The following table sets forth selected historical financial data of the Company for each of the years in the five year period ended December 31, 1999. The selected financial data at December 31, 1996 and 1995 and for the year ended December 31, 1995 has been derived from unaudited financial statements. The table should be read in conjunction with the Company's Consolidated Financial Statements and related notes included elsewhere in this report and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
This discussion should be read together with the historical financial statements of LifePoint included elsewhere herein and the notes thereto and the information set forth under "Selected Consolidated Financial Data" and the notes thereto.
At December 31, 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.
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.
The impairment charges did not have a significant impact on the Company's cash flows and are not expected to significantly impact cash flows for future periods. As a result of the write-downs, depreciation and amortization expense related to these assets will decrease in future periods. In the aggregate, the net effect of the change in depreciation and amortization expense is not expected to have a material effect on operating results for future periods.
ESOP expense of $2.9 million during 1999 relates to the newly established Employee Stock Ownership Plan discussed in Note 9 of the Notes to the Consolidated Financial Statements included elsewhere in this report.
Revenues increased 2.2% to $498.4 million in 1998 compared to $487.6 million in 1997. Inpatient admissions increased 2.9%, equivalent admissions (adjusted to reflect combined inpatient and outpatient volume) increased 4.7% and revenues per equivalent admission decreased 2.3% from 1997. On a same facility basis, revenues decreased 1.8%, inpatient admissions decreased 0.8%, equivalent admissions increased 0.2% and revenues per equivalent admission decreased 2.0%. The decline in revenues (on a same facility basis) and revenues per equivalent admission resulted from several factors, including decreases in Medicare reimbursement rates mandated by the Balanced Budget Act which became effective October 1, 1997 (such rates lowered 1998 revenues by approximately $7.0 million), continued increases in the number of managed care payers (managed care as a percentage of total admissions increased to 18.6% in 1998 compared to 16.7% in 1997) and delays experienced in obtaining Medicare cost report settlements (cost report filings and settlements resulted in favorable revenue adjustments of $1.2 million in 1998 compared to favorable adjustments of $3.3 million in 1997).
Salaries and benefits, as a percentage of revenues, increased to 44.3% in 1998 from 40.3% in 1997. The increase was due to cost pressures on labor (salaries and benefits per equivalent admission increased 8.0% over 1997) and a decline in productivity (man-hours per equivalent admission increased 2.9% over 1997).
Supply costs increased to 12.4% as a percentage of revenues in 1998 from 11.3% in 1997 primarily due to the 1.7% decline in revenues per equivalent admission, while the cost of supplies per equivalent admission increased 8.4%. The higher cost of supplies per equivalent admission resulted from significant increases in pharmaceutical costs and other increases in new product development costs and general inflation.
Other operating expenses decreased as a percentage of revenues to 23.5% in 1998 from 24.5% in 1997. The decrease was due to small decreases in several expense categories as a percentage of revenues, including lower marketing costs being incurred due to the cancellation of a national branding campaign.
Interest expense, which is primarily represented by interest incurred on the net intercompany balance with Columbia/HCA, increased to $19.1 million in 1998 from $15.4 million in 1997 primarily as a result of an increase in the average balance of the advances from Columbia/HCA during 1998 compared to the same period in 1997.
capital needs in each market. At December 31, 1998, the carrying value before the impairment charge of the long-lived assets related to these hospital facilities was approximately $47.0 million. The carrying value was reduced to fair value, based on estimates of selling values, for a total non-cash charge of $24.8 million. The Company recorded, during the third quarter of 1998, an impairment loss of approximately $1.3 million related to the write-off of intangibles and other long-lived assets of certain physician practices where the recorded asset values were not deemed to be fully recoverable based upon the operating results trends and projected future cash flows.
Net income declined to a loss of $21.8 million in 1998 compared to income of $12.5 million in 1997. In addition to the decline in income from continuing operations, the Company incurred a $4.1 million after-tax loss from its discontinued home health operations in 1998 compared to a $0.6 million after-tax loss in 1997, primarily due to declines in Medicare rates of reimbursement under the Balanced Budget Act and declines in home health visits.
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 3.0% for the revolving credit facility and the $60 million term loan facility, and LIBOR plus 3.5% for the $85 million term loan facility. The weighted average interest rate on the Bank Facilities was approximately 9.9% at December 31, 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.
