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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-29818
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LifePoint Hospitals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-2165845
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
103 Powell Court 37027
Brentwood, Tennessee (Zip Code)
(Address of principal executive offices)
(615) 372-8500
(Registrant's telephone number, including area code)
4525 Harding Road
Nashville, Tennessee 37205
(Former name, former address and former fiscal year,
if changed since last report)
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
2
Commission file number 333-84755
--------------------------------
LifePoint Hospitals Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-2167869
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
103 Powell Court
Brentwood, Tennessee 37027
(Address of principal executive offices) (Zip Code)
(615) 372-8500
(Registrant's telephone number, including area code)
4525 Harding Road
Nashville, Tennessee 37205
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of March 17, 2000, the number of outstanding shares of Common Stock
of LifePoint Hospitals, Inc. was 33,704,040, and all of the shares of Common
Stock of LifePoint Hospitals Holdings, Inc. were owned by LifePoint Hospitals,
Inc.
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Part I: Financial Information
Item 1: Financial Statements
LIFEPOINT HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(Dollars in millions, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues........................................................... $ 125.4 $ 124.7 $ 387.8 $ 379.1
Salaries and benefits.............................................. 52.2 54.3 165.1 164.0
Supplies........................................................... 15.7 15.7 47.7 46.3
Other operating expenses........................................... 28.8 27.9 87.4 85.8
Provision for doubtful accounts.................................... 10.7 12.0 30.1 31.3
Depreciation and amortization...................................... 7.9 7.4 23.3 20.4
Interest expense................................................... 6.7 4.8 17.4 14.2
Management fees allocated from Columbia/HCA........................ - 2.2 3.2 6.7
ESOP expense....................................................... 1.2 - 1.7 -
Impairment of long-lived assets.................................... - 1.3 - 1.3
------- ------- ------- -------
123.2 125.6 375.9 370.0
------- ------- ------- -------
Income (loss) from continuing operations before minority
interests and income taxes...................................... 2.2 (0.9) 11.9 9.1
Minority interests in earnings of consolidated entities............ 0.4 0.5 1.4 1.4
------- ------- ------- -------
Income (loss) from continuing operations before income taxes....... 1.8 (1.4) 10.5 7.7
Provision (benefit) for income taxes............................... 0.7 (0.6) 4.4 3.1
------- ------- ------- -------
Income (loss) from continuing operations........................... 1.1 (0.8) 6.1 4.6
Loss from discontinued operations, net of tax benefit of ($0.9)
for the three months and ($2.3) for the nine months ended
September 30, 1998.............................................. - (1.4) - (3.7)
------- ------- ------- -------
Net income (loss)............................................... $ 1.1 $ (2.2) $ 6.1 $ 0.9
======= ======= ======= =======
Basic and diluted earnings (loss) per share:
Income (loss) from continuing operations........................ $ 0.03 $ (0.02) $ 0.20 $ 0.16
Loss from discontinued operations............................... - (0.05) - (0.13)
------- ------- ------- -------
Net income (loss)........................................... $ 0.03 $ (0.07) $ 0.20 $ 0.03
======= ======= ======= =======
Shares used in earnings per share calculations (000s):
Basic........................................................... 30,951 29,899 30,349 29,899
Dilutive securities - stock options......................... 63 - 194 100
------- ------- ------- -------
Diluted......................................................... 31,014 29,899 30,543 29,999
======= ======= ======= =======
See accompanying notes.
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LIFEPOINT HOSPITALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(Dollars in millions, except per share amounts)
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
Current assets:
Cash and cash equivalents .............................................. $ 32.7 $ -
Accounts receivable, less allowance for doubtful accounts of $53.4
at September 30, 1999 and $48.3 at December 31, 1998................... 51.9 36.4
Inventories............................................................. 13.8 14.0
Deferred taxes and other current assets ................................ 24.9 18.6
----------- -----------
123.3 69.0
Property and equipment, at cost:
Land.................................................................... 7.2 7.2
Buildings............................................................... 206.2 203.1
Equipment............................................................... 235.1 221.9
Construction in progress (estimated cost to complete and equip
after September 30, 1999 - $ 33.5)..................................... 30.4 10.4
----------- -----------
478.9 442.6
Accumulated depreciation .................................................. (190.7) (176.2)
----------- -----------
288.2 266.4
Intangible assets, net of accumulated amortization of $8.0 at
September 30, 1999 and $6.9 at December 31, 1998 ....................... 23.4 15.2
Other ..................................................................... 4.1 4.4
----------- -----------
$ 439.0 $ 355.0
=========== ===========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable ....................................................... $ 17.6 $ 15.5
Accrued salaries........................................................ 13.3 11.7
Other current liabilities............................................... 28.2 14.6
Current maturities of long-term debt ................................... 2.2 0.3
----------- -----------
61.3 42.1
Intercompany balances payable to Columbia/HCA ............................. - 167.6
Long-term debt ............................................................ 258.0 0.3
Deferred taxes ............................................................ 20.3 21.3
Professional liability risks and other liabilities ........................ 2.6 0.1
Minority interests in equity of consolidated entities ..................... 3.8 4.9
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized;
no shares issued....................................................... - -
Common stock, $0.01 par value; 90,000,000 shares authorized;
31,066,289 shares outstanding at September 30, 1999 ................... 0.3 -
Capital in excess of par value.......................................... 133.1 -
Unearned ESOP compensation.............................................. (30.3) -
Notes receivable for shares sold to employees........................... (10.2) -
Retained earnings....................................................... 0.1 -
Equity, investments by Columbia/HCA .................................... - 118.7
----------- -----------
93.0 118.7
----------- -----------
$ 439.0 $ 355.0
=========== ===========
See accompanying notes.
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LIFEPOINT HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in millions)
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
Cash flows from continuing operating activities:
Net income............................................ $ 6.1 $ 0.9
Adjustments to reconcile net income to
net cash provided by continuing operating activities:
ESOP expense...................................... 1.7 -
Provision for doubtful accounts................... 30.1 31.3
Depreciation and amortization..................... 23.3 20.4
Deferred income taxes (benefit)................... (7.4) 0.1
Loss from discontinued operations................. - 3.7
Reserve for professional liability risk........... 2.5 -
Increase (decrease) in cash from
operating assets and liabilities:
Accounts receivable............................ (25.8) (30.1)
Inventories and other current assets........... (1.7) (0.5)
Accounts payable and accrued expenses.......... 11.8 0.1
Income taxes payable........................... 10.3 -
Other............................................. (0.7) -
-------- --------
Net cash provided by operating
activities.................................... 50.2 25.9
Cash flows from investing activities:
Purchase of property and equipment, net............... (40.5) (23.6)
Other................................................. 0.3 2.2
-------- --------
Net cash used in investing activities.......... (40.2) (21.4)
Cash flows from financing activities:
Decrease in long-term debt, net....................... (0.4) (1.1)
Increase (decrease) in intercompany balances
with Columbia/HCA, net............................... 23.1 (3.4)
-------- --------
Net cash provided by (used in)
financing activities.......................... 22.7 (4.5)
Change in cash and cash equivalents....................... 32.7 -
Cash and cash equivalents at beginning of period.......... - -
-------- --------
Cash and cash equivalents at end of period................ $ 32.7 $ -
======== ========
Interest payments......................................... $ 10.3 $ 14.2
Income tax payments (refunds), net........................ $ 6.1 $ 0.7
Supplemental financing non-cash activities:
Assumption of debt from Columbia/HCA.................. $ 260.0 $ -
Elimination of intercompany amounts payable
to Columbia/HCA...................................... $ 219.8 $ -
See accompanying notes.
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LIFEPOINT HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the spin-off of its operations comprising the America Group to its
shareholders (the "Distribution") as an independent, publicly-traded company
named LifePoint Hospitals, Inc. LifePoint Hospitals, Inc., together with its
subsidiaries, as appropriate, is hereinafter referred to as "the Company".
Owners of Columbia/HCA Common Stock received one share of the Company's Common
Stock for every 19 shares of Columbia/HCA Common Stock which resulted in
approximately 29.9 million shares of the Company's Common Stock outstanding
immediately after the Distribution.
At September 30, 1999, the Company was comprised of 23 general, acute
care hospitals and related health care entities. The entities are located in
non-urban areas in the states of Alabama, Florida, Georgia, Kansas, Kentucky,
Louisiana, Tennessee, Utah and Wyoming. In connection with the Distribution,
all intercompany amounts payable by the Company to Columbia/HCA were eliminated
and the Company assumed certain indebtedness from Columbia/HCA (see Note 4). In
addition, the Company entered into various agreements with Columbia/HCA which
are intended to facilitate orderly changes for both companies in a way which
would be minimally disruptive to each entity. Information regarding
Columbia/HCA included in this report on Form 10-Q is derived from reports and
other information filed by Columbia/HCA with the Securities and Exchange
Commission (the "Commission").
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For periods prior to the Distribution, such
financial statements were prepared on the push down basis of historical cost to
Columbia/HCA and represent the combined financial position, results of
operations and cash flows of the net assets contributed to the Company. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. This Form 10-Q should be read in conjunction with the
audited combined financial statements and notes included in the Company's Form
10 Registration Statement, as amended.
Certain estimates, assumptions and allocations were made in preparing
the unaudited condensed consolidated financial statements included herein.
Therefore such financial statements may not necessarily be indicative of the
results of operations, financial position or cash flows that would have existed
had the Company been a separate, independent company throughout the periods
presented.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
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On May 11, 1999, Columbia/HCA also completed the spin-off of a
separate, independent company, Triad Hospitals, Inc.
NOTE 2 - CONTINGENCIES
Columbia/HCA Investigations, Litigation and Indemnification Rights
Columbia/HCA is currently the subject of several federal investigations
into certain of its business practices, as well as governmental investigations
by various states. Management of LifePoint understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, Columbia/HCA expects additional
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future. Columbia/HCA is the subject of a formal order of
investigation by the Commission. The Commission investigation includes the
anti-fraud, insider trading, periodic reporting and internal accounting control
provisions of the federal securities laws. According to published reports, on
July 2, 1999, a federal jury in Tampa, Florida found two Columbia/HCA employees
guilty of conspiracy and making false statements on Medicare and TRICARE cost
reports for the years 1992 and 1993 and on the Medicaid cost report for 1993.
Both were found not guilty of obstructing a federal auditor. One other employee
was acquitted on all counts for which he had been charged and the jury was
unable to reach a verdict with respect to another employee. This employee and
the government executed an agreement to defer prosecution for 18 months after
which charges will be dismissed. The two convicted employees were sentenced in
December 1999 and both have appealed to the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, which have been
unsealed and served on Columbia/HCA. The actions allege, in general, that
Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated
the False Claims Act by submitting improper claims to the government for
reimbursement. The lawsuits generally seek damages of three times the amount of
all Medicare or Medicaid claims (involving false claims) presented by the
defendants to the federal government, civil penalties of not less than $5,000
nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees
and costs. The government has intervened in six unsealed qui tam actions against
Columbia/HCA. Columbia/HCA is aware of additional qui tam actions that remain
under seal and believes that there are other sealed qui tam cases of which it is
unaware.
Columbia/HCA is a defendant in a number of other suits, which allege,
in general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions.
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigations will be commenced. If Columbia/HCA is found to
have violated federal or state laws relating to Medicare, Medicaid or similar
programs, Columbia/HCA could be subject to substantial monetary fines, civil and
criminal penalties, and exclusion from participation in the Medicare and
Medicaid programs. Similarly, the amounts claimed in the qui tam and other
actions are substantial, and Columbia/HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions. In addition, a
number of derivative actions have been brought by purported stockholders of
Columbia/HCA against certain current and former officers and directors of
Columbia/HCA alleging breach of fiduciary duty and failure to take reasonable
steps to ensure that Columbia/HCA did not engage in illegal practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include the Company for the periods prior to the date of
the Distribution which are presented herein). The extent to which the Company
may or may not continue to be affected after the Distribution by the ongoing
investigations of Columbia/HCA, the initiation of additional investigations, if
any, and the related media coverage cannot be predicted. It is possible that
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these matters could have a material adverse effect on the financial condition
or results of operations of the Company in future periods.
In connection with the Distribution, Columbia/HCA has agreed to
indemnify the Company in respect of any losses which it may incur arising from
the proceedings described above. Columbia/HCA has also agreed to indemnify the
Company in respect of any losses, which it may incur as a result of proceedings
which may be commenced by government authorities or by private parties in the
future that arise from acts, practices or omissions engaged in prior to the
date of the Distribution and relate to the proceedings described above.
Columbia/HCA has also agreed that, in the event that any hospital owned by the
Company as of the date of the Distribution is permanently excluded from
participation in the Medicare and Medicaid programs as a result of the
proceedings described above, then Columbia/HCA will make cash payments to the
Company based on amounts as defined in the Distribution Agreement by and among
Columbia/HCA and the Company. The Company has agreed with Columbia/HCA that, in
connection with the pending governmental investigations, it will negotiate with
the government with respect to a compliance agreement setting forth the
Company's agreement to comply with applicable laws and regulations. If any of
such indemnified matters were successfully asserted against the Company, or any
of its facilities, and Columbia/HCA failed to meet its indemnification
obligations, then such losses could have a material adverse effect on the
business, financial position, results of operations or prospects of the
Company. Columbia/HCA has not indemnified the Company for losses relating to any
acts, practices and omissions engaged in by the Company after the Distribution,
whether or not the Company is indemnified for similar acts, practices and
omissions occurring prior to the date of the Distribution.
General Liability Claims
The Company is subject to claims and suits arising in the ordinary
course of business. In certain of these actions claimants may ask for punitive
damages against the Company, which are usually not covered by insurance. It is
management's opinion that the ultimate resolution of pending claims and legal
proceedings will not have a material adverse effect on the Company's results of
operations or financial position.
Physician Commitments
The Company has committed to provide certain financial assistance
pursuant to recruiting agreements with various physicians practicing in the
communities it serves. In consideration for a physician relocating to one of
its communities and agreeing to engage in private practice for the benefit of
the respective community, the Company may loan certain amounts of money to a
physician, normally over a period of one year, to assist in establishing his or
her practice. Amounts committed to be advanced approximated $13.5 million at
September 30, 1999. The actual amount of such commitments to be subsequently
advanced to physicians often depends upon the financial results of a
physician's private practice during the guaranteed period. Generally, amounts
advanced under the recruiting agreements may be forgiven pro rata over a period
of 48 months contingent upon the physician continuing to practice in the
respective community. It is management's opinion that amounts actually advanced
and not repaid will not have a material adverse effect on the Company's results
of operations or financial position.
NOTE 3 - DISCONTINUED OPERATIONS
Discontinued operations represent the Company's home health care
business. The Company implemented plans to dispose of this business during
1997. During the fourth quarter of 1998, the Company completed the sale of
substantially all of the Company's home health care operations for total
proceeds of approximately $3.8 million. The proceeds were used to repay
intercompany balances to Columbia/HCA. Revenues of the home health care
business totaled approximately $18.0 million for the nine months ended
September 30, 1998.
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NOTE 4 - LONG - TERM DEBT
Assumption of Certain Indebtedness from Columbia/HCA
In connection with the Distribution, all intercompany amounts payable
by the Company to Columbia/HCA were eliminated, and the Company assumed certain
indebtedness from Columbia/HCA. The indebtedness was comprised of a Bank Credit
Agreement and Senior Subordinated Notes.
Bank Credit Agreement
On May 11, 1999, the Company assumed from Columbia/HCA the obligations
under a Bank Credit Agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of September 30, 1999, $25 million of the $60 million term loan
facility was drawn, with the remaining $35 million available for limited
purposes to be drawn in one or two subsequent draws within one year after the
Distribution. The final payment under this term loan facility is due November
11, 2004.
The $85 million term loan facility was drawn in full at the time of
the Distribution. The final payment under this term loan is due November 11,
2005.
The $65 million revolving credit facility is available for working
capital and other general corporate purposes, and any outstanding amounts
thereunder will be due and payable on November 11, 2004. No amounts were
outstanding under this facility as of October 31, 1999.
