Columbia/HCA Stock you own will not change as a result of the distribution. Record Date If you are a holder of record of Columbia/HCA Stock as of the close of business on the record date ( , 1999), you will be entitled to receive LifePoint common stock and Triad common stock in the distribution. Distribution Ratio You will receive shares of LifePoint common stock and shares of Triad common stock for every shares of Columbia/HCA Stock you own as of the close of business on , 1999. 7 No Fractional Shares Fractional shares will not be distributed. Instead, Will Be Issued they will be aggregated and sold in the public market by the distribution agent and the aggregate cash proceeds will be distributed equally to shareholders otherwise entitled to fractional interests. See "The Distribution--Manner of Effecting the Distribution" beginning on page 37. Shares to be Distributed All of the outstanding LifePoint common stock and Triad common stock will be distributed in the distribution. Based on the shares of Columbia/HCA Common Stock and 21,000,000 shares of Columbia/HCA Non-Voting Common Stock outstanding as of , 1999, shares of LifePoint common stock and shares of Triad common stock will be distributed. Mailing Date The distribution agent will mail LifePoint common stock and Triad common stock certificates to Columbia/HCA stockholders on or about , 1999, which you should receive shortly thereafter. 8 Information Regarding the Distribution, LifePoint and Triad Before the distribution, you should direct inquiries relating to the distribution to: National City Bank Columbia/HCA Healthcare Corporation Shareholder Services Group W. Mark Kimbrough P. O. Box 92301 Assistant Vice President and Investor Cleveland, Ohio 44193-0900 Contact (216) 476-8663 One Park Plaza (800) 622-6757 Nashville, Tennessee 37203 (615) 344-1199 (615) 344-2266 (facsimile) After the distribution, you should direct inquiries relating to an investment in LifePoint common stock to: LifePoint Hospitals, Inc. Investor Relations Department 4525 Harding Road Nashville, Tennessee 37205 (615) 344-6261 After the distribution, you should direct inquiries relating to an investment in Triad common stock to: Triad Hospitals, Inc. Investor Relations Department 13455 Noel Road, 20th Floor Dallas, Texas 75240 (972) - After the distribution, the transfer agent and registrar for the LifePoint common stock and the Triad common stock will be: National City Bank Shareholder Services Group P.O. Box 92301 Cleveland, Ohio 44193-0900 (216) 476-8663 (800) 622-6757 9 Columbia/HCA Healthcare Corporation After the distribution, Columbia/HCA will continue to be one of the leading providers of health care services in the United States. As of February 28, 1999, after giving effect to the transfers of certain hospitals and other health care facilities to LifePoint and Triad immediately prior to the distribution, Columbia/HCA would have operated 198 general, acute care hospitals, 10 psychiatric hospitals, and 77 outpatient surgery centers (including 23 hospitals and 5 outpatient surgery centers which are operated through 50/50 joint ventures that are managed by Columbia/HCA but are not consolidated for financial reporting purposes). Columbia/HCA's primary objective is to provide the communities it serves with a comprehensive array of quality health care services in the most cost effective manner possible. Columbia/HCA's general, acute care hospitals usually provide a full range of services commonly available in hospitals, such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. Outpatient and ancillary health care services are provided by Columbia/HCA's general, acute care hospitals, as well as at free-standing facilities operated by Columbia/HCA, including outpatient surgery and diagnostic centers, rehabilitation facilities and other facilities. In addition, Columbia/HCA operates psychiatric hospitals which generally provide a full range of mental health care services in inpatient, partial hospitalization and outpatient settings. By establishing the America and Pacific Groups as separate, independent companies, Columbia/HCA will be better able to focus its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks. 10 LifePoint Hospitals, Inc. LifePoint's Facilities LifePoint will continue to provide health care services through its hospitals after the distribution. As of December 31, 1998, the America Group (the assets of which will be transferred to LifePoint prior to the distribution) comprised 23 general, acute care hospitals, located in non-urban areas in the States of Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. In almost all of LifePoint's markets, LifePoint's hospital is the only hospital in the community. LifePoint currently intends to sell three of the general, acute care hospitals that the America Group operated as of December 31, 1998. Approximately half of LifePoint's facilities are located in the States of Kentucky and Tennessee. LifePoint's general, acute care hospitals usually provide the range of medical and surgical services commonly available in hospitals in non-urban markets. These hospitals also provide diagnostic and emergency services, as well as outpatient and ancillary services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. Recent Operating Performance LifePoint has experienced an increase in revenues and volume growth during 1998. On a same facility basis in 1998, LifePoint's revenues declined 1.8% and hospital admissions decreased by 0.8%, although equivalent admissions (a measure of combined inpatient and outpatient volume) increased by 0.2%. During the same period, revenues per equivalent admission (on a same facility basis) decreased by 2.0%. Management believes that the declines are primarily attributable to the shift to providing services on an outpatient basis, the increasing proportion of LifePoint's revenue being derived from fixed payment and higher discount sources, including Medicare, Medicaid and managed care plans, and the impact of the government investigations of certain of Columbia/HCA's business practices and the related media coverage. Under the Federal Balanced Budget Act of 1997, levels of Medicare and Medicaid reimbursement have recently been reduced and will be further reduced as additional reductions are phased in over the next few years. For additional information regarding LifePoint's financial performance in recent periods, see the LifePoint consolidated financial statements included elsewhere herein and "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 49. See also "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements" beginning on page 17. Business Strategy LifePoint's strategic goals are centered around the unique patient and health care provider needs and opportunities in its non-urban markets. LifePoint intends to manage its hospitals aggressively to insure that they operate in accordance with the strategic objectives described below: . Develop Facility-Specific Strategies for Non-Urban Markets. LifePoint intends to monitor its facilities individually and to develop facility specific strategies tailored for non-urban markets. By contrast, Columbia/HCA's strategy has been developed on a system-wide basis and has focused on building well-integrated facility networks on a state- wide basis. As an independent company, LifePoint intends to apply the management focus required to maximize the potential of each of its facilities. . Expand Breadth of Service and Reduce Patient Outmigration. LifePoint intends to increase revenues by broadening the scope of health care services available at its facilities, particularly in markets where significant outmigration is occurring, and to recruit physicians with a broader range of specialties. Management believes that this expansion of available treatments should help to encourage local residents in the non-urban markets that LifePoint serves to seek care at facilities within their communities. LifePoint believes its strong community focus should also assist in limiting patient 11 outmigration. As an entity separate from Columbia/HCA, LifePoint will not have to compete with the Columbia/HCA facilities located in larger, urban markets for management attention, support resources, and capital to finance expansion of the range of services offered at its hospitals. . Strengthen Physician Recruiting and Retention. LifePoint seeks to increase revenues by enhancing the quality of care available locally, and believes that recruiting physicians in local communities is critical to increasing the quality of health care and the breadth of available services. As an independent company, LifePoint intends to take advantage of its more specific management focus to work more effectively with individual physicians and physician practices. Management believes that expansion of the range of available treatments at its hospitals should also assist in physician recruiting. In most of its markets, LifePoint will be able to take advantage of exemptions from certain restrictions on business association with physicians that are available in certain non-urban areas. . Retain and Develop Stable Management. LifePoint intends to focus its recruitment of managers and health care professionals on those who wish to live and practice in the communities in which LifePoint's hospitals are located. In the past, managers and health care professionals employed at LifePoint hospitals sometimes relocated to advance their careers elsewhere within the Columbia/HCA system. LifePoint expects that its ability to provide equity-based compensation linked to its performance should assist in management retention. Management believes that achieving long-term retention of executive teams at the hospitals will enhance medical staff relations and maintain continuity of relationships within the community. . Build Strong Community Relations. Management believes that it is important to LifePoint's success that its hospitals continue a high level of involvement in the communities they serve and continue to develop good relations with local governments and business leaders. LifePoint employees, particularly the executive teams at the hospitals, are expected to expend considerable effort on improving community relationships. . Improve Managed Care Position. As part of Columbia/HCA, LifePoint's facilities typically have been included in managed care contracts negotiated by Columbia/HCA on a system-wide basis. LifePoint believes that independence from Columbia/HCA will enable it over time to decrease the number of discount arrangements in which it participates and to negotiate contract terms that are generally more favorable for its facilities. LifePoint does not intend to enter into capitation arrangements in the future. . Acquire Other Hospitals. Management intends to pursue a disciplined acquisition strategy that will seek to identify and acquire attractive hospitals in non-urban markets. In the past, Columbia/HCA has been reluctant to pursue acquisitions of such facilities as non-urban hospitals were not consistent with Columbia's urban market focus. LifePoint will seek to acquire hospitals that (i) are located in non- urban markets with limited competition for hospitals based services, (ii) have a favorable payor mix, and (iii) are located in markets where the projected rate of population growth is above national averages. 12 Triad Hospitals, Inc. Triad's Facilities Triad will continue to provide health care services through its hospitals and outpatient surgery centers located in small cities and selected high growth urban markets in the Southern, Western and Southwestern United States. As of December 31, 1998, the Pacific Group (the assets of which will be transferred to Triad prior to the distribution) comprised 37 general, acute care hospitals, 1 psychiatric hospital, and 17 outpatient surgery centers, located in the States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Oregon and Texas. In addition, Pacific operates one hospital through a 50/50 joint venture that is not consolidated for financial reporting purposes and is building an additional hospital through a 50/50 joint venture that is currently scheduled to open in May 1999. Triad's management has focused on streamlining Triad's portfolio of facilities to eliminate those with poor financial performance, weak competitive market positions or locations in certain urban markets. As a result of this initiative, Triad has decided to divest certain of its facilities. Since December 31, 1998, Triad has sold one of the general, acute care hospitals that it operated as of such date, and has transferred two of such hospitals and three of such surgery centers to an unaffiliated third party pursuant to a long-term lease. Triad currently intends to sell an additional four of its general, acute care hospitals, its one psychiatric hospital and certain of the outpatient surgery centers that it operated as of December 31, 1998, and to cease operation of another hospital which it leases. Triad's general, acute care hospitals usually provide a full range of services commonly available in hospitals, such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. These hospitals also usually provide outpatient and ancillary health care services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. Outpatient services also are provided by surgery centers operated by Triad. In addition, certain of Triad's general, acute care hospitals have a limited number of licensed psychiatric beds. Recent Operating Performance In recent periods, Triad has experienced declines in revenue and volume growth rates. For example, during the year ended December 31, 1998, revenues (on a same facility basis) declined by 1.3%, and hospital admissions (on a same facility basis) decreased by 1.9%, although equivalent admissions (a measure of combined inpatient and outpatient volume) increased by 0.6%. During the same period, revenues per equivalent admission (on a same facility) decreased by 1.9%. Management believes that the declines are primarily attributable to the shift to providing services on an outpatient basis, the increasing proportion of Triad's revenue being derived from fixed payment and higher discount sources, including Medicare, Medicaid and managed care plans and the impact of the government investigations of certain of Columbia/HCA's business practices and the related media coverage. Under the Federal Balanced Budget Act of 1997, levels of Medicare and Medicaid reimbursement have recently been reduced and will be further reduced as additional reductions are phased in over the next few years. For additional information regarding Triad's financial performance in recent periods, see the Triad consolidated financial statements included elsewhere herein and "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 61. See also "Triad Unaudited Pro Forma Condensed Combined Financial Statements" beginning on page 22. Business Strategy Triad's objective is to provide quality health care services and improve operating efficiencies, using the following strategies: . Build on Position in Small Cities and High Population Growth Urban Markets. Triad believes that it is well positioned to build upon its portfolio of facilities in the Southern, Western and Southwestern 13 United States. Triad also believes that, unlike rural markets which have small populations, Triad's small city markets can support increased specialty services which produce relatively higher revenues than other health care services. Triad also intends to strengthen its competitive position in the fast growing larger urban areas of the Southwest (e.g., Phoenix and Tucson, Arizona) where it currently operates. . Recruit Physicians. Triad plans to actively recruit additional primary care physicians. Triad believes that primary care physicians are frequently the first contact point for a patient and that each hospital must establish strong physician relationships in its community in order to enhance patient care. . Enhance Specialty Services, Outpatient Services and Emergency Rooms. Triad believes that many of its markets are large enough to support additional specialty services, such as women's centers, orthopedic facilities, oncology centers and neurology care, and intends to selectively increase these services in order to reduce patient outmigration to urban hospitals. To support this expansion of specialty services, Triad plans to actively recruit additional specialists to its facilities. Recognizing that the shift from inpatient to outpatient care recently experienced by the health care industry is likely to continue, Triad intends to enhance its outpatient service capabilities by improving its free-standing outpatient surgery centers, restructuring its hospital facilities and surgery capacity to better accommodate outpatient treatment, and improving its emergency room facilities. . Develop Strong Relationships with Physicians. Triad believes recruiting and retaining motivated physicians is vitally important to its long term success. Triad believes a model for effective health care service delivery can be developed cooperatively with physicians and the hospitals, which will result in improved quality of care. In each of its markets, Triad has established Physician Leadership Groups made up of leading area physicians who will work with hospital management to establish local priorities. Corporate objectives will be addressed by a national Physician Leadership Group comprised of representatives of local Physician Leadership Groups and members of Triad management. In an effort to further improve communication with its physicians, Triad has appointed a senior manager who is an experienced physician to oversee physician relations. . Improve Cost Management. Triad has initiated several measures to improve the financial performance of its facilities through greater control of operating expenses. Triad has focused on reducing salaries, wages and benefits, the largest component of operating expense, at the facility level. Triad also has instituted a financial training program for its hospital managers to teach effective management of hospital revenues and expenses. . Grow Through Existing Hospital Expansion, New Hospital and Ambulatory Service Center Construction, and Selective Acquisitions. Triad intends to identify expansion opportunities in areas where management perceives that demand is not being adequately met due to rapid population growth or insufficient existing health care services. Triad plans to construct new hospitals and also may seek to make acquisitions in select markets. Triad is currently in the process of building a new facility in South Tulsa, Oklahoma through a joint venture with Hillcrest Healthcare Systems. The facility is scheduled to open in May 1999 and will be 50% owned by Triad. Triad believes that potential acquisition opportunities may arise when other health care providers choose to divest facilities or when independent hospitals believe that they can benefit from becoming part of a larger hospital company. Currently, Triad does not have specific plans for additional new facilities or acquisitions. 14 Comparative Financial Highlights The following table sets forth, for each of the years ended December 31, 1998, 1997 and 1996, revenues, income (loss) from continuing operations, total assets and other operating data for each of LifePoint, Triad and, after giving effect to the distribution, Columbia/HCA. This data is presented for informational purposes only and is not necessarily indicative of the results of operations or financial position that any of such companies would have reported if they had operated independently during the periods presented (dollars in millions).
As of and for the Year Ended December 31, --------------------------------------- 1998 1997 1996 ------------ ------------ ----------- Amount % Amount % Amount % ------- --- ------- --- ------- --- Columbia/HCA revenues................ $16,594 88% $16,722 88% $16,721 89% LifePoint revenues................... 498 3 488 3 464 2 Triad revenues....................... 1,589 9 1,609 9 1,601 9 ------- --- ------- --- ------- --- $18,681 100% $18,819 100% $18,786 100% ======= === ======= === ======= === Columbia/HCA income (loss) from continuing operations (a)........... $ 636 119% $ 184 100% $ 1,354 92% LifePoint income (loss) from continuing operations (a)...................... (18) (3) 17 10 39 3 Triad income (loss) from continuing operations (a)...................... (86) (16) (19) (10) 68 5 ------- --- ------- --- ------- --- $ 532 100% $ 182 100% $ 1,461 100% ======= === ======= === ======= === Columbia/HCA total assets............ $17,703 91% $20,193 92% $19,314 91% LifePoint total assets............... 355 2 398 2 376 2 Triad total assets................... 1,371 7 1,411 6 1,426 7 ------- --- ------- --- ------- --- $19,429 100% $22,002 100% $21,116 100% ======= === ======= === ======= === Other operating data: Columbia/HCA EBITDA(b)............... $ 2,550 93% $ 2,513 90% $ 3,635 90% LifePoint EBITDA(b).................. 57 2 82 3 111 3 Triad EBITDA(b)...................... 149 5 188 7 295 7 ------- --- ------- --- ------- --- $ 2,756 100% $ 2,783 100% $ 4,041 100% ======= === ======= === ======= ===
- -------- (a) Includes charges (net of tax benefits) related to impairments of long-lived assets of $300, $16 and $33 million during 1998 for Columbia/HCA, LifePoint and Triad, respectively, and $282 and $8 million during 1997 for Columbia/HCA and Triad, respectively. (b) EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, equity in earnings of affiliates, management fees, impairment of long-lived assets, gains on sales of facilities, restructuring of operations and investigation related costs, minority interests and income taxes. EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the combined financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. 15 LifePoint Summary Historical Financial Data (Dollars in millions)
Years Ended December 31, ---------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------ ------ ------ Summary of Operations: Revenues............................ $ 498.4 $ 487.6 $464.0 $395.8 $350.1 Income (loss) from continuing operations (a)..................... (17.7) 17.1 39.3 25.6 14.4 Net income (loss) (a)............... (21.8) 12.5 41.2 27.4 15.9 Other Operating Data: EBITDA (b).......................... 56.8 82.0 110.6 82.4 66.3 Number of hospitals at end of period............................. 23 22 22 20 20 Number of licensed beds at end of period (c)......................... 2,108 2,080 2,074 1,881 1,843 Weighted average licensed beds (d).. 2,122 2,078 2,060 1,862 1,783 Admissions (e)...................... 62,264 60,487 59,381 54,549 52,681 Equivalent admissions (f)........... 109,336 105,126 98,869 88,915 81,708 Average length of stay (days) (g)... 4.4 4.4 4.7 4.8 4.9 Average daily census (h)............ 742 733 755 713 713 Occupancy rate (i).................. 35% 35% 37% 38% 40%
- -------- (a) Includes charge related to impairment of long-lived assets of $26.1 million ($15.9 million after-tax) for the year ended December 31, 1998. (b) EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long- lived assets, minority interests and income taxes. EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the combined financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Represents the average number of licensed beds weighted based on periods owned. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to LifePoint's hospitals and is used by management and certain investors as a general measure of inpatient volume. (f) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions is computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (g) Represents the average number of days admitted patients stay in LifePoint's hospitals. Average length of stay has declined due to the continuing pressures from managed care and other payers to restrict admissions and reduce the number of days that are covered by the payers for certain procedures, and by technological and pharmaceutical improvements. (h) Represents the average number of patients in LifePoint's hospital beds each day. (i) Represents the percentage of hospital licensed beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms. The declining occupancy rate is primarily attributed to the trend toward more services, that were previously performed in an inpatient setting, being performed on an outpatient basis and the decline in average length of stay per admission. 16 LifePoint Unaudited Pro Forma Condensed Combined Financial Statements The following Unaudited Pro Forma Condensed Combined Financial Statements of LifePoint are based on the historical combined financial statements, which reflect periods during which the businesses that will comprise LifePoint did not operate as a separate, independent company and certain estimates, assumptions and allocations were made in preparing such financial statements. Therefore, such historical combined financial statements do not necessarily reflect the combined results of operations or financial position that would have existed had LifePoint been a separate, independent company. The Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1998 reflects the results of LifePoint's operations as if the distribution and the divestitures of facilities that LifePoint intends to divest during 1999 had occurred at the beginning of 1998. The Unaudited Pro Forma Condensed Combined Balance Sheet assumes that the distribution and such divestitures had occurred on December 31, 1998. The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the historical financial statements of LifePoint included elsewhere herein and the notes thereto. The pro forma condensed combined financial information is presented for informational purposes only and does not purport to reflect the results of operations or financial position of LifePoint or the results of operations or financial position that would have occurred had LifePoint been operated as a separate, independent company. 17 LIFEPOINT Unaudited Pro Forma Condensed Combined Statement of Operations Year Ended December 31, 1998 (Dollars in millions, except per share amounts)
Pro Forma Pro Historical Adjustments Forma ---------- ----------- ------ Revenues................................................................ $498.4 $(48.0)(a) $450.4 Salaries and benefits................................................... 220.8 (23.5)(a) 200.4 (5.3)(b) 8.4 (c) Supplies................................................................ 62.0 (6.6)(a) 55.9 0.5 (c) Other operating expenses................................................ 117.2 (12.3)(a) 108.0 3.1 (c) Provision for doubtful accounts......................................... 41.6 (5.5)(a) 36.1 Depreciation and amortization........................................... 28.3 (3.2)(a) 25.1 ESOP expense............................................................ -- 5.3 (b) 5.3 Interest expense........................................................ 19.1 (5.6)(a) 23.8 10.3 (d) Management fees allocated from Columbia/HCA............................. 8.9 (0.9)(a) -- (8.0)(c) Impairment of long-lived assets......................................... 26.1 (24.8)(a) 1.3 ------ ------ ------ 524.0 (68.1) 455.9 ------ ------ ------ Loss from continuing operations before minority interests and income tax benefit................................................................ (25.6) 20.1 (5.5) Minority interests in earnings of consolidated entities................. 1.9 -- 1.9 ------ ------ ------ Loss from continuing operations before income taxes..................... (27.5) 20.1 (7.4) Income tax benefit...................................................... (9.8) 7.8 (e) (2.0) ------ ------ ------ Loss from continuing operations......................................... $(17.7) $ 12.3 $ (5.4) ====== ====== ====== Basic and diluted loss per share (g).................................... $ (.41) $ (.13) Shares used in computing basic and diluted loss per share (in millions) (g)................................................ 42.9 42.9
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 18 LIFEPOINT Unaudited Pro Forma Condensed Combined Balance Sheet December 31, 1998 (Dollars in millions, except per share amounts)
Pro Forma Pro Historical Adjustments Forma ---------- ----------- ------ ASSETS ------ Current assets: Accounts receivable, net................... $ 36.4 $ (5.8)(a) $ 30.6 Inventories................................ 14.0 (2.1)(a) 11.9 Deferred taxes and other current assets.... 18.6 (.7)(a) 17.9 ------- ------ ------ 69.0 (8.6) 60.4 Property and equipment, at cost.............. 442.6 (29.7)(a) 412.9 Accumulated depreciation..................... (176.2) 12.0 (a) (164.2) ------- ------ ------ 266.4 (17.7) 248.7 Intangible assets, net....................... 15.2 (.5)(a) 14.7 Other........................................ 4.4 (4.0)(a) 0.4 ------- ------ ------ $ 355.0 $(30.8) $324.2 ======= ====== ====== LIABILITIES AND EQUITY ---------------------- Current liabilities: Accounts payable........................... $ 15.5 $ (1.6)(a) $ 13.9 Accrued salaries........................... 11.7 (1.0)(a) 10.7 Other current liabilities.................. 14.9 (1.2)(a) 13.7 ------- ------ ------ 42.1 (3.8) 38.3 Long-term debt............................... .3 250.0 (f) 250.3 Deferred taxes and other liabilities......... 21.4 -- 21.4 Minority interests in equity of consolidated entities.................................... 4.9 -- 4.9 Equity, investments by and advances from Columbia/HCA................................ 286.3 (27.0)(a) -- (259.3)(f) Preferred stock, par value $0.01 per share; authorized shares, no shares issued..... -- -- -- Common stock, par value $0.01 per share; authorized shares, 42.9 million shares issued and outstanding.. -- 0.4 (f) 0.4 Capital in excess of par value............... -- 8.9 (f) 8.9 ------- ------ ------ $355.0 $(30.8) $324.2 ======= ====== ======
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 19 LifePoint Notes to Unaudited Pro Forma Condensed Combined Financial Statements Note 1--Basis of Presentation The pro forma condensed combined financial statements reflect the combination of historical financial information of the facilities to be part of LifePoint and the pro forma adjustments described in Note 2. Note 2--Pro Forma Adjustments (a) To eliminate the effect of the facilities that LifePoint expects to divest during 1999. (b) To adjust for the estimated non-cash charge associated with the establishment of an Employee Stock Ownership Plan ("ESOP"). The estimated non-cash charge excludes any impact which would result from a fluctuation in the fair value of LifePoint stock. (c) To adjust for estimated general and administrative costs that would have been incurred if LifePoint had managed comparable general and administrative functions. (d) To adjust interest expense to $23.8 million for the year ended December 31, 1998. The interest expense adjustment is based on the elimination of all intercompany amounts payable by LifePoint to Columbia/HCA ($168.0 million at December 31, 1998) and the assumption of certain indebtedness from Columbia/HCA in the aggregate amount of $250.0 million at an assumed average interest rate of 9.5%. (e) To adjust income tax benefit for the estimated impact of the pro forma adjustments. (f) To adjust for estimated initial long-term debt of $250.0 million which will be assumed from Columbia/HCA and record the issuance of 42.9 million shares of LifePoint common stock. (g) Pro forma basic and diluted loss per share was computed based upon 42.9 million shares of LifePoint common stock, which are expected to be issued at the distribution date. 20 Triad Summary Historical Financial Data (Dollars in millions)
Years Ended December 31, ------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Summary of Operations: Revenues.................... $1,588.7 $1,609.3 $1,600.5 $1,558.9 $1,290.5 Income (loss) from continuing operations (a).. (85.5) (19.0) 68.3 163.4 115.1 Net income (loss) (a)....... (87.1) (19.8) 74.7 165.7 116.6 Operating Data: EBITDA (b).................. $ 149.0 $ 187.8 $ 294.5 $ 285.2 $ 206.2 Number of hospitals at end of period.................. 38 38 38 39 38 Number of licensed beds at end of period (c).......... 5,909 5,859 5,872 5,926 5,660 Weighted average licensed beds (d)................... 5,877 5,860 5,882 5,900 5,325 Admissions (e).............. 169,590 172,926 171,265 170,392 147,923 Equivalent admissions (f)... 276,771 275,125 266,660 257,292 211,382 Average length of stay (days) (g)................. 4.9 4.9 5.0 5.2 5.2 Average daily census (h).... 2,260 2,326 2,338 2,405 2,111 Occupancy rate (i).......... 39% 40% 40% 41% 40%
- -------- (a) Includes charges related to impairment of long-lived assets of $55.1 million ($32.9 million after-tax) and $13.7 million ($8.2 million after- tax) for the years ended December 31, 1998 and 1997, respectively. (b) EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long- lived assets, minority interests and income taxes. EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the combined financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Represents the average number of licensed beds, weighted based on periods owned. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to Triad's hospitals and is used by management and certain investors as a general measure of inpatient volume. (f) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (g) Represents the average number of days admitted patients stay in Triad's hospitals. Average length of stay has declined due to the continuing pressures from managed care and other payers to restrict admissions and reduce the number of days that are covered by the payers for certain procedures, and by technological and pharmaceutical improvements. (h) Represents the average number of patients in Triad's hospital beds each day. (i) Represents the percentage of hospital licensed beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms. The declining occupancy rate is primarily attributed to the trend toward more services, that were previously performed in an inpatient setting, being performed on an outpatient basis and the decline in average length of stay per admission. 21 Triad Unaudited Pro Forma Condensed Combined Financial Statements The following Unaudited Pro Forma Condensed Combined Financial Statements of Triad are based on the historical combined financial statements, which reflect periods during which the businesses that will comprise Triad did not operate as a separate, independent company and certain estimates, assumptions and allocations were made in preparing such financial statements. Therefore such historical combined financial statements do not necessarily reflect the combined results of operations or financial position that would have existed had Triad been a separate, independent company. The Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1998 reflects the results of Triad's operations as if the distribution and the divestitures of facilities that Triad intends to divest during the first two quarters of 1999 had occurred at the beginning of 1998. The Unaudited Pro Forma Condensed Combined Balance Sheet assumes that the distribution and such divestitures had occurred on December 31, 1998. The Unaudited Pro Forma Condensed Combined Financial Statements should be read in conjunction with the historical financial statements of Triad included elsewhere herein and the notes thereto. The pro forma condensed combined financial information is presented for informational purposes only and does not purport to reflect the results of operations or financial position of Triad or the results of operations or financial position that would have occurred had Triad been operated as a separate, independent company. 22 Triad Unaudited Pro Forma Condensed Combined Statement of Operations Year Ended December 31, 1998 (Dollars in millions, except per share amounts)
Pro Forma Pro Historical Adjustments Forma ---------- ----------- -------- Revenues................................... $1,588.7 $(196.8)(a) $1,391.9 Salaries and benefits...................... 700.5 (104.6)(a) 595.9 Supplies................................... 241.6 (23.2)(a) 218.4 Other operating expenses................... 359.2 (52.8)(a) 306.4 Provision for doubtful accounts............ 138.4 (19.7)(a) 118.7 Depreciation and amortization.............. 109.6 (16.4)(a) 93.2 Interest expense........................... 68.9 (14.9)(a) 68.2 14.2 (b) Management fees allocated from Columbia/HCA.............................. 29.3 (3.6)(a) 25.7 Impairment of long-lived assets............ 55.1 (31.1)(a) 24.0 -------- ------- -------- 1,702.6 (252.1) 1,450.5 -------- ------- -------- Loss from continuing operations before minority interests and income tax benefit................................... (113.9) 55.3 (58.6) Minority interests in earnings of consolidated entities..................... 11.0 (0.6)(a) 10.4 -------- ------- -------- Loss from continuing operations before income taxes.............................. (124.9) 55.9 (69.0) Income tax benefit......................... (39.4) 15.0 (c) (24.4) -------- ------- -------- Loss from continuing operations............ $ (85.5) $ 40.9 $ (44.6) ======== ======= ======== Basic and diluted loss per share (e)....... $ (1.99) $ (1.04) Shares (in millions) used in computing basic and diluted loss per share (e)...... 42.9 42.9
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 23 Triad Unaudited Pro Forma Condensed Combined Balance Sheet December 31, 1998 (Dollars in millions, except per share amounts)
Pro Forma Pro Historical Adjustments Forma ---------- ----------- -------- ASSETS ------ Current assets: Accounts receivable, net................ $ 199.3 $ (13.9)(a) $ 185.4 Inventories............................. 44.8 (4.0)(a) 40.8 Income taxes............................ 37.9 (2.7)(a) 35.2 Other................................... 23.9 (9.1)(a) 14.8 -------- --------- -------- 305.9 (29.7) 276.2 Property and equipment, at cost........... 1,462.6 (202.4)(a) 1,260.2 Accumulated depreciation.................. (703.1) 119.3 (a) (583.8) -------- --------- -------- 759.5 (83.1) 676.4 Intangible assets, net.................... 272.9 (13.0)(a) 259.9 Other..................................... 33.0 (5.1)(a) 27.9 -------- --------- -------- $1,371.3 $ (130.9) $1,240.4 ======== ========= ======== LIABILITIES AND EQUITY ---------------------- Current liabilities: Accounts payable........................ $ 47.5 $ (5.5)(a) $ 42.0 Accrued salaries........................ 34.8 (5.7)(a) 29.1 Other current liabilities............... 38.7 (4.7)(a) 34.0 -------- --------- -------- 121.0 (15.9) 105.1 Long-term debt............................ 13.4 686.6 (d) 700.0 Deferred taxes and other liabilities...... 62.5 (3.6)(a) 58.9 Minority interests in equity of consolidated entities.................... 60.0 (4.4)(a) 55.6 Equity, investments by and advances from Columbia/HCA............................. 1,114.4 (107.0)(a) -- (1,007.4)(d) Preferred stock, par value $0.01 per share; authorized shares; no shares issued................................... -- -- -- Common stock, par value $0.01 per share; authorized million shares, 42.9 million shares issued and outstanding.... -- 0.4 (d) 0.4 Capital in excess of par value............ -- 320.4 (d) 320.4 -------- --------- -------- $1,371.3 $ (130.9) $1,240.4 ======== ========= ========
The accompanying notes are an integral part of the unaudited pro forma condensed combined financial statements. 24 TRIAD Notes to Unaudited Pro Forma Condensed Combined Financial Statements Note 1--Basis of Presentation The pro forma condensed combined financial statements reflect the combination of historical financial information of the facilities to be part of Triad and the pro forma adjustments described in Note 2. Note 2--Pro Forma Adjustments (a) To eliminate the effect of the facilities that Triad expects to divest during 1999. (b) To adjust interest expense to $68.2 million for the year ended December 31, 1998. The interest expense adjustment is based on the elimination of all intercompany amounts payable by Triad to Columbia/HCA ($596.7 million at December 31, 1998) and the assumption of certain indebtedness from Columbia/HCA in the aggregate amount of $700.0 million at an assumed average interest rate of 9.75%. (c) To adjust income tax expense for the estimated impact of the pro forma adjustments. (d) To adjust for estimated initial long-term debt of $700.0 million which will be assumed from Columbia/HCA and record the issuance of 42.9 million shares of Triad common stock. (e) Pro forma loss per share was computed based upon 42.9 million shares of Triad common stock, which are expected to be issued at the distribution date. 25 Risk Factors Holders of shares of LifePoint common stock and Triad common stock should carefully consider all information contained in this information statement, especially the matters described or referred to in the following paragraphs. Dependence on Physicians Since physicians generally direct the majority of hospital admissions, the success of LifePoint and Triad, in part, is dependent upon the number and quality of physicians on their hospitals' medical staffs, the admissions practices of such physicians and the maintenance of good relations with such physicians. Hospital physicians are generally not employees and, in many of the markets served by Triad, most physicians have admitting privileges at other hospitals. With regard to LifePoint, only a limited number of physicians practice in the non-urban communities in which LifePoint's hospitals are located. Consequently, the loss of physicians in these communities, the inability of LifePoint to recruit and to retain physicians in these communities or the inability of LifePoint to maintain good relations with the physicians on its hospitals' staffs could have a material adverse effect on its business, financial condition or results of operations. The operations of LifePoint's hospitals could also be materially adversely affected by the shortage of nurses and certain other health care professionals in these communities. Dependence on Key Personnel LifePoint is dependent upon the continued services and management experience of Scott L. Mercy, James M. Fleetwood, Jr., and other of its executive officers, and Triad is dependent upon the continued services and management experience of James D. Shelton and other of its executive officers. If Messrs. Mercy, Fleetwood or Shelton, or any of such other executive officers, were to resign their positions or otherwise be unable to serve, the operating results of LifePoint or Triad, as the case may be, could be adversely affected. In addition, the success of each of LifePoint and Triad depends on its ability to attract and retain physicians at its hospitals and other facilities, on the ability of its officers and key employees to manage growth successfully and on its ability to attract and retain skilled employees. No Operating Histories as Independent Companies LifePoint and Triad do not have operating histories as independent, publicly- traded companies and have historically relied on Columbia/HCA for various financial, administrative and managerial expertise relevant to the conduct of their businesses. After the distribution, LifePoint and Triad will maintain their own lines of credit and banking relationships, employ their own senior executives, perform their own administrative functions (except that Columbia/HCA will continue to provide certain support services to LifePoint and Triad on a contractual basis). The operations of the America Group did not generate a profit for 1998, and the operations of the Pacific Group did not generate a profit for 1998 or 1997. There can be no assurance as to the financial results of either LifePoint or Triad as independent, publicly traded companies. See "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements," "Triad Unaudited Pro Forma Condensed Combined Financial Statements," and "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution." Limits on Reimbursement; Health Care Reform Legislation A significant portion of the revenues of LifePoint and Triad are derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes. In recent years, fundamental changes in the Medicare and Medicaid programs (including the implementation of a prospective payment system ("PPS") for inpatient services at medical/surgical hospitals) have resulted in limitations on, and reduced levels of payment and reimbursement for, a substantial portion of hospital procedures and costs. The Federal Balanced Budget Act of 1997 (the "Balanced Budget Act"), which establishes a plan to balance 26 the Federal budget by fiscal year 2002, includes significant additional reductions in spending levels for the Medicare and Medicaid programs. These include, among others, payment reductions for inpatient and outpatient hospital services, establishment of a PPS for skilled nursing facilities and home health agencies under Medicare, and repeal of the Federal payment standard (the so- called "Boren Amendment") for hospitals and nursing facilities under Medicaid. A number of states also are considering legislation designed to reduce their Medicaid expenditures and to provide universal coverage and additional care, including enrolling Medicaid recipients in managed care programs and imposing additional taxes on hospitals to help finance or expand the states' Medicaid systems. In addition, private payers increasingly are attempting to control health care costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review and greater enrollment in managed care programs such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs"). LifePoint and Triad believe that hospital operating margins have been, and may continue to be, under significant pressure because of deterioration in pricing flexibility and payer mix, and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Among the proposals under consideration or already enacted are price controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, Medicare and Medicaid managed care programs and requirements that all businesses offer health insurance coverage to their employees. While LifePoint and Triad anticipate that the rate of increase in payments to hospitals will be reduced as a result of future Federal and state legislation, it is uncertain at this time what legislation on health care reform may ultimately be enacted or whether other changes in the administration or interpretation of governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. Impact of Managed Care Organizations During recent years, United States hospital occupancy rates have declined as a result of changing technology, changes in physician practice patterns from inpatient to outpatient treatment, changes in government regulation and reimbursement, and cost containment pressures. The competitive position of the hospitals of LifePoint and Triad also is affected by the increasing number of initiatives undertaken during the past several years by major purchasers of health care, including Federal and state governments, insurance companies and employers, to revise payment methodologies and monitor health care expenditures in order to contain health care costs. As a result of these initiatives, managed care organizations, which offer prepaid and discounted medical services packages, represent an increasing segment of health care payers, the effect of which has been to reduce hospital revenue growth nationwide. Competition The health care business is highly competitive and competition among hospitals and other health care providers for patients has intensified in recent years. Approximately half of Triad's hospitals operate in geographic areas where they compete with at least one other hospital that provides most of the services offered by Triad's hospitals. Certain of these competing facilities offer services, including extensive medical research and medical education programs, which are not offered by Triad's facilities. Some of the hospitals that compete with Triad are owned by tax-supported governmental agencies or not-for-profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis and are exempt from sales, property and income taxes. In these markets, Triad also faces competition from other providers such as outpatient surgery and diagnostic centers. Almost all of LifePoint's hospitals and approximately half of Triad's hospitals operate in geographic areas where they are currently the sole provider of hospital services in their communities. While these hospitals face 27 less direct competition in their immediate service areas than would be expected in larger communities, they do face competition from other hospitals, including larger tertiary care centers. Although these competing hospitals may be as far as 30 to 50 miles away, patients in these LifePoint and Triad markets often migrate to, are referred by local physicians to, or are lured by incentives from managed care plans to travel to, such distant hospitals. One element of LifePoint's business strategy is expansion through the acquisition of acute care hospitals in growing non-urban markets. The competition to acquire non-urban hospitals is significant, and there can be no assurance that suitable acquisitions, for which other health care companies (including those with greater financial resources than LifePoint) may be competing, can be accomplished on terms favorable to LifePoint or that financing, if necessary, can be obtained for such acquisitions. Concentration of Operations After the distribution and certain intended divestitures (See Note 5-- Impairment of Long-Lived Assets of the Notes to Combined Financial Statements of LifePoint included elsewhere herein), 6 of LifePoint's remaining 20 general, acute care hospitals will be located in the Commonwealth of Kentucky, and 6 of LifePoint's remaining 20 general, acute care hospitals will be located in the State of Tennessee. Giving effect to such intended divestitures, for the year ended December 31, 1998, 38.5% and 21.3% of LifePoint's revenue, was generated by LifePoint's Kentucky and Tennessee hospitals, respectively. Accordingly, any change in the current demographic, economic, competitive and regulatory conditions in Kentucky or Tennessee could have a material adverse effect on the business, financial condition and/or results of operations of LifePoint. After the distribution and certain intended divestitures (see "Triad-- Business"), 13 of Triad's remaining 32 hospitals will be located in the State of Texas, and 4 of Triad's remaining 32 hospitals will be located in the State of Arizona. Giving effect to such intended divestitures, for the year ended December 31, 1998, 33.4% and 19.2% of Triad's revenue was generated by Triad's Texas and Arizona hospitals, respectively. Accordingly, any change in the current demographic, economic, competitive and regulatory conditions in Texas or Arizona could have a material adverse effect on the business, financial condition and/or results of operations of Triad. Extensive Regulation The health care industry is subject to extensive Federal, state and local laws and regulations relating to licensure, conduct of operations, ownership of facilities, addition of facilities and services, and prices for services that are extremely complex and for which, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation. In particular, Medicare and Medicaid antifraud and abuse amendments, codified under Section 1128B(b) of the Social Security Act (the "Anti-Kickback Statute"), prohibit certain business practices and relationships related to items or services reimbursable under Medicare, Medicaid and other Federal health care programs, including the payment or receipt of remuneration to induce or arrange for the referral of patients whose care will be paid for by Medicaid or other governmental programs. Sanctions for violating the Anti- Kickback Statute include criminal penalties and civil sanctions, including civil money penalties and possible exclusion from government programs such as Medicare and Medicaid. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, the United States Department of Health and Human Services has issued regulations which describe some of the conduct and business relationships permissible under the Anti-Kickback Statute (the "Safe Harbors"). The fact that a given business arrangement does not fall within a Safe Harbor does not render the arrangement illegal. However, business arrangements of health care service providers that fail to satisfy the applicable Safe Harbor criteria risk scrutiny by enforcement authorities. Certain of the current arrangements of LifePoint and Triad with physicians do not qualify for the Safe Harbors. The Health Insurance Portability and Accountability Act of 1996, which became effective January 1, 1997, amends, among other things, Title XI (42 U.S.C. (S) 1301 et seq.) to broaden the scope of certain fraud and abuse laws to include all health care services, whether or not they are reimbursed under a Federal program, and 28 creates new enforcement mechanisms to combat fraud and abuse, including an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. Each of LifePoint and Triad provide financial incentives to recruit physicians into the communities served by its hospitals, including loans and minimum revenue guarantees. Although HHS has proposed a Safe Harbor for certain physician recruitment, no Safe Harbor for physician recruitment is currently in force. Each of LifePoint and Triad also enter into certain employment agreements, leases and other agreements with physicians. There can be no assurance that regulatory authorities who enforce the Anti-Kickback Statute will not determine that such physician recruiting activities or other physician arrangements violate the Anti-Kickback Statute or other Federal laws. Such a determination could subject LifePoint or Triad to liabilities under the Social Security Act, including criminal penalties, civil monetary penalties and/or exclusion from participation in Medicare, Medicaid or other Federal health care programs, any of which could have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. In addition, Section 1877 of the Social Security Act (commonly known as the "Stark Law") was amended, effective January 1, 1995, to significantly broaden the scope of prohibited referrals by physicians under the Medicare and Medicaid programs to providers of designated health services with which such physicians have ownership or certain other financial arrangements. Certain exceptions are available for employment agreements, leases, physician recruitment and certain other physician arrangements. Final implementing regulations have not yet been adopted, and there can be no assurance that the physician arrangements of LifePoint or Triad will be found to be in compliance with the Stark Law, as such law ultimately may be interpreted. Many states have adopted or are considering similar anti-kickback and physician self-referral legislation, some of which extends beyond the scope of the Federal law to prohibit the payment or receipt of remuneration for the referral of patients and physician self- referrals regardless of the source of the payment for the care. Both Federal and state government agencies have announced heightened and coordinated civil and criminal enforcement efforts. In addition, the Office of the Inspector General of the United States Department of Health and Human Services and the Department of Justice have from time to time established enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Current initiatives include a focus on hospital billing for outpatient charges associated with inpatient services, as well as hospital laboratory billing practices. Each of LifePoint and Triad is cooperating with the government agencies which are responsible for such initiatives where such initiatives involve their respective hospitals. Each of LifePoint and Triad exercises care in structuring its arrangements with physicians to comply in all material respects with these laws. It is possible, however, that government officials charged with responsibility for enforcing such laws could assert that LifePoint, Triad or certain transactions in which either of them is involved, are in violation of such laws. It is also possible that such laws ultimately could be interpreted by the courts in a manner inconsistent with the interpretations of LifePoint or Triad. Many states have enacted or are considering enacting laws affecting the conversion or sale of not-for-profit hospitals. These laws, in general, include provisions relating to state attorney general approval, advance notification and community involvement. In addition, state attorneys general in states without specific conversion legislation may exercise authority over these transactions based upon existing law. In many states there has been an increased interest in the oversight of not-for-profit conversions. The adoption of conversion legislation and the increased review of not-for-profit hospital conversions may limit the ability of LifePoint or Triad to acquire not-for- profit hospitals. Some states require prior approval for the purchase, construction and expansion of health care facilities, based upon a state's determination of need for additional or expanded health care facilities or services. Such determinations, embodied in Certificates of Need issued by governmental agencies with jurisdiction over health care facilities, may be required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and certain other matters. Five states in which LifePoint currently owns hospitals, Alabama, Florida, Georgia, Kentucky and Tennessee, and four states in which Triad currently owns hospitals, Alabama, 29 Oklahoma, Oregon and Missouri, require Certificates of Need. There can be no assurance that either LifePoint or Triad will be able to obtain required Certificates of Need in the future or that the failure to obtain any required Certificates of Need will not have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. The laws, rules and regulations described above are complex and subject to interpretation. In the event of a determination that either of LifePoint or Triad is in violation of such laws, rules or regulations, or if further changes in the regulatory framework occur, any such determination or changes could have a material adverse effect on business, financial condition or results of operations of LifePoint or Triad. See "Regulation and Other Factors Affecting LifePoint and Triad." Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and Triad Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is the subject of a formal order of investigation by the Securities and Exchange Commission. Columbia/HCA understands that the SEC investigation includes the anti-fraud, periodic reporting and internal accounting control provisions of the Federal securities laws. Columbia/HCA is a defendant in several qui tam actions brought by private parties on behalf of the United States of America, which have been unsealed and served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated the False Claims Act, 31 U.S.C. (S) 3729 et seq., for improper claims submitted to the government for reimbursement. The lawsuits seek three times the amount of damages caused to the United States by the submission of any Medicare or Medicaid false claims presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The government has intervened in two qui tam actions. Columbia/HCA is aware of additional qui tam actions that remain under seal and believes that there may be other sealed qui tam cases of which it is unaware. Columbia/HCA is a defendant in a number of other suits, which allege, in general, improper and fraudulent billing, overcharging, coding and physician referrals, as well as other violations of law. Certain of the suits have been conditionally certified as class actions. See "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation." It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam and other actions, or whether any additional investigations or litigation will be commenced. If Columbia/HCA is found to have violated Federal or state laws relating to Medicare, Medicaid or similar programs, then Columbia/HCA could be subject to substantial monetary fines, civil and criminal penalties, and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui tam and other actions may be substantial, and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more of such actions. Any such sanctions or losses could have a material adverse effect on Columbia/HCA's financial position and results of operations. Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of any losses which they may incur as a result of the proceedings described above. Columbia/HCA has also agreed to indemnify LifePoint and Triad in respect of any losses which they may incur as a result of proceedings which may be commenced by government authorities or by private parties in the future that arise from acts, practices or omissions engaged in prior to the Distribution Date and relate to the proceedings described above. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement." If any of such indemnified matters were successfully asserted against either LifePoint or Triad, or any of their facilities, and Columbia/HCA failed to meet its indemnification obligations, then such losses could have a material adverse effect on the financial position and results of operations of LifePoint and/or Triad, as the case may be. 30 Columbia/HCA believes that the ongoing governmental investigations and related media coverage may be having a negative effect on Columbia/HCA's results of operations (which includes LifePoint and Triad for the periods prior to the distribution date which are presented herein). The extent to which LifePoint and Triad may or may not continue to be affected after the distribution by the ongoing investigations of Columbia/HCA, the initiation of additional investigations, if any, and the related media coverage cannot be predicted. It is possible that these matters could have a material adverse effect on the financial condition or results of operations of LifePoint or Triad in future periods. Professional Liability Risks As is typical in the health care industry, LifePoint and Triad are subject to claims and legal actions by patients and others in the ordinary course of business. Columbia/HCA, LifePoint and Triad intend to cooperate in the purchase of insurance coverage for professional and general liability risks for periods ending on or after the distribution date. Substantially all losses in periods prior to the distribution are insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Insurance Allocation and Administration Agreement." Because substantially all liability for professional and general liability claims incurred is insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA, and Columbia/HCA maintains the related reserve, no reserve for professional and general liability risks is recorded on the balance sheets of LifePoint and Triad. While the professional and general liability insurance coverage maintained for the LifePoint and Triad businesses has been adequate to provide for liability claims in the past, and the insurance coverage to be obtained for future periods is expected to be adequate for future claims, there can be no assurance that such insurance will be adequate. If actual payments of claims after the distribution with respect to professional and general liabilities exceed anticipated payments of claims, the results of operations and cash flow of LifePoint or Triad, as the case may be, could be adversely affected. Leverage and Debt Service Obligations As of December 31, 1998, after giving pro forma effect to the distribution and the assumption by LifePoint of debt obligations under the $ million term loan agreement and $ million % Senior Subordinated Notes due 2009, LifePoint's consolidated long-term debt would have been approximately $250 million. As of December 31, 1998, after giving pro forma effect to the distribution and the assumption by Triad of debt obligations under the $ million term loan agreement and $ million % Senior Subordinated Notes due 2009, Triad's consolidated long-term debt would have been approximately $700 million. See "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements" and "Triad Unaudited Pro Forma Condensed Combined Financial Statements." Each of LifePoint and Triad also expects to enter into a revolving credit loan agreement providing for a commitment for revolving credit loans in an aggregate principal amount of up to $ million, in the case of LifePoint, and $ million, in the case of Triad. While each of LifePoint and Triad believe that future operating cash flow, together with available financing arrangements, will be sufficient to fund their respective operating requirements, leverage and debt service requirements could have important consequences to holders of the LifePoint common stock and the Triad common stock, including the following: (i) such requirements may make LifePoint and Triad more vulnerable to economic downturns and to adverse changes in business conditions (e.g., further limitations on reimbursement under Medicare and Medicaid programs); (ii) either of LifePoint's or Triad's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (iii) a substantial portion of each of LifePoint's and Triad's cash flow from operations may have to be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available for operations; (iv) certain of the borrowings may be at variable rates of interest, which would make LifePoint and Triad vulnerable to increases in interest rates; and (v) the indebtedness of LifePoint and Triad is expected to contain numerous financial and other restrictive covenants (including restrictions on payments of dividends, incurrences of indebtedness and sale of assets), the failure to comply with which may result in an event of 31 default which, if not cured or waived, could cause such indebtedness to be declared immediately due and payable. Any substantial increase in LifePoint's or Triad's debt levels or the inability of either to borrow funds at favorable interest rates or to comply with the financial or other restrictive covenants could have a material adverse effect on the business, financial condition or results of operations of LifePoint and/or Triad. Absence of Dividends Neither LifePoint nor Triad anticipates paying cash dividends in the foreseeable future. In addition, the terms of LifePoint's and Triad's debt agreements immediately prior to the distribution are expected to restrict the payment of cash dividends, and any future indebtedness incurred by LifePoint or Triad to refinance such debt, or to fund future growth, also may prohibit or limit their ability to pay dividends. See "Dividend Policy." Tax Treatment of the Distribution Columbia/HCA does not intend to proceed with the distribution unless it receives a ruling from the IRS concerning the United States Federal income tax consequences of the distribution. The tax ruling is expected to state that, because the distribution will qualify under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"), the distribution generally will be tax- free to Columbia/HCA and to Columbia/HCA's stockholders, except for any cash received instead of fractional shares. Nevertheless, the tax ruling will be based upon the accuracy of representations made by Columbia/HCA as to numerous factual matters and as to the intention to take (or to refrain from taking) certain future action. The inaccuracy of any of those factual representations or the failure to take the intended action (or the taking of actions which were represented would not be taken) could cause the IRS to revoke the tax ruling retroactively. If the distribution were not to qualify under Section 355 of the Code, then, in general, corporate tax (which would be substantial) would be payable by the consolidated group of which Columbia/HCA is the common parent. Under the consolidated return rules, each member of the consolidated group (including LifePoint and Triad) would be jointly and severally liable for such tax liability. If the distribution did not qualify under Section 355 of the Code, the resulting tax liability would have a material adverse effect on the financial position, results of operations and cash flows of Columbia/HCA and, possibly, also of LifePoint and Triad. In addition, if the distribution did not qualify under Section 355 of the Code, then, depending on the circumstances, Columbia/HCA stockholders could be taxable on their receipt of shares of LifePoint and Triad common stock. See "The Distribution--Certain Federal Income Tax Consequences." Columbia/HCA, LifePoint and Triad will enter into a Tax Sharing and Indemnification Agreement, which will allocate tax liabilities among Columbia/HCA, LifePoint and Triad and address certain other tax matters such as responsibility for filing tax returns, control of and cooperation in tax litigation, and qualification of the distribution (and the restructuring that will precede the distribution) as tax-free transactions. Generally, Columbia/HCA will be responsible for taxes that are allocable to periods prior to the distribution date, and each of Columbia/HCA, LifePoint and Triad will be responsible for its own tax liabilities (including its allocable share of taxes shown on any consolidated, combined or other tax return filed by Columbia/HCA) for periods after the distribution date. The Tax Sharing and Indemnification Agreement will prohibit LifePoint and Triad from taking actions that could jeopardize the tax-free nature of the distribution or the restructuring that will precede the distribution, and will require LifePoint and Triad to indemnify each other and Columbia/HCA for any taxes or other losses that result from any such actions. Holding Company Structure LifePoint and Triad will be holding companies and each will hold most of its assets at, and conduct most of its operations through, direct and indirect subsidiaries. As holding companies, the results of operations of LifePoint and Triad will depend on the results of operations of their subsidiaries. Moreover, LifePoint and Triad will be dependent on dividends or other intercompany transfers of funds from their subsidiaries to meet their debt service and other obligations. Claims of creditors of the subsidiaries of LifePoint and Triad, including trade creditors, will generally have priority as to the assets of such subsidiaries over the claims of LifePoint or 32 Triad. See "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," and "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Market Uncertainties With Respect to LifePoint Common Stock and Triad Common Stock There is no existing market for either the LifePoint common stock or the Triad common stock. Although LifePoint and Triad intend to apply for a quotation of their common stock on Nasdaq, there can be no assurance as to the trading prices for either security before or after the distribution date. Until the LifePoint common stock and the Triad common stock are fully distributed and orderly markets develop, the trading prices for such securities may fluctuate. Prices for the LifePoint common stock and Triad common stock will be determined in the trading markets and may be influenced by many factors, including the depth and liquidity of the market for such securities, investor perceptions of LifePoint, Triad and their respective businesses, the results of LifePoint and Triad, the dividend policies of LifePoint and Triad and general economic and market conditions. The LifePoint common stock and Triad common stock distributed to Columbia/HCA stockholders in the distribution generally will be freely transferable under the Securities Act of 1933, as amended (the "Securities Act"), and the sale of a substantial number of shares of LifePoint common stock or Triad common stock after the distribution could adversely affect the market price of the LifePoint common stock or Triad common stock, respectively. See "The Distribution--Market for LifePoint Common Stock and Triad Common Stock." Anti-Takeover Provisions Certain provisions of the Certificate of Incorporation and By-Laws of each of LifePoint and Triad may have the effect of discouraging an acquisition of control not approved by its Board of Directors. These provisions include, for example, terms providing for: . the issuance of "blank check" preferred stock by the Board of Directors without stockholder approval; . higher stockholder voting requirements for certain transactions such as business combinations with certain related parties (i.e., a "fair price provision"); . a prohibition on taking actions by the written consent of stockholders; . restrictions on the persons eligible to call a special meeting of stockholders; . classification of the Board of Directors into three classes; and . the removal of directors only for cause and by a vote of 80% of the outstanding voting power. These provisions may also have the effect of discouraging third parties from making proposals involving an acquisition or change of control of LifePoint or Triad, although such proposals, if made, might be considered desirable by a majority of the stockholders of LifePoint or Triad, as the case may be. These provisions could further have the effect of making it more difficult for third parties to cause the replacement of the Board of Directors of LifePoint or Triad. These provisions have been designed to enable each of LifePoint and Triad to develop its businesses and foster its long-term growth without disruptions caused by the threat of a takeover not deemed by its Board of Directors to be in the best interests of the applicable company and its stockholders. Each of LifePoint and Triad also has adopted a stockholder rights plan. These stockholder rights plans are designed to protect stockholders in the event of an unsolicited offer and other takeover tactics which, in the opinion of the relevant Board of Directors, could impair its ability to represent stockholder interests. The provisions of these stockholder rights plans may render an unsolicited takeover of LifePoint or Triad, as applicable, more difficult or less likely to occur or might prevent such a takeover. Each of LifePoint and Triad will be subject to provisions of Delaware corporate law which may restrict certain business combination transactions. See "LifePoint Description of Capital Stock--LifePoint Common Stock; Delaware Anti-Takeover Provisions," "--LifePoint Preferred Stock Purchase Rights," and "--Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws"; and "Triad Description of Capital Stock--Triad Common Stock; Delaware Anti-Takeover Provisions," "--Triad Preferred Stock Purchase Rights," and "--Certain Anti- Takeover Provisions--Triad Certificate and By-Laws." 33 Certain provisions in the Tax Sharing and Indemnification Agreement entered into among Columbia/HCA, LifePoint and Triad, which are intended to preserve the tax-free status of the distribution for Federal income tax purposes, could discourage certain takeover proposals or make them more expensive. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Tax Sharing and Indemnification Agreement." Year 2000 Compliance Until 2006, LifePoint and Triad will continue to obtain most of their computer applications and support from Columbia Information Systems, Inc. ("CIS"), a wholly owned subsidiary of Columbia/HCA, pursuant to the Computer and Data Processing Services Agreement. CIS has represented that the software owned by CIS and provided to LifePoint and Triad will be Year 2000 ready on or before January 1, 2000, and that CIS will endeavor to address in a timely manner Year 2000 issues with respect to other software and hardware licensed to LifePoint and Triad under the Computer and Data Processing Services Agreement. CIS also has undertaken to examine and remediate the software systems and applications of LifePoint and Triad not obtained from Columbia/HCA and the non- information technology systems (e.g., vendor products, medical equipment and other related equipment with embedded chips) of LifePoint and Triad to ensure that they are Year 2000 ready. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Computer and Data Processing Services Agreement" and "--Transitional Services Agreement." Any malfunctions in such systems, applications or equipment could have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. Neither LifePoint nor Triad is currently able to reasonably estimate the ultimate cost to be incurred by it for the assessment, remediation, upgrade, replacement and testing of its impacted information and non-information technology systems. LifePoint and Triad are dependent upon Columbia/HCA in substantially all respects for the Year 2000 readiness of their respective information technology and non-information technology systems and for contingency planning in respect of Year 2000-related risks. Any failure by Columbia/HCA to adequately address such matters could have a material adverse effect on their businesses, financial conditions and/or results of operations. In addition, each of LifePoint and Triad has significant ongoing relationships with government agencies, third party payers, vendors, suppliers and others that may have computer systems with Year 2000 problems. The Health Care Financing Administration recently announced that, due to potential Year 2000 concerns, Medicare reimbursement updates for hospitals scheduled to take effect October 1, 1999 will be delayed until April 1, 2000, although reimbursement rates will be adjusted to replace revenues lost due to such delay. If the fiscal intermediaries and governmental agencies with which LifePoint and Triad transact business, and which are responsible for payment to LifePoint and Triad under the Medicare and Medicaid programs, other payers, or suppliers and vendors experience problems in Year 2000 readiness, that could have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. See "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of Year 2000 Computer Issues" and "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations--Impact of Year 2000 Computer Issues." 34 Reasons For Furnishing This Information Statement This information statement is being furnished by Columbia/HCA solely to provide information to Columbia/HCA stockholders who will receive LifePoint common stock and Triad common stock in the distribution. It is not, and is not to be construed as, an inducement or encouragement to buy or sell any securities of Columbia/HCA, LifePoint, or Triad. Columbia/HCA, LifePoint and Triad believe that the information presented herein is accurate as of the date hereof. Changes will occur after the date hereof, and none of Columbia/HCA, LifePoint or Triad will update the information except to the extent required in the normal course of their respective public disclosure practices. Forward-looking Information This information statement and other materials filed or to be filed by LifePoint or Triad with the SEC (as well as information included in oral statements or other written statements made, or to be made, by LifePoint or Triad) contain, or will contain, disclosures which are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements address, among other things, strategic objectives and the anticipated effects of the distribution. See "Summary--Introduction," "Summary--Questions and Answers About LifePoint, Triad and the Distribution," "Risk Factors," "The Distribution--Background and Purposes of the Distribution," "LifePoint Business--Business Strategy," "Triad Business--Business Strategy," "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations." These forward-looking statements are based on the current plans and expectations of LifePoint and Triad and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and the future financial condition and results of LifePoint and Triad. These factors include, but are not limited to, (i) the highly competitive nature of the health care business, (ii) the efforts of insurers, health care providers and others to contain health care costs, (iii) possible changes in the Medicare program that may further limit reimbursements to health care providers and insurers, (iv) changes in Federal, state or local regulation affecting the health care industry, (v) the possible enactment of Federal or state health care reform, (vi) the departure of key executive officers from LifePoint or Triad, (vii) claims and legal actions relating to professional liability, (viii) fluctuations in the market value of LifePoint common stock or Triad common stock, (ix) changes in accounting practices, (x) changes in general economic conditions, (xi) the complexity of integrated computer systems and the success and expense of the remediation efforts of Columbia/HCA, LifePoint, Triad and relevant third parties in achieving Year 2000 readiness, and (xii) other risk factors described above. As a consequence, current plans, anticipated actions and future financial conditions and results may differ from those expressed in any forward-looking statements made by or on behalf of LifePoint or Triad. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented herein. 35 The Distribution Background and Purposes of the Distribution Columbia/HCA is the largest provider of health care services in the United States today, operating approximately 300 hospitals, as well as outpatient surgery centers, diagnostic centers, cardiac rehabilitation centers, physical therapy centers, radiation oncology centers, comprehensive outpatient rehabilitation centers, medical office buildings, physician practices and other health care programs. In November 1997, Columbia/HCA restructured its operations into five divisions, including the America Group and the Pacific Group. America's hospitals are located in non-urban areas where, in almost all cases, America's hospital is the only hospital in the community. Approximately three-quarters of Pacific's hospitals are located in small cities, generally in the Southwestern United States, where Pacific's hospital is usually either the only hospital or one of two hospitals in the community, and the remainder of Pacific's hospitals are located in larger urban areas typically characterized by a high rate of population growth. Following that restructuring, Columbia/HCA determined to concentrate its efforts on its core markets, which are typically located in urban areas that are characterized by highly integrated facility networks, and to reorganize the America Group and the Pacific Group as two independent, publicly-traded companies, LifePoint and Triad, respectively. Columbia/HCA management believes that separating the America and Pacific Groups into two smaller, strategically focused public companies will provide the following benefits: . Implement Tailored Business Strategies. Columbia/HCA's management believes that, because of the different community characteristics and levels of network integration that exist in the LifePoint and Triad markets, the LifePoint and Triad business strategies need to be distinguished from each other and from those pursued in Columbia/HCA's core markets. As smaller companies, LifePoint and Triad will have more flexibility in responding to the needs of the communities in which they operate. . Increase Management Focus and Attention. The managements of LifePoint and Triad will be able to focus on making capital improvements to existing facilities in order to expand specialized services, invest in physician and executive recruitment and retention, and improve outreach programs and general health education initiatives. . Tie Compensation to Performance. Following the distribution, LifePoint and Triad will be able to more closely tie compensation incentives for their employees to the performance of their companies. Each of LifePoint and Triad expects to establish for the benefit of its employees an Employee Stock Ownership Plan (an "ESOP"). Shortly after the distribution, the LifePoint ESOP will purchase a number of shares equal to 8.3% of the outstanding common stock of LifePoint and the Triad ESOP will purchase a number of shares equal to 9.0% of the outstanding common stock of Triad. These equity interests are expected to help LifePoint and Triad to attract and retain talented and effective management and to motivate employees throughout the organization. . Improve Access to Capital. The distribution will give each of LifePoint and Triad direct access to capital markets. As divisions of Columbia/HCA, the America and Pacific Groups competed with each other and with the other Columbia/HCA divisions for management attention, support resources, and capital to finance expansion and growth opportunities. As separate entities, with their own management structures, LifePoint and Triad will be better able to implement business strategies appropriate for their markets and to direct capital funding and expansion initiatives. . Increase Visibility to the Capital Markets. Following the distribution, the financial markets will be able to focus on the individual strengths of Columbia/HCA, LifePoint and Triad, and more accurately evaluate the performance of each distinct business compared to companies in the same or similar businesses. Columbia/HCA expects that, in addition to allowing it to focus on its core markets, the distribution of LifePoint and Triad will assist Columbia/HCA in fulfilling its business plan of becoming a smaller company, 36 focused on local, community-based delivery of care, streamlining its organizational structure, and reducing its overhead and administrative costs. After the distribution, however, Columbia/HCA's revenue base will be diminished by approximately 11% and its asset base will be diminished by approximately 9% (based on revenues and assets reported for the year ended December 31, 1998). The separation of the LifePoint and Triad hospitals may adversely affect Columbia/HCA's ability to negotiate favorable managed care contracts in certain markets. Also, to the extent that LifePoint and Triad succeed in stemming outmigration, some patients who previously might have been treated at Columbia/HCA hospitals will instead be treated at LifePoint and Triad hospitals. Manner of Effecting the Distribution The general terms and conditions relating to the distribution are set forth in a Distribution Agreement among Columbia/HCA, LifePoint and Triad. