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