Repayments under the term loan facilities are due in quarterly
installments with quarterly amortization based on annual amounts. Interest on
the Bank Facilities is currently based on LIBOR plus 3.00% for the revolving
credit facility and the $60 million term loan facility, and LIBOR plus 3.50%
for the $85 million term loan facility. The weighted average interest rate on
the Bank Facilities was approximately 8.8% at September 30, 1999. The Company
also pays a commitment fee equal to 0.5% of the average daily amount available
under the revolving credit facility and on the undrawn portion of the $60
million term loan facility.
The Company's bank debt is guaranteed by its subsidiaries. These
guarantees are secured by a pledge of substantially all of the subsidiaries'
assets. The Credit Agreement requires that the Company comply with various
financial ratios and tests and contains covenants, including but not limited to
restrictions on new indebtedness, the ability to merge or consolidate, asset
sales, capital expenditures and dividends.
Senior Subordinated Notes
On May 11, 1999, the Company assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at
10.75%. In November 1999, in a registered exchange offer, the Company issued a
like aggregate principal amount of notes in exchange for these notes (the
"Notes"). Interest is payable semi-annually. The Notes are unsecured obligations
and are subordinated in right of payment to all existing and future senior
indebtedness.
The indenture pursuant to which the Notes were made contains certain
covenants including, but not limited to, restrictions on new indebtedness, the
ability to merge or consolidate, asset sales, capital expenditures and
dividends.
The Notes are guaranteed jointly and severally by all of the Company's
operating subsidiaries ("Subsidiary Guarantors"). The Company is a holding
company with limited operations apart from its ownership of the Subsidiary
Guarantors. The aggregate assets, liabilities, equity and earnings of the
Subsidiary Guarantors are substantially equivalent to the total assets,
liabilities, equity and earnings of the Company and its subsidiaries on a
consolidated basis. At September 30, 1999, substantially all of the Subsidiary
Guarantors were
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wholly-owned and fully and unconditionally guaranteed the Notes. Separate
financial statements of the wholly-owned Subsidiary Guarantors are not
presented because management believes that separate financial statements would
not provide additional material information to investors.
As of September 30, 1999, two of the Subsidiary Guarantors were not
wholly owned and the guarantees of such non-wholly owned entities were limited.
Subsequent to September 30, 1999, the Company acquired ownership of the
remaining interest in one such Subsidiary Guarantor, and the limitations on the
guarantee of such Subsidiary Guarantor, as well as the limitations on the
guarantee of the remaining non-wholly owned Subsidiary Guarantor, were
eliminated. Therefore, subsequent to September 30, 1999, only one of the
Company's subsidiaries, Dodge City Healthcare Group, L.P., was not wholly owned,
although all assets, liabilities, equity and earnings of this entity fully and
unconditionally, jointly and severally guarantee the Notes. The Company owns
approximately 70% of the partnership interests in this mostly owned limited
partnership.
A summarized condensed consolidating balance sheet at September 30,
1999 and condensed consolidating statement of operations and condensed
consolidating statement of cash flows for the nine months ended September 30,
1999 for the Company segregating the parent company, the issuer of the Notes,
the combined wholly owned guarantor subsidiaries, the mostly owned guarantor
subsidiary and eliminations are found below. Separate unaudited financial
statements of the issuer of the Notes, LifePoint Hospitals Holdings, Inc. and
the mostly owned guarantor subsidiary, Dodge City Healthcare Group, L.P., are
included elsewhere in this filing. In addition, separate unaudited financial
statements of Dodge City Healthcare Group, L.P., are being filed with the
Securities and Exchange Commission.
LifePoint Hospitals, Inc.
Condensed Consolidating Statement of Operations
For the Nine Months ended September 30, 1999
(in millions)
Wholly Owned Mostly Owned
Issuer of Guarantor Guarantor Consolidated
Parent Notes Subsidiaries Subsidiary Eliminations Total
Revenues ...................................... $ -- $ -- $ 363.5 $ 24.3 $ -- $ 387.8
Salaries and benefits ......................... -- -- 156.6 8.5 -- 165.1
Supplies ...................................... -- -- 44.4 3.3 -- 47.7
Other operating expenses ...................... 0.2 -- 83.7 3.5 -- 87.4
Provision for doubtful accounts ............... -- -- 28.1 2.0 -- 30.1
Depreciation and amortization ................. -- -- 22.0 1.3 -- 23.3
Interest expense .............................. -- 10.5 6.4 0.5 -- 17.4
Management fees ............................... -- -- 2.7 0.5 -- 3.2
ESOP expense .................................. -- -- 1.7 -- -- 1.7
Equity in earnings of affiliates .............. (6.2) (15.1) -- -- 21.3 --
------------------------------------------------------------------------------
(6.0) (4.6) 345.6 19.6 21.3 375.9
------------------------------------------------------------------------------
Income (loss) before minority interests
and income taxes ............................ 6.0 4.6 17.9 4.7 (21.3) 11.9
Minority interests in earnings of
consolidated entities ....................... -- 1.4 -- -- -- 1.4
------------------------------------------------------------------------------
Income (loss) before income taxes ............. 6.0 3.2 17.9 4.7 (21.3) 10.5
Provision (benefit) for income taxes .......... (0.1) (3.0) 7.5 -- -- 4.4
------------------------------------------------------------------------------
Net income (loss) ........................ $ 6.1 $ 6.2 $ 10.4 $ 4.7 $ (21.3) $ 6.1
==============================================================================
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LifePoint Hospitals, Inc.
Condensed Consolidating Balance Sheet
September 30, 1999
(in millions)
Wholly Owned Mostly Owned Consoli-
Issuer of Guarantor Guarantor dated
Parent Notes Subsidiaries Subsidiary Eliminations Total
ASSETS
------
Current assets:
Cash and cash equivalents ......................... $ -- $ -- $ 32.7 $ -- $ -- $ 32.7
Accounts receivable, net .......................... -- -- 46.7 5.2 -- 51.9
Inventories ....................................... -- -- 12.8 1.0 -- 13.8
Deferred taxes and other current assets ........... -- -- 24.8 0.1 -- 24.9
------------------------------------------------------------------------
-- -- 117.0 6.3 -- 123.3
Property and equipment, at cost:
Land .............................................. -- -- 6.9 0.3 -- 7.2
Buildings ......................................... -- -- 196.7 9.5 -- 206.2
Equipment ......................................... -- -- 225.0 10.1 -- 235.1
Construction in progress .......................... -- -- 29.9 0.5 -- 30.4
------------------------------------------------------------------------
-- -- 458.5 20.4 -- 478.9
Accumulated depreciation .............................. -- -- (179.9) (10.8) -- (190.7)
------------------------------------------------------------------------
-- -- 278.6 9.6 -- 288.2
Net investment in and advances to subsidiaries ........ 93.0 347.3 -- -- (440.3) --
Intangible assets, net ................................ -- 8.7 4.1 10.6 -- 23.4
Other ................................................. -- -- 4.1 -- -- 4.1
------------------------------------------------------------------------
$ 93.0 $356.0 $ 403.8 $ 26.5 $(440.3) $ 439.0
========================================================================
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable .................................. $ -- $ -- $ 16.9 $ 0.7 $ -- $ 17.6
Accrued salaries .................................. -- -- 13.3 -- -- 13.3
Other current liabilities ......................... 6.6 21.4 0.2 -- 28.2
Current maturities of long-term debt .............. -- 2.0 0.2 -- -- 2.2
------------------------------------------------------------------------
-- 8.6 51.8 0.9 -- 61.3
Intercompany balances to affiliates ................... -- (7.4) (5.3) 12.7 --
Long-term debt ........................................ -- 258.0 -- -- -- 258.0
Deferred income taxes ................................. -- -- 20.3 -- -- 20.3
Professional liability risks and other liabilities .... -- -- 2.6 -- -- 2.6
Minority interests in equity of consolidated entities . -- 3.8 -- -- 3.8
Stockholders' equity .................................. 93.0 93.0 334.4 12.9 (440.3) 93.0
------------------------------------------------------------------------
$ 93.0 $356.0 $ 403.8 $ 26.5 $(440.3) $ 439.0
========================================================================
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LifePoint Hospitals, Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months ended September 30, 1999
(in millions)
Wholly Owned Mostly Owned Consoli-
Issuer of Guarantor Guarantor dated
Parent Notes Subsidiaries Subsidiary Eliminations Total
Cash flows from operating activities:
Net income ........................................ $ 6.1 $ 6.2 $ 10.4 $ 4.7 $ (21.3) $ 6.1
Adjustments to reconcile net income to net cash
provided by operating activities:
ESOP expense ................................... -- -- 1.7 -- 1.7
Equity in earnings of affiliates ............... (6.2) (15.1) -- -- 21.3 --
Provision for doubtful accounts ................ -- -- 28.1 2.0 30.1
Depreciation and amortization .................. -- -- 22.0 1.3 23.3
Amortization of deferred loan costs ............ -- -- -- -- --
Deferred income taxes (benefit) ................ -- -- (7.4) -- (7.4)
Impairment of long-lived assets ................ -- -- -- -- --
Reserve for professional liability risk ........ -- -- 2.5 -- 2.5
Increase (decrease) in cash from operating
assets and liabilities:
Accounts receivable .......................... -- -- (24.4) (1.4) (25.8)
Inventories and other current assets ......... -- -- (1.6) (0.1) (1.7)
Accounts payable and accrued expenses ........ -- 10.5 1.5 (0.2) 11.8
Income taxes payable ......................... -- -- 10.3 -- 10.3
Other .......................................... 0.1 1.4 (2.2) -- (0.7)
------------------------------------------------------------------------
Net cash provided by
operating activities ........................ -- 3.0 40.9 6.3 -- 50.2
Cash flows from investing activities:
Purchase of property and equipment, net ........... -- -- (39.3) (1.2) (40.5)
Other ............................................. -- -- 0.3 -- 0.3
------------------------------------------------------------------------
Net cash used in
investing activities ........................ -- -- (39.0) (1.2) -- (40.2)
Cash flows from financing activities:
Decrease in long-term debt, net ................... -- -- (0.1) (0.3) (0.4)
Distributions ..................................... -- -- 6.0 (6.0) --
Increase (decrease) in intercompany balances
with affiliates, net ............................ -- (3.0) 1.8 1.2 --
Increase (decrease) in intercompany balances
with Columbia/HCA, net .......................... -- -- 23.1 -- 23.1
------------------------------------------------------------------------
Net cash provided by (used in)
financing activities ........................ -- (3.0) 30.8 (5.1) -- 22.7
Change in cash and cash equivalents .................. -- -- 32.7 -- -- 32.7
Cash and cash equivalents at beginning of period ..... -- -- -- -- -- --
------------------------------------------------------------------------
Cash and cash equivalents at end of period ........... $ -- $ -- $ 32.7 $ -- $ -- $ 32.7
========================================================================
NOTE 5 - STOCK BENEFIT PLANS
In connection with the Distribution, the Company adopted the 1998
Long-Term Incentive Plan, for which 5,425,000 shares of the Company's Common
Stock have been reserved for issuance. The 1998 Long-Term Incentive Plan
authorizes the grant of stock
11
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options, stock appreciation rights and other stock based awards to officers and
employees of the Company. On the Distribution date, 549,854 stock options were
granted under this plan, relating to pre-existing vested Columbia/HCA options.
These options were granted at various prices and were exercisable on the date
of grant. In June 1999, 2,687,000 stock options were granted under this plan
with an exercise price of the fair market value on the date of grant. These
options are exercisable beginning in part from the date of grant to five years
after the date of grant. All options granted under this plan expire in 10 years
from the date of grant. The Company also granted 340,000 options to
Columbia/HCA executives with an exercise price of the fair market value on the
date of grant. These options were exercisable on the date of grant.
Columbia/HCA paid the Company $1.5 million in exchange for the issuance of
these options.
The Company has also adopted the Executive Stock Purchase Plan, in
which 1,000,000 shares of the Company's Common Stock were reserved and
subsequently issued. The Executive Stock Purchase Plan grants a right to
specified executives of the Company to purchase shares of Common Stock from the
Company. The Company loaned each participant in the plan 100% of the purchase
price of the Company's Common Stock (approximately $10.2 million), on a full
recourse basis. The loans are reflected as a reduction to stockholders' equity
as "Notes receivable for shares sold to employees". In addition, such
executives have been granted options equal to three-quarters of a share for
each share purchased. As of September 30, 1999, options to purchase 750,000
shares had been issued. The exercise price of these stock options is equal to
the purchase price of the shares. The options expire in 10 years and are
exercisable 50% on the date of grant and 50% five years after the Distribution.
In addition, the Company adopted various other plans for which 425,000
shares of the Company's Common Stock have been reserved for issuance. In June
1999, 19,976 options were granted under such plans to non-employee directors.
These options are exercisable beginning in part from the date of grant to three
years after the date of grant and expire 10 years after grant.
In connection with the Distribution, the Company established the
LifePoint Employee Stock Ownership Plan ("ESOP"). The ESOP purchased from the
Company approximately 8.3% of the Company's Common Stock at fair market value
(approximately 2.8 million shares at $11.50 per share). Shares will be
allocated ratably to employee accounts over the next 10 years beginning in
fiscal year 1999. The shares held by the ESOP which have not yet been allocated
to employee accounts are included in shareholders' equity as "Unearned ESOP
compensation". Unearned ESOP shares are released at historical cost upon being
allocated to employee accounts. ESOP expense is recognized using the average
market price of shares committed to be released during the allocation period
with any difference between the average market price and the cost being charged
or credited to capital in excess of par value. As the shares are committed to
be released, the shares become outstanding for earnings per share calculations.
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LIFEPOINT HOSPITALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(Dollars in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
Revenues........................................................... $ 125.4 $ 124.7 $ 387.8 $ 379.1
Salaries and benefits.............................................. 52.2 54.3 165.1 164.0
Supplies........................................................... 15.7 15.7 47.7 46.3
Other operating expenses........................................... 28.6 27.9 87.2 85.8
Provision for doubtful accounts.................................... 10.7 12.0 30.1 31.3
Depreciation and amortization...................................... 7.9 7.4 23.3 20.4
Interest expense................................................... 6.7 4.8 17.4 14.2
Management fees allocated from Columbia/HCA........................ - 2.2 3.2 6.7
ESOP expense....................................................... 1.2 - 1.7 -
Impairment of long-lived assets.................................... - 1.3 - 1.3
------- ------- ------- -------
123.0 125.6 375.7 370.0
------- ------- ------- -------
Income (loss) from continuing operations before minority
interests and income taxes...................................... 2.4 (0.9) 12.1 9.1
Minority interests in earnings of consolidated entities............ 0.4 0.5 1.4 1.4
------- ------- ------- -------
Income (loss) from continuing operations before income taxes....... 2.0 (1.4) 10.7 7.7
Provision (benefit) for income taxes............................... 0.8 (0.6) 4.5 3.1
------- ------- ------- -------
Income (loss) from continuing operations........................... 1.2 (0.8) 6.2 4.6
Loss from discontinued operations, net of tax benefit of ($0.9)
for the three months and ($2.3) for the nine months ended
September 30, 1998.............................................. - (1.4) - (3.7)
------- ------- ------- -------
Net income (loss)............................................... $ 1.2 $ (2.2) $ 6.2 $ 0.9
======= ======= ======= =======
See accompanying notes.
