(1) Triad holds a fifty percent equity interest in a non-consolidated joint venture which owns and operates this facility. (2) Triad continues to own the assets related to these hospitals, but has transferred the exclusive rights to use and control the hospitals' operations to a separate, independent entity pursuant to a long-term lease agreement effective as of January 1, 1999. (3) Triad currently leases this hospital pursuant to a long-term lease which provide that it has the exclusive right to use and control the hospital operations. (4) Triad ceased operations of this facility on February 11, 2000.
Triad's headquarters, hospitals and other facilities are suitable for their respective uses and are, in general, adequate for Triad's present needs.
The following consolidated selected financial data as of and for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 has been derived from Triad's audited consolidated financial statements. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Triad's consolidated financial statements and related notes to the consolidated financial statements, which are included herein.
(a) Includes charges related to impairment of long-lived assets of $69.2 million ($55.8 million after tax benefit), $55.1 million ($32.9 million after tax benefit) and $13.7 million ($8.2 million after tax benefit) for the years ended December 31, 1999, 1998 and 1997, respectively. (b) EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, gain on sales of assets, impairment of long-lived assets, minority interests in earnings of consolidated entities and income tax benefit. EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from EBITDA should not be considered in isolation or as an alternative to net income, cash flows generated by operating, investing or financing activities or other financial statement data presented in the consolidated financial statements as an indicator of financial performance or liquidity. Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. (c) Number of hospitals includes two facilities which are leased to a third party and two hospitals not consolidated for financial reporting purposes for 1999. This table does not include any operating statistics for these facilities. (d) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (e) Represents the average number of licensed beds, weighted based on periods owned. (f) Available beds are those beds a facility actually has in use. (g) Represents the total number of patients admitted (in the facility for a period in excess of 23 hours) to Triad's hospitals and is used by management and certain investors as a general measure of inpatient volume. (h) Adjusted admissions are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Adjusted 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 adjusted admissions computation "adjusts" outpatient revenue to the volume measure (admissions) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (i) Represents the average number of days admitted patients stay in Triad's hospitals. Average length of stay has declined due to the continuing pressures from managed care and other payers to restrict admissions and reduce the number of days that are covered by the payers for certain procedures, and by technological and pharmaceutical improvements. (j) Represents the average number of patients in Triad's hospital beds each day. (k) Represents the percentage of hospital available beds occupied by patients. Both average daily census and occupancy rate provide measures of the utilization of inpatient rooms. (l) Triad's earnings were insufficient to cover fixed charges for the years ended December 31, 1999, 1998 and 1997 by $112.4 million, $115.6 million and $15.1 million, respectively.
As of January 1, 1999 Triad owned or operated 39 hospitals, including one facility Triad is leasing from others and an investment in one hospital that is accounted for using the equity method, 19 free-standing ambulatory surgery centers, including two investments in ambulatory surgery centers that are accounted for using the equity method, and related health care entities located in eleven southwestern, western, and southcentral states. Management of Triad has focused on streamlining its portfolio of facilities to eliminate those with poor financial performance, weak competitive market positions or locations in certain urban markets. As a result, management determined that eleven of the facilities- 10 general, acute care hospitals and one psychiatric hospital - which were part of the Pacific Group division of Columbia/HCA as of January 1, 1999, did not meet Triad's strategic plan and decided to divest these facilities. During the year ended December 31, 1999, Triad sold eight of these general, acute care hospitals, the psychiatric hospital, and two ambulatory surgery centers, including two sales prior to the distribution where the proceeds of which were retained by Columbia/HCA. In addition, Triad sold one general acute care hospital which was not included in the eleven facilities referred previously. Triad also completed a swap of one of its hospitals in Laredo, Texas for a hospital located in Victoria, Texas on June 1, 1999. On January 1, 1999, Triad transferred two acute care hospitals and three ambulatory surgery centers located in the Kansas City, Missouri area to an unaffiliated third party pursuant to a long-term lease which provides for payment to Triad of rental amounts approximating $16.0 million per year. Also, in May 1999, Triad opened one hospital, which is accounted for using the equity method.