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement." On the distribution date, Columbia/HCA will effect the distribution by delivering all of the outstanding shares of LifePoint common stock and Triad common stock to National City Bank, as distribution agent, for distribution to the holders of record of Columbia/HCA Stock at the close of business on the record date. The distribution will be made on the basis of shares of LifePoint common stock and shares of Triad common stock for every shares of Columbia/HCA Stock. The actual number of shares of LifePoint common stock and Triad common stock that will be distributed will depend on the number of shares of Columbia/HCA Stock outstanding on the record date. The shares of LifePoint common stock and Triad common stock will be fully paid and nonassessable, and the holders of such shares will not be entitled to preemptive rights. See "LifePoint Description of Capital Stock" and "Triad Description of Capital Stock." It is expected that certificates representing shares of LifePoint common stock and of Triad common stock will be mailed to Columbia/HCA stockholders on or about , 1999. Certificates or scrip representing fractional shares of LifePoint common stock or Triad common stock will not be issued to Columbia/HCA stockholders as part of the distribution. Instead, each holder of Columbia/HCA Stock who would otherwise be entitled to receive a fractional share will receive cash for such fractional interests. The distribution agent will, as soon as practicable after the distribution date, aggregate and sell all such fractional interests on Nasdaq at then prevailing market prices and distribute the aggregate proceeds ratably to Columbia/HCA stockholders otherwise entitled to such fractional interests. Columbia/HCA will pay all brokers' fees and commissions in respect of such sale. See "The Distribution--Certain Federal Income Tax Consequences" for a discussion of the Federal income tax treatment of fractional share interests. Results of the Distribution After the distribution, LifePoint and Triad will be separate, independent publicly-traded companies. The number and identity of stockholders of LifePoint and Triad immediately after the distribution will be the same as the number and identity of stockholders of Columbia/HCA on the record date. Based on the number of record stockholders and the number of issued and outstanding shares of Columbia/HCA Stock as of the close of business on , 1999 and the distribution ratios of shares of LifePoint common stock and shares of Triad common stock for every shares of Columbia/HCA Stock, immediately after the distribution, LifePoint expects to have approximately 18,700 record holders, and approximately outstanding shares, of LifePoint common stock, and Triad expects to have approximately 18,700 record holders, and approximately outstanding shares, of Triad common stock. The actual number of shares of LifePoint common stock and Triad common stock that will be distributed will be determined as of the record date. The distribution will not affect the number of outstanding shares of Columbia/HCA Stock or the rights of Columbia/HCA stockholders. Each of LifePoint and Triad expects to establish for the benefit of its employees an Employee Stock Ownership Plan (an "ESOP"). Shortly after the distribution, the LifePoint ESOP is expected to purchase, at fair market value, a number of newly issued shares of LifePoint common stock equal to 8.3% of the 37 outstanding shares of LifePoint common stock (approximately shares), and the Triad ESOP is expected to purchase, at fair market value, a number of newly issues shares of Triad common stock equal to 9.0% of the outstanding shares of Triad common stock (approximately shares). Each purchase will be financed by (i) issuing a promissory note to LifePoint in the case of the LifePoint ESOP or issuing a promissory note to Triad in the case of the Triad ESOP or (ii) borrowing from a third party lender (which loan will be guaranteed by LifePoint, in the case of the LifePoint ESOP or Triad, in the case of the Triad ESOP). Each loan will be amortized over a period of not more than 10 years. Material Federal Income Tax Consequences Columbia/HCA does not intend to proceed with the distribution unless it receives a tax ruling from the IRS to the effect, among other things, that, as the distribution will qualify as a tax-free distribution under Section 355 of the Code, for Federal income tax purposes: . Columbia/HCA generally will not recognize gain or loss upon the distribution of the LifePoint common stock and the Triad common stock to Columbia/HCA's stockholders. . Columbia/HCA stockholders will not recognize any gain or loss (and will not be required to include any amount as income) as a result of their receipt of LifePoint common stock and Triad common stock in the distribution, except as described below in connection with cash received in lieu of fractional shares of LifePoint common stock or Triad common stock. . Columbia/HCA stockholders will apportion their tax basis in Columbia/HCA Stock among their Columbia/HCA Stock and the LifePoint common stock and the Triad common stock they receive in the distribution (including any fractional share interest in LifePoint common stock and Triad common stock to which the Columbia/HCA stockholders are entitled) in accordance with the relative fair market values of these securities at the time of the distribution. . Columbia/HCA stockholders' holding period in the LifePoint common stock and Triad common stock received in the distribution will include the holding period of the Columbia/HCA Stock with respect to which the LifePoint common stock and Triad common stock will be distributed, provided that the Columbia/HCA Stock is held as a capital asset on the distribution date. . Columbia/HCA stockholders who receive cash in lieu of fractional shares of LifePoint common stock or Triad common stock will recognize gain or loss equal to the difference between the cash received and the tax basis allocated to such fractional shares. Any gain or loss will be capital gain or loss if the fractional shares would have been held as a capital asset on the distribution date. The tax ruling will be based upon representations made by Columbia/HCA as to numerous factual matters and as to the intention to take (or to refrain from taking) certain future actions. The inaccuracy of any of those factual representations or the failure to take the intended actions (or the taking of actions which were represented would not be taken) could cause the IRS to revoke the tax ruling retroactively. In that event, the IRS might assert that the distribution was taxable. See "Risk Factors--Tax Treatment of the Distribution" and "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Tax Sharing and Indemnification Agreement." After the distribution, Columbia/HCA will send a letter to you that will explain how to allocate your tax basis among Columbia/HCA Stock, LifePoint common stock and Triad common stock. The foregoing is only a summary of the material United States Federal income tax consequences of the distribution under current law. It does not purport to cover all tax consequences and may not apply to stockholders who acquired their Columbia/HCA stock in connection with a grant of shares as compensation, who are not citizens or residents of the United States, or who are otherwise subject to special treatment under 38 the Code. Each stockholder is urged to consult his or her tax advisor as to the particular consequences of the distribution to such stockholder, including the application of state, local and foreign tax laws, and as to possible changes in tax laws that may affect the tax consequences described above. Regulatory Approvals The distribution is subject to review and approvals by certain Federal agencies, state departments of insurance, state health planning and licensure agencies. Prior to the distribution date, Columbia/HCA will have provided appropriate notifications regarding the distribution to, and expects that all material approvals from or reviews of the regulatory authorities having jurisdiction in respect of the distribution and related reorganization transactions will have been received or completed, respectively. Market for LifePoint Common Stock and Triad Common Stock There is no existing market for LifePoint common stock or Triad common stock. LifePoint and Triad intend to apply for quotation of their common stock on Nasdaq. If the shares are accepted for quotation, a when-issued trading market for both LifePoint common stock and Triad common stock is expected to develop on or shortly before the record date. The term "when-issued" means that shares can be traded prior to the time certificates are actually available or issued. There can be no assurance about the trading prices for LifePoint common stock and Triad common stock before or after the distribution date, and until the LifePoint common stock and Triad common stock are fully distributed and an orderly market develops, the trading prices for such securities may fluctuate. Prices for LifePoint common stock and Triad common stock will be determined in the trading markets and may be influenced by many factors, including the depth and liquidity of the market for such securities, developments affecting the businesses of LifePoint and Triad generally, the impact of the factors referred to in "Risk Factors," investor perceptions of LifePoint, Triad and their businesses, the results of LifePoint and Triad, the dividend policies of LifePoint and Triad, and general economic and market conditions. It is anticipated that LifePoint common stock will be traded on Nasdaq under the symbol " ," and that Triad common stock will be traded on Nasdaq under the symbol " ." Columbia/HCA Common Stock will continue to trade on the New York Stock Exchange. After the distribution, the trading price of Columbia/HCA Common Stock likely will be lower than the trading price immediately prior to the distribution. Moreover, until the market has evaluated the operations of Columbia/HCA without LifePoint and Triad, the trading price of Columbia/HCA Common Stock may fluctuate. The Transfer Agent and Registrar for the LifePoint common stock and Triad common stock will be National City Bank, Shareholder Services Group, P.O. Box 92301, Cleveland, Ohio, 44193-0900. For certain information regarding options to purchase LifePoint common stock and Triad common stock that will be granted in connection with the distribution, see "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement-- Treatment of Columbia/HCA Common Stock Options"; "LifePoint Management-- LifePoint Compensation Arrangements--The LifePoint 1998 Long-Term Incentive Plan"; and "Triad Management--Triad Compensation Arrangements--The Triad 1998 Long-Term Incentive Plan." For certain information regarding the LifePoint ESOP and the Triad ESOP, see "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement--The LifePoint ESOP and the Triad ESOP." Shares of LifePoint common stock and Triad common stock distributed to Columbia/HCA stockholders in the distribution will be freely transferable under the Securities Act, except for shares of LifePoint common stock received by persons who may be deemed to be affiliates of LifePoint and shares of Triad common stock received by persons who may be deemed to be affiliates of Triad. Persons who may be deemed to be affiliates of LifePoint or Triad after the distribution generally include individuals or entities that control, are controlled by, or are under common control with, LifePoint or Triad, respectively, and may include certain officers and directors, or principal stockholders, of LifePoint or Triad, as applicable. After LifePoint and Triad become 39 publicly-traded companies, securities held by persons who are their affiliates will be subject to resale restrictions under the Securities Act. Affiliates of LifePoint and Triad will be permitted to sell shares of the entity of which such persons are affiliates only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act. Conditions Precedent to the Distribution It is expected that the distribution will be effective on the distribution date, , 1999, provided that, among other things: 1. the Registration Statements on Form 10 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), filed by each of LifePoint (the "LifePoint Form 10 Registration Statement") and Triad (the "Triad Form 10 Registration Statement") shall have been declared effective and no stop order relating to either Registration Statement shall be in effect; 2. all necessary permits, registrations and consents required under the securities or blue sky laws of states or other political subdivisions of the United States in connection with the distribution shall have been received or become effective; 3. the IRS tax ruling shall have been received and shall not have been revoked or modified in any material respect; 4. each of the LifePoint common stock and the Triad common stock shall have been approved for quotation on Nasdaq, subject to official notice of issuance; 5. the transfers of assets and liabilities to LifePoint and Triad required to constitute LifePoint and Triad as described herein shall have been completed; and 6. no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the distribution or any of the transactions related thereto (including the transfers of assets and liabilities contemplated by the Distribution Agreement) shall be in effect. The fulfillment or waiver of the foregoing conditions shall not create any obligation on the part of Columbia/HCA to effect the distribution, and the Columbia/HCA Board has reserved the right to amend, modify or abandon the distribution and the related transactions at any time prior to the distribution date. Arrangements Among Columbia/HCA, LifePoint And Triad Relating To The Distribution Immediately prior to the distribution, LifePoint and Triad will be wholly owned by Columbia/HCA and, until the distribution, the results of operations of the assets and entities that will constitute LifePoint and Triad will be included in Columbia/HCA's consolidated financial statements. After the distribution, Columbia/HCA will not have any ownership interest in either LifePoint or Triad, which will be independent, publicly-traded companies, although certain Columbia/HCA benefit plans will receive shares of LifePoint and Triad in the distribution. See "LifePoint Security Ownership by Certain Beneficial Owners and Management" and "Triad Security Ownership by Certain Beneficial Owners and Management." After the distribution, neither LifePoint nor Triad will have any ownership interest in the other. Immediately prior to the distribution, Columbia/HCA, LifePoint and Triad will enter into certain agreements to define their ongoing relationships after the distribution and to allocate tax, employee benefits and certain other liabilities and obligations arising from periods prior to the distribution date. These agreements are summarized below and have been filed as exhibits to the LifePoint Form 10 Registration Statement and/or the Triad Form 10 Registration Statement. The following descriptions include a summary of the material terms of these agreements but do not purport to be complete and are qualified in their entirety by reference to the filed agreements. 40 Distribution Agreement Columbia/HCA, LifePoint and Triad will enter into the Distribution Agreement which will provide for, among other things, certain corporate transactions required to effect the distribution and other arrangements among Columbia/HCA, LifePoint and Triad subsequent to the distribution. The Distribution Agreement also sets forth the conditions to the distribution. See "The Distribution-- Conditions Precedent to the Distribution." Transfers of Assets to LifePoint and Triad The Distribution Agreement provides that Columbia/HCA will transfer all of its right, title and interest in the assets constituting the America Group business to LifePoint and all of its right, title and interest in the assets constituting the Pacific Group business to Triad. The Distribution Agreement further provides that each of LifePoint and Triad will take such action, if any, as may be necessary to transfer assets owned by it so that, upon completion of all asset transfers by Columbia/HCA, LifePoint and Triad, the assets constituting the America Group business are owned by LifePoint and the assets constituting the Pacific Group business are owned by Triad. Each party to the Distribution Agreement agrees to exercise its reasonable efforts to obtain promptly any necessary consents and approvals and to take such actions as may be reasonably necessary or desirable to carry out the purposes of the Distribution Agreement and the other agreements summarized below. In the event that any transfers contemplated by the Distribution Agreement are not effected on or prior to the distribution date, the parties agree to cooperate to effect such transfers as promptly as practicable following the distribution date, and pending any such transfers, to hold any asset not so transferred in trust for the use and benefit of the party entitled thereto (at the expense of the party entitled thereto), and to retain any liability not so transferred for the account of the party by whom such liability is to be assumed. All assets are being transferred without any representation or warranty, on an "as is-where is" basis and the relevant transferee bears the risk that any necessary consent to transfer is not obtained. Allocation of Financial Responsibility The Distribution Agreement provides for, among other things, assumptions of liabilities and cross-indemnities designed to allocate, effective as of the distribution date, financial responsibility for the liabilities arising out of or in connection with: . the assets and entities that will constitute LifePoint and its subsidiaries (including liabilities arising in respect of the transfer of such assets and entities to LifePoint), as well as the LifePoint Form 10 Registration Statement, to LifePoint; and . the assets and entities that will constitute Triad and its subsidiaries (including liabilities arising in respect of the transfer of such assets and entities to Triad), as well as the Triad Form 10 Registration Statement, to Triad. After the distribution, Columbia/HCA will indemnify LifePoint and Triad for any losses which they may incur arising from the pending governmental investigations of some of Columbia/HCA's business practices. Columbia/HCA will also indemnify LifePoint and Triad for any losses which they may incur arising from stockholder actions and other legal proceedings related to the governmental investigations which are currently pending against Columbia/HCA, and from proceedings which may be commenced by government authorities or by private parties in the future that arise from acts, practices or omissions engaged in prior to the Distribution Date and relate to the pending proceedings. See "Risk Factors--Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and Triad" and "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation." Prior to the distribution, Columbia/HCA, through its wholly owned insurance subsidiary and through third party carriers, maintained insurance for the businesses of LifePoint and Triad. The Distribution Agreement provides that Columbia/HCA also will be solely responsible for: 41 . claims against LifePoint or Triad covered by an insurance policy maintained by Columbia/HCA (without regard to deductible amounts, coinsurance amounts and policy limits), which are based upon facts and circumstances occurring prior to the distribution date; and . workers' compensation claims against LifePoint or Triad if the underlying injury or condition was incurred before the distribution. Government Programs LifePoint and Triad will be responsible for the Medicare, Medicaid and Blue Cross cost reports, and associated receivables and payables, for their facilities, whether relating to periods prior to or after the distribution, but Columbia/HCA will retain the benefits and burdens of all group appeals relating to cost reporting periods ending on or prior to the distribution date. LifePoint and Triad will be responsible for their own cost report functions after the distribution date, as well as for any terminating cost reports required to be filed in respect of the distribution. Other Matters Each of Columbia/HCA, LifePoint and Triad generally agrees to provide to the other parties reasonable access to certain corporate records and information reasonably requested by another party. Each of Columbia/HCA, LifePoint and Triad is generally required to maintain the confidentiality of confidential information it possesses regarding another party. The parties will endeavor to resolve any disputes which may arise through discussion among senior management of the affected parties. If such discussions do not succeed in resolving a disputed matter, the parties retain the right to commence a legal action. The Distribution Agreement also provides that, generally, the costs and expenses incurred through the distribution date in connection with the distribution are properly allocable to, and will be paid by, Columbia/HCA. Except as set forth in the Distribution Agreement or any related agreement, each party shall bear its own costs and expenses after the distribution. Tax Sharing and Indemnification Agreement Columbia/HCA, LifePoint and Triad will enter into a Tax Sharing and Indemnification Agreement, which will allocate tax liabilities among Columbia/HCA, LifePoint and Triad and address certain other tax matters such as responsibility for filing tax returns, control of and cooperation in tax litigation, and qualification of the distribution (and the restructuring that will precede the distribution) as tax-free transactions. Generally, Columbia/HCA will be responsible for taxes that are allocable to periods prior to the distribution date, and each of Columbia/HCA, LifePoint and Triad will be responsible for its own tax liabilities (including its allocable share of taxes shown on any consolidated, combined or other tax return filed by Columbia/HCA) for periods after the distribution date. The Tax Sharing and Indemnification Agreement will prohibit LifePoint and Triad from taking actions that could jeopardize the tax-free nature of the distribution or the restructuring that will precede the distribution, and will require LifePoint and Triad to indemnify each other and Columbia/HCA for any taxes or other losses that result from any such actions. Benefits and Employment Matters Agreement Columbia/HCA, LifePoint and Triad will enter into a Benefits and Employment Matters Agreement, which allocates responsibilities for employee compensation, benefits, labor, benefit plan administration and certain other employment matters on and after the distribution date. 42 General Allocation Each of LifePoint and Triad will assume responsibility as employer in respect of its employees from and after the distribution date. Subject to specific exceptions, Columbia/HCA will retain the liabilities in respect of former employees associated with the facilities and operations of LifePoint and Triad who terminated employment on or prior to the distribution date. Benefit plans established by LifePoint or Triad generally will recognize past service with Columbia/HCA. Defined Contribution and Welfare Benefit Plans The Benefits and Employment Matters Agreement provides that each of LifePoint and Triad will adopt a new defined contribution plan for their respective employees, as well as for the respective former employees associated with the facilities and operations of LifePoint and Triad. Generally, assets of the current Columbia/HCA money purchase pension, stock bonus and salary deferral plans that are attributable to current and former employees of LifePoint and Triad will be transferred, effective immediately prior to the distribution date, to the new plans, and LifePoint and Triad thereafter will provide benefits under such plans to their current and former employees. Except for such transferred assets, Columbia/HCA will retain sole responsibility for all liabilities and obligations under the existing Columbia/HCA defined contribution plans. LifePoint and Triad will adopt welfare benefit plans for their employees that, as of the distribution date, will be substantially identical to the benefit plans of Columbia/HCA. Generally, Columbia/HCA will be responsible for all liabilities and obligations relating to claims incurred or premiums owed in respect of welfare plans for periods prior to the distribution date and LifePoint or Triad, as appropriate, will assume such responsibility for periods thereafter with respect to their current or former employees. Columbia/HCA will provide certain administrative and investment services in respect of the LifePoint and Triad welfare plans. Services will be provided through the end of 1999 in respect of Triad welfare plans and through May 31, 1999 in respect of LifePoint welfare plans. LifePoint and Triad have agreed to indemnify Columbia/HCA and its agents in respect of the services performed for such plans, so long as Columbia/HCA and its agents shall have acted in good faith in performing such services. The LifePoint ESOP and the Triad ESOP Each of LifePoint and Triad expects to establish an ESOP. Shortly after the distribution, the LifePoint ESOP is expected to purchase, at fair market value, a number of newly issued shares of LifePoint common stock equal to 8.3% of the outstanding LifePoint common stock (approximately shares), and the Triad ESOP is expected to purchase, at fair market value, a number of newly issued shares of Triad common stock equal to 9.0% of the outstanding Triad common stock (approximately shares). Each purchase will be financed by (i) issuing a promissory note to LifePoint in the case of the LifePoint ESOP or issuing a promissory note to Triad in the case of the Triad ESOP or (ii) borrowing from a third party lender (which loan will be guaranteed by LifePoint, in the case of the LifePoint ESOP or Triad, in the case of the Triad ESOP). Each loan will be amortized over a period of not more than 10 years. Treatment of Columbia/HCA Common Stock Options The Benefits and Employment Matters Agreement provides that each of LifePoint and Triad will establish new stock option plans, and that outstanding Columbia/HCA Common Stock options will be adjusted to reflect the distribution. The nature of the adjustment will depend on the type of option, as follows: . Incentive Stock Options: The option spread (whether positive or negative) at the distribution date with respect to each of the existing Columbia/HCA options intended to qualify as Incentive Stock Options under Section 422 of the Code ("ISOs") will be preserved by having each such ISO replaced entirely by an ISO issued by the appropriate post- distribution date employer. 43 . Vested Nonqualified Stock Options: Except in the case of vested Columbia/HCA Nonqualified Stock Options to acquire a small number of shares, the option spread (whether positive or negative) at the distribution date with respect to each of the existing vested Columbia/HCA Nonqualified Stock Options will be preserved by (i) adjusting the exercise price of such Columbia/HCA options and (ii) having LifePoint and Triad issue additional vested Nonqualified Stock Options. This rule will apply regardless of which post-distribution date employer employs the optionee. Similar adjustments will be made with respect to vested Columbia/HCA Nonqualified Stock Options held by non- employee directors. In the case of vested Columbia/HCA Nonqualified Stock Options to acquire a small number of shares, a cash-out payment may be made or alternatively such Columbia/HCA Options may be adjusted in a manner that preserves the pre-distribution value of such Columbia/HCA Options. . Non-Vested Nonqualified Stock Options: Non-vested Columbia/HCA Nonqualified Stock Options held by employees of LifePoint and Triad will be cancelled and LifePoint and Triad may, in their discretion, grant non-vested nonqualified stock options to their respective employees. In the case of non-vested Columbia/HCA Nonqualified Stock Options held by Columbia/HCA employees, the exercise price will be adjusted to reflect the distribution. Non-vested non-qualified options to acquire LifePoint and Triad stock will also be issued to certain employees of Columbia/HCA. See "LifePoint Management--LifePoint Compensation Arrangements--The LifePoint 1998 Long-Term Incentive Plan" and "Triad Management--Triad Compensation Arrangements--The Triad 1998 Long-Term Incentive Plan." Insurance Allocation and Administration Agreement Columbia/HCA has maintained various insurance policies for the benefit and protection of its America Group and Pacific Group divisions. Substantially all losses in periods prior to the distribution are insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA. In connection with the distribution, Columbia/HCA, LifePoint and Triad will enter into the Insurance Allocation and Administration Agreement to provide for their continuing rights and obligations in respect of such insurance after the distribution date and to define their relationship regarding the insurance on their respective properties. The Insurance Allocation and Administration Agreement provides that any claims against insurers outstanding on the distribution date will be for the benefit of the party who will own the asset which is the basis for the claim, or, in the case of a liability claim, which is the owner of the facility at which the activity which is the subject of the claim occurred. In addition, Columbia/HCA will pay to LifePoint or Triad, as the case may be, any portion of such a claim that is unpaid by an insurer to satisfy deductible, co-insurance or self-insurance amounts (unless such amounts were paid to or accounted for by the affected entity prior to the distribution date). Columbia/HCA, LifePoint and Triad will do all things necessary to ensure that all of the insurance policies which provide coverage to LifePoint and Triad remain available after the distribution date to the same extent they were available prior to the distribution date. Any retroactive rate adjustments for periods ending on or before the distribution date in respect of any such insurance policies will be paid or received by Columbia/HCA. Columbia/HCA, LifePoint and Triad will cooperate with each other in the purchase of insurance coverage for periods after the distribution date, although each retains the right to obtain separate insurance under certain circumstances. It is anticipated that LifePoint and Triad will purchase continuous coverage under extensions or renewals of existing, or new, policies issued by Health Care Indemnity, Inc., a subsidiary of Columbia/HCA. They also will endeavor to obtain coverage for claims incurred but not reported prior to the distribution date which would have been covered by the insurance policies existing at that time, if the policies obtained to cover periods after the distribution do not cover such claims. Columbia/HCA will bear the cost of any such additional coverage. 44 Columbia/HCA will defend any claim made against two or more of the parties, if indemnification for the claim is available to LifePoint or Triad, as the case may be, under the Distribution Agreement. If indemnification under the Distribution Agreement is not available and there is no other agreement or indemnification in respect of such claim, the parties to the claim will jointly defend the claim and will attempt to agree upon an appropriate allocation of liability, subject to arbitration in the event the parties disagree. Columbia/HCA, or an affiliate of Columbia/HCA, will continue to administer all claims under the insurance policies in effect prior to the distribution date. In addition, Columbia/HCA, or an affiliate of Columbia/HCA, will administer claims under the new policies that will cover periods after the distribution date, for an interim period ending on , unless extended by agreement of the parties. Computer and Data Processing Services Agreement Columbia/HCA's wholly owned subsidiary Columbia Information Services, Inc. ("CIS"), will enter into separate Computer and Data Processing Services Agreements with each of LifePoint and Triad. Pursuant to this agreement, CIS will provide computer installation, support, training, maintenance, data processing and other related services to LifePoint and Triad. The initial term of each agreement will be seven years, which will be followed by a wind-down period of up to one year. CIS will charge fees to LifePoint and Triad for services provided under this agreement that are market competitive based on CIS's costs incurred in providing such services. Lease Agreements Columbia/HCA will enter into an agreement with LifePoint pursuant to which LifePoint will sub-lease from Columbia/HCA its principal executive offices (at the same price per square foot as is payable under the existing Columbia/HCA lease). The LifePoint sub-lease will terminate on , 2001, but either party may terminate the sub-lease upon six months prior written notice. Columbia/HCA also will enter into an agreement with Triad, pursuant to which Triad will sub- lease from Columbia/HCA its principal executive offices (at the same price per square foot as is payable under the existing Columbia/HCA lease). The Triad sub-lease will terminate on November , 2003. Transitional Services Agreement Columbia/HCA will enter into separate Transitional Services Agreements with each of LifePoint and Triad. Pursuant to this agreement, Columbia/HCA will continue to furnish various administrative services to LifePoint and Triad. These services will include support in various aspects of payroll processing and tax reporting for employees of LifePoint and Triad, real estate design and construction management, and legal, human resources, insurance and accounting matters. Columbia/HCA also will continue its ongoing program of inspecting medical equipment at each of LifePoint's and Triad's hospitals to assure Year 2000 compliance. Each agreement will terminate on December 31, 2000, but may be terminated by LifePoint or Triad as to specific services before December 31, 2000. LifePoint and Triad will pay fees to Columbia/HCA for services provided in amounts equal to Columbia/HCA's costs incurred in providing such services. Other Agreements Columbia/HCA will enter into agreements with each of LifePoint and Triad whereby Columbia/HCA will share telecommunications services with LifePoint and Triad under Columbia/HCA's agreements with its telecommunications services provider and whereby Columbia/HCA will make certain account collection services available to LifePoint and Triad. Each of LifePoint and Triad will also participate, along with Columbia/HCA, in a group purchasing organization which will make certain national supply and equipment contracts available to their respective facilities. In addition, Columbia/HCA and LifePoint will enter into an agreement pursuant to which they will jointly own a corporate aircraft. LifePoint will reimburse Columbia/HCA for a portion of the cost of operating the aircraft proportionate to LifePoint's ownership interest. 45 Dividend Policy LifePoint LifePoint currently intends to retain its earnings for use in the operation and expansion of its business and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of LifePoint's debt agreements are expected to restrict the payment of cash dividends by LifePoint. Any future determination to declare or pay cash dividends will be made by the LifePoint Board of Directors. The actual amount and timing of dividends, if any, will depend on LifePoint's financial condition, results of operations, business prospects, capital requirements, credit agreements and such other matters as the LifePoint Board of Directors may deem relevant. See "LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Triad Triad currently intends to retain its earnings for use in the operation and expansion of its business and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. In addition, the terms of Triad's debt agreements are expected to restrict the payment of cash dividends by Triad. Any future determination to declare or pay cash dividends will be made by the Triad Board of Directors. The actual amount and timing of dividends, if any, will depend on Triad's financial condition, results of operations, business prospects, capital requirements, credit agreements and such other matters as the Triad Board of Directors may deem relevant. See "Triad Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 46 LifePoint Selected Financial Data (Dollars in millions)
Years Ended December 31, ---------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------ ------ ------ Summary of Operations: Revenues............................ $ 498.4 $ 487.6 $464.0 $395.8 $350.1 Income (loss) from continuing operations(a)...................... (17.7) 17.1 39.3 25.6 14.4 Net income (loss)(a)................ (21.8) 12.5 41.2 27.4 15.9 Financial Position: Assets.............................. $ 355.0 $ 397.9 $376.0 $324.5 $312.3 Long-term debt, including amounts due within one year................ 0.6 1.6 1.6 2.1 1.7 Other Operating Data: EBITDA(b)........................... 56.8 82.0 110.6 82.4 66.3 Number of hospitals at end of period............................. 23 22 22 20 20 Number of licensed beds at end of period(c).......................... 2,108 2,080 2,074 1,881 1,843 Weighted average licensed beds(d)... 2,122 2,078 2,060 1,862 1,783 Admissions(e)....................... 62,264 60,487 59,381 54,549 52,681 Equivalent admissions(f)............ 109,336 105,126 98,869 88,915 81,708 Average length of stay (days)(g).... 4.4 4.4 4.7 4.8 4.9 Average daily census(h)............. 742 733 755 713 713 Occupancy rate(i)................... 35% 35% 37% 38% 40%
- -------- (a) Includes charge related to impairment of long-lived assets of $26.1 million ($15.9 million after-tax) for the year ended December 31, 1998. (b) EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long- lived assets, minority interests and income taxes. EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the combined financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Represents the average number of licensed beds weighted based on periods owned. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to LifePoint's hospitals and is used by management and certain investors as a general measure of inpatient volume. (f) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (g) Represents the average number of days admitted patients stay in LifePoint's hospitals. Average length of stay has declined due to the continuing pressures from managed care and other payers to restrict 47 admissions and reduce the number of days that are covered by the payers for certain procedures, and by technological and pharmaceutical improvements. (h) Represents the average number of patients in LifePoint's hospital beds each day. (i) Represents the percentage of hospital licensed beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms. The declining occupancy rate is primarily attributed to the trend toward more services, that were previously performed in an inpatient setting, being performed on an outpatient basis and the decline in average length of stay per admission. 48 LifePoint Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read together with the historical financial statements of LifePoint Hospitals, Inc. included elsewhere herein and the notes thereto and the information set forth under "LifePoint Selected Financial Data" and "LifePoint Unaudited Pro Forma Condensed Combined Financial Statements" and the notes thereto. Overview LifePoint will own and operate the health care service business which has comprised the America Group of Columbia/HCA until the distribution by Columbia/HCA to its shareholders of all of the shares of outstanding common stock of LifePoint. The distribution marks the beginning of LifePoint's operations as an independent, publicly-traded company. As such, the historical financial statements of LifePoint Hospitals, Inc. may not be indicative of LifePoint's future performance, nor do they necessarily reflect what the financial position and results of operations of LifePoint would have been if it had operated as a separate, stand-alone entity during the periods covered. See "Risk Factors--No Operating Histories as Independent Companies." Forward-Looking Statements This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains disclosures which are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on the current plans and expectations of LifePoint and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and the future financial condition and results of LifePoint. These factors include, but are not limited to, (i) the highly competitive nature of the health care business, (ii) the efforts of insurers, health care providers and others to contain health care costs, (iii) possible changes in the Medicare program that may further limit reimbursements to health care providers and insurers, (iv) changes in Federal, state or local regulation affecting the health care industry, (v) the possible enactment of Federal or state health care reform, (vi) the departure of key executive officers from LifePoint, (vii) claims and legal actions relating to professional liability, (viii) fluctuations in the market value of LifePoint common stock, (ix) changes in accounting practices, (x) changes in general economic conditions, (xi) the complexity of integrated computer systems and the success and expense of the remediation efforts of Columbia/HCA, LifePoint and relevant third parties in achieving Year 2000 readiness, and (xii) other risk factors described above. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of LifePoint. You are cautioned not to unduly rely on such forward- looking statements when evaluating the information presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Investigations Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is the subject of a formal order of investigation by the Securities and Exchange Commission. Columbia/HCA understands that the SEC investigation includes the anti-fraud, periodic reporting and internal accounting control provisions of the Federal securities laws. Management believes that the ongoing governmental investigations and related media coverage may be having a negative effect on Columbia/HCA's results of operations (which includes LifePoint for the periods prior to the distribution date which are presented herein). The extent to which LifePoint may or may not continue to be affected after the distribution by the ongoing investigations of Columbia/HCA, the initiation of 49 additional investigations, if any, and the related media coverage cannot be predicted. It is possible that these matters could have a material adverse effect on the financial condition or results of operations of LifePoint in future periods. Columbia/HCA has agreed to indemnify LifePoint in respect of any losses which it may incur arising from the governmental investigations described above and from stockholder actions and other legal proceedings related to the governmental investigations which are currently pending against Columbia/HCA. Columbia/HCA has also agreed to indemnify LifePoint in respect of any losses which it may incur as a result of proceedings which may be commenced by government authorities or by private parties in the future that arise from acts, practices or omissions engaged in prior to the Distribution Date and relate to the proceedings described above. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement." If any of such indemnified matters were successfully asserted against LifePoint, or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations, then such losses could have a material adverse effect on the financial position and results of operations of LifePoint. (See Note 3--Columbia/HCA Investigations, Litigation and Indemnification Rights and Note 11--Contingencies of the Notes to Combined Financial Statements of LifePoint included elsewhere herein). Results of Operations Revenue/Volume Trends LifePoint has experienced an increase in revenues and volume growth during 1998. However, on a same facility basis, LifePoint has experienced declines in revenues and volume growth rates as well as operational deficiencies. Management believes three primary factors have contributed to these declines in revenue and volume growth rate (on a same facility basis): the impact of reductions in Medicare payments mandated by the Balanced Budget Act of 1997 (the "Balanced Budget Act"), the continuing trend toward the conversion of more services to an outpatient basis and the impact of the government investigations. LifePoint's revenues continue to be affected by an increasing proportion of revenue being derived from fixed payment, higher discount sources, including Medicare, Medicaid and managed care plans. In addition, insurance companies, government programs (other than Medicare) and employers purchasing health care services for their employees are also negotiating discounted amounts that they will pay health care providers rather than paying standard prices. LifePoint expects patient volumes from Medicare and Medicaid to continue to increase due to the general aging of the population and the expansion of state Medicaid programs. However, under the Balanced Budget Act, LifePoint's reimbursement from the Medicare and Medicaid programs was reduced in 1998 and will be further reduced as some reductions in reimbursement levels are phased in over the next two years. The Balanced Budget Act has accelerated a shift, by certain Medicare beneficiaries, from traditional Medicare coverage to medical coverage that is provided under managed care plans. LifePoint generally receives lower payments per patient under managed care plans than under traditional indemnity insurance plans. With an increasing proportion of services being reimbursed based upon fixed payment amounts (where the payment is based upon the diagnosis, regardless of the cost incurred or the level of service provided) revenues, earnings and cash flows are being significantly reduced. Admissions related to Medicare, Medicaid and managed care plan patients were 87.7% and 86.1% of total admissions for the years ended December 31, 1998 and 1997, respectively. LifePoint's hospitals do not receive any revenues from capitation arrangements (prepaid health service agreements). See "Government and Other Sources of Reimbursement for LifePoint and Triad." LifePoint's revenues also continue to be affected by the trend toward certain services being performed more frequently on an outpatient basis. Growth in outpatient services is expected to continue in the health care industry as procedures performed on an inpatient basis are converted to outpatient procedures through continuing advances in pharmaceutical and medical technologies. The redirection of certain procedures to an outpatient basis is also influenced by pressures from payers to perform certain procedures as outpatient care rather than inpatient care. Generally, the payments received for an outpatient procedure are less than for a similar procedure performed in an inpatient setting. Outpatient revenues grew to 47.9% of net patient revenues for the year ended December 31, 1998 from 47.1% during the prior year. 50 Management believes that the impact of the ongoing governmental investigations of certain of Columbia/HCA's business practices and the related media coverage, combined with Columbia/HCA's restructuring of operations (including the distribution of Triad and LifePoint and the announced divestitures of several facilities), have created uncertainties with physicians, patients and payers in certain markets. See "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation." Reductions in the rate of increase in Medicare and Medicaid reimbursement, increasing percentages of the patient volume being related to patients participating in managed care plans and continuing trends toward more services being performed on an outpatient basis are expected to present an ongoing challenge to LifePoint. The challenges presented by these trends are magnified by LifePoint's inability to control these trends and the associated risks. To maintain and improve its operating margins in future periods, LifePoint must increase patient volumes while controlling the costs of providing services. If LifePoint is not able to achieve reductions in the cost of providing services through increased operational efficiencies, and the trend toward declining reimbursements and payments continues, results of operations and cash flow will deteriorate. Management believes that the proper response to these challenges includes the delivery of a broad range of quality health care services to patients by assuring that physicians with appropriate specializations practice in the hospitals, that the appropriate equipment and range of specialized services are available within the hospitals, and that the hospitals are positioned as community assets. Operating Results Summary The following are comparative summaries of results from continuing operations for the years ended December 31, 1998 and 1997 and the years ended December 31, 1997 and 1996 (dollars in millions):
Years Ended December 31, --------------------------- 1998 1997 ------------- ------------ Amount Ratio Amount Ratio ------ ----- ------ ----- Revenues.......................................... $498.4 100.0 $487.6 100.0 Salaries and benefits............................. 220.8 44.3 196.6 40.3 Supplies.......................................... 62.0 12.4 55.0 11.3 Other operating expenses.......................... 117.2 23.5 119.5 24.5 Provision for doubtful accounts................... 41.6 8.4 34.5 7.1 Depreciation and amortization..................... 28.3 5.7 27.4 5.6 Interest expense.................................. 19.1 3.8 15.4 3.2 Management fees allocated from Columbia/HCA....... 8.9 1.8 8.2 1.7 Impairment of long-lived assets................... 26.1 5.2 - - ------ ----- ------ ----- 524.0 105.1 456.6 93.7 ------ ----- ------ ----- Income (loss) from continuing operations before minority interests and income taxes (benefit).... (25.6) (5.1) 31.0 6.3 Minority interests in earnings of consolidated entities......................................... 1.9 0.4 2.2 0.4 ------ ----- ------ ----- Income (loss) from continuing operations before income taxes (benefit)........................... (27.5) (5.5) 28.8 5.9 Provision (benefit) for income taxes.............. (9.8) (2.0) 11.7 2.4 ------ ----- ------ ----- Income (loss) from continuing operations.......... $(17.7) (3.5) $ 17.1 3.5 ====== ===== ====== ===== % changes from prior year: Revenues........................................ 2.2% Income (loss) from continuing operations before income taxes (benefit)......................... (195.4) Income (loss) from continuing operations........ (204.0) Admissions (a).................................. 2.9 Equivalent admissions (b)....................... 4.0 Revenues per equivalent admission............... (1.7) Same facility % changes from prior year (c): Revenues........................................ (1.8) Admissions (a).................................. (.8) Equivalent admissions (b)....................... .2 Revenues per equivalent admission............... (2.0)
51 Operating Results Summary (continued)
Years Ended December 31, -------------------------- 1997 1996 ------------- ------------ Amount Ratio Amount Ratio ------ ----- ------ ----- Revenues........................................... $487.6 100.0 $464.0 100.0 Salaries and benefits.............................. 196.6 40.3 175.2 37.8 Supplies........................................... 55.0 11.3 50.9 11.0 Other operating expenses........................... 119.5 24.5 99.3 21.4 Provision for doubtful accounts.................... 34.5 7.1 28.0 6.0 Depreciation and amortization...................... 27.4 5.6 23.5 5.1 Interest expense................................... 15.4 3.2 14.1 3.0 Management fees allocated from Columbia/HCA........ 8.2 1.7 6.2 1.3 ------ ----- ------ ----- 456.6 93.7 397.2 85.6 ------ ----- ------ ----- Income from continuing operations before minority interests and income taxes........................ 31.0 6.3 66.8 14.4 Minority interests in earnings of consolidated entities.......................................... 2.2 0.4 1.2 0.3 ------ ----- ------ ----- Income from continuing operations before income taxes............................................. 28.8 5.9 65.6 14.1 Provision for income taxes......................... 11.7 2.4 26.3 5.7 ------ ----- ------ ----- Income from continuing operations.................. $ 17.1 3.5 $ 39.3 8.4 ====== ===== ====== ===== % changes from prior year: Revenues......................................... 5.1% Income from continuing operations before income taxes........................................... (56.1) Income from continuing operations................ (56.5) Admissions (a)................................... 1.9 Equivalent admissions (b)........................ 6.3 Revenues per equivalent admission................ (1.2) Same facility % changes from prior year (c): Revenues......................................... 2.5 Admissions (a)................................... 0.7 Equivalent admissions (b)........................ 5.8 Revenues per equivalent admission................ (3.1)
- -------- (a) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to LifePoint's hospitals and is used by management and certain investors as a general measure of inpatient volume. (b) Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (c) "Same facility" information excludes the operations of hospitals and their related facilities which were either acquired, consolidated or divested during the current and prior year. The facilities that LifePoint intends to divest will continue to be included in "same facility" until the date they are divested. 52 Years Ended December 31, 1998 and 1997 Revenues increased 2.2% to $498.4 million in 1998 compared to $487.6 million in 1997. Inpatient admissions increased 2.9%, equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) increased 4.0% and revenues per equivalent admission decreased 1.7% from 1997. On a same facility basis, revenues decreased 1.8%, inpatient admissions decreased .8%, equivalent admissions increased .2% and revenues per equivalent admission decreased 2.0%. The decline in revenues (on a same facility basis) and revenues per equivalent admission was due to several factors, including decreases in Medicare reimbursement rates mandated by the Balanced Budget Act which became effective October 1, 1997 (such rates lowered 1998 revenues by approximately $7 million), continued increases in discounts from the growing number of managed care payers (managed care as a percentage of total admissions increased to 18.6% in 1998 compared to 16.7% in 1997) and delays experienced in obtaining Medicare cost report settlements (cost report filings and settlements resulted in favorable revenue adjustments of $1.2 million in 1998 compared to favorable adjustments of $3.3 million in 1997). Operating expenses increased as a percentage of revenues in every expense category except for other operating expenses, which decreased 1.0%. The primary reason for the increases, as a percentage of revenues, was LifePoint's inability to adjust expenses in line with the decreases experienced in same facility volume and reimbursement trends. The level of management's attention being devoted to the governmental investigations, reactions by certain physicians and patients to the related negative media coverage and management changes at several levels and locations throughout LifePoint contributed to LifePoint's inability to implement changes to reduce operating expenses in response to the revenue and volume growth rate declines on a same facility basis. Salaries and benefits, as a percentage of revenues, increased to 44.3% in 1998 from 40.3% in 1997. The increase was due to cost pressures on labor (salaries and benefits per equivalent admission increased 8.0% over last year) and a decline in productivity (man-hours per equivalent admission increased 2.9% over last year). Supply costs increased to 12.4% as a percentage of revenues in 1998 from 11.3% in 1997 primarily due to the 1.7% decline in revenues per equivalent admission, while the cost of supplies per equivalent admission increased 8.4%. The higher cost of supplies per equivalent admission resulted from significant increases in pharmaceutical costs and other increases in new product development costs and general inflation. Other operating expenses decreased as a percentage of revenues to 23.5% in 1998 from 24.5% in 1997. Other operating expenses consists primarily of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance, marketing and non-income taxes. The decrease was due to small decreases in several of these expense categories as a percentage of revenues, including lower marketing costs being incurred due to the cancellation of a national branding campaign. Provision for doubtful accounts, as a percentage of revenues, increased to 8.4% in 1998 from 7.1% in 1997 due to internal factors such as computer information system conversions (including patient accounting systems) at various facilities and external factors such as payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles) and payer remittance slowdowns. The information system conversions hampered the business office billing functions and collection efforts in those facilities as some resources were directed to installing and converting systems and building new data files, rather than devoting full effort to billing and collecting receivables. LifePoint has experienced an increased occurrence of charge audits from certain payers due to the negative publicity surrounding the government investigations which have resulted in delays in the collection of receivables. The delays in collection resulted in an increase in receivables reserved under LifePoint's bad debt allowance policy. Management is not able to quantify the effects of each of these factors, but the shift in payer mix is expected to continue and the provision for doubtful accounts is likely to remain at higher levels than in past years (1996 and prior). Interest expense, which is primarily represented by interest incurred on the net intercompany balance with Columbia/HCA, increased to $19.1 million in 1998 from $15.4 million in 1997 primarily as a result of an increase in the average balance of the advances from Columbia/HCA during 1998 compared to the same period in 1997. During 1998, LifePoint, as part of its strategic business plan, decided to divest three of its facilities. The divestitures are expected to be completed through sales. The carrying value for these facilities expected to be 53 sold was reduced to fair value, based upon estimated selling values, resulting in a pre-tax impairment charge of $24.8 million. An additional pre-tax impairment loss of approximately $1.3 million was recorded during 1998 related to the write-off of intangibles and other long-lived assets of certain physician practices where the recorded asset values were not deemed to be fully recoverable based upon the operating results trends and projected future cash flows. These assets are now recorded at estimated fair value. (See Note 5-- Impairment of Long-Lived Assets in the Notes to Combined Financial Statements of LifePoint included elsewhere herein.) Income (loss) from continuing operations before income taxes (benefit) declined to a loss of $27.5 million in 1998 from income of $28.8 million in 1997 primarily due to the $15.9 million after-tax charge related to impairment of long-lived assets. Also, the three facilities that management has determined to divest as part of their plan to establish the structure for the future operations of LifePoint contributed significantly to the decline in results of operations. These facilities to be divested incurred losses from continuing operations before income tax benefit of approximately $9.6 million and $3.8 million for the years ended December 31, 1998 and 1997, respectively. Net income declined to a loss of $21.8 million in 1998 compared to income of $12.5 million in 1997. In addition to the decline in income from continuing operations, LifePoint incurred a $4.1 million after-tax loss from its discontinued home health operations in 1998 compared to a $0.6 million after- tax loss in 1997, primarily due to declines in Medicare rates of reimbursement under the Balanced Budget Act and declines in home health visits. Years Ended December 31, 1997 and 1996 Revenues increased 5.1% to $487.6 million in 1997 compared to $464.0 million in 1996. Inpatient admissions increased 1.9%, equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) increased 6.3% and revenues per equivalent admission decreased 1.2% from 1996. The increase in revenues and equivalent admissions was primarily due to the acquisition of two hospitals during March and May of 1996. On a same facility basis, revenues increased 2.5%, admissions increased 0.7%, equivalent admissions increased 5.8% and revenues per equivalent admission decreased 3.1%. The increase in outpatient volume (reflected by the increases in equivalent admissions) is primarily a result of the continuing trend of certain services, previously provided in an inpatient setting, being converted to an outpatient setting. The decline in revenues per equivalent admission was due in part to delays experienced in obtaining cost report settlements (cost reports resulted in favorable revenue adjustments of $3.3 million in 1997 compared to $10.6 million in 1996), decreases in Medicare rates of reimbursement mandated by the Balanced Budget Act which became effective October 1, 1997 (such rates lowered fourth quarter 1997 revenues by approximately $1.5 million) and increased discounts from the growing number of managed care payers (managed care as a percentage of total admissions increased to 16.7% in 1997 compared to 13.8% in 1996). Operating expenses increased as a percentage of revenues in every expense category primarily due to LifePoint's inability to control expenses in line with the reimbursement rate declines. The level of management's attention being devoted to the governmental investigations during the fourth quarter of 1997, reactions by certain physicians and patients to the related negative media coverage and management changes at several levels and locations throughout LifePoint contributed to LifePoint's inability to control operating expenses. Salaries and benefits, as a percentage of revenues, increased to 40.3% in 1997 from 37.8% in 1996. The increase was primarily due to cost pressures on labor (salaries and benefits per equivalent admission increased 5.5% over last year). Other operating expenses increased to 24.5% of revenues in 1997 compared to 21.4% in 1996. Included in 1997 are costs associated with start-up activities whereby in prior years similar costs were previously capitalized and subsequently amortized. LifePoint changed its policy on accounting for start-up costs effective January 1, 1997, which resulted in approximately $4.6 million being recorded as other operating expenses for 1997, compared to similar costs being capitalized and the related expense recorded as amortization expense 54 during 1996. (See Note 7--Accounting Change of the Notes to Combined Financial Statements of LifePoint included elsewhere herein). The increase was also due, in part, to small increases in various operating expense categories including contract services as a percentage of revenues. Provision for doubtful accounts, as a percentage of revenues, increased to 7.1% in 1997 from 6.0% in 1996 due to internal factors such as computer information system conversions (including patient accounting systems) at various facilities and external factors such as payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles) and payer remittance slowdowns. Depreciation and amortization increased as a percentage of revenues to 5.6% in 1997 from 5.1% in 1996. The increase was primarily due to increased capital expenditures related to ancillary services (such as outpatient services) and information systems. Interest expense, which is primarily represented by interest incurred on the net intercompany balance with Columbia/HCA, increased to $15.4 million in 1997 compared to $14.1 million in 1996, primarily as a result of an increase in the average balance of the advances from Columbia/HCA during 1997 compared to 1996. This was due, in part, to a $18.4 million decline in net cash flows provided from operations during 1997 compared to 1996. Income from continuing operations before income taxes declined to $28.8 million in 1997 from $65.6 million in 1996 due to the increases in expenses as discussed above. Also, the three facilities that LifePoint plans to divest contributed to the decline in results of operations. These facilities to be divested incurred losses from continuing operations before income tax benefit of approximately $3.8 million for the year ended December 31, 1997 compared to income from continuing operations before income taxes of $1.8 million for the year ended December 31, 1996. Net income declined to $12.5 million in 1997 compared to $41.2 million in 1996. In addition to the decline in income from continuing operations, LifePoint incurred a $4.0 million after-tax loss from its discontinued home health operations in 1997 compared to $1.9 million in after-tax income in 1996. The 1997 loss includes a $3.4 million after-tax estimated loss on disposal of its home health operations. The majority of the decline in income from operations of the discontinued home health businesses was due to reductions in Medicare rates of reimbursement under the Balanced Budget Act. Liquidity and Capital Resources LifePoint has previously relied upon Columbia/HCA for liquidity and sources of capital to supplement any needs not met by operations. Following the distribution, as an independent, publicly-traded company, LifePoint will have direct access to the capital markets and the ability to enter into its own bank borrowing arrangements. At December 31, 1998, LifePoint had working capital of $26.9 million. Cash provided by operating activities decreased slightly to $45.3 million for the year ended December 31, 1998 from $45.4 million last year. The decrease was due to reduced income before non-cash charges and partially offset by higher growth in accounts receivable balances in the prior period. For the year ended December 31, 1997, cash provided by operating activities decreased to $45.4 million from $63.8 million for the year ended December 31, 1996. The decrease was primarily due to reduced income from continuing operations and partially offset by a decline in working capital outflows during 1997 compared to the prior year. The decline in working capital outflows was primarily due to a higher growth in accounts receivable balances in the prior year partially offset by a growth in accounts payable in the same year. Cash used in investing activities decreased to $29.3 million for the year ended December 31, 1998 from $51.9 million during the same period last year. The decrease was primarily due to decreased purchases of property and equipment during the year ended 1998 and approximately $7.2 million in equity investments in joint ventures during the same period last year. Cash used in investing activities was $51.9 million for the year ended December 31, 1997 compared to $58.6 million in 1996. 55 Routine capital expenditures approximated $29.3 million for the year ended December 31, 1998. Management believes that its capital expenditure program is adequate to expand, improve and equip LifePoint's existing health care facilities. At December 31, 1998, there were projects under construction which had an estimated cost to complete and equip over the next eighteen months of approximately $61.8 million (including the construction of a replacement hospital located in Florida that is estimated to cost approximately $32.0 million). In connection with the distribution, all intercompany accounts payable by LifePoint to Columbia/HCA will be eliminated, and LifePoint will assume $250 million of debt obligations from Columbia/HCA. $ million of this debt financing is expected to consist of a -year term loan with a syndicate of banks, and $ million is expected to consist of % Senior Subordinated Notes due 2009. LifePoint also expects to enter into a revolving credit loan agreement providing for a commitment for revolving credit loans in an aggregate principal amount of up to $ million. Borrowings under the revolving credit facility will be available to fund working capital needs and to finance acquisitions. Management does not consider the sale of any assets to be necessary to repay LifePoint's indebtedness or to provide working capital. However, for other reasons, certain of LifePoint's hospitals may be sold in the future from time to time. Although LifePoint's indebtedness will be more substantial than was historically the case for its predecessor entities, management expects that operations and working capital facilities will provide sufficient liquidity for fiscal 1999. LifePoint does not expect to pay dividends on its common stock in the foreseeable future. Impact of Year 2000 Computer Issues Background and General Information The Year 2000 problem is the result of two potential malfunctions that could have an impact on Columbia/HCA's systems and equipment, including systems and equipment on which LifePoint relies. The first problem arises due to computers being programmed to use two rather than four digits to define the applicable year. The second problem arises in embedded chips, where microchips and microcontrollers have been designed using two rather than four digits to define the applicable year. Certain of Columbia/HCA's computer programs, building infrastructure components (e.g., alarm systems and HVAC systems) and medical devices that are date sensitive, may recognize a date using "00" as the year 1900 rather than the year 2000. If uncorrected, the problem could result in computer system and program failures or equipment and medical device malfunctions that could result in a disruption of business operations or that could affect patient diagnosis and treatment. LifePoint obtains most of its information technology and information technology infrastructure systems from CIS pursuant to the Computer and Data Processing Services Agreement. CIS has represented that the software that is owned by CIS and provided to LifePoint will be Year 2000 ready on or before January 1, 2000, and that it will endeavor to address in a timely manner Year 2000 issues with respect to other software and hardware licensed to LifePoint under the Computer and Data Processing Services Agreement. In connection with its participation in Columbia/HCA's Year 2000 project, LifePoint has made and will continue to make certain expenditures in respect of software systems and applications not obtained from CIS and non-information technology systems (e.g., vendor products, medical equipment and other related equipment with embedded chips) to ensure that they are Year 2000 ready. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Computer and Data Processing Services Agreement" and "--Transitional Services Agreement." Pursuant to the Computer and Data Processing Services Agreement, after the distribution, LifePoint will rely on CIS to provide virtually all of its computer support and information technology services. Pursuant to the Transitional Services Agreement, Columbia/HCA will continue its ongoing program to inspect medical equipment at LifePoint facilities for Year 2000 readiness. LifePoint is dependent upon Columbia/HCA in substantially all respects for the Year 2000 readiness of its information technology and non-information 56 technology systems and for contingency planning in respect of Year 2000-related risks. Any failure by Columbia/HCA to adequately address such matters could have a material adverse effect on the business, financial condition and/or results of operations of LifePoint. Columbia/HCA is utilizing both internal and external resources to manage and implement its Year 2000 program. With the assistance of external resources, Columbia/HCA has undertaken development of contingency plans in the event that its Year 2000 efforts, or the Year 2000 efforts of third-parties upon which Columbia/HCA and LifePoint rely, are not accurately or timely completed. LifePoint management consults regularly with the Columbia/HCA personnel responsible for development of such contingency plans. Columbia/HCA has developed a contingency planning methodology and will implement contingency plans throughout 1999. Information Technology Systems With respect to the information technology portions of Columbia/HCA's Year 2000 project, which address the inventory, assessment, remediation, testing and implementation of internally developed software, Columbia/HCA has identified various software applications that are being addressed on separate time lines. Columbia/HCA has begun remediating all these software applications and is testing the software applications where remediation has been completed. Columbia/HCA has also completed the assessment of mission critical third party software (i.e., that software which is essential for day-to-day operations) and has developed testing and implementation plans with separate time lines. Columbia/HCA has completed and placed into production 60% of software applications and is 75% complete on most of the remaining software applications, and anticipates completing, in all material respects, remediation, testing and implementation for internally developed and mission critical third party software by June 1999. Columbia/HCA's efforts are currently on schedule in all material respects. With respect to the information technology infrastructure portion of Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor- supplied products (hardware, systems software, business software, and telecommunication equipment). Columbia/HCA has implemented a program to contact vendors, analyze information provided, and remediate, replace or otherwise address information technology products that pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all material respects, of the information technology infrastructure portion of its program by June 1999. The information technology infrastructure portion of Columbia/HCA's Year 2000 project is currently on schedule in all material respects. Columbia/HCA presently believes that with modifications to existing software or the installation of upgraded software under the information technology infrastructure portion, the Year 2000 will not pose material operational problems for its computer systems. However, if such modifications or upgrades are not accomplished in a timely manner, Year 2000 related failures may present a material adverse impact on the operations of LifePoint. Non-Information Technology Systems and Equipment With respect to the non-information technology infrastructure portion of Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor products, medical equipment and other related equipment with embedded chips. Columbia/HCA has implemented a program to contact vendors, analyze information provided, and remediate, replace or otherwise address devices or equipment that pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all material respects, of the non-information technology infrastructure portion of its program by a revised date of September 30, 1999, from the previously anticipated date of June 30, 1999. With respect to such revised date, the non- information technology infrastructure portion of Columbia/HCA's Year 2000 project is currently on schedule in all material respects. 57 Columbia/HCA is prioritizing its non-information technology infrastructure efforts by focusing on equipment and medical devices that will have a direct impact on patient safety and health. Columbia/HCA is directing substantial efforts to repair, replace, upgrade or otherwise address this equipment and these medical devices in order to minimize risk to patient safety and health. Columbia/HCA is relying on information that is being provided to it by equipment and medical device manufacturers regarding the Year 2000 readiness of their products. While Columbia/HCA is attempting to evaluate information provided by its past and present vendors, there can be no assurance that in all instances accurate information is being provided. Columbia/HCA also cannot in all instances guarantee that the repair, replacement or upgrade of all non- information technology infrastructure systems will occur on a timely basis or that such repairs, replacement or upgrades will avoid any Year 2000 problems. Third-Party Payers and Intermediaries, and Suppliers Columbia/HCA has initiated communications with LifePoint's major third party payers and intermediaries, including government payers and intermediaries. LifePoint relies on these entities for accurate and timely reimbursement of claims, often through the use of electronic data interfaces. Columbia/HCA has not received assurances that these interfaces will be timely converted. Testing with payers and intermediaries will not be completed by June 30, 1999 because the payers and intermediaries are not ready to test with Columbia/HCA's systems. Failure of these third party systems could have a material adverse effect on LifePoint's cash flow, or results of operations. Columbia/HCA also has initiated communications with LifePoint's mission critical suppliers and vendors (i.e. those suppliers and vendors whose products and services are essential for day-to-day operations) to verify their ability to continue to deliver goods and services through the Year 2000. Columbia/HCA has not received assurances from all mission critical suppliers and vendors that they will be able to continue to deliver goods and services through the Year 2000, but Columbia/HCA is continuing its efforts to obtain such assurances. The failure of these third parties could have a material adverse effect on the business, financial condition or results of operations of LifePoint, and/or the ability of LifePoint to provide health care services. With the assistance of external resources, Columbia/HCA has undertaken the development of contingency plans in the event that its Year 2000 efforts, or the Year 2000 efforts of third parties upon which Columbia/HCA and LifePoint rely, are not accurately or timely completed. Columbia/HCA has developed a contingency planning methodology and will implement contingency plans throughout 1999. Year 2000 Risks While Columbia/HCA is developing contingency plans to address possible failure scenarios, LifePoint recognizes that there are "worst-case" scenarios which may develop and are largely outside its or Columbia/HCA's control. LifePoint recognizes the risks associated with extended infrastructure (e.g., power, water and telecommunications) failure, the interruption of insurance and government program payments to the organization and the failure of equipment or software that could impact patient safety or health despite the assurances of third parties. Columbia/HCA is addressing these and other failure scenarios in its contingency planning effort and is engaging third parties in discussions regarding how to manage common failure scenarios, but neither Columbia/HCA nor Lifepoint can currently estimate the likelihood or the potential cost such failures. Costs and Expenses The Year 2000 project costs incurred by Columbia/HCA will have an impact on the Computer and Data Processing Services Agreement with LifePoint. LifePoint is not currently able to reasonably estimate the ultimate cost to be incurred by it for the assessment, remediation, upgrade, replacement and testing of its impacted non-information technology systems. The majority of the costs (except the cost of new equipment) related to the Year 2000 project will be expensed as incurred and are expected to be funded through operating cash flows. 58 The successful completion of the project and completion dates for the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantees that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area and the ability to locate and correct all relevant computer codes and all medical equipment. Effects of Inflation and Changing Prices Various federal, state and local laws have been enacted that, in certain cases, limit LifePoint's ability to increase prices. Revenues for acute care hospital services rendered to Medicare patients are established under the Federal government's prospective payment system. Total Medicare revenues approximated 37.8%, 39.4% and 40.9% for the years ended December 31, 1998, 1997 and 1996, respectively. Management believes that hospital industry operating margins have been, and may continue to be, under significant pressure because of deterioration in inpatient volumes, changes in payer mix, and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. Management expects that the average rate of increase in Medicare prospective payments will continue to decline slightly in 1999. In addition, as a result of increasing regulatory and competitive pressures, LifePoint's ability to maintain operating margins through price increases to non-Medicare patients is limited. Health Care Reform In recent years, an increasing number of legislative proposals have been introduced or proposed to Congress and in some state legislatures that would significantly affect health care systems in LifePoint's markets. The cost of certain proposals would be funded in significant part by reduction in payments by government programs, including Medicare and Medicaid, to health care providers (similar to the reductions incurred as part of the Balanced Budget Act as previously discussed). While LifePoint is unable to predict which, if any, proposals for health care reform will be adopted, there can be no assurance that proposals adverse to the business of LifePoint will not be adopted. 59 Triad Selected Financial Data (Dollars in millions)
Years Ended December 31, ------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Summary of Operations: Revenues................ $1,588.7 $1,609.3 $1,600.5 $1,558.9 $1,290.5 Income (loss) from continuing operations (a).................... (85.5) (19.0) 68.3 163.4 115.1 Net income (loss) (a)... (87.1) (19.8) 74.7 165.7 116.6 Financial Position: Assets.................. $1,371.3 $1,410.5 $1,426.3 $1,351.8 $1,169.4 Long-term debt, including amounts due within one year........ 14.4 15.4 17.1 27.5 32.3 Other Operating Data: EBITDA(b)............... $ 149.0 $ 187.8 $ 294.5 $ 285.2 $ 206.2 Number of hospitals at end of period.......... 38 38 38 39 38 Number of licensed beds at end of period (c)... 5,909 5,859 5,872 5,926 5,660 Weighted average licensed beds (d)...... 5,877 5,860 5,882 5,900 5,325 Admissions (e).......... 169,590 172,926 171,265 170,392 147,923 Equivalent admissions (f).................... 276,771 275,125 266,660 257,292 211,382 Average length of stay (days) (g)............. 4.9 4.9 5.0 5.2 5.2 Average daily census (h).................... 2,260 2,326 2,338 2,405 2,111 Occupancy rate (i)...... 39% 40% 40% 41% 40%
- -------- (a) Includes charges related to impairment of long-lived assets of $55.1 million ($32.9 million after-tax) and $13.7 million ($8.2 million after- tax) for the years ended December 31, 1998 and 1997, respectively. (b) EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long- lived assets, minority interests and income taxes. EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the combined financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Represents the average number of licensed beds, weighted based on periods owned. (e) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to Triad's hospitals and is used by management and certain investors as a general measure of inpatient volume. (f) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (g) Represents the average number of days admitted patients stay in Triad's hospitals. Average length of stay has declined due to the continuing pressures from managed care and other payers to restrict admissions and reduce the number of days that are covered by the payers for certain procedures, and by technological and pharmaceutical improvements. (h) Represents the average number of patients in Triad's hospital beds each day. (i) Represents the percentage of hospital licensed beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms. The declining occupancy rate is primarily attributed to the trend toward more services, that were previously performed in an inpatient setting, being performed on an outpatient basis and the decline in average length of stay per admission. 60 Triad Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion should be read together with the historical financial statements of Triad Hospitals, Inc. included elsewhere herein and the notes thereto and the information set forth under "Triad Selected Financial Data" and "Triad Unaudited Pro Forma Condensed Combined Financial Statements" and the notes thereto. Overview Triad will own and operate the health care service business which has comprised the Pacific Group of Columbia/HCA until the distribution by Columbia/HCA to its shareholders of all of the shares of outstanding common stock of Triad. The distribution marks the beginning of Triad's operations as an independent, publicly-traded company. As such, the historical financial statements of Triad Hospitals, Inc. may not be indicative of Triad's future performance, nor do they necessarily reflect what the financial position and results of operations of Triad would have been if it had operated as a separate, stand-alone entity during the periods covered. See "Risk Factors--No Operating Histories as Independent Companies." Forward-Looking Statements This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains disclosures which are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on the current plans and expectations of Triad and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and the future financial condition and results of Triad. These factors include, but are not limited to, (i) the highly competitive nature of the health care business, (ii) the efforts of insurers, health care providers and others to contain health care costs, (iii) possible changes in the Medicare program that may further limit reimbursements to health care providers and insurers, (iv) changes in Federal, state or local regulation affecting the health care industry, (v) the possible enactment of Federal or state health care reform, (vi) the departure of key executive officers from Triad, (vii) claims and legal actions relating to professional liability, (viii) fluctuations in the market value of Triad common stock, (ix) changes in accounting practices, (x) changes in general economic conditions, (xi) the complexity of integrated computer systems and the success and expense of the remediation efforts of Columbia/HCA, Triad and relevant third parties in achieving Year 2000 readiness, and (xii) other risk factors described above. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of Triad. You are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Investigations Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is the subject of a formal order of investigation by the Securities and Exchange Commission. Columbia/HCA understands that the SEC investigation includes the anti-fraud, periodic reporting and internal accounting control provisions of the Federal securities laws. Management believes that the ongoing governmental investigations and related media coverage may be having a negative effect on Columbia/HCA's results of operations (which includes Triad for the periods prior to the distribution date which are presented herein). The extent to which Triad may or may not continue to be affected after the distribution by the ongoing investigations of Columbia/HCA, the initiation of additional investigations, if any, and the related media coverage cannot be predicted. It is possible that these matters could have a material adverse effect on the financial condition or results of operations of Triad in future periods. 61 Columbia/HCA has agreed to indemnify Triad in respect of any losses which it may incur arising from the governmental investigations described above and from stockholder actions and other legal proceedings related to the governmental investigations which are currently pending against Columbia/HCA. Columbia/HCA has also agreed to indemnify Triad in respect of any losses which it may incur as a result of proceedings which may be commenced by government authorities or by private parties in the future that arise from acts, practices or omissions engaged in prior to the Distribution Date and related to the proceedings described above. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement." If any such indemnified matters were successfully asserted against Triad, or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations, then such losses could have a material adverse effect on the financial position and results of operations of Triad. (See Note 3--Columbia/HCA Investigations, Litigation and Indemnification Rights and Note 11--Contingencies of the Notes to Combined Financial Statements of Triad included elsewhere herein). Results of Operations Revenue/Volume Trends During the year ended December 31, 1998, Triad has experienced declines in revenue and volume growth rates as well as operational deficiencies. Management believes three primary factors have contributed to the declines in revenue and volume growth rate: the impact of reductions in Medicare payments mandated by the Balanced Budget Act of 1997 (the "Balanced Budget Act"), the continuing trend toward the conversion of more services to an outpatient basis and the impact of the government investigations. Triad's revenues continue to be affected by an increasing proportion of revenue being derived from fixed payment, higher discount sources, including Medicare, Medicaid and managed care plans. In addition, insurance companies, government programs (other than Medicare) and employers purchasing health care services for their employees are also negotiating discounted amounts that they will pay health care providers rather than paying standard prices. Triad expects patient volumes from Medicare and Medicaid to continue to increase due to the general aging of the population and expansion of state Medicaid programs. However, under the Balanced Budget Act, Triad's reimbursement from the Medicare and Medicaid programs was reduced in 1998 and will be further reduced as some reductions in reimbursement levels are phased in over the next two years. The Balanced Budget Act has accelerated a shift, by certain Medicare beneficiaries, from traditional Medicare coverage to medical coverage that is provided under managed care plans. Triad generally receives lower payments per patient under managed care plans than under traditional indemnity insurance plans. With an increasing proportion of services being reimbursed based upon fixed payment amounts (where the payment is based upon the diagnosis, regardless of the cost incurred or level of service provided), revenues, earnings and cash flows are being significantly reduced. Admissions related to Medicare, Medicaid and managed care plan patients were 88.4% and 87.3% of total admissions for the years ended December 31, 1998 and 1997, respectively. Revenues from capitation arrangements (prepaid health service agreements) are less than 1% of revenues. See "Government and Other Sources of Reimbursement for LifePoint and Triad." Triad's revenues also continue to be affected by the trend toward certain services being performed more frequently on an outpatient basis. Growth in outpatient services is expected to continue in the health care industry as procedures performed on an inpatient basis are converted to outpatient procedures through continuing advances in pharmaceutical and medical technologies. The redirection of certain procedures to an outpatient basis is also influenced by pressures from payers to perform certain procedures as outpatient care rather than inpatient care. Generally, the payments received for an outpatient procedure are less than for a similar procedure performed in an inpatient setting. Outpatient revenues grew to 43.3% of net patient revenues for the year ended December 31, 1998 from 40.4% during the prior year. Management believes that the impact of the ongoing governmental investigations of certain Columbia/HCA business practices and the related media coverage, combined with Columbia/HCA's restructuring of operations (including the distribution of Triad and LifePoint and the announced divestitures of several facilities), have created uncertainties with physicians, patients and payers in certain markets. See 62 "Regulation and Other Factors Affecting LifePoint and Triad--Governmental Investigation of Columbia/HCA and Related Litigation." Reductions in the rate of increase in Medicare and Medicaid reimbursement, increasing percentages of the patient volume being related to patients participating in managed care plans and continuing trends toward more services being performed on an outpatient basis are expected to present an ongoing challenge to Triad. The challenges presented by these trends are magnified by Triad's inability to control these trends and the associated risks. To maintain and improve its operating margins in future periods, Triad must increase patient volumes while controlling the costs of providing services. If Triad is not able to achieve reductions in the cost of providing services through increased operational efficiencies, and the trend toward declining reimbursements and payments continues, results of operations and cash flows will deteriorate. Management believes that the proper response to these challenges includes the delivery of a broad range of quality health care services to physicians and patients with operating decisions being made by the local management teams and local physicians. Operating Results Summary Following are comparative summaries of results from continuing operations for the years ended December 31, 1998 and 1997 and the years ended December 31, 1997 and 1996 (dollars in millions):