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LIFEPOINT HOSPITALS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
(Dollars in millions, except per share amounts)
September 30, December 31,
ASSETS 1999 1998
------ ------------- ------------
Current assets:
Cash and cash equivalents .............................................. $ 32.7 $ -
Accounts receivable, less allowance for doubtful accounts of $53.4
at September 30, 1999 and $48.3 at December 31, 1998................... 51.9 36.4
Inventories............................................................. 13.8 14.0
Deferred taxes and other current assets ................................ 24.9 18.6
----------- -----------
123.3 69.0
Property and equipment, at cost:
Land.................................................................... 7.2 7.2
Buildings............................................................... 206.2 203.1
Equipment............................................................... 235.1 221.9
Construction in progress (estimated cost to complete and equip
after September 30, 1999 - $ 33.5)..................................... 30.4 10.4
----------- -----------
478.9 442.6
Accumulated depreciation .................................................. (190.7) (176.2)
----------- -----------
288.2 266.4
Intangible assets, net of accumulated amortization of $8.0 at
September 30, 1999 and $6.9 at December 31, 1998 ....................... 23.4 15.2
Other ..................................................................... 4.1 4.4
----------- -----------
$ 439.0 $ 355.0
=========== ===========
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable ....................................................... $ 17.6 $ 15.5
Accrued salaries........................................................ 13.3 11.7
Other current liabilities............................................... 28.2 14.6
Current maturities of long-term debt ................................... 2.2 0.3
----------- -----------
61.3 42.1
Intercompany balances payable to Columbia/HCA ............................. - 167.6
Long-term debt ............................................................ 258.0 0.3
Deferred taxes ............................................................ 20.3 21.3
Professional liability risks and other liabilities ........................ 2.6 0.1
Minority interests in equity of consolidated entities ..................... 3.8 4.9
Stockholder's equity:
Common stock, $0.01 par value; 1,000 shares authorized;
999 shares outstanding at September 30, 1999 .......................... - -
Capital in excess of par value.......................................... 92.8 -
Retained earnings....................................................... 0.2 -
Equity, investments by Columbia/HCA .................................... - 118.7
----------- -----------
93.0 118.7
----------- -----------
$ 439.0 $ 355.0
=========== ===========
See accompanying notes.
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LIFEPOINT HOSPITALS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in millions)
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
Cash flows from continuing operating activities:
Net income............................................ $ 6.2 $ 0.9
Adjustments to reconcile net income to
net cash provided by continuing operating activities:
ESOP expense...................................... 1.7 -
Provision for doubtful accounts................... 30.1 31.3
Depreciation and amortization..................... 23.3 20.4
Deferred income taxes (benefit)................... (7.4) 0.1
Loss from discontinued operations................. - 3.7
Reserve for professional liability risk........... 2.5 -
Increase (decrease) in cash from
operating assets and liabilities:
Accounts receivable............................ (25.8) (30.1)
Inventories and other current assets........... (1.7) (0.5)
Accounts payable and accrued expenses.......... 11.8 0.1
Income taxes payable........................... 10.3 -
Other............................................. (0.8) -
-------- --------
Net cash provided by operating
activities.................................... 50.2 25.9
Cash flows from investing activities:
Purchase of property and equipment, net............... (40.5) (23.6)
Other................................................. 0.3 2.2
-------- --------
Net cash used in investing activities.......... (40.2) (21.4)
Cash flows from financing activities:
Decrease in long-term debt, net....................... (0.4) (1.1)
Increase (decrease) in intercompany balances
with Columbia/HCA, net............................... 23.1 (3.4)
-------- --------
Net cash provided by (used in)
financing activities.......................... 22.7 (4.5)
Change in cash and cash equivalents....................... 32.7 -
Cash and cash equivalents at beginning of period.......... - -
-------- --------
Cash and cash equivalents at end of period................ $ 32.7 $ -
======== ========
Interest payments......................................... $ 10.3 $ 14.2
Income tax payments (refunds), net........................ $ 6.1 $ 0.7
Supplemental financing non-cash activities:
Assumption of debt from Columbia/HCA.................. $ 260.0 $ -
Elimination of intercompany amounts payable
to Columbia/HCA...................................... $ 219.8 $ -
See accompanying notes.
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LIFEPOINT HOSPITALS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
LifePoint Hospitals Holdings, Inc. ("Holdings" or "the Company") is a
wholly owned subsidiary of LifePoint Hospitals, Inc. ("LifePoint"). LifePoint
has limited independent operations and net assets other than through its
ownership of the Company and indirect ownership of the Company's subsidiaries.
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the spin-off of its operations comprising the America Group to its
shareholders by distributing all outstanding shares of LifePoint (the
"Distribution"). Owners of Columbia/HCA Common Stock received one share of
LifePoint's Common Stock for every 19 shares of Columbia/HCA Common Stock which
resulted in approximately 29.9 million shares of LifePoint's Common Stock
outstanding immediately after the Distribution.
At September 30, 1999, the Company was comprised of 23 general, acute
care hospitals and related health care entities. The entities are located in
non-urban areas in the states of Alabama, Florida, Georgia, Kansas, Kentucky,
Louisiana, Tennessee, Utah and Wyoming. In connection with the Distribution, all
intercompany amounts payable by the Company to Columbia/HCA were eliminated and
the Company assumed certain indebtedness from Columbia/HCA (see Note 4). In
addition, LifePoint, on behalf of the Company, entered into various agreements
with Columbia/HCA which are intended to facilitate orderly changes for both
companies in a way which would be minimally disruptive to each entity.
Information regarding Columbia/HCA included in this report on Form 10-Q is
derived from reports and other information filed by Columbia/HCA with the
Securities and Exchange Commission (the "Commission").
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For periods prior to the Distribution, such
financial statements were prepared on the push down basis of historical cost to
Columbia/HCA and represent the combined financial position, results of
operations and cash flows of the net assets contributed to the Company. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. This Form 10-Q should be read in conjunction with the
audited combined financial statements and notes included in LifePoint's Form 10
Registration Statement, as amended.
Certain estimates, assumptions and allocations were made in preparing
the unaudited condensed consolidated financial statements included herein.
Therefore such financial statements may not necessarily be indicative of the
results of operations, financial position or cash flows that would have existed
had the Company been a separate, independent company throughout the periods
presented.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
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On May 11, 1999, Columbia/HCA also completed the spin-off of a
separate, independent company, Triad Hospitals, Inc.
NOTE 2 - CONTINGENCIES
Columbia/HCA Investigations, Litigation and Indemnification Rights
Columbia/HCA is currently the subject of several federal investigations
into certain of its business practices, as well as governmental investigations
by various states. Management of the Company understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, Columbia/HCA expects additional
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future. Columbia/HCA is the subject of a formal order of
investigation by the Commission. The Commission investigation includes the
anti-fraud, periodic reporting and internal accounting control provisions of the
federal securities laws. According to published reports, on July 2, 1999, a
federal jury in Tampa, Florida found two Columbia/HCA employees guilty of
conspiracy and making false statements on Medicare and TRICARE cost reports for
the years 1992 and 1993 and on a Medicaid cost report for 1993. Both were found
not guilty of obstructing a federal auditor. One other employee was acquitted on
all counts for which he had been charged and the jury was unable to reach a
verdict with respect to another employee. This employee and the government
executed an agreement to defer prosecution for 18 months after which charges
will be dismissed. The two convicted employees were sentenced in December 1999
and both have appealed to the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, which have been
unsealed and served on Columbia/HCA. The actions allege, in general, that
Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated
the False Claims Act by submitting improper claims to the government for
reimbursement. The lawsuits seek damages of three times the amount of all
Medicare or Medicaid claims (involving false claims) presented by the defendants
to the federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The
government has intervened in six unsealed qui tam actions against Columbia/HCA.
Columbia/HCA is aware of additional qui tam actions that remain under seal and
believes that there are other sealed qui tam cases of which it is unaware.
Columbia/HCA is a defendant in a number of other suits, which allege,
in general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions.
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigations will be commenced. If Columbia/HCA is found to
have violated federal or state laws relating to Medicare, Medicaid or similar
programs, Columbia/HCA could be subject to substantial monetary fines, civil and
criminal penalties, and exclusion from participation in the Medicare and
Medicaid programs. Similarly, the amounts in question in the qui tam and other
actions may be substantial, and Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions. In
addition, a number of derivative actions have been brought by purported
stockholders of Columbia/HCA against certain current and former officers and
directors of Columbia/HCA alleging breach of fiduciary duty and failure to take
reasonable steps to ensure that Columbia/HCA did not engage in illegal
practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include the Company for the periods prior to the date of
the Distribution which are presented herein). The extent to which LifePoint and
the Company may or may not continue to be affected after the Distribution by the
ongoing investigations of Columbia/HCA, the initiation of additional
investigations, if any, and the related media coverage cannot be predicted. It
is possible that
17
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these matters could have a material adverse effect on the financial condition
or results of operations of LifePoint and the Company in future periods.
In connection with the Distribution, Columbia/HCA has agreed to
indemnify LifePoint and the Company in respect of any losses which it may incur
arising from the proceedings described above. Columbia/HCA has also agreed to
indemnify LifePoint and the Company in respect of any losses, which it may incur
as a result of proceedings which may be commenced by government authorities or
by private parties in the future that arise from acts, practices or omissions
engaged in prior to the date of the Distribution and relate to the proceedings
described above. Columbia/HCA has also agreed that, in the event that any
hospital owned by the Company as of the date of the Distribution is permanently
excluded from participation in the Medicare and Medicaid programs as a result of
the proceedings described above, then Columbia/HCA will make cash payments to
LifePoint based on amounts as defined in the Distribution Agreement by and among
Columbia/HCA and LifePoint. LifePoint, on behalf of the Company, has agreed with
Columbia/HCA that, in connection with the pending governmental investigations,
it will negotiate with the government with respect to a compliance agreement
setting forth the Company's agreement to comply with applicable laws and
regulations. If any of such indemnified matters were successfully asserted
against LifePoint or the Company, or any of its facilities, and Columbia/HCA
failed to meet its indemnification obligations, then such losses could have a
material adverse effect on the business, financial position, results of
operations or prospects of LifePoint and the Company. Columbia/HCA has not
indemnified LifePoint nor the Company for losses relating to any acts, practices
and omissions engaged in by LifePoint and the Company after the Distribution,
whether or not LifePoint or the Company is indemnified for similar acts,
practices and omissions occurring prior to the date of the Distribution.
General Liability Claims
The Company is subject to claims and suits arising in the ordinary
course of business. In certain of these actions claimants may ask for punitive
damages against the Company, which are usually not covered by insurance. It is
management's opinion that the ultimate resolution of pending claims and legal
proceedings will not have a material adverse effect on the Company's results of
operations or financial position.
Physician Commitments
The Company has committed to provide certain financial assistance
pursuant to recruiting agreements with various physicians practicing in the
communities it serves. In consideration for a physician relocating to one of
its communities and agreeing to engage in private practice for the benefit of
the respective community, the Company may loan certain amounts of money to a
physician, normally over a period of one year, to assist in establishing his or
her practice. Amounts committed to be advanced approximated $13.5 million at
September 30, 1999. The actual amount of such commitments to be subsequently
advanced to physicians often depends upon the financial results of a
physician's private practice during the guaranteed period. Generally, amounts
advanced under the recruiting agreements may be forgiven pro rata over a period
of 48 months contingent upon the physician continuing to practice in the
respective community. It is management's opinion that amounts actually advanced
and not repaid will not have a material adverse effect on the Company's results
of operations or financial position.
NOTE 3 - DISCONTINUED OPERATIONS
Discontinued operations represent the Company's home health care
business. The Company implemented plans to dispose of this business during
1997. During the fourth quarter of 1998, the Company completed the sale of
substantially all of the Company's home health care operations for total
proceeds of approximately $3.8 million. The proceeds were used to repay
intercompany balances to Columbia/HCA. Revenues of the home health care
business totaled approximately $18.0 million for the nine months ended
September 30, 1998.
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NOTE 4 - LONG - TERM DEBT
Assumption of Certain Indebtedness from Columbia/HCA
In connection with the Distribution, all intercompany amounts payable
by the Company to Columbia/HCA were eliminated, and the Company assumed certain
indebtedness from Columbia/HCA. The indebtedness was comprised of a Bank Credit
Agreement and Senior Subordinated Notes.
Bank Credit Agreement
On May 11, 1999, the Company assumed from Columbia/HCA the obligations
under a Bank Credit Agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of September 30, 1999, $25 million of the $60 million term loan
facility was drawn, with the remaining $35 million available for limited
purposes to be drawn in one or two subsequent draws within one year after the
Distribution. The final payment under this term loan facility is due November
11, 2004.
The $85 million term loan facility was drawn in full at the time of
the Distribution. The final payment under this term loan is due November 11,
2005.
The $65 million revolving credit facility is available for working
capital and other general corporate purposes, and any outstanding amounts
thereunder will be due and payable on November 11, 2004. No amounts were
outstanding under this facility as of October 31, 1999.
Repayments under the term loan facilities are due in quarterly
installments with quarterly amortization based on annual amounts. Interest on
the Bank Facilities is currently based on LIBOR plus 3.00% for the revolving
credit facility and the $60 million term loan facility, and LIBOR plus 3.50%
for the $85 million term loan facility. The weighted average interest rate on
the Bank Facilities was approximately 8.8% at September 30, 1999. The Company
also pays a commitment fee equal to 0.5% of the average daily amount available
under the revolving credit facility and on the undrawn portion of the $60
million term loan facility.
The Company's bank debt is guaranteed by its subsidiaries. These
guarantees are secured by a pledge of substantially all of the subsidiaries'
assets. The Credit Agreement requires that the Company comply with various
financial ratios and tests and contains covenants, including but not limited to
restrictions on new indebtedness, the ability to merge or consolidate, asset
sales, capital expenditures and dividends.
Senior Subordinated Notes
On May 11, 1999, the Company assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at
10.75%. In November 1999, in a registered exchange offer the Company issued like
aggregate principle amount of notes in exchange for these notes (the "Notes").
Interest is payable semi-annually. The Notes are unsecured obligations and are
subordinated in right of payment to all existing and future senior indebtedness.
The indenture pursuant to which the Notes were made contains
certain covenants including, but not limited to, restrictions on new
indebtedness, the ability to merge or consolidate, asset sales, capital
expenditures and dividends.
The Notes are guaranteed jointly and severally by all of the Company's
operating subsidiaries ("Subsidiary Guarantors"). The Company is a holding
company with limited operations apart from its ownership of the Subsidiary
Guarantors. The aggregate assets, liabilities, equity and earnings of the
Subsidiary Guarantors are equivalent to the total assets, liabilities, equity
and earnings of the Company and its subsidiaries on a consolidated basis. At
September 30, 1999, substantially all of the Subsidiary Guarantors were
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21
wholly-owned and fully and unconditionally guaranteed the Notes. Separate
financial statements of the wholly-owned Subsidiary Guarantors are not
presented because management believes that separate financial statements would
not provide additional material information to investors.
As of September 30, 1999, two of the Subsidiary Guarantors were not
wholly owned and the guarantees of such non-wholly owned entities were limited.
Subsequent to September 30, 1999, the Company acquired ownership of the
remaining interest in one such Subsidiary Guarantor, and the limitations on the
guarantee of such Subsidiary Guarantor, as well as the limitations on the
guarantee of the remaining non-wholly owned Subsidiary Guarantor, were
eliminated. Therefore, subsequent to September 30, 1999, only one of the
Company's subsidiaries, Dodge City Healthcare Group, L.P., was not wholly owned,
although all assets, liabilities, equity and earnings of this entity fully and
unconditionally, jointly and severally guarantee the Notes. The Company owns
approximately 70% of the partnership interests in this mostly owned limited
partnership.
A summarized condensed consolidating balance sheet at September 30,
1999 and condensed consolidating statement of operations and condensed
consolidating statement of cash flows for the nine months ended September 30,
1999 for the Company segregating the parent company, the combined wholly owned
guarantor subsidiaries, the mostly owned guarantor subsidiary and eliminations
are found below. Separate financial statements of the mostly owned guarantor
subsidiary, Dodge City Healthcare Group, L.P., are included elsewhere in this
filing.
LifePoint Hospitals Holdings, Inc.