. the highly competitive nature of the health care business, . the efforts of insurers, health care providers and others to contain health care costs, . possible changes in the Medicare and Medicaid programs that may further limit reimbursements to health care providers and insurers, . changes in federal, state or local regulation affecting the health care industry, . the possible enactment of federal or state health care reform, . the ability to attract and retain qualified management and personnel, including physicians, . the departure of key executive officers from Triad, . claims and legal actions relating to professional liabilities and other matters, . fluctuations in the market value of Triad common stock,
Reductions in the rate of increase in Medicare and Medicaid reimbursement, increasing percentages of the patient volume being related to patients participating in managed care plans and continuing trends toward more services being performed on an outpatient basis are expected to present ongoing challenges. The challenges presented by these trends are magnified by Triad's inability to control these trends and the associated risks. To maintain and improve its operating margins in future periods, Triad must increase patient volumes while controlling the costs of providing services. If Triad is not able to achieve reductions in the cost of providing services through operational efficiencies, and the trend toward declining reimbursements and payments continues, results of operations and cash flows will deteriorate.
(a) EBITDA is defined as income from continuing operations before depreciation and amortization, interest expense, management fees, gain on sales of assets, impairment of long-lived assets, minority interests in earnings of consolidated entities and income tax benefit. EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability.
Revenues decreased 16.3% to $1,329.1 million in the year ended December 31, 1999 compared to $1,588.7 million in the year ended December 31, 1998. Inpatient admissions decreased 13.0% and adjusted admissions, adjusted to reflect combined inpatient and outpatient volume, decreased 13.0% in the year ended December 31, 1999 compared to the year ended December 31, 1998. Revenues, admissions and adjusted admissions declined primarily as a result of the facilities that were leased in January 1999 and the facilities that were sold during 1999. The leased facilities had revenues of $216.6 million, admissions of 18,134 and adjusted admissions of 30,562 during year ended December 31, 1998. The ten hospitals sold had net revenues of $189.7 million and $330.3 million, admissions of 22,821 and 38,280 and adjusted admissions of 33,277 and 55,381 during the years ended December 31, 1999 and 1998, respectively. Additionally, $3.0 million of favorable cost report settlements were received in 1998. These were partially offset by $16.7 million of lease income from the leased facilities in the year ended December 31, 1999 and increases in net revenues of $85.7 million, admissions of 7,691 and adjusted admissions of 13,443 in the facilities that will remain after the divestitures. Revenues have been decreasing over the past several years due to several additional factors. These factors include decreases in Medicare rates of reimbursement mandated by the Balanced Budget Act which became effective October 1, 1997; such rates lowered revenues by approximately $12.0 million and $17.0 million during the years ended December 31, 1999 and 1998, respectively, and continued increases in discounts from the growing number of managed care payers; managed care as a percent of net revenues increased to 32.7% compared to 27.0% during the year ended December 31, 1999 and 1998, respectively.
Other operating expenses, primarily consisting of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance and non-income taxes, as a percentage of revenues, decreased to 22.7% in the year ended December 31, 1999 from 22.8% in the year ended December 31, 1998 due primarily to a reduction in the use of outside contract vendors. This was partially offset by collection fees relating to collection efforts on the remaining accounts receivable of the leased facilities in 1999.
Management fees allocated from Columbia/HCA decreased to $8.9 million from $29.3 million during the year ended December 31, 1999 compared to the year ended December 31, 1998, due to the distribution from Columbia/HCA.
Minority interests, which are primarily related to one ambulatory surgery center joint venture in Arizona, were 0.7% as a percentage of net revenues in both the years ended December 31, 1999 and 1998.
Depreciation and amortization increased as a percentage of revenues to 6.9% for the year ended December 31, 1998 from 6.3% for the year ended December 31, 1997. The increase was primarily due to the 1.3% decline in revenues on a same- facility basis and increased capital expenditures related to ancillary services such as outpatient services and information systems.
Interest expense, which is primarily represented by interest incurred on the net intercompany balance with Columbia/HCA, increased to $68.9 million in the year ended December 31, 1998 compared to $60.5 million in the year ended December 31, 1997, primarily as a result of an increase in the average balance of the advances from Columbia/HCA during 1998 compared to the same period in 1997. This was due, in part, to a $76.4 million decline in cash flows from operations.
(b) elimination of the year ended December 31, 1999, 1998 and 1997 results of operations of one acute care hospital which was closed on February 11, 2000;
(2) To reflect the long term lease payment of $16.0 million per year and elimination of operations in the year ended December 31, 1999, 1998 and 1997 of two acute care hospitals and three ambulatory surgery centers in the Kansas City, Missouri area in January 1999 as though such lease had commenced at the beginning of each period.