Years Ended December 31, --------------------------------- 1998 1997 ---------------- --------------- Amount Ratio Amount Ratio -------- ----- -------- ----- Revenues................................... $1,588.7 100.0 $1,609.3 100.0 Salaries and benefits...................... 700.5 44.1 666.8 41.4 Supplies................................... 241.6 15.2 232.8 14.5 Other operating expenses................... 359.2 22.6 383.4 23.8 Provision for doubtful accounts............ 138.4 8.7 138.5 8.6 Depreciation and amortization.............. 109.6 7.0 102.9 6.3 Interest expense........................... 68.9 4.3 60.5 3.8 Management fees allocated from Columbia/HCA.............................. 29.3 1.8 25.4 1.6 Impairment of long-lived assets............ 55.1 3.5 13.7 0.9 -------- ----- -------- ----- 1,702.6 107.2 1,624.0 100.9 -------- ----- -------- ----- Loss from continuing operations before minority interests and income taxes....... (113.9) (7.2) (14.7) (0.9) Minority interests in earnings of consolidated entities..................... 11.0 0.7 11.5 0.7 -------- ----- -------- ----- Loss from continuing operations before income tax benefit........................ (124.9) (7.9) (26.2) (1.6) Income tax benefit......................... (39.4) (2.5) (7.2) (0.4) -------- ----- -------- ----- Loss from continuing operations............ $ (85.5) (5.4) $ (19.0) (1.2) ======== ===== ======== ===== % changes from prior year: Revenues................................. (1.3%) Loss from continuing operations.......... 350.8 Admissions (a)........................... (1.9) Equivalent admissions (b)................ 0.6 Revenues per equivalent admission........ (1.9) Same facility % changes from prior year (c): Revenues................................. (1.3) Admissions (a)........................... (1.9) Equivalent admissions (b)................ 0.6 Revenues per equivalent admission........ (1.9)
63 Operating Results Summary (continued)
Years Ended December 31, ------------------------------- 1997 1996 --------------- -------------- Amount Ratio Amount Ratio -------- ----- -------- ----- Revenues....................................... $1,609.3 100.0 $1,600.5 100.0 Salaries and benefits.......................... 666.8 41.4 628.1 39.2 Supplies....................................... 232.8 14.5 221.9 13.9 Other operating expenses....................... 383.4 23.8 349.5 21.8 Provision for doubtful accounts................ 138.5 8.6 106.5 6.7 Depreciation and amortization.................. 102.9 6.3 94.5 5.9 Interest expense............................... 60.5 3.8 52.0 3.2 Management fees allocated from Columbia/HCA.... 25.4 1.6 20.7 1.3 Impairment of long-lived assets................ 13.7 0.9 - - -------- ----- -------- ----- 1,624.0 100.9 1,473.2 92.0 -------- ----- -------- ----- Income (loss) from continuing operations before minority interests and income taxes (benefit)..................................... (14.7) (0.9) 127.3 8.0 Minority interests in earnings of consolidated entities...................................... 11.5 0.7 10.8 0.7 -------- ----- -------- ----- Income (loss) from continuing operations before income taxes (benefit)........................ (26.2) (1.6) 116.5 7.3 Provision for income taxes (benefit)........... (7.2) (0.4) 48.2 3.0 -------- ----- -------- ----- Income (loss) from continuing operations....... $ (19.0) (1.2) $ 68.3 4.3 ======== ===== ======== ===== % changes from prior year: Revenues..................................... 0.6% Income (loss) from continuing operations..... (127.8) Admissions (a)............................... 1.0 Equivalent admissions (b).................... 3.2 Revenues per equivalent admission............ (2.5) Same facility % changes from prior year (c): Revenues..................................... 0.6 Admissions (a)............................... 1.7 Equivalent admissions (b).................... 3.9 Revenues per equivalent admission............ (3.1)
- -------- (a) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to Triad's hospitals and is used by management and certain investors as a general measure of inpatient volume. (b) Equivalent admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (c) "Same facility" information excludes the operations of hospitals and their related facilities which were either acquired or divested during the current and prior year. The facilities that Triad intends to divest will continue to be included in "same facility" until the date they are divested. 64 Years Ended December 31, 1998 and 1997 The loss from continuing operations before income tax benefit increased 377.2% to a loss of $(124.9) million in 1998 from a loss from continuing operations before income tax benefit of $(26.2) million in 1997. The facilities that management has determined to divest as part of their plan to establish the structure for the future operations of Triad contributed significantly to the decline in results of operations. These facilities to be divested incurred losses from continuing operations before income taxes (benefit) of approximately $(70.1) million and $(29.7) million for the years ended December 31, 1998 and 1997, respectively. Management established these divestiture plans based upon analysis of the market potential for each of its facilities considering current competitive conditions, anticipated changes in competitive conditions, expected demographic trends, lease opportunities, joint venture opportunities and capital allocation requirements. Revenues decreased by 1.3% to $1,588.7 million in 1998 compared to $1,609.3 million in 1997. Inpatient admissions decreased 1.9% from a year ago and equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) increased 0.6%. The decrease in revenues and the small 0.6% increase in equivalent admissions resulted in a 1.9% decline in revenue per equivalent admission. On a same facility basis, revenues decreased 1.3%, admissions decreased 1.9% and equivalent admissions increased 0.6% from a year ago. The decline in revenues combined with the small increase in equivalent admissions resulted in a decline in same facility revenue per equivalent admission of 1.9%. The decline in revenue per equivalent admission was due to several factors, including decreases in Medicare reimbursement rates mandated by the Balanced Budget Act which became effective October 1, 1997 (certain Balanced Budget Act provisions lowered 1998 revenues by approximately $17 million), continued increases in discounts from the growing number of managed care payers (managed care as a percentage of total admissions increased to 32% in 1998 compared to 29% during 1997), and the announced divestitures of hospitals in certain markets. Operating expenses increased as a percentage of revenues in each expense category, except other operating expenses (which decreased 1.2% from 1997). The primary reason for the increases, as a percentage of revenues, in all the expense categories was the inability to adjust expenses in line with the decreases experienced in volume and reimbursement trends. The level of management's attention being devoted to the governmental investigations, reactions by certain physicians and patients to the related negative media coverage and management changes at several levels and locations throughout Triad have contributed to Triad's inability to implement changes to reduce operating expenses in response to the volume and revenue growth rate declines. Salaries and benefits, as a percentage of revenues, increased to 44.1% in 1998 from 41.4% in 1997. The increase was due to a 4.4% increase in salaries and benefits per equivalent admission and Triad's inability to adjust staffing levels to mitigate the declining revenue per equivalent admission (man-hours per equivalent admission increased 1.1% compared to last year). Supply costs increased as a percentage of revenues to 15.2% in 1998 from 14.5% in 1997 due to the 1.9% decline in net revenue per equivalent admission, while the cost of supplies per equivalent admission increased 3.2%. Other operating expenses (which includes contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance, marketing and non-income taxes) decreased as a percentage of revenues to 22.6% in 1998 from 23.8% in 1997. The decrease was due to small decreases in several of these expense categories as a percentage of revenues, including lower marketing costs being incurred due to the cancellation of a national branding campaign. Provision for doubtful accounts, as a percentage of revenues, increased to 8.7% in 1998 from 8.6% in 1997. The increase was due to internal factors such as information system conversions (including patient accounting systems) at certain facilities and external factors such as payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles) and increases in claim audits and 65 remittance denials from certain payers. Management is not able to quantify the effects of each of these factors, but the shift in payer mix is expected to continue and the provision for doubtful accounts is likely to remain at higher levels than in past years (1996 and prior). Depreciation and amortization increased as a percentage of revenues to 7.0% in 1998 from 6.3% in 1997. The increase was primarily due to the decline in revenues (1.3% decline on a same facility basis) and increased capital expenditures related to ancillary services (such as outpatient services) and information systems. Interest expense, which is primarily represented by interest incurred on the net intercompany balance with Columbia/HCA, increased to $68.9 million in 1998 compared to $60.5 million in 1997, primarily as a result of an increase in the average balance of the advances from Columbia/HCA during 1998 compared to the same period in 1997. This was due, in part, to a $76.4 million decline in cash flows from operations. During 1998, Triad, as part of its strategic business plan, decided to divest certain of its facilities. The divestitures are expected to be completed through sales. The carrying value for these facilities expected to be sold was reduced to fair value, based upon estimated selling values, resulting in a pre- tax impairment charge of $55.1 million. (See Note 5--Impairment of Long-lived Assets in the Notes to Combined Financial Statements of Triad included elsewhere herein.) Minority interests were 0.7% as a percentage of revenues in both 1998 and 1997. Triad incurred a $(1.6) million net loss from operations of its discontinued home health businesses in 1998 compared to net income of $4.9 million during the prior year period. The loss is primarily due to revenue reductions related to Medicare rates of reimbursement for home health visits under the Balanced Budget Act and a decline in home health visits. Years Ended December 31, 1997 and 1996 Income (loss) from continuing operations before income taxes (benefit) declined 122.5% to a loss of $(26.2) million in 1997 from income of $116.5 million in 1996. The facilities that Triad plans to divest contributed to the decline in profitability by incurring losses from continuing operations before income taxes (benefit) of approximately $(29.7) million and approximately $(4.6) million for the years ended December 31, 1997 and 1996, respectively. Revenues increased 0.6% to $1,609.3 million in 1997 compared to $1,600.5 million in 1996. Inpatient admissions increased 1.0% and equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) increased 3.2%. On a same facility basis, revenues increased 0.6%, admissions increased 1.7% and equivalent admissions increased 3.9% from 1996. The lower growth rate in both reported and same facility revenues, compared to the increases in equivalent admissions, resulted in declines in revenue per equivalent admission of 2.5% on a reported basis and 3.1% on a same facility basis. As previously discussed, the increase in outpatient volume (reflected by the increases in equivalent admissions) is primarily a result of the continuing trend of certain services, previously provided in an inpatient setting, being converted to an outpatient setting. The decline in revenue per equivalent admission was due to several factors including decreases in Medicare reimbursement rates mandated by the Balanced Budget Act which became effective October 1, 1997 (such rates lowered fourth quarter 1997 revenues by approximately $5 million), continued increases in discounts from the growing number of managed care payers (managed care as a percentage of total admissions increased to 29% in 1997 compared to 25% during 1996), delays experienced in obtaining Medicare cost report settlements (cost report filings and settlements netted to zero in 1997 compared to favorable revenue adjustments of $32.4 million in 1996). 66 Operating expenses increased, as a percentage of revenues, in each expense category. The primary reason for the increases as a percentage of revenues in all expense categories was Triad's inability to adjust expenses in line with the decreases experienced in revenue and reimbursement trends. Management's attention to the governmental investigations, reactions by certain physicians and patients to the related negative media coverage and management changes at several levels and locations throughout Triad contributed to Triad's inability to implement changes to reduce operating expenses in response to the revenue and reimbursement rate declines. Salaries and benefits, as a percentage of revenues, increased to 41.4% in 1997 from 39.2% in 1996. The decline in revenues per equivalent admission was a primary factor in the increase. A 2.9% increase in salaries and benefits per equivalent admission resulted from the combined effect of decreasing man-hours per equivalent admission of 1.8, while labor cost per man-hour increased 4.3% and revenue per equivalent admission declined 2.5%. Supply costs increased as a percentage of revenues to 14.5% in 1997 from 13.9% in 1996 due to a decline in net revenue per equivalent admission while the cost of supplies per equivalent admission increased 1.7%. Other operating expenses (which includes professional fees, contract services, repairs and maintenance, rent, utilities, insurance, marketing and non-income taxes) increased as a percentage of revenues to 23.8% in 1997 from 21.8% in 1996. The increase was due to small increases in several of these expense categories as a percentage of revenues. Provision for doubtful accounts, as a percentage of revenues, increased to 8.6% in 1997 from 6.7% in 1996 due to internal factors such as continued computer information system conversions (including patient accounting systems) at various facilities and external factors such as payer mix shifts to managed care plans (resulting in increased amounts of patient co-payments and deductibles) and payer remittance slowdowns. The information system conversions hampered the business office billing functions and collection efforts in those facilities as some resources are directed to installing and converting systems and building new data files, rather than devoting full effort to billing and collecting receivables. Triad has experienced an increased occurrence of charge audits from certain payers due to the negative publicity surrounding the government investigations which have resulted in delays in the collection of receivables. Depreciation and amortization increased as a percentage of revenues to 6.3% in 1997 from 5.9% in 1996, primarily due to the slowdown in revenue growth. Interest expense increased to $60.5 million in 1997 compared to $52.0 million in 1996, primarily as a result of an increase in the average balance of the advances from Columbia/HCA during 1997 compared to 1996. Net cash provided by operating activities declined by $65.0 million in 1997 compared to 1996. During the fourth quarter of 1997 Triad determined that the recorded values of certain long-lived assets related to certain surgery centers and physician practices were not deemed fully recoverable based upon the operating results trends and projected future cash flows. The recorded value for these surgery centers and physician practices was reduced to estimated fair value resulting in a pre-tax impairment charge of $13.7 million. Minority interests were 0.7% as a percentage of revenues both in 1997 and 1996. Triad earned $4.9 million net income from operations of its discontinued home health business in 1997 compared to net income of $6.4 million during 1996. The majority of the decline in income from operations of the discontinued home health businesses was due to revenue reductions related to Medicare rates of reimbursement for home health visits under the Balanced Budget Act. During 1997, Triad recorded a $2.9 million charge, net of tax benefits, on the expected divestiture of the home health businesses. 67 Liquidity and Capital Resources Triad has previously relied upon Columbia/HCA for liquidity and sources of capital to supplement any needs not met by operations. Following the distribution, as an independent, publicly-traded company, Triad will have direct access to the capital markets and the ability to enter into its own borrowing arrangements. At December 31, 1998, Triad had working capital of $184.9 million. Cash provided by continuing operating activities declined to $23.9 million for the year ended December 31, 1998 from $100.3 million during the previous year. The decrease was primarily due to a larger net loss incurred for 1998 (a loss of $(87.1) million in 1998 compared to a loss of $(19.8) million in 1997) and an increase in accounts receivable balances during 1998. For the year ended December 31, 1997, cash provided by operating activities declined to $100.3 million from $165.3 million for the year ended December 31, 1996. The decrease was due to reduced income before non-cash charges in addition to decreases in cash related to working capital items. The increase in working capital outflows was primarily the result of reductions in accounts payable and accrued expenses compared to the prior year. Cash used in investing activities for the year ended December 31, 1998 was consistent with the levels used during 1997 and 1996. At December 31, 1998, there were projects under construction which had an estimated cost to complete of approximately $107.8 million. These construction projects are expected to be completed over the next eighteen months. In connection with the distribution, all intercompany accounts payable by Triad to Columbia/HCA will be eliminated, and Triad will assume approximately $700 million of debt obligations from Columbia/HCA. $ million of this debt financing is expected to consist of a -year term loan with a syndicate of banks, and $ million is expected to consist of % Senior Subordinated Notes due 2009. Triad also expects to enter into a revolving credit loan agreement providing for a commitment for revolving credit loans in an aggregate principal amount of up to $ million. Borrowings under the revolving credit facility will be available to fund working capital needs and to finance acquisitions. Management does not consider the sale of any assets to be necessary to repay Triad's indebtedness or to provide working capital. However, for other reasons, certain of Triad's hospitals may be sold in the future from time to time. Although Triad's indebtedness will be more substantial than was historically the case for its predecessor entities, management expects that operations and working capital facilities will provide sufficient liquidity for fiscal 1999. Triad does not expect to pay dividends on its common stock in the foreseeable future. Impact of Year 2000 Computer Issues Background and General Information The Year 2000 problem is the result of two potential malfunctions that could have an impact on Columbia/HCA's systems and equipment including systems and equipment on which Triad relies. The first problem arises due to computers being programmed to use two rather than four digits to define the applicable year. The second problem arises in embedded chips, where microchips and microcontrollers have been designed using two rather than four digits to define the applicable year. Certain of Columbia/HCA's computer programs, building infrastructure components (e.g. alarm systems and HVAC systems) and medical devices that are date sensitive, may recognize a date using "00" as the year 1900 rather than the year 2000. If uncorrected, the problem could result in computer system and program failures or equipment and medical device malfunctions that could result in a disruption of business operations or that could affect patient diagnosis and treatment. Triad obtains most of its information technology and information technology infrastructure systems from CIS pursuant to the Computer and Data Processing Services Agreement. CIS has represented that the software 68 that is owned by CIS and provided to Triad will be Year 2000 ready on or before January 1, 2000, and that it will endeavor to address in a timely manner Year 2000 issues with respect to other software and hardware licensed to Triad under the Computer and Data Processing Services Agreement. In connection with its participation in Columbia/HCA's Year 2000 project, Triad has made and will continue to make certain expenditures related to software systems and applications not obtained from CIS and non-information technology systems (e.g., vendor products, medical equipment and other related equipment with embedded chips) to ensure that they are Year 2000 ready. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Computer and Data Processing Services Agreement" and "--Transitional Services Agreement." Pursuant to the Computer and Data Processing Services Agreement, after the distribution, Triad will rely on CIS to provide virtually all of its computer support and information technology services. Pursuant to the Transitional Services Agreement, Columbia/HCA will continue its ongoing program to inspect medical equipment at Triad facilities for Year 2000 readiness. Triad is dependent upon Columbia/HCA in substantially all respects for the Year 2000 readiness of its information technology and non-information technology systems and for contingency planning in respect of Year 2000-related risks. Any failure by Columbia/HCA to adequately address such matters could have a material adverse effect on the business, financial condition and/or results of operations of Triad. Columbia/HCA is utilizing both internal and external resources to manage and implement its Year 2000 program. With the assistance of external resources, Columbia/HCA has undertaken development of contingency plans in the event that its Year 2000 efforts, or the Year 2000 efforts of third-parties upon which Columbia/HCA and Triad rely, are not accurately or timely completed. Triad management consults regularly with Columbia/HCA personnel for development of such contingency plans. Columbia/HCA has developed a contingency planning methodology and will implement contingency plans throughout 1999. Information Technology Systems With respect to the information technology portions of Columbia/HCA's Year 2000 project, which address the inventory, assessment, remediation, testing and implementation of internally developed software, Columbia/HCA has identified various software applications that are being addressed on separate time lines. Columbia/HCA has begun remediating all these software applications and is testing the software applications where remediation has been completed. Columbia/HCA has also completed the assessment of mission critical third party software (i.e., that software which is essential for day to day operations) and has developed testing and implementation plans with separate time lines. Columbia/HCA has completed and placed into production 60% of software applications and is 75% complete on most of the remaining software applications, and anticipates completing, in all material respects, remediation, testing and implementation for internally developed and mission critical third party software by June 1999. Columbia/HCA's efforts are currently on schedule in all material respects. With respect to the information technology infrastructure portion of Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor- supplied products (hardware, systems software, business software, and telecommunication equipment). Columbia/HCA has implemented a program to contact vendors, analyze information provided, and remediate, replace or otherwise address information technology products that pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all material respects, of the information technology infrastructure portion of its program by June 1999. The information technology infrastructure portion of Columbia/HCA's Year 2000 project is currently on schedule in all material respects. Columbia/HCA presently believes that with modifications to existing software or the installation of upgraded software under the information technology infrastructure portion, the Year 2000 will not pose material operational problems for its computer systems. However, if such modifications or upgrades are not accomplished in a timely manner, Year 2000-related failures may present a material adverse impact on the operations of Triad. 69 Non-Information Technology Systems and Equipment With respect to the non-information technology infrastructure portion of Columbia/HCA's Year 2000 project, Columbia/HCA has undertaken a program to inventory, assess and correct, replace or otherwise address impacted vendor products, medical equipment and other related equipment with embedded chips. Columbia/HCA has implemented a program to contact vendors, analyze information provided, and remediate, replace or otherwise address devices or equipment that pose a material Year 2000 impact. Columbia/HCA anticipates completion, in all material respects, of the non-information technology infrastructure portion of its program by a revised date of September 30, 1999, from the previously anticipated date of June 30, 1999. With respect to such revised date, the non- information technology infrastructure portion of Columbia/HCA's Year 2000 project is currently on schedule in all material respects. Columbia/HCA is prioritizing its non-information technology infrastructure efforts by focusing on equipment and medical devices that will have a direct impact on patient safety and health. Columbia/HCA is directing substantial efforts to repair, replace, upgrade or otherwise address this equipment and these medical devices in order to minimize risk to patient safety and health. Columbia/HCA is relying on information that is being provided to it by equipment and medical device manufacturers regarding the Year 2000 readiness of their products. While Columbia/HCA is attempting to evaluate information provided by its past and present vendors, there can be no assurance that in all instances accurate information is being provided. Columbia/HCA also cannot in all instances guarantee that the repair, replacement or upgrade of all non- information technology infrastructure systems will occur on a timely basis or that such repairs, replacements or upgrades will avoid any Year 2000 problems. Third-Party Payers and Intermediaries, and Suppliers Columbia/HCA has initiated communications with Triad's major third party payers and intermediaries, including government payers and intermediaries. Triad relies on these entities for accurate and timely reimbursement of claims, often through the use of electronic data interfaces. Columbia/HCA has not received assurances that these interfaces will be timely converted. Testing with payers and intermediaries will not be completed by June 30, 1999 because the payers and intermediaries are not ready to test with Columbia/HCA's systems. Failure of these third party systems could have a material adverse effect on Triad's cash flow or results of operations. Columbia/HCA also has initiated communications with its mission critical suppliers and vendors (i.e., those suppliers and vendors whose products and services are essential for day-to-day operations) to verify their ability to continue to deliver goods and services through the Year 2000. Columbia/HCA has not received assurances from all mission critical suppliers and vendors that they will be able to continue to deliver goods and services through the Year 2000, but Columbia/HCA is continuing its efforts to obtain such assurances. The failure of these third parties could have a material impact on the business, financial condition or results of operations of Triad and/or the ability of Triad to provide health care services. With the assistance of external resources, Columbia/HCA has undertaken the development of contingency plans in the event that its Year 2000 efforts, or the Year 2000 efforts of third parties upon which Columbia/HCA and Triad rely, are not accurately or timely completed. Columbia/HCA has developed a contingency planning methodology and will implement contingency plans throughout 1999. Year 2000 Risks While Columbia/HCA is developing contingency plans to address possible failure scenarios, Triad recognizes that there are "worst-case" scenarios which may develop and are largely outside its or Columbia/HCA's control. Triad recognizes the risks associated with extended infrastructure (e.g., power, water and telecommunications) failure, the interruption of insurance and government program payments to the organization and the failure of equipment or software that could impact patient safety or health despite the assurances of third parties. Columbia/HCA is addressing these and other failure scenarios in its contingency 70 planning effort and is engaging third parties in discussions regarding how to manage common failure scenarios, but neither Columbia/HCA nor Triad can currently estimate the likelihood or the potential cost of such failures. Costs and Expenses The Year 2000 project costs incurred by Columbia/HCA will have an impact on the Computer and Data Processing Services Agreement with Triad. Triad is not currently able to reasonably estimate the ultimate cost to be incurred by it for the assessment, remediation, upgrade, replacement and testing of its impacted non-information technology systems. The majority of the costs (except the cost of new equipment) related to the Year 2000 project will be expensed as incurred and are expected to be funded through operating cash flows. The successful completion of the project and completion dates for the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantees that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area and the ability to locate and correct all relevant computer codes and all medical equipment. Effects of Inflation and Changing Prices Various federal, state and local laws have been enacted that, in certain cases, limit Triad's ability to increase prices. Revenues for acute care hospital services rendered to Medicare patients are established under the federal government's prospective payment system. Total Medicare revenues approximated 34.6% in 1998, 35.4% in 1997 and 36.5% in 1996. Management believes that hospital industry operating margins have been, and may continue to be, under significant pressure because of deterioration in inpatient volumes, changes in payer mix and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. Management expects that the average rate of increase in Medicare prospective payments will continue to decline slightly in 1999. In addition, as a result of increasing regulatory and competitive pressures, Triad's ability to maintain operating margins through price increases to non-Medicare patients is limited. Health Care Reform In recent years, an increasing number of legislative proposals have been introduced or proposed to Congress and in some state legislatures that would significantly affect health care systems in Triad's markets. The cost of certain proposals would be funded in significant part by reduction in payments by government programs, including Medicare and Medicaid, to health care providers (similar to the reductions incurred as part of the Balanced Budget Act as previously discussed). While Triad is unable to predict which, if any, proposals for health care reform will be adopted, there can be no assurance that proposals adverse to the business of Triad will not be adopted. 71 LifePoint Business General LifePoint operates 23 general, acute care hospitals located in growing non- urban areas. LifePoint will be a successor to the America Group, which was created by Columbia/HCA in November 1997 to operate these hospitals. In 21 of its 23 markets, LifePoint's hospital is the only hospital in the community. LifePoint's hospitals are located in the States of Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. All but 5 of LifePoint's hospitals are located in states that have certificate of need laws, which laws may have the effect of limiting the development of competing facilities. LifePoint currently intends to sell three of the general, acute care hospitals that the America Group operated as of December 31, 1998. LifePoint's principal executive offices are located at 4525 Harding Road, Suite 300, Nashville, Tennessee 37205 (telephone number (615) 344-6261). The Non-Urban Health Care Market LifePoint believes that growing, non-urban health care markets are attractive to health care service providers as a result of favorable demographic and economic trends. All of LifePoint's facilities are located in non-urban markets. Twenty-one of LifePoint's twenty-three hospitals are the only acute- care hospitals in their respective communities, and the remaining hospitals are one of only two hospitals in its community. Because non-urban service areas have smaller populations, there are generally fewer hospitals and other health care service providers in each community, resulting in less direct competition for hospital-based services. Management believes that the smaller populations and relative dominance of the one or two acute care hospitals in these markets also limit the entry of alternate non- hospital providers, such as outpatient surgery centers or rehabilitation or diagnostic imaging centers, as well as managed care plans. There is generally a lower level of managed care payer penetration (i.e., the relative proportion of the market population enrolled in managed care programs (HMOs and PPOs)) in LifePoint's markets than there is in urban markets. In addition, LifePoint believes that non-urban communities are generally characterized by a high level of patient and physician loyalty that fosters cooperative relationships among the local hospital, physicians and patients. As a result, the local hospital is viewed as a key part of the local community. Management believes that the characteristics of the non-urban health care market provide LifePoint with attractive acquisition opportunities. Currently, the majority of non-urban hospitals are owned by not-for-profit and governmental entities that typically have limited access to capital to keep pace with advances in medical technology. In addition, such entities frequently lack the management resources necessary to control hospital expenses, recruit and retain physicians, expand healthcare services and comply with increasingly complex reimbursement and managed care requirements. Collectively, these factors frequently lead to poor operating performance, a decline in the breadth of services offered, dissatisfaction by community physicians and residents, and the perception of sub-par quality of care in the community. As a result, patients migrate to, are referred by local physicians to, or are lured by incentives from managed care plans to travel to, hospitals in larger, urban markets which may be as far as 30 to 50 miles away. Management believes that as a result of these pressures, not-for-profit and governmental owners of non- urban hospitals who wish to preserve the local availability of quality health care services have sought to sell or lease these hospitals to companies, like LifePoint, that have the access to capital and management resources which can better serve the community and are committed to the local delivery of health care. Business Strategy LifePoint business strategy is centered upon the unique patient and health care provider needs and opportunities in its non-urban markets. LifePoint intends to manage its facilities aggressively to ensure that they operate in accordance with the strategic objectives described below: . Develop Facility-Specific Strategies for Non-Urban Markets. LifePoint monitors its facilities individually and has developed facility-specific strategies tailored for non-urban markets. By 72 contrast, Columbia/HCA's strategy has been developed on a system-wide basis and has focused on building well-integrated facility networks on a state-wide basis. As an independent company, LifePoint intends to apply the management focus required to maximize the potential of each of its facilities to improve the quality and breadth of health care services, to provide an outstanding workplace for its employees, to recognize and expand the hospitals' roles as community assets and to increase profitability. . Expand Breadth of Service and Reduce Patient Outmigration. LifePoint intends to increase revenues by broadening the scope of health care services available at its facilities, particularly in markets where significant outmigration is occurring, and to recruit physicians with a broader range of specialties. Management believes that this expansion of available treatments should help to encourage local residents in the non-urban markets that LifePoint serves to seek care at facilities within their communities. LifePoint believes its strong community focus should also assist in limiting patient outmigration. As an entity separate from Columbia/HCA, LifePoint will not have to compete with the Columbia/HCA facilities located in larger, urban markets for management attention, support resources, and capital to finance expansion of the range of services offered at its hospitals. . Strengthen Physician Recruiting and Retention. LifePoint seeks to enhance the quality of care available locally (and the revenue derived therefrom), and believes that recruiting physicians in local communities is critical to increasing the quality of health care and the breadth of available services. As an independent company, LifePoint intends to take advantage of its more specific management focus to work more effectively with individual physicians and physician practices. Management believes that expansion of the range of available treatments at its hospitals should also assist in physician recruiting. In most of its markets, LifePoint will be able to take advantage of exemptions from certain restrictions on business association with physicians that are available in certain non-urban areas. . Retain and Develop Stable Management. LifePoint intends to focus its recruitment of managers and health care professionals on those who wish to live and practice in the communities in which LifePoint's hospitals are located. In the past, managers and health care professionals employed at LifePoint hospitals sometimes relocated to advance their careers elsewhere within the Columbia/HCA system. LifePoint expects that its ability to provide equity-based compensation linked to its performance should assist in management retention. Management believes that achieving long-term retention of executive teams at the hospitals will enhance medical staff relations and maintain continuity of relationships within the community. . Build Strong Community Relations. Management believes that it is important to LifePoint's success that its hospitals continue a high level of involvement in the communities they serve and continue to develop good relations with local governments and business leaders. LifePoint employees, particularly the executive teams at the hospitals, are expected to expend considerable effort on improving community relationships. . Improve Managed Care Position. As part of Columbia/HCA, LifePoint's facilities typically have been included in managed care contracts negotiated by Columbia/HCA on a system-wide basis. LifePoint believes that independence from Columbia/HCA will enable it over time to decrease the number of discount arrangements in which it participates and to negotiate contract terms that are generally more favorable for its facilities. LifePoint does not intend to enter into capitation arrangements in the future. . Acquire Other Hospitals. Management intends to pursue a disciplined acquisition strategy that will seek to identify and acquire attractive hospitals in non-urban markets. In the past, Columbia/HCA has been reluctant to pursue acquisitions of such facilities as non-urban hospitals were not consistent with Columbia's urban market focus. LifePoint will seek to acquire hospitals that (i) are located in non- urban markets with limited competition for hospital based services, (ii) have a favorable payor mix, and (iii) are located in markets where the projected rate of population growth is above national averages. 73 Operations LifePoint's general, acute care hospitals usually provide the range of medical and surgical services commonly available in hospitals in non-urban markets. These hospitals also provide diagnostic and emergency services, as well as outpatient and ancillary services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. Each of LifePoint's hospitals is governed by a board of trustees, which includes members of the hospital's medical staff. The board of trustees establishes policies concerning medical, professional and ethical practices, monitors such practices, and is responsible for ensuring that these practices conform to established standards. LifePoint maintains quality assurance programs to support and monitor quality of care standards and to meet accreditation and regulatory requirements. Patient care evaluations and other quality of care assessment activities are monitored on a continuing basis. Like most hospitals located in non-urban areas, LifePoint's hospitals do not engage in extensive medical research and medical education programs. However, certain of LifePoint's hospitals have an affiliation with medical schools, including the clinical rotation of medical students. In addition to providing capital resources, LifePoint will make available a variety of management services to its health care facilities. These services will include information systems; ethics and compliance programs; national supply and equipment purchasing and leasing contracts; accounting, financial and clinical systems; legal support; personnel management and internal audit; access to regional managed care networks; and resource management. Some of these services initially will be provided through transitional arrangements made with Columbia/HCA. LifePoint also will participate, along with Columbia/HCA and Triad, in a group purchasing organization which will make certain national supply and equipment contracts available to LifePoint's facilities. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution" and "--Other Agreements." Services and Utilization LifePoint believes that the two most important factors relating to the overall utilization of a hospital are the quality and market position of the hospital and the number, quality and specialties of physicians providing patient care within the facility. Generally, LifePoint believes that the ability of a hospital to meet the health care needs of its community is determined by its breadth of services, level of technology, emphasis on quality of care and convenience for patients and physicians. Other factors which impact utilization include the growth in local population, local economic conditions, market penetration of managed care programs and the availability of reimbursement programs such as Medicare and Medicaid. Utilization across the industry also is being affected by improved treatment protocols as a result of advances in medical technology and pharmacology. 74 The following table sets forth certain operating statistics for consolidated hospitals owned by LifePoint for each of the past five years ended December 31. Medical/surgical hospital operations are subject to certain seasonal fluctuations, including decreases in patient utilization during holiday periods and increases in the cold weather months.
Years Ended December 31, ---------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------ ------ ------ Number of hospitals at end of period............................. 23 22 22 20 20 Number of licensed beds at end of period (a)......................... 2,108 2,080 2,074 1,881 1,843 Weighted average licensed beds (b).. 2,122 2,078 2,060 1,862 1,783 Admissions (c)...................... 62,264 60,487 59,381 54,549 52,681 Equivalent admissions (d)........... 109,336 105,126 98,869 88,915 81,708 Average length of stay (days) (e)... 4.4 4.4 4.7 4.8 4.9 Average daily census (f)............ 742 733 755 713 713 Occupancy rate (g).................. 35% 35% 37% 38% 40%
- -------- (a) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (b) Represents the average number of licensed beds weighted based on periods owned. (c) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to LifePoint's hospitals and is used by management and certain investors as a general measure of inpatient volume. (d) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (e) Represents the average number of days admitted patients stay in LifePoint's hospitals. Average length of stay has declined due to the continuing pressures from managed care and other payers to restrict admissions and reduce the number of days that are covered by the payers for certain procedures, and by technological and pharmaceutical improvements. (f) Represents the average number of patients in LifePoint's hospital beds each day. (g) Represents the percentage of hospital licensed beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms. The declining occupancy rate is primarily attributed to the trend toward more services, that were previously performed in an inpatient setting, being performed on an outpatient basis and the decline in average length of stay per admission. LifePoint's hospitals have experienced significant shifts from inpatient to outpatient care as well as decreases in average lengths of inpatient stay, primarily as a result of improvements in technology and clinical practices and hospital payment changes by Medicare, insurance carriers and self-insured employers. These hospital payment changes generally encourage the utilization of outpatient, rather than inpatient, services whenever possible, and shortened lengths of stay for inpatient care. 75 Sources of Revenue LifePoint receives payment for patient services from the Federal government primarily under the Medicare program, state governments under their respective Medicaid programs, HMOs, PPOs and other private insurers, as well as directly from patients. The approximate percentages of net patient revenues from continuing operations of LifePoint's facilities from such sources during the periods specified below were as follows:
Years Ended December 31, ------------------- 1998 1997 1996 ----- ----- ----- Medicare.............................................. 37.8% 39.4% 40.9% Medicaid.............................................. 11.1% 11.1% 11.5% Other sources......................................... 51.1% 49.5% 47.6% ----- ----- ----- Total............................................... 100.0% 100.0% 100.0% ===== ===== =====
Medicare is a Federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a Federal-state program administered by the states which provides hospital benefits to qualifying individuals who are unable to afford care. All of LifePoint's hospitals are certified as providers of Medicare and Medicaid services. Amounts received under the Medicare and Medicaid programs are generally significantly less than the hospital's customary charges for the services provided. To attract additional volume, most of LifePoint's hospitals offer discounts from established charges to certain large group purchasers of health care services, including private insurance companies, employers, HMOs, PPOs and other managed care plans. These discount programs limit LifePoint's ability to increase charges in response to increasing costs. See "LifePoint Business-- Competition." In addition to government programs, LifePoint is reimbursed by private payers including HMOs, PPOs, private insurance companies, employers and individual private payers. Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, HMOs or PPOs, but are responsible for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Collection of amounts due from individuals is typically more difficult than from governmental or business payers. For more information on the reimbursement programs on which LifePoint's revenues are dependent, see "Government and Other Sources of Reimbursement for LifePoint and Triad." Competition The primary bases of competition among hospitals in non-urban markets are the quality and scope of medical services, strength of referral network, location and, to a lesser extent, price. Generally, LifePoint serves markets in which its hospital is the only hospital in the community. Therefore, most of LifePoint's hospitals face less competition in their immediate patient service areas than would be expected in larger communities. While LifePoint's hospitals are generally the primary provider of health care services in their respective communities, its hospitals face competition from hospitals in nearby communities, including larger tertiary care centers and, in some cases, other non-urban hospitals. Some of the hospitals that compete with LifePoint are owned by tax-supported governmental agencies or by not-for-profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis. One of the most significant factors in the competitive position of a hospital is the number and quality of physicians affiliated with the hospital. Although physicians may at any time terminate their affiliation with a hospital operated by LifePoint, LifePoint's hospitals seek to retain physicians of varied specialties on the hospitals' medical staffs and to attract other qualified physicians. LifePoint believes that physicians refer patients to a hospital primarily on the basis of the quality of services it renders to patients and physicians, the quality of other physicians on the medical staff, the location of the hospital and the quality of the hospital's facilities, equipment and employees. Accordingly, LifePoint strives to maintain high ethical and professional standards and quality facilities, equipment, employees and services for physicians and their patients. 76 Another factor in the competitive position of a hospital is management's ability to negotiate service contracts with purchasers of group health care services. HMOs and PPOs attempt to direct and control the use of hospital services through managed care programs and to obtain discounts from hospitals' established charges. In addition, employers and traditional health insurers are increasingly interested in containing costs through negotiations with hospitals for managed care programs and discounts from established charges. Generally, hospitals compete for service contracts with group health care service purchasers on the basis of market reputation, geographic location, quality and range of services, quality of the medical staff, convenience and price. The importance of obtaining contracts with managed care organizations varies from market to market, depending on the market strength of such organizations. Managed care contracts generally are less important in the non-urban markets served by LifePoint than they are in urban and suburban markets where there is typically a higher level of managed care penetration. State certificate of need ("CON") laws, which place limitations on a hospital's ability to expand hospital services and add new equipment, also may have the effect of restricting competition. Every state that LifePoint operates in has CON laws except Kansas, Utah and Wyoming. The application process for approval of covered services, facilities, changes in operations and capital expenditures is, therefore, highly competitive. In those states which have no CON laws or which set relatively high thresholds before expenditures become reviewable by state authorities, competition in the form of new services, facilities and capital spending is more prevalent. LifePoint has not experienced, and does not expect to experience, any material adverse effects from state CON requirements or from the imposition, elimination or relaxation of such requirements. See "Regulation and Other Factors Affecting LifePoint and Triad." LifePoint, and the health care industry as a whole, face the challenge of continuing to provide quality patient care while dealing with rising costs, strong competition for patients and a general reduction of reimbursement rates by both private and government payers. As both private and government payers reduce the scope of what may be reimbursed and reduce reimbursement levels for what is covered, Federal and state efforts to reform the health care system may further impact reimbursement rates. Changes in medical technology, existing and future legislation, regulations and interpretations and competitive contracting for provider services by private and government payers may require changes in LifePoint's facilities, equipment, personnel, rates and/or services in the future. The hospital industry and LifePoint's hospitals continue to have significant unused capacity. Inpatient utilization, average lengths of stay and average occupancy rates continue to be negatively affected by payer-required pre- admission authorization, utilization review, and payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Admissions constraints, payer pressures and increased competition are expected to continue. LifePoint will endeavor to meet these challenges by expanding its facilities' outpatient services, offering discounts to private payer groups, upgrading facilities and equipment, and offering new programs and services. One element of LifePoint's business strategy is expansion through the acquisition of acute care hospitals in growing non-urban markets. The competition to acquire non-urban hospitals is significant, and there can be no assurance that suitable acquisitions, for which other health care companies (including those with greater financial resources than LifePoint) may be competing, can be accomplished on terms favorable to LifePoint or that financing, if necessary, can be obtained for such acquisitions. LifePoint believes that often the acquiror will be selected for a variety of reasons and not exclusively on the basis of price. LifePoint believes that its strategic goals align its interests with those of the local communities served by its hospitals. LifePoint believes that its commitment to maintaining the local availability of health care services, together with LifePoint's reputation for providing market-specific, high quality health care, its focus on physician recruiting and retention, its management's operating experience, and its direct access to capital will enable LifePoint to compete successfully for acquisitions. 77 Properties The following table lists the hospitals owned or operated by the America Group of Columbia/HCA (the assets of which will be transferred to LifePoint prior to the distribution) as of December 31, 1998:
Licensed Facility Name City State Beds - ------------- ---- ----- -------- Andalusia Hospital Andalusia AL 101 Bartow Memorial Hospital (1) Bartow FL 56 Barrow Medical Center Winder GA 56 Western Plains Regional Hospital (2) Dodge City KS 110 Halstead Hospital Halstead KS 177 Georgetown Community Hospital Georgetown KY 75 PineLake Regional Hospital Mayfield KY 106 Meadowview Regional Medical Center Maysville KY 111 Bourbon Community Hospital Paris KY 58 Logan Memorial Hospital Russellville KY 100 Lake Cumberland Regional Hospital Somerset KY 227 Riverview Medical Center Gonzales LA 104 Springhill Medical Center Springhill LA 63 Smith County Memorial Hospital Carthage TN 63 Trinity Hospital Erin TN 40 Crockett Hospital Lawrenceburg TN 107 Livingston Regional Hospital Livingston TN 116 Hillside Hospital Pulaski TN 95 Emerald-Hodgson Hospital Sewanee TN 24 Southern Tennessee Medical Center Winchester TN 126 Castleview Hospital Price UT 84 Ashley Valley Medical Center Vernal UT 39 Riverton Memorial Hospital Riverton WY 70
- -------- (1) The America Group operates and is general partner of a partnership that leases and operates Bartow Memorial Hospital. (2) The America Group operates and holds a majority equity interest in a consolidated joint venture which owns and operates Western Plains Regional Hospital. Medical office buildings also are operated in conjunction with its hospitals. These office buildings are primarily occupied by physicians who practice at LifePoint's hospitals. LifePoint's headquarters are located in approximately 17,280 square feet of space in one office building in Nashville, Tennessee. After the distribution date, LifePoint will sub-lease this space from Columbia/HCA. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Lease Agreements." LifePoint's headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for LifePoint's present needs. Employees and Medical Staff At December 31, 1998, LifePoint had approximately 6,800 employees, including approximately 1,780 part-time employees. No LifePoint employees are subject to collective bargaining agreements. LifePoint considers its employee relations to be good. While some of LifePoint's hospitals experience union organizing activity from time to time, LifePoint does not expect such efforts to materially affect its future operations. LifePoint's hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate. There can be no assurance as to future availability and cost of qualified medical personnel. LifePoint's hospitals are staffed by licensed physicians who have been admitted to the medical staff of individual hospitals. Any licensed physician may apply to be admitted to the medical staff of any of LifePoint's 78 hospitals, but admission to the staff must be approved by the hospital's medical staff and the appropriate governing board of the hospital in accordance with established credentialling criteria. With certain exceptions, physicians generally are not employees of LifePoint's hospitals. However, LifePoint has conducted a physician practice management program pursuant to which some physicians provide services in LifePoint's hospitals by contract. After the distribution, LifePoint intends to limit the scope of its physician practice management program. LifePoint's Regulatory Compliance Program It is LifePoint's policy that its business be conducted with integrity and in compliance with the law. LifePoint is developing a corporate-wide compliance program, which will focus on all areas of regulatory compliance, including physician recruitment, reimbursement and cost reporting practices, and laboratory operations. This regulatory compliance program is intended to assure that high standards of conduct are maintained in the operation of LifePoint's business and to help assure that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, LifePoint will provide initial and periodic legal compliance and ethics training to every employee, review various areas of LifePoint's operations, and develop and implement policies and procedures designed to foster compliance with the law. LifePoint will regularly monitor its ongoing compliance efforts. The program also will include a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors or designated compliance officers in the LifePoint's hospitals. Legal Proceedings LifePoint is, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts or for wrongful restriction of or interference with physician's staff privileges. In certain of these actions, plaintiffs request punitive or other damages that may not be covered by insurance. LifePoint is currently not a party to any such proceeding which, in management's opinion, would have a material adverse effect on LifePoint's business, financial condition or results of operations. 79 Triad Business General Triad will be organized as a Delaware corporation to own and operate the health care services business that has constituted the Pacific Group of Columbia/HCA. The Pacific Group (the assets of which will be transferred to Triad prior to the distribution) was formed by Columbia/HCA in November 1997. After the distribution, Triad will continue to provide health care services through its hospitals and outpatient surgery centers located in small cities and selected high growth urban markets in the Southern, Western and Southwestern United States. Triad's principal executive offices are located at 13455 Noel Road, 20th Floor, Dallas, Texas 75240 (telephone number (972) - ). As of December 31, 1998, the Pacific Group comprised 37 general, acute care hospitals, 1 psychiatric hospital, and 17 outpatient surgery centers, located in the States of Alabama, Arizona, Arkansas, California, Kansas, Louisiana, Missouri, New Mexico, Oklahoma, Oregon and Texas. In addition, Triad operates one hospital through a 50/50 joint venture that is not consolidated for financial reporting purposes and is building an additional hospital through a 50/50 joint venture that is currently scheduled to open in May 1999. Triad's management has focused on streamlining Triad's portfolio of facilities to eliminate those with poor financial performance, weak competitive market positions or locations in certain urban markets. As a result of this initiative, Triad has decided to divest certain of its facilities. Since December 31, 1998, Triad has sold 1 of the general, acute care hospitals that it operated as of such date, and has transferred 2 of such hospitals and 3 of such surgery centers to an unaffiliated third party pursuant to a long-term lease. Triad currently intends to sell an additional 4 of its general, acute care hospitals, its one psychiatric hospital, and certain of the outpatient surgery centers that it operated as of December 31, 1998, and to cease operation of another hospital which it leases. In addition to providing capital resources, Triad will make available a variety of management services to its health care facilities. These services will include ethics and compliance programs; national supply and equipment purchasing and leasing contracts; accounting, financial and clinical systems; governmental reimbursement assistance; information systems; legal support; personnel management and internal audit; access to regional managed care networks; and resource management. Some of these services initially will be provided through transitional arrangements made with Columbia/HCA. Triad also will participate, along with Columbia/HCA and LifePoint, in a group purchasing organization which will make certain national supply and equipment contracts available to Triad's facilities. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to Distribution" and "--Other Agreements." Triad's Markets Most of Triad's facilities are located in two distinct types of markets in the Southern, Western and Southwestern United States. Approximately three- quarters of the hospitals operated by Triad as of December 31, 1998 were located in small cities (generally with populations less than 150,000 residents and located more than 60 miles from a major urban center), where Triad's hospital was usually either the only hospital or one of two hospitals. The remainder of Triad's hospitals were located in five larger urban areas. The urban areas where Triad operates are typically characterized by a high rate of population growth (e.g., Phoenix and Tucson, Arizona). Approximately half of Triad's facilities are located in the States of Arizona and Texas. Small Cities Triad believes that the small cities of the Southern, Western and Southwestern United States are attractive to health care service providers as a result of favorable demographic and economic trends. Twenty-seven of the thirty-seven general, acute care hospitals that Triad operated as of December 31, 1998 were located in these markets. Of these hospitals, twenty-two hospitals are located in communities where they currently are the sole 80 hospital or one of only two hospitals. After completion of the planned divestitures described above, 19 of Triad's 31 remaining general, acute care hospitals will be located in communities where they currently are the sole hospital or one of only two hospitals. While Triad's hospitals located in these small cities are more likely to face direct competition than facilities located in smaller non-urban markets, that competition usually is limited to a single competitor in the relevant market. Triad believes that the smaller populations and relative dominance of the one or two acute care hospitals in these markets also limit the entry of alternate non-hospital providers, such as outpatient surgery centers or rehabilitation or diagnostic imaging centers, as well as managed care plans. Larger Urban Markets Ten of the thirty-seven general, acute care hospitals that Triad operated as of December 31, 1998 were located in larger urban markets of the Southwestern United States, and after completion of the planned divestitures described above, eight of Triad's thirty-one remaining general, acute care hospitals will be located in such urban markets. In addition to the direct competition Triad faces from other health care providers in its markets, there are higher levels of managed care penetration (i.e., the relative proportion of the market population enrolled in managed care programs (HMOs and PPOs)) which create significant downward pressure on revenues. Business Strategy Triad's objective is to provide quality health care services and improve operating efficiencies, using the following strategies: . Build on Position in Small Cities and High Population Growth Urban Markets. Triad believes that it is well positioned to build upon its portfolio of facilities in the Southern, Western and Southwestern United States.Triad also believes that, unlike rural markets which have small populations, Triad's small city markets can support increased specialty services which produce relatively higher revenues than other health care services. Triad also intends to strengthen its competitive position in the fast growing larger urban areas of the Southwest (e.g., Phoenix and Tucson, Arizona) where it currently operates. . Recruit Physicians. Triad plans to actively recruit additional primary care physicians. Triad believes that primary care physicians are frequently the first contact point for a patient and that each hospital must establish strong physician relationships in its community in order to enhance patient care. . Enhance Specialty Services, Outpatient Services and Emergency Rooms. Triad believes that many of its markets are large enough to support additional specialty services, such as women's centers, orthopedic facilities, oncology centers and neurology care, and intends to selectively increase these services in order to reduce patient outmigration to urban hospitals. To support this expansion of specialty services, Triad plans to actively recruit additional specialists to its facilities. Recognizing that the shift from inpatient to outpatient care recently experienced by the health care industry is likely to continue, Triad intends to enhance its outpatient service capabilities by improving its free-standing outpatient surgery centers, restructuring its hospital facilities and surgery capacity to better accommodate outpatient treatment, and improving its emergency room facilities. . Develop Strong Relationships with Physicians. Triad believes recruiting and retaining motivated physicians is vitally important to its long term success. Triad believes a model for effective health care service delivery can be developed cooperatively with physicians and the hospitals which will result in improved quality of care. In each of its markets, Triad has established a Physician Leadership Group made up of leading area physicians who will work with hospital management to establish local priorities. Corporate objectives will be addressed by a national Physician Leadership 81 Group comprised of representatives of local Physician Leadership Groups and members of Triad management. In an effort to further improve communication with its physicians, Triad has appointed a senior manager who is an experienced physician to oversee physician relations. . Improve Cost Management. Triad has initiated several measures to improve the financial performance of its facilities through greater control of operating expenses. Triad has focused on reducing salaries, wages and benefits, the largest component of operating expense, at the facility level. Triad also has instituted a financial training program for its hospital managers to teach effective management of hospital revenues and expenses. . Grow Through Existing Hospital Expansion, New Hospital and Ambulatory Service Center Construction, and Selective Acquisitions. Triad intends to identify expansion opportunities in areas where management perceives that demand is not being adequately met due to rapid population growth or insufficient existing health care services. Triad plans to construct new hospitals and also may seek to make acquisitions in select markets. Triad is currently in the process of building a new facility in South Tulsa, Oklahoma through a joint venture with Hillcrest Healthcare Systems. The facility is scheduled to open in May 1999 and will be 50% owned by Triad. Triad believes that potential acquisition opportunities may arise when other health care providers choose to divest facilities or when independent hospitals believe that they can benefit from becoming part of a larger hospital company. Currently, Triad does not have specific plans for additional new facilities or acquisitions. Operations Triad's general, acute care hospitals usually provide a full range of services commonly available in hospitals, such as internal medicine, general surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well as diagnostic and emergency services. These hospitals also usually provide outpatient and ancillary health care services such as outpatient surgery, laboratory, radiology, respiratory therapy, cardiology and physical therapy. Outpatient services also are provided by surgery centers operated by Triad. In addition, certain of Triad's general, acute care hospitals have a limited number of licensed psychiatric beds. Each of Triad's hospitals is governed by a board of trustees, which includes members of the hospital's medical staff. The board of trustees establishes policies concerning the medical, professional and ethical practices, monitors such practices, and is responsible for ensuring that these practices conform to established standards. Triad maintains quality assurance programs to support and monitor quality of care standards and to meet accreditation and regulatory requirements. Patient care evaluations and other quality of care assessment activities are monitored on a continuing basis. Services and Utilization Hospital revenues depend upon inpatient occupancy levels, the volume of outpatient procedures and the charges or negotiated payment rates for such services. Charges and reimbursement rates for inpatient routine services vary significantly depending on the type of service (e.g., medical/surgical, intensive care or psychiatric) and the geographic location of the hospital. Triad believes that important factors relating to the overall utilization of a hospital include the quality and market position of the hospital and the number, quality and specialities of physicians providing patient care within the facility. Generally, Triad believes that the ability of a hospital to meet the health care needs of its community is determined by its breadth of services, level of technology, emphasis on quality of care and 82 convenience for patients and physicians. Other factors which impact utilization include the growth in local population, local economic conditions, market penetration of managed care programs and the availability of reimbursement programs such as Medicare and Medicaid. Utilization across the industry also is being affected by improved treatment protocols as a result of advances in medical technology and pharmacology. The following table sets forth certain operating statistics for hospitals owned by Triad for each of the past five years ended December 31. Medical/surgical hospital operations are subject to certain seasonal fluctuations, including decreases in patient utilization during holiday periods and increases in the cold weather months.
Years Ended December 31, ------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- Number of hospitals at end of period.......................... 38 38 38 39 38 Number of licensed beds at end of period (a)...................... 5,909 5,859 5,872 5,926 5,660 Weighted average licensed beds (b)............................. 5,877 5,860 5,882 5,900 5,325 Admissions (c)................... 169,590 172,926 171,265 170,392 147,923 Equivalent admissions (d)........ 276,771 275,125 266,660 257,292 211,382 Average length of stay (days) (e)............................. 4.9 4.9 5.0 5.2 5.2 Average daily census (f)......... 2,260 2,326 2,338 2,405 2,111 Occupancy rate (g)............... 39% 40% 40% 41% 40%
- -------- (a) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (b) Represents the average number of licensed beds weighted based on periods owned. (c) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to Triad's hospitals and is used by management and certain investors as a general measure of inpatient volume. (d) Equivalent admissions is used by management and certain investors as a general measure of combined inpatient and outpatient volume. Equivalent admissions are computed by multiplying admissions (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The equivalent admissions computation "equates" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (e) Represents the average number of days admitted patients stay in Triad's hospitals. Average length of stay has declined due to the continuing pressures from managed care and other payers to restrict admissions and reduce the number of days that are covered by the payers for certain procedures, and by technological and pharmaceutical improvements. (f) Represents the average number of patients in Triad's hospital beds each day. (g) Represents the percentage of hospital licensed beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms. The declining occupancy rate is primarily attributed to the trend toward more services, that were previously performed in an inpatient setting, being performed on an outpatient basis and the decline in average length of stay per admission. Triad's hospitals have experienced significant shifts from inpatient to outpatient care as well as decreases in average lengths of inpatient stay, primarily as a result of improvements in technology and clinical practices and hospital payment changes by Medicare, insurance carriers, and self-insured employers. These hospital payment changes generally encourage the utilization of outpatient, rather than inpatient, services whenever possible, and shortened lengths of stay for inpatient care. Triad has responded to the outpatient trend by enhancing its hospitals' outpatient service capabilities, including (i) dedicating resources to its freestanding outpatient surgery centers at or near certain of its hospital facilities, (ii) reconfiguring certain hospitals to more effectively accommodate outpatient treatment by, among other things, providing more convenient registration procedures and separate entrances, and (iii) restructuring existing surgical capacity to allow a greater number and range of procedures to be performed on an outpatient basis. Triad's facilities will continue to emphasize those outpatient services that can be provided on a quality, cost-effective basis and that the company believes will experience increased demand. 83 Sources of Revenue Triad receives payment for patient services from the Federal government primarily under the Medicare program, state governments under their respective Medicaid programs, HMOs, PPOs and other private insurers as well as directly from patients. The approximate percentages of net patient revenues from continuing operations of Triad's facilities from such sources during the periods specified below were as follows:
Years Ended December 31, ------------------- 1998 1997 1996 ----- ----- ----- Medicare.............................................. 34.6% 35.4% 36.5% Medicaid.............................................. 6.5% 6.0% 6.9% Other sources......................................... 58.9% 58.6% 56.6% ----- ----- ----- Total............................................... 100.0% 100.0% 100.0% ===== ===== =====
Medicare is a Federal program that provides certain hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. Medicaid is a Federal-state program administered by the states which provides hospital benefits to qualifying individuals who are unable to afford care. All of Triad's hospitals are certified as providers of Medicare and Medicaid services. Amounts received under the Medicare and Medicaid programs are generally significantly less than the hospital's customary charges for the services provided. To attract additional volume, most of Triad's hospitals offer discounts from established charges to certain large group purchasers of health care services, including private insurance companies, employers, HMOs, PPOs and other managed care plans. These discount programs limit Triad's ability to increase charges in response to increasing costs. See "--Competition." In addition to government programs, Triad is reimbursed by private payers including HMOs, PPOs, private insurance companies, employers and individual private payers. Patients are generally not responsible for any difference between customary hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, HMOs or PPOs, but are responsible to for services not covered by such plans, exclusions, deductibles or co-insurance features of their coverage. The amount of such exclusions, deductibles and co-insurance has generally been increasing each year. Collection of amounts due from individuals is typically more difficult than from governmental or business payers. For more information on the reimbursement programs on which Triad's revenues are dependent, see "Government and Other Sources of Reimbursement for LifePoint and Triad." Competition The competition among hospitals and other health care providers has intensified in recent years as hospital occupancy rates have declined. Triad's strategies are designed, and management believes that its hospitals are positioned, to be competitive under these changing circumstances. Seventeen of the hospitals operated by Triad as of December 31, 1998 were located in geographic areas where they were the only hospital in the community. These hospitals generally face less competition in their immediate patient service areas than would be expected in larger communities, and there is usually a lower level of managed care penetration in these areas than there would be in larger urban markets. While these Triad hospitals are generally the primary provider of hospital services in their respective communities, they face competition from larger tertiary care centers. Although these competitive hospitals may be as far as 30 to 50 miles away, patients often migrate to, are referred by local physicians to, or are lured by incentives from managed care plans to travel to, such distant hospitals. Nine of the hospitals operated by Triad as of December 31, 1998 were located in geographic areas where they competed with only one other hospital. The remainder of the hospitals were located in geographic areas where they competed with more than one other hospital. Additionally, in the past several years, the number of freestanding outpatient surgery and diagnostic centers in the geographic areas in which Triad operates has increased significantly. As a result, Triad's hospitals operate in an increasingly competitive environment. The rates charged by Triad's hospitals are intended to be competitive with those charged by other local hospitals for 84 similar services. In some cases, competing hospitals are more established than Triad's hospitals. Certain of these competing facilities, particularly in Triad's urban markets, offer services, including extensive medical research and medical education programs, which are not offered by Triad's facilities. In addition, in certain of the urban markets where Triad operates, there are large teaching hospitals which provide highly specialized facilities, equipment and services which may not be available at Triad's hospitals. Also, some of the hospitals that compete with Triad's facilities are owned by tax-supported governmental agencies or by not-for-profit entities supported by endowments and charitable contributions which can finance capital expenditures on a tax-exempt basis. One of the most significant factors in the competitive position of a hospital is the number and quality of physicians affiliated with the hospital. Although physicians may at any time terminate their affiliation with a hospital operated by Triad, Triad's hospitals seek to retain physicians of varied specialties on the hospitals' medical staffs and to attract other qualified physicians. Triad believes that physicians refer patients to a hospital primarily on the basis of the quality of services it renders to patients and physicians, the quality of other physicians on the medical staff, the location of the hospital and the quality of the hospital's facilities, equipment and employees. Accordingly, Triad strives to maintain high ethical and professional standards and quality facilities, equipment, employees and services for physicians and their patients. Another major factor in the competitive position of a hospital is management's ability to negotiate service contracts with purchasers of group health care services. HMOs and PPOs attempt to direct and control the use of hospital services through managed care programs and to obtain discounts from hospitals' established charges. In addition, employers and traditional health insurers are increasingly interested in containing costs through negotiations with hospitals for managed care programs and discounts from established charges. Generally, hospitals compete for service contracts with group health care service purchasers on the basis of price, market reputation, geographic location, quality and range of services, quality of the medical staff and convenience. The importance of obtaining contracts with managed care organizations varies from market to market depending on the market strength of such organizations. State CON laws, which place limitations on a hospital's ability to expand hospital services and add new equipment, may also have the effect of restricting competition. Alabama is the only state where Triad operates that has CON laws. The application process for approval of covered services, facilities, changes in operations and capital expenditures is, therefore, highly competitive. In those states which have no CON laws or which set relatively high thresholds before expenditures become reviewable by state authorities, competition in the form of new services, facilities and capital spending is more prevalent. Triad has not experienced, and does not expect to experience, any material adverse effects from state CON requirements or from the imposition, elimination or relaxation of such requirements. See "Regulation and Other Factors Affecting LifePoint and Triad." Triad, and the health care industry as a whole, face the challenge of continuing to provide quality patient care while dealing with rising costs, strong competition for patients and a general reduction of reimbursement rates by both private and government payers. As both private and government payers reduce the scope of what may be reimbursed and reduce reimbursement levels for what is covered, Federal and state efforts to reform the health care system may further impact reimbursement rates. Changes in medical technology, existing and future legislation, regulations and interpretations and competitive contracting for provider services by private and government payers may require changes in Triad's facilities, equipment, personnel, rates and/or services in the future. The hospital industry and Triad's hospitals continue to have significant unused capacity. Inpatient utilization, average lengths of stay and average occupancy rates continue to be negatively affected by payer-required pre- admission authorization, utilization review, and payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Admissions constraints, payer pressures and increased competition are expected to continue. Triad endeavors to meet these challenges by expanding many of its facilities to include outpatient centers, offering discounts to private payer groups, upgrading facilities and equipment, and offering new programs and services. 85 Properties The following table lists the hospitals owned or operated by the Pacific Group of Columbia/HCA (the assets of which will be transferred to Triad prior to the distribution) as of December 31, 1998. As described in the table, the Pacific Group has sold or currently intends to sell certain of the general, acute care hospitals and its psychiatric hospital.