Condensed Consolidating Statement of Operations
For the Nine Months ended September 30, 1999
(in millions)
Wholly Owned Mostly Owned
Guarantor Guarantor Consolidated
Parent Subsidiaries Subsidiary Eliminations Total
------ ------------ ---------- ------------ -----
Revenues ......................................... $ -- $363.5 $ 24.3 $ -- $387.8
Salaries and benefits ............................ -- 156.6 8.5 -- 165.1
Supplies ......................................... -- 44.4 3.3 -- 47.7
Other operating expenses ......................... -- 83.7 3.5 -- 87.2
Provision for doubtful accounts .................. -- 28.1 2.0 -- 30.1
Depreciation and amortization .................... -- 22.0 1.3 -- 23.3
Interest expense ................................. 10.5 6.4 0.5 -- 17.4
Management fees .................................. -- 2.7 0.5 -- 3.2
ESOP expense ..................................... -- 1.7 -- -- 1.7
Equity in earnings of affiliates ................. (15.1) -- -- 15.1 --
---------------------------------------------------------------------
(4.6) 345.6 19.6 15.1 375.7
---------------------------------------------------------------------
Income (loss) before minority interests and
income taxes .................................... 4.6 17.9 4.7 (15.1) 12.1
Minority interests in earnings of consolidated
entities ........................................ 1.4 -- -- -- 1.4
---------------------------------------------------------------------
Income (loss) before income taxes ................ 3.2 17.9 4.7 (15.1) 10.7
Provision (benefit) for income taxes ............. (3.0) 7.5 -- -- 4.5
---------------------------------------------------------------------
Net income (loss) ........................... $ 6.2 $ 10.4 $ 4.7 $(15.1) $ 6.2
=====================================================================
20
22
LifePoint Hospitals Holdings, Inc.
Condensed Consolidating Balance Sheet
September 30, 1999
(in millions)
Wholly Owned Mostly Owned
Guarantor Guarantor Consolidated
ASSETS Parent Subsidiaries Subsidiary Eliminations Total
------ ------ ------------ ---------- ------------ -----
Current assets:
Cash and cash equivalents .................. $ - $ 32.7 $ - $ - $ 32.7
Accounts receivable, net ................... - 46.7 5.2 - 51.9
Inventories ................................ - 12.8 1.0 - 13.8
Deferred taxes and other current assets .... - 24.8 0.1 - 24.9
----------------------------------------------------------------------------
- 117.0 6.3 - 123.3
Property and equipment, at cost:
Land ....................................... - 6.9 0.3 - 7.2
Buildings .................................. - 196.7 9.5 - 206.2
Equipment .................................. - 225.0 10.1 - 235.1
Construction in progress ................... - 29.9 0.5 - 30.4
----------------------------------------------------------------------------
- 458.5 20.4 - 478.9
Accumulated depreciation ........................ - (179.9) (10.8) - (190.7)
----------------------------------------------------------------------------
- 278.6 9.6 - 288.2
Net investment in and advances to
subsidiaries ................................... 347.3 - - (347.3) -
Intangible assets, net .......................... 8.7 4.1 10.6 - 23.4
Other ........................................... - 4.1 - - 4.1
----------------------------------------------------------------------------
$ 356.0 $ 403.8 $ 26.5 $ (347.3) $ 439.0
============================================================================
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable ........................... $ - $ 16.9 $ 0.7 $ - $ 17.6
Accrued salaries ........................... - 13.3 - - 13.3
Other current liabilities .................. 6.6 21.4 0.2 28.2
Current maturities of long-term debt ....... 2.0 0.2 - - 2.2
----------------------------------------------------------------------------
8.6 51.8 0.9 - 61.3
Intercompany balances to affiliates ............. (7.4) (5.3) 12.7 -
Long-term debt .................................. 258.0 - - - 258.0
Deferred income taxes ........................... - 20.3 - - 20.3
Professional liability risks and other
liabilities .................................... - 2.6 - - 2.6
Minority interests in equity of consolidated
entities ....................................... 3.8 - - 3.8
Stockholders' equity ............................ 93.0 334.4 12.9 (347.3) 93.0
----------------------------------------------------------------------------
$ 356.0 $ 403.8 $ 26.5 $ (347.3) $ 439.0
============================================================================
21
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LifePoint Hospitals Holdings, Inc.
Condensed Consolidating Statement of Cash Flows
For the Nine Months ended September 30, 1999
(in millions)
Wholly Owned Mostly Owned
Guarantor Guarantor Consolidated
Parent Subsidiaries Subsidiary Eliminations Total
------ ------------ ---------- ------------ -----
Cash flows from operating activities:
Net income ............................................. $ 6.2 $ 10.4 $ 4.7 $ (15.1) $ 6.2
Adjustments to reconcile net income to net
cash provided by operating activities:
ESOP expense ....................................... - 1.7 - 1.7
Equity in earnings of affiliates ................... (15.1) - - 15.1 -
Provision for doubtful accounts .................... - 28.1 2.0 30.1
Depreciation and amortization ...................... - 22.0 1.3 23.3
Amortization of deferred loan costs ................ - - - -
Deferred income taxes (benefit) .................... - (7.4) - (7.4)
Impairment of long-lived assets .................... - - - -
Reserve for professional liability risk ............ - 2.5 - 2.5
Increase (decrease) in cash from operating
assets and liabilities:
Accounts receivable ............................. - (24.4) (1.4) (25.8)
Inventories and other current assets ............ - (1.6) (0.1) (1.7)
Accounts payable and accrued expenses ........... 10.5 1.5 (0.2) 11.8
Income taxes payable ............................ - 10.3 - 10.3
Other .............................................. 1.4 (2.2) - (0.8)
-----------------------------------------------------------------
Net cash provided by operating
activities ..................................... 3.0 40.9 6.3 - 50.2
Cash flows from investing activities:
Purchase of property and equipment, net ................ - (39.3) (1.2) (40.5)
Other .................................................. - 0.3 - 0.3
-----------------------------------------------------------------
Net cash used in investing
activities ..................................... - (39.0) (1.2) - (40.2)
Cash flows from financing activities:
Decrease in long-term debt, net ........................ - (0.1) (0.3) (0.4)
Distributions .......................................... - 6.0 (6.0) -
Increase (decrease) in intercompany balances with
affiliates, net ....................................... (3.0) 1.8 1.2 -
Increase in intercompany balances with
Columbia/HCA, net ..................................... - 23.1 - 23.1
-----------------------------------------------------------------
-
Net cash provided by (used in) financing
activities ..................................... (3.0) 30.8 (5.1) - 22.7
Change in cash and cash equivalents ........................ - 32.7 - - 32.7
Cash and cash equivalents at beginning of period ........... - - - - -
-----------------------------------------------------------------
Cash and cash equivalents at end of period ................. $ - $ 32.7 $ - $ - $ 32.7
=================================================================
NOTE 5 - PARTICIPATION IN STOCK BENEFIT PLANS
In connection with the Distribution, LifePoint adopted the 1998
Long-Term Incentive Plan, for which 5,425,000 shares of LifePoint's Common
Stock have been reserved for issuance. The 1998 Long-Term Incentive Plan
authorizes the grant of stock
22
24
options, stock appreciation rights and other stock based awards to officers and
employees of the Company. On the Distribution date, 549,854 stock options were
granted under this plan, relating to pre-existing vested Columbia/HCA options.
These options were granted at various prices and were exercisable on the date of
grant. In June 1999, 2,687,000 stock options were granted under this plan with
an exercise price of the fair market value on the date of grant. These options
are exercisable beginning in part from the date of grant to five years after the
date of grant. All options granted under this plan expire in 10 years from the
date of grant. LifePoint also granted 340,000 options to Columbia/HCA executives
with an exercise price of the fair market value on the date of grant. These
options were exercisable on the date of grant. Columbia/HCA paid the Company
$1.5 million in exchange for the issuance of these options.
LifePoint has also adopted the Executive Stock Purchase Plan, in which
1,000,000 shares of LifePoint's Common Stock were reserved and subsequently
issued. The Executive Stock Purchase Plan grants a right to specified executives
of LifePoint to purchase shares of Common Stock from LifePoint. LifePoint loaned
each participant in the plan 100% of the purchase price of LifePoint's Common
Stock (approximately $10.2 million), on a full recourse basis. The loans are
reflected as a reduction to stockholders' equity as "Notes receivable for shares
sold to employees". In addition, such executives have been granted options equal
to three-quarters of a share for each share purchased. As of September 30, 1999,
options to purchase 750,000 shares had been issued. The exercise price of these
stock options is equal to the purchase price of the shares. The options expire
in 10 years and are exercisable 50% on the date of grant and 50% five years
after the Distribution.
In addition, LifePoint adopted various other plans for which 425,000
shares of LifePoint's Common Stock have been reserved for issuance. In June
1999, 19,976 options were granted under such plans to non-employee directors.
These options are exercisable beginning in part from the date of grant to three
years after the date of grant and expire 10 years after grant.
In connection with the Distribution, LifePoint established the
LifePoint Employee Stock Ownership Plan ("ESOP"). The ESOP purchased from
LifePoint approximately 8.3% of LifePoint's Common Stock at fair market value
(approximately 2.8 million shares at $11.50 per share). Shares will be allocated
ratably to employee accounts over the next 10 years beginning in fiscal year
1999. The shares held by the ESOP which have not yet been allocated to employee
accounts are included in shareholders' equity as "Unearned ESOP compensation".
Unearned ESOP shares are released at historical cost upon being allocated to
employee accounts. ESOP expense is allocated by LifePoint to the Company and is
recognized using the average market price of LifePoint shares committed to be
released during the allocation period.
23
25
DODGE CITY HEALTHCARE GROUP, L.P.
CONDENSED STATEMENTS OF INCOME
UNAUDITED
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues $ 7,688 $ 8,157 $ 24,302 $ 24,133
Allocation of personnel costs 2,676 2,780 8,471 8,970
Supplies 1,002 857 3,253 2,868
Other operating expenses 1,224 1,395 3,650 3,972
Provision for doubtful accounts 813 861 1,983 1,541
Depreciation and amortization 422 429 1,276 1,214
Interest expense 164 172 461 426
Management fees 153 162 484 480
--------- --------- --------- ---------
6,454 6,656 19,578 19,471
--------- --------- --------- ---------
Net income $ 1,234 $ 1,501 $ 4,724 $ 4,662
========= ========= ========= =========
See accompanying notes
24
26
DODGE CITY HEALTHCARE GROUP, L.P.
CONDENSED BALANCE SHEETS
UNAUDITED
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
ASSETS
Current assets:
Accounts receivable, less allowance for doubtful accounts of $3,150
at September 30, 1999, and $3,185 at December 31, 1998 $ 5,247 $ 4,467
Inventories 982 966
Prepaid expenses and other 89 68
---------- ----------
6,318 5,501
Property and equipment, at cost:
Land 319 319
Buildings and improvements 9,484 9,481
Equipment 10,101 9,551
Construction in progress 553 22
---------- ----------
20,457 19,373
Accumulated depreciation (10,807) (9,838)
---------- ----------
9,650 9,535
Intangible assets, net of accumulated amortization of $1,369
at September 30, 1999, and $1,145 at December 31, 1998 10,578 10,802
---------- ----------
$ 26,546 $ 25,838
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 653 $ 791
Accrued expenses 288 336
Current maturities of long-term debt -- 19
---------- ----------
941 1,146
Intercompany balances payable to affiliate 12,713 11,515
Long-term debt -- 301
Partners' capital:
Limited partners (990 units authorized and 890 units issued and
outstanding) 12,750 12,732
General partner (10 units authorized, issued and outstanding) 142 144
---------- ----------
12,892 12,876
---------- ----------
$ 26,546 $ 25,838
========== ==========
See accompanying notes.
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27
DODGE CITY HEALTHCARE GROUP, L.P.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------
1999 1998
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,724 $ 4,662
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for doubtful accounts 1,983 1,541
Depreciation and amortization 1,276 1,214
Increase (decrease) in cash from operating
assets and liabilities:
Accounts receivable (1,446) (3,208)
Inventories, prepaid expenses and other current assets (37) 8
Accounts payable and accrued expenses (186) (408)
---------- ----------
Net cash provided by operating activities 6,314 3,809
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,166) (1,523)
---------- ----------
Net cash used in investing activities (1,166) (1,523)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in long-term debt, net (320) (935)
Increase in intercompany balances payable to
affiliate, net 1,198 6,117
Distributions (6,026) (7,468)
---------- ----------
Net cash used in financing activities (5,148) (2,286)
Change in cash $ -- $ --
Cash at beginning of period -- --
---------- ----------
Cash at end of period $ -- $ --
========== ==========
SUPPLEMENTAL INFORMATION:
Interest payments $ 461 $ 426
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS:
Contribution from Columbia/HCA $ 1,317 $ --
========== ==========
See accompanying notes.
26
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DODGE CITY HEALTHCARE GROUP, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Dodge City Healthcare Group, L.P., a Kansas limited partnership (the
"Partnership"), was organized on March 1, 1995. Dodge City Healthcare Partner,
Inc., a Kansas corporation ("DCHP"), is the general partner of the Partnership
with a 1.1% partnership interest. The limited partners of the Partnership are
Western Plains Regional Hospital, LLC, a Delaware limited liability company
("WPRH"), and Dodge City Outpatient Surgical Facility Inc., a Kansas corporation
("DCOSF"), with partnership interests of 68.9% and 30.0%, respectively. DCHP and
WPRH are indirect wholly owned subsidiaries of LifePoint Hospitals, Inc., a
Delaware corporation ("LifePoint"), through its direct wholly owned subsidiary,
LifePoint Hospital Holdings, Inc. ("Holdings").
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the tax-free spin-off of its operations comprising the America Group
by distributing all outstanding shares of LifePoint to its shareholders (the
"Distribution"). As a result, Columbia/HCA's combined 70.0% interest in the
Partnership was transferred to LifePoint and LifePoint assumed the rights as
sole general partner of the Partnership. Information regarding Columbia/HCA
included in this report on Form 10-Q is derived from reports and other
information filed by Columbia/HCA with the Securities and Exchange Commission
(the "Commission").
The Partnership owns and operates Western Plains Regional Hospital, a
110-bed acute care hospital, and an outpatient surgery center which provide
health care services to patients in and around Dodge City, Kansas. The
Partnership receives payment for patient services from the federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, preferred provider organizations and other private insurers
and directly from patients.
The partnership agreement provides that the Partnership is to
distribute, in quarterly installments to the general and limited partners in
accordance with their respective ownership interests, an amount equal to 90% of
its annual income. The partnership agreement further provides that profits and
losses of the Partnership will be allocated to the partners in accordance with
their respective ownership interests.
As further defined in the partnership agreement, the general partner
is obligated to manage and supervise the Partnership business and affairs. The
Partnership shall be dissolved on December 31, 2050, unless sooner dissolved by
law or pursuant to the partnership agreement or unless extended by amendment to
the partnership agreement.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of Partnership management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three months and nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
27
29
Certain estimates, assumptions and allocations were made in preparing
the unaudited condensed financial statements included herein. Therefore, such
financial statements may not necessarily be indicative of the results of
operations, financial position or cash flows that would have existed had the
Partnership been a separate, independent company throughout the periods
presented.
Certain prior year amounts have been reclassified to conform to the
current year presentation.
NOTE 2 - INCOME TAXES
The Partnership is not an income tax paying entity. No provision is
made in the accounts of the Partnership since such taxes are liabilities of the
individual partners of the Partnership, and the amounts thereof depend on their
respective tax situations.
The Partnership's tax returns and the amounts of distributable
Partnership income or loss are subject to examination by the federal and state
taxing authorities. In the event of an examination of the Partnership's tax
return, the tax liability of the partners could be changed if any adjustment to
the Partnership taxable income or loss is ultimately sustained by the taxing
authorities.
NOTE 3 - TRANSACTIONS WITH AFFILIATE
INTERCOMPANY BALANCES PAYABLE TO AFFILIATE
Intercompany balances payable to affiliate represent the net excess of
funds transferred to or paid on behalf of the Partnership over funds
transferred to the centralized cash management account of LifePoint
post-Distribution and Columbia/HCA pre-Distribution. Generally, this balance is
increased by partnership distributions and disbursements made by LifePoint on
behalf of the Partnership for operating expenses and to pay the Partnership's
debt, completed construction project additions, fees and services provided by
LifePoint, including information systems services and other operating expenses,
such as personnel costs, interest and insurance. Generally, the balance is
decreased through daily cash deposits by the Partnership to the account. Prior
to the Distribution, the Partnership was charged interest on the outstanding
intercompany balance at each month end at various rates ranging from 6% to 10%.