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 Company's obligations under the Notes are guaranteed by its subsidiaries.
With respect to the Company's interest-bearing liabilities, approximately $110.0 million of long-term debt (including current portion) at December 31, 1999 is subject to variable rates of interest, while the remaining balance in long-term debt (including current portion) of $150.2 million at December 31, 1999 is subject to fixed rates of interest. The fair value of the Company's total long-term debt (including current portion) was $264.7 million at December 31, 1999. The fair value of the Notes has been determined using the quoted market price at December 31, 1999. The fair values of the remaining long-term debt are estimated using discounted cash flows, based on the Company's incremental borrowing rates. Based on a hypothetical 1% increase in interest rates on the Company's variable rate debt, the potential annualized losses in future pretax earnings would be approximately $1.1 million. The impact of such a change in interest rates on the carrying value of long-term debt would not be significant. The estimated changes to interest expense and the fair value of long-term debt are determined considering the impact of hypothetical interest rates on the Company's borrowing cost and long-term debt balances. These analyses do not consider the effects, if any, of the potential changes in the Company's credit ratings or the overall level of economic activity. Further, in the event of a change of significant magnitude, management would expect to take actions intended to further mitigate its exposure to such change. For further information, see above discussion of the Company's long-term debt.
LifePoint is highly leveraged. At December 31, 1999, LifePoint's consolidated long-term debt was approximately $260.2 million. LifePoint also may draw upon an additional term loan commitment of $35 million available for limited purposes and a revolving credit commitment of up to $65 million under its credit agreement. LifePoint also has the ability to incur additional debt, subject to limitations imposed by its credit agreement and the indenture governing the notes issued by Holdings. While LifePoint believes that future operating cash flow, together with available financing arrangements, will be sufficient to fund operating requirements, leverage and debt service requirements could have important consequences to LifePoint, including the following:
A significant portion of the revenues of LifePoint are derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes. In recent years, fundamental changes in the Medicare and Medicaid programs, including the implementation of a PPS for inpatient services at medical/surgical hospitals, have resulted in limitations on, and reduced levels of payment and reimbursement for, a substantial portion of hospital procedures and costs. The Balanced Budget Act, which establishes a plan to balance the federal budget by fiscal year 2002, includes significant additional reductions in spending levels for the Medicare and Medicaid programs. These include, among others, payment reductions for inpatient and outpatient hospital services, establishment of a PPS for hospital outpatient services, skilled nursing facilities and home health agencies under Medicare, and repeal of the federal payment standard (the so-called "Boren Amendment") for hospitals and nursing facilities under Medicaid. A number of states also are considering legislation designed to reduce their Medicaid expenditures and to provide universal coverage and additional care, including enrolling Medicaid recipients in managed care programs and imposing additional taxes on hospitals to help finance or expand the states' Medicaid systems. In addition, private payers increasingly are attempting to control health care costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review and greater enrollment in managed care programs such as health maintenance organizations and preferred provider organizations. LifePoint believes that hospital operating margins have been, and may continue to be, under significant pressure because of deterioration in pricing flexibility and payer mix, and growth in operating expenses in excess of the increase in prospective payments under the Medicare program.
offering prepaid and discounted medical services packages represent an increasing portion of LifePoint's admissions, resulting in reduced hospital revenue growth. If LifePoint is unable to lower costs through increased operational efficiencies and the trend toward declining reimbursements and payments continues, LifePoint's results of operations and cash flows will be adversely affected. One managed care organization in Tennessee has been placed in receivership by the state of Tennessee. There can be no assurances that other managed care organizations with which LifePoint has contracts will not encounter similar difficulties in paying claims in the future.
The health care business is highly competitive and competition among hospitals and other health care providers for patients has intensified in recent years. Almost all of LifePoint's hospitals operate in geographic areas where they are currently the sole provider of hospital services in their communities. While these hospitals face less direct competition in their immediate service areas than would be expected in larger communities, they do face competition from other hospitals, including larger tertiary care centers. Although these competing hospitals may be in excess of 30 to 50 miles away, patients in these markets may migrate to, may be referred by local physicians to, or may be lured by incentives from managed care plans to travel to, such distant hospitals.