Licensed Facility Name City State Beds - ------------- ---- ----- -------- Crestwood Medical Center Huntsville AL 120 DeQueen Regional Medical Center DeQueen AR 122 Medical Center of South Arkansas (1) El Dorado AR 360 Medical Park Hospital Hope AR 91 Phoenix Regional Medical Center Phoenix AZ 290 Paradise Valley Hospital Phoenix AZ 162 El Dorado Hospital Tucson AZ 166 Northwest Hospital Tucson AZ 174 San Leandro Hospital San Leandro CA 136 Mission Bay Memorial Hospital San Diego CA 128 Women & Children's Hospital Lake Charles LA 80 Medical Center of Carlsbad Carlsbad NM 135 Lea Regional Hospital Hobbs NM 250 Claremore Regional Hospital Claremore OK 89 Willamette Valley Medical Center McMinnville OR 80 Douglas Medical Center Roseburg OR 118 Panhandle Surgical Hospital Amarillo TX 21 Alice Regional Hospital Alice TX 131 Brownwood Regional Medical Center (4) Brownwood TX 218 College Station Medical Center College Station TX 119 Navarro Regional Hospital Corsicana TX 168 Doctors Hospital of Laredo Laredo TX 117 Longview Regional Hospital Longview TX 164 Woodland Heights Medical Center Lufkin TX 127 Medical Center of Pampa Pampa TX 107 San Angelo Community Medical Center San Angelo TX 165 Community Medical Center of Sherman Sherman TX 160 Medical Center at Terrell (2) Terrell TX 130 DeTar Hospital Victoria TX 217 Gulf Coast Medical Center Wharton TX 161 Divested as of March 1, 1999 Overland Park Regional Medical Center (3) Overland Park KS 360 Independence Regional Health Center (3) Independence MO 366 Palm Drive Hospital Sebastopol CA 49 Held For Sale Wagoner Community Hospital (2) (4) Wagoner OK 100 Beaumont Medical and Surgical Hospital Beaumont TX 366 Silsbee Doctors Hospital Silsbee TX 69 West Anaheim Medical Center Anaheim CA 219 Huntington Beach Hospital Huntington Beach CA 134 Research Psychiatric Center (5) Kansas City MO 100
- -------- (1) The Pacific Group holds a fifty percent equity interest in a non- consolidated joint venture which owns and operates the Medical Center of South Arkansas. 86 (2) The Pacific Group currently leases each of these hospitals pursuant to long-term leases which provide that it has the exclusive right to use and control the hospital operations. (3) The Pacific Group continues to own the assets related to these hospitals, but has transferred the exclusive rights to use and control the hospitals' operations to a separate, independent entity pursuant to a long-term lease agreement effective as of January 1, 1999. (4) The Pacific Group will cease to operate this facility in April 1999. (5) The Pacific Group holds a sixty percent equity interest in a consolidated joint venture which owns and operates the Research Psychiatric Center. The Pacific Group holds an equity interest in a joint venture that is building a new hospital in South Tulsa, Oklahoma, which will be operated by Triad. Upon completion of this project, which is scheduled for May 1999, Triad's equity interest will be fifty percent. In addition to the hospitals listed in the table above and the hospital under construction in South Tulsa, Oklahoma, as of December 31, 1998, the Pacific Group operated 17 outpatient surgery centers (including 3 surgery centers that are operated by an unaffiliated third party pursuant to a long-term lease), certain of which Triad currently intends to sell. Medical office buildings also are operated in conjunction with its hospitals. These office buildings are primarily occupied by physicians who practice at Triad's hospitals. Triad's headquarters are located in approximately 45,000 square feet of space in one office building in Dallas, Texas. After the distribution date, Triad will sub-lease this space from Columbia/HCA. See "Arrangements Among Columbia/HCA, LifePoint and Triad relating to the Distribution--Lease Agreements." Triad's headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for Triad's present needs. Employees and Medical Staff At December 31, 1998, Triad had approximately 28,300 employees, including approximately 9,100 part-time employees . Employees at two hospitals are currently represented by a labor union. Triad considers its employee relations to be satisfactory. While Triad's non-union hospitals experience union organizational activity from time to time, Triad does not expect such efforts to materially affect its future operations. Triad's hospitals, like most hospitals, have experienced labor costs rising faster than the general inflation rate. There can be no assurance as to future availability and cost of qualified medical personnel. Triad's hospitals are staffed by licensed physicians who have been admitted to the medical staff of individual hospitals. With certain exceptions, physicians generally are not employees of Triad's hospitals. However, some physicians provide services in Triad's hospitals under contracts, which generally describe a term of service, provide and establish the duties and obligations of such physicians, require the maintenance of certain performance criteria and fix compensation for such services. Any licensed physician may apply to be admitted to the medical staff of any of Triad's hospitals, but admission to the staff must be approved by the hospital's medical staff and the appropriate governing board of the hospital in accordance with established credentialling criteria. Members of the medical staffs of Triad's hospitals located in areas where there are other hospitals often also serve on the medical staffs of other hospitals and may terminate their affiliation with a hospital at any time. Triad's Regulatory Compliance Program It is Triad's policy that its business be conducted with integrity and in compliance with the law. Triad is developing a corporate-wide compliance program, which will focus on all areas of regulatory compliance, including physician recruitment, reimbursement and cost reporting practices, and laboratory operations. 87 This regulatory compliance program is intended to assure that high standards of conduct are maintained in the operation of Triad's business and to help assure that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, Triad will provide initial and periodic legal compliance and ethics training to every employee, review various areas of Triad's operations, and develop and implement policies and procedures designed to foster compliance with the law. Triad will regularly monitor its ongoing compliance efforts. The program also will include a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors or designated compliance officers in Triad's hospitals. Legal Proceedings Triad is, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts or for wrongful restriction of or interference with physician's staff privileges. In certain of these actions, plaintiffs request punitive or other damages that may not be covered by insurance. Triad is currently not a party to any such proceeding which, in management's opinion, would have a material adverse effect on Triad's business, financial condition or results of operations. 88 Government and Other Sources of Reimbursement for LifePoint and Triad Medicare. Under the Medicare program, LifePoint and Triad hospitals receive reimbursement under a prospective payment system ("PPS") for inpatient hospital services. Psychiatric, long-term care, rehabilitation, specially designated children's hospitals and certain designated cancer research hospitals, as well as psychiatric or rehabilitation units that are distinct parts of a hospital and meet Health Care Financing Administration criteria for exemption, are currently exempt from PPS and are reimbursed on a cost-based system, subject to certain cost limits (known as TEFRA limits). Under the PPS, fixed payment amounts per inpatient discharge are established based on the patient's assigned diagnosis related group ("DRG"). DRGs classify treatments for illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. DRG rates have been established for each hospital participating in the Medicare program and are based upon a statistically normal distribution of severity. When treatments for certain patients fall well outside the normal distribution, providers receive additional payments. DRG payments do not consider a specific hospital's costs, but are adjusted for area wage differentials. The DRG payments do not include reimbursement for capital costs, which are reimbursed separately. DRG rates are updated and re-calibrated annually and have been affected by several recent Federal enactments. The index used to adjust the DRG rates gives consideration to the inflation experienced by hospitals (and entities outside of the health care industry) in purchasing goods and services ("market basket"). However, for several years the percentage increases to the DRG rates have been lower than the percentage increases in the costs of goods and services purchased by hospitals. The DRG rates are adjusted each Federal fiscal year, which begins on October 1. The historical DRG rate increases were 1.1%, 1.5% and 2.0% for Federal fiscal years 1995, 1996 and 1997, respectively. For Federal fiscal year 1998, there was no increase. The budgeted updates for Federal fiscal years 1999 through 2002 are market basket minus 1.9%, 1.8%, 1.1% and 1.1%, respectively. LifePoint and Triad anticipate that future legislation may decrease the future rate of increase for DRG payments, but neither is able to predict the amount of the reduction. Medicare reimburses general, acute care hospitals' capital costs separately from DRG payments. Outpatient services provided at general, acute care hospitals typically are reimbursed by Medicare at the lower of customary charges or approximately 82% of actual cost, subject to additional limits on the reimbursement of certain outpatient services. The Balanced Budget Act, enacted August 5, 1997, contains provisions that affect outpatient hospital services, including a requirement that HCFA adopt a prospective payment system for outpatient hospital services to begin January 1, 1999. However, implementation of the PPS will be delayed because of Year 2000 systems concerns. The outpatient PPS will be implemented as soon as possible after January 1, 2000. At such time as the PPS is implemented, the rates will be based on the rates that would have been in effect January 1, 1999, updated by the rate of increase in the hospital market basket minus one percentage point. Neither LifePoint nor Triad is able to predict the effect, if any, that the new payment system will have on its financial results. After the fee schedule is established for this new system, the fee schedule is to be updated by the market basket minus 1.0% for each of Federal fiscal years 2000 through 2002. Similarly, therapy services will be converted to a fee schedule on January 1, 1999, and payments for non-hospital- based therapy services will be subject to limits on payment. The Balanced Budget Act mandates a prospective payment system for skilled nursing facility services for Medicare cost reporting periods commencing after June 30, 1998, hospital outpatient services beginning January 1, 1999, home health services for Medicare cost reporting periods beginning after September 30, 1999, and inpatient rehabilitation hospital services for Medicare cost reporting periods beginning after September 30, 2000. Prior to the commencement of the prospective payment systems, payment constraints will be applied to PPS- exempt hospitals and units for Medicare cost reporting periods beginning on or after October 1, 1997. For the year ended December 31, 1998, LifePoint had 49 units that were reimbursed under this methodology, and Triad had 126 units that were reimbursed under this methodology. 89 Payments to PPS-exempt hospitals and units, (i.e., inpatient psychiatric, rehabilitation and long-term hospital services), are based upon reasonable cost, subject to a cost per discharge target. These limits are updated annually by a market basket index. For Federal fiscal year 1995, 1996 and 1997, the market basket rate of increase was 3.7%, 3.4%, and 2.5% respectively. For Federal fiscal year 1998, there was no increase. For Federal fiscal year 1999, the market basket index is projected to be 2.4%. Furthermore, limits have been established for the cost per discharge target at the 75th percentile for each category of PPS-exempt hospitals and hospital units, i.e., psychiatric, rehabilitation and long-term hospitals. For Federal fiscal year 1998, these limits were $10,547, $19,250, and $37,688 per discharge, respectively. For Federal fiscal year 1999, these limits are $10,737, $19,962 and $38,393 per discharge, respectively. In addition, the cost per discharge for new hospitals/hospital units cannot exceed 110% of the national median target rate for hospitals in the same category. For Federal fiscal year 1998, these amounts were $8,517, $16,738, and $18,947 per discharge for psychiatric, rehabilitation and long-term hospital services, respectively. For Federal fiscal year 1999, these amounts are $8,686, $17,077 and $22,010 per discharge, respectively. Skilled nursing facilities have historically been reimbursed by Medicare on the basis of actual costs, subject to certain limits. The Balanced Budget Act requires the establishment of a prospective payment system for Medicare skilled nursing facilities under which facilities will be paid a Federal per diem rate for virtually all covered services. The new payment system will be phased in over three cost reporting periods, starting with cost reporting periods beginning on or after July 1, 1998. The law also institutes consolidated billing for skilled nursing facility services, under which payments for most non-physician Part B services for beneficiaries no longer eligible for Part A skilled nursing facility care will be made to the facility, regardless of whether the item or service was furnished by the facility, by others under arrangement, or under any other contracting or consulting arrangement. Consolidated billing is being implemented on a transition basis, effective for items or services furnished on or after July 1, 1998 or January 1, 1999 at the election of the provider. The Balanced Budget Act also requires United States Department of Health and Human Services ("HHS") to establish a PPS for home health services, to be implemented beginning October 1, 1999. Prior to implementation, the Balanced Budget Act establishes certain interim payment reforms for cost reporting periods beginning on or after October 1, 1997, including reduced home health limits, reduced per visit costs limits, and agency-specific per beneficiary annual limits on an agency's costs. Currently, physicians are paid by Medicare on a fee for service basis. However, physicians working in rural health clinics, such as those maintained by LifePoint and Triad, are reimbursed at cost, but such reimbursement is subject to a limit on payments if the rural health clinic is not based at a rural hospital with less than 50 beds. Medicare has special payment provisions for "sole community hospitals." A sole community hospital is generally the only hospital in at least a 35-mile radius. Five of LifePoint's facilities and six of Triad's facilities qualify as sole community hospitals under Medicare regulations. Special payment provisions related to sole community hospitals include a higher DRG rate, which is based on a blend of hospital-specific costs and the national DRG rate, and a 90% payment "floor" for capital costs which guarantees the sole community hospital capital reimbursement equal to 90% of capital cost. In addition, the CHAMPUS program has special payment provisions for hospitals recognized as sole community hospitals for Medicare purposes. Medicaid. Most state Medicaid payments are made under a prospective payment system or under programs which negotiate payment levels with individual hospitals. Medicaid reimbursement is often less than a hospital's cost of services. Medicaid is currently funded approximately 50% by the states and 50% by the Federal government. The Federal government and many states are currently considering significant reductions in the level of Medicaid funding while at the same time expanding Medicaid benefits, which could adversely affect future levels of Medicaid reimbursement received by the hospitals of LifePoint and Triad. On November 27, 1991, Congress enacted the Medicaid Voluntary Contribution and Provider-Specific Tax Amendments of 1991, which limit the amount of voluntary contributions and provider-specific taxes that can be used by states to fund Medicaid and require the use of broad-based taxes for such funding. As a result of enactment of these amendments, certain states in which LifePoint and Triad operate have adopted broad-based 90 provider taxes to fund their Medicaid programs. The impact of these new taxes upon LifePoint and Triad has not been materially adverse. However, neither LifePoint nor Triad can predict whether any additional broad-based provider taxes will be adopted by the states in which it operates and, accordingly, neither is able to assess the effect of such additional taxes on its results of operations or financial position. Annual Cost Reports. Review of previously submitted annual cost reports and the cost report preparation process are areas included in the ongoing government investigations of Columbia/HCA. It is too early to predict the outcome of these investigations, but if LifePoint or Triad, or any of their facilities, were found to be in violation of Federal or state laws relating to Medicare, Medicaid or similar programs, they could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on the financial position and results of operations of LifePoint or Triad, as the case may be. Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of any liabilities arising out of such government investigations. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement," "Risk Factors-- Columbia/HCA Investigations, Litigation; Indemnification of LifePoint and Triad," and "Regulation and Other Factors Affecting LifePoint and Triad-- Governmental Investigation of Columbia/HCA and Related Litigation." Annual cost reports required under the Medicare and Medicaid programs are subject to routine audits, which may result in adjustments to the amounts ultimately determined to be due to LifePoint and Triad under these reimbursement programs. These audits often require several years to reach the final determination of amounts earned under the programs. Providers also have rights of appeal, and it is common to contest issues raised in audits of prior years' reports. Columbia/HCA, LifePoint and Triad have agreed that any recovery for pending group appeal issues will belong to Columbia/HCA. Each of LifePoint and Triad believes that adequate provision has been made in its financial statements for any material retroactive adjustments that might result from such audits and that final resolution of the contested issues will not have a material adverse effect upon its results of operations or financial position. Managed Care. Pressures to control the cost of health care have resulted in increases to the percentage of admissions and net revenues attributable to managed care payers. The percentage of LifePoint's admissions attributable to managed care payers increased from 16.7% for the year ended December 31, 1997 to 18.6% for the year ended December 31, 1998. The percentage of LifePoint's net revenue from continuing operations attributable to managed care payers increased from 15.9% for the year ended December 31, 1997 to 20.1% for the year ended December 31, 1998. The percentage of Triad's admissions attributable to managed care payers increased from 28.7% for the year ended December 31, 1997 to 32.2% for the year ended December 31, 1998 and the percentage of Triad's net revenue from continuing operations attributable to managed care payers increased from 24.2% for the year ended December 31, 1997 to 29.5% for the year ended December 31, 1998. LifePoint and Triad expect that the trend toward increasing percentages related to managed care payers will continue in the future. LifePoint and Triad generally receive lower payments from managed care payers than from traditional commercial/indemnity insurers; however, as part of their business strategy, LifePoint and Triad intend to take steps to improve their managed care positions, see "LifePoint Business--Business Strategy" and "Triad Business--Business Strategy." Commercial Insurance. The hospitals of LifePoint and of Triad provide services to individuals covered by private health care insurance. Private insurance carriers make direct payments to such hospitals or, in some cases, reimburse their policy holders, based upon the particular hospital's established charges and the particular coverage provided in the insurance policy. Commercial insurers are continuing efforts to limit the costs of hospital services by adopting discounted payment mechanisms, including prospective payment or DRG based payment systems, for more inpatient and outpatient services. To the extent that such efforts are successful and reduce the insurers' reimbursement to hospitals for the costs of providing services to their beneficiaries, such reduced levels of reimbursement may have a negative impact on the operating results of the hospitals of LifePoint and of Triad. 91 Regulation and Other Factors Affecting LifePoint and Triad Licensure, Certification and Accreditation. Health care facility construction and operation is subject to Federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Facilities are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. All of the health care facilities of LifePoint and Triad are properly licensed under appropriate state laws. All of the general, acute care hospitals of LifePoint and Triad are certified under the Medicare program and are accredited by the Joint Commission on Accreditation of Healthcare Organizations, the effect of which is to permit the facilities to participate in the Medicare and Medicaid programs. Certain of the psychiatric hospitals of Triad do not participate in these programs. Should any facility lose its accreditation by this Joint Commission, or otherwise lose its certification under the Medicare program, the facility would be unable to receive reimbursement from the Medicare and Medicaid programs. The facilities of LifePoint and Triad are in substantial compliance with current applicable Federal, state, local and independent review body regulations and standards. The requirements for licensure, certification and accreditation are subject to change and, in order to remain qualified, it may be necessary for LifePoint and Triad to effect changes in their facilities, equipment, personnel and services. Certificates of Need. The construction of new facilities, the acquisition of existing facilities, and the addition of new beds or services may be subject to review by state regulatory agencies under a CON program. Each of LifePoint and Triad will operate some hospitals in states that require approval under a CON program. Such laws generally require appropriate state agency determination of public need and approval prior to the addition of beds or services or certain other capital expenditures. Failure to obtain necessary state approval can result in the inability to expand facilities, complete an acquisition or change ownership. Further, violation may result in the imposition of civil sanctions or the revocation of a facility's license. State Rate Review. Some states in which LifePoint or Triad will own hospitals have adopted legislation mandating rate or budget review for hospitals or have adopted taxes on hospital revenues, assessments or licensure fees to fund indigent health care within the state. In the aggregate, state rate or budget review and indigent tax provisions have not materially adversely affected the results of operations of either LifePoint or Triad. Neither LifePoint nor Triad is able to predict whether any additional state rate or budget review or indigent tax provisions will be adopted and, accordingly, neither is able to assess the effect thereof on its results of operations or financial condition. Utilization Review. Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards, are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by peer review organizations, which review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of DRG classifications and the appropriateness of cases of extraordinary length of stay or cost. Peer review organizations may deny payment for services provided, may assess fines and also have the authority to recommend to the HHS that a provider which is in substantial noncompliance with the standards of the peer review organization be excluded from participation in the Medicare program. Utilization review is also a requirement of most non- governmental managed care organizations. Medicare Regulations and Fraud and Abuse. Participation in the Medicare program is heavily regulated by Federal statute and regulation. If a hospital provider fails substantially to comply with the numerous conditions of participation in the Medicare program or performs certain prohibited acts, such hospital's participation in the Medicare program may be terminated or civil or criminal penalties may be imposed upon it under certain provisions of the Social Security Act. Prohibited acts include: . making false claims to Medicare for services not rendered or misrepresenting actual services rendered in order to obtain higher reimbursement; 92 . paying remuneration to induce Medicare referrals (so called "fraud and abuse" which is prohibited by the "anti-kickback" provisions of the Social Security Act); . failing to stabilize all individuals who come to its emergency room who have an "emergency medical condition," whether or not the individual is eligible for Medicare; . transferring any stabilized patient to another health care facility before the other facility has agreed to the transfer of the patient, if the other facility does not have sufficient room and staff to treat the patient, without the patient's emergency department medical records, or without appropriate life support equipment; and . transferring any unstabilized patient (except those transferred at the patient's request or with physician certification that the medical risks from the transfer are less harmful than continued treatment at the transferring facility). Moreover, HHS and the courts have interpreted the Anti-Kickback Statute broadly to include the intentional offer, payment, solicitation or receipt of anything of value if one purpose of the payment is to induce the referral of Medicare business. Health care providers generally are concerned that many relatively innocuous, or even beneficial, commercial arrangements with their physicians (or others that may provide referrals) may technically violate this strict interpretation of the Anti-Kickback Statute. In 1976, Congress established the Office of Inspector General ("OIG") at HHS to identify and eliminate fraud, abuse and waste in HHS programs and to promote efficiency and economy in HHS departmental operations. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to health care providers on ways to engage in legitimate business practices and avoid scrutiny under the fraud and abuse statutes, the OIG has from time to time issued "fraud alerts" identifying features of transactions, which, if present, may indicate that the transaction violates the Anti-Kickback Statute. The OIG has identified the following incentive arrangements as potential violations: . payment of any sort of incentive by the hospital each time a physician refers a patient to the hospital; . the use of free or significantly discounted office space or equipment (in facilities usually located close to the hospital); . provision of free or significantly discounted billing, nursing or other staff services; . free training for a physician's office staff in areas such as management techniques and laboratory techniques; . guarantees which provide that, if the physician's income fails to reach a predetermined level, the hospital will supplement the remainder up to a certain amount; . low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients (or some number of patients) to the hospital; . payment of the costs of a physician's travel and expenses for conferences; . coverage on the hospital's group health insurance plans at an inappropriately low cost to the physician; or . payment for services (which may include consultations at the hospital) which require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of services rendered. The OIG has encouraged persons having information about hospitals who offer the above types of incentives to physicians to report such information to the OIG. In July 1991, the OIG issued final regulations outlining certain "safe harbors" for practices, which, although potentially capable of inducing prohibited referrals of business under Medicare or state health programs, would not be subject to enforcement action under the Anti-Kickback Statute. The practices protected 93 by the regulations include certain physician joint venture transactions, rental of space and equipment, personnel services and management contracts, sales of physician practices, referral services, warranties, discounts, payments to employees, group purchasing organizations and waivers of beneficiary deductibles and co-payments. Section 1877 of the Social Security Act (commonly known as the "Stark Law") prohibits referrals of Medicare and Medicaid patients by physicians to entities with which the physician has a financial relationship and which provide certain "designated health services" which are reimbursable by Medicare or Medicaid. "Designated health services" include, among other things, clinical laboratory services, physical and occupational therapy services, radiology services, durable medical equipment, home health, and inpatient and outpatient hospital services. Sanctions for violating the Stark Law include civil money penalties up to $15,000 per prohibited service provided, assessments equal to twice the dollar value of each such service provided and exclusion from the Medicare and Medicaid programs. There are certain exceptions to the self-referral prohibition, including an exception if the physician has an ownership interest in the entire hospital. Proposed regulations implementing the Stark Law, as amended, have not been implemented. In addition, a physician may have an ownership interest in and refer patients to an entity providing designated health services if the entity is located in a rural area. The requirements of the "rural provider" exception are that (i) the provider is located in an area that is not considered a metropolitan statistical area, and (ii) at least 75 percent of the patients served by the facility reside in a rural area. Neither LifePoint nor Triad can predict the final form that such regulations will take or the effect that the Stark Law or the regulations promulgated thereunder will have on LifePoint and Triad. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), which became effective January 1, 1997, amends, among other things, Title XI (42 U.S.C. (S) 1301 et seq.) to broaden the scope of certain fraud and abuse laws to include all health care services, whether or not they are reimbursed under a Federal program, and creates new enforcement mechanisms to combat fraud and abuse, including an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. Under HIPAA, health care fraud, now defined as knowingly and willfully executing or attempting to execute a "scheme or device" to defraud any health care benefit program, is made a Federal criminal offense. In addition, for the first time, Federal enforcement officials will have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed health care fraud, even if the investor, officer or employee had no knowledge of the fraud. HIPAA also establishes a new violation for the payment of inducements to Medicare or Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner. The Balanced Budget Act also expands numerous health care fraud provisions. Each of LifePoint and Triad provide financial incentives to recruit physicians into the communities served by its hospitals, including loans and minimum revenue guarantees. Although HHS has proposed a Safe Harbor for certain physician recruitment, no Safe Harbor for physician recruitment is currently in force. Each of LifePoint and Triad also enter into certain employment agreements, leases and other agreements with physicians. Although each of LifePoint and Triad believes that its arrangements with physicians comply with current law, there can be no assurance that regulatory authorities who enforce the Anti-Kickback Statute will not determine that such physician recruiting activities or other physician arrangements violate the Anti-Kickback Statute or other Federal laws. Such a determination could subject LifePoint or Triad to liabilities under the Social Security Act, including criminal penalties, civil monetary penalties and/or exclusion from participation in Medicare, Medicaid or other Federal health care programs, any of which could have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect these arrangements. There is increasing scrutiny by law enforcement authorities, the HHS, OIG, the courts and Congress of arrangements between health care providers and potential referral sources to ensure that the 94 arrangements are not designed as a mechanism to exchange remuneration for patient care referrals and opportunities. Investigators have also demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purpose of payments between health care providers and potential referral sources. The Social Security Act also imposes criminal and civil penalties for making false claims to Medicare and Medicaid for services not rendered or for misrepresenting actual services rendered in order to obtain higher reimbursement. Like the Anti-Kickback Statute, this statute is very broad. Careful and accurate coding of claims for reimbursement must be performed to avoid liability under the false claims statutes. Many states in which LifePoint or Triad will operate also have adopted, or are considering adopting, laws that prohibit payments to physicians for patient referrals with statutory language similar to the Anti-Kickback Statute, some of which apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties as well as loss of licensure. Many states also have passed legislation similar to the Stark Law, but also with broader effect, since the state legislation applies regardless of the source of payment for care. Little precedent exists for the interpretation or enforcement of these state laws. The Federal Medicaid regulations also prohibit fraudulent and abusive practices and authorize the exclusion from such program of providers in violation of such regulations. Corporate Practice of Medicine. Some of the states in which LifePoint and Triad will operate have laws that prohibit corporations and other entities from employing physicians or that prohibit certain direct and indirect payments or fee-splitting arrangements between health care providers. In addition, some states restrict certain business relationships between physicians and pharmacies. Possible sanctions for violation of these restrictions include loss of a physicians's license and civil and criminal penalties. These statutes vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies. Although each of LifePoint and Triad exercises care in an effort to structure its arrangements with health care providers to comply with the relevant state statutes, and each believes such arrangements comply with applicable laws in all material respects, there can be no assurance that governmental officials charged with responsibility for enforcing these laws will not assert that LifePoint or Triad, or certain transactions in which either of them is involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with the interpretations of LifePoint or Triad. Health Care Reform. Health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. In recent years, an increasing number of legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Among the proposals under consideration are cost controls on hospitals, insurance market reforms to increase the availability of group health insurance to small businesses, and requirements that all businesses offer health insurance coverage to their employees. The costs of certain proposals would be funded in significant part by reductions in payments by governmental programs, including Medicare and Medicaid, to health care providers such as hospitals. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse effect on the business, financial condition or results of operations of LifePoint or Triad. Conversion Legislation. Many states have enacted or are considering enacting laws affecting the conversion or sale of not-for-profit hospitals. These laws, in general, include provisions relating to attorney general approval, advance notification and community involvement. In addition, state attorneys general in states without specific conversion legislation may exercise authority over these transactions based upon existing law. In many states there has been an increased interest in the oversight of not-for-profit conversions. The adoption of conversion legislation and the increased review of not-for-profit hospital conversions may limit the ability of LifePoint or Triad to acquire not-for- profit hospitals. 95 Revenue Ruling 98-15. During March 1998, the IRS issued guidance regarding the tax consequences of joint ventures between for-profit and not-for-profit hospitals. Neither LifePoint nor Triad has determined the impact of the tax ruling on its existing joint ventures, or the development of future ventures, and is consulting with its joint venture partners and tax advisers to develop an appropriate course of action. The tax ruling could limit joint venture development with not-for-profit hospitals, require the restructuring of certain existing joint ventures with not-for-profits and influence the exercise of "put agreements" (that require the purchase of the partner's interest in the joint venture) by certain existing joint venture partners. Environmental Matters. LifePoint and Triad are subject to various Federal, state and local statutes and ordinances regulating the discharge of materials into the environment. Neither LifePoint nor Triad expects that it will be required to expend any material amounts in order to comply with these laws and regulations or that compliance will materially affect its capital expenditures, earnings or competitive position. Insurance. As is typical in the health care industry, LifePoint and Triad are subject to claims and legal actions by patients in the ordinary course of business. To cover these claims, LifePoint and Triad maintain professional malpractice liability insurance and general liability insurance in amounts which each believes to be sufficient for its operations, although some claims may exceed the scope of the coverage in effect. Each of LifePoint and Triad also maintains umbrella coverage. At various times in the past, the cost of malpractice and other liability insurance has risen significantly. Therefore, there can be no assurance that such insurance will continue to be available at reasonable prices which will allow LifePoint and Triad to maintain adequate levels of coverage. Substantially all losses in periods prior to the distribution are insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA. Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of claims covered by such insurance policies, claims which would be covered by a standard policy of comprehensive general public liability and property insurance, directors' and officers' insurance or health care errors and omissions insurance and workers compensation claims arising prior to the distribution. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement" and "--Insurance Allocation and Administration Agreement." Because substantially all liability for general and professional liability claims incurred is insured through a wholly-owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA, and Columbia/HCA maintains the related reserve, no reserve for general and professional liability risks is recorded on the balance sheets of LifePoint and Triad. Any losses incurred in excess of amounts maintained under such insurance will be funded from working capital. There can be no assurance that the cash flow of LifePoint and Triad will be adequate to provide for professional and general liability claims in the future. If payments for general and professional liabilities exceed anticipated losses, the results of operations and financial condition of LifePoint or Triad, as the case may be, could be adversely affected. Governmental Investigation of Columbia/HCA and Related Litigation. In March 1997, various facilities of Columbia/HCA's El Paso, Texas operations were searched by Federal authorities pursuant to search warrants, and government agents removed various records and documents. In February 1998, an additional warrant was executed and a single computer was seized. In July 1997, various Columbia/HCA affiliated facilities and offices were searched pursuant to search warrants. During July, September and November 1997, Columbia/HCA also was served with subpoenas requesting records and documents related to laboratory billing and DRG coding in various states and home health operations in various jurisdictions, including but not limited to, Florida. In January 1998, Columbia/HCA received a subpoena which requested records and documents relating to physician relationships. The United States District Court for the Middle District of Florida, in Fort Myers, issued an indictment against three employees of a subsidiary of Columbia/HCA in July 1997. The indictment relates to the alleged false characterization of interest payments on certain debt resulting in Medicare and CHAMPUS overpayments since 1986 to Columbia Fawcett Memorial Hospital, a Port Charlotte, Florida hospital that was acquired by 96 Columbia/HCA in 1992. Columbia/HCA has been served with subpoenas for various records and documents. In July 1998, a fourth employee of a subsidiary of Columbia/HCA was indicted by a superseding indictment. Several hospital facilities affiliated with Columbia/HCA in various states have received individual Federal and/or state government inquiries, both informal and formal, requesting information related to reimbursement from government programs. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the scope of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA also is the subject of a formal order of investigation by the SEC. Columbia/HCA understands that the investigation includes the anti-fraud, periodic reporting and internal accounting control provisions of the Federal securities laws. Columbia/HCA is a defendant in several qui tam actions brought by private parties on behalf of the United States of America, which have been unsealed and served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated the False Claims Act, 31 U.S.C. (S) 3729 et seq., for improper claims submitted to the government for reimbursement. The lawsuits seek damages of three times the amount of all Medicare or Medicaid claims (involving false claims) presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The government has intervened in two qui tam actions. Columbia/HCA is aware of additional qui tam actions that remain under seal and believes that there may be other sealed qui tam cases of which it is unaware. Since April 8, 1997, numerous Federal securities class action and derivative lawsuits have been brought against Columbia/HCA and a number of its current and former directors, officers and employees. On October 10, 1997, all of the securities class action claims were consolidated into a single-captioned case which seeks the certification of a class of persons or entities who acquired Columbia/HCA's common stock from April 9, 1994 to September 9, 1997. The lawsuit alleges, among other things, that the defendants committed violations of the Federal securities laws by materially inflating Columbia/HCA's revenues and earnings through a number of practices, including upcoding, maintaining reserve cost reports, disseminating false and misleading statements, cost shifting, illegal reimbursements, improper billing, unbundling, and violating various Medicare laws. The lawsuit seeks compensatory damages, costs, and expenses. On October 10, 1997, all of the derivative law claims were consolidated into a single-captioned case. The lawsuit alleges, among other things, derivative claims against the individual defendants that they intentionally or negligently breached their fiduciary duties to Columbia/HCA by authorizing, permitting, or failing to prevent Columbia/HCA from engaging in various schemes to improperly increase revenue, upcoding, improper cost reporting, improper referrals, improper acquisition practices, and overbilling. In addition, the lawsuit asserts a derivative claim against some of the individual defendants for breaching their fiduciary duties by engaging in insider trading. The lawsuit seeks restitution, damages, recoupment of fines or penalties paid by Columbia/HCA, restitution and pre-judgment interest against the alleged insider trading defendants, and costs and disbursements. In addition, the lawsuit seeks orders prohibiting Columbia/HCA from paying individual defendants employment benefits, terminating all improper business relationships with individual defendants, and requiring Columbia/HCA to implement effective corporate governance and internal control mechanisms designed to monitor compliance with Federal and state laws and ensure reports to the Board of material violations of law. Several derivative actions have been filed in state court by certain purported stockholders of Columbia/HCA against certain of Columbia/HCA's current and former officers and directors alleging breach of fiduciary duty and failure to take reasonable steps to ensure that Columbia/HCA did not engage in illegal practices which exposed Columbia/HCA to significant damages. 97 A suit filed on November 7, 1997 against Columbia/HCA and certain members of the retirement committee, alleges violations of the Employee Retirement Income Security Act of 1974. The suit alleges Columbia/HCA breached its fiduciary duty to participants in Columbia/HCA's Stock Bonus Plan, fraudulently concealed information from the public and fraudulently inflated Columbia/HCA's stock price through billing fraud, over charges, inaccurate medical cost reports and illegal kickbacks for physician referrals. Columbia/HCA also is a defendant in a number of Federal and state courts actions filed by patients and/or payers, alleging, in general, improper and fraudulent billing, overcharging, coding and physician referrals, as well as other violations of law. Certain of the lawsuits have been conditionally certified as class actions and others are purported class actions. It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam, stockholder derivative and class action lawsuits, or whether any additional investigations or litigation will be commenced. If Columbia/HCA is found to have violated Federal or state laws relating to Medicare, Medicaid or similar programs, then Columbia/HCA could be subject to substantial monetary fines, civil and criminal penalties, and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui tam, stockholder derivative and class action lawsuits may be substantial and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more of such lawsuits. Any such sanctions or losses could have a material adverse effect on Columbia/HCA's financial position and results of operations. Columbia/HCA has agreed to indemnify LifePoint and Triad in respect of any losses which they may incur as a result of the proceedings described above. Columbia/HCA has also agreed to indemnify LifePoint and Triad in respect of any losses which they may incur as a result of proceedings which may be commenced by government authorities or by private parties in the future that arise from acts, practices or omissions engaged in prior to the Distribution Date and relate to the proceedings described above. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Distribution Agreement." If any of such indemnified matters were successfully asserted against either LifePoint or Triad, or any of their facilities, and Columbia/HCA failed to meet its indemnification obligations, then such losses could have a material adverse effect on the financial position and results of operations of LifePoint and/or Triad, as the case may be. 98 LifePoint Management Directors On the distribution date, the directors of LifePoint will be the persons named below.
Principal Occupation or Employment Name Age for Past Five Years ---- --- ---------------------------------- Scott L. Mercy.. 37 Chairman and Chief Executive Officer, LifePoint, as of the distribution date and, since September 1, 1998, Chief Executive Officer, America Group of Columbia/HCA; President and Chief Executive Officer of America Service Group, Inc. (health care services for correctional facilities) from 1996 through September 1, 1998; Senior Vice President--Financial Operations of Columbia/HCA Healthcare Corporation (health care services) from 1994 through 1995; Vice President--Financial Operations and Director--Financial Operations Support of Hospital Corporation of America (health care services), prior thereto. [Director]...... [Director]...... [Director]...... [Director]...... [Director]...... [Director]......
The LifePoint Certificate provides that the LifePoint Board of Directors will be divided into three classes, with the classes to be as nearly equal in number as possible. Of the initial LifePoint directors following the distribution, one-third will continue to serve until the 2000 Annual Meeting of Stockholders, one-third will continue to serve until the 2001 Annual Meeting of Stockholders, and one-third will continue to serve until the 2002 Annual Meeting of Stockholders. Of the initial directors, , and will serve until the 2000 Annual Meeting of Stockholders; , and will serve until the 2001 Annual Meeting of Stockholders; and , and will serve until the 2002 Annual Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one class of directors will be elected each year for a three-year term. See "LifePoint Description of Capital Stock--Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws--Classified Board of Directors." The LifePoint Board of Directors will have a number of standing committees, including an Executive Committee, an Audit Committee and a Compensation Committee. The Executive Committee may exercise certain powers of the Board of Directors regarding the management and direction of the business and affairs of LifePoint when the Board of Directors is not in session. All action taken by the Executive Committee is reported to and reviewed by the LifePoint Board of Directors. The Executive Committee also will screen candidates to be nominated for election to the LifePoint Board of Directors by the stockholders or chosen to fill newly created directorships or vacancies on the LifePoint Board of Directors. The members of the Executive Committee will be , , and , with serving as Chair. The Audit Committee of the LifePoint Board of Directors will review and make reports and recommendations to the Board of Directors with respect to the selection of the independent auditors of LifePoint and its subsidiaries, the arrangements for and the scope of the audits to be performed by them and the internal audit activities, accounting procedures and controls of LifePoint, and will review the annual consolidated financial statements of LifePoint. The members of the Audit Committee will be , and , with serving as Chair. 99 The Compensation Committee of the LifePoint Board of Directors will be responsible for approving compensation arrangements for executive management of LifePoint, reviewing compensation plans relating to officers, grants of options and other benefits under LifePoint's employee benefit plans and reviewing generally LifePoint's employee compensation policy. The members of the Compensation Committee will be , and , with serving as Chair. Compensation of Directors The annual retainer for outside directors who are neither officers nor employees of LifePoint ("Non-Employee Directors") will be $18,000 and the Board meeting fee will be $1,500 per meeting. Committee members will receive a fee of $1,000 per meeting payable only for attendance at committee meetings not held in conjunction with a meeting of the LifePoint Board of Directors. Directors also are reimbursed for expenses incurred relating to attendance at meetings. Under the LifePoint Outside Directors Stock and Incentive Compensation Plan, each Non-Employee Director may elect to receive, in lieu of all or any portion (in multiples of 25%) of his annual retainer, deferred stock units, the payout of which, at the election of the director, may be deferred for two years or until the end of such director's term of office. The payment of deferred stock units will be made through the issuance of a stock certificate for a number of shares equal to the number of deferred stock units. The plan further provides that each Non-Employee Director will receive a one- time grant of an option, as of the first business day of the director's first term of office, to acquire shares of LifePoint common stock (exercisable at the fair market value of LifePoint common stock on the date of grant) for a number of shares having an aggregate value as of such date, equal to two times the Non-Employee Director's annual retainer fee. Each person who is a Non-Employee Director on the day of the annual meeting of LifePoint's stockholders will be granted on that day an option to acquire shares of LifePoint common stock (exercisable at the fair market value of LifePoint common stock on the date of grant) for a number of shares having an aggregate value as of such date, equal to the Non-Employee Director's annual retainer fee. The one-time options described above will become exercisable as to all of the shares covered by the option on the third anniversary of the date of grant. The annual options will become exercisable as to one-third of the shares covered by the option on each of the first three anniversaries of the date of grant. The plan further provides that Non-Employee Directors may receive discretionary option grants. Executive Officers On the distribution date, the executive officers of LifePoint will be as follows:
Name Age Position And Professional Experience ---- --- ------------------------------------ Scott L. Mercy............ 37 Chairman and Chief Executive Officer, LifePoint, as of the distribution date and, since September 1, 1998, Chief Executive Officer, America Group of Columbia/HCA; President and Chief Executive Officer of America Service Group, Inc. (health care services for correctional facilities) from 1996 through September 1, 1998; Senior Vice President--Financial Operations of Columbia/HCA Healthcare Corporation (health care services) from 1994 through 1995; Vice President--Financial Operations and Director-- Financial Operations Support of Hospital Corporation of America (health care services), prior thereto. James M. Fleetwood, Jr. .. 51 President and Chief Operating Officer of LifePoint, as of the distribution date, and since January 1, 1998, President, the America Group of Columbia/HCA; President--Florida Group of Columbia/HCA from May 1996 to January 1, 1998; President of the North Florida Division of Columbia/HCA from April 1995 to May 1996; Regional Vice President of Healthtrust, Inc.--The Hospital Company (health care services), prior thereto.
100
Name Age Position And Professional Experience ---- --- ------------------------------------ William F. Carpenter III.. 44 Senior Vice President and General Counsel, LifePoint, as of the distribution date, and since November 16, 1998, General Counsel, the America Group of Columbia/HCA; Member, Waller Lansden Dortch & Davis, PLLC (law firm), prior to December 31, 1998. Kenneth C. Donahey........ 48 Senior Vice President and Chief Financial Officer, LifePoint, as of the distribution date, and since November 5, 1998, Chief Financial Officer, the America Group of Columbia/HCA; Senior Vice President and Controller, Columbia/HCA from April 1995 through November 4, 1998; Senior Vice President and Controller, Healthtrust, Inc.--The Hospital Company, prior thereto. Neil D. Hemphill.......... 45 Senior Vice President of Administration and Human Resources, LifePoint, as of the distribution date and, since September 1, 1998, Senior Vice President of Administration and Human Resources, the America Group of Columbia/HCA; Senior Vice President of Human Resources, Columbia/HCA from February 1994 to September 1, 1998; Vice President of Human Resources, Columbia Healthcare Corporation, prior thereto. William Gracey............ 45 Division President, LifePoint, as of the distribution date and, since July 1998, Division President, the America Group of Columbia/HCA; President of Operations Support for the Atlantic Group of Columbia/HCA from January 1998 through June 1998; Division President, Columbia/HCA from September 1995 to December 1997; Chief Operating Officer of the Pacific Division of Columbia/HCA from February 1995 to September 1995; Chief Executive Officer of other facilities of Hospital Corporation of America (health care services), prior thereto. Dan Slipkovich............ 41 Division President, LifePoint, as of the distribution date; and since October 1998, Division President of the America Group of Columbia/HCA; Chief Financial Officer of the America Group of Columbia/HCA, January 1998 to October 1998; Chief Financial Officer and Vice President of the Florida Group of Columbia/HCA from July 1996 to January 1998; Chief Financial Officer and Vice President of the North Florida Division of Columbia/HCA from April 1995 to July 1996; Regional Assistant Vice President of Healthtrust, Inc.--The Hospital Company, prior thereto.
101 Executive Compensation The information under this heading relates to the compensation paid by Columbia/HCA to the Chief Executive Officer of LifePoint and the four individuals who will be executive officers of LifePoint as of the distribution date and who were, based on such compensation, the most highly compensated LifePoint executive officers for the year ended December 31, 1998. All cash compensation was paid by Columbia/HCA and all stock compensation was in the form of Columbia/HCA Common Stock or options to purchase shares of Columbia/HCA Common Stock. The principal positions listed in the table are those that will be held by such persons as of the distribution date. For information regarding certain future compensation arrangements which have been established for LifePoint as an independent, publicly-traded company, see "--LifePoint Compensation Arrangements." LifePoint Summary Compensation Table
Annual Compensation Long-Term Compensation ------------------------------ -------------------------- Securities Other Annual Restricted Underlying All Other Name and Principal Salary Bonus Compensation Stock Options/SARS Compensation Position Year ($)(2) ($)(3) ($)(4) Awards ($)(5) (#)(6) ($)(7) ------------------ ---- -------- -------- ------------ ------------- ------------ ------------ Scott L. Mercy.......... 1998 $133,333 $ -- $ -- $ 11,137 -- $ -- Chairman and Chief 1997 $ -- $ -- $ -- $ -- -- $ -- Executive Officer (1) James M. Fleetwood, Jr. ................... 1998 $472,500 $ -- $ 31,978 $100,638 -- $10,864 President and Chief 1997 $350,000 $175,000 $ 8,333 $ -- 340,000 $ 8,439 Operating Officer Kenneth C. Donahey...... 1998 $412,500 $ -- $ -- $ 48,764 -- $15,738 Senior Vice President 1997 $275,000 $ -- $ -- $183,369 290,000 $15,903 and Controller William Gracey.......... 1998 $296,100 $ -- $ -- $ 46,703 -- $14,480 Division President 1997 $210,000 $105,000 $ -- $ -- 72,000 $12,084 Dan Slipkovich.......... 1998 $258,570 $ -- $ 63,408 $ 55,040 -- $13,380 Division President 1997 $191,500 $ 95,750 $ -- $ -- 125,000 $13,530
- -------- (1) Mr. Mercy became employed by Columbia/HCA in September 1998 and therefore received no compensation in 1997. (2) 1998 salary amounts do not include the value of restricted stock awards granted in lieu of a portion of annual salary. (3) Reflects bonus earned during 1997. In some instances, all or a portion of the bonus was paid during 1998. Each of the Executive officers identified in the table had the option to take all or part of their bonus in shares of Columbia/HCA restricted stock at a 25% discount from the fair market value at the time of grant, which is reflected in the Restricted Stock Awards column. Columbia/HCA's cash bonus program was discontinued in August 1997. (4) Perquisites and other personal benefits did not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus for any executive officer identified in the table. Other compensation consists principally of relocation expenses. (5) 1998 amounts represent the fair market value on the date of grant of Columbia/HCA shares issued in lieu of a portion of annual salary and shares earned under Columbia/HCA's 1998 Performance Equity Incentive Plan. 1997 amounts represent fair market value on the date of grant of shares of Columbia/HCA restricted stock granted in lieu of all or a portion of a cash bonus. (6) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA granted options at two separate times in 1997. The 1997 regular grant was issued in February 1997. A special grant was issued in November 1997 to help ensure the retention and motivation of key executives, including each of the executive officers identified in the table, at the time Columbia/HCA was reorganizing. On average, the size of the November 1997 grant is two times a competitive median long-term grant for a two year period (1998-99). (7) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and Investment Plan, Money Purchase Plan and Stock Bonus Plan. 102 Aggregated Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Underlying Value of Unexercised In-the- Unexercised Options/SARs at Money Options/SARs at Fiscal Fiscal Year-End (#) Year-End($) (1) ------------------------------ ----------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ------------- -------------- ------------------- --------------- Scott L. Mercy.......... 7,500 -- $ 184,542.75 $ 0 James M. Fleetwood, Jr..................... 131,745 396,250 1,241,673.28 0 Kenneth C. Donahey...... 161,984 346,250 1,459,010.81 0 William Gracey.......... 17,624 94,876 0 0 Dan Slipkovich.......... 33,026 141,125 294,813.30 0
- -------- (1) The closing price for the Columbia/HCA Common Stock, as reported by the NYSE, on December 31, 1998 was $24.75. Value is calculated on the basis of the difference between the option exercise price and $24.75, multiplied by the number of shares of Columbia/HCA Common Stock underlying the option. LifePoint Compensation Arrangements Benefits and Employment Matters Agreement In connection with the distribution, Columbia/HCA, LifePoint and Triad will enter into the Benefits and Employment Matters Agreement, which allocates responsibilities for employee compensation, benefits, labor, benefit plan administration and certain other employment matters on and after the distribution date. Among other things, the Benefits and Employment Matters Agreement generally provides for grants to LifePoint employees of options to purchase shares of LifePoint common stock and Triad common stock in respect of vested options to purchase Columbia/HCA Common Stock (other than incentive stock options), and grants to purchase LifePoint stock in replacement of incentive stock options covering Columbia/HCA Common Stock. In addition, the Benefits and Employment Matters Agreement provides for the cancellation of non- vested options to purchase Columbia/HCA Common Stock and the discretionary grant of options to purchase LifePoint common stock. The Benefits and Employment Matters Agreement also provides for the establishment of certain of the benefit plans described in this section. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement." The LifePoint 1998 Long-Term Incentive Plan The LifePoint 1998 Long-Term Incentive Plan has been adopted by the Board of Directors of Columbia/HCA in contemplation of the distribution. Reservation of Shares. Under the LifePoint Long-Term Incentive Plan, shares of LifePoint common stock will be reserved for issuance. The shares of LifePoint common stock to be issued will be made available from authorized but unissued shares of LifePoint common stock or issued shares that have been reacquired by LifePoint. If any shares of LifePoint common stock that are the subject of an award are not issued and cease to be issuable for any reason, such shares will no longer be charged against the maximum share limitations and may again be made subject to awards. In the event of certain corporate reorganizations, recapitalizations, or other specified corporate transactions affecting LifePoint or the LifePoint common stock, proportionate adjustments may be made to the number of shares available for grant, as well as the other maximum share limitations, under the LifePoint Long-Term Incentive Plan, and the number of shares and prices under outstanding awards. Duration. The LifePoint Long-Term Incentive Plan has a term of 10 years, subject to earlier termination or amendment by the LifePoint Board of Directors. 103 Administration. Beginning with the first meeting of the LifePoint Board of Directors, the LifePoint Long-Term Incentive Plan will be administered by the Compensation Committee of the LifePoint Board of Directors. Subject to the limitations set forth in the LifePoint Long-Term Incentive Plan, the LifePoint Compensation Committee has the authority to determine the persons to whom awards are granted, the types of awards to be granted, the time at which awards will be granted, the number of shares, units or other rights subject to each award, the exercise, base or purchase price of an award (if any), the time or times at which the award will become vested, exercisable or payable, and the duration of the award. Eligibility. All employees of LifePoint and its subsidiaries and, in the case of awards other than incentive stock options, any consultant or independent contractor providing services to LifePoint or a subsidiary, will be eligible to be granted awards under the LifePoint Long-Term Incentive Plan, as selected from time to time by the LifePoint Compensation Committee in its sole discretion. Types of Awards. The LifePoint Long-Term Incentive Plan authorizes the grant of the following types of awards: . Stock Options (nonqualified and incentive stock options). The maximum number of shares that may be covered under options granted to any individual in any calendar year is shares. The exercise price of an option may be determined by the LifePoint Compensation Committee, provided that the exercise price per share of an option may not be less than the fair market value of a share of LifePoint common stock on the date of grant. The value of LifePoint common stock (determined at the time of grant) that may be subject to incentive stock options that become exercisable by an employee in any one year is limited to $100,000. The maximum term of any stock option will be ten years from the date of grant. The LifePoint Compensation Committee is to determine the extent to which an option will become and/or remain exercisable in the event of termination of employment or service of a participant under various circumstances, including retirement, death or disability, subject to certain limitations for incentive stock options. An option may be exercised in whole or in part at any time during the term thereof by written notice to LifePoint, together with payment of the aggregate exercise price of the option. In addition to the exercise price, the participant must pay LifePoint in cash or, at the LifePoint Compensation Committee's discretion, in LifePoint common stock, the full amount of all applicable income tax and employment tax amounts required to be withheld in connection with the exercise of the option. . Stock Appreciation Rights. A stock appreciation right may be granted either in tandem with an option or without a related option. A stock appreciation right entitles the holder, upon exercise, to receive a payment based on the difference between the base price of the stock appreciation right (which may not be less than the fair market value of a share of LifePoint common stock on the date of grant) and the fair market value of a share of LifePoint common stock on the date of exercise, multiplied by the number of shares as to which such stock appreciation right is being exercised. The maximum term of a stock appreciation right will be 10 years from the date of grant. No more than shares of LifePoint common stock may be subject to stock appreciation rights granted to any one participant during any calendar year. Stock appreciation rights are payable, in the discretion of the LifePoint Compensation Committee, in cash, in shares of LifePoint common stock, or in a combination of cash and shares of LifePoint common stock. . Performance Awards. Performance awards are units denominated on the date of grant either in shares of LifePoint common stock ("performance shares") or in specified dollar amounts ("performance units"). Performance awards are payable upon the achievement of performance criteria established by the LifePoint Compensation Committee at the beginning of the applicable performance period. At the time of grant, the Compensation Committee establishes the number of units, the duration of the performance period or periods, the applicable performance criteria, and, in the case of performance units, the target unit value or range of unit values for the performance awards. At the end of the performance period, the Compensation Committee determines the payment to be made, based on the extent to which the performance goals have been achieved. Performance awards are payable, in the 104 discretion of the LifePoint Compensation Committee, in cash, in shares of LifePoint common stock, or in a combination of cash and shares of LifePoint common stock. The maximum amount of compensation that may be payable to a participant during any one calendar year with respect to a performance unit shall be $ million. The maximum number of performance shares granted to a participant during any one calendar year shall be performance shares. . Phantom Stock. An award of phantom stock gives the participant the right to receive payment at the end of a fixed vesting period based on the value of a share of LifePoint common stock at the time of vesting. Phantom stock units are subject to such restrictions and conditions to payment as the LifePoint Compensation Committee determines are appropriate. An award of phantom stock may be granted, at the discretion of the LifePoint Compensation Committee, together with an award of dividend equivalent rights for the same number of shares covered thereby. Phantom stock awards are payable, in the discretion of the LifePoint Compensation Committee, in cash, in shares of LifePoint common stock having an equivalent fair market value on the applicable vesting dates, or in a combination thereof. . Restricted Stock Awards. An award of restricted stock represents shares of LifePoint common stock that are issued subject to such restrictions on transfer and incidents of ownership, and such forfeiture conditions, as the LifePoint Compensation Committee deems appropriate. The restrictions imposed upon an award of restricted stock will lapse in accordance with the vesting requirements specified by the LifePoint Compensation Committee in the award agreement. Such vesting requirements may be based on the continued employment of the participant for a specified time period or on the attainment of specified business goals or performance criteria established by the LifePoint Compensation Committee. The LifePoint Compensation Committee may, in connection with an award of restricted stock, require the payment of a specified purchase price. Subject to the transfer restrictions and forfeiture restrictions relating to the restricted stock award, the participant will have the rights of a stockholder of LifePoint, including all voting and dividend rights, during the restriction period, unless the LifePoint Compensation Committee determines otherwise at the time of the grant. The maximum number of shares of common stock that may be subject to a restricted stock award granted to a participant during any one calendar year shall be shares. . Dividend Equivalents. Dividend equivalent awards entitle the holder to a right to receive cash payments determined by reference to dividends declared on the LifePoint common stock during the term of the award, which will not exceed 10 years from the date of grant. Dividend equivalent awards may be granted on a stand-alone basis or in tandem with other awards under the LifePoint Long-Term Incentive Plan. Dividend equivalent awards are payable in cash or in shares of LifePoint common stock, as determined by the LifePoint Compensation Committee. Change-In-Control. The LifePoint Compensation Committee may, in an award agreement, provide for the effect of a change-in-control (as defined in the LifePoint Long-Term Incentive Plan) on the award. Such provisions may include the acceleration of an award's vesting or extension of the time for exercise, the elimination or modification of performance or other conditions, the cash settlement of an award or other adjustments that the LifePoint Compensation Committee considers appropriate. LifePoint Executive Stock Purchase Plan The LifePoint Executive Stock Purchase Plan will be adopted by LifePoint, and approved by the Columbia/HCA Board of Directors (as the sole shareholder of LifePoint common Stock), prior to the distribution date. Reservation of Shares. Under the LifePoint Executive Stock Purchase Plan, shares of LifePoint common stock will be reserved for issuance pursuant to all rights granted under the plan. The shares of LifePoint common stock to be issued will be made available from authorized but unissued shares of LifePoint common stock or issued shares that have been reacquired by LifePoint. To the extent that any right to purchase Lifepoint common stock granted under the plan is forfeited, cancelled, or otherwise terminated, the 105 shares of LifePoint common stock covered thereunder will no longer be charged against the maximum share limitation and may again be made subject to rights granted under the plan. Duration. The LifePoint Executive Stock Purchase Plan will have a term of 10 years, subject to earlier termination or amendment by the LifePoint Board of Directors. Administration. The LifePoint Executive Stock Purchase Plan will be administered by the Compensation Committee of the LifePoint Board of Directors. Subject to limitations to be set forth in the LifePoint Executive Stock Purchase Plan, the Compensation Committee will have the authority to determine the persons to whom rights are granted, the time at which rights will be granted, the number of shares that may be purchased under a right, the date or period during which such right may be exercised and all other terms of the right. With the consent of the affected participant, the Compensation Committee will have the authority to cancel and replace outstanding rights previously granted with new rights for the same or a different number of shares and to amend the terms of any outstanding right. Eligibility. All executive employees of LifePoint and its subsidiaries will be eligible to receive rights under the Lifepoint Executive Stock Purchase Plan; however, no person will be granted more than one right. Initial Grants. The LifePoint Executive Stock Purchase Plan will specifically provide for initial grants of rights to certain executive officers. These rights are to be exercised within the 20 trading-day period beginning on the distribution date. Exercise of Rights. A right will be exercised by written notice to LifePoint on or prior to a specified exercise date. Such written notice will be an agreement by the participant to pay the full purchase price of the LifePoint common stock by means of a purchase loan, except to the extent the notice is accompanied by a cash payment. Purchase Loan. LifePoint will loan each participant 100% of the purchase price of LifePoint common stock acquired by the participant under a right, on a full recourse basis, to the extent the participant does not elect to pay the purchase price in cash. The loan will be secured by the shares purchased. Interest will be paid upon the loan's maturity or upon the loan's prepayment and will accrue at the applicable Federal rate, compounded semi-annually. However, if the participant's employment terminates for cause or the participant voluntarily terminates employment (other than for a good reason) within three years of purchasing the shares, in addition to any amounts otherwise due under the loan (including accrued interest), the participant will be required to pay LifePoint the additional interest that would have been payable in respect of the loan, if the regular interest rate on such purchase loan had been the prime rate, and interest thereon at such rate to the actual date of payment. Loan Maturity and Repayment. A loan will mature upon the earlier of (i) the fifth anniversary following the purchase of the shares, (ii) termination of the participant's employment for any reason, or (iii) bankruptcy of the participant. Within 120 days following the loan's maturity, the participant will be required to pay LifePoint the full amount remaining due on the loan, including all unpaid accrued interest. Loan Prepayments. The loan may be prepaid, in whole or in part, at any time. At any time following the earlier of (i) the second anniversary following the purchase of the shares, or (ii) a change in control, such shares may, at the participant's election, be sold to repay the loan. Any cash dividends received on the purchased shares prior to payment of the full amount due on such loan, net of assumed Federal, state and local income taxes, will be used to prepay the loan. Transfer Restrictions. A participant will not be entitled to delivery of the stock certificates representing the shares purchased and none of such shares may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of (except by will or the applicable laws of descent and distribution) until the later of (i) full repayment of the purchase price and accrued interest (and any additional amount that may be due under the LifePoint Executive Stock Purchase Plan), and (ii) the earlier of (1) the third anniversary of the date the shares were purchased, (2) the participant's termination of employment or bankruptcy, and (3) a change in control. However, such shares may be sold to pay the loan at maturity, or to voluntarily prepay such loan at any time after the earlier of (i) the second anniversary of the date the shares were purchased, or (ii) a change in control. 106 Death or Disability Benefit. In the event of termination of employment because of death or disability, where the amount remaining due on the loan (including accrued interest) is greater than the fair market value of the shares purchased, as of the date of such death or disability, LifePoint will pay a death or disability benefit equal to the amount of such payment remaining due over the shares' fair market value as of the date of such death or disability. LifePoint Annual Cash Bonus Plan LifePoint plans to adopt the LifePoint Hospitals, Inc. Annual Cash Bonus Plan (the "Bonus Plan") that will provide for the payment of annual cash bonuses following the close of each plan year, based upon the achievement of objective performance goals. The Bonus Plan will be administered by the Office of the SVP, Human Resources and Administration. A Plan Committee, the Compensation Committee of the Board of Directors (the "Compensation Committee") and the Chief Executive Officer of LifePoint will also have administrative functions. Participation is limited to key management employees. An appropriate senior officer will recommend non-officer employees for participation in the Bonus Plan as well as the related performance targets. Such recommendations will be subject to final review and approval by the Chief Executive Officer. All recommendations regarding officers are to be made by the Chief Executive Officer, subject to final review and approval by the Compensation Committee. As soon as practicable after the end of each plan year and after receiving the recommendation of the Plan Committee, the Chief Executive Officer will review and approve bonus payments for all non-officer participants. The Compensation Committee will review and approve bonus payments for all participating officers. Bonus payments are based on the achievement of specific performance objectives, based on criteria determined in accordance with the Bonus Plan's terms. Such criteria may include constituency satisfaction, the financial performance of the Company and other selected strategic components. Performance objectives may be subject to retroactive adjustments to reflect equitably unforeseen circumstances. The Chief Executive Officer, with the approval of the Compensation Committee, may modify, amend or terminate the Bonus Plan, in whole or in part, at any time (except that no such action may negatively affect bonuses for any prior year). The LifePoint Management Stock Purchase Plan The LifePoint Management Stock Purchase Plan will be adopted by the LifePoint Board of Directors in contemplation of the distribution. Reservation of Shares. shares of LifePoint common stock may be issued pursuant to all awards of restricted shares or in respect of restricted share units under the LifePoint Management Stock Purchase Plan. The shares of LifePoint common stock to be issued will be made available from authorized but unissued shares of LifePoint common stock or issued shares that have been reacquired by LifePoint. If any shares of LifePoint common stock that are the subject of an award are forfeited, the related shares will no longer be charged against such maximum share limitation and may again be made subject to awards. In the event of certain corporate reorganizations, recapitalizations, or other specified corporate transactions affecting LifePoint or the LifePoint common stock, such substitution or adjustment shall be made in the aggregate number of LifePoint common stock that may be distributed as restricted shares or in respect of restricted share units under the LifePoint Management Stock Purchase Plan, and the number of restricted shares and/or restricted share units outstanding under the LifePoint Management Stock Purchase Plan, as may be determined to be appropriate by the Compensation Committee in its sole discretion. Duration. The LifePoint Management Stock Purchase Plan has a term of ten years, subject to earlier termination or amendment by the LifePoint Board of Directors. 107 Administration. The LifePoint Management Stock Purchase Plan will be administered by the Compensation Committee of the LifePoint Board of Directors. The Compensation Committee shall have authority to administer the plan and to exercise all the powers and authorities either specifically granted to it under, or necessary or advisable in the administration of, the LifePoint Management Stock Purchase Plan, including, without limitation, to interpret the plan, to prescribe, amend and rescind rules and regulations relating to the plan, to determine the terms and provisions of agreements (which need not be identical) entered into under the plan and to make all other determinations deemed necessary or advisable for the administration of the plan. Eligibility. All LifePoint employees or groups of employees designated by the Compensation Committee in its sole discretion are eligible to be granted awards. Restricted Share Awards. The Compensation Committee may make awards of restricted shares. Under the LifePoint Management Stock Purchase Plan, a participant may elect to reduce his base salary up to a maximum percentage established by the Compensation Committee with respect to his employee classification and, in lieu of salary, receive a number of restricted shares equal to the amount of such salary reduction divided by a dollar amount equal to 75% of the average market value (as defined in the plan) of LifePoint common stock on the date on which such restricted share is granted. Restricted shares will be granted on June 30 and December 31 of each calender year for which a salary reduction election is in effect. An award of restricted shares represents shares of LifePoint common stock that are issued subject to such restrictions on transfer and incidents of ownership, and such forfeiture conditions, as set forth in the plan and as the Compensation Committee deems appropriate. Generally, the restricted period of restricted shares granted under the LifePoint Management Stock Purchase Plan will be three years from the date of grant. Subject to such transfer and forfeiture restrictions, the participant shall have all rights of a stockholder with respect to such restricted shares, including the right to receive dividends and the right to vote such restricted shares. Conversion of Restricted Shares into Restricted Share Units. If during the restricted period the Compensation Committee determines that LifePoint may lose its Federal income tax deduction in connection with the future lapsing of the restrictions on restricted shares because of the deductibility cap of Section 162(m) of the Code, the Compensation Committee, in its discretion, may convert some or all of the restricted shares into an equal number of share units, as to which payment will be postponed until such time as LifePoint will not lose its Federal income tax deduction for such payment under Section 162(m). Until payment of the restricted share units is made, the participant will be credited with dividend equivalents on the restricted share units, which dividend equivalents will be converted into additional restricted share units. Termination of Employment During the Restricted Period. If during the restricted period the participant's employment is terminated by LifePoint either (i) for cause (as defined) or (ii) for any reason by the participant, the participant will forfeit his or her rights in the restricted shares, which shall automatically be considered to be cancelled, and shall have only an unfunded right to receive from LifePoint's general assets a cash payment equal to the lesser of (i) the fair market value of such restricted shares on the participant's last day of employment or (ii) the aggregate base salary foregone by the participant as a condition of receiving the restricted shares. If a participant's employment is terminated by LifePoint without cause during the restricted period, the participant will forfeit his rights in the restricted shares, which shall automatically be considered to be cancelled, and shall have only an unfunded right to receive from LifePoint's general assets a cash payment equal to either (i) the fair market value of such restricted shares on the participant's last day of employment or (ii) the aggregate base salary foregone by the participant as a condition of receiving the restricted shares, with the Compensation Committee to have the sole discretion as to which of such amounts shall be payable. If the employment of a participant holding restricted share units terminates during the restricted period relating to the restricted share units, they shall be treated in a manner substantially equivalent to the treatment of restricted shares set forth above. 108 Upon a termination of employment which results from a participant's death or disability (as defined), all restrictions then outstanding with respect to restricted shares held by the participant automatically will expire. Upon the retirement of a participant, the Compensation Committee shall determine, in its discretion, whether all restrictions then outstanding with respect to restricted shares held by the participant shall expire or whether the participant shall instead be treated as though the participant's employment had been terminated by LifePoint without cause, as described above. Change-In-Control. Upon the occurrence of a change-in-control of LifePoint (as defined), the restricted period automatically will terminate as to all restricted shares awarded under the plan. LifePoint Employee Stock Ownership Plan LifePoint expects to establish for the benefit of its employees a leveraged Employee Stock Ownership Plan (the "LifePoint ESOP") which, shortly after the distribution, will purchase newly issued shares of LifePoint common stock from LifePoint in an amount equal to 8.3% of the outstanding shares of LifePoint. The purchase price of the shares will be financed by issuing a promissory note to LifePoint or by borrowing from a third party lender (which loan will be guaranteed by LifePoint). Initially, all such shares will be held in a suspense account under the LifePoint ESOP. LifePoint will contribute annually to the LifePoint ESOP the funds required to repay the ESOP loan. As the ESOP loan is repaid, shares will be released from the suspense account and will be allocated to accounts established for participants under the LifePoint ESOP. The loan will be repaid over a 10 year period. Generally, each employee of LifePoint and its participating subsidiaries will participate in the LifePoint ESOP as of the first January 1 after his or her date of hire. Each participant in the LifePoint ESOP will be fully vested in his accounts after completion of seven years of service with LifePoint (including any pre-distribution service with Columbia/HCA and its affiliates). Employment Contracts, Termination Of Employment Arrangements and Change in Control Arrangements Each of Messrs. Fleetwood, Donahey, and Gracey will participate in an enhanced severance plan through December 31, 1999. In the event that either Mr. Fleetwood or Mr. Donahey is terminated without cause during 1999, he will receive continued payment of his then-current base salary and his target bonus for thirty-six months after such termination. In the event that Mr. Gracey is terminated without cause during 1999, he will receive continued payment of his then-current base salary and his target bonus for twenty-four months after such termination. Severance policies for termination occurring subsequent to December 31, 1999 have not yet been established. LifePoint Security Ownership by Certain Beneficial Owners and Management Immediately prior to the distribution, Columbia/HCA will own beneficially and of record approximately shares of LifePoint common stock, representing 100% of the shares of capital stock of LifePoint expected to be issued and outstanding immediately after the distribution. Columbia/HCA will have sole voting and sole investment power with respect to the shares owned by it. After the completion of the distribution, none of the outstanding shares of LifePoint common stock will be owned by Columbia/HCA. The following table sets forth the projected beneficial ownership of LifePoint common stock as of the distribution date of Columbia/HCA sponsored benefit plans (which collectively are projected to own 5% or more of such class of securities); certain persons LifePoint believes will become the beneficial owners of 5% or more of such class of securities; each of the persons who will be an LifePoint director as of the distribution date; each of the executive officers named in the Summary Compensation Table; and all of the persons who will be LifePoint directors and executive officers as of the distribution date as a group. The ownership information presented below: . is based on Columbia/HCA's knowledge of the beneficial ownership of Columbia/HCA Stock as of , 1999; 109 . reflects the distribution ratio of shares of LifePoint common stock for every shares of Columbia/HCA Stock outstanding on the record date; . reflects the options to purchase LifePoint common stock to be granted and the Employee Stock Ownership Plan that LifePoint expects to establish in accordance with the Benefits and Employment Matters Agreement; and . assumes no change in beneficial ownership of Columbia/HCA Stock between , 1999 and the record date.
