(a) Includes charges related to impairment of long-lived assets of $8.0 million ($4.7 million after tax benefit), $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, 2000, 1999, 1998 and 1997, respectively. (b) EBITDA is defined as income (loss) from continuing operations before depreciation and amortization, interest expense, ESOP expense, management fees, gain on sales of assets, impairment of long-lived assets, minority in earnings of consolidated entities and income taxes. EBITDA is commonly used as an analytical indicator within the health care industry, and also serves as a measure of leverage capacity and debt service ability. EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from EBITDA 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 2000 and 1999. This table does not include any operating statistics for these facilities.
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains disclosures which are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "believe," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based on the current plans and expectations of Triad and are subject to a number of uncertainties and risks that could significantly affect current plans and expectations and the future financial condition and results of Triad. These factors include, but are not limited to,
. changes in federal, state or local regulation affecting the health care industry,
. the ability to enter into managed care provider arrangements on acceptable terms,
. the continuing trend toward the conversion of more services to an outpatient basis.
In connection with the distribution, HCA agreed to indemnify Triad for any payments which it is required to make in respect of Medicare, Medicaid and Blue Cross cost reports for former HCA facilities owned by Triad at the time of the spin-off from HCA relating to periods ending on or prior to the date of the distribution, and Triad agreed to indemnify HCA for and pay to HCA any payments received by it relating to such cost reports relating to periods ending on or prior to the date of the distribution. Triad will be responsible for the filing of these cost reports and any terminating cost reports. Triad has recorded a receivable from HCA relating to the indemnification of $27.7 million as of December 31, 2000.
Following are comparative summaries of results from continuing operations for the years ended December 31, 2000, 1999 and 1998. Dollars are in millions, except per share amounts and ratios.
Other operating expenses (primarily consisting of contract services, professional fees, repairs and maintenance, rents and leases, utilities, insurance and non-income taxes), decreased as a percentage of revenues to 21.0% in the year ended December 31, 2000 compared to 22.7% in the year ended December 31, 1999. For the year ended December 31, 1999, other operating expenses for the facilities sold or closed were $72.8 million compared to $16.5 million in the year ended December 31, 2000. Other operating expenses for ongoing operations decreased 0.6% as a percentage of revenue in the year ended December 31, 2000 compared to the year ended December 31, 1999. This decrease was due primarily to the increase in revenues. This was partially offset by $4.3 million from the acquisition of two facilities in the fourth quarter of 2000.
Provision for doubtful accounts, as a percentage of revenues, decreased to 8.4% in the year ended December 31, 2000 compared to 9.7% in the year ended December 31, 1999. Provision for doubtful accounts for the facilities sold or closed were $36.6 million in the year ended December 31, 1999 compared to $4.9 million in the year ended December 31, 2000. Provision for doubtful accounts for ongoing operations decreased 0.2% as a percentage of revenue in the year ended December 31, 2000 compared to the year ended December 31, 1999 due to improved collections and refinement of the estimation process for allowances for doubtful accounts of approximately $2.0 million. Days in accounts receivable decreased two days in the year ended December 31, 2000 compared to the year ended December 31, 1999. This decrease was offset partially by $3.0 million from the acquisition of two facilities in the fourth quarter of 2000.
Management fees allocated from HCA were $8.9 million during the year ended December 31, 1999. No management fees were allocated during the year ended December 30, 2000 due to the distribution from HCA.
Interest expense allocated from HCA, which was represented by interest incurred on the net intercompany balance with HCA, decreased to $22.5 million in the year ended December 31, 1999 compared to $66.2 million in the year ended December 31, 1998 due to the distribution which eliminated the intercompany balances.
Management fees allocated from 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 HCA.
Cash used in investing activities increased to $172.9 million in the year ended December 31, 2000 from $57.7 million in the year ended December 31, 1999. This was due primarily to $118.8 million paid for acquisitions during 2000. Additionally, $20.7 million in proceeds from sales of assets was received in 2000 compared to $117.8 million received during 1999. This was partially offset by a decrease in capital expenditures of $38.3 million in the year ended December 31, 2000 compared to the year ended December 31, 1999 and investments in a new hospital during 1999 of $52.4 million, which is not consolidated for financial reporting purposes, which opened in May 1999. Triad expects to expend approximately $120 million in capital expenditures ($90 million for expansion) in 2001.
Cash provided by financing activities was $37.1 million in the year ended December 31, 2000 compared to cash used in financing activities of $26.6 million in the year ended December 31, 1999. This increase was due to $51.0 million proceeds from a new delay draw loan in 2000. This was offset by $75.0 million payoff of the asset bridge loan, which was required from the asset sale proceeds, and $33.0 million in payments on other bank indebtedness in 1999. This was partially offset by changes in the intercompany balances with HCA prior to the distribution.
On March 31, 2000, Triad sold its limited partnership interest in a rehabilitation hospital located in Tucson, Arizona for $4.0 million. A gain of $4.2 million was recognized on the sale.
On February 11, 2000, Triad closed its acute care hospital in Roseberg, Oregon. An impairment charge of $6.8 million on this facility was recognized during the year ended December 31, 1999. As of December 31, 2000, the carrying value of this facility after impairment charge was $3.9 million. For the years ended December 31, 2000 and 1999, this facility had net revenues of $1.9 million and $21.8 million, respectively, and pre-tax losses before impairment charges and income taxes of $4.7 million and $5.6 million, respectively. Triad continues to pursue a lawsuit against another hospital in the market, seeking damages for various causes of action, including breach of fiduciary duties, interference with business advantage, and breach of contract and it expects ultimately to sell the facility for real estate value.