(a) Core (pro forma) EBITDA is EBITDA, as defined previously, adjusted (1) as if the distribution and the divestitures of certain facilities that Triad has divested during 1999 and intends to divest during 2000 had occurred at the beginning of each period, (2) as if the long term lease of the Kansas City facilities in January 1999 had occurred at the beginning of each period, (3) the swap of facilities in June 1999 had occurred at the beginning of each period, (4) to exclude non-cash ESOP expense and (5) to include Triad's management's estimated corporate overhead costs of $22.4 million on an annual basis that are recorded in the Core Operating (pro forma) Results Summary to replace the management fees allocated by Columbia/HCA. Core (pro forma) EBITDA is commonly used as an analytical indicator of leverage capacity and debt service ability. Core (pro forma) EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from core (pro forma) EBITDA are significant components in
The following discussion compares the results of the year ended December 31, 1999 on a core (pro forma) basis to the results of the year ended December 31, 1998 on a core (pro forma) basis, in each case giving effect to the assumptions set forth above the summary table of core operating (pro forma) results from continuing operations for the year ended December 31, 1999 and December 31, 1998.
On a core (pro forma) basis, revenues increased 6.6% to $1,105.9 million in the years ended December 31, 1999 compared to $1,037.7 million in the year ended December 31, 1998. Inpatient admissions increased 6.9% and
adjusted admissions increased 7.1% in the year ended December 31, 1999 compared to the year ended December 31, 1998 on a core (pro forma) basis. The increase in revenues, on a core (pro forma) basis, was due primarily to increased focus by management on the markets that met Triad's strategic plan as Triad progressed toward and completed the distribution. That increased management attention decreased the uncertainty in the affected markets as to the eventual disposition of the facilities. The increase in revenues was partially offset by $2.8 million of favorable cost report settlements in the year ended December 31, 1998.
Core (Pro Forma) Comparisons of the Year Ended December 31, 1998 and 1997
On a core (pro forma) basis, loss from continuing operations before income taxes decreased to $32.7 million in the year ended December 31, 1998 from income from continuing operations before income taxes of $5.6 million in the year ended December 31, 1997. The core (pro forma) decrease was primarily due to the inability to adjust expenses in line with volumes. The level of management's attention being devoted to the governmental investigations, reactions by certain physicians and patients to the negative media coverage, and management changes at several levels and locations throughout Triad contributed to Triad's inability to implement changes to reduce operating expenses.
On a core (pro forma) basis, salaries and benefits, as a percentage of net revenue, increased to 40.9% in the year ended December 31, 1998 from 37.7% in the year ended December 31, 1997. Salaries and benefits increased 4.8% per adjusted admission due to the inability to adjust staffing levels to mitigate a decline in revenues per adjusted admission.
On a core (pro forma) basis, supplies, as a percentage of net revenue, increased to 14.5% compared to 13.5% in the year ended December 31, 1998 and 1997, respectively. The increase was due to a decline in revenues per adjusted admission while the cost of supplies per adjusted admission increased 3.2%.
On a core (pro forma) basis, depreciation and amortization has increased to $79.7 million from $76.1 million in the years ended December 31, 1998 and 1997, respectively, due primarily to increased capital expenditures.
Cash provided by operating activities was $155.2 million in the year ended December 31, 1999 compared to $33.6 million in the year ended December 31, 1998. The increase was due to an increase in accounts payable and other current liabilities, decrease in inventories and other assets and a smaller increase in accounts receivable in 1999 than in 1998.
Cash used in investing activities decreased to $57.7 million in the year ended December 31, 1999 from $108.3 million in the year ended December 31, 1998. This was due to $117.8 million in proceeds received on the sale of ten facilities during 1999. This was partially offset by an increase of construction projects in the year ended December 31, 1999 compared to the year ended December 31, 1998 and investments in a new hospital, which is not consolidated for financial reporting purposes, which opened in May 1999. Triad expects to expend approximately $100 million in capital expenditures ($70 million for expansion) in 2000.
As previously discussed, based upon a review of all facilities and trends in each market, management of Triad determined that 10 acute care hospitals and one psychiatric hospital were not compatible with Triad's strategic plans. Of these facilities, eight acute care hospitals and one psychiatric hospital were sold during the year ended December 31, 1999, two of which were sold prior to the distribution and the proceeds were retained by Columbia/HCA. In addition, Triad sold one acute care hospital which was not included in the facilities referred to previously. Triad is required to use a portion of future proceeds on sales of facilities to retire certain outstanding indebtedness.