Number of Name of Beneficial Owner Shares(1)(2) Percent - ------------------------ ------------ ------- The Columbia/HCA Healthcare Corporation Stock Bonus Plan (3)..................................................... 4.2% The Columbia/HCA Healthcare Corporation Salary Deferral Plan (3)................................................ 3.2% The San Leandro Retirement and Savings Plan (3).......... * FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson (4)..................................................... 8.3% Wellington Management Company, LLP (5)................... 7.0% Scott L. Mercy........................................... * [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... James M. Fleetwood....................................... * Kenneth C. Donahey....................................... * William Gracey........................................... * Dan Slipkovich........................................... * All Directors and Executive Officers as a Group ( persons)................................................
- -------- * Less than one percent. (1) Unless otherwise indicated, each stockholder shown on the table has sole voting and investment power with respect to the shares beneficially owned. The number of shares shown does not include the interest of certain persons in shares held by family members in their own right. (2) Each named person or group is deemed to be the beneficial owner of securities which may be acquired within 60 days through the exercise or conversion of options, warrants and rights, if any, and such securities are deemed to be outstanding for the purpose of computing the percentage beneficially owned by such person or group. Such securities are not deemed to be outstanding for the purpose of computing the percentage beneficially owned by any other person or group. Accordingly, the indicated number of shares includes shares issuable upon conversion of convertible securities or upon exercise of options (including employee stock options) held by such person or group. (3) The address of the Columbia/HCA Healthcare Corporation Stock Bonus Plan, the Columbia/HCA Salary Deferral Plan and the San Leandro Retirement and Savings Plan is One Park Plaza, Nashville, Tennessee 37203. Such shares are beneficially owned by employees participating in such benefit plans and voted at the direction of Columbia/HCA's Retirement Committee which is composed of certain Columbia/HCA officers. (4) The ownership given for FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson is based on information contained in the Schedule 13G dated February 1, 1999, filed with the SEC by FMR Corp. in respect of its beneficial ownership of Columbia/HCA Common Stock. The address of FMR Corp is 82 Devonshire Street, Boston, Massachusetts 02109. (5) The ownership given for Wellington Management Company, LLP is based on information contained in the Schedule 13G dated December 31, 1998, filed with the SEC by Wellington Management Company, LLP in respect of its beneficial ownership of Columbia/HCA Common Stock. The address of Wellington Management Company, LLP is 75 State Street, Boston, Massachusetts 02109. 110 Triad Management Directors On the distribution date, the directors of Triad will be the persons named below.
Name Age Principal Occupation or Employment for Past Five Years ---- --- ------------------------------------------------------ James D. Shelton.... 45 Chairman, President and Chief Executive Officer of Triad, as of the distribution date; and since January 1, 1998, President, the Triad Group of Columbia/HCA; President-- Central Group of Columbia/HCA from June 1994 until January 1, 1998; Executive Vice President of the Central Division of National Medical Enterprises, Inc. (presently called Tenet Healthcare Corporation) (health care services) from May 1993 to June 1994; Senior Vice President of Operations of National Medical Enterprises, Inc., prior thereto. Michael J. Parsons.. 43 Chief Operating Officer and Treasurer of Triad, as of the distribution date; and since January 1, 1998, Chief Operating Officer, the Pacific Group of Columbia/HCA; Chief Financial Officer--Central Group of Columbia/HCA from July 1994 until January 1, 1998; Chief Financial Officer of the Central Group of National Medical Enterprises, Inc. prior thereto. [Director].......... [Director].......... [Director].......... [Director].......... [Director].......... [Director]..........
The Triad Certificate provides that the Triad Board of Directors will be divided into three classes, with the classes to be as nearly equal in number as possible, and that, of the initial Triad directors following the distribution, one-third will continue to serve until the 2000 Annual Meeting of Stockholders, one-third will continue to serve until the 2001 Annual Meeting of Stockholders, and one-third will continue to serve until the 2002 Annual Meeting of Stockholders. Of the initial directors, , , and will serve until the 2000 Annual Meeting of Stockholders; , and will serve until the 2001 Annual Meeting of Stockholders; and , , and will serve until the 2002 Annual Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one class of directors will be elected each year for a three-year term. See "Triad Description of Capital Stock--Certain Anti-Takeover Provisions--Triad Certificate and By-Laws--Classified Board of Directors." The Triad Board of Directors will have a number of standing committees, including an Executive Committee, an Audit Committee, and a Compensation Committee. The Triad Board of Directors will not have a standing nominating committee, but rather will act as a committee of the whole to screen candidates to be nominated for election thereto by the stockholders or chosen to fill newly created directorships or vacancies on the Triad Board of Directors. The Executive Committee may exercise certain powers of the Board of Directors regarding the management and direction of the business and affairs of Triad when the Board of Directors is not in session. All action taken by the Executive Committee is reported to and reviewed by the Triad Board of Directors. The members of the Executive Committee will be , , and , with serving as Chair. The Audit Committee of the Triad Board of Directors will review and make reports and recommendations to the Board of Directors with respect to the selection of the independent auditors of Triad and its subsidiaries, the arrangements for and the scope of the audits to be performed by them and the internal audit activities, 111 accounting procedures and controls of Triad, and will review the annual consolidated financial statements of Triad. The members of the Audit Committee will be , and , with serving as Chair. The Compensation Committee of the Triad Board of Directors will be responsible for approving compensation arrangements for executive management of Triad, reviewing compensation plans relating to officers, grants of options and other benefits under Triad's employee benefit plans and reviewing generally Triad's employee compensation policy. The members of the Compensation Committee will be , , and , with serving as Chair. Compensation of Directors The annual retainer for outside directors who are neither officers nor employees of Triad ("Non-Employee Directors") will be $ and the Board meeting fee will be $ per meeting. Committee members will receive a fee of $ per meeting payable only for attendance at committee meetings not held in conjunction with a meeting of the Triad Board of Directors. Directors also are reimbursed for expenses incurred relating to attendance at meetings. Under the Triad Outside Directors Stock and Incentive Compensation Plan, each Non- Employee Director may elect to receive, in lieu of all or any portion (in multiples of 25%) of his annual retainer, deferred stock units, the payout of which, at the election of the director, may be deferred for two years or until the end of such director's term of office. The payment of deferred stock units will be made through the issuance of a stock certificate for a number of shares equal to the number of deferred stock units. The plan further provides that each Non-Employee Director will receive a one- time grant of an option, as of the first business day of the director's first term of office, to acquire shares of Triad common stock (exercisable at the fair market value of Triad common stock on the date of grant) for a number of shares having an aggregate value as of such date, under the Black-Scholes valuation method, equal to two times the Non-Employee Director's annual retainer fee. Each person who is a Non-Employee Director on the day of the annual meeting of Triad's stockholders will be granted on that day an option to acquire shares of Triad common stock (exercisable at the fair market value of Triad common stock on the date of grant) for a number of shares having an aggregate value as of such date, under the Black-Scholes valuation method, equal to the Non-Employee Director's annual retainer fee. The one-time options described above will become exercisable as to all of the shares covered by the option on the third anniversary of the date of grant. The annual options will become exercisable as to one-third of the shares covered by the option on each of the first three anniversaries of the date of grant. The plan further provides that Non-Employee Directors may receive discretionary option grants. Executive Officers On the distribution date, the executive officers of Triad will be as follows:
Name Age Position And Professional Experience ---- --- ------------------------------------ James D. Shelton.... 45 Chairman, President and Chief Executive Officer of Triad, as of the distribution date; and since January 1, 1998, President, the Pacific Group of Columbia/HCA; President-- Central Group of Columbia/HCA from June 1994 until January 1, 1998; Executive Vice President of the Central Division of National Medical Enterprises, Inc. (presently called Tenet Healthcare Corporation) (health care services) from May 1993 to June 1994; Senior Vice President of Operations of National Medical Enterprises, Inc., prior thereto. Michael J. Parsons.. 43 Chief Operating Officer and Treasurer of Triad, as of the distribution date; and since January 1, 1998, Chief Operating Officer, the Pacific Group of Columbia/HCA; Chief Financial Officer--Central Group of Columbia/HCA from July 1994 until January 1, 1998; Chief Financial Officer of the Central Group of National Medical Enterprises, Inc. prior thereto.
112
Name Age Position And Professional Experience ---- --- ------------------------------------ Burke W. Whitman....... 43 Chief Financial Officer of Triad, as of the distribution date; and since February 1, 1999, Chief Financial Officer, the Pacific Group of Columbia/HCA; President, Chief Financial Officer, Director and Co-founder, Deerfield Health Corporation from May 1994 until January 31, 1999; Vice President, Development and Finance, Almost Family, Inc. (a wholly owned subsidiary of Caretenders Health Corporation), prior thereto. Donald P. Fay.......... 55 Senior Vice President and General Counsel of Triad, as of the distribution date; and since January 1, 1998, Senior Vice President, the Pacific Group of Columbia/HCA; Vice President--Legal, Columbia/HCA from February 1994 through December 1997; Senior Counsel, Columbia/HCA, prior thereto. Christopher A. Holden.. 34 Senior Vice President of Triad, as of the distribution date; and since January 1, 1998, the Pacific Group of Columbia/HCA; President, West Texas Division of the Central Group of Columbia/HCA from September 1997 until January 1, 1998; Vice President of Administration for the Central Group of Columbia/HCA from August 1994 until September 1997; Assistant Vice President--Administration of the Central Group of National Medical Enterprises, Inc. prior thereto. Nicholas J. Marzocco... 44 Senior Vice President of Triad, as of the distribution date; and since January 1, 1998, President--East Division, the Pacific Group of Columbia/HCA; Chief Operating Officer of the Louisiana Division of Columbia/HCA from September 1996 until January 1, 1998; Chief Executive Officer of North Shore Regional Medical Center (a 310-bed hospital owned by National Medical Enterprises, Inc. and located in Slidell, Louisiana) prior thereto.
Executive Compensation The information under this heading relates to the compensation paid by Columbia/HCA to the Chief Executive Officer of Triad and the four individuals who will be executive officers of Triad as of the distribution date and who were, based on such compensation, the most highly compensated Triad executive officers for the year ended December 31, 1998. All cash compensation was paid by Columbia/HCA and all stock compensation was in the form of Columbia/HCA Common Stock or options to purchase shares of Columbia/HCA Common Stock. The principal positions listed in the table are those that will be held by such persons as of the distribution date. For information regarding certain future compensation arrangements which have been established for Triad as an independent, publicly-traded company, see "--Triad Compensation Arrangements." Triad Summary Compensation Table
Annual Compensation Long-Term Compensation --------------------------------- ------------------------- Securities Other Annual Restricted Underlying All Other Salary Compensation Stock Options/SARS Compensation Name and Principal Position Year ($)(2) Bonus($)(3) ($)(4) Awards($)(5) (#)(6) ($)(7) --------------------------- ---- -------- ----------- ------------ ------------ ------------ ------------ James D. Shelton (1)......... 1998 $510,450 $ -- $ -- $173,242 -- $9,448 Chairman, President and 1997 $415,000 $ 41,500 $ -- $221,400 350,000 $7,629 Chief Executive Officer 1996 $350,000 $ 35,000 $ -- $187,000 80,500 $7,214 Michael J. Parsons........... 1998 $303,750 $ -- $ -- $ 64,673 -- $7,790 Senior Vice President, Chief 1997 $225,000 $ 56,250 $ -- $ 75,000 135,000 $7,629 Operating Officer and Treasurer Nicholas J. Marzocco......... 1998 $263,925 $ -- $34,448 $ 79,558 -- $7,453 Senior Vice President 1997 $207,000 $103,500 $31,158 $ -- 64,000 $7,004 Christopher A. Holden........ 1998 $234,000 $ -- $26,594 $ 87,743 -- $7,628 Senior Vice President 1997 $195,000 $ 42,840 $28,950 $ -- 60,000 $6,373 Donald P. Fay................ 1998 $240,300 $ -- $ -- $ 24,030 4,200 $8,348 Senior Vice President and 1997 $178,000 $ 62,300 $ -- $ -- 12,000 $8,438 General Counsel
- -------- (1) Pursuant to SEC rules, includes information for 1996 because Mr. Shelton's compensation for that year was previously included in public disclosure by Columbia/HCA. 113 (2) 1998 salary amounts do not include the value of restricted stock awards granted in lieu of a portion of annual salary. (3) Reflects bonus earned during 1997. In some instances, all or a portion of the bonus was paid during 1998. Each of the executive officers identified in the table, except for Messrs. Holden and Fay, had the option to take all or part of their bonus in shares of Columbia/HCA restricted stock at a 25% discount from the fair market value at the time of grant, which is reflected in the Restricted Stock Awards column. Columbia/HCA's cash bonus program was discontinued in August 1997. (4) Perquisites and other personal benefits did not exceed the lesser of either $50,000 or 10% of the total of annual salary and bonus for any executive officer identified in the table. Other compensation consists principally of relocation expenses. (5) 1998 amounts represent the fair market value on the date of grant of Columbia/HCA shares issued in lieu of a portion of annual salary and shares earned under Columbia/HCA's 1998 Performance Equity Incentive Plan and granted in 1999. 1997 amounts represent the fair market value on the date of grant of shares of Columbia/HCA restricted stock granted in lieu of all or a portion of a cash bonus. (6) Options to acquire shares of Columbia/HCA Common Stock. Columbia/HCA granted options at two separate times in 1997. The 1997 regular grant was issued in February 1997. A special grant was issued in November 1997 to help ensure the retention and motivation of key executives, including Messrs. Shelton, Parsons, Marzocco and Holden, at the time Columbia/HCA was reorganizing. On average, the size of the November 1997 grant is two times a competitive median long-term grant for a two-year period (1998-99). (7) Consists of Columbia/HCA contributions to Columbia/HCA's Savings and Investment Plan, Money Purchase Plan and Stock Bonus Plan. 114 Columbia/HCA Option Grants In 1998 The following table provides information on grants of options to purchase shares of Columbia/HCA Common Stock made during 1998 to the persons named in the Triad Summary Compensation Table. For a discussion of the treatment of such options and certain replacement grants of options to purchase shares of Triad common stock, see "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement-- Treatment of Columbia/HCA Common Stock Options." Option/SAR Grants in Last Fiscal Year
Percent of Potential Realizable Total Value At Assumed Annual Number of Options/SARs Rates of Securities Granted to Stock Price Appreciation Underlying Employees Exercise or for Option Term (4) SARS/Options in Fiscal Base Price Expiration ------------------------ Name Granted (#) (1) Year ($/Sh)(2)(3) Date 5% ($) 10% ($) - ---- --------------- ------------ ------------ ---------- ----------- ------------ James D. Shelton........ -- -- -- -- -- -- Michael J. Parsons...... -- -- -- -- -- -- Nicholas J. Marzocco.... -- -- -- -- -- -- Christopher A. Holden... -- -- -- -- -- -- Donald P. Fay........... 4,200 0.06% $26.4688 3/5/08 $ 69,913.56 $ 177,174.69
- -------- (1) Options to acquire Columbia/HCA Common Stock. (2) The option exercise price may be paid in shares of Columbia/HCA Common Stock owned by the executive officer, in cash, or a combination thereof. (3) The ten-year options become exercisable with respect to 25% of the shares covered thereby on the second, third, fourth and fifth anniversary dates following the date of grant. The exercise price was equal to the fair market value of the Columbia/HCA Common Stock on the date of the grant. (4) The potential realizable value portion of the foregoing table illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their term, assuming the specified compounded rates of appreciation on the Columbia/HCA Common Stock over the term of the options. These amounts do not take into account provisions of the options relating to termination of the option following termination of employment, non- transferability or vesting over periods of up to five years. Aggregated Option/SAR Exercises In Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Underlying Value of Unexercised In-the- Unexercised Options/SARs at Money Options/SARs at Fiscal Fiscal Year-End (#) Year-End ($)(1) ----------------------------------- ---------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- --------------- ---------------- -------------- --------------- James D. Shelton........ 84,375 453,125 -- -- Michael J. Parsons...... 37,125 178,875 -- -- Nicholas J. Marzocco.... 0 75,250 -- -- Christopher A. Holden... 1,140 71,280 -- -- Donald P. Fay........... 27,750 39,450 -- --
- -------- (1) The closing price for the Columbia/HCA Common Stock, as reported by the NYSE, on December 31, 1998 was $24.75. Value is calculated on the basis of the difference between the option exercise price and 24.75, multiplied by the number of shares of Columbia/HCA Common Stock underlying the option. 115 Triad Compensation Arrangements Benefits and Employment Matters Agreement In connection with the distribution, Columbia/HCA, LifePoint and Triad will enter into the Benefits and Employment Matters Agreement, which allocates responsibilities for employee compensation, benefits, labor, benefit plan administration and certain other employment matters on and after the distribution date. Among other things, the Benefits and Employment Matters Agreement generally provides for grants to Triad employees of options to purchase shares of LifePoint Common Stock and Triad common stock in respect of vested options to purchase Columbia/HCA Common Stock (other than incentive stock options) and grants to purchase Triad stock in replacement of incentive stock options covering Columbia/HCA Common Stock. In addition, the Benefits and Employment Matters Agreement provides for the cancellation of non-vested options to purchase Columbia/HCA Common Stock and the discretionary grant of options to purchase Triad common stock. The Benefits and Employment Matters Agreement also provides for the establishment of certain of the benefit plans described in this section. See "Arrangements Among Columbia/HCA, LifePoint and Triad Relating to the Distribution--Benefits and Employment Matters Agreement." The Triad 1998 Long-Term Incentive Plan The Triad 1998 Long-Term Incentive Plan will be adopted by the Board of Directors of Columbia/HCA in contemplation of the distribution. Reservation of Shares. Under the Triad Long-Term Incentive Plan, shares of Triad common stock will be reserved for issuance. The shares of Triad common stock to be issued will be made available from authorized but unissued shares of Triad common stock or issued shares that have been reacquired by Triad. If any shares of Triad common stock that are the subject of an award are not issued and cease to be issuable for any reason, such shares will no longer be charged against the maximum share limitations and may again be made subject to awards. In the event of certain corporate reorganizations, recapitalizations, or other specified corporate transactions affecting Triad or the Triad common stock, proportionate adjustments may be made to the number of shares available for grant, as well as the other maximum share limitations, under the Triad Long-Term Incentive Plan, and the number of shares and prices under outstanding awards. Duration. The Triad Long-Term Incentive Plan will have a term of 10 years, subject to earlier termination or amendment by the Triad Board of Directors. Administration. Beginning with the first meeting of the Triad Board of Directors, the Triad Long-Term Incentive Plan will be administered by the Compensation Committee of the Triad Board of Directors. Subject to the limitations set forth in the Triad Long-Term Incentive Plan, the Triad Compensation Committee has the authority to determine the persons to whom awards are granted, the types of awards to be granted, the time at which awards will be granted, the number of shares, units or other rights subject to each award, the exercise, base or purchase price of an award (if any), the time or times at which the award will become vested, exercisable or payable, and the duration of the award. Eligibility. All employees of Triad and its subsidiaries and, in the case of awards other than incentive stock options, any consultant or independent contractor providing services to Triad or a subsidiary, will be eligible to be granted awards under the Triad Long-Term Incentive Plan, as selected from time to time by the Triad Compensation Committee in its sole discretion. Types of Awards. The Triad Long-Term Incentive Plan will authorize the grant of the following types of awards: . Stock Options (nonqualified and incentive stock options). The maximum number of shares that may be covered under options granted to any individual in any calendar year is shares. The exercise price of an option may be determined by the Triad Compensation Committee, provided that the exercise price per share of an option may not be less than the fair market value of a share of Triad common stock on the date of grant. The value of Triad common stock (determined at the time 116 of grant) that may be subject to incentive stock options that become exercisable by an employee in any one year is limited to $100,000. The maximum term of any stock option will be ten years from the date of grant. The Triad Compensation Committee is to determine the extent to which an option will become and/or remain exercisable in the event of termination of employment or service of a participant under various circumstances, including retirement, death or disability, subject to certain limitations for incentive stock options. An option may be exercised in whole or in part at any time during the term thereof by written notice to Triad, together with payment of the aggregate exercise price of the option. In addition to the exercise price, the participant must pay Triad in cash or, at the Triad Compensation Committee's discretion, in Triad common stock, the full amount of all applicable income tax and employment tax amounts required to be withheld in connection with the exercise of the option. . Stock Appreciation Rights. A stock appreciation right may be granted either in tandem with an option or without a related option. A stock appreciation right entitles the holder, upon exercise, to receive a payment based on the difference between the base price of the stock appreciation right (which may not be less than the fair market value of a share of Triad common stock on the date of grant) and the fair market value of a share of Triad common stock on the date of exercise, multiplied by the number of shares as to which such stock appreciation right is being exercised. The maximum term of a stock appreciation right will be 10 years from the date of grant. No more than shares of Triad common stock may be subject to stock appreciation rights granted to any one participant during any calendar year. Stock appreciation rights are payable, in the discretion of the Triad Compensation Committee, in cash, in shares of Triad common stock, or in a combination of cash and shares of Triad common stock . Performance Awards. Performance awards are units denominated on the date of grant either in shares of Triad common stock ("performance shares") or in specified dollar amounts ("performance units"). Performance awards are payable upon the achievement of performance criteria established by the Triad Compensation Committee at the beginning of the applicable performance period. At the time of grant, the Compensation Committee establishes the number of units, the duration of the performance period or periods, the applicable performance criteria, and, in the case of performance units, the target unit value or range of unit values for the performance awards. At the end of the performance period, the Compensation Committee determines the payment to be made, based on the extent to which the performance goals have been achieved. Performance awards are payable, in the discretion of the Triad Compensation Committee, in cash, in shares of Triad common stock, or in a combination of cash and shares of Triad common stock. The maximum amount of compensation that may be payable to a participant during any one calendar year with respect to a performance unit shall be $ . The maximum number of performance shares granted to a participant during any one calendar year shall be performance shares. . Phantom Stock. An award of phantom stock gives the participant the right to receive payment at the end of a fixed vesting period based on the value of a share of Triad common stock at the time of vesting. Phantom stock units are subject to such restrictions and conditions to payment as the Triad Compensation Committee determines are appropriate. An award of phantom stock may be granted, at the discretion of the Triad Compensation Committee, together with an award of dividend equivalent rights for the same number of shares covered thereby. Phantom stock awards are payable, in the discretion of the Triad Compensation Committee, in cash, in shares of Triad common stock having an equivalent fair market value on the applicable vesting dates, or in a combination thereof. . Restricted Stock Awards. An award of restricted stock represents shares of Triad common stock that are issued subject to such restrictions on transfer and incidents of ownership, and such forfeiture conditions, as the Triad Compensation Committee deems appropriate. The restrictions imposed upon an award of restricted stock will lapse in accordance with the vesting requirements specified by the Triad Compensation Committee in the award agreement. Such vesting requirements may be based on 117 the continued employment of the participant for a specified time period or on the attainment of specified business goals or performance criteria established by the Triad Compensation Committee. The Triad Compensation Committee may, in connection with an award of restricted stock, require the payment of a specified purchase price. Subject to the transfer restrictions and forfeiture restrictions relating to the restricted stock award, the participant will have the rights of a stockholder of Triad, including all voting and dividend rights, during the restriction period, unless the Triad Compensation Committee determines otherwise at the time of the grant. The maximum number of shares of common stock that may be subject to a restricted stock award granted to a participant during any one calendar year shall be shares. . Dividend Equivalents. Dividend equivalent awards entitle the holder to a right to receive cash payments determined by reference to dividends declared on the Triad common stock during the term of the award, which will not exceed 10 years from the date of grant. Dividend equivalent awards may be granted on a stand-alone basis or in tandem with other awards under the Triad Long-Term Incentive Plan. Dividend equivalent awards are payable in cash or in shares of Triad common stock, as determined by the Triad Compensation Committee. Change-In-Control. The Triad Compensation Committee may, in an award agreement, provide for the effect of a change-in-control (as defined in the Triad Long-Term Incentive Plan) on the award. Such provisions may include the acceleration of an award's vesting or extension of the time for exercise, the elimination or modification of performance or other conditions, the cash settlement of an award or other adjustments that the Triad Compensation Committee considers appropriate. Triad Executive Stock Purchase Plan The Triad Executive Stock Purchase Plan will be adopted by Triad, and approved by the Columbia/HCA Board of Directors (as the sole shareholder of LifePoint common Stock), prior to the distribution date. Reservation of Shares. Under the Triad Executive Stock Purchase Plan, shares of Triad common stock will be reserved for issuance pursuant to all rights granted under the plan. The shares of Triad common stock to be issued will be made available from authorized but unissued shares of Triad common stock or issued shares that have been reacquired by Triad. To the extent that any right to purchase Triad common stock granted under the plan is forfeited, cancelled, or otherwise terminated, the shares of Triad common stock covered thereunder will no longer be charged against the maximum share limitation and may again be made subject to rights granted under the plan. Duration. The Triad Executive Stock Purchase Plan will have a term of 10 years, subject to earlier termination or amendment by the Triad Board of Directors. Administration. The Triad Executive Stock Purchase Plan will be administered by the Compensation Committee of the Triad Board of Directors. Subject to limitations to be set forth in the Triad Executive Stock Purchase Plan, the Compensation Committee will have the authority to determine the persons to whom rights are granted, the time at which rights will be granted, the number of shares that may be purchased under a right, the date or period during which such right may be exercised and all other terms of the right. With the consent of the affected participant, the Compensation Committee will have the authority to cancel and replace outstanding rights previously granted with new rights for the same or a different number of shares and to amend the terms of any outstanding right. Eligibility. All executive employees of Triad and its subsidiaries will be eligible to receive rights under the Triad Executive Stock Purchase Plan; however, no person will be granted more than one right. Initial Grants. The Triad Executive Stock Purchase Plan will specifically provide for initial grants of rights to certain executive officers. These rights are to be exercised within the 20 trading-day period beginning on the distribution date. 118 Exercise of Rights. A right will be exercised by written notice to Triad on or prior to a specified exercise date. Such written notice will be an agreement by the participant to pay the full purchase price of the Triad common stock by means of a purchase loan, except to the extent the notice is accompanied by a cash payment. Purchase Loan. Triad will loan each participant 100% of the purchase price of Triad common stock acquired by the participant under a right, on a full recourse basis, to the extent the participant does not elect to pay the purchase price in cash. The loan will be secured by the shares purchased. Interest will be paid upon the loan's maturity or upon the loan's prepayment and will accrue at the applicable Federal rate, compounded semi-annually. However, if the participant's employment terminates for cause or the participant voluntarily terminates employment (other than for a good reason) within three years of purchasing the shares, in addition to any amounts otherwise due under the loan (including accrued interest), the participant will be required to pay Triad the additional interest that would have been payable in respect of the loan, if the regular interest rate on such purchase loan had been the prime rate, and interest thereon at such rate to the actual date of payment. Loan Maturity and Repayment. A loan will mature upon the earlier of (i) the fifth anniversary following the purchase of the shares, (ii) termination of the participant's employment for any reason, or (iii) bankruptcy of the participant. Within 120 days following the loan's maturity, the participant will be required to pay Triad the full amount remaining due on the loan, including all unpaid accrued interest. Loan Prepayments. The loan may be prepaid, in whole or in part, at any time. At any time following the earlier of (i) the second anniversary following the purchase of the shares, or (ii) a change in control, such shares may, at the participant's election, be sold to repay the loan. Any cash dividends received on the purchased shares prior to payment of the full amount due on such loan, net of assumed Federal, state and local income taxes, will be used to prepay the loan. Transfer Restrictions. A participant will not be entitled to delivery of the stock certificates representing the shares purchased and none of such shares may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of (except by will or the applicable laws of descent and distribution) until the later of (i) full repayment of the purchase price and accrued interest (and any additional amount that may be due under the Triad Executive Stock Purchase Plan), and (ii) the earlier of (1) the third anniversary of the date the shares were purchased, (2) the participant's termination of employment or bankruptcy, and (3) a change in control. However, such shares may be sold to pay the loan at maturity, or to voluntarily prepay such loan at any time after the earlier of (i) the second anniversary of the date the shares were purchased, or (ii) a change in control. Death or Disability Benefit. In the event of termination of employment because of death or disability, where the amount remaining due on the loan (including accrued interest) is greater than the fair market value of the shares purchased, as of the date of such death or disability, Triad will pay a death or disability benefit equal to the amount of such payment remaining due over the shares' fair market value as of the date of such death or disability. The Triad Management Stock Purchase Plan The Triad Management Stock Purchase Plan will be adopted by the Triad Board of Directors in contemplation of the distribution. Reservation of Shares. shares of Triad common stock may be issued pursuant to all awards of restricted shares or in respect of restricted share units under the Triad Management Stock Purchase Plan. The shares of Triad common stock to be issued will be made available from authorized but unissued shares of Triad common stock or issued shares that have been reacquired by Triad. If any shares of Triad common stock that are the subject of an award are forfeited, the related shares will no longer be charged against such maximum share limitation and may again be made subject to awards. In the event of certain corporate reorganizations, recapitalizations, or other specified corporate transactions affecting Triad or the Triad common stock, such substitution or adjustment shall be made in the aggregate number of Triad common stock 119 that may be distributed as restricted shares or in respect of restricted share units under the Triad Management Stock Purchase Plan, and the number of restricted shares and/or restricted share units outstanding under the Triad Management Stock Purchase Plan, as may be determined to be appropriate by the Compensation Committee in its sole discretion. Duration. The Triad Management Stock Purchase Plan has a term of ten years, subject to earlier termination or amendment by the Triad Board of Directors. Administration. The Triad Management Stock Purchase Plan will be administered by the Compensation Committee of the Triad Board of Directors. The Compensation Committee shall have authority to administer the plan and to exercise all the powers and authorities either specifically granted to it under, or necessary or advisable in the administration of, the Triad Management Stock Purchase Plan, including, without limitation, to interpret the plan, to prescribe, amend and rescind rules and regulations relating to the plan, to determine the terms and provisions of agreements (which need not be identical) entered into under the plan and to make all other determinations deemed necessary or advisable for the administration of the plan. Eligibility. All Triad employees or groups of employees designated by the Compensation Committee in its sole discretion are eligible to be granted awards. Restricted Share Awards. The Compensation Committee may make awards of restricted shares. Under the Triad Management Stock Purchase Plan, a participant may elect to reduce his base salary up to a maximum percentage established by the Compensation Committee with respect to his employee classification and, in lieu of salary, receive a number of restricted shares equal to the amount of such salary reduction divided by a dollar amount equal to 75% of the average market value (as defined in the plan) of Triad common stock on the date on which such restricted share is granted. Restricted shares will be granted on June 30 and December 31 of each calender year for which a salary reduction election is in effect. An award of restricted shares represents shares of Triad common stock that are issued subject to such restrictions on transfer and incidents of ownership, and such forfeiture conditions, as set forth in the plan and as the Compensation Committee deems appropriate. Generally, the restricted period of restricted shares granted under the Triad Management Stock Purchase Plan will be three years from the date of grant. Subject to such transfer and forfeiture restrictions, the participant shall have all rights of a stockholder with respect to such restricted shares, including the right to receive dividends and the right to vote such restricted shares. Conversion of Restricted Shares into Restricted Share Units. If during the restricted period the Compensation Committee determines that Triad may lose its Federal income tax deduction in connection with the future lapsing of the restrictions on restricted shares because of the deductibility cap of Section 162(m) of the Code, the Compensation Committee, in its discretion, may convert some or all of the restricted shares into an equal number of share units, as to which payment will be postponed until such time as Triad will not lose its Federal income tax deduction for such payment under Section 162(m). Until payment of the restricted share units is made, the participant will be credited with dividend equivalents on the restricted share units, which dividend equivalents will be converted into additional restricted share units. Termination of Employment During the Restricted Period. If during the restricted period the participant's employment is terminated by Triad either (i) for cause (as defined) or (ii) for any reason by the participant, the participant will forfeit his or her rights in the restricted shares, which shall automatically be considered to be cancelled, and shall have only an unfunded right to receive from Triad's general assets a cash payment equal to the lesser of (i) the fair market value of such restricted shares on the participant's last day of employment or (ii) the aggregate base salary foregone by the participant as a condition of receiving the restricted shares. If a participant's employment is terminated by Triad without cause during the restricted period, the participant will forfeit his rights in the restricted shares, which shall automatically be considered to be cancelled, and shall have only an unfunded right to receive from Triad's general assets a cash payment equal to either (i) the fair market value of such restricted shares on the participant's last day of employment or (ii) the aggregate base salary foregone by the participant as a condition of receiving the restricted shares, with the Compensation Committee 120 to have the sole discretion as to which of such amounts shall be payable. If the employment of a participant holding restricted share units terminates during the restricted period relating to the restricted share units, they shall be treated in a manner substantially equivalent to the treatment of restricted shares set forth above. Upon a termination of employment which results from a participant's death or disability (as defined), all restrictions then outstanding with respect to restricted shares held by the participant automatically will expire. Upon the retirement of a participant, the Compensation Committee shall determine, in its discretion, whether all restrictions then outstanding with respect to restricted shares held by the participant shall expire or whether the participant shall instead be treated as though the participant's employment had been terminated by Triad without cause, as described above. Change-In-Control. Upon the occurrence of a change-in-control of Triad (as defined), the restricted period automatically will terminate as to all restricted shares awarded under the plan. Triad Employee Stock Ownership Plan Triad expects to establish for the benefit of its employees a leveraged Employee Stock Ownership Plan (the "Triad ESOP") which, shortly after the distribution, will purchase newly issued shares of Triad common stock in an amount equal to 9.0% of the outstanding shares of Triad. The purchase price of the shares will be financed by issuing a promissory note to Triad or by borrowing from a third party lender (which loan will be guaranteed by Triad). Initially, all such shares will be held in a suspense account under the Triad ESOP. Triad will contribute annually to the Triad ESOP the funds required to repay the ESOP loan. As the ESOP loan is repaid, shares will be released from the suspense account and will be allocated to accounts established for participants under the Triad ESOP. The loan will be repaid over a 10 year period. Generally, each employee of Triad and its participating subsidiaries will participate in the Triad ESOP as of the first January 1 after his or her date of hire. Each participant in the Triad ESOP will be fully vested in his accounts after completion of seven years of service with Triad (including any pre-distribution service with Columbia/HCA and its affiliates). Employment Contracts, Termination Of Employment Arrangements and Change in Control Arrangements Each of Messrs. Parsons, Marzocco, Holden and Fay will participate in an enhanced severance plan through December 31, 1999. In the event that any of Messrs. Parsons, Marzocco or Holden is terminated without cause during 1999, he will receive continued payment of his then-current base salary and his target bonus for twenty-four months after such termination. In the event that Mr. Fay is terminated without cause during 1999, he will receive continued payment of his then-current base salary and his target bonus for twelve months after such termination. Severance policies for termination occurring subsequent to December 31, 1999 have not yet been established. Triad Security Ownership by Certain Beneficial Owners and Management Immediately prior to the distribution, Columbia/HCA will own beneficially and of record approximately 42,888,940 shares of Triad common stock, representing 100% of the shares of capital stock of Triad expected to be issued and outstanding immediately after the distribution. Columbia/HCA will have sole voting and sole investment power with respect to the shares owned by it. After the completion of the distribution none of the outstanding shares of Triad common stock will be owned by Columbia/HCA. The following table sets forth the projected beneficial ownership of Triad common stock as of the distribution date of Columbia/HCA sponsored benefit plans (which collectively are projected to own 5% or more of such class of securities); certain persons Triad believes will become the beneficial owners of 5% or more of such class of securities; each of the persons who will be a Triad director as of the distribution date; each of the executive officers named in the Summary Compensation Table; and all of the persons who will be 121 Triad directors and executive officers as of the distribution date as a group. The ownership information presented below: . is based on Columbia/HCA's knowledge of the beneficial ownership of Columbia/HCA Stock as of , 1999; . reflects the distribution ratio of shares of Triad common stock for every shares of Columbia/HCA Stock outstanding on the record date; . reflects the options to purchase Triad common stock to be granted and the Employee Stock Ownership Plan Triad expects to establish in accordance with the Benefits and Employment Matters Agreement; and . assumes no change in beneficial ownership of Columbia/HCA Stock between , 1999 and the record date.
Number of Name of Beneficial Owner Shares(1)(2) Percent - ------------------------ ------------ ------- The Columbia/HCA Healthcare Corporation Stock Bonus Plan (3)..................................................... 4.2% The Columbia/HCA Healthcare Corporation Salary Deferral Plan (3)................................................ 3.2% The San Leandro Retirement and Savings Plan (3).......... * FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson (4)..................................................... 8.3% Wellington Management Company, LLP (5)................... 7.0% James D. Shelton......................................... * [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... [Director]............................................... Michael J. Parsons....................................... * Nicholas J. Marzocco..................................... * Christopher A. Holden.................................... * Donald P. Fay............................................ * All Directors and Executive Officers as a Group ( persons)................................................
- -------- * Less than one percent. (1) Unless otherwise indicated, each stockholder shown on the table has sole voting and investment power with respect to the shares beneficially owned. The number of shares shown does not include the interest of certain persons in shares held by family members in their own right. (2) Each named person or group is deemed to be the beneficial owner of securities which may be acquired within 60 days through the exercise or conversion of options, warrants and rights, if any, and such securities are deemed to be outstanding for the purpose of computing the percentage beneficially owned by such person or group. Such securities are not deemed to be outstanding for the purpose of computing the percentage beneficially owned by any other person or group. Accordingly, the indicated number of shares includes shares issuable upon conversion of convertible securities or upon exercise of options (including employee stock options) held by such person or group. (3) The address of the Columbia/HCA Healthcare Corporation Stock Bonus Plan, the Columbia/HCA Salary Deferral Plan and the San Leandro Retirement and Savings Plan is One Park Plaza, Nashville, Tennessee 37203. Such shares are beneficially owned by employees participating in such benefit plans and voted at the direction of Columbia/HCA's Retirement Committee which is composed of certain Columbia/HCA officers. (4) The ownership given for FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson is based on information contained in the Schedule 13G dated February 1, 1999, filed with the SEC by FMR Corp. in respect of its beneficial ownership of Columbia/HCA Common Stock. The address of FMR Corp is 82 Devonshire Street, Boston, Massachusetts 02109. (5) The ownership given for Wellington Management Company, LLP is based on information contained in the Schedule 13G dated December 31, 1998, filed with the SEC by Wellington Management Company, LLP in respect of its beneficial ownership of Columbia/HCA Common Stock. The address of Wellington Management Company, LLP is 75 State Street, Boston, Massachusetts 02109. 122 LifePoint Description of Capital Stock Introduction LifePoint presently expects to have the following capital stock authorization and terms and anti-takeover provisions in place on the distribution date. Authorized And Outstanding Capital Stock LifePoint's authorized capital stock consists of shares of LifePoint common stock, par value $.01 per share, and authorized shares of preferred stock, par value $.01 per share. After the completion of the distribution, there are expected to be approximately shares of LifePoint common stock outstanding held of record by approximately 18,700 persons, excluding shares of LifePoint common stock issuable upon the exercise of LifePoint stock options granted pursuant to the LifePoint Corporation 1999 Stock Option Plan in connection with the distribution. See "The Distribution--Results of the Distribution," and "LifePoint Management--LifePoint Compensation Arrangements--The LifePoint 1998 Long-Term Incentive Plan." LifePoint Common Stock; Delaware Anti-Takeover Provisions The holders of LifePoint common stock are entitled to one vote for each share on all matters voted on by the stockholders, and are not entitled to cumulate votes for the election of directors. Subject to any preferences that may be applicable to any outstanding LifePoint preferred stock, the holders of LifePoint common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the LifePoint Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of LifePoint, the holders of shares of LifePoint common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of LifePoint preferred stock, if any, then outstanding. Holders of LifePoint common stock have no preemptive, conversion or other subscription rights, and there are no redemption or sinking fund provisions applicable to the LifePoint common stock. LifePoint is subject to the provisions of Section 203 of the Delaware General Corporation Law (the "Delaware Law"). Subject to certain exceptions, Section 203 of the Delaware Law prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the time of the transaction in which the person became an interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. A "business combination" includes a merger, consolidation, sale or other disposition of assets having an aggregate value in excess of 10% of either the aggregate market value of the consolidated assets of the corporation or the aggregate market value of all the outstanding stock of the corporation, and certain transactions that would increase the interested stockholder's proportionate share ownership in the corporation or which provide the interested stockholder with a financial benefit. These restrictions do not apply where: . the business combination or the transaction in which the stockholder becomes interested is approved by the corporation's board of directors prior to the time the interested stockholder acquired its shares; . the interested stockholder acquired at least 85% of the outstanding voting stock of the corporation in the transaction in which the stockholder became an interested stockholder excluding, for purposes of determining the number of shares outstanding, shares owned by persons who are directors as well as officers and by employee stock plans in which participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or 123 . the business combination is approved by the board of directors and the affirmative vote of two-thirds of the outstanding voting stock not owned by the interested stockholder at an annual or special meeting. The business combinations provisions of Section 203 of the Delaware Law may have the effect of deterring merger proposals, tender offers or other attempts to effect changes in control of LifePoint that are not negotiated with and approved by the LifePoint Board of Directors. LifePoint Preferred Stock The LifePoint Certificate of Incorporation (the "LifePoint Certificate") provides that LifePoint may issue up to shares of LifePoint preferred stock. The LifePoint Board of Directors has the authority to issue LifePoint preferred stock in one or more series and to fix for each such series the voting powers, full, limited or none, and the designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereon, and the number of shares constituting any series and the designations of such series, without any further vote or action by the stockholders of LifePoint. Because the terms of the LifePoint preferred stock may be fixed by the LifePoint Board of Directors without stockholder action, the LifePoint preferred stock could be issued quickly with terms calculated to defeat a proposed takeover of LifePoint or to make the removal of management of LifePoint more difficult. Under certain circumstances, this could have the effect of decreasing the market price of the LifePoint common stock. In connection with the stockholder rights plan adopted by LifePoint, the LifePoint Certificate provides for the issuance of a series of shares of LifePoint preferred stock designated as the Series A Junior Participating Preferred Stock, par value $.01 per share (the "LifePoint Series A Preferred Stock"). For a description of the terms of the LifePoint Series A Preferred Stock, see "--LifePoint Preferred Stock Purchase Rights." LifePoint Preferred Stock Purchase Rights LifePoint has adopted a stockholders' rights plan, pursuant to which each outstanding share of LifePoint common stock is accompanied by one preferred stock purchase right (a "LifePoint Right," and collectively, the "LifePoint Rights") (in all cases, unless and until the LifePoint Rights expire or are redeemed or an LifePoint Rights Distribution Date (as defined below) occurs). Each LifePoint Right entitles the registered holder to purchase from LifePoint one one-thousandth of a share of LifePoint Series A Preferred Stock at a price of $ per one one-thousandth of a share, subject to adjustment. The description and terms of the LifePoint Rights are set forth in a Rights Agreement, dated as of 1999 (the "LifePoint Rights Agreement") between LifePoint and as Rights Agent (the "LifePoint Rights Agent"). Each share of LifePoint Series A Preferred Stock will be entitled, when, as and if declared, to a preferential quarterly dividend payment in an amount equal to the greater of $10 or 1,000 times the aggregate of all dividends declared per share of LifePoint common stock. In the event of liquidation, dissolution or winding up of LifePoint, the holders of LifePoint Series A Preferred Stock will be entitled to a minimum preferential liquidation payment equal to $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, but will be entitled to an aggregate payment of 1,000 times the payment made per share of LifePoint common stock. Each share of LifePoint Series A Preferred Stock will entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of LifePoint. In the event of any consolidation, merger, combination or other transaction in which shares of LifePoint common stock are exchanged, each share of LifePoint Series A Preferred Stock will be entitled to receive 1,000 times the aggregate amount of stock, securities, cash and/or other property (payable in kind) as the case may be, into which or for which each share of LifePoint common stock is changed or exchanged. The rights of LifePoint Series A Preferred Stock as to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary anti-dilution provisions. 124 Initially, the LifePoint Rights will be attached to all LifePoint common stock certificates and no separate LifePoint Rights certificates will be issued. Separate certificates evidencing the LifePoint Rights ("LifePoint Right Certificates") will be mailed to holders of record of the LifePoint common stock as of the close of business on the earlier to occur of (1) the tenth day after a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding LifePoint common stock, or (2) such date as may be determined by action of the Board of Directors of LifePoint following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding LifePoint common stock (the earlier of such dates being the "LifePoint Rights Distribution Date"). Prior to the time that a person would otherwise become an Acquiring Person, however, the Board of Directors may determine that such person shall not be an Acquiring Person for purposes of the LifePoint Rights Agreement. The LifePoint Rights Agreement provides that, until the LifePoint Rights Distribution Date (or earlier redemption or expiration of the LifePoint Rights): . the LifePoint Rights will be transferred with and only with the certificates for LifePoint common stock, . new LifePoint common stock certificates issued after the record date upon transfer or new issuance of LifePoint common stock will contain a notation incorporating the LifePoint Rights Agreement by reference, and . the surrender for transfer of any certificates for LifePoint common stock outstanding as of the record date also will constitute the transfer of the LifePoint Rights associated with the LifePoint common stock represented by such certificate. The LifePoint Rights are not exercisable until the LifePoint Rights Distribution Date. The LifePoint Rights will expire on , 2009, unless the expiration date is extended or unless the LifePoint Rights are earlier redeemed or exchanged by LifePoint, in each case, as described below. If a person or group becomes an Acquiring Person, each holder of an LifePoint Right will thereafter have the right to receive, upon exercise, LifePoint common stock (or, in certain circumstances, LifePoint Series A Preferred Stock or other similar securities of LifePoint) having a value equal to two times the exercise price of the LifePoint Right. Notwithstanding any of the foregoing, following the existence of an Acquiring Person, all LifePoint Rights that are, or (under certain circumstances specified in the LifePoint Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. In the event that LifePoint is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a LifePoint Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the LifePoint Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the LifePoint Right. At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding shares of LifePoint common stock, the Board of Directors may exchange the LifePoint Rights (other than LifePoint Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of LifePoint common stock or one one-thousandth of a share of LifePoint Series A Preferred Stock (or of a share of a class or series of LifePoint's preferred stock having equivalent rights, preferences and privileges), as the case may be, per LifePoint Right (subject to adjustment). At any time prior to the existence of an Acquiring Person, the Board of Directors of LifePoint may redeem the LifePoint Rights, in whole but not in part, at a redemption price of $.01 per LifePoint Right. The 125 redemption of the LifePoint Rights may be made effective at such time and on such basis with such conditions as the Board of Directors, in its sole discretion, may establish. Immediately upon any redemption of the LifePoint Rights, the right to exercise the LifePoint Rights will terminate and the only right of the holders of LifePoint Rights will be to receive the redemption price. The terms of the LifePoint Rights may be amended by the Board of Directors of LifePoint without the consent of the holders of the LifePoint Rights, except that from and after the existence of an Acquiring Person no such amendment may adversely affect the interests of the holders of the LifePoint Rights (other than the Acquiring Person). The number of outstanding LifePoint Rights and the number of one one- thousandths of a share of LifePoint Series A Preferred Stock issuable upon exercise of each LifePoint Right are subject to adjustment under certain circumstances. Until a LifePoint Right is exercised, the holder thereof, as such, will have no rights as a stockholder of LifePoint, including, without limitation, the right to vote or to receive dividends. The LifePoint Rights have certain anti-takeover effects. The LifePoint Rights will cause substantial dilution to a person or group that attempts to acquire LifePoint on terms not determined by the Board of Directors to be in the best interests of all stockholders. The LifePoint Rights should not interfere with any merger or other business combination approved by the Board of Directors since (subject to the limitations described above) the LifePoint Rights may be redeemed by LifePoint at $.01 per LifePoint Right prior to the time a person or group has become an Acquiring Person. Certain Anti-Takeover Provisions--LifePoint Certificate and By-Laws Certain provisions of the LifePoint Certificate and the LifePoint By-Laws may have the effect, either alone or in combination with each other, of making more difficult or discouraging a tender offer, takeover attempt or change in control that is opposed by LifePoint's Board of Directors but that a stockholder might consider to be in its best interest. LifePoint believes that such provisions are necessary to enable LifePoint to develop its business in a manner that will foster its long-term growth without disruption caused by the threat of a takeover not deemed by the LifePoint Board of Directors to be in the best interests of LifePoint and its stockholders. These provisions are summarized in the following paragraphs. Classified Board of Directors. The Delaware Law provides that a corporation's board of directors may be divided into various classes with staggered terms of office. The LifePoint Certificate provides that the LifePoint Board of Directors is divided into three classes of directors, with the classes to be as nearly equal in number as reasonably possible. The Board consists of the persons referred to in "LifePoint Management-- Directors." The LifePoint Certificate provides that of the initial directors of LifePoint, one-third will continue to serve until the 2000 Annual Meeting of Stockholders, one-third will continue to serve until the 2001 Annual Meeting of Stockholders, and one-third will continue to serve until the 2002 Annual Meeting of Stockholders. Of the initial directors, Messrs. and will serve until the 2000 Annual Meeting of Stockholders; Messrs. , and will serve until the 2001 Annual Meeting of Stockholders; and Messrs. , and will serve until the 2002 Annual Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one class of directors will be elected each year for a three-year term. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of the LifePoint Board of Directors. At least two annual meetings of stockholders, instead of one, generally will be required to effect a change in a majority of the Board of Directors. Such a delay may help ensure that LifePoint's directors, if confronted by a holder attempting to force a proxy contest, a tender or exchange offer, or an extraordinary corporate transaction, would have sufficient time to review the proposal as well as any available alternatives to the proposal and to act in what they believe to be the best interest of the stockholders. The classification provisions will apply to every election of directors, however, regardless of 126 whether a change in the composition of the Board would be beneficial to LifePoint and its stockholders and whether or not a majority of LifePoint's stockholders believe that such a change would be desirable. The classification provisions also could have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of LifePoint, even though such an attempt might be beneficial to LifePoint and its stockholders. The classification of the Board could thus increase the likelihood that incumbent directors will retain their positions. In addition, because the classification provisions may discourage accumulations of large blocks of the LifePoint common stock by purchasers whose objective is to take control of LifePoint and remove a majority of the Board, the classification of the Board could tend to reduce the likelihood of fluctuations in the market price of the LifePoint common stock that might result from accumulations of large blocks for such a purpose. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of LifePoint common stock at a higher market price than might otherwise be the case. Number of Directors; Removal of Directors; Vacancies. The LifePoint Certificate provides that the number of directors will be fixed from time to time by action of not less than a majority of the LifePoint Board of Directors then in office, but in no event shall the number of directors be less than three nor more than 15. As of the distribution date, the number of directors of LifePoint will be seven. The LifePoint Certificate provides that any vacancies (including newly-created directorships) will be filled only by the affirmative vote of a majority of the remaining directors, whether or not they constitute a quorum of directors. Directors appointed to fill vacancies created by the resignation or termination of a director will serve the remainder of the term of the resigning or terminated director. Accordingly, the LifePoint Board of Directors could prevent any stockholder from enlarging the LifePoint Board of Directors and filling the new directorships with such stockholder's own nominees. Under the Delaware Law, unless provided in the certificate of incorporation, directors serving on a classified board may be removed by the stockholders only for cause. The LifePoint Certificate provides that directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors, voting as a single class (without a separate vote of the holders of the LifePoint preferred stock unless required pursuant to the terms of any series of LifePoint preferred stock). Business Conducted at Meetings; Director Nominations. The By-Laws provide that nominations of persons for election to the LifePoint Board and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (a) pursuant to LifePoint's notice with respect to such meeting, (b) by or at the direction of the LifePoint Board or (c) by any stockholder of record of LifePoint who was a stockholder of record at the time of the giving of the notice required by the By-Laws, described below, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in the By-Laws. For nominations or other business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of LifePoint, such business must be a proper matter for stockholder action under the Delaware Law and, if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, solicits or participates in the solicitation of proxies in support of such proposal or nomination, the stockholder must have timely indicated such stockholder's, or such beneficial owner's, intention to do so. To be timely, a stockholder's notice must be delivered to the Secretary at the principal executive offices of LifePoint not less than 90 days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed more than 60 days after such anniversary date, notice by the stockholder to be timely must be delivered not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. The notice must include: . certain information as to each person whom the stockholder proposes to nominate for election or reelection as a director and such person's written consent to serve as a director if elected; 127 . as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and . certain information as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, including whether either such stockholder or beneficial owner intends to solicit or participate in the solicitation of proxies in favor of such proposal or nominee or nominees. In the event that the number of directors to be elected to the LifePoint Board is increased and there is not a public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by LifePoint at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice will be timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of LifePoint not later than the close of business on the 10th day following the day on which such public announcement is first made by LifePoint. If the officer of LifePoint or other person presiding at a meeting determines that a person was not nominated, or other business was not brought before the meeting, in accordance with these advance notice provisions, such person will not be eligible for election as a director or such business will not be conducted at such meeting, as the case may be. By requiring advance notice of nominations by stockholders, the LifePoint Board of Directors has an appropriate opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the LifePoint Board of Directors, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, annual meetings of stockholders may be conducted in a more orderly manner and, to the extent deemed necessary or desirable by the LifePoint Board of Directors, the LifePoint Board of Directors has an appropriate opportunity to inform stockholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the LifePoint Board of Directors' position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although the LifePoint By-Laws do not give the LifePoint Board of Directors any power to approve or disapprove stockholder nominations of the election of directors or proposals for action, the foregoing provisions may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to LifePoint and its stockholders. No Stockholder Action by Written Consent; Stockholder Action at Meetings. The LifePoint Certificate provides that stockholder action can be taken only at an annual or special meeting of stockholders and prohibits stockholder action by written consent in lieu of a meeting. The LifePoint Certificate also provides that special meetings of stockholders can be called only by the Chairman of the Board or the Chief Executive Officer of LifePoint, in either of their discretion or at the written request of a majority of the LifePoint Board of Directors. Stockholders are not permitted to call a special meeting or to require that the LifePoint Board of Directors call a special meeting of stockholders. The business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting pursuant to the notice of meeting given by LifePoint. The provisions of the LifePoint Certificate prohibiting stockholder action by written consent may have the effect of delaying consideration of a stockholder proposal until the next annual meeting of stockholders. These provisions would also prevent the holders of a majority of the outstanding shares of voting stock of LifePoint from unilaterally using the written consent procedure to take stockholder action. Moreover, a stockholder could 128 not force stockholder consideration of a proposal opposed by the Chairman of the Board, the Chief Executive Officer and a majority of the LifePoint Board of Directors by calling a special meeting of stockholders prior to the time the Chairman of the Board, the Chief Executive Officer or a majority of the LifePoint Board of Directors believes such consideration to be appropriate. Fair Price Provision. The LifePoint Certificate contains a "fair price" provision, requiring that, in addition to any other vote required by the LifePoint Certificate or the Delaware Law, certain "business combination" transactions with a "related person" will be subject to the affirmative vote of the holders of not less than 85% of the voting power of all of the outstanding shares of voting stock of LifePoint held by stockholders other than the related person. The 85% voting requirement will not be applicable if either: 1. The business combination is approved by the Board of Directors of LifePoint by the affirmative vote of at least 66 2/3% of the "continuing directors," or 2. All of the following conditions are satisfied: . the aggregate amount of cash and the fair market value of the property, securities or other consideration to be received per share of capital stock of LifePoint in the business combination by the holders of capital stock of LifePoint, other than the related person involved in the business combination, will not be less than the highest of (1) the highest per share price (including brokerage commissions, soliciting dealers' fees, and dealer-manager compensation, and with appropriate adjustments for recapitalizations, stock splits, stock dividends and like transactions and distributions) paid by such related person in acquiring any of its holdings of such class or series of capital stock, (2) the highest per share "market value" of such class or series of capital stock within the twelve-month period immediately preceding the date the proposal for such business combination was first publicly announced, or (3) the book value per share of such class or series of capital stock, determined in accordance with generally accepted accounting principles, as of the last day of the month immediately preceding the date the proposal for such business combination was first publicly announced; . the consideration to be received in such business combination by holders of capital stock other than the related person involved will, except to the extent that a stockholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the related person in acquiring capital stock already owned by it; provided, however, that if the related person has paid for capital stock with varying forms of consideration, the form of consideration for shares of capital stock acquired in the business combination by the related person must either be cash or the form used to acquire the largest number of shares of capital stock previously acquired by it; and . a proxy statement responsive to the requirements of the Exchange Act is mailed to the stockholders of LifePoint for the purpose of soliciting stockholder approval of such business combination and contains (1) any recommendations as to the advisability (or inadvisability) of the business combination which the continuing directors may choose to state and (2) the opinion of a reputable investment banking firm selected by the continuing directors as to the fairness of the terms of such business combination, from a financial point of view, to the public stockholders (other than the related person) of LifePoint. For the purpose of the fair price provision included in the LifePoint Certificate, certain terms are defined as follows. "Business Combination" means: . any merger or consolidation of LifePoint or a subsidiary with a related person; . any sale, lease, exchange, mortgage, pledge, transfer or other disposition other than in the ordinary course of business to or with a related person of any assets of LifePoint or a subsidiary having an aggregate fair market value of $25,000,000 or more; 129 . the issuance or transfer by LifePoint of any shares of voting stock of LifePoint or securities convertible into or exercisable for such shares (other than by way of pro rata distribution to all stockholders) to a related person; . any recapitalization, merger or consolidation that would have the effect of increasing the voting power of a related person; . the adoption of any plan or proposal for the liquidation or dissolution of LifePoint or a subsidiary proposed, directly or indirectly, by or on behalf of a related person; . any merger or consolidation of LifePoint with another person proposed, directly or indirectly, by or on behalf of a related person, unless the entity surviving or resulting from such merger or consolidation has a provision in its certificate or articles of incorporation, charter or similar governing instrument which is substantially identical to the fair price provisions of the LifePoint Certificate; or . any agreement, contract or other arrangement or understanding providing, directly or indirectly, for any of the foregoing transactions. "Related Person" means any individual, partnership, corporation, trust or other person which together with its "affiliates" and "associates," as defined in Rule 12b-2 under the Exchange Act as in effect on , 1999, and together with any other individual, partnership, corporation, trust or other person with which it or they have any agreement, contract or other arrangement or understanding with respect to acquiring, holding, voting or disposing of shares of voting stock of LifePoint, "beneficially owns" (within the meaning of Rule 13d-3 under the Exchange Act on said date) an aggregate of 10% or more of the voting power of all of the outstanding shares of voting stock of LifePoint. A related person, its affiliates and associates and all such other individuals, partnerships, corporations and other persons with whom it or they have any such agreement, contract or other arrangement or understanding, are deemed a single related person for purposes of this provision; provided, however, that the members of the LifePoint Board of Directors shall not be deemed to be associates or otherwise to constitute a Related Person solely by reason of their board membership. A person who is a related person (1) as of the time any definitive agreement relating to a business combination is entered into, (2) as of the record date for the determination of stockholders entitled to notice of and to vote on a business combination or (3) immediately prior to the consummation of a business combination, shall be deemed a related person for purposes of this provision. "Continuing Director" means any member of the LifePoint Board of Directors who is not an affiliate or associate of the related person and was a member of the LifePoint Board of Directors prior to the time that such person became a related person, and any successor of a continuing director who is unaffiliated with such related person and is recommended to succeed a continuing director by a majority of the continuing directors. "Market Value" means the average of the high-bid and low-asked quoted sales price on the date in question (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) of a share on the NYSE Composite Tape, or, if the shares are not listed or admitted to trading on such exchange, on the principal United States securities exchange registered under the Exchange Act on which the shares are listed or admitted to trading, or, if the shares are not listed or admitted to trading on any such exchange, the mean between the closing high-bid and the low-asked quotations with respect to a share on such date as quoted on Nasdaq, or any similar system then in use, or, if no such quotations are available, the fair market value on such date of a share as at least 66 2/3% of the continuing directors shall determine. The fair price provision included in the LifePoint Certificate is intended to ensure that all stockholders of LifePoint receive equal treatment in the event of a tender or exchange offer and to protect stockholders of LifePoint against coercive or two-tiered takeover bids. Notwithstanding the foregoing, the provision could also have the effect of discouraging a third party from making a tender or exchange offer for LifePoint, even though such an offer might be beneficial to LifePoint and its stockholders. Amendment of the LifePoint Certificate and By-laws. The LifePoint Certificate contains provisions requiring the affirmative vote of the holders of a least 80% of the voting power of all of the outstanding shares 130 of voting stock of LifePoint to amend certain provisions of the LifePoint Certificate (including the provisions discussed above relating to directors, action by written consent, special stockholder meetings and advance notice of stockholder nominations and stockholder proposals) or to amend any provision of the LifePoint By-laws. An amendment of the fair price provision included in the LifePoint Certificate requires the approval of 66 2/3% of the directors of LifePoint then in office and the affirmative vote of 85% of the voting power of all of the outstanding shares of voting stock of LifePoint held by stockholders other than any related person, unless the amendment is approved by 66 2/3% of the continuing directors. These provisions make it more difficult for stockholders to make changes in the LifePoint Certificate and the LifePoint By- laws, including changes designed to facilitate the exercise of control over LifePoint. Other Constituencies. In addition to any other considerations which the LifePoint Board of Directors may lawfully take into account, in determining whether to take or to refrain from taking corporate action on any matter, including proposing any matter to the stockholders of LifePoint, the Board may consider the effects, both short-term and long-term, of such action on the interests of the employees, associates, associated physicians, distributors, patients or other customers, suppliers or creditors of LifePoint, and the communities in which LifePoint owns or leases property or conducts business. Limited Liability and Indemnification Provisions The LifePoint Certificate eliminates to the fullest extent now or hereafter permitted by the Delaware Law, liability of a director to LifePoint or its stockholders for monetary damages for any action taken, or failure to take any action, as a director, except for liability: . for any breach of the director's duty of loyalty to LifePoint or its stockholders; . for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . under Section 174 of the Delaware Law, relating to prohibited dividends, distributions and repurchases or redemptions of stock; or . for any transaction for which the director derives an improper personal benefit. This provision is intended to afford directors additional protection from, and limit their potential liability for, suits alleging a breach of duty by a director. LifePoint believes this provision will assist it in maintaining and securing the services of directors who are not employees of LifePoint. As a result of the inclusion of this provision, stockholders may be unable to recover monetary damages from directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions, such as an injunction or rescission based on a director's breach of the duty of care; as a practical matter, equitable remedies may not be available (e.g., after a transaction has already been effected). If equitable remedies are found not to be available to stockholders for any particular case, stockholders may not have any effective remedy against the challenged conduct. Section 145 of the Delaware Law permits indemnification of directors, officers, agents and controlling persons of a corporation under certain conditions and subject to certain limitations. Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director, officer or agent of the corporation or another enterprise if serving at the request of the corporation. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner such person reasonably believed to be in or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. In the case of an action by or in the right of LifePoint, no 131 indemnification may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of LifePoint has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. The LifePoint Certificate contains provisions for indemnification of directors, officers, employees and agents to the fullest extent permitted by Section 145 and Delaware law which, in general, presently requires that the individual act in good faith and in a manner he or she reasonably believed to be in or not opposed to LifePoint's best interests and, in the case of any criminal proceedings, that the individual has no reason to believe his or her conduct was unlawful. The LifePoint Certificate also permits LifePoint to purchase insurance and LifePoint has purchased and maintains insurance on behalf of LifePoint directors, officers, employees and agents against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not LifePoint would have the power to indemnify such person against such liability under the foregoing provisions of the LifePoint Certificate. Triad Description of Capital Stock Introduction Triad presently expects to have the following capital stock authorization and terms and anti-takeover provisions in place on the distribution date. Authorized And Outstanding Capital Stock Triad's authorized capital stock consists of authorized shares of Triad common stock, par value $.01 per share, and authorized shares of preferred stock, par value $.01 per share. After the completion of the distribution, there are expected to be approximately shares of Triad common stock outstanding held of record by approximately 18,700 persons, excluding shares of Triad common stock issuable upon the exercise of Triad stock options granted pursuant to the Triad Corporation 1999 Stock Option Plan in connection with the distribution. See "The Distribution--Results of the Distribution" and "Triad Management--Triad Compensation Arrangements--The Triad 1998 Long-Term Incentive Plan." Triad Common Stock; Delaware Anti-Takeover Provisions The holders of Triad common stock are entitled to one vote for each share on all matters voted on by the stockholders, and are not entitled to cumulate votes for the election of directors. Subject to any preferences that may be applicable to any outstanding Triad preferred stock, the holders of Triad common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Triad Board of Directors out of funds legally available therefor. In the event of liquidation, dissolution or winding up of Triad, the holders of shares of Triad common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Triad preferred stock, if any, then outstanding. Holders of Triad common stock have no preemptive, conversion or other subscription rights, and there are no redemption or sinking fund provisions applicable to the Triad common stock. Triad is subject to the provisions of Section 203 of the Delaware Law. Subject to certain exceptions, Section 203 of the Delaware Law prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the time of the transaction in which the person became an interested stockholder. Subject to certain exceptions, an "interested stockholder" 132 is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. A "business combination" includes a merger, consolidation, sale or other disposition of assets having an aggregate value in excess of 10% of either the aggregate market value of the consolidated assets of the corporation or the aggregate market value of all the outstanding stock of the corporation, and certain transactions that would increase the interested stockholder's proportionate share ownership in the corporation or which provide the interested stockholder with a financial benefit. These restrictions do not apply where: . the business combination or the transaction in which the stockholder becomes interested is approved by the corporation's board of directors prior to the time the interested stockholder acquired its shares; . the interested stockholder acquired at least 85% of the outstanding voting stock of the corporation in the transaction in which the stockholder became an interested stockholder excluding, for purposes of determining the number of shares outstanding, shares owned by persons who are directors as well as officers and by employee stock plans in which participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . the business combination is approved by the board of directors and the affirmative vote of two-thirds of the outstanding voting stock not owned by the interested stockholder at an annual or special meeting. The business combinations provisions of Section 203 of the Delaware Law may have the effect of deterring merger proposals, tender offers or other attempts to effect changes in control of Triad that are not negotiated with and approved by the Triad Board of Directors. Triad Preferred Stock The Triad Certificate of Incorporation (the "Triad Certificate") provides that Triad may issue up to shares of Triad preferred stock. The Triad Board of Directors has the authority to issue Triad preferred stock in one or more series and to fix for each such series the voting powers, full, limited or none, and the designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereon, and the number of shares constituting any series and the designations of such series, without any further vote or action by the stockholders of Triad. Because the terms of the Triad preferred stock may be fixed by the Triad Board of Directors without stockholder action, the Triad preferred stock could be issued quickly with terms calculated to defeat a proposed takeover of Triad or to make the removal of management of Triad more difficult. Under certain circumstances, this could have the effect of decreasing the market price of the Triad common stock. In connection with the stockholder rights plan adopted by Triad, the Triad Certificate provides for the issuance of a series of shares of Triad preferred stock designated as the Series A Junior Participating Preferred Stock, par value $.01 per share (the "Triad Series A Preferred Stock"). For a description of the terms of the Triad Series A Preferred Stock, see "--Triad Preferred Stock Purchase Rights." Triad Preferred Stock Purchase Rights Triad has adopted a stockholders' rights plan, pursuant to which each outstanding share of Triad common stock is accompanied by one preferred stock purchase right (a "Triad Right," and collectively, the "Triad Rights") (in all cases, unless and until the Triad Rights expire or are redeemed or a Triad Rights Distribution Date (as defined below) occurs). Each Triad Right entitles the registered holder to purchase from Triad one one-thousandth of a share of Triad Series A Preferred Stock at a price of $ per one one-thousandth of a share, subject to adjustment. The description and terms of the Triad Rights are set forth in a Rights Agreement, dated as of 1999 (the "Triad Rights Agreement") between Triad and as Rights Agent (the "Triad Rights Agent"). Each share of Triad Series A Preferred Stock will be entitled, when, as and if declared, to a preferential quarterly dividend payment in an amount equal to the greater of $10 or 1,000 times the aggregate of all 133 dividends declared per share of Triad common stock. In the event of liquidation, dissolution or winding up of Triad, the holders of Triad Series A Preferred Stock will be entitled to a minimum preferential liquidation payment equal to $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, but will be entitled to an aggregate payment of 1,000 times the payment made per share of Triad common stock. Each share of Triad Series A Preferred Stock will entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of Triad. In the event of any consolidation, merger, combination or other transaction in which shares of Triad common stock are exchanged, each share of Triad Series A Preferred Stock will be entitled to receive 1,000 times the aggregate amount of stock, securities, cash and/or other property (payable in kind) as the case may be, into which or for which each share of Triad common stock is changed or exchanged. The rights of Triad Series A Preferred Stock as to dividends, liquidation and voting, and in the event of mergers and consolidations, are protected by customary anti-dilution provisions. Initially, the Triad Rights will be attached to all Triad common stock certificates and no separate Triad Rights certificates will be issued. Separate certificates evidencing the Triad Rights ("Triad Right Certificates") will be mailed to holders of record of the Triad common stock as of the close of business on the earlier to occur of (1) the tenth day after a public announcement that an Acquiring Person has acquired beneficial ownership of 15% or more of the outstanding Triad common stock or (2) such date as may be determined by action of the Board of Directors of Triad following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding Triad common stock (the earlier of such dates being the "Triad Rights Distribution Date"). Prior to the time that a person would otherwise become an Acquiring Person, however, the Board of Directors may determine that such person shall not be an Acquiring Person for purposes of the Triad Rights Agreement. The Triad Rights Agreement provides that, until the Triad Rights Distribution Date (or earlier redemption or expiration of the Triad Rights): . the Triad Rights will be transferred with and only with the certificates for Triad common stock, . new Triad common stock certificates issued after the record date upon transfer or new issuance of Triad common stock will contain a notation incorporating the Triad Rights Agreement by reference, and . the surrender for transfer of any certificates for Triad common stock outstanding as of the record date also will constitute the transfer of the Triad Rights associated with the Triad common stock represented by such certificate. The Triad Rights are not exercisable until the Triad Rights Distribution Date. The Triad Rights will expire on , 2009, unless the expiration date is extended or unless the Triad Rights are earlier redeemed or exchanged by Triad, in each case, as described below. If a person or group becomes an Acquiring Person, each holder of a Triad Right will thereafter have the right to receive, upon exercise, Triad common stock (or, in certain circumstances, Triad Series A Preferred Stock or other similar securities of Triad) having a value equal to two times the exercise price of the Triad Right. Notwithstanding any of the foregoing, following the existence of an Acquiring Person, all Triad Rights that are, or (under certain circumstances specified in the Triad Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. In the event that Triad is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power are sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a Triad Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Triad Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Triad Right. 134 At any time after any person or group becomes an Acquiring Person and prior to the acquisition by such person or group of 50% or more of the outstanding shares of Triad common stock, the Board of Directors may exchange the Triad Rights (other than Triad Rights owned by such person or group which will have become void), in whole or in part, at an exchange ratio of one share of Triad common stock or one one-thousandth of a share of Triad Series A Preferred Stock (or of a share of a class or series of Triad's preferred stock having equivalent rights, preferences and privileges), as the case may be, per Triad Right (subject to adjustment). At any time prior to the existence of an Acquiring Person, the Board of Directors of Triad may redeem the Triad Rights, in whole but not in part, at a redemption price of $.01 per Triad Right. The redemption of the Triad Rights may be made effective at such time and on such basis with such conditions as the Board of Directors, in its sole discretion, may establish. Immediately upon any redemption of the Triad Rights, the right to exercise the Triad Rights will terminate and the only right of the holders of Triad Rights will be to receive the redemption price. The terms of the Triad Rights may be amended by the Board of Directors of Triad without the consent of the holders of the Triad Rights, except that from and after the existence of an Acquiring Person no such amendment may adversely affect the interests of the holders of the Triad Rights (other than the Acquiring Person). The number of outstanding Triad Rights and the number of one one-thousandths of a share of Triad Series A Preferred Stock issuable upon exercise of each Triad Right are subject to adjustment under certain circumstances. Until a Triad Right is exercised, the holder thereof, as such, will have no rights as a stockholder of Triad, including, without limitation, the right to vote or to receive dividends. The Triad Rights have certain anti-takeover effects. The Triad Rights will cause substantial dilution to a person or group that attempts to acquire Triad on terms not determined by the Board of Directors to be in the best interests of all stockholders. The Triad Rights should not interfere with any merger or other business combination approved by the Board of Directors since (subject to the limitations described above) the Triad Rights may be redeemed by Triad at $.01 per Triad Right prior to the time a person or group has become an Acquiring Person. Certain Anti-Takeover Provisions--Triad Certificate and By-Laws Certain provisions of the Triad Certificate and the By-Laws may have the effect, either alone or in combination with each other, of making more difficult or discouraging a tender offer, takeover attempt or change in control that is opposed by Triad's Board of Directors but that a stockholder might consider to be in its best interest. Triad believes that such provisions are necessary to enable Triad to develop its business in a manner that will foster its long-term growth without disruption caused by the threat of a takeover not deemed by the Triad Board of Directors to be in the best interests of Triad and its stockholders. These provisions are summarized in the following paragraphs. Classified Board of Directors. The Delaware Law provides that a corporation's board of directors may be divided into various classes with staggered terms of office. The Triad Certificate provides that the Triad Board of Directors is divided into three classes of directors, with the classes to be as nearly equal in number as reasonably possible. The Board consists of the persons referred to in "Triad Management--Directors." The Triad Certificate provides that of the initial directors of Triad, one-third will continue to serve until the 2000 Annual Meeting of Stockholders, one-third will continue to serve until the 2001 Annual Meeting of Stockholders, and one-third will continue to serve until the 2002 Annual Meeting of Stockholders. Of the initial directors, Messrs. , , and will serve until the 2000 Annual Meeting of Stockholders; Messrs. , and will serve until the 2001 Annual Meeting of Stockholders; and Messrs. 135 , , and will serve until the 2002 Annual Meeting of Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one class of directors will be elected each year for a three-year term. The classification of directors will have the effect of making it more difficult for stockholders to change the composition of the Triad Board of Directors. At least two annual meetings of stockholders, instead of one, generally will be required to effect a change in a majority of the Board of Directors. Such a delay may help ensure that Triad's directors, if confronted by a holder attempting to force a proxy contest, a tender or exchange offer, or an extraordinary corporate transaction, would have sufficient time to review the proposal as well as any available alternatives to the proposal and to act in what they believe to be the best interest of the stockholders. The classification provisions will apply to every election of directors, however, regardless of whether a change in the composition of the Board would be beneficial to Triad and its stockholders and whether or not a majority of Triad's stockholders believe that such a change would be desirable. The classification provisions also could have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of Triad, even though such an attempt might be beneficial to Triad and its stockholders. The classification of the Board could thus increase the likelihood that incumbent directors will retain their positions. In addition, because the classification provisions may discourage accumulations of large blocks of the Triad common stock by purchasers whose objective is to take control of Triad and remove a majority of the Board, the classification of the Board could tend to reduce the likelihood of fluctuations in the market price of the Triad common stock that might result from accumulations of large blocks for such a purpose. Accordingly, stockholders could be deprived of certain opportunities to sell their shares of Triad common stock at a higher market price than might otherwise be the case. Number of Directors; Removal of Directors; Vacancies. The Triad Certificate provides that the number of directors will be fixed from time to time by action of not less than a majority of the Triad Board of Directors then in office, but in no event shall the number of directors be less than three nor more than 15. As of the distribution date, the number of directors of Triad will be [nine/ten]. The Triad Certificate provides that any vacancies (including newly- created directorships) will be filled only by the affirmative vote of a majority of the remaining directors, whether or not they constitute a quorum of directors. Directors appointed to fill vacancies created by the resignation or termination of a director will serve the remainder of the term of the resigning or terminated director. Accordingly, the Triad Board of Directors could prevent any stockholder from enlarging the Triad Board of Directors and filling the new directorships with such stockholder's own nominees. Under the Delaware Law, unless provided in the certificate of incorporation, directors serving on a classified board may be removed by the stockholders only for cause. The Triad Certificate provides that directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors, voting as a single class (without a separate vote of the holders of the Triad preferred stock unless required pursuant to the terms of any series of Triad preferred stock). Business Conducted at Meetings; Director Nominations. The By-Laws provide that nominations of persons for election to the Triad Board and the proposal of business to be transacted by the stockholders may be made at an annual meeting of stockholders (a) pursuant to Triad's notice with respect to such meeting, (b) by or at the direction of the Triad Board or (c) by any stockholder of record of Triad who was a stockholder of record at the time of the giving of the notice required by the By-Laws, described below, who is entitled to vote at the meeting and who has complied with the notice procedures set forth in the By-Laws. For nominations or other business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of Triad, such business must be a proper matter for stockholder action under the Delaware Law and, if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, solicits or participates in the solicitation of proxies in support of such proposal or nomination, the stockholder must have timely indicated such stockholder's, or such beneficial owner's, intention to do so. To be timely, a stockholder's notice must be delivered to the Secretary at the 136 principal executive offices of Triad not less than 90 days prior to the first anniversary of the preceding year's annual meeting of stockholders; provided, however, that if the date of the annual meeting is advanced more than 30 days prior to or delayed more than 60 days after such anniversary date, notice by the stockholder to be timely must be delivered not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. The notice must include: . certain information as to each person whom the stockholder proposes to nominate for election or reelection as a director and such person's written consent to serve as a director if elected; . as to any other business that the stockholder proposes to bring before the meeting, a brief description of such business, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and . certain information as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, including whether either such stockholder or beneficial owner intends to solicit or participate in the solicitation of proxies in favor of such proposal or nominee or nominees. In the event that the number of directors to be elected to the Triad Board is increased and there is not a public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by Triad at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice will be timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of Triad not later than the close of business on the 10th day following the day on which such public announcement is first made by Triad. If the officer of Triad or other person presiding at a meeting determines that a person was not nominated, or other business was not brought before the meeting, in accordance with these advance notice provisions, such person will not be eligible for election as a director or such business will not be conducted at such meeting, as the case may be. By requiring advance notice of nominations by stockholders, the Triad Board of Directors has an appropriate opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Triad Board of Directors, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, annual meetings of stockholders may be conducted in a more orderly manner and, to the extent deemed necessary or desirable by the Triad Board of Directors, the Triad Board of Directors has an appropriate opportunity to inform stockholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the Triad Board of Directors' position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. Although the Triad By-laws do not give the Triad Board of Directors any power to approve or disapprove stockholder nominations of the election of directors or proposals for action, the foregoing provisions may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to Triad and its stockholders. No Stockholder Action by Written Consent; Stockholder Action at Meetings. The Triad Certificate provides that stockholder action can be taken only at an annual or special meeting of stockholders and prohibits stockholder action by written consent in lieu of a meeting. The Triad Certificate also provides that special meetings of stockholders can be called only by the Chairman of the Board or the Chief Executive Officer of Triad, in either of their discretion or at the written request of a majority of the Triad Board of Directors. 137 Stockholders are not permitted to call a special meeting or to require that the Triad Board of Directors call a special meeting of stockholders. The business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting pursuant to the notice of meeting given by Triad. The provisions of the Triad Certificate prohibiting stockholder action by written consent may have the effect of delaying consideration of a stockholder proposal until the next annual meeting of stockholders. These provisions would also prevent the holders of a majority of the outstanding shares of voting stock of Triad from unilaterally using the written consent procedure to take stockholder action. Moreover, a stockholder could not force stockholder consideration of a proposal opposed by the Chairman of the Board, the Chief Executive Officer and a majority of the Triad Board of Directors by calling a special meeting of stockholders prior to the time the Chairman of the Board, the Chief Executive Officer or a majority of the Triad Board of Directors believes such consideration to be appropriate. Fair Price Provision. The Triad Certificate contains a "fair price" provision, requiring that, in addition to any other vote required by the Triad Certificate or the Delaware Law, certain "business combination" transactions with a "related person" will be subject to the affirmative vote of the holders of not less than 85% of the voting power of all of the outstanding shares of voting stock of Triad held by stockholders other than the related person. The 85% voting requirement will not be applicable if either: 1. The business combination is approved by the Board of Directors of Triad by the affirmative vote of at least 66 2/3% of the "continuing directors," or 2.All of the following conditions are satisfied: . the aggregate amount of cash and the fair market value of the property, securities or other consideration to be received per share of capital stock of Triad in the business combination by the holders of capital stock of Triad, other than the related person involved in the business combination, will not be less than the highest of (1) the highest per share price (including brokerage commissions, soliciting dealers' fees, and dealer-manager compensation, and with appropriate adjustments for recapitalizations, stock splits, stock dividends and like transactions and distributions) paid by such related person in acquiring any of its holdings of such class or series of capital stock, (2) the highest per share "market value" of such class or series of capital stock within the twelve-month period immediately preceding the date the proposal for such business combination was first publicly announced, or (3) the book value per share of such class or series of capital stock, determined in accordance with generally accepted accounting principles, as of the last day of the month immediately preceding the date the proposal for such business combination was first publicly announced; . the consideration to be received in such business combination by holders of capital stock other than the related person involved will, except to the extent that a stockholder agrees otherwise as to all or part of the shares which he or she owns, be in the same form and of the same kind as the consideration paid by the related person in acquiring capital stock already owned by it; provided, however, that if the related person has paid for capital stock with varying forms of consideration, the form of consideration for shares of capital stock acquired in the business combination by the related person must either be cash or the form used to acquire the largest number of shares of capital stock previously acquired by it; and . a proxy statement responsive to the requirements of the Exchange Act is mailed to the stockholders of Triad for the purpose of soliciting stockholder approval of such business combination and contains (1) any recommendations as to the advisability (or inadvisability) of the business combination which the continuing directors may choose to state and (2) the opinion of a reputable investment banking firm selected by the continuing directors as to the fairness of the terms of such business combination, from a financial point of view, to the public stockholders (other than the related person) of Triad. 138 For the purpose of the fair price provision included in the Triad Certificate, certain terms are defined as follows. "Business Combination" means: . any merger or consolidation of Triad or a subsidiary with a related person; . any sale, lease, exchange, mortgage, pledge, transfer or other disposition other than in the ordinary course of business to or with a related person of any assets of Triad or a subsidiary having an aggregate fair market value of $25,000,000 or more; . the issuance or transfer by Triad of any shares of voting stock of Triad or securities convertible into or exercisable for such shares (other than by way of pro rata distribution to all stockholders) to a related person; . any recapitalization, merger or consolidation that would have the effect of increasing the voting power of a related person; . the adoption of any plan or proposal for the liquidation or dissolution of Triad or a subsidiary proposed, directly or indirectly, by or on behalf of a related person; . any merger or consolidation of Triad with another person proposed, directly or indirectly, by or on behalf of a related person, unless the entity surviving or resulting from such merger or consolidation has a provision in its certificate or articles of incorporation, charter or similar governing instrument which is substantially identical to the fair price provisions of the Triad Certificate; or . any agreement, contract or other arrangement or understanding providing, directly or indirectly, for any of the foregoing transactions. "Related Person" means any individual, partnership, corporation, trust or other person which together with its "affiliates" and "associates," as defined in Rule 12b-2 under the Exchange Act as in effect on , 1999, and together with any other individual, partnership, corporation, trust or other person with which it or they have any agreement, contract or other arrangement or understanding with respect to acquiring, holding, voting or disposing of shares of voting stock of Triad, "beneficially owns" (within the meaning of Rule 13d-3 under the Exchange Act on said date) an aggregate of 10% or more of the voting power of all of the outstanding shares of voting stock of Triad. A related person, its affiliates and associates and all such other individuals, partnerships, corporations and other persons with whom it or they have any such agreement, contract or other arrangement or understanding, are deemed a single related person for purposes of this provision; provided, however, that the members of the Triad Board of Directors shall not be deemed to be associates or otherwise to constitute a Related Person solely by reason of their board membership. A person who is a related person (1) as of the time any definitive agreement relating to a business combination is entered into, (2) as of the record date for the determination of stockholders entitled to notice of and to vote on a business combination or (3) immediately prior to the consummation of a business combination, shall be deemed a related person for purposes of this provision. "Continuing Director" means any member of the Triad Board of Directors who is not an affiliate or associate of the related person and was a member of the Triad Board of Directors prior to the time that such person became a related person, and any successor of a continuing director who is unaffiliated with such related person and is recommended to succeed a continuing director by a majority of the continuing directors. "Market Value" means the average of the high-bid and low-asked quoted sales price on the date in question (or, if there is no reported sale on such date, on the last preceding date on which any reported sale occurred) of a share on the NYSE Composite Tape, or, if the shares are not listed or admitted to trading on such exchange, on the principal United States securities exchange registered under the Exchange Act on which the shares are listed or admitted to trading, or, if the shares are not listed or admitted to trading on any such exchange, the mean between the closing high-bid and the low-asked quotations with respect to a share on such date as quoted on Nasdaq, or any similar system then in use, or, if no such quotations are available, the fair market value on such date of a share as at least 66 2/3% of the continuing directors shall determine. 139 The fair price provision included in the Triad Certificate is intended to ensure that all stockholders of Triad receive equal treatment in the event of a tender or exchange offer and to protect stockholders of Triad against coercive or two-tiered takeover bids. Notwithstanding the foregoing, the provision could also have the effect of discouraging a third party from making a tender or exchange offer for Triad, even though such an offer might be beneficial to Triad and its stockholders. Amendment of the Triad Certificate and By-laws. The Triad Certificate contains provisions requiring the affirmative vote of the holders of a least 80% of the voting power of all of the outstanding shares of voting stock of Triad to amend certain provisions of the Triad Certificate (including the provisions discussed above relating to directors, action by written consent, special stockholder meetings and advance notice of stockholder nominations and stockholder proposals) or to amend any provision of the Triad By-laws. An amendment of the fair price provision included in the Triad Certificate requires the approval of 66 2/3% of the directors of Triad then in office and the affirmative vote of 85% of the voting power of all of the outstanding shares of voting stock of Triad held by stockholders other than any related person, unless the amendment is approved by 66 2/3% of the continuing directors. These provisions make it more difficult for stockholders to make changes in the Triad Certificate and the Triad By-laws, including changes designed to facilitate the exercise of control over Triad. Other Constituencies. In addition to any other considerations which the Triad Board of Directors may lawfully take into account, in determining whether to take or to refrain from taking corporate action on any matter, including proposing any matter to the stockholders of Triad, the Board may consider the effects, both short-term and long-term, of such action on the interests of the employees, associates, associated physicians, distributors, patients or other customers, suppliers or creditors of Triad, and the communities in which Triad owns or leases property or conducts business. Limited Liability and Indemnification Provisions The Triad Certificate eliminates to the fullest extent now or hereafter permitted by the Delaware Law, liability of a director to Triad or its stockholders for monetary damages for any action taken, or failure to take any action, as a director, except for liability: . for any breach of the director's duty of loyalty to Triad or its stockholders; . for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . under Section 174 of the Delaware Law, relating to prohibited dividends, distributions and repurchases or redemptions of stock; or . for any transaction for which the director derives an improper personal benefit. This provision is intended to afford directors additional protection from, and limit their potential liability for, suits alleging a breach of duty by a director. Triad believes this provision will assist it in maintaining and securing the services of directors who are not employees of Triad. As a result of the inclusion of this provision, stockholders may be unable to recover monetary damages from directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions, such as an injunction or rescission based on a director's breach of the duty of care; as a practical matter, equitable remedies may not be available (e.g., after a transaction has already been effected). If equitable remedies are found not to be available to stockholders for any particular case, stockholders may not have any effective remedy against the challenged conduct. Section 145 of the Delaware Law permits indemnification of directors, officers, agents and controlling persons of a corporation under certain conditions and subject to certain limitations. Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or 140 investigative, by reason of the fact that such person is or was a director, officer or agent of the corporation or another enterprise if serving at the request of the corporation. Depending on the character of the proceeding, a corporation may indemnify against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if the person indemnified acted in good faith and in a manner such person reasonably believed to be in or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. In the case of an action by or in the right of Triad, no indemnification may be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine that despite the adjudication of liability such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 145 further provides that to the extent a director or officer of Triad has been successful in the defense of any action, suit or proceeding referred to above or in the defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. The Triad Certificate contains provisions for indemnification of directors, officers, employees and agents to the fullest extent permitted by Section 145 and Delaware law which, in general, presently requires that the individual act in good faith and in a manner he or she reasonably believed to be in or not opposed to Triad's best interests and, in the case of any criminal proceedings, that the individual has no reason to believe his or her conduct was unlawful. The Triad Certificate also permits Triad to purchase insurance and Triad has purchased and maintains insurance on behalf of Triad directors, officers, employees and agents against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not Triad would have the power to indemnify such person against such liability under the foregoing provisions of the Triad Certificate. Additional Information LifePoint has filed with the SEC a Registration Statement on Form 10 under the Exchange Act with respect to the shares of LifePoint common stock and associated LifePoint Rights to be received by Columbia/HCA stockholders in the distribution, and Triad has filed with the SEC a Registration Statement on Form 10 under the Exchange Act with respect to the shares of Triad common stock and associated Triad Rights to be received by Columbia/HCA stockholders in the distribution. This information statement does not contain all of the information set forth in the LifePoint Form 10 Registration Statement or the Triad Form 10 Registration Statement and (in each case) the exhibits and schedules relating thereto. Statements made in this information statement as to the contents of any contract, agreement, instrument or other document are not necessarily complete, and in each instance we refer you to the copy of the contract, agreement, instrument or document filed as an exhibit to the LifePoint Form 10 Registration Statement and the Triad Form 10 Registration Statement; each such statement is qualified in all respects by reference to such documents and the exhibits and schedules thereto. For further information, we refer you to the LifePoint Form 10 Registration Statement and the Triad Form 10 Registration Statement and the exhibits and schedules relating thereto, which are on file at the offices of the SEC and may be read and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC in New York (Seven World Trade Center, Suite 1300, New York, New York 10048) and Chicago (500 West Madison Street, Suite 1400, Chicago, Illinois 60661). The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Such material may also be inspected at the offices of the NYSE (20 Broad Street, New York, New York 10005) or accessed electronically by means of the SEC's home page on the World Wide Web (http://www.sec.gov). 141 Following the distribution, each of LifePoint and Triad will be required to comply with the reporting requirements of the Exchange Act and will file annual, quarterly and other reports with the SEC. LifePoint and Triad also will be subject to the proxy solicitation requirements of the Exchange Act and, accordingly, will furnish audited financial statements to their respective stockholders in connection with their annual meetings of stockholders. You should rely only on the information contained in this information statement and other documents referred to in this information statement. Columbia/HCA, LifePoint and Triad have not authorized anyone to provide you with information that is different. 142 INDEX TO FINANCIAL STATEMENTS LIFEPOINT HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS Report of Independent Auditors................................ F-2 Combined Statements of Operations--for the years ended December 31, 1998, 1997 and 1996............................. F-3 Combined Balance Sheets--December 31, 1998 and 1997........... F-4 Combined Statements of Equity--for the years ended December 31, 1998, 1997 and 1996...................................... F-5 Combined Statements of Cash Flows--for the years ended December 31, 1998, 1997 and 1996............................. F-6 Notes to Combined Financial Statements........................ F-7 thru F-16 TRIAD HOSPITALS, INC. COMBINED FINANCIAL STATEMENTS Report of Independent Auditors................................ F-17 Combined Statements of Operations--for the years ended December 31, 1998, 1997 and 1996............................. F-18 Combined Balance Sheets--December 31, 1998 and 1997........... F-19 Combined Statements of Equity--for the years ended December 31, 1998, 1997 and 1996...................................... F-20 Combined Statements of Cash Flows--for the years ended December 31, 1998, 1997 and 1996............................. F-21 Notes to Combined Financial Statements........................ F-22 thru F-31
Explanatory Note: The historical combined financial statements presented herein are those of the America Group and the Pacific Group of Columbia/HCA Healthcare Corporation. Prior to the distribution date, the assets and liabilities of the America Group will be contributed to LifePoint Hospitals, Inc., a newly-formed Delaware holding company and the assets and liabilities of the Pacific Group will be contributed to Triad Hospitals, Inc., a newly-formed Delaware holding company. On the distribution date, the assets and liabilities of the America Group will constitute substantially all of the assets and liabilities of LifePoint Hospitals, Inc. and the assets and liabilities of the Pacific Group will constitute substantially all of the assets and liabilities of Triad Hospitals, Inc. F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders Columbia/HCA Healthcare Corporation We have audited the accompanying combined balance sheets of the net assets and operations to be contributed to LifePoint Hospitals, Inc. (see Note 1) as of December 31, 1998 and 1997 and the related combined statements of operations, equity and cash flows for each of the three years in the period ended December 31, 1998. These combined financial statements are the responsibility of the management of Columbia/HCA Healthcare Corporation (the "Company"). Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the net assets and operations to be contributed to LifePoint Hospitals, Inc. (see Note 1) at December 31, 1998 and 1997 and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. As explained in Note 7 to the combined financial statements, effective January 1, 1997, the Company changed its method of accounting for start-up costs. Ernst & Young LLP Nashville, Tennessee March 5, 1999 F-2 LIFEPOINT HOSPITALS, INC. COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in millions, except per share amounts)
1998 1997 1996 ------ ------ ------ Revenues................................................ $498.4 $487.6 $464.0 Salaries and benefits................................... 220.8 196.6 175.2 Supplies................................................ 62.0 55.0 50.9 Other operating expenses................................ 117.2 119.5 99.3 Provision for doubtful accounts......................... 41.6 34.5 28.0 Depreciation and amortization........................... 28.3 27.4 23.5 Interest expense........................................ 19.1 15.4 14.1 Management fees allocated from Columbia/HCA............. 8.9 8.2 6.2 Impairment of long-lived assets......................... 26.1 -- -- ------ ------ ------ 524.0 456.6 397.2 ------ ------ ------ Income (loss) from continuing operations before minority interests and income taxes (benefit)................... (25.6) 31.0 66.8 Minority interests in earnings of consolidated entities............................................... 1.9 2.2 1.2 ------ ------ ------ Income (loss) from continuing operations before income taxes (benefit)........................................ (27.5) 28.8 65.6 Provision for income taxes (benefit).................... (9.8) 11.7 26.3 ------ ------ ------ Income (loss) from continuing operations ............... (17.7) 17.1 39.3 Discontinued operations: Income (loss) from operations, net of income taxes (benefit) of $(2.6), $(0.1) and $1.2 for the years ended December 31, 1998, 1997 and 1996, respectively......................................... (4.1) (.6) 1.9 Estimated loss on disposal, net of income tax benefit of $2.4.............................................. -- (3.4) -- Cumulative effect of accounting change, net of income tax benefit of $0.4.................................... -- (.6) -- ------ ------ ------ Net income (loss).................................. $(21.8) $ 12.5 $ 41.2 ====== ====== ====== Basic and diluted earnings (loss) per share (see Note 13): Continuing operations................................. $ (.41) $ .40 $ .92 Discontinued operations............................... (.10) (.10) .04 Cumulative effect of accounting change................ -- (.01) -- ------ ------ ------ Net income (loss).................................. $ (.51) $ .29 $ .96 ====== ====== ======
The accompanying notes are an integral part of the combined financial statements. F-3 LIFEPOINT HOSPITALS, INC. COMBINED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (Dollars in millions)
1998 1997 ------ ------ ASSETS ------ Current assets: Accounts receivable, less allowances for doubtful accounts of $48.3 and $37.5 at December 31, 1998 and 1997.............. $ 36.4 $ 53.1 Inventories................................................. 14.0 13.0 Deferred taxes and other current assets..................... 18.6 14.4 ------ ------ 69.0 80.5 Property and equipment, at cost: Land........................................................ 7.2 7.2 Buildings................................................... 203.1 222.9 Equipment................................................... 221.9 198.8 Construction in progress (estimated cost to complete and equip after December 31, 1998--$61.8)...................... 10.4 10.7 ------ ------ 442.6 439.6 Accumulated depreciation...................................... (176.2) (154.2) ------ ------ 266.4 285.4 Intangible assets, net of accumulated amortization of $7.7 and $6.6 at December 31, 1998 and 1997........................... 15.2 17.8 Other......................................................... 4.4 14.2 ------ ------ $355.0 $397.9 ====== ====== LIABILITIES AND EQUITY ---------------------- Current liabilities: Accounts payable............................................ $ 15.5 $ 15.3 Accrued salaries............................................ 11.7 11.7 Other current liabilities................................... 14.9 12.4 ------ ------ 42.1 39.4 Long-term debt................................................ .3 1.4 Deferred taxes and other liabilities.......................... 21.4 28.9 Minority interests in equity of consolidated entities......... 4.9 5.2 Equity, investments by and advances from Columbia/HCA......... 286.3 323.0 ------ ------ $355.0 $397.9 ====== ======
The accompanying notes are an integral part of the combined financial statements. F-4 LIFEPOINT HOSPITALS, INC. COMBINED STATEMENTS OF EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in millions)
1998 1997 1996 ------ ------ ------ Equity at beginning of period............................ $323.0 $304.0 $267.6 Net income (loss)...................................... (21.8) 12.5 41.2 Investments by and advances from Columbia/HCA, net..... (14.9) 6.5 (4.8) ------ ------ ------ Equity at end of period.................................. $286.3 $323.0 $304.0 ====== ====== ======
The accompanying notes are an integral part of the combined financial statements. F-5 LIFEPOINT HOSPITALS, INC. COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in millions)
1998 1997 1996 ------ ----- ----- Cash flows from operating activities: Net income (loss)...................................... $(21.8) $12.5 $41.2 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for doubtful accounts...................... 41.6 34.5 28.0 Depreciation and amortization........................ 28.3 27.4 23.5 Deferred income taxes (benefit)...................... (12.4) 4.1 15.3 Impairment of long-lived assets...................... 26.1 -- -- Loss (income) from discontinued operations........... 4.1 4.0 (1.9) Cumulative effect of accounting change............... -- .6 -- Increase (decrease) in cash from operating assets and liabilities: Accounts receivable................................ (21.3) (37.9) (46.4) Inventories and other assets....................... .2 .1 (3.8) Accounts payable and accrued expenses.............. .9 (.1) 7.2 Other................................................ (.4) .2 .7 ------ ----- ----- Net cash provided by operating activities.......... 45.3 45.4 63.8 Cash flows from investing activities: Purchase of property and equipment..................... (29.3) (51.8) (53.4) Investments in and advances to affiliates.............. .1 (7.2) (2.8) Other.................................................. (.1) 7.1 (2.4) ------ ----- ----- Net cash used in investing activities.............. (29.3) (51.9) (58.6) Cash flows from financing activities: Increase (decrease) in long-term debt, net............. (1.1) -- (.4) Increase (decrease) in investments by and advances from Columbia/HCA, net..................................... (14.9) 6.5 (4.8) ------ ----- ----- Net cash provided by (used in) financing activities........................................ (16.0) 6.5 (5.2) ------ ----- ----- Change in cash and cash equivalents...................... $ -- $ -- $ -- ====== ===== ===== Interest payments........................................ $ 19.1 $15.4 $14.1 Income tax payments (refunds), net....................... $ -- $ 4.7 $14.2
The accompanying notes are an integral part of the combined financial statements. F-6 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1--COLUMBIA/HCA'S PROPOSED SPIN-OFF OF AMERICA CORPORATION In 1998, the Board of Directors of Columbia/HCA Healthcare Corporation ("Columbia/HCA" or the "Company") approved in principle the spin-off of its operations comprising the America Group to its shareholders (the "Distribution") as an independent, publicly-traded company. The America Group and the independent, publicly-traded company to which its assets and liabilities will be contributed are hereinafter referred to as "LifePoint Hospitals, Inc." or LifePoint." The Distribution is subject to obtaining a tax ruling by the Internal Revenue Service ("IRS") that would allow it to be tax- free to Columbia/HCA and its shareholders, various regulatory approvals and approval of a definitive plan by Columbia/HCA's Board of Directors. LifePoint is comprised of 23 general, acute care hospitals and related health care entities. The entities are located in non-urban areas in the states of Alabama, Florida, Georgia, Kansas, Kentucky, Louisiana, Tennessee, Utah and Wyoming. The accompanying financial statements, prepared on the pushed down basis of the historical cost to Columbia/HCA, represent the combined financial position, results of operations and cash flows of LifePoint. In connection with the Distribution, all intercompany amounts payable by LifePoint to Columbia/HCA will be eliminated, and LifePoint will assume certain indebtedness from Columbia/HCA. In addition, LifePoint will enter into various agreements with Columbia/HCA which are intended to facilitate orderly changes for both companies in a way which would be minimally disruptive to each entity. The combined financial statements included herein may not necessarily be indicative of the results of operations, financial position and cash flows of LifePoint in the future or had it operated as a separate, independent company during the periods presented. The combined financial statements included herein do not reflect any changes that may occur in the financing and operations of LifePoint as a result of the Distribution. NOTE 2--ACCOUNTING POLICIES Principles of Combination The combined financial statements include the accounts of LifePoint and all affiliated subsidiaries and entities controlled by LifePoint through LifePoint's direct or indirect ownership of a majority voting interest or other rights granted to LifePoint as the sole general partner. Significant intercompany transactions within LifePoint have been eliminated. Investments in entities which LifePoint does not control, but in which it has a substantial ownership interest and can exercise significant influence, are accounted for using the equity method. The preparation of the combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Equity Equity represents the net investment in and advances to LifePoint by Columbia/HCA. It includes common stock, additional paid-in-capital, net earnings and net intercompany balances with Columbia/HCA. Intercompany balances represent the net excess of funds transferred to or paid on behalf of LifePoint over funds transferred to the centralized cash management account of Columbia/HCA. Generally, this balance is increased by cash transfers from and payments of debt made by Columbia/HCA, construction project additions paid by Columbia/HCA, and certain fees and services provided by Columbia/HCA, including information systems services and other operating expenses, such as payroll, interest, insurance and income taxes. Generally, the balance is decreased through daily cash deposits by LifePoint to the account. LifePoint is charged interest on the intercompany balances at various rates ranging from 6% to 10% and the interest computations are based F-7 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 2--ACCOUNTING POLICIES (continued) on the outstanding balance at month end. The net intercompany balances were $167.6 million and $182.5 million at December 31, 1998 and 1997, respectively. Interest expense related to the net intercompany balances was $19.1 million, $15.4 million and $14.1 million for the years ended December 31, 1998, 1997, and 1996, respectively. Revenues LifePoint's health care facilities have entered into agreements with third- party payers, including government programs and managed care health plans, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Revenues are recorded at estimated amounts due from patients and third-party payers for the health care services provided. Settlements under reimbursement agreements with third-party payers are estimated and recorded in the period the related services are rendered and are adjusted in future periods as final settlements are determined. The net adjustments to estimated settlements resulted in increases to revenues of $1.2 million, $3.3 million and $10.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. In association with the ongoing Federal investigation into certain of Columbia/HCA's business practices, the applicable governmental agencies have ceased the settlement of cost reports. Since the cost reports are not being settled, the Company is not receiving updated information which has historically been the basis used to adjust estimated settlement amounts. At this time, the Company cannot predict when, or if, the historical cost report settlement process will be resumed. Management believes that adequate provisions have been made for adjustments that may result from final determination of amounts earned under these programs. LifePoint provides care without charge to patients who are financially unable to pay for the health care services they receive. Because LifePoint does not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. Accounts Receivable LifePoint receives payment for services rendered from federal and state agencies (under the Medicare, Medicaid and CHAMPUS programs), managed care health plans, commercial insurance companies, employers and patients. During the years ended December 31, 1998, 1997 and 1996, approximately 37.8%, 39.4% and 40.9%, respectively, of LifePoint's revenues related to patients participating in the Medicare program. LifePoint recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there are significant credit risks associated with these government agencies. LifePoint does not believe that there are any other significant concentrations of revenues from any particular payer that would subject it to any significant credit risks in the collection of its accounts receivable. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Long-Lived Assets (a) Property and Equipment Property and equipment are stated at cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized. F-8 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 2--ACCOUNTING POLICIES (continued) Depreciation expense, computed using the straight-line method, was $27.1 million, $25.1 million and $21.9 million for the years ended December 31, 1998, 1997 and 1996, respectively. Buildings and improvements are depreciated over estimated useful lives ranging generally from 10 to 40 years. Estimated useful lives of equipment vary generally from 3 to 10 years. (b) Intangible Assets Intangible assets consist primarily of costs in excess of the fair value of identifiable net assets of acquired entities and are amortized using the straight-line method, generally over periods ranging from 30 to 40 years for hospital acquisitions and periods ranging from 5 to 20 years for physician practice and clinic acquisitions. Noncompete agreements and debt issuance costs are amortized based upon the terms of the respective contracts or loans. When events, circumstances and operating results indicate that the carrying values of certain long-lived assets and the related identifiable intangible assets might be impaired, LifePoint prepares projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts are not expected to be recoverable, such amounts are reduced to estimated fair value. Income Taxes Columbia/HCA files consolidated Federal and state income tax returns which includes all of its eligible subsidiaries, including LifePoint. The provisions for income taxes (benefits) in the combined statements of operations for all periods presented have been computed on a separate return basis (i.e., assuming LifePoint had not been included in a consolidated income tax return with Columbia/HCA). All income tax payments are made by LifePoint through Columbia/HCA. Deferred tax assets and liabilities result principally from certain revenue and expense items being recognized for tax purposes in years other than the year in which they are reflected in the combined financial statements. General and Professional Liability Risks Columbia/HCA assumes the liability for all general and professional liability claims incurred through the distribution date. The cost of general and professional liability coverage is allocated by Columbia/HCA's captive insurance company to LifePoint based on actuarially determined estimates. LifePoint intends to continue the general and professional liability coverage with Columbia/HCA under the same general terms through December 31, 1999. The cost for the years ended December 31, 1998, 1997 and 1996 was approximately $6.8 million, $6.1 million and $5.6 million, respectively. LifePoint participates in a self-insured program for workers' compensation and health insurance administered by Columbia/HCA. Columbia/HCA will retain sole responsibility for all workers' compensation and health claims incurred prior to the distribution date. The cost for these programs is based upon claims paid, plus an actuarially determined amount for claims incurred but not reported. The cost was approximately $5.6 million for each of the years ended December 31, 1998, 1997 and 1996. Management Fees Columbia/HCA incurs various corporate general and administrative expenses. These corporate overhead expenses are allocated to LifePoint based on net revenues. In the opinion of management, this allocation method is reasonable. F-9 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 2--ACCOUNTING POLICIES (continued) The management fees allocated to LifePoint are less than management's estimate of the general and administrative costs that would have been incurred if LifePoint had been a separate, independent entity and had otherwise managed comparable general and administrative functions during 1998. Subsequent to the Distribution, LifePoint will be required to manage these functions and will be responsible for the expenses associated with the management of a separate public corporation. Disclosures about Segments of an Enterprise In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that these enterprises report selected information about operating segments in interim financial reports. Management has determined that LifePoint does not have separately reportable segments as defined under SFAS 131. Rather, LifePoint's facilities are all similar in their business activities and the economic environments in which they operate (i.e, non-urban markets). LifePoint intends to monitor its facilities individually and to develop facility specific strategies. Assessment of performance and corresponding management decisions will be based upon individual facility results. NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is a defendant in several qui tam actions brought by private parties on behalf of the United States of America, which have been unsealed and served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated the False Claims Act for improper claims submitted to the government for reimbursement. The lawsuits seek damages of three times the amount of all Medicare or Medicaid claims (involving false claims) presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The government has intervened in two qui tam actions. Columbia/ HCA is aware of additional qui tam actions that remain under seal and believes that there are other sealed qui tam cases of which it is unaware. Columbia/HCA is a defendant in a number of other suits, which allege, in general, improper and fraudulent billing, overcharging, coding and physician referrals, as well as other violations of law. Certain of the suits have been conditionally certified as class actions. It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam and other actions, or whether any additional investigations or litigation will be commenced. If Columbia/HCA is found to have violated Federal or state laws relating to Medicare, Medicaid or similar programs, Columbia/HCA could be subject to substantial monetary fines, civil and criminal penalties, and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui tam and other actions may be substantial, and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more of such actions. Any such sanctions or losses could have a material adverse effect on Columbia/HCA's financial position and results of operations. F-10 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS (continued) Columbia/HCA has agreed to indemnify LifePoint in respect of any losses which it may incur as a result of the proceedings described above. Columbia/HCA has also agreed to indemnify LifePoint in respect of any losses which it may incur as a result of proceedings which may be commenced by government authorities or by private parties in the future that arise from acts, practices or omissions engaged in prior to the Distribution Date and relate to the proceedings described above. If any of such indemnified matters were successfully asserted against LifePoint, or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations, then such losses could have a material adverse effect on the financial position and results of operations of LifePoint. (See Note 11--Contingencies). NOTE 4--INCOME TAXES The provision for income taxes (benefit) for the years ended December 31, 1998, 1997 and 1996 consists of the following (dollars in millions):
1998 1997 1996 ----- ----- ----- Current: Federal................. $ 2.6 $ 6.5 $ 9.3 State................... -- 1.1 1.7 Deferred: Federal................. (10.5) 3.6 12.9 State................... (1.9) 0.5 2.4 ----- ----- ----- $(9.8) $11.7 $26.3 ===== ===== ===== A reconciliation of the federal statutory rate to the effective income tax rate for the years ended December 31, 1998, 1997 and 1996 follows: 1998 1997 1996 ----- ----- ----- Federal statutory rate.... 35.0% 35.0% 35.0% State income taxes, net of federal income tax bene- fit...................... 3.9 4.1 4.0 Non-deductible intangible assets................... (2.6) 1.1 0.7 Other items, net.......... (0.7) 0.5 0.4 ----- ----- ----- Effective income tax rate..................... 35.6% 40.7% 40.1% ===== ===== =====
A summary of the items comprising the deferred tax assets and liabilities at December 31 follows (dollars in millions):
1998 1997 ------------------ ------------------ Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Depreciation and fixed asset basis dif- ferences............................... $ -- $24.8 $ -- $32.4 Doubtful accounts....................... 11.4 -- 6.6 -- Compensation............................ 2.6 -- 2.6 -- Other................................... 4.5 0.6 4.5 0.6 ----- ----- ----- ----- $18.5 $25.4 $13.7 $33.0 ===== ===== ===== =====
Current deferred income tax assets totaled $14.4 million and $9.5 million at December 31, 1998 and 1997, respectively. Noncurrent deferred income tax liabilities totaled $21.3 million and $28.8 million at December 31, 1998 and 1997, respectively. Columbia/HCA and LifePoint will enter into a tax sharing and indemnification agreement which will provide that Columbia/HCA will generally be responsible for all taxes that are allocable to periods prior to the distribution date and Columbia/HCA and LifePoint will each be responsible for its own tax liabilities for periods after the distribution date. F-11 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 5--IMPAIRMENT OF LONG-LIVED ASSETS LifePoint adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121") during the first quarter of 1996. SFAS 121 addresses accounting for the impairment of long-lived assets and long-lived assets to be disposed of, certain identifiable intangibles and goodwill related to those assets, and provides guidance for recognizing and measuring impairment losses. The statement requires that the carrying amount of impaired assets be reduced to fair value. During the fourth quarter of 1998, LifePoint decided to sell three hospital facilities that were identified as not compatible with LifePoint's operating plans, based upon management's review of all facilities, and giving consideration to current and expected market conditions and the current and expected capital needs in each market. The carrying value of the long-lived assets related to these hospital facilities of approximately $47.0 million was reduced to fair value, based on estimates of selling values, for a total non- cash charge of $24.8 million. LifePoint expects to complete the sales of these facilities during 1999. For the years ended December 31, 1998, 1997 and 1996, respectively, these facilities to be divested had net revenues of approximately $48.0 million, $50.6 million and $42.1 million and incurred income (losses) from continuing operations before income taxes (benefit) and the asset impairment charge of approximately $(9.6) million, $(3.8) million and $1.8 million. LifePoint recorded, during the third quarter of 1998, an impairment loss of approximately $1.3 million related to the write-off of intangibles and other long-lived assets of certain physician practices where the recorded asset values were not deemed to be fully recoverable based upon the operating results trends and projected future cash flows. These assets are now recorded at estimated fair value. The impairment charges did not have a significant impact on LifePoint's cash flows and are not expected to significantly impact cash flows for future periods. As a result of the write-downs, depreciation and amortization expense related to these assets will decrease in future periods. In the aggregate, the net effect of the change in depreciation and amortization expense is not expected to have a material effect on operating results for future periods. NOTE 6--DISCONTINUED OPERATIONS During the fourth quarter of 1998, Columbia/HCA and LifePoint completed the divestiture of their home health businesses. Columbia/HCA and LifePoint implemented plans to sell the home health businesses during the third quarter of 1997. The combined financial statements reflect the results of operations and net assets of the home health businesses as discontinued operations. Revenues for the home health businesses disposed of were approximately $18.9 million, $55.3 million and $52.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. The after-tax loss incurred upon the divestiture of the home health businesses of $3.4 million was recorded during the fourth quarter of 1997 and is presented in the "Discontinued operations" section of the combined statements of operations. NOTE 7--ACCOUNTING CHANGE During 1997, LifePoint changed its method of accounting for start-up costs. The change involved expensing these costs as incurred, rather than capitalizing and subsequently amortizing such costs. LifePoint believes the new method is preferable due to certain changes in business strategy and reviews of emerging accounting guidance on accounting for similar (i.e., start-up, software system training and process reengineering) costs. F-12 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 7--ACCOUNTING CHANGE (Continued) The change in accounting principle resulted in the write-off of the costs capitalized as of January 1, 1997. The cumulative effect of the write-off, which totals $0.6 million (net of tax benefit), has been expensed and reflected in the statement of operations for the year ended December 31, 1997. Had the new method been used in the past, the pro forma effect on prior years would have primarily affected 1996 (such costs incurred for periods prior to 1996 are considered immaterial to operations for those periods). The pro forma effect on the years ended December 31, 1997 and 1996 follows (dollars in millions):
1997 1996 ------------------ ------------------ As As Reported Pro Forma Reported Pro Forma -------- --------- -------- --------- Income from continuing operations.... $17.1 $17.1 $39.3 $38.7 Net income........................... $12.5 $13.1 $41.2 $40.6
NOTE 8--LONG TERM DEBT Long-term debt consists of various notes payable to third parties with an average life of 6 years and rates averaging 9%. Current portion of long-term debt totaled $.3 million and $.2 million at December 31, 1998 and 1997, respectively, and is included in other current liabilities on the combined balance sheets. In connection with the Distribution, all intercompany amounts payable by LifePoint to Columbia/HCA (included in "Equity, investments by and advances from Columbia/HCA" in the combined balance sheets) will be eliminated, and LifePoint will assume certain indebtedness from Columbia/HCA. NOTE 9--STOCK BENEFIT PLANS LifePoint employees have participated in the Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan (the "1992 Plan"). Under the 1992 Plan, stock options are generally granted at no less than the market price on the date of grant. Options are exercisable in whole or in part beginning two to five years after the grant and ending ten years after the grant. The number of options granted to LifePoint employees under Columbia/HCA's stock option plan was approximately 185,000 options, 1,324,800 options, and 357,000 options, during 1998, 1997 and 1996, respectively. Immediately following the Distribution, nonvested Columbia/HCA stock options held by LifePoint employees will be cancelled and LifePoint may, in its discretion, grant stock option awards. The vested Columbia/HCA stock options held by LifePoint employees will generally be converted into a combination of LifePoint stock options, Columbia/HCA stock options and stock options of Columbia/HCA's other spin-off company, Triad Hospitals, Inc., in a manner that preserves the pre-spin-off intrinsic value and the pre-spin-off ratio of the exercise prices to the underlying market value of the related common stock. At December 31, 1998 there were approximately 2,527,300 Columbia/HCA stock options held by LifePoint employees. That amount includes an aggregate of approximately 1,937,800 unvested options that will be cancelled. LifePoint cannot currently determine the number of shares of its common stock that will be subject to any discretionary grants of options by LifePoint after the Distribution. LifePoint has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, but continues to measure stock-based compensation cost in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. Accordingly, no compensation cost has been recognized for LifePoint's stock benefit plans. If LifePoint had F-13 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 9--STOCK BENEFIT PLANS (Continued) measured compensation cost for the Columbia/HCA stock options granted to its employees during 1998, 1997 and 1996 under the fair value based method prescribed by SFAS 123, the net income (loss) would have been changed to the pro forma amounts set forth below (dollars in millions):
1998 1997 1996 ------ ----- ----- Net income (loss) Reported............................................... $(21.8) $12.5 $41.2 Pro forma.............................................. $(22.7) $11.7 $40.9
The fair values of Columbia/HCA stock options granted to LifePoint employees used to compute pro forma net income (loss) disclosures were estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions used by Columbia/HCA:
1998 1997 1996 ------- ------- ------- Risk free interest rate.............................. 4.74% 5.61% 5.81% Expected life........................................ 6 years 6 years 6 years Expected volatility.................................. 23.90% 23.90% 23.90% Expected dividend yield.............................. .30% .23% .19%
The weighted-average fair values of Columbia/HCA stock options granted to LifePoint employees during the years ended 1998, 1997 and 1996 were $8.77, $11.23 and $13.52 per option, respectively. The pro forma amounts above are not necessarily representative of the effects of stock-based awards on future pro forma net income because (1) future grants of employee stock options by management may not be comparable to awards made to employees while LifePoint was a part of Columbia/HCA, (2) the assumptions used to compute the fair value of any stock option awards will be specific to LifePoint and therefore may not be comparable to the Columbia/HCA assumptions used and (3) they exclude the pro forma compensation expense related to unvested stock options granted before 1996. NOTE 10--RETIREMENT PLANS LifePoint participates in Columbia/HCA's defined contribution retirement plans, which cover substantially all employees. Benefits are determined primarily as a percentage of a participant's earned income and are vested over specific periods of employee service. Certain plans also require LifePoint to make matching contributions at certain percentages. The cost of these plans was $5.3 million, $5.9 million and $4.4 million during 1998, 1997 and 1996, respectively. Amounts approximately equal to expense for these plans are funded annually. NOTE 11--CONTINGENCIES Significant Legal Proceedings Various lawsuits, claims and legal proceedings have been and are expected to be instituted or asserted against Columbia/HCA and LifePoint, including those relating to shareholder derivative and class action complaints; purported class action lawsuits filed by patients and payers alleging, in general, improper and fraudulent billing, coding and physician referrals, as well as other violations of law; certain qui tam or "whistleblower" actions alleging, in general, unlawful claims for reimbursement or unlawful payments to physicians for the referral of patients, as well as other violations and litigation matters. While the amounts claimed may be substantial, the ultimate liability cannot be determined or reasonably estimated at this time due to the considerable uncertainties F-14 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 11--CONTINGENCIES (Continued) that exist. Therefore, it is possible that Columbia/HCA's and LifePoint's results of operations, financial position and liquidity in a particular period could be materially, adversely affected upon the resolution of certain of these contingencies. (See Note 3--Columbia/HCA Investigations, Litigation and Indemnification Rights, for a description of the ongoing government investigations and Columbia/HCA's obligations to indemnify LifePoint with respect to losses incurred by LifePoint arising from such governmental investigations and related proceedings.) General Liability Claims LifePoint is subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians staff privileges. In certain of these actions claimants may ask for punitive damages against LifePoint, which are usually not covered by insurance. It is management's opinion that the ultimate resolution of pending claims and legal proceedings will not have a material adverse effect on LifePoint's results of operations or financial position. Physician Commitments LifePoint has committed to provide certain financial assistance pursuant to recruiting agreements with various physicians practicing in the communities it serves. In consideration for a physician relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, LifePoint may loan certain amounts of money to a physician normally over a period of one year to assist in establishing his or her practice. Amounts committed to be advanced approximated $11.9 million at December 31, 1998. The actual amount of such commitments to be subsequently advanced to physicians often depends upon the financial results of a physician's private practice during the guaranteed period. Generally, amounts advanced under the recruiting agreements may be forgiven prorata over a period of 48 months contingent upon the physician continuing to practice in the respective community. It is management's opinion that amounts actually advanced and not repaid will not have a material adverse effect on LifePoint's results of operations or financial position. NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS A summary of other current liabilities as of December 31 follows (in millions):
1998 1997 ----- ----- Employee benefit plans.......................................... $ 7.0 $ 7.0 Taxes other than income......................................... 3.6 3.2 Other........................................................... 4.3 2.2 ----- ----- $14.9 $12.4 ===== =====
A summary of activity in LifePoint's allowances for doubtful accounts follows (in millions):
Additions Accounts Balances at Charged to Written off, Balance Beginning Costs and Net of at end of Period Expenses Recoveries of Period ----------- ---------- ------------ --------- Allowances for doubtful ac- counts: Year ended December 31, 1996..................... $12.7 $28.0 $(11.2) $29.5 Year ended December 31, 1997..................... 29.5 34.5 (26.5) 37.5 Year ended December 31, 1998..................... 37.5 41.6 (30.8) 48.3
NOTE 13--EARNINGS PER SHARE LifePoint expects to issue 42,888,940 shares of LifePoint common stock on the distribution date. The 42,888,940 shares, assumed outstanding for all periods presented, were used to compute basic and diluted earnings (loss) per share. F-15 LIFEPOINT HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 14--UNAUDITED QUARTERLY FINANCIAL INFORMATION The quarterly interim financial information shown below has been prepared by the Company's management and is unaudited. It should be read in conjunction with the audited combined financial statements appearing herein (dollars in millions, except per share amounts).