After certain intended divestitures, six of LifePoint's remaining 20 general, acute care hospitals will be located in the Commonwealth of Kentucky, and six of LifePoint's remaining 20 general, acute care hospitals will be located in the state of Tennessee. After giving effect to such intended divestitures, for the year ended December 31, 1999, 42.7% of LifePoint's revenue was generated by LifePoint's Kentucky hospitals and 22.2% of LifePoint's revenue was generated by LifePoint's Tennessee hospitals. Accordingly, any change in the current demographic, economic, competitive, regulatory, Medicaid reimbursement rates or legislative conditions in Kentucky or Tennessee could have a material adverse effect on the business, financial condition, results of operations or prospects of LifePoint.
involved, are in violation of such laws. It is also possible that such laws ultimately could be interpreted by the courts in a manner inconsistent with the interpretations of LifePoint.
The laws, rules and regulations described above are complex and subject to interpretation. In the event of a determination that LifePoint is in violation of such laws, rules or regulations, or if further changes in the regulatory framework occur, any such determination or changes could have a material adverse effect on business, financial condition, results of operations or prospects of LifePoint. See "Business -- Government Regulation and Other Factors" for a detailed discussion of laws and regulations affecting LifePoint.
Columbia/HCA is currently facing significant legal challenges. Columbia/HCA is the subject of various federal and state investigations, qui tam actions, shareholder derivative and class action suits filed in federal court, shareholder derivative actions filed in state courts, patient/payer actions and general liability claims. In general, management understands that these investigations, actions and claims relate to Columbia/HCA and its subsidiaries, including subsidiaries that, prior to the Distribution Date, owned the facilities now owned by the Company. It is too early to predict the effect or outcome of any of the ongoing investigations or qui tam and other actions, or whether any additional investigations or litigation will be commenced. 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. Any such sanctions or losses could have a material adverse effect on Columbia/HCA's financial position and results of operations. In addition, if any of such matters were asserted against LifePoint or any of its facilities, and Columbia/HCA failed to meet its indemnification obligations under the Distribution Agreement, then such losses could have a material adverse effect on the business, financial position, results of operations or prospects of LifePoint. Columbia/HCA has not indemnified LifePoint for losses relating to any acts, practices and omissions engaged in by LifePoint after the Distribution Date, whether or not LifePoint is indemnified for similar acts, practices and omissions occurring prior to the Distribution Date.
Columbia/HCA 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 LifePoint for the periods prior to the Distribution Date which are presented herein. The extent to which LifePoint may or may not continue to be affected 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 business, financial condition, results of operations or prospects of LifePoint in future periods.
As is typical in the health care industry, LifePoint is subject to claims and legal actions by patients and others in the ordinary course of business. Columbia/HCA and LifePoint have cooperated in the purchase of insurance coverage for professional and general liability risks for periods ending on or after the Distribution Date. Substantially all losses in periods prior to the Distribution are insured through a wholly owned insurance subsidiary of Columbia/HCA and excess loss policies maintained by Columbia/HCA. See "Business -- Arrangements Relating to the Distribution -- Insurance Allocation and Administration Agreement" for a more detailed discussion of such arrangement.
Columbia/HCA, LifePoint and Triad entered into a tax sharing and indemnification agreement, which allocates tax liabilities among Columbia/HCA, LifePoint and Triad and addresses certain other tax matters such as responsibility for filing tax returns, control of and cooperation in tax litigation, and the tax treatment of the Distribution. Generally, Columbia/HCA will be responsible for taxes that are allocable to periods prior to the Distribution Date, and each of Columbia/HCA, LifePoint and Triad will be responsible for its own tax liabilities, including its allocable share of taxes shown on any consolidated, combined or other tax return filed by Columbia/HCA for periods after the Distribution Date. The tax sharing and indemnification agreement prohibits LifePoint and Triad from taking actions that could jeopardize the tax treatment of either the Distribution or the restructuring that preceded the Distribution, and requires LifePoint and Triad to indemnify each other and Columbia/HCA for any taxes or other losses that result from any such actions.
- the issuance of "blank check" preferred stock by the Board of Directors without stockholder approval;
- restrictions on the persons eligible to call a special meeting of stockholders;