In January 1999, Triad entered into a fifteen year lease with an unaffiliated party for the operations of two acute care hospitals and three ambulatory surgery centers located in the Kansas City, Missouri area. The lease payments are approximately $16.0 million per year. In January 2001, the lessee has an option to purchase the facilities for approximately $130.0 million. As of December 31, 1999, these facilities assets had a carrying value of $68.3 million.
Triad sold a majority of the assets of its acute care hospital in Phoenix, Arizona for $29.2 million on November 30, 1999. A loss on the sale of $3.8 million was recognized during the year ended December 31, 1999. Triad retained the accounts receivable and certain liabilities with a book value at December 31, 1999 of $(0.8) million. For the years ended December 31, 1999 and 1998, this facility had net revenues of $35.4 million and $65.4 million, respectively, and pre-tax losses before loss on sale of assets and impairment charges of $21.5 million and $13.5 million, respectively.
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 understands that Columbia/HCA is cooperating in these investigations and that Columbia/HCA believes, through written notice and other means, that it is a target in these investigations. Given the breadth of the ongoing investigations, management understands that Columbia/HCA expects additional subpoenas and other investigative and prosecutorial activity to occur in these and other jurisdictions in the future.
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 Triad for the periods prior to the distribution date which are presented herein. The extent to which Triad may or may not continue in the future to be affected by the ongoing investigations of Columbia/HCA, the initiation of additional investigations, if any, and the related media coverage cannot be predicted.
Pursuant to the distribution agreement entered into by and among Columbia/HCA, Triad and LifePoint in connection with the distribution, Columbia/HCA has agreed to indemnify Triad in respect of any losses which it may incur arising from the governmental investigations described above and from stockholder actions and other legal proceedings related to the governmental investigations which are currently pending against Columbia/HCA.
Columbia/HCA has also agreed to indemnify Triad in respect of any losses which it may incur as a result of proceedings which may be commenced by government authorities or by private parties in the future that arise from acts, practices or omissions engaged in prior to the distribution date and related to the proceedings described above. Columbia/HCA has also agreed that, in the event that any hospital owned by Triad is permanently excluded from participation in the Medicare and Medicaid programs as a result of the proceedings described above, then Columbia/HCA will make a cash payment to Triad in an amount, if positive, equal to five times the excluded hospital's 1998 income from continuing operations before depreciation and amortization, interest expense, management fees, impairment of long-lived assets, minority interests and income taxes, as set forth on a schedule to the distribution agreement, less the net proceeds of the sale or other disposition of the excluded hospital. Triad has agreed that, in connection with the pending governmental investigations described above, it will participate with Columbia/HCA in negotiating one or more compliance agreements setting forth each of their agreements to comply with applicable laws and regulations. If any of such indemnified matters were successfully asserted against Triad, or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations, then such losses could have a material adverse effect on the business, financial position, results of operations or prospects of Triad. Columbia/HCA will not indemnify Triad for losses relating to any acts, practices and omissions engaged in by Triad after the distribution date, whether or not Triad is indemnified for similar acts, practices and omissions occurring prior to the distribution date. See "Note 13 - AGREEMENTS WITH COLUMBIA/HCA" in the consolidated financial statements for a more detailed description of such arrangements.
In connection with the distribution, Triad and Columbia/HCA entered into a computer and data processing agreement pursuant to which Triad obtains most of its information technology and information technology infrastructure from Columbia/HCA. See "Note 13- AGREEMENTS WITH COLUMBIA/HCA" in the consolidated financial statements for a more detailed description of such arrangement. Triad and Columbia/HCA implemented programs to mitigate any Year 2000 risks with its information technology systems, its non-information technology systems and equipment and its third party payers, intermediaries and suppliers. Triad has not experienced any significant Year 2000 related issues in any of these areas and does not expect any issues to have a material adverse effect on operations or financial results in fiscal 2000.
The Year 2000 project costs incurred by Columbia/HCA had an impact on the computer and data processing services agreement with Triad. The majority of the costs, except the cost of new equipment, related to the Year 2000 project were expensed as incurred and were funded through operating cash flows.
Information with respect to this Item is contained in Triad's consolidated financial statements indicated in the Index on Page of this Annual Report on Form 10-K.