1998 -------------------------------- First Second Third Fourth ------ ------ ------ ------ Revenues.............................. $130.0 $124.4 $124.7 $119.3 Net income (loss)..................... $ 1.6 $ 1.5 $ (2.2)(a) $(22.7)(b) Basic and diluted earnings (loss) per share (see Note 13).................. $ .04 $ .03 $ (.05)(a) $ (.53)(b) 1997 -------------------------------- First Second Third Fourth ------ ------ ------ ------ Revenues.............................. $130.7 $128.5 $116.1 $112.3 Net income (loss): Income (loss) before accounting change............................. $ 15.3 $ 13.2 $ 0.2 $(15.6) Cumulative effect of accounting change............................. (0.6) -- -- -- ------ ------ ------ ------ Net income (loss)................. $ 14.7 $ 13.2 $ 0.2 $(15.6) ====== ====== ====== ====== Basic and diluted earnings (loss) per share (see Note 13): Income (loss) before accounting change............................. $ .36 $ .31 $ -- $ (.37) Cumulative effect of accounting change............................. (.01) -- -- -- ------ ------ ------ ------ Net income (loss)................. $ .35 $ .31 $ -- $ (.37) ====== ====== ====== ======
- -------- (a) During the third quarter of 1998, LifePoint recorded a $1.3 million pre- tax charge ($0.8 million after-tax) related to the impairment of certain long-lived assets. See Note 5--Impairment of Long-Lived Assets). (b) During the fourth quarter of 1998, LifePoint recorded a $24.8 million pre- tax charge ($15.1 million after-tax) related to the impairment of certain long-lived assets. See Note 5--Impairment of Long-Lived Assets). F-16 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders Columbia/HCA Healthcare Corporation We have audited the accompanying combined balance sheets of the net assets and operations to be contributed to Triad Hospitals, Inc. (see Note 1) as of December 31, 1998 and 1997 and the related combined statements of operations, equity and cash flows for each of the three years in the period ended December 31, 1998. These combined financial statements are the responsibility of management of Columbia/HCA Healthcare Corporation (the "Company"). Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the net assets and operations to be contributed to Triad Hospitals, Inc. (see Note 1) at December 31, 1998 and 1997 and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. As explained in Note 7 to the combined financial statements, effective January 1, 1997, the Company changed its method of accounting for start-up costs. Ernst & Young LLP Nashville, Tennessee February 26, 1999 F-17 TRIAD HOSPITALS, INC. COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in millions, except per share amounts)
1998 1997 1996 -------- -------- -------- Revenues.......................................... $1,588.7 $1,609.3 $1,600.5 Salaries and benefits............................. 700.5 666.8 628.1 Supplies.......................................... 241.6 232.8 221.9 Other operating expenses.......................... 359.2 383.4 349.5 Provision for doubtful accounts................... 138.4 138.5 106.5 Depreciation and amortization..................... 109.6 102.9 94.5 Interest expense.................................. 68.9 60.5 52.0 Management fees allocated from Columbia/HCA....... 29.3 25.4 20.7 Impairment of long-lived assets................... 55.1 13.7 -- -------- -------- -------- 1,702.6 1,624.0 1,473.2 -------- -------- -------- Income (loss) from continuing operations before minority interests and income taxes..................................... (113.9) (14.7) 127.3 Minority interests in earnings of consolidated entities......................................... 11.0 11.5 10.8 -------- -------- -------- Income (loss) from continuing operations before income taxes (benefit)........................... (124.9) (26.2) 116.5 Provision for income taxes (benefit).............. (39.4) (7.2) 48.2 -------- -------- -------- Income (loss) from continuing operations.......... (85.5) (19.0) 68.3 Discontinued operations: Income (loss) from operations, net of income taxes (benefit) of $(0.7), $3.2 and $4.1 for the years ended December 31, 1998, 1997 and 1996, respectively............................. (1.6) 4.9 6.4 Estimated loss on disposal, net of income tax benefit of $1.9................................ -- (2.9) -- Cumulative effect of accounting change, net of income tax benefit of $1.8....................... -- (2.8) -- -------- -------- -------- Net income (loss)............................. $ (87.1) $ (19.8) $ 74.7 ======== ======== ======== Basic and diluted earnings (loss) per share (see Note 13): Continuing operations........................... $ (1.99) $ (0.44) $ 1.59 Discontinued operations......................... (0.04) 0.05 0.15 Cumulative effect of accounting change.......... -- (0.07) -- -------- -------- -------- Net income (loss)............................. $ (2.03) $ (0.46) $ 1.74 ======== ======== ========
The accompanying notes are an integral part of the combined financial statements. F-18 TRIAD HOSPITALS, INC. COMBINED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (Dollars in millions)
1998 1997 -------- -------- ASSETS ------ Current assets: Accounts receivable, less allowances for doubtful accounts of $155.9 and $136.9 at December 31, 1998 and 1997.................................................... $ 199.3 $ 191.8 Inventories.............................................. 44.8 43.2 Income taxes............................................. 37.9 31.9 Other.................................................... 23.9 23.3 -------- -------- 305.9 290.2 Property and equipment, at cost: Land..................................................... 82.0 81.1 Buildings................................................ 604.9 639.4 Equipment................................................ 712.0 655.5 Construction in progress (estimated cost to complete and equip after December 31, 1998--$107.8).............................. 63.7 46.9 -------- -------- 1,462.6 1,422.9 Accumulated depreciation................................... (703.1) (624.2) -------- -------- 759.5 798.7 Intangible assets, net of accumulated amortization of $50.2 and $40.5 at December 31, 1998 and 1997................................ 272.9 279.9 Investment in equity of affiliates......................... 24.3 21.6 Other...................................................... 8.7 20.1 -------- -------- $1,371.3 $1,410.5 ======== ======== LIABILITIES AND EQUITY ---------------------- Current liabilities: Accounts payable......................................... $ 47.5 $ 62.6 Accrued salaries......................................... 34.8 38.1 Other current liabilities................................ 38.7 39.2 -------- -------- 121.0 139.9 Long-term debt............................................. 13.4 14.4 Deferred taxes and other liabilities....................... 62.5 81.3 Minority interests in equity of consolidated entities...... 60.0 62.1 Equity, investments by and advances from Columbia/HCA...... 1,114.4 1,112.8 -------- -------- $1,371.3 $1,410.5 ======== ========
The accompanying notes are an integral part of the combined financial statements. F-19 TRIAD HOSPITALS, INC. COMBINED STATEMENTS OF EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in millions)
1998 1997 1996 -------- -------- -------- Equity at beginning of period.................... $1,112.8 $1,117.1 $1,085.2 Net income (loss).............................. (87.1) (19.8) 74.7 Investments by and advances from Columbia/HCA, net........................................... 88.7 15.5 (42.8) -------- -------- -------- Equity at end of period.......................... $1,114.4 $1,112.8 $1,117.1 ======== ======== ========
The accompanying notes are an integral part of the combined financial statements. F-20 TRIAD HOSPITALS, INC. COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in millions)
1998 1997 1996 ------- ------- ------- Cash flows from operating activities: Net income (loss)................................. $ (87.1) $ (19.8) $ 74.7 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for doubtful accounts................. 138.4 138.5 106.5 Depreciation and amortization................... 109.6 102.9 94.5 Deferred income taxes (benefit)................. (24.6) (10.8) 0.8 Impairment of long-lived assets................. 55.1 13.7 -- Loss (income) from discontinued operations...... 1.6 (2.0) (6.4) Cumulative effect of accounting change.......... -- 2.8 -- Increase (decrease) in cash from operating assets and liabilities: Accounts receivable........................... (145.9) (115.3) (135.0) Inventories and other assets.................. (2.1) (1.6) 3.4 Accounts payable and other current liabilities.................................. (18.9) (6.8) 19.0 Other........................................... (2.2) (1.3) 7.8 ------- ------- ------- Net cash provided by operating activities..... 23.9 100.3 165.3 ------- ------- ------- Cash flows from investing activities: Purchase of property and equipment................ (114.9) (120.1) (94.4) Investment in and advances to affiliates.......... (2.7) (2.5) (19.1) Other............................................. 5.9 8.1 2.5 ------- ------- ------- Net cash used in investing activities........... (111.7) (114.5) (111.0) ------- ------- ------- Cash flows from financing activities: Decrease in long-term debt, net................... (0.9) (1.3) (11.5) Increase (decrease) in investments by and advances from Columbia/HCA, net........................... 88.7 15.5 (42.8) ------- ------- ------- Net cash provided by (used in) financing activities..................................... 87.8 14.2 (54.3) ------- ------- ------- Change in cash and cash equivalents................. $ -- $ -- $ -- ======= ======= ======= Interest payments................................... $ 69.4 $ 61.1 $ 52.2 Income tax payments (refunds), net.................. $ (15.9) $ 3.6 $ 46.6
The accompanying notes are an integral part of the combined financial statements. F-21 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS NOTE 1--COLUMBIA/HCA'S PROPOSED SPIN-OFF OF PACIFIC CORPORATION In 1998, the Board of Directors of Columbia/HCA Healthcare Corporation ("Columbia/HCA") approved in principle the spin-off of its operations comprising the Pacific Group to its shareholders (the "Distribution") as an independent, publicly-traded company. The Pacific Group and the independent, publicly-traded company to which its assets and liabilities will be contributed are hereinafter referred to as "Triad Hospitals, Inc." or "Triad." The Distribution is subject to obtaining a tax ruling by the Internal Revenue Service ("IRS") that would allow it to be tax-free to Columbia/HCA and its shareholders, various regulatory approvals and approval of a definitive plan by Columbia/HCA's Board of Directors. Triad is comprised of 39 hospitals (including two facilities that are being leased from Triad and an investment in one hospital that is accounted for using the equity method), 17 free-standing surgery centers (including three surgery centers that are being leased from Triad) and related health care entities located in eleven western, southwestern and southeastern states. The accompanying financial statements, prepared on the pushed down basis of the historical cost to Columbia/HCA, represent the combined financial position, results of operations and cash flows of Triad. In connection with the Distribution, all intercompany amounts payable by Triad to Columbia/HCA will be eliminated, and Triad will assume certain indebtedness from Columbia/HCA. In addition, Triad will enter into various agreements with Columbia/HCA which are intended to facilitate orderly changes for both companies in a way which will be minimally disruptive to each entity. The combined financial statements included herein may not necessarily be indicative of the results of operations, financial position and cash flows of Triad in the future or had it operated as a separate, independent company during the periods presented. The combined financial statements included herein do not reflect any changes that may occur in the financing and operations of Triad as a result of the Distribution. NOTE 2--ACCOUNTING POLICIES Principles of Combination The combined financial statements include the accounts of Triad and all affiliated subsidiaries and entities controlled by Triad through Triad's direct or indirect ownership of a majority voting interest. Significant intercompany transactions within Triad have been eliminated. Investments in entities which Triad does not control, but in which it has a substantial ownership interest and can exercise significant influence, are accounted for using the equity method. The preparation of the combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Equity Equity represents the net investment in and advances to Triad by Columbia/HCA. It includes common stock, additional paid-in-capital, net earnings and net intercompany balances with Columbia/HCA. Intercompany balances represent the net excess of funds transferred to or paid on behalf of Triad over funds transferred to the centralized cash management account of Columbia/HCA. Generally, this balance is increased by cash transfers from and payments of debt made by Columbia/HCA, construction project additions paid by Columbia/HCA, and certain fees and services provided by Columbia/HCA, including information systems services and other operating expenses, such as payroll, interest, insurance and income taxes. Generally, the balance is decreased through daily cash deposits by Triad to the account. Triad is charged interest on the intercompany balances at various rates ranging from 6% to 10% and the interest computations are based on the outstanding balance at each month end. The net intercompany balances were $596.7 million and $525.0 million at December 31, 1998 and December 31, 1997, respectively. Interest expense related to the net intercompany balances was $68.0 million, $59.6 million and $51.0 million for the years ended December 31, 1998, 1997 and 1996, respectively. F-22 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 2--ACCOUNTING POLICIES (continued) Revenues Triad's health care facilities have entered into agreements with third-party payers, including government programs and managed care health plans, under which the facilities are paid based upon established charges, the cost of providing services, predetermined rates per diagnosis, fixed per diem rates or discounts from established charges. Revenues are recorded at estimated amounts due from patients and third-party payers for the health care services provided. Settlements under reimbursement agreements with third-party payers are estimated and recorded in the period the related services are rendered and are adjusted in future periods as final settlements are determined. The net adjustments to estimated settlements resulted in increases to revenues of $3.0 million and $32.4 million for the years ended December 31, 1998 and 1996, respectively (adjustments for 1997 netted to zero). In association with the ongoing Federal investigations into certain of Columbia/HCA's business practices, the applicable governmental agencies have ceased the settlement of cost reports. Since the cost reports are not being settled, the Company is not receiving updated information which has historically been the basis used to adjust estimated settlement amounts. At this time, the Company cannot predict when, or if, the historical cost report settlement process will be resumed. Management believes that adequate provisions have been made for adjustments that may result from final determination of amounts earned under these programs. Triad provides care without charge to patients who are financially unable to pay for the health care services they receive. Because Triad does not pursue collection of amounts determined to qualify as charity care, they are not reported in revenues. Accounts Receivable Triad receives payment for services rendered from federal and state agencies (under the Medicare, Medicaid and CHAMPUS programs), managed care health plans, commercial insurance companies, employers and patients. During the years ended December 31, 1998, 1997 and 1996, approximately 34.6%, 35.4% and 36.5%, respectively, of Triad's revenues related to patients participating in the Medicare program. Triad recognizes that revenues and receivables from government agencies are significant to its operations, but it does not believe that there are significant credit risks associated with these government agencies. Triad does not believe that there are any other significant concentrations of revenues from any particular payer that would subject it to any significant credit risks in the collection of its accounts receivable. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Long-Lived Assets (a) Property and Equipment Property and equipment are stated at cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase capacities or extend useful lives are capitalized. Depreciation expense, computed using the straight-line method, was $99.0 million, $90.8 million and $83.2 million for the years ended December 31, 1998, 1997 and 1996, respectively. Buildings and improvements are depreciated over estimated useful lives ranging generally from 10 to 40 years. Estimated useful lives of equipment vary generally from 3 to 10 years. (b) Intangible Assets Intangible assets consist primarily of costs in excess of the fair value of identifiable net assets of acquired entities and are amortized using the straight-line method, generally over periods ranging from 30 to 40 years for F-23 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 2--ACCOUNTING POLICIES (continued) hospital acquisitions and periods ranging from 5 to 20 years for physician practice and clinic acquisitions. Noncompete agreements and debt issuance costs are amortized based upon the terms of the respective contracts or loans. When events, circumstances and operating results indicate that the carrying values of certain long-lived assets and the related identifiable intangible assets might be impaired, Triad prepares projections of the undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the projections indicate that the recorded amounts are not expected to be recoverable, such amounts are reduced to estimated fair value. Income Taxes Columbia/HCA files consolidated federal and state income tax returns which includes all of its eligible subsidiaries, including Triad. The provisions for income taxes (benefits) in the combined statements of operations for all periods presented have been computed on a separate return basis (i.e., assuming Triad had not been included in a consolidated income tax return with Columbia/HCA). All income tax payments are made by Triad through Columbia/HCA. Deferred tax assets and liabilities result principally from certain revenue and expense items being recognized for tax purposes in years other than the year in which they are reflected in the combined financial statements. General and Professional Liability Risks Columbia/HCA assumes the liability for all general and professional liability claims incurred through the distribution date. The cost of general and professional liability coverage is allocated by Columbia/HCA's captive insurance company to Triad based on actuarially determined estimates. Triad intends to continue the general and professional coverage with Columbia/HCA under the same general terms, through December 31, 1999. The cost for the years ended December 31, 1998, 1997 and 1996 was approximately $27.0 million, $22.9 million and $21.4 million, respectively. Triad participates in a self-insured program for workers' compensation and health insurance administered by Columbia/HCA. Columbia/HCA will retain sole responsibility for all workers' compensation and health claims incurred prior to the distribution date. The cost for these programs is based upon claims paid, plus an actuarially determined amount for claims incurred but not reported. The cost for the years ended December 31, 1998, 1997 and 1996 was approximately $8.1 million, $8.1 million and $7.6 million, respectively. Management Fees Columbia/HCA incurs various corporate general and administrative expenses. These corporate overhead expenses are allocated to Triad based on net revenues. In the opinion of management, this allocation method is reasonable. The management fees allocated to Triad are not materially different from management's estimate of the general and administrative costs that would have been incurred if Triad had been a separate, independent entity and had otherwise managed comparable general and administrative functions. Subsequent to the Distribution, Triad will be required to manage these functions and will be responsible for the expenses associated with the management of a separate public corporation. Disclosures about Segments of an Enterprise In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). F-24 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 2--ACCOUNTING POLICIES (continued) SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Triad will adopt the new requirements in the annual report following the Distribution as identification of the reportable operating segments has not been determined by management at this time. Disclosures of Derivative Instruments In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 1999. Because of Triad's minimal use of derivatives, management does not anticipate that the adoption of the new statement will have a significant effect on earnings or the financial position of Triad. NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS Columbia/HCA is currently the subject of several Federal investigations into certain of its business practices, as well as governmental investigations by various states. Columbia/HCA is cooperating in these investigations and understands, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future. Columbia/HCA is a defendant in several qui tam actions brought by private parties on behalf of the United States of America, which have been unsealed and served on Columbia/HCA. The actions allege, in general, that Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated the False Claims Act for improper claims submitted to the government for reimbursement. The lawsuits seek damages of three times the amount of all Medicare or Medicaid claims (involving false claims) presented by the defendants to the Federal government, civil penalties of not less than $5,000 nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The government has intervened in two qui tam actions. Columbia/HCA is aware of additional qui tam actions that remain under seal and believes that there are other sealed qui tam cases of which it is unaware. Columbia/HCA is a defendant in a number of other suits, which allege, in general, improper and fraudulent billing, overcharging, coding and physician referrals, as well as other violations of law. Certain of the suits have been conditionally certified as class actions. It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam and other actions, or whether any additional investigations or litigation will be commenced. If Columbia/HCA is found to have violated Federal or state laws relating to Medicare, Medicaid or similar programs, Columbia/HCA could be subject to substantial monetary fines, civil and criminal penalties, and exclusion from participation in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui tam and other actions may be substantial, and Columbia/HCA could be subject to substantial costs resulting from an adverse outcome of one or more of such actions. Any such sanctions or losses could have a material adverse effect on Columbia/HCA's financial position and results of operations. F-25 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 3--COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS (continued) Columbia/HCA has agreed to indemnify Triad in respect of any losses which it may incur as a result of the proceedings described above. Columbia/HCA has also agreed to indemnify Triad in respect of any losses which it may incur as a result of proceedings which may be commenced by government authorities or by private parties in the future that arise from acts, practices or omissions engaged in prior to the Distribution Date and relate to the proceedings described above. If any of such indemnified matters were successfully asserted against Triad, or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations, then such losses could have a material adverse effect on the financial position and results of operations of Triad (See Note 11--Contingencies). NOTE 4--INCOME TAXES The provision for income taxes (benefit) for the years ended December 31, 1998, 1997 and 1996 consists of the following (dollars in millions):
1998 1997 1996 ------ ----- ----- Current: Federal.......................................... $(12.5) $ 3.0 $40.0 State............................................ (2.3) 0.6 7.4 Deferred: Federal.......................................... (20.8) (9.1) 0.7 State............................................ (3.8) (1.7) 0.1 ------ ----- ----- $(39.4) $(7.2) $48.2 ====== ===== ===== A reconciliation of the federal statutory rate to the effective income tax rate follows: 1998 1997 1996 ------ ----- ----- Federal statutory rate............................. 35.0 % 35.0 % 35.0% State income taxes, net of federal income tax benefit........................................... 3.1 2.4 4.3 Non-deductible intangible assets................... (6.5) (8.8) 2.2 Other items, net................................... (0.2) (1.5) 0.3 ------ ----- ----- Effective income tax rate.......................... 31.4 % 27.1 % 41.8% ====== ===== =====
A summary of the items comprising the deferred tax assets and liabilities at December 31 follows (dollars in millions):
1998 1997 ------------------ ------------------ Assets Liabilities Assets Liabilities ------ ----------- ------ ----------- Depreciation and fixed asset basis differences........................ $ - $63.4 $ - $82.1 Doubtful accounts................... 29.8 - 24.2 - Compensation........................ 8.4 - 8.1 - Other............................... 5.3 4.0 5.4 4.1 ----- ----- ----- ----- $43.5 $67.4 $37.7 $86.2 ===== ===== ===== =====
F-26 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 4--INCOME TAXES (continued) Deferred income taxes of $37.9 million and $31.9 million at December 31, 1998 and 1997, respectively, are included in current assets. Noncurrent deferred income tax liabilities totaled $61.8 million and $80.4 million at December 31, 1998 and 1997, respectively. At December 31, 1998, state net operating loss carryforwards (expiring in years 1999 through 2003) available to offset future taxable income approximated $69.0 million. Utilization of net operating loss carryforwards in any one year may be limited and, in certain cases, result in a reduction of intangible assets. Net deferred tax assets related to such carryforwards are not significant. Columbia/HCA and Triad will enter into a tax sharing and indemnification agreement which will provide that Columbia/HCA will generally be responsible for all taxes that are allocable to periods prior to the distribution date and Columbia/HCA and Triad will each be responsible for its own tax liabilities for periods after the distribution date. NOTE 5--IMPAIRMENT OF LONG-LIVED ASSETS Triad adopted Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of ("SFAS 121"), during the first quarter of 1996. SFAS 121 addresses accounting for the impairment of long-lived assets and long-lived assets to be disposed of, certain identifiable intangibles and goodwill related to those assets, and provides guidance for recognizing and measuring impairment losses. The statement requires that the carrying amount of impaired assets be reduced to fair value. During the third and fourth quarters of 1998 Triad decided to sell certain hospital facilities and surgery centers that were identified as not compatible with Triad's operating plans, based upon management's review of all facilities, and giving consideration to current and expected competition in each market, expected population trends in each market and the current and expected capital needs in each market. The carrying value of the long-lived assets related to certain of these facilities (4 hospital facilities and one surgery center), of approximately $75.7 million, was reduced to fair value, based on estimates of selling values, for a total non-cash charge of $31.1 million. For the years ended December 31, 1998, 1997 and 1996, respectively, these facilities to be divested had net revenues of approximately $91.8 million, $97.8 million and $104.1 million and incurred losses from continuing operations before income tax benefit and the asset impairment charge of approximately $(30.4) million, $(28.2) million and $(11.7) million. Triad expects to complete the sales of these facilities during 1999. Triad recorded, during the fourth quarters of 1998 and 1997, impairment losses of approximately $24.0 million and $13.7 million, respectively, related to one hospital facility in 1998 and intangibles and other long-lived assets of certain surgery centers and physician practices in 1997, where the recorded asset values were not deemed to be fully recoverable based upon the operating results trends and projected future cash flows. These assets are now recorded at estimated fair value. The impairment charges did not have a significant impact on Triad's cash flows and are not expected to significantly impact cash flows for future periods. As a result of the write-downs, depreciation and amortization expense related to these assets will decrease in future periods. In the aggregate, the net effect of the change in depreciation and amortization expense is not expected to have a material effect on operating results for future periods. NOTE 6--DISCONTINUED OPERATIONS During the fourth quarter of 1998, Columbia/HCA and Triad completed the divestiture of their home health businesses. Columbia/HCA and Triad implemented plans to sell the home health businesses during the third quarter of 1997. The combined financial statements reflect the results of operations and net assets of the home health businesses as discontinued operations. F-27 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 6--DISCONTINUED OPERATIONS (continued) Revenues for the home health businesses disposed of were approximately $38.3 million, $74.4 million and $79.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. The after-tax loss incurred upon the divestiture of the home health businesses of $(2.9) million was recorded during the fourth quarter of 1997 and is presented in the "Discontinued operations" section of the combined statements of operations. NOTE 7--ACCOUNTING CHANGE During 1997, Triad changed its method of accounting for start-up costs. The change involved expensing these costs as incurred, rather than capitalizing and subsequently amortizing such costs. Triad believes the new method is preferable due to certain changes in business strategy and reviews of emerging accounting guidance on accounting for similar (i.e., start-up, software system training and process reengineering) costs. The change in accounting principle resulted in the write-off of the costs capitalized as of January 1, 1997. The cumulative effect of the write-off, which totals $2.8 million (net of tax benefit), has been expensed and reflected in the statements of operations for the year ended December 31, 1997. Had the new method been used in the past, the pro forma effect on prior years would have primarily affected 1996 (such costs incurred for periods prior to 1996 are considered immaterial to operations for those periods). The pro forma effect on the years ended December 31, 1997 and 1996 follows (dollars in millions):
1997 1996 ------------------ ------------------ As As Reported Pro Forma Reported Pro Forma -------- --------- -------- --------- Income (loss) from continuing operations......................... $(19.0) $(19.0) $68.3 $65.5 Net income (loss)................... $(19.8) $(17.0) $74.7 $71.9
NOTE 8--LONG TERM DEBT A summary of long-term debt follows (including related interest rates at December 31, 1998), (dollars in millions):
1998 1997 ----- ----- Total debt, average life of 5 years (rates averaging 5.7%)..... $14.4 $15.4 Less amounts due within one year............................... 1.0 1.0 ----- ----- $13.4 $14.4 ===== =====
In connection with the Distribution, all amounts payable by Triad to Columbia/HCA (included in "Equity, investments by and advances from Columbia/HCA" in the combined balance sheet) will be eliminated, and Triad will assume certain indebtedness from Columbia/HCA. NOTE 9--STOCK BENEFIT PLANS Triad employees have participated in the Columbia/HCA Healthcare Corporation 1992 Stock and Incentive Plan (the "1992 Plan"). Under the 1992 Plan, stock options are generally granted at no less than the market price on the date of grant. Options are exercisable in whole or in part beginning two to five years after the grant and ending ten years after the grant. The number of options granted to Triad employees under Columbia/HCA's option plan was approximately 327,400 options, 1,121,800 options and 487,091 options, during 1998, 1997 and 1996, respectively. F-28 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 9--STOCK BENEFIT PLANS (continued) Immediately following the Distribution, nonvested Columbia/HCA stock options held by Triad employees will be cancelled and Triad may, in its discretion, grant unvested stock option awards. The vested Columbia/HCA stock options held by Triad employees will generally be converted into a combination of Triad stock options, Columbia/HCA stock options and stock options of Columbia/HCA's other spin-off company, LifePoint Hospitals, Inc., in a manner that preserves the pre-spin-off intrinsic value and the pre-spin-off ratio of the exercise prices to the underlying market value of the related common stock. At December 31, 1998 there were approximately 2,482,800 Columbia/HCA stock options held by Triad employees. That amount includes an aggregate of approximately 2,011,400 unvested options that will be cancelled. Triad cannot currently determine the number of shares of its common stock that will be subject to any discretionary grants of options by Triad after the Distribution. Triad has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, but continues to measure stock-based compensation cost in accordance with Accounting Principles Board Opinion No. 25 and its related interpretations. If Triad had measured compensation cost for the Columbia/HCA stock options granted to its employees during 1998, 1997 and 1996 under the fair value based method prescribed by SFAS 123, the net income (loss) would have been changed to the pro forma amounts set forth below (dollars in millions):
1998 1997 1996 ------- ------- ------- Net income (loss) Reported......................................... $(87.1) $(19.8) $74.7 Pro forma........................................ $(88.0) $(20.8) $74.3 The fair values of Columbia/HCA stock options granted to Triad employees used to compute pro forma net income disclosures were estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions used by Columbia/HCA: 1998 1997 1996 ------- ------- ------- Risk free interest rate............................ 4.74% 5.61% 5.81% Expected life...................................... 6 years 6 years 6 years Expected volatility................................ 23.90% 23.90% 23.90% Expected dividend yield............................ .30% .23% .19%
The weighted-average fair values of Columbia/HCA stock options granted to Triad employees during the years ended 1998, 1997 and 1996 were $8.77, $12.03 and $13.47 per option, respectively. The pro forma amounts above are not necessarily representative of the effects of stock-based awards on future pro forma net income because (1) future grants of employee stock options by management may not be comparable to awards made to employees while Triad was a part of Columbia/HCA, (2) the assumptions used to compute the fair value of any stock option awards will be specific to Triad and therefore may not be comparable to the Columbia/HCA assumptions used and (3) they exclude the pro forma compensation expense related to unvested stock options granted before 1996. NOTE 10--RETIREMENT PLANS Triad participates in Columbia/HCA's defined contribution retirement plans, which cover substantially all employees. Benefits are determined primarily as a percentage of a participant's earned income and are vested over specific periods of employee service. Retirement plan expense was $21.0 million, $18.6 million and $15.9 million for the years ended December 31, 1998, 1997 and 1996, respectively. Amounts approximately equal to retirement plan expense are funded annually. F-29 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 11--CONTINGENCIES Significant Legal Proceedings Various lawsuits, claims and legal proceedings have been and are expected to be instituted or asserted against Columbia/HCA and Triad, including those relating to shareholder derivative and class action complaints; purported class action lawsuits filed by patients and payers alleging, in general, improper and fraudulent billing, coding and physician referrals, as well as other violations of law; certain qui tam or "whistleblower" actions alleging, in general, unlawful claims for reimbursement or unlawful payments to physicians for the referral of patients, as well as other violations and litigation matters. While the amounts claimed may be substantial, the ultimate liability cannot be determined or reasonably estimated at this time due to the considerable uncertainties that exist. Therefore, it is possible that Columbia/HCA's and Triad's results of operations, financial position and liquidity in a particular period could be materially, adversely affected upon the resolution of certain of these contingencies. (See Note 3--Columbia/HCA Investigations, Litigation and Indemnification Rights, for a description of the ongoing government investigations and Columbia/HCA's obligations to indemnify Triad with respect to losses arising from such governmental investigations and related proceedings). General Liability Claims Triad is subject to claims and suits arising in the ordinary course of business, including claims for personal injuries or wrongful restriction of, or interference with, physicians staff privileges. In certain of these actions claimants may ask for punitive damages against Triad, which are usually not covered by insurance. It is management's opinion that the ultimate resolution of pending claims and legal proceedings will not have a material adverse effect on Triad's results of operations or financial position. NOTE 12--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS A summary of other current liabilities as of December 31 follows (in millions):
1998 1997 ----- ----- Employee benefit plans.......................................... $20.7 $20.6 Taxes, other than income........................................ 9.3 8.5 Other........................................................... 8.7 10.1 ----- ----- $38.7 $39.2 ===== =====
A summary of activity in Triad's allowances for doubtful accounts follows (in millions):
Accounts Balances at Additions Written off, Balances Beginning Charged to Net of at End of Period Expense Recoveries of Period ----------- ---------- ------------ --------- Allowances for doubtful accounts: Year ended December 31, 1996..................... $ 59.9 $106.5 $ (63.3) $103.1 Year ended December 31, 1997..................... 103.1 138.5 (104.7) 136.9 Year ended December 31, 1998..................... 136.9 138.4 (119.4) 155.9
F-30 TRIAD HOSPITALS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued) NOTE 13--EARNINGS PER SHARE Triad expects to issue 42,888,940 shares of Triad common stock on the distribution date. Earnings per share information has been presented as if 42,888,940 shares had been outstanding for all periods presented. NOTE 14--UNAUDITED QUARTERLY FINANCIAL INFORMATION The quarterly interim financial information shown below has been prepared by the Company's management and is unaudited. It should be read in conjunction with the audited combined financial statements appearing herein (dollars in millions, except per share amounts).
1998 --------------------------------- First Second Third Fourth ------ ------ ------ ------ Revenues............................. $414.0 $399.8 $389.6 $385.3 Net loss............................. $ (4.5) $(10.1) $(22.1)(a) $(50.4)(b) Basic and diluted loss per share (see Note 13)............................ $(0.10) $(0.24) $(0.51)(a) $(1.18)(b) 1997 --------------------------------- First Second Third Fourth ------ ------ ------ ------ Revenues............................. $433.2 $415.9 $382.8 $377.4 Net income (loss): Income (loss) before accounting change............................ $ 30.0 $ 21.8 $(12.9) $(55.9)(c) Cumulative effect of accounting change............................ (2.8) - - - ------ ------ ------ ------ Net income (loss)................ $ 27.2 $ 21.8 $(12.9) $(55.9) ====== ====== ====== ====== Basic and diluted earnings (loss) per share (see Note 13): Income (loss) before accounting change............................ $ 0.70 $ 0.51 $(0.30) $(1.30)(c) Cumulative effect of accounting change............................ (0.07) - - - ------ ------ ------ ------ Net income (loss)................ $ 0.63 $ 0.51 $(0.30) $(1.30) ====== ====== ====== ======
- -------- (a) During the third quarter of 1998, Triad recorded a $19.3 million pretax charge related to the impairment of certain long-lived assets (See Note 5-- Impairment of Long-lived Assets). (b) During the fourth quarter of 1998, Triad recorded a $35.8 million pretax charge related to the impairment of certain long-lived assets (See Note 5-- Impairment of Long-lived Assets). (c) During the fourth quarter of 1997, Triad recorded a $13.7 million pretax charge related to the impairment of certain long-lived assets (See Note 5-- Impairment of Long-lived Assets). F-31 EX-2.2 3 FORM OF DISTRIBUTION AGREEMENT EXHIBIT 2.2 Distribution Agreement Dated as of ________ __, 1999 By and Among Columbia/HCA Healthcare Corporation, LifePoint Hospitals, Inc. and Triad Hospitals, Inc. Table of Contents
Page ---- Article I Definitions........................................................................................ 1 Section 1.1.............. Definitions........................................................................................ 1 Article II Pre-Distribution Transactions; Certain Covenants................................................... 9 Section 2.1.............. Restructuring Transactions......................................................................... 9 Section 2.2.............. Consents........................................................................................... 9 Section 2.3.............. Transfer and Assignment of Certain Licenses and Permits............................................ 9 Section 2.4.............. Transfer and Assignment of Certain Business Agreements............................................. 9 Section 2.5.............. Transfers Not Effected Prior to the Distribution Date; Transfers Deemed Effective as of the Distribution Date............................................ 10 Section 2.6.............. Securities Matters................................................................................. 11 Section 2.7.............. Conduct Prior to the Distribution Date............................................................. 12 Section 2.8.............. Resignations....................................................................................... 12 Section 2.9.............. Election of Officers............................................................................... 12 Section 2.10............. Other Agreements................................................................................... 12 Article III The Distribution................................................................................... 13 Section 3.1.............. Conditions Precedent to the Distribution........................................................... 13 Section 3.2.............. No Constraint...................................................................................... 14 Section 3.3.............. The Distribution................................................................................... 14 Section 3.4.............. Fractional Shares.................................................................................. 14 Article IV Covenants.......................................................................................... 15 Section 4.1.............. Further Assurances................................................................................. 15 Section 4.2.............. Certain Intellectual Property Matters.............................................................. 16 Section 4.3.............. Assumption and Satisfaction of Liabilities......................................................... 16 Section 4.4.............. Removal of Certain Guarantees...................................................................... 17 Section 4.5.............. No Representations or Warranties; Consents......................................................... 18 Section 4.6.............. Limitation on Solicitation of Employees............................................................ 19 Article V Indemnification.................................................................................... 20 Section 5.1.............. Indemnification by Columbia/HCA.................................................................... 20 Section 5.2.............. Indemnification by LifePoint....................................................................... 21 Section 5.3.............. Indemnification by Triad........................................................................... 21 Section 5.4.............. Limitations on Indemnification Obligations......................................................... 21 Section 5.5.............. Procedures Regarding Indemnification............................................................... 23 Section 5.6.............. Indemnification Payments........................................................................... 25 Section 5.7.............. Cooperation of the Parties with Respect to Actions and Third Party Claims....................................................................................... 25 Section 5.8.............. Contribution....................................................................................... 26 Section 5.9.............. Survival of Indemnities; Exclusive Remedy.......................................................... 26 Article VI Ancillary Agreements............................................................................... 27 Section 6.1.............. Generally.......................................................................................... 27
i
Page ---- Article VII Accounting Matters................................................................................ 27 Section 7.1.............. Settlement of Intercompany Accounts................................................................ 27 Section 7.2.............. Allocation of Prepaid Items and Reserves........................................................... 28 Section 7.3.............. Accounting Treatment of Assets Transferred and Liabilities Assumed............................................................................................ 28 Article VIII Government Programs................................................................................ 28 Section 8.1.............. Medicare Provider, Medicaid Provider and Cost-Based Blue Cross Provider Receivables and Payables............................................................ 28 Section 8.2.............. Medicare and Medicaid Appeals...................................................................... 29 Section 8.3.............. Medicare Provider, Medicaid Provider and Cost-Based Blue Cross Provider Cost Reports........................................................................ 29 Section 8.4.............. Cooperation on Medicare Matters.................................................................... 30 Article IX Corporate Records and Information.................................................................. 31 Section 9.1.............. Provision, Transfer and Delivery of Applicable Corporate Records............................................................................................ 31 Section 9.2.............. Access to Information.............................................................................. 32 Section 9.3.............. Confidentiality.................................................................................... 32 Section 9.4.............. Litigation Cooperation............................................................................. 33 Section 9.5.............. Retention of Records............................................................................... 34 Section 9.6.............. Privileged Matters................................................................................. 34 Section 9.7.............. Certain Matters.................................................................................... 36 Article X Interest On Payments............................................................................... 37 Section 10.1............. Interest on Payments............................................................................... 37 Article XI Miscellaneous...................................................................................... 37 Section 11.1............. Allocation of Costs and Expenses................................................................... 37 Section 11.2............. Termination; Amendment............................................................................. 38 Section 11.3............. Disputes........................................................................................... 38 Section 11.4............. Consent to Jurisdiction............................................................................ 39 Section 11.5............. Waiver of Jury Trial............................................................................... 39 Section 11.6............. Notices............................................................................................ 40 Section 11.7............. Entire Agreement................................................................................... 41 Section 11.8............. Assignment......................................................................................... 41 Section 11.9............. Survival of Agreements and Covenants............................................................... 41 Section 11.10............ No Third Party Beneficiaries....................................................................... 41 Section 11.11............ Waiver............................................................................................. 41 Section 11.12............ Severability....................................................................................... 42 Section 11.13............ Governing Law...................................................................................... 42 Section 11.14............ Counterparts....................................................................................... 42 Section 11.15............ Headings........................................................................................... 43
ii Distribution Agreement Distribution Agreement (this "Agreement") dated as of ________ __, 1999 by and among Columbia/HCA Healthcare Corporation, a Delaware corporation (together with its successors and permitted assigns, "Columbia/HCA"), LifePoint Hospitals, Inc., a Delaware corporation (together with its successors and permitted assigns, "LifePoint"), and Triad Hospitals, Inc., a Delaware corporation (together with its successors and permitted assigns, "Triad"). W i t n e s s e t h: - - - - - - - - - - Whereas, the Board of Directors of Columbia/HCA has determined that it is in the best interests of Columbia/HCA and its stockholders (i) to separate certain of the businesses of Columbia/HCA and its Subsidiaries from the other businesses conducted by Columbia/HCA and its Subsidiaries by transferring certain businesses to each of LifePoint and Triad, (ii) to distribute on a pro rata basis to the holders of Columbia/HCA Common Stock (as hereinafter defined) all of the outstanding shares of LifePoint Common Stock (as hereinafter defined) and Triad Common Stock (as hereinafter defined) owned by Columbia/HCA (which, as of the Distribution Date (as hereinafter defined), will constitute 100% of the issued and outstanding shares of LifePoint Common Stock and Triad Common Stock), and (iii) to effect the other transactions contemplated by this Agreement; and Whereas, the parties have determined that it is necessary and desirable to set forth in this Agreement the principal corporate transactions required to effect the Distribution (as hereinafter defined) and to set forth other agreements that will govern certain other matters following such Distribution; Now, Therefore, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, the parties hereto hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1. Definitions. As used herein, the following terms have the ----------- following meanings: "Action" means any action, suit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority or arbitration tribunal, whether at law or in equity. "Affiliate" means, with respect to a specified person, any person that directly or indirectly controls, is controlled by or is under common control with the -1- specified person. A person shall be deemed to control another person if such first person has the power to direct or cause the direction of the management and policies of such other person, whether through ownership of voting securities, by contract or otherwise. "Ancillary Agreements" means all of the agreements identified on Exhibit A hereto. - --------- "Assets" means all properties, rights, contracts, leases and claims, of every kind and description, wherever located, whether tangible or intangible, and whether real, personal or mixed. "Benefits Agreement" means the Benefits and Employment Matters Agreement by and among Columbia/HCA, LifePoint and Triad, entered into on or before the Distribution Date, as amended from time to time. "Books and Records" means all books, records, manuals, agreements and other materials (in any form or medium), including, without limitation, all mortgages, licenses, indentures, contracts, financial data, customer lists, marketing materials and studies, advertising materials, price lists, correspondence, distribution lists, supplier lists, production data, sales and promotional materials and records, purchasing materials and records, personnel records, manufacturing and quality control records and procedures, blue prints, research and development files, records, data and laboratory books, account records, sales order files, litigation files, computer files, microfiche, tape recordings, photographs, patient and medical records, and Medicare files, workpapers, manuals and similar documents. "Code" means the Internal Revenue Code of 1986, as amended. "Columbia/HCA Assets" means the Assets of Columbia/HCA and its Subsidiaries, after giving effect to the Restructuring Transactions and the Distribution. Any positive recovery which results from resolution of a proceeding or claim which is an Indemnified Matter shall be deemed to be a Columbia/HCA Asset. "Columbia/HCA Common Stock" means the outstanding shares of common stock, $0.01 par value per share, and nonvoting common stock, $0.01 par value per share, of Columbia/HCA. "Columbia/HCA Group" means Columbia/HCA and its Subsidiaries, after giving effect to the Restructuring Transactions and the Distribution. "Columbia/HCA Group Business" means the business now or formerly conducted by Columbia/HCA and its present and former Subsidiaries, but excluding (i) the LifePoint Group Business and (ii) the Triad Group Business. "Columbia/HCA Group Records" is defined in Section 9.1(a) below. -------------- -2- "Columbia/HCA Indemnitees" means (i) Columbia/HCA and, after giving effect to the Restructuring Transactions and the Distribution, each of its Affiliates, and (ii) each of the directors, officers, employees and agents of the entities described in the immediately preceding clause (i) and each of the heirs, executors, successors and assigns of any of such directors, officers, employees and agents. "Columbia/HCA Liabilities" means (i) Liabilities, whether arising before, on or after the Distribution Date, incurred in connection with the conduct or operation of the Columbia/HCA Group Business, or ownership or use of the Columbia/HCA Assets; (ii) Liabilities arising from any claim against LifePoint, Triad, or any of their Affiliates, which claim is based upon facts and circumstances occurring prior to the Distribution Date and is covered by an insurance policy maintained by Columbia/HCA and listed on Exhibit H hereto, without regard to deductible amounts, coinsurance amounts or policy limits, and (iii) Liabilities arising from any worker's compensation claim against LifePoint, Triad, or any of their Affiliates if the injury or condition giving rise to the claim was incurred on or before the Distribution Date. "Commission" means the Securities and Exchange Commission. "Consents" is defined in Section 2.2 below. ----------- "Conveyancing and Assumption Instruments" shall mean, collectively, the various agreements, instruments and other documents heretofore entered into and to be entered into to effect the transfer of Assets and the assumption of Liabilities in the manner contemplated by this Agreement, or otherwise arising out of or relating to the transactions contemplated by this Agreement, which shall be in such form as the parties agree. "Disputes" is defined in Section 11.3(a) below. --------------- "Distribution" means the LifePoint Distribution and the Triad Distribution, collectively. "Distribution Agent" means National City Bank, in its capacity as distribution agent. "Distribution Date" means the date on which the Distribution shall be effective, as determined by the Board of Directors of Columbia/HCA. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Facilities" is defined in Section 8.1 below. ----------- "Government Investigations" is defined in Section 5.1 below. ----------- -3- "Governmental Authority" means any federal, state, local, foreign or international government, agency, bureau, board, commission, court, department, official, or other regulatory, administrative or governmental authority. "Group" means any of the Columbia/HCA Group, the LifePoint Group or the Triad Group, as the context requires. "HCFA" means the United States Health Care Financing Administration. "Indemnified Matters" is defined in Section 5.1 below. ----------- "Indemnifying Party" is defined in Section 5.4(a) below. -------------- "Indemnitee" is defined in Section 5.4(a) below. -------------- "Information Statement" means the information statement to be sent in connection with the Distribution to holders of record of Columbia/HCA Common Stock at the close of business on the Record Date. "Insurance Allocation and Administration Agreement" means the Insurance Allocation and Administration Agreement by and among Columbia/HCA, LifePoint and Triad, entered into on or before the Distribution Date, as amended from time to time. "Insurance Proceeds" means, with respect to any insured party, those monies, net of any applicable premium adjustment, retrospectively-rated premium, deductible, retention or cost of reserve paid or held by or for the benefit of such insured party, which are either: (i) received by an insured party from an insurance carrier or (ii) paid by an insurance carrier on behalf of an insured party. "IRS" means the Internal Revenue Service. "Law" means all laws, statutes and ordinances and all regulations, rules and other pronouncements of Governmental Authorities having the effect of law of the United States, any foreign country or any foreign or domestic state, province, commonwealth, city, country, municipality, territory, protectorate, possession or similar instrumentality or any Governmental Authority thereof. "Liabilities" means any and all claims, debts, liabilities and obligations, absolute or contingent, matured or not matured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, including all costs and expenses relating thereto, and including, without limitation, those debts, liabilities and obligations arising under this Agreement, under any law, rule, regulation, action, order, injunction or decree of any governmental entity or under any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. -4- "LifePoint Assets" means all Assets reflected as Assets of LifePoint on the LifePoint Balance Sheet and all other Assets that are determined by Columbia/HCA in its sole discretion to be associated primarily or exclusively with the LifePoint Group Business. "LifePoint Balance Sheet" means the most recent consolidated balance sheet of LifePoint included in the LifePoint Form 10. "LifePoint By-laws" means the By-laws of LifePoint in the form attached as Exhibit B hereto. "LifePoint Certificate" means the certificate of incorporation of LifePoint in the form attached as Exhibit C hereto. --------- "LifePoint Common Stock" means the outstanding shares of common stock, $0.01 par value per share, of LifePoint. "LifePoint Distribution" means the distribution on the Distribution Date of all outstanding shares of LifePoint Common Stock owned by Columbia/HCA to the holders of Columbia/HCA Common Stock at the close of business on the Record Date. "LifePoint Form 10" means the registration statement filed on Form 10 pursuant to the Exchange Act (File No. 1-14693), which was declared effective by the Commission on _________ __, 1999, as such registration statement was amended through the effective date. "LifePoint Group" means LifePoint and its Subsidiaries, as constituted upon completion of the Restructuring Transactions. "LifePoint Group Business" means the business conducted by LifePoint and its Subsidiaries, as described in the LifePoint Form 10. "LifePoint Group Records" is defined in Section 9.1(b) below. -------------- "LifePoint Indemnitees" means (i) LifePoint and, after giving effect to the Restructuring Transactions and the Distribution, each of its Affiliates, and (ii) each of the directors, officers, employees and agents of the entities described in the immediately preceding clause (i) and each of the heirs, executors, successors and assigns of any of such directors, officers, employees and agents. "LifePoint Liabilities" means (i) Liabilities of LifePoint or, after giving effect to the Restructuring Transactions and the Distribution, any of its Subsidiaries, whether arising before, on or after the Distribution Date, including all Liabilities incurred in connection with the conduct or operation of any LifePoint Group Business, the ownership or use of any of the LifePoint Assets, or the establishment or maintenance of, or contributions to, any employee benefit plan (as defined in Section 3(3) of ERISA) for the benefit of persons employed by any LifePoint Group Business, (ii) Liabilities arising -5- in connection with any transfer or attempted transfer of any Asset to the LifePoint Group, including without limitation, Liabilities arising in connection with the failure to obtain any Consent or to comply with any requirement of Law, (iii) Liabilities arising under or in connection with the LifePoint Form 10 (other than in respect of disclosure in the LifePoint Form 10 set forth under the captions "Summary--Columbia/HCA Healthcare Corporation" and "Governmental Investigation of Columbia/HCA and Related Litigation"), and (iv) all Liabilities reflected as liabilities or obligations on the LifePoint Balance Sheet; provided, however, that the following Liabilities are not LifePoint Liabilities: (1) Liabilities arising from any claim based upon facts and circumstances occurring prior to the Distribution Date and covered by an insurance policy maintained by Columbia/HCA and listed on Exhibit H hereto, without regard to deductible amounts, coinsurance amounts or policy limits, (2) Liabilities arising from any worker's compensation claim if the injury or condition giving rise to the claim was incurred on or before the Distribution Date, and (3) Liabilities that are Columbia/HCA Liabilities or Triad Liabilities. "Listing" means the listing of the LifePoint Common Stock and the Triad Common Stock on NASDAQ. "Losses" means, with respect to any matter for which a person is entitled to indemnification pursuant to Article V hereof (including any Indemnified Matter), any and all losses, liabilities, damages, settlements, claims, fines, penalties, costs and expenses (including reasonable attorneys' fees, but excluding time spent by employees of such person and excluding any consequential damages) actually incurred by such person arising from such matter. "NASDAQ" means the National Association of Securities Dealers Automated Quotation System. "Privilege" is defined in Section 9.6(a) below. -------------- "Privileged Information" is defined in Section 9.6(c) below. -------------- "Record Date" means such date as is designated by Columbia/HCA's Board of Directors as the record date for determining the stockholders of Columbia/HCA entitled to receive the Distribution. "Restructuring Transactions" means (i) the series of transactions, the form and sequence of which shall be directed by Columbia/HCA in its sole discretion, undertaken for the purpose of (a) assigning, transferring and conveying to LifePoint (or to the appropriate member of the LifePoint Group) the LifePoint Assets, (b) effecting the assumption by LifePoint (or by the appropriate member of the LifePoint Group) of the LifePoint Liabilities, (c) assigning, transferring and conveying to Triad (or to the appropriate member of the Triad Group) the Triad Assets, and (d) effecting the assumption by Triad (or by the appropriate member of the Triad Group) of the Triad Liabilities, and shall also mean (ii) any transaction undertaken at the direction or with the -6- consent of Columbia/HCA for the purpose of confirming the right, title and interest of Columbia/HCA to the Columbia/HCA Assets and the responsibility of Columbia/HCA for the Columbia/HCA Liabilities. "Social Security Act" means the Social Security Act, as amended. "Subsidiary" means, with respect to any entity, (i) any corporation in which such entity, directly or indirectly, owns or controls, at the time of determination, at least a majority in interest of the outstanding voting stock (having by the terms thereof voting power under ordinary circumstances to elect a majority of the directors of such corporation, irrespective of whether or not stock of any other class or classes of such corporation shall have or might have voting power by reason of the occurrence of a contingency); or (ii) any non- corporate entity in which such entity either (a) directly or indirectly, at the time of determination, has at least a majority ownership interest, or (b) at the date of determination, is a general partner or an entity performing similar functions (for example, manager of a limited liability company or a trustee of a trust). "Tax" has the meaning set forth in the Tax Agreement. "Tax Agreement" means the Tax Sharing and Indemnification Agreement by and among Columbia/HCA, LifePoint and Triad, entered into on or before the Distribution Date, as amended from time to time. "Third Party Claim" is defined in Section 5.5(a) below. -------------- "Tradenames" is defined in Section 4.2(a) below. -------------- "Triad Assets" means all Assets reflected as Assets of Triad on the Triad Balance Sheet and all other Assets that are determined by Columbia/HCA in its sole discretion to be associated primarily or exclusively with the Triad Group Business. "Triad Balance Sheet" means the most recent consolidated balance sheet of Triad included in the Triad Form 10. "Triad By-laws" means the By-laws of Triad in the form attached as Exhibit D hereto. - --------- "Triad Certificate" means the certificate of incorporation of Triad in the form attached as Exhibit E hereto. --------- "Triad Common Stock" means the outstanding shares of common stock, $0.01 par value per share, of Triad. "Triad Distribution" means the distribution on the Distribution Date of all outstanding shares of Triad Common Stock owned by Columbia/HCA to the holders of Columbia/HCA Common Stock at the close of business on the Record Date. -7- "Triad Form 10" means the registration statement filed on Form 10 pursuant to the Exchange Act (File No. 1-14695), which was declared effective by the Commission on __________ __, 1999, as such registration statement was amended through the effective date. "Triad Group" means Triad and its Subsidiaries, as constituted upon completion of the Restructuring Transactions. "Triad Group Business" means the business conducted by Triad and its Subsidiaries, as described in the Triad Form 10. "Triad Group Records" is defined in Section 9.1(c) below. -------------- "Triad Indemnitees" means (i) Triad and, after giving effect to the Restructuring Transactions and the Distribution, each of its Affiliates, and (ii) each of the directors, officers, employees and agents of the entities described in the immediately preceding clause (i) and each of the heirs, executors, successors and assigns of any of such directors, officers, employees and agents. "Triad Liabilities" means (i) Liabilities of Triad or, after giving effect to the Restructuring Transactions and the Distribution, any of its Subsidiaries, whether arising before, on or after the Distribution Date, including all Liabilities incurred in connection with the conduct or operation of any Triad Group Business, the ownership or use of any of the Triad Assets, or the establishment or maintenance of, or contributions to, any employee benefit plan (as defined in Section 3(3) of ERISA) for the benefit of persons employed by any Triad Group Business, (ii) Liabilities arising in connection with any transfer or attempted transfer of any Asset to the Triad Group, including without limitation, Liabilities arising in connection with the failure to obtain any Consent or to comply with any requirement of Law, (iii) Liabilities arising under or in connection with the Triad Form 10 (other than in respect of disclosure in the Triad Form 10 set forth under the captions "Summary-- Columbia/HCA Healthcare Corporation" and "Governmental Investigation of Columbia/HCA and Related Litigation"), and (iv) all Liabilities reflected as liabilities or obligations on the Triad Balance Sheet; provided, however, that the following Liabilities are not Triad Liabilities: (1) Liabilities arising from any claim based upon facts and circumstances occurring prior to the Distribution Date and covered by an insurance policy maintained by Columbia/HCA and listed on Exhibit H hereto, without regard to deductible amounts, coinsurance amounts or policy limits, (2) Liabilities arising from any worker's compensation claim if the injury or condition giving rise to the claim was incurred on or before the Distribution Date, and (3) Liabilities that are Columbia/HCA Liabilities or LifePoint Liabilities. -8- ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS Section 2.1. Restructuring Transactions. Each of Columbia/HCA, -------------------------- LifePoint and Triad shall take all necessary action to cause, effect and consummate the Restructuring Transactions. In connection with the Restructuring Transactions, the parties shall execute or cause to be executed by the appropriate entities the Conveyancing and Assumption Instruments. Any transfers of capital stock shall be effected by means of delivery of stock certificates and executed stock powers and notation on the stock record books of the corporation or other legal entities involved and, to the extent required by applicable law, by notation on public registries. Section 2.2. Consents. The parties hereto shall cooperate and shall -------- use their reasonable efforts to obtain any third-party consents or approvals that are required to consummate the Restructuring Transactions, the Distribution and the other transactions contemplated hereby (the "Consents"). Section 2.3. Transfer and Assignment of Certain Licenses and Permits. ------------------------------------------------------- (a) Licenses and Permits Relating to the LifePoint Group ---------------------------------------------------- Business. On or prior to the Distribution Date, or as soon as reasonably -------- practicable thereafter, each of Columbia/HCA and Triad shall take all necessary action to duly and validly transfer, or cause to be duly and validly transferred, to the appropriate member of the LifePoint Group all transferable licenses, permits and authorizations issued by any Governmental Authority, if any, that relate primarily or exclusively (as determined by Columbia/HCA in its sole discretion) to the LifePoint Group Business but which are held in the name of Columbia/HCA or Triad, or any of their respective Subsidiaries, employees, officers, directors, stockholders or agents. (b) Licenses and Permits Relating to the Triad Group ------------------------------------------------- Business. On or prior to the Distribution Date, or as soon as reasonably -------- practicable thereafter, each of Columbia/HCA and LifePoint shall take all necessary action to duly and validly transfer, or cause to be duly and validly transferred, to the appropriate member of the Triad Group all transferable licenses, permits and authorizations issued by any Governmental Authority, if any, that relate primarily or exclusively (as determined by Columbia/HCA in its sole discretion) to the Triad Group Business but which are held in the name of Columbia/HCA or LifePoint, or any of their respective Subsidiaries, employees, officers, directors, stockholders or agents. Section 2.4. Transfer and Assignment of Certain Business Agreements. ------------------------------------------------------ (a) Transfer and Assignment of LifePoint Group Business --------------------------------------------------- Agreements. On or prior to the Distribution Date, or as soon as ---------- reasonably -9- practicable thereafter, and subject to the limitations set forth in this Section 2.4, each of Columbia/HCA and Triad shall take all necessary ----------- action to assign, transfer and convey, or cause to be assigned, transferred and conveyed, to the appropriate member of the LifePoint Group all of its (or any of its Subsidiaries') right, title and interest in and to any and all agreements, if any, that relate primarily or exclusively (as determined by Columbia/HCA in its sole discretion) to the LifePoint Group Business or any member of the LifePoint Group. (b) Transfer and Assignment of Triad Group Business ------------------------------------------------ Agreements. On or prior to the Distribution Date, or as soon as ---------- reasonably practicable thereafter, and subject to the limitations set forth in this Section 2.4, each of Columbia/HCA and LifePoint shall take all ----------- necessary action to assign, transfer and convey, or cause to be assigned, transferred and conveyed, to the appropriate member of the Triad Group all of its (or any of its Subsidiaries') right, title and interest in and to any and all agreements, if any, that relate primarily or exclusively (as determined by Columbia/HCA in its sole discretion) to the Triad Group Business or any member of the Triad Group. (c) Joint Agreements. Subject to the provisions of this ---------------- Section 2.4, any agreement to which any party hereto (or, after giving ----------- effect to the Restructuring Transactions and the Distribution, any of such party's Subsidiaries) is a party that inures to the benefit of more than one of the Columbia/HCA Group Business, the LifePoint Group Business and the Triad Group Business shall be assigned in part, on or prior to the Distribution Date or as soon as reasonably practicable thereafter, as directed by Columbia/HCA in its sole discretion with the intention that each Group shall continue to possess the rights and benefits, and be subject to the obligations, inuring to its business under such agreement. (d) Obligations of Assignees. The assignee of any agreement ------------------------ assigned, in whole or in part, pursuant to this Section 2.4 shall assume ----------- and agree to pay, perform and fully discharge all obligations of the assignor under such agreement (whether such obligations arose or were incurred prior to, on or subsequent to the Distribution Date and irrespective of whether such obligations have been asserted as of the Distribution Date); provided, however, that each assignor shall promptly upon request from an assignee reimburse such assignee for any payments made by such assignee pursuant to an assigned agreement which were due prior to the Distribution Date, but not timely paid by the assignor. In the case of a partial assignment under Section 2.4(c) above, such assignee shall -------------- assume and agree to pay, perform and discharge the related portion of such obligations as determined in accordance with the terms of the relevant agreement, where determinable on the face thereof, and otherwise as directed by Columbia/HCA in its sole discretion in connection with such partial assignment. Section 2.5. Transfers Not Effected Prior to the Distribution Date; ----------------------------------------------------- Transfers Deemed Effective as of the Distribution Date. To the extent that any - ------------------------------------------------------ transfers contemplated by this Article II shall not have been consummated on or ---------- prior to the -10- Distribution Date, each party hereto shall cooperate (and shall cause each of its Subsidiaries to cooperate) to effect such transfers as promptly following the Distribution Date as shall be practicable. Nothing herein shall be deemed to require any party to, or constitute an agreement to, transfer any Assets or assume any Liabilities which would require the Consent of a third party which Consent had not been obtained or which otherwise by its terms or by operation of Law cannot be transferred or assumed. If any such transfer of Assets or Liabilities has not been consummated, or if an attempted transfer of any Asset would be ineffective or would adversely affect the rights of any party hereto so that such party would not receive all rights to such Asset, from and after the Distribution Date the party required to transfer such Asset shall hold such Asset in trust for the use and benefit of the party entitled thereto (at the expense of the party entitled thereto) or retain such Liability for the account of the party by whom such Liability is to be assumed pursuant hereto, as the case may be, and take such other action as may be reasonably requested by the party to whom such Asset is to be transferred, or by whom such Liability is to be assumed, as the case may be, in order to place such party, insofar as is reasonably possible, in the same position as would have existed had such Asset or Liability been transferred or assumed as contemplated hereby. As and when any such Asset or Liability becomes transferable or assumable, such transfer shall be effected forthwith. As of the Distribution Date, each party hereto (or, as applicable, such Subsidiary of such party) shall be deemed to have acquired (or, as applicable, retained) complete and sole beneficial ownership over all the Assets, together with all rights, powers and privileges incident thereto, and shall be deemed to have assumed in accordance with the terms of this Agreement all the Liabilities, and all duties, obligations and responsibilities incident thereto, which such party (or, after giving effect to the Restructuring Transactions and the Distribution, any Subsidiary of such party) is entitled to acquire or required to assume pursuant to the terms of this Agreement. Section 2.6. Securities Matters. ------------------ (a) LifePoint shall cooperate with Columbia/HCA and Triad to prepare, and Columbia/HCA shall cause to be mailed to the holders of Columbia/HCA Common Stock at the close of business on the Record Date, for receipt by such holders prior to the Distribution Date, the Information Statement. Columbia/HCA and LifePoint shall cooperate in preparing and filing with the Commission any registration statements which it is necessary or advisable to file prior to the Distribution Date in respect of any employee benefit or other plan involving securities of LifePoint contemplated by the Benefits Agreement. (b) Triad shall cooperate with Columbia/HCA and LifePoint to prepare, and Columbia/HCA shall cause to be mailed to the holders of Columbia/HCA Common Stock at the close of business on the Record Date, for receipt by such holders prior to the Distribution Date, the Information Statement. Columbia/HCA and Triad shall cooperate in preparing and filing with the Commission any registration statements which it is necessary or advisable to file prior to the Distribution Date in respect of any employee benefit or other plan involving securities of Triad contemplated by the Benefits Agreement. -11- Section 2.7. Conduct Prior to the Distribution Date. Prior to the -------------------------------------- Distribution Date, the businesses of the LifePoint Group and the Triad Group shall be operated for the sole benefit of Columbia/HCA. Section 2.8. Resignations. ------------ (a) Subject to Section 2.8(d) below, Columbia/HCA shall cause -------------- all of its employees and all of the employees of its Subsidiaries to resign, effective as of 12:01 a.m. on the Distribution Date, from all positions as officers or directors of any Subsidiary of LifePoint in which they serve, and LifePoint shall cause all of its employees and all of the employees of its Subsidiaries to resign, effective as of 12:01 a.m. on the Distribution Date, from all positions as officers or directors of any Subsidiary of Columbia/HCA in which they serve. (b) Subject to Section 2.8(d) below, Columbia/HCA shall cause -------------- all of its employees and all of the employees of its Subsidiaries to resign, effective as of 12:01 a.m. on the Distribution Date, from all positions as officers or directors of any Subsidiary of Triad in which they serve, and Triad shall cause all of its employees and all of the employees of its Subsidiaries to resign, effective as of 12:01 a.m. on the Distribution Date, from all positions as officers or directors of any Subsidiary of Columbia/HCA in which they serve. (c) Subject to Section 2.8(d) below, LifePoint shall cause -------------- all of its employees and all of the employees of its Subsidiaries to resign, effective as of 12:01 a.m. on the Distribution Date, from all positions as officers or directors of any Subsidiary of Triad in which they serve, and Triad shall cause all of its employees and all of the employees of its Subsidiaries to resign, effective as of 12:01 a.m. on the Distribution Date, from all positions as officers or directors of any Subsidiary of LifePoint in which they serve. (d) No person shall be required by any party hereto to resign from any position or office with another party hereto if such person has been appointed by the Board of Directors of the relevant entity to hold such position or office following the Distribution. Section 2.9. Election of Officers. On or prior to the Distribution -------------------- Date, each of Columbia/HCA, LifePoint and Triad shall, as applicable, take all actions necessary and desirable so that, as of the Distribution Date, the executive officers of LifePoint and Triad will be as set forth in the LifePoint Form 10 or the Triad Form 10, as the case may be. Section 2.10. Other Agreements. On or prior to the Distribution Date, ---------------- or (in the case of agreements other than the Ancillary Agreements) as soon as reasonably practicable thereafter, each of Columbia/HCA, LifePoint and Triad shall take all necessary action to execute and deliver, or cause to be executed and delivered, (a) the Ancillary Agreements, and (b) any other agreements in respect of the Restructuring -12- Transactions and the Distribution as are necessary or appropriate in connection with the transactions contemplated hereby and thereby. ARTICLE III THE DISTRIBUTION Section 3.1. Conditions Precedent to the Distribution. The ---------------------------------------- Distribution shall be subject to, in the sole discretion of Columbia/HCA, the fulfillment or waiver of each of the following conditions: (a) the Board of Directors of Columbia/HCA shall have declared the Distribution, established the Record Date and the Distribution Date and any appropriate procedures in connection with the Distribution to the extent not provided for herein; (b) any necessary regulatory approvals shall have been received; (c) the LifePoint Form 10 and the Triad Form 10 each shall have become effective under the Exchange Act and no stop order shall have been entered, and no proceeding for that purpose shall have been initiated or threatened by the Commission with respect thereto; (d) all necessary permits, registrations and consents required under the securities or blue sky laws of states or other political subdivisions of the United States of America in connection with the transactions contemplated by this Agreement shall have been received or become effective; (e) Columbia/HCA shall have elected or caused the election of the Board of Directors of LifePoint, as named in the LifePoint Form 10, and the LifePoint Certificate and the LifePoint By-laws shall be in effect; (f) Columbia/HCA shall have elected or caused the election of the Board of Directors of Triad, as named in the Triad Form 10, and the Triad Certificate and the Triad By-laws shall be in effect; (g) each of the LifePoint Common Stock and the Triad Common Stock shall have been approved for listing on NASDAQ, subject to official notice of issuance; (h) each of the Ancillary Agreements shall have been executed and delivered by the parties thereto and shall be in full force and effect; (i) Columbia/HCA shall have received a