For periods after the Distribution, the Partnership is being charged interest
at prime rates which approximated 8.25% at September 30, 1999. In the opinion
of LifePoint management, the interest rate charged has been at prevailing
market rates. Interest expense under this arrangement is included in the
Statements of Income.
MANAGEMENT FEES
In accordance with the terms of the partnership agreement, the general
partner receives a monthly management fee based upon the Partnership's net
patient revenues. The management fee charged to the Partnership is not
necessarily indicative of the actual costs which may have been incurred had the
Partnership operated as an entity unaffiliated with LifePoint post-Distribution
or Columbia/HCA pre-Distribution; however, in the opinion of the Partnership
management, the management fee charged is reasonable.
PERSONNEL COSTS
To facilitate payroll administration, all personnel assigned to
perform duties for the Partnership are employed by a LifePoint affiliate
post-Distribution and a Columbia/HCA affiliate pre-Distribution. The
Partnership
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reimburses the affiliate for the direct costs (i.e., salaries and related
benefits) associated with such personnel. Such reimbursements are recorded as
"Allocation of Personnel Costs" in the accompanying Statements of Income.
RETIREMENT PLANS
Personnel assigned to the Partnership subsequent to the Distribution
participate in LifePoint's employee stock ownership plan ("ESOP"). Under the
ESOP, shares of LifePoint Common Stock will be allocated ratably to
participants over the next ten years, beginning in fiscal year 1999. ESOP
expense is allocated to the Partnership based upon the average market price of
shares committed to be released during the allocation period.
Personnel assigned to the Partnership during the nine months ended
September 30, 1998 participated in Columbia/HCA's defined contribution
retirement plans which covered substantially all personnel assigned to the
Partnership. The Partnership reimbursed a Columbia/HCA affiliate for personnel
costs, including contributions to the plan. Benefits were determined primarily
as a percentage of a participant's earned income.
COST REPORT LIABILITIES
Pursuant to the terms of the distribution agreement between LifePoint
and Columbia/HCA, LifePoint and its subsidiaries, including the Partnership,
are responsible for the Medicare, Medicaid and Blue Cross cost reports, and
associated receivables and payables, for all periods ending after May 11, 1999.
Columbia/HCA agreed to indemnify LifePoint and its subsidiaries, including the
Partnership, with respect to cost reports relating to periods ending on or
prior to the Distribution. Net settlement liabilities of approximately
$1,317,000 recorded by the Partnership as of May 11, 1999 were deemed to be
assumed by Columbia/HCA and, accordingly, recorded as a contribution from
Columbia/HCA to the capital of the Partnership.
PROFESSIONAL AND GENERAL LIABILITY RISKS
The cost of professional and general liability coverage is allocated to
the Partnership by LifePoint post-Distribution, and by Columbia/HCA
pre-Distribution, based on actuarially determined estimates. The actuarially
determined estimate of cost allocated to the Partnership by LifePoint is
discounted to its present value using a rate of 6%. LifePoint, as well as
Columbia/HCA, maintains reserves for professional and general liability risks.
Accordingly, no reserve for liability risks is recorded on the accompanying
balance sheets. Columbia/HCA assumed the liability for all professional and
general liability claims incurred prior to the Distribution.
Personnel assigned to the Partnership participate in a self-insured
program for health insurance administered by LifePoint post-Distribution and by
Columbia/HCA pre-Distribution. Cost for health insurance is allocated to the
Partnership based upon claims paid and an estimate of claims incurred but not
reported. LifePoint, as well as Columbia/HCA, maintains reserves for incurred
but not reported health claims. Accordingly, no reserve for incurred but not
reported health claims is recorded on the accompanying balance sheets.
Columbia/HCA assumed the liability for all health claims incurred prior to the
Distribution.
29
31
NOTE 4 - GUARANTEE OF LONG-TERM DEBT
On May 11, 1999, LifePoint assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009. In November 1999, in a
registered exchange offer, LifePoint issued a like aggregate principal amount
of notes in exchange for these notes (the "Notes"). The Notes are unsecured
obligations and are subordinated in right of payment to all existing and future
senior indebtedness. The Notes are guaranteed jointly, severally and
unconditionally by all of LifePoint's operating subsidiaries including the
Partnership.
On May 11, 1999, LifePoint also assumed from Columbia/HCA the
obligations under a Bank Credit Agreement (the "Credit Agreement") with a group
of lenders with commitments aggregating $210 million. The Credit Agreement
consists of a $60 million term loan facility, an $85 million term loan
facility, and a $65 million revolving credit facility (collectively the "Bank
Facilities").
As of September 30, 1999, $25 million of the $60 million term loan
facility was drawn, with the remaining $35 million available for limited
purposes to be drawn by May 11, 2000. The final payment under this term loan
facility is due November 11, 2004.
The $85 million term loan facility was drawn in full at the time of
the Distribution. The final payment under this term loan is due November 11,
2005.
The $65 million revolving credit facility is available for working
capital and other general corporate purposes, and any outstanding amounts
thereunder will be due and payable on November 11, 2004. No amounts were
outstanding under this facility as of September 30, 1999.
LifePoint's obligations under the Bank Facilities are guaranteed by
its subsidiaries including the Partnership.
The subsidiary guarantees of the Notes and the Bank Facilities are
secured by a pledge of substantially all of the subsidiaries' assets including
all of the assets of the Partnership.
NOTE 5 - CONTINGENCIES
COLUMBIA/HCA INVESTIGATIONS, LITIGATION AND INDEMNIFICATION RIGHTS
Columbia/HCA is currently the subject of several federal investigations
into certain of its business practices, as well as governmental investigations
by various states. Management of the Partnership understands that Columbia/HCA
is cooperating in these investigations and that Columbia/HCA understands,
through written notice and other means, that it is a target in these
investigations. Given the breadth of the ongoing investigations, Columbia/HCA
expects additional investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. Columbia/HCA is the subject of a formal
order of investigation by the Commission. The Commission investigation includes
the anti-fraud, periodic reporting and internal accounting control provisions of
the federal securities laws. According to published reports, on July 2, 1999, a
federal jury in Tampa, Florida found two Columbia/HCA employees guilty of
conspiracy and making false statements on Medicare and TRICARE cost reports for
the years 1992 and 1993 and on a Medicaid cost report for 1993. Both were found
not guilty of obstructing a federal auditor. One other employee was acquitted on
all counts for which he had been charged and the jury was unable to reach a
verdict with respect to another employee. This employee and the government
executed an agreement to defer prosecution for 18 months after which charges
will be dismissed. The two convicted employees were sentenced in December 1999
and both have appealed to the 11th Circuit.
30
32
Columbia/HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, which have been
unsealed and served on Columbia/HCA. The actions allege, in general, that
Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated
the False Claims Act by submitting improper claims to the government for
reimbursement. The lawsuits seek damages of three times the amount of all
Medicare or Medicaid claims (involving false claims) presented by the defendants
to the federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. The
government has intervened in six unsealed qui tam actions against Columbia/HCA.
Columbia/HCA is aware of additional qui tam actions that remain under seal and
believes that there are other sealed qui tam cases of which it is unaware.
Columbia/HCA is a defendant in a number of other suits, which allege,
in general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions.
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigations will be commenced. If Columbia/HCA is found to
have violated federal or state laws relating to Medicare, Medicaid or similar
programs, Columbia/HCA could be subject to substantial monetary fines, civil and
criminal penalties, and exclusion from participation in the Medicare and
Medicaid programs. Similarly, the amounts in question in the qui tam and other
actions are substantial, and Columbia/HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions. In addition, a
number of derivative actions have been brought by purported stockholders of
Columbia/HCA against certain current and former officers and directors of
Columbia/HCA alleging breach of fiduciary duty and failure to take reasonable
steps to ensure that Columbia/HCA did not engage in illegal practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which include LifePoint for the periods prior to the date of the
Distribution which are presented herein). The extent to which LifePoint may or
may not continue to be affected after the Distribution by the ongoing
investigations of Columbia/HCA, the initiation of additional investigations, if
any, and the related media coverage cannot be predicted. It is possible that
these matters could have a material adverse effect on the financial condition
or results of operations of LifePoint in future periods.
In connection with the Distribution, Columbia/HCA has agreed to
indemnify LifePoint and its subsidiaries, including the Partnership, in respect
of any losses which it may incur arising from the proceedings described above.
Columbia/HCA has also agreed to indemnify LifePoint in respect of any losses,
which it may incur as a result of proceedings which may be commenced by
government authorities or by private parties in the future that arise from
acts, practices or omissions engaged in prior to the date of the Distribution
and relate to the proceedings described above. Columbia/HCA has also agreed
that, in the event that any hospital owned by LifePoint, including Western
Plains Regional Hospital, as of the date of the Distribution is permanently
excluded from participation in the Medicare and Medicaid programs as a result
of the proceedings described above, then Columbia/HCA will make cash payments
to LifePoint based on amounts as defined in the Distribution Agreement by and
among Columbia/HCA and LifePoint. LifePoint has agreed with Columbia/HCA that,
in connection with the pending governmental investigations, it will negotiate
with the government with respect to a compliance agreement setting forth
LifePoint's agreement to comply with applicable laws and regulations. If any of
such indemnified matters were successfully asserted against LifePoint, or any
of its facilities, including the Partnership, and Columbia/HCA failed to meet
its
31
33
indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations or prospects
of LifePoint and the Partnership. Columbia/HCA has not indemnified LifePoint or
the Partnership for losses relating to any acts, practices and omissions engaged
in by LifePoint or the Partnership after the Distribution, whether or not
LifePoint or the Partnership is indemnified for similar acts, practices and
omissions occurring prior to the date of the Distribution.
GENERAL LIABILITY CLAIMS
The Partnership is subject to claims and suits arising in the ordinary
course of business. The Partnership is currently not a party to any proceeding
which, in the opinion of management, would have a material adverse effect on the
Partnership's business, financial condition or results of operations.
OTHER
Final determination of amounts earned under prospective payment and
cost-reimbursement activities is subject to review by appropriate governmental
authorities or their agents.
32
34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements included herein.
A discussion and analysis of financial condition and results of
operations of LifePoint Hospitals Holdings, Inc. ("Holdings") has not been
provided as management believes that this information would not enhance the
quality of the information provided nor enhance an assessment of the financial
condition and results of operations of LifePoint's business as a whole.
LifePoint has limited independent operations and net assets other than through
its ownership of Holdings and indirect ownership of Holdings' subsidiaries. For
more information regarding Holdings, please see the related financial statements
and accompanying notes appearing elsewhere herein.
Overview
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the spin-off of its operations comprising the America Group to its
shareholders (the "Distribution") as an independent, publicly-traded company
named LifePoint Hospitals, Inc. (hereinafter referred to as "LifePoint
Hospitals, Inc." or the "Company"). Owners of Columbia/HCA Common Stock
received one share of the Company's Common Stock for every 19 shares of
Columbia/HCA Common Stock which resulted in approximately 29.9 million shares
of the Company's Common Stock outstanding immediately after the Distribution.
At September 30, 1999, the Company was comprised of 23 general, acute
care hospitals and related health care entities. The entities are located in
non- urban areas in the states of Alabama, Florida, Georgia, Kansas, Kentucky,
Louisiana, Tennessee, Utah and Wyoming. In connection with the Distribution,
all intercompany amounts payable by the Company to Columbia/HCA were eliminated
and the Company assumed certain indebtedness from Columbia/HCA (see Note 4 of
the Notes to the Condensed Consolidated Financial Statements). In addition, the
Company entered into various agreements with Columbia/HCA which are intended to
facilitate orderly changes for both companies in a way, which would be
minimally disruptive to each entity. Information regarding Columbia/HCA
included in this Report on Form 10-Q is derived from reports and other
information filed by Columbia/HCA with the Securities and Exchange Commission.
Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains disclosures, which are forward-looking
statements. Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be identified by the use
of words such as "may", "believe", "will", "expect", "project", "estimate",
"anticipate", "plan" or "continue". These forward-looking statements are based
on the current plans and expectations of the Company and are subject to a
number of uncertainties and risks that could significantly affect current plans
and expectations and the Company's future financial condition and results.
These factors include, but are not limited to, (i) the highly competitive
nature of the health care business, (ii) the efforts of insurers, health care
providers and others to contain health care costs, (iii) possible changes in
the Medicare program that may further limit reimbursements to health care
providers and insurers, (iv) changes in federal, state or local regulation
affecting the health care industry, (v) the possible enactment of federal or
state health care reform, (vi) the ability to attract and retain qualified
management and personnel, including physicians, (vii) liabilities and other
claims asserted against the Company, (viii) fluctuations in the market value of
the Company's Common Stock, (ix) changes in accounting practices, (x) changes
in general economic conditions, (xi) the complexity of integrated computer
systems and the success and expense of the remediation efforts of Columbia/HCA,
the Company and relevant third parties in achieving Year 2000 readiness, and
(xii) other risk factors. As a consequence, current plans, anticipated actions
and future financial condition and results may differ from those expressed in
any forward- looking statements made by or on behalf of the Company. You are
cautioned not to unduly rely on such forward-looking statements when evaluating
the information presented in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
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Results of Operations
Revenue/Volume Trends
The Company has experienced an increase in revenues and volume growth
for the nine months ended September 30, 1999 compared to the prior year.
However, the Company's revenues per equivalent admission decreased for the nine
months ended September 30, 1999 compared to the prior year. Management believes
the decline in revenue per equivalent admission is primarily attributable to
the impact of reductions in Medicare payments mandated by the federal Balanced
Budget Act of 1997 (the "Balanced Budget Act"), the increasing percentage of
patient volume related to patients participating in managed care plans and the
continuing trend toward the conversion of more services to an outpatient basis.
The Company's revenues continue to be affected by an increasing
proportion of revenue being derived from fixed payment, higher discount
sources, including Medicare, Medicaid and managed care plans. In addition,
insurance companies, government programs (other than Medicare) and employers
purchasing health care services for their employees are also negotiating
discounted amounts that they will pay health care providers rather than paying
standard prices. The Company expects patient volumes from Medicare and Medicaid
to continue to increase due to the general aging of the population and the
expansion of state Medicaid programs. However, under the Balanced Budget Act,
the Company's reimbursement from the Medicare and Medicaid programs was reduced
in 1998 and for the nine months ended September 30, 1999 and will be further
reduced as some reductions in reimbursement levels are phased in over the next
two to three years. The Company generally receives lower payments per patient
under managed care plans than under traditional indemnity insurance plans. With
an increasing proportion of services being reimbursed based upon prospective
payment amounts regardless of the cost incurred, revenues, earnings and cash
flows are being reduced. Admissions related to Medicare, Medicaid and managed
care plan patients were 89.3% and 87.5% of total admissions for the nine months
ended September 30, 1999 and 1998, respectively. Revenues from capitation
arrangements (prepaid health service agreements) are less than 1.0% of
revenues.
The Company's revenues also continue to be adversely affected by the
trend toward certain services being performed more frequently on an outpatient
basis. Generally, the payments received for an outpatient procedure are less
than for a similar procedure performed in an inpatient setting. The Company
anticipates that further payment reductions may occur as a result of the
implementation of a prospective payment system for Medicare outpatient services
(pursuant to the Balanced Budget Act and scheduled for implementation in
mid-year 2000). Growth in outpatient services is expected to continue in the
health care industry as procedures performed on an inpatient basis are
converted to outpatient procedures through continuing advances in
pharmaceutical and medical technologies. The redirection of certain procedures
to an outpatient basis is also influenced by pressures from payers to perform
certain procedures as outpatient care rather than inpatient care.
Management also believes that the impact of the ongoing governmental
investigations of certain of Columbia/HCA's business practices and the related
media coverage have created uncertainties with physicians, patients and payers
in certain markets.