On November 30, 2000, Triad closed its acute care hospital in San Diego, California. An impairment charge of $7.1 million on this facility was recognized during the year ended December 31, 2000. As of December 31, 2000 the carrying value of this facility after impairment charge was $8.3 million. For the years ended December 31, 2000 and 1999, this facility had net revenue of $22.1 million and $26.0 million, respectively, and income (losses) before impairment charges and income taxes of $(8.9) million and $0.1 million, respectively.
Triad announced on October 19, 2000 that it entered into an agreement to acquire Quorum for approximately $2.4 billion in cash, stock and assumption of debt. Under the terms of the agreement, Quorum shareholders will receive $3.50 in cash and 0.4107 shares of Triad common stock for each outstanding share of Quorum stock, plus cash in lieu of fractional shares of Triad common stock. However, if the average closing price of a share of Triad common stock over the 20 trading-day period ending 5 business days prior to the date of the Quorum special meeting of stockholders is less than $21.00, Quorum may notify Triad of its intention to terminate the merger agreement. In that event, Triad will have the right to increase the $3.50 cash portion of the merger consideration by the amount equal to the difference between $21.00 and the average closing price of a share of Triad common stock over the 20 trading-day trading period ending 5 business days prior to the Quorum special meeting, multiplied by .4107. If Triad exercises that right, Quorum will not be permitted to terminate the merger agreement. After the transaction Triad will have revenues of approximately $3.0 billion, 50 hospitals, 14 ambulatory surgery centers and 9,000 licensed beds, including 282 beds that are in joint venture hospitals and 726 beds that are in hospitals leased to third parties.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"), which was required to be adopted in the first quarter of years beginning after December 15, 1999. In June 2000, the effective date of SAB 101 was delayed until the fourth quarter of 2000 for years beginning after December 15, 1999. The application of SAB 101 did not have a significant effect on the results of operations or the financial position of Triad.
court by certain purported stockholders of HCA against certain of its current and former officers and directors alleging breach of fiduciary duty, and failure to take reasonable steps to ensure that HCA did not engage in illegal practices thereby exposing it to significant damages.
On May 18, 2000, HCA announced that it had reached an understanding with attorneys of the Civil Division of the Department of Justice to recommend an agreement to settle, subject to certain conditions, the civil claims actions against HCA relating to diagnosis related group coding, outpatient laboratory billing and home health issues. The understanding with the Department of Justice attorneys would require HCA to pay $745 million in compensation to the government, with interest accruing at a fixed rate of 6.5% per annum (beginning May 18, 2000), and would reduce HCA's existing letter of credit agreement with the government from $1 billion to $250 million at the time of the payment of the settlement. On December 14, 2000, HCA announced that it had entered into a settlement agreement with the Civil Division of the Department of Justice and that payment of the amounts required by the settlement agreement would be made upon court approval of the settlement, which HCA expects will occur in the first quarter of 2001. HCA also entered into a corporate integrity agreement with the OIG. HCA is in continuing discussions with the government regarding civil issues relating to cost reporting and physician relations.
. any civil, criminal or administrative liability under the Internal Revenue Code;
. any administrative liability, including mandatory exclusion from Federal health care programs;
. any liability to the United States (or its agencies) for any conduct other than the conduct covered in the government's investigation;
. any claims for personal injury or property damage or for other similar consequential damages arising from the conduct subject to the investigation; and
Triad is unable to predict the effect or outcome of any of the ongoing investigations or qui tam and other actions, or whether any additional investigations or litigation will be commenced. In connection with the distribution, Triad entered into a distribution agreement with HCA. The terms of the distribution agreement provide that HCA will indemnify Triad for any losses (other than consequential damages) which it may incur as a result of proceedings described above. HCA has also agreed to indemnify Triad for any losses (other than consequential damages) 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
Various federal, state and local laws have been enacted that, in certain cases, limit Triad's ability to increase prices. Revenues for acute care hospital services rendered to Medicare patients are established under the federal government's prospective payment system. Net Medicare revenues approximated 29.6% in 2000, 31.9% in 1999 and 35.2% in 1998.
Management believes that hospital industry operating margins have been, and may continue to be, under significant pressure because of deterioration in pricing flexibility and payer mix, and growth in operating expenses in excess of the increase in prospective payments under the Medicare program. Although Medicare prospective payments will increase in 2001, management expects that the average rate of increase in Medicare prospective payments will decline slightly in 2002 and 2003 not withstanding the enactment of the Refinement Act and BIPA. In addition, as a result of increasing regulatory and competitive pressures, Triad's ability to maintain operating margins through price increases to non- Medicare patients is limited.
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 the services provided by and reimbursement to health care providers in Triad's markets. The cost of certain proposals would be funded in significant part by reduction in payments by government programs, including Medicare and Medicaid, to health care providers, similar to the reductions incurred as part of the Balanced Budget Act as previously discussed. Future health care legislation or other changes in the administration or interpretation of governmental health care programs may have a material adverse effect on Triad's business, financial condition, results of operations or prospects.