private letter ruling from the IRS (in form and substance satisfactory to Columbia/HCA) to the effect -13- that neither the Restructuring Transactions nor the Distribution will be taxable to Columbia/HCA or the stockholders of Columbia/HCA, and in respect of such other matters as Columbia/HCA shall have deemed appropriate or desirable; (j) the Restructuring Transactions shall have been effected; and (k) consummation of the Distribution and the other transactions contemplated hereby shall not be prohibited by Law and no Governmental Authority of competent jurisdiction shall have enacted, issued, promulgated or entered, or shall have threatened to enact, issue, promulgate or enter, any statute, rule, regulation, executive order, decree, injunction or other order (whether temporary, preliminary or permanent) which materially restricts, prevents or prohibits consummation of such transactions. Section 3.2. No Constraint. Notwithstanding the provisions of ------------- Section 3.1 above, the fulfillment or waiver of any or all of the conditions - ----------- precedent to the Distribution set forth therein shall not: (a) create any obligation on the part of Columbia/HCA to effect the Distribution; (b) in any way limit Columbia/HCA's right and power under Section 11.2 below to terminate this Agreement and to abandon the ------------ Distribution; or (c) alter the consequences of any such termination under Section ------- 11.2 below from those specified therein. ---- Section 3.3. The Distribution. On or before the Distribution Date ---------------- subject to satisfaction or waiver of the conditions set forth in this Agreement, Columbia/HCA shall deliver to the Distribution Agent certificates representing all of the then outstanding shares of LifePoint Common Stock and Triad Common Stock owned by Columbia/HCA (which, as of the Distribution Date, will constitute 100% of the issued and outstanding shares of LifePoint Common Stock and Triad Common Stock), endorsed in blank, and shall instruct the Distribution Agent to distribute to each holder of record of Columbia/HCA Common Stock at the close of business on the Record Date certificates representing one share of LifePoint Common Stock and one share of Triad Common Stock for every fifteen shares of Columbia/HCA Common Stock so held. LifePoint agrees to provide all certificates for shares of LifePoint Common Stock that the Distribution Agent shall require to effect the LifePoint Distribution, and Triad agrees to provide all certificates for shares of Triad Common Stock that the Distribution Agent shall require in order to effect the Triad Distribution. Section 3.4. Fractional Shares. Notwithstanding anything herein to ----------------- the contrary, no fractional shares of LifePoint Common Stock or Triad Common Stock shall -14- be issued in connection with the Distribution, and any such fractional share interests to which a stockholder would otherwise be entitled will not entitle such stockholder to vote or to any rights of a stockholder of LifePoint or Triad, as the case may be. In lieu of any such fractional shares, each stockholder who, but for the provisions of this Section 3.4, would be entitled ----------- to receive a fractional share of LifePoint Common Stock or Triad Common Stock pursuant to the LifePoint Distribution or the Triad Distribution, or both, shall be paid cash, without any interest thereon, as hereinafter provided. Columbia/HCA shall instruct the Distribution Agent to determine the number of whole shares and fractional shares of LifePoint Common Stock and Triad Common Stock allocable to each stockholder, to aggregate all such fractional shares into whole shares, to sell the whole shares obtained thereby in the open market at the then prevailing prices on behalf of stockholders who otherwise would be entitled to receive fractional share interests and to distribute to each such stockholder his, her or its ratable share of the total proceeds of such sale, after making appropriate deductions of the amount required for federal income tax withholding purposes and after deducting any applicable transfer taxes. All brokers' fees and commissions incurred in connection with such sales shall be paid by Columbia/HCA. Solely for purposes of computing fractional shares pursuant to this Section 3.4, the beneficial owner of shares of LifePoint Common ----------- Stock or Triad Common Stock held of record in the name of a nominee will be treated as the holder of record of such shares. ARTICLE IV COVENANTS Section 4.1. Further Assurances. From and after the Distribution Date, ------------------ each of the parties hereto will execute and deliver, and cause its Subsidiaries to execute and deliver, such further instruments and documents and take such other actions as any other party hereto may reasonably request in order to carry out the transactions contemplated by this Agreement or by any of the Ancillary Agreements. Without limitation of the foregoing, each of the parties hereto will take, or cause to be taken, all actions, and do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement or by any of the Ancillary Agreements, including, without limitation, executing, and causing its Subsidiaries to execute, such other instruments and documents as may be reasonably required to assign, transfer, convey and vest in the proper party ownership of its respective Assets or to effect the assumption by the proper party of its respective Liabilities, using its reasonable efforts to obtain any Consents, and making any filings and applications and taking all such further reasonable actions as shall be necessary or desirable in order to consummate the transactions contemplated by this Agreement or by the Ancillary Agreements. -15- Section 4.2. Certain Intellectual Property Matters. ------------------------------------- (a) Except as otherwise specifically set forth elsewhere herein, from and after the Distribution Date, no party hereto, directly or indirectly, shall use (or permit any of its Subsidiaries to use) any name or any other trademark or tradename (collectively, the "Tradenames") of any other party hereto (or, after giving effect to the Restructuring Transactions and the Distribution, any Subsidiary of any other party hereto) or any tradename or trademark likely to cause confusion with any such Tradenames. (b) From and after the Distribution Date, each party hereto (and each of their respective Subsidiaries) shall have the right to use existing brochures, packaging, labeling, containers, linens, supplies, advertising materials and any similar materials bearing any Tradenames until the earlier of (i) one year after the Distribution Date and (ii) the date existing stocks of such material are exhausted. Each party hereto shall (and shall cause each of its Subsidiaries to) comply with all applicable laws or regulations in any use of packaging or labeling containing the Tradenames. (c) Each party hereto agrees to use its reasonable efforts to (and to cause each of its Subsidiaries to) cease using the Tradenames of any other party (or, after giving effect to the Restructuring Transactions and the Distribution, any Subsidiary of any other party hereto) on buildings, cars, trucks and other fixed assets as soon as possible but in any event within a period not to exceed one year after the Distribution Date. (d) From and after the Distribution Date, no party hereto shall represent or permit to be represented to any third person that it (or any of its Subsidiaries) has a business affiliation with any other party hereto (or, after giving effect to the Restructuring Transactions and the Distribution, any Subsidiary of any other party hereto), except as expressly permitted by this Section 4.2 or by any of the Ancillary ----------- Agreements. Section 4.3. Assumption and Satisfaction of Liabilities. Except as ------------------------------------------ otherwise specifically set forth in any Ancillary Agreement, from and after the Distribution Date: (a) Columbia/HCA shall take all necessary action to assume, pay, perform and discharge, or cause to be assumed, paid, performed and discharged, all Columbia/HCA Liabilities in accordance with their terms, when determinable, and otherwise as determined in accordance with the practice of the parties prior to the Distribution; (b) LifePoint shall take all necessary action to assume, pay, perform and discharge, or cause to be assumed, paid, performed and discharged, all LifePoint Liabilities in accordance with their terms, when determinable, and -16- otherwise as determined in accordance with the practice of the parties prior to the Distribution; and (c) Triad shall take all necessary action to assume, pay, perform and discharge, or cause to be assumed, paid, performed and discharged, all Triad Liabilities in accordance with their terms, when determinable, and otherwise as determined in accordance with the practice of the parties prior to the Distribution. Section 4.4. Removal of Certain Guarantees. ----------------------------- (a) Removal of Columbia/HCA as Guarantor of LifePoint -------------------------------------------------- Liabilities and Triad Liabilities. Except as otherwise contemplated by the --------------------------------- Restructuring Transactions or as specified in any Ancillary Agreement or on Exhibit F hereto, each of Columbia/HCA, LifePoint and Triad shall use its --------- reasonable efforts to have, on or prior to the Distribution Date, or as soon as practicable thereafter, Columbia/HCA (and, after giving effect to the Restructuring Transactions and the Distribution, any Subsidiary of Columbia/HCA) removed as a guarantor of, or obligor under or for, any LifePoint Group Liability or Triad Group Liability, as the case may be, including, without limitation, in respect of any agreement (or part thereof) assigned to LifePoint or Triad (or, after giving effect to the Restructuring Transactions and the Distribution, any of their respective Subsidiaries) pursuant to Section 2.4 above. ----------- (b) Removal of LifePoint as Guarantor of Columbia/HCA ------------------------------------------------- Liabilities and Triad Liabilities. Except as otherwise contemplated by the --------------------------------- Restructuring Transactions or as specified in any Ancillary Agreement or on Exhibit F hereto, each of Columbia/HCA, LifePoint and Triad shall use its --------- reasonable efforts to have, on or prior to the Distribution Date, or as soon as practicable thereafter, LifePoint (and, after giving effect to the Restructuring Transactions and the Distribution, any Subsidiary of LifePoint) removed as a guarantor of, or obligor under or for, any Columbia/HCA Group Liability or Triad Group Liability, as the case may be, including, without limitation, in respect of any agreement (or part thereof) assigned to Columbia/HCA or Triad (or, after giving effect to the Restructuring Transactions and the Distribution, any of their respective Subsidiaries) pursuant to Section 2.4 above. ----------- (c) Removal of Triad as Guarantor of Columbia/HCA Liabilities --------------------------------------------------------- and LifePoint Liabilities. Except as otherwise contemplated by the ------------------------- Restructuring Transactions or as specified in any Ancillary Agreement or on Exhibit F hereto, each of Columbia/HCA, LifePoint and Triad shall use its reasonable efforts to have, on or prior to the Distribution Date, or as soon as practicable thereafter, Triad (and, after giving effect to the Restructuring Transactions and the Distribution, any Subsidiary of Triad) removed as a guarantor of, or obligor under or for, any Columbia/HCA Group Liability or LifePoint Group Liability, as the case may be, including, without limitation, in -17- respect of any agreement (or part thereof) assigned to Columbia/HCA or LifePoint (or, after giving effect to the Restructuring Transactions and the Distribution, any of their respective Subsidiaries) pursuant to Section ------- 2.4 above. --- (d) Indemnification Relating to Guarantees. If (x) Columbia/HCA, -------------------------------------- LifePoint or Triad, or any of their respective Subsidiaries, as the case may be, cannot be removed as a guarantor or obligor as set forth in Section ------- 4.4(a), (b) or (c) above or (y) Liabilities arise from and after the ------ --- --- Distribution Date but before a guarantor or obligor with reference to any such Liability is removed pursuant to Section 4.4(a), (b) or (c) above, -------------- --- --- then such guarantor or obligor shall be indemnified for all Liabilities incurred by it in its capacity as guarantor or obligor by (i) Columbia/HCA with respect to any Columbia/HCA Liabilities, (ii) LifePoint with respect to any LifePoint Liabilities, and (iii) Triad with respect to any Triad Liabilities. Section 4.5. No Representations or Warranties; Consents. ------------------------------------------ (a) General. Each of the parties hereto understands and agrees ------- that no party hereto, or to any other agreement or document contemplated by this Agreement (including the Ancillary Agreements and Conveyancing and Assumption Instruments, and any agreements or documents contemplated thereby), is making any representation or warranty whatsoever, including, without limitation, any representation or warranty: (i) as to the value or freedom from encumbrance of, or any other matter concerning, any Assets of such party; or (ii) as to the legal sufficiency to convey title to any Asset. Each of the parties hereto confirms that it is not relying on any representation or warranty made by any other party hereto or any other person in connection with its execution and delivery of this Agreement. (b) Disclaimer of Merchantability or Fitness of Assets. Each party hereto understands and agrees that there are no warranties, express or implied, as to the merchantability or fitness of any of the Assets either transferred to or retained by the Columbia/HCA Group, the LifePoint Group or the Triad Group, as the case may be, pursuant to the Restructuring Transactions and the other terms and provisions of this Agreement, any Ancillary Agreement, any Conveyancing and Assumption Instrument or any other agreement or document, and all such Assets which are so transferred will be transferred on an "as is, where is" basis, and the party to which any such Assets are transferred hereunder, or which retains Assets hereunder, shall bear the economic and legal risk that any conveyances of such Assets shall prove to be insufficient or that the title of such -18- party or any other member of its respective Group to any such Assets shall be other than good and marketable and free from encumbrances. (c) Acknowledgment of Disclosure and Waiver. Each of LifePoint --------------------------------------- and Triad acknowledges, for itself and on behalf of each of its Subsidiaries, that: (i) Columbia/HCA has disclosed, and LifePoint and Triad have knowledge of, all matters pertaining to the Assets to be conveyed to the LifePoint Group or the Triad Group pursuant to the Restructuring Transactions or otherwise pursuant to this Agreement to the same extent that Columbia/HCA or any of its Affiliates has knowledge of such matters; and (ii) such knowledge constitutes notice and disclosure of such matters. Each of LifePoint and Triad waives, to the fullest extent permitted by Law, for itself and for each of its Subsidiaries, any and all claims or causes of action which any of them may have arising out of such matters or the failure of any Conveyancing and Assumption Instrument to describe or refer to, or provide notice of, any such matters. (d) No Representations or Warranties Regarding Consents. Each of --------------------------------------------------- the parties hereto understands and agrees that no party hereto, or to any other agreement or document contemplated by this Agreement (including the Ancillary Agreements and Conveyancing and Assumption Instruments, and any agreement or document contemplated thereby) is making any representation or warranty whatsoever that the obtaining of any Consents, the execution and delivery of any amendatory agreements and the making of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable agreements or the requirements of any or all applicable Laws. Each of the parties hereto further agrees and understands that the party to which any Assets are transferred as contemplated by the Restructuring Transactions or this Agreement shall bear the economic and legal risk that any Consents are not obtained or that any requirements of Laws are not complied with. Section 4.6. Limitation on Solicitation of Employees. Each of --------------------------------------- Columbia/HCA, LifePoint and Triad agrees, for itself and, after giving effect to the Restructuring Transactions and the Distribution, its Subsidiaries and Affiliates, that it shall not directly or indirectly, or in connection with any other person, firm or entity approach, counsel, or induce any employee of any other party hereto or, after giving effect to the Restructuring Transactions and the Distribution, any of such other party's Subsidiaries or Affiliates, to leave his or her employment at any time prior to the second anniversary of the Distribution Date without the prior written consent of such other party. -19- ARTICLE V INDEMNIFICATION Section 5.1. Indemnification by Columbia/HCA. Except as otherwise ------------------------------- specifically set forth in any provision of this Agreement or of any Ancillary Agreement, Columbia/HCA shall, to the fullest extent permitted by law, indemnify and hold harmless each of the LifePoint Indemnitees and the Triad Indemnitees from and against any and all Losses which are actually incurred by the LifePoint Indemnitees and the Triad Indemnitees, respectively, and which arise from either (a) the Columbia/HCA Liabilities or (b) the breach by Columbia/HCA or, after giving effect to the Restructuring Transactions and the Distribution, any of its Subsidiaries, of any contractual obligation arising under this Agreement, any of the Ancillary Agreements, or any of the Conveyancing and Assumption Instruments. In addition, Columbia/HCA shall, to the fullest extent permitted by law, indemnify and hold harmless each of the LifePoint Indemnitees and the Triad Indemnitees from and against any and all Losses which are actually incurred by the LifePoint Indemnitees and the Triad Indemnitees, respectively, and which arise from the Indemnified Matters; provided, however, that the indemnification ----------------- provided for in this Section 5.1 shall exclude, and Columbia/HCA shall have no responsibility for, (A) Losses which constitute consequential damages and (B) Losses arising out of or relating to acts, practices or omissions engaged in after the Distribution Date by LifePoint or Triad or, after giving effect to the Restructuring and the Distribution, any of their respective Subsidiaries or Affiliates. For purposes hereof, "Indemnified Matters" means (x) proceedings commenced by the United States Department of Justice and other federal and state governmental authorities conducting the pending investigations (the "Government Investigations") of certain acts, practices or omissions alleged to have been engaged in by Columbia/HCA and its Subsidiaries and Affiliates prior to the Distribution Date with respect to Medicare, Medicaid and CHAMPUS patients regarding (a) allegedly improper diagnosis related group ("DRG") coding (commonly referred to as "upcoding") relating to bills submitted for medical services, (b) allegedly improper outpatient laboratory billing (e.g., unbundling of services, medically unnecessary tests), (c) inclusion of allegedly improper items in cost reports submitted as a basis for reimbursement under Medicare, Medicaid and similar government programs for all cost reports relating to periods ending on or prior to the Distribution Date (it being understood that the scope of this clause (c) includes any stub period from the date of filing of any such cost report to the Distribution Date), (d) arrangements with physicians and other parties that allegedly violate certain federal and state laws governing referral relationships, including fraud and abuse, anti-kickback and "Stark" laws, (e) allegedly improper acquisitions of home health care agencies and allegedly excessive billing for home health care services, and (f) other allegedly improper billing practices with respect to government programs; (y) proceedings commenced and claims asserted by private parties and described in Columbia/HCA's Annual Report on Form 10-K for the Fiscal Year ended December 31, 1998 (other than proceedings and claims generically described in such Form 10-K as matters arising in the ordinary course of business, except to the extent that any such proceeding or claim is covered by an -20- insurance policy maintained by Columbia/HCA and listed on Exhibit H hereto), and (z) proceedings commenced and claims asserted by Governmental Authorities and private parties arising from acts, practices or omissions engaged in prior to the Distribution Date and relating to the subjects of the proceedings referred to above. It is agreed by the parties hereto that any positive recovery which results from resolution of a proceeding or claim which is an Indemnified Matter shall be for the sole benefit of Columbia/HCA. Section 5.2. Indemnification by LifePoint. Except as otherwise ---------------------------- specifically set forth in any provision of this Agreement or of any Ancillary Agreement, LifePoint shall, to the fullest extent permitted by law, indemnify and hold harmless the Columbia/HCA Indemnitees and the Triad Indemnitees from and against any and all Losses of the Columbia/HCA Indemnitees and the Triad Indemnitees, respectively, arising out of, by reason of or otherwise in connection with either (a) the LifePoint Liabilities or (b) the breach by LifePoint or, after giving effect to the Restructuring Transactions and the Distribution, any of its Subsidiaries, of any contractual obligation arising under this Agreement, any of the Ancillary Agreements, or any of the Conveyancing and Assumption Instruments. Section 5.3. Indemnification by Triad. Except as otherwise ------------------------ specifically set forth in any provision of this Agreement or of any Ancillary Agreement, Triad shall, to the fullest extent permitted by law, indemnify and hold harmless the Columbia/HCA Indemnitees and the LifePoint Indemnitees from and against any and all Losses of the Columbia/HCA Indemnitees and the LifePoint Indemnitees, respectively, arising out of, by reason of or otherwise in connection with either (a) the Triad Liabilities or (b) the breach by Triad or, after giving effect to the Restructuring Transactions and the Distribution, any of its Subsidiaries, of any contractual obligation arising under this Agreement, any of the Ancillary Agreements, or any of the Conveyancing and Assumption Instruments. Section 5.4. Limitations on Indemnification Obligations. ------------------------------------------ (a) Reductions for Insurance Proceeds and Other Recoveries. The ------------------------------------------------------ amount that any party (an "Indemnifying Party") is or may be required to pay to any person (an "Indemnitee") pursuant to Section 5.1, Section 5.2 or ----------- ----------- Section 5.3 above, as applicable, shall be reduced (retroactively or ----------- prospectively) by any Insurance Proceeds, other amounts actually recovered from third parties, or amounts recovered pursuant to any Ancillary Agreement, by or on behalf of such Indemnitee in respect of the related Losses. Each of the parties agrees that it shall use its best efforts to collect any such Insurance Proceeds or other amounts to which it or any of its Subsidiaries may be entitled. The existence of a claim by an Indemnitee for insurance or against a third party in respect of any Loss shall not delay any payment pursuant to the indemnification provisions contained herein and otherwise determined to be due and owing by an Indemnifying Party; rather, the Indemnifying Party shall make payment in full of such amount so determined to be due and owing by it against an assignment by the Indemnitee to the Indemnifying Party of the entire claim of the Indemnitee for such insurance or -21- against such third party. No insurer or any other third party shall be (i) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, (ii) relieved of the responsibility to pay any claims for which it is obligated, or (iii) entitled to any subrogation rights with respect to any obligation arising under the foregoing indemnification provisions. If an Indemnitee shall have received the payment required by this Agreement from an Indemnifying Party in respect of any Loss and shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Loss, then such Indemnitee shall hold such Insurance Proceeds or other amounts in trust for the benefit of such Indemnifying Party and promptly shall pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Agreement in respect of such Loss. (b) Adjustments for Taxes. The amount of any Loss shall be: (i) --------------------- increased (retroactively or prospectively) to take into account any net Tax cost actually incurred by an Indemnitee arising from any payments received from the Indemnifying Party (grossed up for such increase); and (ii) reduced (retroactively or prospectively) to take into account any net Tax benefit actually realized by an Indemnitee arising from the incurrence or payment of any such Loss. In computing the amount of such Tax cost or Tax benefit, an Indemnitee shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt of any payment with respect to any such Loss or the incurrence or payment of any such Loss. If an Indemnitee shall have received the payment required by this Agreement from an Indemnifying Party and shall subsequently actually realize any net Tax benefit arising from the incurrence or payment of such Loss, then such Indemnitee promptly shall pay to such Indemnifying Party a sum equal to the amount of such net Tax benefit, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Agreement in respect of such Loss. (c) Reductions for Subsequent Recoveries or Other Events. In ---------------------------------------------------- addition to any adjustments required pursuant to Section 5.4(a) or Section -------------- ------- 5.4(b) above, if the amount of any Loss shall, at any time subsequent to ------ any indemnification payment made by an Indemnifying Party pursuant to this Article V, be reduced by recovery, settlement or otherwise, the amount of --------- such reduction, less any expenses incurred in connection therewith, shall promptly be repaid by Indemnitee to the Indemnifying Party, up to the aggregate amount of any payments received from such Indemnifying Party pursuant to this Article V in respect of such Loss. --------- (d) Assignment of Claims for Contribution and/or -------------------------------------------- Indemnification. Upon the request of an Indemnifying Party, an Indemnitee --------------- shall assign to the Indemnifying Party any and all claims of such Indemnitee for contribution and/or indemnification against any party (other than another Indemnitee) arising out of the claim for which indemnity is sought. -22- Section 5.5. Procedures Regarding Indemnification. ------------------------------------ (a) Notice of Third Party Claims. If a claim or demand is made ---------------------------- against an Indemnitee by any person who is not a party hereto or a Subsidiary of a party hereto (a "Third Party Claim") as to which such Indemnitee is entitled to indemnification pursuant to this Agreement, such Indemnitee shall notify the Indemnifying Party in writing, and in reasonable detail, of the Third Party Claim promptly (and in any event within fifteen business days) after receipt by such Indemnitee of written notice of the Third Party Claim; provided, however, that failure to give such notification shall not affect the Indemnitee's right to indemnification hereunder except to the extent the Indemnifying Party shall have been actually prejudiced as a result of such failure (except that the Indemnifying Party shall not be liable for any expenses incurred during the period in which the Indemnitee failed to give such notice). Thereafter, the Indemnitee shall deliver to the Indemnifying Party, promptly (and in any event within five business days) after the Indemnitee's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third Party Claim. (b) Legal Defense of Third Party Claims. If a Third Party Claim ----------------------------------- is made against an Indemnitee, the Indemnifying Party shall be entitled to participate in the defense thereof and, if it so chooses, to assume the defense thereof with counsel selected by the Indemnifying Party. Should the Indemnifying Party so elect to assume the defense of a Third Party Claim, the Indemnifying Party shall, within 30 days of its receipt of notice of such Third Party Claim from Indemnitee (or sooner if the nature of the Third Party Claim so requires), notify the Indemnitee of its intent to do so, and the Indemnifying Party shall thereafter not be liable to the Indemnitee for legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof; provided, that such Indemnitee shall have the right to employ counsel to represent such Indemnitee if, in the judgment of the Indemnifying Party, a conflict of interest between such Indemnitee and such Indemnifying Party exists in respect of such claims which would make representation of both such parties by one counsel inappropriate, and in such event the fees and expenses of such separate counsel shall be paid by such Indemnifying Party. If the Indemnifying Party assumes such defense, the Indemnitee shall have the right to participate in the defense thereof and to employ counsel, subject to the proviso of the preceding sentence, at its own expense, separate from the counsel employed by the Indemnifying Party, it being understood that the Indemnifying Party shall control such defense. The Indemnifying Party shall be liable for the fees and expenses of counsel employed by the Indemnitee for any period during which the Indemnifying Party has failed to assume the defense thereof (other than during any period during which the Indemnitee shall have failed to have given notice of the Third Party Claim as required above). If the Indemnifying Party so elects to assume the defense of any Third Party Claim, the Indemnifying Party shall have the right to settle such action or claim on such terms as it deems appropriate, and all of the Indemnitees -23- shall fully and completely cooperate with the Indemnifying Party in the defense of such action or claim and shall provide the Indemnifying Party with access (including access to employees of the Indemnitees) and copying rights during normal business hours to all records, books, contracts, instruments, computer data and other information in the possession of the Indemnitees which is reasonably required in connection with the defense of such action or claim. It is understood and agreed that wherever in this Section 5.5 reference is made to the payment of fees and expenses of ----------- counsel for the Indemnitee by the Indemnifying Party, the Indemnifying Party shall not, in connection with any Third Party Claim or any group of separate but substantially similar Third Party Claims arising out of the same general allegations, be liable for the fees and expenses of more than one separate firm of attorneys at any time for all Indemnitees. (c) Settlement of Third Party Claims. Except as otherwise -------------------------------- provided in this Section 5.5 or as otherwise specifically provided in any ----------- Ancillary Agreement, unless and until the Indemnifying Party has failed to assume the defense of any Third Party Claim within thirty days of its receipt of notice of such Third Party Claim from Indemnitee (or sooner if the nature of the Third Party Claim so requires), then in no event will the Indemnitee admit any liability with respect to, or settle, compromise or discharge, any Third Party Claim without the Indemnifying Party's prior written consent; provided, however, that the Indemnitee shall have the right to settle, compromise or discharge such Third Party Claim without the consent of the Indemnifying Party if the Indemnitee releases the Indemnifying Party from its indemnification obligation hereunder with respect to such Third Party Claim and such settlement, compromise or discharge would not otherwise adversely affect the Indemnifying Party. If, upon expiration of 30 days from the date that the Indemnifying Party receives notice of a Third Party Claim from Indemnitee, the Indemnifying Party has not notified the Indemnitee of its election to assume the defense of such Third Party Claim, then in no event shall the Indemnitee settle, compromise or discharge such Third Party Claim without providing prior written notice to the Indemnifying Party, and the Indemnifying Party shall then have the option within fifteen days following receipt of such notice to: (A) approve and agree to pay the settlement; (B) approve the amount of the settlement, reserving the right to contest the Indemnitee's right to indemnity pursuant to this Agreement; or (C) disapprove the settlement and assume in writing all past and future responsibility for such Third Party Claim (including all of Indemnitee's prior expenditures in connection -24- therewith, and the Indemnifying Party shall furnish reasonable assurance that it will discharge such responsibility). (d) Other Claims. Any claim on account of a Loss which does not ------------ result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the applicable Indemnifying Party. Such Indemnifying Party shall have a period of fifteen days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such fifteen-day period, or if such Indemnifying Party rejects such claim in whole or in part, then such Indemnitee shall be free to pursue such remedies as may be available to it under this Agreement. Section 5.6. Indemnification Payments. Indemnification required by ------------------------ this Article V shall be made by periodic payment of the amount thereof during - --------- the course of the investigation or defense, as and when bills are received or loss, liability, claim, damage or expense is incurred. Section 5.7. Cooperation of the Parties with Respect to Actions and ------------------------------------------------------ Third Party Claims. - ------------------ (a) Identification of Party in Interest. Any party to this ----------------------------------- Agreement that has responsibility for an Action or Third Party Claim shall identify itself as the true party in interest with respect to such Action or Third Party Claim and shall use its reasonable efforts to obtain the dismissal of any other party to this Agreement from such Action or Third Party Claim. (b) Disputes Regarding Responsibility for Actions and Third ------------------------------------------------------- Party Claims. If there is uncertainty or disagreement concerning which ------------ party to this Agreement has responsibility for any Action or Third Party Claim, the following procedure shall be followed in an effort to reach agreement concerning responsibility for such Action or Third Party Claim: (i) The parties in disagreement over the responsibility for an Action or Third Party Claim shall exchange brief written statements setting forth their position concerning which party has responsibility for the Action or Third Party Claim in accordance with the provisions of this Article V. These statements shall be exchanged --------- within ten days of a party putting another party on written notice that such other party is or may be responsible for the Action or Third Party Claim. (ii) If, within ten days of the exchange of the written statement of each party's position, agreement is not reached on responsibility for the Action or Third Party Claim, the General Counsel for each of the parties in disagreement over responsibility for the Action or Third Party Claim shall meet (which meeting may be by telephone or in -25- person) to attempt to reach agreement on responsibility for the Action or Third Party Claim. (c) Effect of Failure to Follow Procedure. Failure to follow the ------------------------------------- procedure set forth in Section 5.7(b) above shall not affect the rights and responsibilities of the parties as established by the other provisions of this Article V. --------- (d) Exchange of Information. In connection with the handling of ----------------------- current or future Actions or Third Party Claims, the parties may determine that it is in their mutual interest to exchange privileged or confidential information. If so, the parties agree to discuss whether it is in their mutual interest to enter into a joint defense agreement or information exchange agreement to maintain the confidentiality of their communications and to permit them to maintain the confidentiality of proprietary information or information that is otherwise confidential or subject to an applicable privilege, including but not limited to the attorney-client, work product, executive, deliberative process, or self-evaluation privileges. Section 5.8. Contribution. To the extent that any indemnification ------------ provided for under Section 5.1, Section 5.2 or Section 5.3 above is unavailable ----------- ----------- ----------- to an Indemnitee or is insufficient in respect of any Loss of such Indemnitee, then the Indemnifying Party under such Section, in lieu of indemnifying such Indemnitee in respect of such Loss, shall contribute to the amount paid or payable by such Indemnitee as a result of such Loss (a) in such proportion as is appropriate to reflect the relative value of the business owned or held by the Indemnifying Party immediately after giving effect to the Distribution, on the one hand, and the value of the business owned or held by the Indemnitee immediately after giving effect to the Distribution, on the other hand, or (b) if the allocation provided by clause (a) above is not permitted by applicable Law, in such proportion as is appropriate to reflect not only the relative sizes of the parties referred to in clause (a) above but also the relative fault of the Indemnifying Party, on the one hand, and of the Indemnitee, on the other hand, in connection with the action, inaction, statements or omissions that resulted in such Loss as well as any other relevant equitable considerations. Section 5.9. Survival of Indemnities; Exclusive Remedy. The ----------------------------------------- indemnification obligations of Columbia/HCA, LifePoint and Triad under this Article V shall survive the sale or other transfer by any of them of any - --------- Assets or businesses or the assignment by any of them of any Liabilities, with respect to any Loss by any Indemnitee related to such Assets, businesses or Liabilities; provided, however, that the indemnification obligations set forth ----------------- herein shall be terminated to the extent that any Indemnitee seeks indemnification in respect of a matter in which the procedures regarding indemnification set forth in this Article V (including the provision of Section --------- ------- 5.5 above requiring that an Indemnifying Party be given the opportunity to - --- assume and control the defense of any Third Party Claim) shall not have been followed. The indemnification provided for in this Article V shall be the --------- exclusive remedy in any action -26- seeking damages or any other form of monetary relief brought by any party to this Agreement against another party. ARTICLE VI ANCILLARY AGREEMENTS Section 6.1. Generally. Except as provided in Section 5.4 above --------- ----------- relating to adjustment of indemnification amounts for insurance proceeds and net Tax benefits or detriments, all matters relating to the subject matter of each Ancillary Agreement shall be governed exclusively by such Ancillary Agreement, and the provisions of such Ancillary Agreement shall govern in the event of any inconsistency with this Agreement. ARTICLE VII ACCOUNTING MATTERS Section 7.1. Settlement of Intercompany Accounts. ----------------------------------- (a) Settlement of Intercompany Accounts Between LifePoint Group ----------------------------------------------------------- and Columbia/HCA Group. All intercompany receivables, payables and loans ---------------------- (other than receivables, payables and loans otherwise specifically provided for in any of the Ancillary Agreements or hereunder), including, without limitation, in respect of any cash balances, any cash balances representing deposited checks or drafts for which only a provisional credit has been allowed or any cash held in any centralized cash management system, between the LifePoint Group, on the one hand, and the Columbia/HCA Group, on the other hand, shall, as of the close of business on the Distribution Date, be settled, capitalized or converted into ordinary trade accounts, in each case as may be agreed in writing -27- prior to the Distribution Date by duly authorized representatives of the Columbia/HCA Group and the LifePoint Group. (b) Settlement of Intercompany Accounts Between Triad Group and ----------------------------------------------------------- Columbia/HCA Group. All intercompany receivables, payables and loans (other ------------------ than receivables, payables and loans otherwise specifically provided for in any of the Ancillary Agreements or hereunder), including, without limitation, in respect of any cash balances, any cash balances representing deposited checks or drafts for which only a provisional credit has been allowed or any cash held in any centralized cash management system, between the Triad Group, on the one hand, and the Columbia/HCA Group, on the other hand, shall, as of the close of business on the Distribution Date, be settled, capitalized or converted into ordinary trade accounts, in each case as may be agreed in writing prior to the Distribution Date by duly authorized representatives of the Columbia/HCA Group and the Triad Group. (c) Settlement of Intercompany Accounts Between LifePoint Group ----------------------------------------------------------- and Triad Group. All intercompany receivables, payables and loans (other --------------- than receivables, payables and loans otherwise specifically provided for in any of the Ancillary Agreements or hereunder), including, without limitation, in respect of any cash balances, any cash balances representing deposited checks or drafts for which only a provisional credit has been allowed or any cash held in any centralized cash management system, between the LifePoint Group, on the one hand, and the Triad Group, on the other hand, shall, as of the close of business on the Distribution Date, be settled, capitalized or converted into ordinary trade accounts, in each case as may be agreed in writing prior to the Distribution Date by duly authorized representatives of the LifePoint Group and the Triad Group. Section 7.2. Allocation of Prepaid Items and Reserves. All prepaid ---------------------------------------- items and reserves that have been maintained by Columbia/HCA on a consolidated basis but that relate in part to Assets or Liabilities of the LifePoint Group or the Triad Group shall be allocated among the Columbia/HCA Group, the LifePoint Group and the Triad Group in such manner as shall be determined by Columbia/HCA in its sole discretion. Section 7.3. Accounting Treatment of Assets Transferred and ---------------------------------------------- Liabilities Assumed. Solely for accounting purposes, any transfers of Assets of - ------------------- the Columbia/HCA Group to the LifePoint Group or the Triad Group pursuant to this Agreement shall constitute contributions by Columbia/HCA to the capital of LifePoint or Triad, as the case may be, and any assumption by the LifePoint Group or the Triad Group of Liabilities of the Columbia/HCA Group pursuant to this Agreement, net of Assets received, shall be treated as a distribution by LifePoint or Triad, as the case may be, to Columbia/HCA. ARTICLE VIII GOVERNMENT PROGRAMS Section 8.1. Medicare Provider, Medicaid Provider and Cost-Based Blue -------------------------------------------------------- Cross Provider Receivables and Payables. Following the Distribution, each of - --------------------------------------- LifePoint and Triad shall prepare and file Medicare, Medicaid and Blue Cross home office cost reports for its respective costs, and Columbia/HCA shall prepare and file Medicare, Medicaid and Blue Cross home office cost reports for its costs. Columbia/HCA, LifePoint and Triad agree that for cost reports filed prior to or after the Distribution, each shall be entitled to, or be responsible for, any Medicare, Medicaid or cost-based Blue Cross receivables or payables in respect of their respective hospitals and other health care facilities (the "Facilities"), and each acknowledges that among the Assets and Liabilities being transferred to and assumed by the LifePoint Group and the -28- Triad Group, are the accounts receivable and accounts payable recorded on the books of Columbia/HCA relating to such cost reports, as well as all other administrative responsibilities and financial or other obligations relating to such reports in respect of their respective Facilities; provided, however, that Columbia/HCA shall retain any and all rights to Medicare and Medicaid reimbursement for group appeal issues relating to any period ending on or prior to the Distribution Date, including, without limitation, those group appeal issues identified on Exhibit G hereto. Columbia/HCA shall have sole discretion --------- to initiate and pursue any group appeal issue for cost reporting periods ending on or prior to the Distribution Date. The term "group appeals" as used in this Section 8.1 shall have the meaning set forth in Part I, Section 2920, of the - ----------- Provider Reimbursement Manual published by HCFA. If either of LifePoint or Triad shall determine not to pursue any individual Facility appeal issues related to cost reports filed on or prior to the Distribution Date, it shall give Columbia/HCA written notice of such determination. Upon receipt of such notice, Columbia/HCA shall have the right, in its sole discretion and upon written notice to the party providing notice of such determination, to pursue such appeal issues and shall be entitled to any additional reimbursement resulting from such appeal; provided, however, that Columbia/HCA shall reimburse the notifying party for all costs and expenses arising from or relating to the pursuit of such appeals that are incurred by such party after the date that Columbia/HCA elects to pursue such appeal issues. After such date, such party shall take action and incur costs with respect to such appeal issues only at Columbia/HCA's direction or with Columbia/HCA's prior written consent. Section 8.2. Medicare and Medicaid Appeals. Each of Columbia/HCA, ----------------------------- LifePoint and Triad shall be responsible for its own separate and distinct Medicare and Medicaid appeal functions (including, without limitation, the protection of appeal rights and the filing of appeal requests) relating to any period ending on or after the Distribution Date; provided, however, that if Medicare and/or Medicaid group appeal cases can be or are required to be consolidated for cost reporting periods ending after the Distribution Date, each of Columbia/HCA, LifePoint and Triad agree to share the legal fees and expert witness fees on a pro rata basis based upon the Medicare and/or Medicaid reimbursement in dispute for the appeal cases for each party. Each party shall bear its own internal costs as related to such appeal. The decision to consolidate the cases shall be made through the mutual agreement of the parties affected by the appeal, and where cases are consolidated, such parties shall mutually agree as to the management of the appeal cases (including, without limitation, approval of position papers, attorneys to be used, expert witnesses and venue). Section 8.3. Medicare Provider, Medicaid Provider and Cost-Based Blue -------------------------------------------------------- Cross Provider Cost Reports. - --------------------------- (a) Each of LifePoint and Triad shall be responsible for filing the Medicare provider, Medicaid provider and cost-based Blue Cross provider cost reports for its respective Facilities for cost reporting periods ending prior to, on or after the Distribution Date, including any terminating cost reports due as a result of the transactions contemplated hereby, and each shall accept full -29- responsibility for such reports, including, without limitation, financial responsibility for the receivables and payables relating to such reports. (b) Prior to the preparation of the cost reports, each of LifePoint and Triad shall obtain information and data from Columbia/HCA on appeal issues that are to be included in such reports. Any portion of such cost reports relating to such appeal issues shall be prepared on a basis consistent with the cost reports of Columbia/HCA and its providers. In order to assure that the appeal issues have been properly included in such cost reports, each of LifePoint and Triad shall submit draft cost reports to Columbia/HCA for review and approval before such reports are filed with the Medicare and Medicaid fiscal intermediaries. Columbia/HCA shall be entitled to the receivables, and shall bear the responsibility for payables, with respect to such appeal issues to the extent provided in Section 8.1 above. ----------- (c) Each of LifePoint and Triad agrees that, without the prior written consent of Columbia/HCA, it shall not file or cause to be filed any amended cost reports for periods ending on or prior to the Distribution Date which relates to an appeal issue relevant to Columbia/HCA unless such reports reflect appeal issues related to Columbia/HCA on a basis consistent with the cost reports of Columbia/HCA and its providers. Section 8.4. Cooperation on Medicare Matters. ------------------------------- (a) Each of Columbia/HCA, LifePoint and Triad shall notify each other affected party of all significant issues (determined in good faith by the notifying party) arising out of an audit with respect to any terminating cost reports due as a result of the transactions contemplated hereby and any other material or significant issues relating to the Medicare and Medicaid programs or any other governmental health care programs. The parties shall transfer all information, records and documents relating to the Medicare, Medicaid and cost-based Blue Cross receivables and payables of their respective Groups in accordance with Section 9.1 ----------- below, shall maintain the confidentiality of such information, records and documents in accordance with Section 9.6 below, and shall preserve such ----------------- information, records and documents in accordance with Section 9.5 below. ----------- (b) Each of LifePoint and Triad shall have the right to take all reasonable and appropriate action in connection with the conduct of any audit or other proceeding with respect to reimbursement through the Medicare and Medicaid programs or any other governmental health care programs; provided, however, that in the event that any such action could reasonably be expected to have an adverse impact on any other party hereto with respect to such reimbursement, the party proposing to take such action shall consult with the potentially adversely affected party and shall refrain from taking such action until the parties have reached agreement with regard thereto. -30- (c) Each of Columbia/HCA, LifePoint and Triad shall cooperate with, and provide information upon the reasonable request of, any other party hereto in connection with the preparation or filing of a cost report or in conducting any audit or other proceeding relating to the Medicare and Medicaid programs or any other governmental health care programs. (d) Any funds received by any Group, which are due to any other Group pursuant to this Article VIII, shall be paid to such other Group ------------ within thirty days after receipt thereof. ARTICLE IX CORPORATE RECORDS AND INFORMATION Section 9.1. Provision, Transfer and Delivery of Applicable Corporate -------------------------------------------------------- Records. Except as otherwise provided in any Ancillary Agreement: ------- (a) Provision, Transfer and Delivery of Columbia/HCA Group ------------------------------------------------------ Records. Each of LifePoint and Triad shall take all necessary action to ------- transfer, or cause to be transferred, as soon as practicable following the Distribution Date (at Columbia/HCA's expense) to Columbia/HCA, the Books and Records in its or its Subsidiaries' possession that relate primarily to the Columbia/HCA Group Business or are necessary to operate the Columbia/HCA Group Business (collectively, the "Columbia/HCA Group Records"), except to the extent such items are already in the possession of the Columbia/HCA Group. The Columbia/HCA Group Records shall be the property of Columbia/HCA, but shall be available pursuant to Section 9.2 ----------- below to each of LifePoint and Triad for review and copying. (b) Provision, Transfer and Delivery of LifePoint Group Records. ----------------------------------------------------------- Each of Columbia/HCA and Triad shall take all necessary action to transfer, or cause to be transferred, as soon as practicable following the Distribution Date (at LifePoint's expense) to LifePoint, the Books and Records in its or its Subsidiaries' possession that relate primarily to the LifePoint Group Business or are necessary to operate the LifePoint Group Business (collectively, the "LifePoint Group Records"), except to the extent such items are already in the possession of the LifePoint Group. The LifePoint Group Records shall be the property of LifePoint, but shall be available pursuant to Section 9.2 below to each of Columbia/HCA and Triad ----------- for review and copying. (c) Provision, Transfer and Delivery of Triad Group Records. ------------------------------------------------------- Each of Columbia/HCA and LifePoint shall take all necessary action to transfer, or cause to be transferred, as soon as practicable following the Distribution Date (at Triad's expense) to Triad, the Books and Records in its or its Subsidiaries' possession that relate primarily to the Triad Group Business or are necessary to operate the Triad Group Business (collectively, the "Triad Group Records"), -31- except to the extent such items are already in the possession of the Triad Group. The Triad Group Records shall be the property of Triad, but shall be available pursuant to Section 9.2 below to each of Columbia/HCA and ----------- LifePoint for review and copying. Section 9.2. Access to Information. From and after the Distribution --------------------- Date, each of Columbia/HCA, LifePoint and Triad shall afford one another (including each party's accountants, counsel and other designated representatives) reasonable access (including using reasonable efforts to give access to persons or firms possessing information) and copying rights during normal business hours to all records, books, contracts, instruments, computer data and other data and information in its possession relating to its business and affairs, insofar as such access is reasonably required, including, without limitation, for audit, accounting and litigation purposes. Any copying expense shall be borne by the party requesting such copying. Notwithstanding the foregoing, no party shall have the right to access any patient information or medical records to the extent that such access, in the reasonable judgment of the party requested to provide such access, would not be permitted by applicable Law or otherwise would violate obligations related to patient confidentiality. Section 9.3. Confidentiality. --------------- (a) General Restriction on Disclosure. Each of Columbia/HCA, --------------------------------- LifePoint and Triad shall take all necessary action to hold, and shall cause its (and its respective Subsidiaries') consultants, advisors and other representatives to hold, in strict confidence all information concerning each other party hereto and such other party's Subsidiaries in its possession, custody or control to the extent such information either: (i) relates to the period up to the Distribution Date; (ii) is obtained pursuant to Section 9.2 above; ----------- (iii) relates to any Ancillary Agreement; or (iv) is obtained in the course of performing services for the other party pursuant to any Ancillary Agreement, and each party hereto shall (and shall cause each of its respective Subsidiaries to) refrain from otherwise releasing or disclosing such information to any other person, except for such person's auditors, attorneys, financial advisors, bankers and other consultants and advisors, without the prior written consent of the other affected party or parties. (b) Exceptions to Confidential Treatment. Notwithstanding ------------------------------------ Section 9.3(a) above, no party hereto shall be prohibited from using or -------------- permitting the use of and no party shall be required to hold in confidence any information to -32- the extent that (i) such information has been or is in the public domain through no fault of such party, (ii) such information was used or held for use in such party's business (and in no other party's business) prior to the Distribution Date, (iii) such information is, after the Distribution Date, lawfully acquired by such party from sources other than a party hereto or a Subsidiary of a party hereto, (iv) this Agreement, any Ancillary Agreement or any other agreement entered into pursuant hereto permits the use or disclosure of such information by such party, or (v) such information is necessary for such party to investigate, evaluate, defend or prosecute any claim or Action involving any other party hereto. To the extent that a party hereto (or any of its Subsidiaries or, to the knowledge of such party or Subsidiary, any current or former employee of such party or Subsidiary) is requested (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any information required to be kept confidential pursuant to this Section 9.3, such party agrees to take all ----------- necessary action to maintain, or cause to be maintained (or in respect of a current or former employee, to take all reasonable action as is necessary to cause such employee to maintain), the confidentiality of such information and to provide prompt notice to any of (i) Columbia/HCA, if such information relates to the Columbia/HCA Group Business or to the Columbia/HCA Liabilities, (ii) LifePoint, if such information relates to the LifePoint Group Business or to the LifePoint Liabilities, or (iii) Triad, if such information relates to the Triad Group Business or to the Triad Liabilities, so that the party or parties to which the information pertains may seek an appropriate protective order or waive the notifying party's compliance with this Section 9.3(b). If, in the absence of a -------------- protective order or the receipt of a waiver hereunder, the person which has received such a request is, nonetheless, in the reasonable written opinion of counsel, legally required to disclose such information, such person may disclose such information, and no party shall be liable pursuant to this Section 9.3(b); provided, that such person furnishes only that portion of -------------- the information which such person is advised by counsel to disclose and exercises its reasonable efforts to obtain assurance that confidential treatment will be accorded to the disclosed portion of the information. Notwithstanding the foregoing, each party will be permitted to disclose confidential information in any proceeding in which such party is in an adversarial position to any other party to this Agreement. Section 9.4. Litigation Cooperation. Each of Columbia/HCA, LifePoint ---------------------- and Triad shall use its best efforts to make available to one another, upon written request of a party hereto, its Group's officers, directors, employees and agents as witnesses to the extent that such persons may reasonably be required in connection with any legal, legislative, administrative or other proceedings arising out of the business of such requesting party prior to the Distribution Date in which the requesting party may from time to time be involved. In the event that any party provides witnesses pursuant to this Section 9.4, it shall be entitled to reimbursement from the requesting party for - ----------- all -33- reasonably incurred out-of-pocket costs and expenses, but not including internal time charges. Section 9.5. Retention of Records. Except when a longer period is -------------------- required by Law or is specifically provided for herein or in any Ancillary Agreement, each party hereto shall take all necessary action to keep, or cause to be kept, in its original form, for a period of at least fifteen years following the Distribution Date, all material information (including, without limitation, all material Books and Records) relating to such party's Group and its operations prior to the Distribution Date; provided, however, that any party -------- ------- hereto may offer in writing to deliver to the other parties all or a portion of such information as it relates to the offering party's Group and, if such offer is accepted in writing within 90 days after receipt thereof, the offering party shall promptly arrange for the delivery of such information (or copies thereof) to each accepting party (at the expense of such accepting party). If such offer is not so accepted, the offered information may be destroyed or otherwise disposed of by the offering party at any time thereafter. Notwithstanding the foregoing, no such information shall be destroyed or disposed of prior to the date that Columbia/HCA shall notify LifePoint and Triad that the Government Investigations have been concluded. With regard to patient records, each party hereto shall maintain the patient records held at each of its Facilities (or delivered to it pursuant hereto) relating to periods prior to the Distribution Date in accordance with applicable Law (including, if applicable, 42 U.S.C. Section 1395 (V)(I)(i)), and requirements of relevant insurance carriers, and in a manner consistent with its maintenance of patient records generated at its Facilities after the Distribution Date. Each party acknowledges that as a result of operating the Facilities it will gain access to patient and other information which is subject to rules and regulations regarding confidentiality, and agrees to abide by such rules and regulations with regard to such confidential information. Section 9.6. Privileged Matters. ------------------ (a) Privileged Information. Each of the parties hereto shall ---------------------- take all reasonable action as is necessary to maintain, preserve, protect and assert, or cause to be maintained, preserved, protected and asserted, all privileges, including, without limitation, all privileges arising under or relating to the attorney-client relationship (including, but not limited to, the attorney-client and attorney work product privileges), that relate directly or indirectly to the business of any other Group for any period prior to the Distribution Date ("Privilege" or "Privileges"). Columbia/HCA shall be entitled in perpetuity to require the assertion or to decide whether to consent to the waiver of any and all Privileges which relate primarily to the Columbia/HCA Liabilities; LifePoint shall be entitled in perpetuity to require the assertion or to decide whether to consent to the waiver of all Privileges which relate primarily to the LifePoint Liabilities; and Triad shall be entitled in perpetuity to require the assertion or to decide whether to consent to the waiver of all Privileges which relate primarily to the Triad Liabilities. Each of the parties hereto shall use the same degree of care as it would use with respect to its own Privileges, so as not to waive, or permit to be -34- waived, any such Privilege that could be asserted under applicable Law without the prior written consent of the other party or parties having the right to assert or waive such Privilege pursuant to this Section 9.6(a). -------------- (b) Shared Privileges. ----------------- (i) The parties hereto agree that they shall have a shared Privilege, with equal right to assert or waive, subject to the restrictions in this Section 9.6(b)(i), with respect to all Privileges ----------------- not allocated pursuant to the terms of Section 9.6(a) above. All -------------- Privileges relating to any claims, proceedings, litigation, disputes, or other matters which involve two or more of Columbia/HCA, LifePoint or Triad and in respect of which two or more of such parties retain any responsibility or liability under this Agreement, shall be subject to a shared Privilege among them. (ii) No party hereto may waive any Privilege which could be asserted under any applicable law, and in which any other party hereto has a shared Privilege, without the consent of the other party, except to the extent reasonably required in connection with any litigation with third-parties or as provided in Section 9.6(c) below. -------------- Consent shall be in writing, or shall be deemed to be granted unless written objection is made within twenty days after notice upon the other party requesting such consent. (iii) If a dispute arises between or among the parties hereto or their respective Subsidiaries regarding whether a Privilege should be waived to protect or advance the interest of any party, each party agrees that it shall negotiate in good faith, shall endeavor to minimize any prejudice to the rights of the other parties, and shall not unreasonably withhold consent to any request for waiver by another party. Each party hereto specifically agrees that it will not withhold consent to waiver for any purpose except to protect its own legitimate interests. (c) Compelled Disclosure. To the extent that a party hereto (or -------------------- any of its Subsidiaries or, to the knowledge of such party or Subsidiary, any current or former employee of such party or Subsidiary) is requested (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose any information under circumstances in which any Privilege would be available ("Privileged Information"), such party agrees to take all necessary action to assert, or cause to be asserted (or in respect of a current or former employee, to take all reasonable action as is necessary to cause such employee to assert), such Privilege in good faith and to provide prompt notice to any of (i) Columbia/HCA, if such Privileged Information relates to the Columbia/HCA Liabilities, (ii) LifePoint, if such Privileged Information relates to the LifePoint Liabilities, or (iii) Triad, if -35- such Privileged Information relates to the Triad Liabilities, so that the party or parties to which the Privileged Information pertains may seek an appropriate protective order or waive the notifying party's compliance with this Section 9.6(c). If, in the absence of a protective order or the -------------- receipt of a waiver hereunder, the person which has received such a request is, nonetheless, in the reasonable written opinion of counsel, legally required to disclose such Privileged Information or else stand liable for contempt or suffer other censure or penalty, such person may disclose such Privileged Information, and no party shall be liable pursuant to this Section 9.6(c); provided, that such person furnishes only that portion of -------------- the Privileged Information which such person is advised by counsel to disclose and (ii) exercises its reasonable efforts to obtain assurance that confidential treatment will be accorded to the disclosed portion of the Privileged Information. Notwithstanding the foregoing, each party will be permitted to disclose Privileged Information in any proceeding in which such party is in an adversarial position to any other party to this Agreement. (d) No Waiver. The parties hereto agree that the transfer of any Books and Records or other information between the Columbia/HCA Group, the LifePoint Group, or the Triad Group shall be made in reliance on the agreements of Columbia/HCA, LifePoint and Triad, as set forth in Section ------- 9.3 above and this Section 9.6, to maintain the confidentiality of --- ----------- confidential information and to assert and maintain all applicable Privileges. The Books and Records being transferred pursuant to Section 9.1 ----------- above, the access to information being granted pursuant to Section 9.2 ----------- above, the agreement to provide witnesses and individuals pursuant to Section 9.4 above and the transfer of Privileged Information to any party ----------- hereto (or any of its Subsidiaries) pursuant to this Agreement shall not be deemed a waiver of any Privilege that has been or may be asserted under this Section 9.6 or otherwise. Nothing in this Agreement shall operate to ----------- reduce, minimize or condition the rights granted to each party in, or the obligations imposed upon each party by, this Section 9.6. ----------- Section 9.7. Certain Matters. Notwithstanding any other provision of --------------- this Article IX, each of LifePoint and Triad acknowledges the existence of the ---------- Government Investigations and of the proceedings and claims which constitute the Indemnified Matters, and each acknowledges that Columbia/HCA may need access to information regarding the LifePoint Group Business and the Triad Group Business for purposes of responding to the Government Investigations and the Indemnified Matters. Each of LifePoint and Triad agrees to provide all information which is requested by Columbia/HCA in connection with the Government Investigations and the Indemnified Matters, and that such information may be disclosed by Columbia/HCA to the representatives of the Governmental Authorities who are conducting the Government Investigations and otherwise may be disclosed as deemed to be appropriate by Columbia/HCA in connection with the Indemnified Matters. Each of LifePoint and Triad further agrees to provide representatives of the Governmental Authorities who are conducting the Government Investigations with direct, full and complete access to all of the LifePoint Group Records (in the case of LifePoint) and the Triad Group Records (in -36- the case of Triad) as well as the right to make copies of such records, and to permit representatives of such Governmental Authorities to remove original records upon reasonable notice and the substitution of copies for any records to be removed. Each of LifePoint and Triad also agrees to permit employees to speak with the representatives of such Governmental Authorities. ARTICLE X INTEREST ON PAYMENTS Section 10.1. Interest on Payments. Except as otherwise expressly -------------------- provided in this Agreement, all payments by one party to the other under this Agreement shall be paid, by wire transfer of immediately available funds to an account in the United States designated by the recipient, within 30 days after receipt of an invoice or other written request for payment setting forth the specific amount due and a description of the basis therefor in reasonable detail. Any amount remaining unpaid beyond its due date, including disputed amounts that are ultimately determined to be payable, shall bear interest during the period that such amount remains unpaid (computed on the basis of a 360-day year of twelve 30-day months) at a fluctuating rate per annum equal to the prime commercial lending rate publicly announced by The Chase Manhattan Bank or any successor thereto at its principal office (or any alternative rate substituted therefor by such bank). ARTICLE XI MISCELLANEOUS Section 11.1. Allocation of Costs and Expenses. Except as otherwise -------------------------------- set forth in this Agreement or any Ancillary Agreement, all costs and expenses incurred on or prior to the Distribution Date (whether or not paid on or prior to the Distribution Date) in connection with the Restructuring Transactions, the Distribution and the other transactions contemplated hereby, including, but not limited to, (i) the preparation, printing and filing of the LifePoint Form 10 and the Triad Form 10, (ii) the Listing of the LifePoint Common Stock and the Triad Common Stock, (iii) the preparation and negotiation of all of the documentation related to the Restructuring Transactions, the Distribution and the other transactions contemplated hereby, (iv) the preparation, printing and mailing of the Information Statement, (v) the preparation and filing of the private letter ruling request submission by Columbia/HCA to the IRS, and (vi) the engagement of Goldman, Sachs & Co. as financial advisor to Columbia/HCA in connection with Restructuring Transactions, the Distribution and the other transactions contemplated hereby, shall be charged to and paid by Columbia/HCA; provided, however, that each of LifePoint and Triad shall be solely responsible and liable for any fees, costs or other expenses that it separately and directly incurs in connection with any of the Restructuring Transactions, the Distribution or any of the other transactions contemplated by this Agreement or any of the Ancillary Agreements. Except as otherwise set forth in this -37- Agreement or any Ancillary Agreement, each party shall bear its own costs and expenses incurred after the Distribution Date. Any amount or expense to be paid or reimbursed by any party hereto to any other party hereto shall be so paid or reimbursed promptly after the existence and amount of such obligation is determined and demand therefor is made. Section 11.2. Termination; Amendment. This Agreement may be ---------------------- terminated and the Distribution may be amended, modified or abandoned at any time prior to the consummation of the Distribution by and in the sole discretion of Columbia/HCA without the approval of LifePoint or Triad. In the event of such termination, amendment, modification or abandonment, no party hereto shall have any Liability of any kind to any other party or any other person. After the Distribution Date, this Agreement may not be terminated, amended or modified except by an agreement in writing signed by all of the parties hereto; provided, -------- however, that only the signatures of Columbia/HCA and LifePoint shall be - ------- required to amend or modify this Agreement in a manner which affects only the rights and obligations hereunder as between Columbia/HCA and LifePoint, and only the signatures of Columbia/HCA and Triad shall be required to amend or modify this Agreement in a manner which affects only the rights and obligations hereunder as between Columbia/HCA and Triad. Section 11.3. Disputes. -------- (a) Resolution of any and all disputes arising from or in connection with this Agreement, any Ancillary Agreement, any Conveyancing and Assumption Instrument or any transaction contemplated hereby or thereby, whether based on contract, tort, statute or otherwise, including, but not limited to, disputes in connection with claims by third parties (collectively, "Disputes"), shall be resolved in accordance with this Section 11.3; provided, however, that a party may, without prejudice to the ------------ provisions of this Section 11.3, file a complaint for statute of ------------ limitations reasons, or to seek a preliminary injunction or other provisional relief, if in its sole judgment such action is necessary to avoid irreparable damage or to preserve the status quo. Despite such action the parties shall continue to participate in good faith in the procedures specified in this Section 11.3. All applicable statutes of limitations and ------------ defenses based upon the passage of time shall be tolled while the procedures set forth in this Section 11.3 are pending. The parties shall ------------ take such action, if any, as is required to effectuate such tolling. (b) The parties shall use all reasonable efforts to amicably resolve any Dispute through direct discussions, and each party agrees that its senior management will respond promptly to notice of any such Dispute. Any party hereto may give another party written notice of any Dispute, which notice shall include a statement of the position of the party giving such notice and a summary of arguments supporting that position. Within 30 days after such written notice is received, one or more members of the senior management of each of the parties involved in the Dispute shall meet in Nashville, Tennessee to -38- attempt in good faith to resolve the Dispute. All reasonable requests for information made by one party to the other will be honored. (c) If the Dispute has not been resolved by negotiation pursuant to Section 11.3(b) above within 90 days of delivery of the first written --------------- notice, or if the senior management of the parties to the Dispute have failed to meet within 45 days after the date of delivery of such notice, then within 15 days thereafter, the chief executive officer of each of the parties involved in the Dispute shall meet in Nashville, Tennessee to attempt in good faith to resolve the Dispute. (d) If the Dispute has not been resolved by negotiation pursuant to Section 11.3(b) or (c) above within 120 days of delivery of the first --------------- --- written notice, or if the chief executive officers of such parties have failed to meet when required pursuant to Section 11.3(c) above, then each --------------- party to the Dispute shall retain and thereafter may pursue all rights and remedies it may have at law or in equity in respect of such Dispute, including, without limitation, commencing any Action permitted by Law or, if the parties mutually shall agree, submitting such matter to be settled by arbitration. Section 11.4. Consent to Jurisdiction. Columbia/HCA, LifePoint and ----------------------- Triad each hereby expressly (a) submits and consents in advance to the jurisdiction of any Tennessee State Court sitting in Nashville, Tennessee or the United States District Court for the Middle District of Tennessee with respect to any Actions arising out of or relating to this Agreement, (b) waives any objection which it may have based upon lack of personal jurisdiction, improper venue or forum non conveniens, (c) agrees that all claims with respect to such Actions may be heard and determined in any Tennessee State Court sitting in Nashville, Tennessee or the United States District Court for the Middle District of Tennessee, (d) agrees not to commence any Action relating to this Agreement other than in a Tennessee State Court sitting in Nashville, Tennessee or the United States District Court for the Middle District of Tennessee, and (e) agrees that a final judgment in any such Action shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Section 11.5. Waiver of Jury Trial. EACH OF COLUMBIA/HCA, LIFEPOINT -------------------- AND TRIAD ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE -39- FOREGOING WAIVER, (B) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH PARTY MAKES THIS WAIVER VOLUNTARILY AND (D) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.5. ------------ Section 11.6. Notices. All notices or other communications required or ------- permitted under this Agreement shall be in writing and sufficient if sent by registered or certified mail, postage prepaid, addressed as provided below; or delivered personally, by private courier or fax, and followed by such mailing: If to Columbia/HCA, to Columbia/HCA Healthcare Corporation One Park Plaza Nashville, Tennessee 37203 Telecopy: (615) 344-2075 Attention: Robert A. Waterman, Esq. Senior Vice President and General Counsel If to LifePoint, to LifePoint Hospitals, Inc. 4525 Harding Road Suite 103 Nashville, Tennessee 37205 Telecopy: (615) ___-____ Attention: Mr. Scott L. Mercy Chairman and Chief Executive Officer If to Triad, to Triad Hospitals, Inc. 13455 Noel Road 20th Floor Dallas, Texas 75240 Telecopy: (___) ___-____ Attention: Mr. James D. Shelton Chairman and Chief Executive Officer In each case, with a copy to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019-6092 Telecopy: (212) 259-6333 Attention: Morton A. Pierce, Esq. -40- Any party may change the person and address to which notices or other communications are to be sent to it by giving written notice of any such change in the manner provided herein. Section 11.7. Entire Agreement. This Agreement, together with the ---------------- Ancillary Agreements and the exhibits and other documents delivered pursuant hereto, sets forth the entire agreement and understanding of the parties hereto in respect of the transactions contemplated hereby, and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof. No party hereto has relied upon any oral or written statement, representation, warranty, covenant, condition, understanding or agreement made by any other party or any representative, agent or employee thereof, except for those expressly set forth in this Agreement or in the exhibits or other documents delivered pursuant hereto. Nothing herein is intended to diminish any of the rights or obligations of any of the parties pursuant to the Tax Agreement, the Insurance Allocation and Administration Agreement, the Employee Benefits Agreement, any of the other Ancillary Agreements or any Conveyancing and Assumption Instrument. Section 11.8. Assignment. This Agreement shall inure to the benefit ---------- of, and be binding upon, the parties hereto and their respective successors, heirs, executors, administrators, legal representatives and permitted assigns; provided, however, that no assignment of any rights or delegation of any obligations provided for herein shall be made by any party hereto without the express prior written consent of each other party hereto; provided, further, that only the signatures of Columbia/HCA and LifePoint shall be required to effect an assignment in a manner which affects only the rights and obligations hereunder as between Columbia/HCA and LifePoint, and only the signatures of Columbia/HCA and Triad shall be required to effect an assignment in a manner which affects only the rights and obligations hereunder as between Columbia/HCA and Triad. Notwithstanding the foregoing, the indemnification by Columbia/HCA of the LifePoint Indemnitees and the Triad Indemnitees in respect of the Indemnified Matters provided for herein shall not be assignable, and no party shall request that Columbia/HCA consent to such assignment. Section 11.9. Survival of Agreements and Covenants. Except as ------------------------------------ otherwise expressly provided herein, all agreements and covenants of the parties hereto which are contained in this Agreement, together with the exhibits and other documents delivered pursuant hereto, shall survive the Distribution and remain operative and in full force and effect, regardless of any investigation heretofore or hereafter made by or on behalf of any of the parties hereto. Section 11.10. No Third Party Beneficiaries. Except as provided in ---------------------------- Article V above (relating to Indemnitees), this Agreement is solely for the - --------- benefit of the parties hereto, and should not be construed to confer upon any other person any remedy, claim, liability, right of reimbursement, claim of action or other right. Section 11.11. Waiver. No delay or omission by any party hereto to ------ exercise any right or power under this Agreement or pursuant to applicable law shall -41- impair such right or power or be construed as a waiver thereof. A waiver by any party hereto of any of the covenants to be performed by any other party or any breach shall not be construed to be a waiver of any succeeding breach or of any other covenant. All rights and remedies conferred under this Agreement or by any other instrument or law shall be cumulative and may be exercised singularly or concurrently. The failure by either party to enforce any term shall not be deemed to be a waiver of future enforcement of that or any other term of this Agreement. Section 11.12. Severability. In the event that any provision hereof ------------ is prohibited or unenforceable in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Section 11.13. Governing Law. This Agreement shall be deemed to be ------------- made in and in all respects shall be interpreted, construed and governed by and in accordance with the law of the State of Delaware without regard to the conflict of law principles thereof. Section 11.14. Counterparts. This Agreement may be executed in any ------------ number of separate counterparts, each of which shall be deemed to be an original, but which together shall constitute one and the same instrument. -42- Section 11.15. Headings. The section headings contained in this -------- Agreement are inserted for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, each party hereto has duly executed this Agreement, or has caused this Agreement to be duly executed, as of the date first above written. Columbia/HCA Healthcare Corporation By_____________________________ Thomas F. Frist, Jr., M.D. Chairman and Chief Executive Officer LifePoint Hospitals, Inc. By_____________________________ Scott L. Mercy Chairman and Chief Executive Officer Triad Hospitals, Inc. By_____________________________ James D. Shelton Chairman and Chief Executive Officer -43- List of Exhibits Exhibit Description ------- ----------- Exhibit A Ancillary Agreements Exhibit B LifePoint By-laws Exhibit C LifePoint Certificate of Incorporation Exhibit D Triad By-laws Exhibit E Triad Certificate of Incorporation Exhibit F Certain Guarantees Exhibit G Medicare and Medicaid Reimbursement for Appeal Issues Exhibit H Standard Forms of Insurance Policies Exhibit I -44- EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 0 0 85 48 14 69 443 176 355 42 0 0 0 0 286 355 0 498 0 283 117 42 19 (28) (10) (18) (4) 0 0 (22) (.51) (.51)
EX-27.2 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 0 0 91 38 13 81 440 154 398 39 1 0 0 0 323 398 0 488 0 252 120 35 15 29 12 17 (4) 0 (1) 13 .29 .29
EX-27.3 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 0 0 80 30 13 78 392 133 376 38 1 0 0 0 304 376 0 464 0 227 199 28 14 66 26 40 2 0 0 42 .96 .96
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