Reductions in Medicare and Medicaid reimbursement, the increasing
percentage of the patient volume being related to patients participating in
managed care plans and continuing trends toward more services being performed
on an outpatient basis are expected to present ongoing challenges. The
challenges presented by these trends are magnified by the Company's inability
to control these trends and the associated risks. To maintain and improve its
operating margins in future periods, the Company must increase patient volumes
while controlling the costs of providing services. If the Company is not able
to achieve these improvements and the trend toward declining reimbursements and
payments continues, results of operations and cash flow will deteriorate.
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Management believes that the proper response to these challenges
includes the delivery of a broad range of quality health care services to
patients by assuring that physicians with appropriate specializations practice
in the hospitals, that the appropriate equipment and range of specialized
services are available within the hospitals, and that the hospitals are
positioned as community assets.
As part of Columbia/HCA, the Company's facilities were included in
managed care contracts negotiated by Columbia/HCA on a market-wide basis
emphasizing large urban facilities. The Company's management believes that
independence from Columbia/HCA will help the Company over time to negotiate
contract terms that are generally more favorable for its facilities.
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Operating Results Summary
The following is a summary of results from continuing operations for
the three months and nine months ended September 30, 1999 and 1998 (dollars in
millions):
Three Months ended September 30,
1999 1998
---- ----
Amount Ratio Amount Ratio
------ ----- ------ -----
Revenues.............................. $125.4 100.0% $124.7 100.0%
Salaries & benefits................... 52.2 41.7 54.3 43.6
Supplies.............................. 15.7 12.5 15.7 12.6
Other operating expenses.............. 28.8 23.0 27.9 22.4
Provision for doubtful accounts....... 10.7 8.5 12.0 9.6
Depreciation & amortization........... 7.9 6.4 7.4 5.8
Interest expense...................... 6.7 5.3 4.8 3.8
Management fees allocated from
Columbia/HCA......................... - - 2.2 1.8
ESOP expense.......................... 1.2 0.9 - -
Impairment of long-lived assets....... - - 1.3 1.1
----- ----- ----- -----
123.2 98.3 125.6 100.7
Income (loss) from continuing
operations before minority
interests and income taxes........... 2.2 1.7 (0.9) (0.7)
Minority interests in earnings of
consolidated entities................ 0.4 0.3 0.5 0.4
---- ----- ----- ----
Income(loss)from continuing
operations before income taxes....... 1.8 1.4 (1.4) (1.1)
Provision (benefit) for income
taxes................................ 0.7 0.6 (0.6) (0.4)
----- ----- ----- -----
Income (loss) from continuing
operations........................... $1.1 0.8 $(0.8) (0.7)
===== ===== ===== =====
% changes from prior year:
Revenues.............................. 0.6%
Income(loss)from continuing
operations before income taxes....... 232.8
Income(loss)from continuing
operations........................... 228.2
Admissions (a)........................ 1.3
Equivalent admissions (b)............. 3.1
Revenues per equivalent admission..... (2.4)
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Nine Months ended September 30,
1999 1998
---- ----
Amount Ratio Amount Ratio
------ ----- ------ -----
Revenues............................. $387.8 100.0% $379.1 100.0%
Salaries & benefits.................. 165.1 42.6 164.0 43.3
Supplies............................. 47.7 12.3 46.3 12.2
Other operating expenses............. 87.4 22.5 85.8 22.7
Provision for doubtful accounts...... 30.1 7.8 31.3 8.2
Depreciation & amortization.......... 23.3 6.0 20.4 5.3
Interest expense..................... 17.4 4.5 14.2 3.7
Management fees allocated from
Columbia/HCA........................ 3.2 0.8 6.7 1.8
ESOP expense......................... 1.7 0.4 - -
Impairment of long-lived assets...... - - 1.3 0.4
----- ----- ----- -----
375.9 96.9 370.0 97.6
Income from continuing operations
before minority interests
and income taxes.................... 11.9 3.1 9.1 2.4
Minority interests in earnings of
consolidated entities............... 1.4 0.4 1.4 0.4
----- ----- ---- -----
Income from continuing operations
before income taxes................. 10.5 2.7 7.7 2.0
Provision for income taxes........... 4.4 1.1 3.1 0.8
----- ----- ----- -----
Income from continuing operations.... $ 6.1 1.6 $ 4.6 1.2
===== ===== ===== =====
% changes from prior year:
Revenues............................. 2.3%
Income from continuing operations
before income taxes................. 35.9
Income from continuing operations.... 31.4
Admissions (a)....................... 3.8
Equivalent admissions (b)............ 4.4
Revenues per equivalent admission.... (2.0)
(a) Represents the total number of patients admitted (in the facility for
a period in excess of 23 hours) to the Company's hospitals and is used
by management and certain investors as a general measure of inpatient
volume.
(b) Equivalent admissions are used by management and certain investors as
a general measure of combined inpatient and outpatient volume.
Equivalent admissions are computed by multiplying admissions
(inpatient volume) by the sum of gross inpatient revenue and gross
outpatient revenue and then dividing the resulting amount by gross
inpatient revenue. The equivalent admissions computation "equates"
outpatient revenue to the volume measure (admissions) used to measure
inpatient volume resulting in a general measure of combined inpatient
and outpatient volume.
For the Three Months Ended September 30, 1999 and 1998
Revenues increased 0.6% to $125.4 million for the three months ended
September 30, 1999 compared to $124.7 million for the three months ended
September 30, 1998
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primarily as a result of increases in volumes. Inpatient admissions increased
1.3%, equivalent admissions (adjusted to reflect combined inpatient and
outpatient volume) increased 3.1% and revenues per equivalent admission
decreased 2.4% for the three months ended September 30, 1999 compared to the
three months ended September 30, 1998. The decline in revenues per equivalent
admission was primarily due to decreases in Medicare reimbursement rates
mandated by the Balanced Budget Act which became effective October 1, 1997
(such rates lowered revenues by approximately $1.7 million for the three months
ended September 30, 1999 compared to the three months ended September 30,
1998), and continued increases in discounts from the growing number of managed
care payers (managed care as a percentage of total admissions increased to
20.8% for the three months ended September 30, 1999 compared to 18.5% for the
three months ended September 30, 1998). In addition, favorable cost report
adjustments of $0.3 million were recorded during the three months ended
September 30, 1999 compared to $1.0 million recorded during the three months
ended September 30, 1998.
Salaries and benefits, as a percentage of revenues, decreased to 41.7%
for the three months ended September 30, 1999 from 43.6% for the three months
ended September 30, 1998. The decrease was primarily due to improvements in
labor productivity (man-hours per equivalent admission decreased 9.0% over the
same period in the prior year).
Supply costs decreased slightly to 12.5% as a percentage of revenues
for the three months ended September 30, 1999 from 12.6% for the three months
ended September 30, 1998.
Other operating expenses increased as a percentage of revenues to
23.0% for the three months ended September 30, 1999 from 22.4% for the three
months ended September 30, 1998. Other operating expenses consist primarily of
contract services, physician recruitment, professional fees, repairs and
maintenance, rents and leases, utilities, insurance, marketing and non-income
taxes. The increase was primarily due to an increase in physician recruitment
costs and operating expenses related to the establishment of the Company's
corporate office.
Provision for doubtful accounts, as a percentage of revenues,
decreased to 8.5% for the three months ended September 30, 1999 from 9.6% for
the three months ended September 30, 1998 primarily due to the Company's focus
on collections of accounts receivable. In addition, in fiscal year 1998, a
majority of the Company's facilities were undergoing computer information
system conversions (including patient accounting) which hampered the business
office billing functions. As a result, accounts were not billed timely and the
Company's allowance for bad debt increased.
Depreciation and amortization expense increased to $7.9 million for
the three months ended September 30, 1999 from $7.4 million for the three
months ended September 30, 1998 primarily due to increased capital expenditures
related to computer information system conversions. The majority of the
Company's facilities began depreciating the systems in the fourth quarter of
fiscal 1998.
Interest expense increased to $6.7 million for the three months ended
September 30, 1999 from $4.8 million for the three months ended September 30,
1998. This increase is primarily due to the interest expense incurred on the
debt obligations assumed from Columbia/HCA as discussed in Note 4 of the Notes
to the Condensed Consolidated Financial Statements. For the three months ended
September 30, 1998, interest expense was primarily represented by interest
incurred on the net intercompany balance with Columbia/HCA. However, upon the
Distribution, the intercompany amounts payable by the Company to Columbia/HCA
were eliminated.
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40
As of the Distribution, Columbia/HCA stopped allocating management
fees to the Company; therefore, there were no management fees allocated by
Columbia/HCA for the three months ended September 30, 1999. For the three
months ended September 30, 1998, Columbia/HCA allocated $2.2 million of
management fees to the Company. The management fee allocation represented
allocations, using revenues as the allocation basis, of the corporate, general
and administrative expenses of Columbia/HCA. The elimination of management fee
allocations by Columbia/HCA were offset by increases in salaries and benefits,
supplies and other operating costs related to the establishment and operation
of the Company's corporate office.
ESOP expense of $1.2 million relates to the newly established ESOP
discussed in Note 5 of the Notes to the Condensed Consolidated Financial
Statements.
For the three months ended September 30, 1998, the Company recorded an
impairment loss of approximately $1.3 million related to the write-off of
intangibles and other long-lived assets of certain physician practices where
the recorded asset values were not deemed to be fully recoverable based upon
the operating results trends and projected future cash flows. These assets
being held and used are now recorded at estimated fair value based upon
discounted, estimated future cash flows.
Minority interests decreased slightly as a percentage of revenues to
0.3% for the three months ended September 30, 1999 from 0.4% for the three
months ended September 30, 1998.
Income from continuing operations before income taxes increased to
$1.8 million for the three months ended September 30, 1999 compared to a loss
of $1.4 million for the three months ended September 30, 1998 primarily as a
result of the decreases in certain expenses as described above.
Net income increased to $1.1 million for the three months ended
September 30, 1999 compared to a loss of $2.2 million for the three months
ended September 30, 1998. For the three months ended September 30, 1998, the
Company incurred a $1.4 million after-tax loss from its discontinued home
health operations, primarily due to declines in Medicare rates of reimbursement
under the Balanced Budget Act and declines in home health visits.
For the Nine Months Ended September 30, 1999 and 1998
Revenues increased 2.3% to $387.8 million for the nine months ended
September 30, 1999 compared to $379.1 million for the nine months ended
September 30, 1998 primarily as a result of increases in volumes. Inpatient
admissions increased 3.8% and equivalent admissions (adjusted to reflect
combined inpatient and outpatient volume) increased 4.4% for the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998.
Revenues per equivalent admission decreased 2.0% for the nine months ended
September 30, 1999 compared to prior year. The decline in revenues per
equivalent admission was due to several factors, including decreases in
Medicare reimbursement rates mandated by the Balanced Budget Act which became
effective October 1, 1997 (such rates lowered revenues by approximately $5.1
million for the nine months ended September 30, 1999 compared to the prior
year), and continued increases in discounts from the growing number of managed
care payers (managed care as a percentage of total admissions increased to
19.9% for the nine months ended September 30, 1999 compared to 18.6% for the
nine months ended September 30, 1998). In addition, favorable cost report
adjustments of $0.7 million were recorded during the nine months ended
September 30, 1999 compared to $2.3 million recorded during the nine months
ended September 30, 1998.
Salaries and benefits decreased as a percentage of revenues to 42.6%
for the nine months ended September 30, 1999 from 43.3% for the nine months
ended September 30, 1998 primarily due to improvements in labor productivity
(man-hours per equivalent admission decreased 10.1% over the same period in the
prior year).
Supply costs increased slightly to 12.3% as a percentage of revenues
for the nine months ended September 30, 1999 from 12.2% for the nine months
ended September 30, 1998.
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Other operating expenses decreased as a percentage of revenues to
22.5% for the nine months ended September 30, 1999 from 22.7% for the nine
months ended September 30, 1998. Other operating expenses consist primarily of
contract services, physician recruitment, professional fees, repairs and
maintenance, rents and leases, utilities, insurance, marketing and non-income
taxes. The decrease was primarily due to decreases in professional fees and
contract services.
Provision for doubtful accounts, as a percentage of revenues,
decreased to 7.8% for the nine months ended September 30, 1999 from 8.2% for
the nine months ended September 30, 1998 primarily due to the Company's focus
on collections of accounts receivable. In addition, in fiscal year 1998, a
majority of the Company's facilities were undergoing computer information
system conversions (including patient accounting) which hampered the business
office billing functions. As a result, accounts were not billed timely and the
Company's allowance for bad debt increased.
Depreciation and amortization expense increased to $23.3 million for
the nine months ended September 30, 1999 from $20.4 million for the nine months
ended September 30, 1998 primarily due to increased capital expenditures
related to computer information system conversions. The majority of the
Company's facilities began depreciating the systems in the fourth quarter of
fiscal 1998.
Interest expense increased to $17.4 million for the nine months ended
September 30, 1999 from $14.2 million for the nine months ended September 30,
1998. This increase is primarily due to the interest expense incurred on the
debt obligations assumed from Columbia/HCA as discussed in Note 4 of the Notes
to the Condensed Consolidated Financial Statements. For the nine months ended
September 30, 1998, interest expense was primarily represented by interest
incurred on the net intercompany balance with Columbia/HCA. However, upon the
Distribution, the intercompany amounts payable by the Company to Columbia/HCA
were eliminated.
Management fees allocated by Columbia/HCA were $3.2 million for the
nine months ended September 30, 1999 and $6.7 million for the nine months ended
September 30, 1998. The management fee allocation represented allocations,
using revenues as the allocation basis, of the corporate, general and
administrative expenses of Columbia/HCA. However, as of the Distribution,
Columbia/HCA stopped allocating management fees to the Company. The elimination
of management fee allocations by Columbia/HCA were offset by increases in
salaries and benefits, supplies and other operating costs related to the
establishment and operation of the Company's corporate office.
ESOP expense of $1.7 million relates to the newly established ESOP
discussed in Note 5 of the Notes to the Condensed Consolidated Financial
Statements.
For the nine months ended September 30, 1998, the Company recorded an
impairment loss of approximately $1.3 million related to the write-off of
intangibles and other long-lived assets of certain physician practices where
the recorded asset values were not deemed to be fully recoverable based upon
the operating results trends and projected future cash flows. These assets
being held and used are now recorded at estimated fair value based upon
discounted, estimated future cash flows.
Minority interests remained unchanged as a percentage of revenues at
0.4% compared to the prior year.
Income from continuing operations before income taxes increased 35.9%
to $10.5 million for the nine months ended September 30, 1999 from $7.7 million
for the nine months ended September 30, 1998 primarily due to decreases in
certain expenses as described above.
Net income increased to $6.1 million for the nine months ended
September 30, 1999 compared to $0.9 million for the nine months ended September
30, 1998. For the nine months ended September 30, 1998, the Company incurred a
$3.7 million after-tax loss from its discontinued home health operations,
primarily due to declines in Medicare rates of reimbursement under the Balanced
Budget Act and declines in home health visits.
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Liquidity and Capital Resources
Prior to the Distribution, the Company had relied upon Columbia/HCA
for liquidity and sources of capital to supplement any needs not met by
operations. As an independent, publicly traded company, the Company has direct
access to the capital markets and the ability to enter into its own bank
borrowing arrangements. At September 30, 1999, the Company had working capital
of $62.0 million compared to $26.9 million at December 31, 1998. The increase
in working capital was primarily due to a $32.7 million increase in cash from
December 31, 1998 resulting from net cash collections since the Distribution.
In addition, accounts receivable increased approximately $15.5 million
primarily as a result of Columbia/HCA's agreement to indemnify the Company with
respect to Medicare, Medicaid, and cost-based Blue Cross receivables and
payables relating to cost reporting periods ending on or prior to the
Distribution. The increase in working capital was partially offset by increases
in accrued interest and income taxes payable as a result of the Distribution.
Cash provided by operating activities was $50.2 million for the nine
months ended September 30, 1999 compared to $25.9 million for the nine months
ended September 30, 1998. This increase was primarily attributable to increases
in accrued interest and income taxes payable since the Distribution for the
nine months ended September 30, 1998.
Cash used in investing activities was $40.2 million for the nine
months ended September 30, 1999 compared to $21.4 million for the nine months
ended September 30, 1998. The increase was primarily due to capital
expenditures of $40.5 million during the nine months ended September 30, 1999
compared to $23.6 million for the nine months ended September 30, 1998. At
September 30, 1999, there were projects under construction which had an
estimated cost to complete and equip over the next six months of approximately
$33.5 million (including construction costs of a replacement hospital located
in Florida with an estimated project cost of approximately $33.0 million of
which $17.1 million has been spent as of September 30, 1999). Management
believes that its capital expenditure program is adequate to expand, improve
and equip the Company's existing health care facilities.
Cash provided by financing activities was $22.7 million for the nine
months ended September 30, 1999 compared to cash used in financing activities
of $4.5 million for the nine months ended September 30, 1998. The increase was
primarily due to changes in the intercompany amounts payable by the Company to
Columbia/HCA prior to the Distribution.
Management does not consider the sale of any assets to be necessary to
repay the Company's indebtedness or to provide working capital. However, for
other reasons, certain of the Company's hospitals may be sold in the future
from time to time. Three of the Company's hospitals are currently held for
sale. Although the Company's indebtedness will be more substantial than was
historically the case for its predecessor entities, management expects that
operations and working capital facilities will provide sufficient liquidity for
fiscal 1999 and for the next several years.
The Company does not expect to pay dividends on its Common Stock in
the foreseeable future.
Long-Term Debt
Assumption of Certain Indebtedness from Columbia/HCA
In connection with the Distribution, all intercompany amounts payable
by the Company to Columbia/HCA were eliminated, and the Company assumed certain
indebtedness from Columbia/HCA. The indebtedness was comprised of a Bank Credit
Agreement and Senior Subordinated Notes.
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Bank Credit Agreement
On May 11, 1999, the Company assumed from Columbia/HCA the obligations
under a Bank Credit Agreement (the "Credit Agreement") with a group of lenders
with commitments aggregating $210 million. The Credit Agreement consists of a
$60 million term loan facility, an $85 million term loan facility, and a $65
million revolving credit facility (collectively the "Bank Facilities").
As of September 30, 1999, $25 million of the $60 million term loan
facility was drawn, with the remaining $35 million available for limited
purposes to be drawn in one or two subsequent draws within one year after the
Distribution. The final payment under this term loan facility is due November
11, 2004.
The $85 million term loan facility was drawn in full at the time of
the Distribution. The final payment under this term loan is due November 11,
2005.
The $65 million revolving credit facility is expected to be available
for working capital and other general corporate purposes, and any outstanding
amounts thereunder will be due and payable on November 11, 2004. No amounts
were outstanding under this facility as of October 31, 1999.
Repayments under the term loan facilities are due in quarterly
installments with quarterly amortization based on annual amounts. Interest on
the Bank Facilities is currently based on LIBOR plus 3.00% for the revolving
credit facility and the $60 million term loan facility, and LIBOR plus 3.50%
for the $85 million term loan facility. The weighted average interest rate on
the Bank Facilities was approximately 8.8% at September 30, 1999. The Company
also pays a commitment fee equal to 0.5% of the average daily amount available
under the revolving credit facility and on the undrawn portion of the $60
million term loan facility.
The Company's bank debt is guaranteed by its subsidiaries. These
guarantees are secured by a pledge of substantially all of the subsidiaries'
assets. The Credit Agreement requires that the Company comply with various
financial ratios and tests and contains covenants, including but not limited to
restrictions on new indebtedness, the ability to merge or consolidate, asset
sales, capital expenditures and dividends.
Senior Subordinated Notes
On May 11, 1999, the Company assumed from Columbia/HCA $150 million in
Senior Subordinated Notes maturing on May 15, 2009 and bearing interest at
10.75%. In November 1999, in a registered exchange offer, the Company issued a
like aggregate principal amount of notes in exchange for these notes (the
"Notes"). Interest is payable semi-annually. The Notes are unsecured obligations
and are subordinated in right of payment to all existing and future senior
indebtedness.
The indenture pursuant to which the Notes were made contains certain
covenants including, but not limited to, restrictions on new indebtedness, the
ability to merge or consolidate, asset sales, capital expenditures and
dividends.
Contingencies
Columbia/HCA is currently the subject of several federal investigations
into certain of its business practices, as well as governmental investigations
by various states. Management of LifePoint understands that Columbia/HCA is
cooperating in these investigations and that Columbia/HCA understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, Columbia/HCA expects additional
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future. Columbia/HCA is the subject of a formal order of
investigation by the Commission. The Commission investigation includes the
anti-fraud, insider trading, periodic reporting and internal accounting control
provisions of the federal securities laws. According to
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published reports, on July 2, 1999, a federal jury in Tampa, Florida found two
Columbia/HCA employees guilty of conspiracy and making false statements on
Medicare and TRICARE cost reports for the years 1992 and 1993 and on the
Medicaid cost report for 1993. Both were found not guilty of obstructing a
federal auditor. One other employee was acquitted on all counts for which he
had been charged and the jury was unable to reach a verdict with respect to
another employee. This employee and the government executed an agreement to
defer prosecution for 18 months after which charges will be dismissed. The two
convicted employees were sentenced in December 1999 and both have appealed to
the 11th Circuit.
Columbia/HCA is a defendant in several qui tam actions brought by
private parties on behalf of the United States of America, which have been
unsealed and served on Columbia/HCA. The actions allege, in general, that
Columbia/HCA and certain subsidiaries and/or affiliated partnerships violated
the False Claims Act by submitting improper claims to the government for
reimbursement. The lawsuits generally seek damages of three times the amount of
all Medicare or Medicaid claims (involving false claims) presented by the
defendants to the federal government, civil penalties of not less than $5,000
nor more than $10,000 for each such Medicare or Medicaid claim, attorneys' fees
and costs. The government has intervened in six unsealed qui tam actions against
Columbia/HCA. Columbia/HCA is aware of additional qui tam actions that remain
under seal and believes that there are other sealed qui tam cases of which it is
unaware.
Columbia/HCA is a defendant in a number of other suits, which allege,
in general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions.
It is too early to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigations will be commenced. If Columbia/HCA is found to
have violated federal or state laws relating to Medicare, Medicaid or similar
programs, Columbia/HCA could be subject to substantial monetary fines, civil
and criminal penalties, and exclusion from participation in the Medicare and
Medicaid programs. Similarly, the amounts claimed in the qui tam and other
actions are substantial, and Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions. In
addition, a number of derivative actions have been brought by purported
stockholders of Columbia/HCA against certain current and former officers and
directors of Columbia/HCA alleging breach of fiduciary duty and failure to take
reasonable steps to ensure that Columbia/HCA did not engage in illegal
practices.
Management believes that the ongoing governmental investigations and
related media coverage may have had a negative effect on Columbia/HCA's results
of operations (which includes the Company for the periods prior to the date of
Distribution, which are presented herein). The extent to which the Company may
or may not continue to be affected after the Distribution by the ongoing
investigations of Columbia/HCA, the initiation of additional investigations, if
any, and the related media coverage cannot be predicted. It is possible that
these matters could have a material adverse effect on the financial condition
or results of operations of the Company in future periods.
In connection with the Distribution, Columbia/HCA has agreed to
indemnify the Company in respect of any losses, which it may incur arising from
the proceedings described above. Columbia/HCA has also agreed to indemnify the
Company in respect of any losses which it may incur as a result of proceedings
which may be commenced by government authorities or by private parties in the
future that arise from acts, practices or omissions engaged in prior to the
date of the Distribution and relate to the proceedings described above.
Columbia/HCA has also agreed that, in the event that any hospital owned by the
Company as of the date of the Distribution is permanently excluded from
participation in the Medicare and Medicaid programs as a result of the
proceedings described above, then Columbia/HCA will make cash payments to the
Company based on amounts as defined in the Distribution Agreement by and among
Columbia/HCA and the Company. The Company has agreed with Columbia/HCA that, in
connection with the pending governmental investigations, it will negotiate with
the government with respect to a compliance agreement setting forth the
Company's agreement to comply with applicable laws and regulations. If any of
such indemnified matters were successfully asserted
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45
against the Company, or any of its facilities, and Columbia/HCA failed to meet
its indemnification obligations, then such losses could have a material adverse
effect on the business, financial position, results of operations or prospects
of the Company. Columbia/HCA has not indemnified the Company for losses relating
to any acts, practices and omissions engaged in by the Company after the
Distribution, whether or not the Company is indemnified for similar acts,
practices and omissions occurring prior to the date of the Distribution.
Impact of Year 2000 Computer Issues
Background and General Information
The Year 2000 problem is the result of two potential malfunctions that
could have an impact on systems and equipment on which the Company relies. The
first problem arises due to computers being programmed to use two rather than
four digits to define the applicable year. The second problem arises in
embedded chips, where microchips and microcontrollers have been designed using
two rather than four digits to define the applicable year. Certain computer
programs, building infrastructure components (e.g., alarm systems and HVAC
systems) and medical devices that are date sensitive, may recognize a date
using 00 as the year 1900 rather than the year 2000. If uncorrected, the
problem could result in computer system and program failures that could result
in a disruption of business operations or equipment and medical device
malfunctions that could affect patient diagnosis and treatment.
In connection with the Distribution, Columbia/HCA's wholly owned
subsidiary, Columbia Information Services, Inc. ("CIS") and the Company entered
into a Computer and Data Processing Services Agreement, pursuant to which the
Company obtains most of its information technology and information technology
infrastructure systems. CIS does not warrant that the software and hardware
used by CIS in providing services to the Company will be Year 2000 ready, but
CIS is currently making efforts in a professional, timely, and workmanlike
manner that it deems reasonable to address Year 2000 issues with respect to the
software licensed to the Company under the Computer and Data Processing
Services Agreement. In connection with its participation in Columbia/HCA's Year
2000 project, the Company has made and will continue to make certain
expenditures in respect of software systems and applications not obtained from
CIS and non-information technology systems (e.g., vendor products, medical
equipment and other related equipment with embedded chips) to ensure that they
are Year 2000 ready.
Pursuant to the Computer and Data Processing Services Agreement, the
Company will rely on CIS to provide virtually all of its computer support and
information technology services. In connection with the Distribution,
Columbia/HCA's wholly owned subsidiary CHCA Management Services, L.P. ("CHCA")
and the Company entered into a Year 2000 Professional Services Agreement,
pursuant to which CHCA will continue to provide the services of the CHCA Year
2000 program to the Company. References to "Columbia/HCA" with respect to the
Year 2000 project and the Year 2000 services refer to Columbia HCA/Healthcare
Corporation and its affiliates, principally CHCA. The Company is dependent upon
Columbia/HCA in substantially all respects for the Year 2000 readiness of its
information technology and non-information technology systems and for
contingency planning in respect of Year 2000 related risks. Any failure by
Columbia/HCA to adequately address such matters could have a material adverse
effect on the business, financial condition, and results of operations or
prospects of the Company.
Columbia/HCA is utilizing both internal and external resources to
manage and implement its Year 2000 program. With the assistance of external
resources, Columbia/HCA has undertaken development of contingency plans in the
event that its Year 2000 efforts, or the Year 2000 efforts of third-parties
upon which Columbia/HCA and the Company rely, are not accurately or timely
completed. The Company's management consults regularly with the Columbia/HCA
personnel responsible for development of such contingency plans. The Company,
in conjunction with Columbia/HCA, has developed a contingency planning
methodology and will implement contingency plans throughout 1999.
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Information Technology Systems
With respect to the information technology ("IT") systems portions of
Columbia/HCA's Year 2000 project, which address the inventory, assessment,
remediation, testing and implementation of internally developed software,
Columbia/HCA has identified various software applications that were addressed
on separate time lines. Columbia/HCA has completed remediating these software
applications. Columbia/HCA has also completed the assessment of mission
critical third party software (i.e., that software which is essential for
day-to-day operations) and has developed testing and implementation plans with
separate time lines. Remediation, testing and implementation of various
software applications for certain of the Company's subsidiaries will be
completed in the fourth quarter of 1999 and should not have a material effect
on the Company's readiness. The IT systems portion of Columbia/HCA's Year 2000
project is currently on schedule.
The Company, in participation with Columbia/HCA, has undertaken a
program to inventory, assess and correct, replace or otherwise address
impacted, vendor - supplied products (hardware, systems software, business
software, and telecommunication equipment) with respect to Year 2000
compliance. Columbia/HCA has implemented a program to contact vendors, analyze
information provided, and to remediate, replace or otherwise address IT
products that pose a material Year 2000 impact and expects to complete, in all
material respects, the IT infrastructure portion of the program during the
fourth quarter of 1999. This is a revised date from September 30, 1999 due to
changes in vendor product status.
The Company's management presently believes that with modifications to
existing software or the installation of upgraded software under the IT
infrastructure portion, the Year 2000 will not pose material operational
problems for the Company's computer systems. However, if such modifications or
upgrades are not accomplished in a timely manner, Year 2000 related failures
may present a material adverse impact on the operations of the Company.
Non-Information Technology Systems and Equipment
With respect to the non-IT infrastructure project, the Company, in
participation with Columbia/HCA has undertaken a program to inventory, assess
and correct, replace or otherwise address impacted vendor products, medical
equipment and other related equipment with embedded chips. The Company, in
participation with Columbia/HCA, has implemented a program to contact vendors,
analyze information provided, and to remediate, replace or otherwise address
devices or equipment that pose a material Year 2000 impact. The Company
anticipates completion, in all material respects, of the non-IT infrastructure
portion of its program in the fourth quarter of 1999. This is a revised date
from September 30, 1999 due to changes in vendor product status.
The Company is prioritizing its non-IT infrastructure efforts by
focusing on equipment and medical devices that will have a direct impact on
patient care. The Company is directing substantial efforts to repair, replace,
upgrade or otherwise address this equipment and these medical devices in order
to minimize risk to patient safety and health. The Company is relying on
information that is being provided to it by equipment and medical device
manufacturers and Columbia/HCA regarding the Year 2000 status of their
products. While the Company is attempting to evaluate information provided by
its previous and current vendors, there can be no assurance that in all
instances accurate information is being provided. The Company also cannot in
all instances guarantee that the repair, replacement or upgrade of all non-IT
infrastructure systems will occur on a timely basis or that such repairs,
replacements or upgrades will avoid all Year 2000 problems.
Third-Party Payers and Intermediaries, and Suppliers
Columbia/HCA and the Company have initiated communications with the
Company's major third party payers and intermediaries, including government
payers and intermediaries. The Company relies on these entities for accurate
and
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47
timely reimbursement of claims, often through the use of electronic data
interfaces. Neither the Company nor Columbia/HCA received assurances that these
interfaces will be converted in a timely manner. Because certain payers have
refused or are not ready to test with the Company's systems, testing with
payers and intermediaries will continue through the end of the year. Failure of
these third party systems could have a material adverse effect on the Company's
cash flow and results of operations.
Columbia/HCA and the Company have also initiated communications with
the Company's mission critical suppliers and vendors (i.e. those suppliers and
vendors whose products and services are essential for day-to-day operations) to
verify their ability to continue to deliver goods and services through the Year
2000. The Company has not received assurances from all mission critical
suppliers and vendors that they will be able to continue to deliver goods and
services through the Year 2000, but the Company is continuing its efforts to
obtain such assurances. Failure of these third parties could have a material
impact on operations and/or the ability of the Company to provide health care
services.
With the assistance of external resources, including Columbia/HCA, the
Company has undertaken the development of contingency plans in the event that
its Year 2000 efforts, or the Year 2000 efforts of third parties upon which
Columbia/HCA and the Company rely, are not accurately or timely completed. The
Company has developed a contingency planning methodology and will implement
contingency plans throughout 1999.
Year 2000 Risks/Contingency Planning
While the Company is developing contingency plans to address possible
failure scenarios, the Company recognizes that there are "worst case" scenarios
which may develop and are largely outside the Company's or Columbia/HCA's
control. The Company recognizes the risks associated with extended
infrastructure (e.g., power, water and telecommunications) failure, the
interruption of insurance and other payments to the Company and the failure of
equipment or software that could impact patient safety or health despite the
assurances of third parties. The Company is addressing these and other failure
scenarios in its contingency planning effort and is engaging third parties in
discussions regarding how to manage common failure scenarios, but neither
Columbia/HCA nor the Company can currently estimate the likelihood or the
potential cost of such failures. Contingency plans have been developed for
mission-critical and high impact patient care and business operations. The
contingency plans developed by the facilities include those in the following
areas: medical equipment, suppliers and service providers, utilities,
information technology and services, facility and physical plant equipment and
business office operations. Currently the Company does not believe that any
reasonably likely worst case scenario will have a material impact on the
Company's revenues or operations. Those reasonably likely worst case scenarios
include continued expenditures for remediation, continued expenditures for
replacement or upgrade of equipment, continued efforts regarding contingency
planning, increased staffing for the periods immediately preceding and after
January 1, and payment delays from the Company's payers.
The Company believes that if (i) any material phase or aspect of its
Year 2000 project is not completed successfully and timely, (ii) certain
mission critical suppliers and vendors (particularly medical surgical suppliers
and utilities) are not able to deliver goods or services after December 31,
1999, or (iii) its contingency plans do not anticipate and effectively address
actually experienced Year 2000 related problems or do not effectively address
unanticipated Year 2000 related problems, then the Company's results of
operations and financial condition, as well as its day-to-day business
operations and its ability to provide health care services (potentially
including patient diagnosis and treatment), could be materially adversely
affected.
Costs and Expenses
The Year 2000 project is currently estimated to have a minimum total
cost of $2.3 million, of which the Company has incurred $0.5 million of
expenses in the first nine months of 1999. The Company currently estimates the
cost to be incurred for the remediation, upgrade and replacement of its
impacted non-IT infrastructure systems, and equipment to be approximately $1.5
million, which is included in the above estimated minimum total cost of $2.3
million. These estimates do not include the costs of executing any contingency
plans or potential litigation claims resulting from any Year 2000 failure.
The majority of the costs related to the Year 2000 project (except the
cost of new equipment) will be expensed as incurred and are expected to be
funded through operating cash flows.
The costs of the project and completion dates for the Year 2000
modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantees that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but
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are not limited to, the availability and cost of personnel trained in this area
and the ability to locate and correct all relevant computer codes and all
medical equipment.
Inflation
The health care industry is labor intensive. Wages and other expenses
increase during periods of inflation and when shortages in marketplaces occur.
In addition, suppliers pass along rising costs to the Company in the form of
higher prices. The Company's ability to pass on these increased costs is
limited due to increasing regulatory and competitive pressures, as discussed
above.
Health Care Reform
In recent years, an increasing number of legislative proposals have
been introduced or proposed to Congress and in some state legislatures that
would significantly affect health care systems in the Company's markets. The
cost of certain proposals would be funded in significant part by reduction in
payments by government programs, including Medicare and Medicaid, to health
care providers or taxes levied on hospitals or other providers. While the
Company is unable to predict which, if any, proposals for health care reform
will be adopted; there can be no assurance that proposals adverse to the
business of the Company will not be adopted.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Operating Data
1999 1998
------ -------
Number of hospitals in operations at
March 31................................. 23 23
June 30.................................. 23 23
September 30............................. 23 23
December 31.............................. 23
Licensed hospitals beds at (a):
March 31................................. 2,169 2,136
June 30.................................. 2,169 2,113
September 30............................. 2,169 2,112
December 31.............................. 2,169
Weighted average licensed beds (b):
Quarter:
First.................................... 2,169 2,136
Second................................... 2,169 2,128
Third.................................... 2,169 2,113
Fourth................................... 2,131
Year......................................... 2,127
Average daily census (c):
Quarter:
First.................................... 863 853
Second................................... 714 695
Third.................................... 668 699
Fourth................................... 725
Year......................................... 742
Admissions (d):
Quarter:
First.................................... 18,051 16,842
Second................................... 15,335 14,940
Third.................................... 15,018 14,832
Fourth................................... 15,655
Year......................................... 62,269
Equivalent Admissions (e):
Quarter:
First.................................... 30,741 28,412
Second................................... 27,651 27,175
Third.................................... 27,767 26,920
Fourth................................... 27,522
Year......................................... 110,029
Average length of stay (days) (f):
Quarter:
First.................................... 4.3 4.6
Second................................... 4.2 4.2
Third.................................... 4.1 4.3
Fourth................................... 4.3
Year......................................... 4.4
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
Operating Data (Continued)
- ---------
(a) Licensed beds are those beds for which a facility has been granted
approval to operate from the applicable state licensing agency.
(b) Represents the average number of licensed beds, weighted based on
periods owned.
(c) Represents the average number of patients in the company's hospital
beds each day.
(d) Represents the total number of patients admitted (in the facility for
a period in excess of 23 hours) to the Company's hospitals and is used
by management and certain investors as a general measure of inpatient
volume.
(e) Equivalent admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume.
Equivalent admissions is computed by multiplying admissions (inpatient
volume) by the sum of gross inpatient revenue and gross outpatient
revenue and then dividing the resulting amount by gross inpatient
revenue. The equivalent admissions computation "equates" outpatient
revenue to the volume measure (admissions) used to measure inpatient
volume resulting in a general measure of combined inpatient and
outpatient volume.
(f) Represents the average number of days admitted patients stay in the
Company's hospitals. Average length of stay has declined due to the
continuing pressures from managed care and other payers to restrict
admissions and reduce the number of days that are covered by the
payers for certain procedures, and by technological and pharmaceutical
improvements.
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Part II. Other Information
Item 5: Other Information
(a) Unaudited Pro Forma Financial Statements as of and for the three
months and nine months ended September 30, 1999
The following Unaudited Pro Forma Condensed Consolidated Financial
Statements of the Company are based on the historical consolidated financial
statements, which reflect periods during which the businesses that comprise the
Company did not operate as a separate, independent company and certain
estimates, assumptions and allocations were made in preparing such financial
statements. Therefore, such historical consolidated financial statements do not
necessarily reflect the consolidated results of operations or financial
position that would have existed had the Company been a separate, independent
company throughout the periods presented.
The Unaudited Pro Forma Condensed Consolidated Statements of Income for
the three months and nine months ended September 30, 1999 reflect the results
of the Company's operations as if the Distribution and the divestitures of
certain facilities that the Company intends to divest had occurred at the
beginning of 1999. The Unaudited Pro Forma Condensed Consolidated Balance Sheet
assumes that the Distribution and such divestitures had occurred on September
30, 1999.
The Unaudited Pro Forma Condensed Consolidated Financial Statements should
be read in conjunction with the historical financial statements of the Company
included elsewhere herein and the notes thereto. The pro forma condensed
consolidated financial information is presented for informational purposes only
and does not purport to reflect the results of operations or financial position
of the Company or the results of operations or financial position that would
have occurred had the Company been operated as a separate, independent company.
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52
LIFEPOINT HOSPITALS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars in millions, except per share amounts)
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ----------
Revenues ..................................................... $ 125.4 $ (9.4)(a) $ 116.0
Salaries and benefits ........................................ 52.2 (4.5)(a) 47.7
Supplies ..................................................... 15.7 (1.4)(a) 14.3
Other operating expenses ..................................... 28.8 (2.8)(a) 26.0
Provision for doubtful accounts .............................. 10.7 (1.5)(a) 9.2
Depreciation and amortization ................................ 7.9 (0.8)(a) 7.1
Interest expense ............................................. 6.7 -- 6.7
ESOP expense ................................................. 1.2 -- 1.2
---------- ---------- ----------
123.2 (11.0) 112.2
---------- ---------- ----------
Income from continuing operations before minority
interests and income taxes ................................ 2.2 1.6 3.8
Minority interests in earnings of consolidated
entities .................................................. 0.4 -- 0.4
---------- ---------- ----------
Income from continuing operations before income
taxes ..................................................... 1.8 1.6 3.4
Provision for income taxes ................................... 0.7 0.7 (e) 1.4
---------- ---------- ----------
Income from continuing operations ............................ $ 1.1 $ 0.9 $ 2.0
========== ========== ==========
Basic and diluted earnings per share ......................... $ 0.03 $ 0.04 $ 0.07
========== ========== ==========
Shares used in earnings per share calculations (000s):
Basic ..................................................... 30,951 30,951 30,951
Dilutive securities - stock options .................. 63 63 63
---------- ---------- ----------
Diluted ................................................... 31,014 31,014 31,014
========== ========== ==========
See accompanying notes.
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LIFEPOINT HOSPITALS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Dollars in millions, except per share amounts)
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ---------
Revenues ................................................................. $ 387.8 $ (33.5)(a) $ 354.3
Salaries and benefits .................................................... 165.1 (15.7)(a) 147.6
0.9 (c)
(2.7)(b)
Supplies ................................................................. 47.7 (4.7)(a) 43.1
0.1 (c)
Other operating expenses ................................................. 87.4 (8.6)(a) 80.1
1.3 (c)
Provision for doubtful accounts .......................................... 30.1 (4.3)(a) 25.8
Depreciation and amortization ............................................ 23.3 (2.6)(a) 20.7
Interest expense ......................................................... 17.4 2.6 (d) 20.0
Management fees allocated from Columbia/HCA .............................. 3.2 (3.2)(c) --
ESOP expense ............................................................. 1.7 1.0 (b) 2.7
------- ------- -------
375.9 (35.9) 340.0
------- ------- -------
Income from continuing operations before minority
interests and income taxes ............................................ 11.9 2.4 14.3
Minority interests in earnings of consolidated
entities .............................................................. 1.4 -- 1.4
------- ------- -------
Income from continuing operations before income
taxes ................................................................. 10.5 2.4 12.9
Provision for income taxes ............................................... 4.4 1.0 (e) 5.4
------- ------- -------
Income from continuing operations ........................................ $ 6.1 $ 1.4 $ 7.5
======= ======= =======
Basic and diluted earnings per share ..................................... $ 0.20 $ 0.05 $ 0.25
======= ======= =======
Shares used in earnings per share calculations (000s):
Basic ................................................................. 30,349 30,349 30,349
Dilutive securities - stock options .............................. 194 194 194
------- ------- -------
Diluted ............................................................... 30,543 30,543 30,543
======= ======= =======
See accompanying notes.
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LIFEPOINT HOSPITALS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(Dollars in millions, except per share amounts)
Pro Forma
ASSETS Historical Adjustments Pro Forma
------ ---------- ----------- ---------
Current assets:
Cash and cash equivalents.......................... $ 32.7 $ - $ 32.7
Accounts receivable, net........................... 51.9 (6.4)(a) 45.5
Inventories........................................ 13.8 (1.9)(a) 11.9
Deferred taxes and other current assets............ 24.9 (1.4)(a) 23.5
------- ------ -------
123.3 (9.7) 113.6
Property and equipment, at cost...................... 478.9 (30.9)(a) 448.0
Accumulated depreciation............................. (190.7) 13.3 (a) (177.4)
------- ------ -------
288.2 (17.6) 270.6
Intangible assets, net............................... 23.4 (0.4)(a) 23.0
Other................................................ 4.1 (4.1)(a) -
------- ------ -------
$ 439.0 $(31.8) $ 407.2
======= ====== =======
LIABILITIES AND EQUITY
----------------------
Current liabilities:
Accounts payable................................... $ 17.6 $ (1.3)(a) $ 16.3
Accrued salaries................................... 13.3 (0.8)(a) 12.5
Other current liabilities.......................... 28.2 (0.8)(a) 27.4
Current maturities of long-term debt............... 2.2 - 2.2
------- ------ -------
61.3 (2.9) 58.4
Long-term debt....................................... 258.0 - 258.0
Deferred taxes....................................... 20.3 6.3 (a) 26.6
Professional liability risks and other liabilities... 2.6 - 2.6
Minority interests in equity of
consolidated entities............................... 3.8 - 3.8
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; no shares issued....................... - - -
Common stock, $0.01 par value; 90,000,000 shares
authorized; 31,066,289 shares outstanding at
September 30, 1999................................. 0.3 - 0.3
Capital in excess of par value...................... 133.1 (37.8)(a) 95.3
Unearned ESOP compensation.......................... (30.3) - (30.3)
Notes receivable for shares sold to employees....... (10.2) - (10.2)
Retained earnings................................... 0.1 2.6 (a) 2.7
------- ------ -------
93.0 (35.2) 57.8
------- ------ -------
$ 439.0 $(31.8) $ 407.2
======= ====== =======
See accompanying notes.
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Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements
(a) To eliminate the assets and liabilities as of September 30, 1999 and
results of operations for the three months and nine months ended
September 30, 1999 for three facilities which are currently held for
sale by the Company.
(b) To adjust historical retirement plan expense recorded as a component
of salaries and wages and record the estimated LifePoint Hospitals,
Inc. Retirement Plan (the "ESOP") expense for the nine months ended
September 30, 1999. See Note 5 in the Notes to Condensed Consolidated
Financial Statements.
(c) To adjust for the estimated general and administrative costs that
would have been incurred if the Company had managed comparable general
and administrative functions and to eliminate the management fees
allocated from Columbia/HCA for the nine months ended September 30,
1999.
(d) To adjust interest expense to $20.0 million for the nine months ended
September 30, 1999. The interest expense adjustment is based on the
elimination of all intercompany amounts payable by the Company to
Columbia/HCA and the assumption of certain indebtedness from
Columbia/HCA at an assumed average interest rate of approximately 9.9%
and $0.5 million in amortization of the deferred loan cost. The
historical balance sheet as of September 30, 1999 already reflects the
elimination and assumption of these debt amounts since the transaction
occurred on May 11, 1999.
(e) To adjust income tax provision for the estimated impact of the pro
forma adjustments.
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Item 6: Exhibits and Reports on Form 8-K
(a) List of Exhibits:
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation of LifePoint Hospitals,
Incorporated by reference from LifePoint Hospitals' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
3.2 Bylaws of LifePoint Hospitals. Incorporated by reference from
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
3.3 Certificate of Incorporation of LifePoint Holdings.
Incorporated by reference from LifePoint Holdings' Annual
Report on Form 10-K for the year ended December 31, 1999.
3.4 Bylaws of LifePoint Holdings. Incorporated by reference from
LifePoint Holdings' Annual Report on Form 10-K for the year
ended December 31, 1999.
27.1 Financial Data Schedule for LifePoint Hospitals (for SEC use
only).
27.2 Financial Data Schedule for LifePoint Holdings (for SEC use
only).
(b) Reports on Form 8-K filed during the quarter ended September 30, 1999:
None.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LifePoint Hospitals, Inc.
Date: March 31, 2000 /s/ Kenneth C. Donahey
-------------------------------------
Kenneth C. Donahey
Senior Vice President & Chief
Financial Officer
LifePoint Hospitals Holdings, Inc.
Date: March 31, 2000 /s/ Kenneth C. Donahey
-------------------------------------
Kenneth C. Donahey
Senior Vice President &
Chief Financial Officer
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Exhibit Index
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation of LifePoint Hospitals.
Incorporated by reference from LifePoint Hospitals' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
3.2 Bylaws of LifePoint Hospitals. Incorporated by reference from
LifePoint Hospitals' Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
3.3 Certificate of Incorporation of LifePoint Holdings.
Incorporated by reference from LifePoint Holdings' Annual
Report on Form 10-K for the year ended December 31, 1999.
3.4 Bylaws of LifePoint Holdings. Incorporated by reference from
LifePoint Holdings' Annual Report on Form 10-K for the year
ended December 31, 1999.
27.1 Financial Data Schedule for LifePoint Hospitals (for SEC use
only).
27.2 Financial Data Schedule for LifePoint Holdings (for SEC use
only).
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