UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-29816
Triad Hospitals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2816101
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13455 Noel Road, Suite 2000
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
(972) 789-2700
(Registrant's telephone number, including area code)
Not Applicable
(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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock of the latest practical date.
As of April 30, 2001, the number of shares of common stock of Triad Hospitals,
Inc. outstanding was 70,637,652.
Part I: Financial Information
Item 1: Financial Statements
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the periods ended March 31, 2001 and 2000
Unaudited
(Dollars in millions, except per share amounts)
For the three
months ended
-------------
2001 2000
------ ------
Revenues................................................................. $365.8 $311.6
Salaries and benefits.................................................... 143.9 126.4
Supplies................................................................. 57.0 46.9
Other operating expenses................................................. 70.2 63.1
Provision for doubtful accounts.......................................... 36.2 24.6
Depreciation............................................................. 21.4 19.1
Amortization............................................................. 2.0 1.7
Interest expense......................................................... 16.7 16.1
Interest income.......................................................... (0.4) (1.2)
ESOP expense............................................................. 2.3 1.2
Gain on sale of assets................................................... (0.4) (4.2)
Impairment of long-lived assets.......................................... --- 0.9
------ ------
Total operating expenses................................................. 348.9 294.6
------ ------
Income before minority interests and income tax provision................ 16.9 17.0
Minority interests in earnings of consolidated entities.................. (1.7) (2.3)
------ ------
Income before income tax provision....................................... 15.2 14.7
Income tax provision..................................................... (7.4) (6.7)
------ ------
Net income............................................................... $ 7.8 $ 8.0
====== ======
Income per common share:
Basic................................................................ $ 0.24 $ 0.26
====== ======
Diluted.............................................................. $ 0.22 $ 0.25
====== ======
See notes to the condensed consolidated financial statements.
2
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in millions)
March 31, December 31,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 16.0 $ 6.7
Restricted cash.................................................................. 5.7 ---
Accounts receivable, less allowances for doubtful accounts of
$128.5 at March 31, 2001 and $122.9 at December 31, 2000...................... 178.1 171.1
Inventories...................................................................... 37.3 34.7
Deferred income taxes............................................................ 36.8 40.5
Other............................................................................ 70.8 75.2
-------- --------
344.7 328.2
Property and equipment, at cost:
Land............................................................................. 74.8 71.9
Buildings and improvements....................................................... 581.2 540.7
Equipment........................................................................ 716.5 662.2
Construction in progress......................................................... 61.6 51.1
-------- --------
1,434.1 1,325.9
Accumulated depreciation........................................................ (592.9) (572.9)
-------- --------
841.2 753.0
Intangible assets, net of accumulated amortization...................................... 225.9 227.8
Investment in and advances to affiliates................................................ 30.9 79.4
Other................................................................................... 14.1 12.1
-------- --------
Total assets............................................................................ $1,456.8 $1,400.5
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable................................................................. $ 60.5 $ 67.4
Accrued salaries................................................................. 30.1 31.8
Current portion of long-term debt................................................ 9.1 9.0
Other current liabilities........................................................ 43.9 28.1
-------- --------
143.6 136.3
Long-term debt.......................................................................... 611.4 581.7
Other liabilities....................................................................... 12.6 9.6
Deferred taxes.......................................................................... 52.9 49.2
Minority interests in equity of consolidated entities................................... 51.2 50.0
Stockholders' equity:
Common stock .01 par value: 90,000,000 shares authorized,
34,843,124 and 34,783,816 shares issued and outstanding at
March 31, 2001 and December 31, 2000, respectively................................. 0.4 0.4
Additional paid-in capital......................................................... 662.1 659.3
Unearned ESOP compensation and stockholder notes receivable........................ (35.9) (36.7)
Accumulated deficit................................................................ (41.5) (49.3)
-------- --------
Total stockholders' equity......................................................... 585.1 573.7
-------- --------
Total liabilities and stockholders' equity.............................................. $1,456.8 $1,400.5
======== ========
See notes to the condensed consolidated financial statements.
3
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the periods ended March 31, 2001 and 2000
Unaudited
(Dollars in millions)
For the three
months ended
------------
2001 2000
---- ----
Cash flows from operating activities
Net income....................................................................... $ 7.8 $ 8.0
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts................................................ 36.2 24.6
Depreciation and amortization.................................................. 23.4 20.8
ESOP expense................................................................... 2.3 1.2
Minority interests............................................................. 1.7 2.3
Deferred income taxes.......................................................... 7.4 6.7
Gain on sale of assets......................................................... (0.4) (4.2)
Impairment of long-lived assets................................................ --- 0.9
Increase (decrease) in cash from operating assets and liabilities
Accounts receivable.......................................................... (30.7) (12.6)
Inventories and other assets................................................. (1.0) (1.2)
Accounts payable and other current liabilities............................... 2.4 (33.4)
Other........................................................................ 2.4 (0.2)
------ ------
Net cash provided by operating activities...................................... 51.5 12.9
Cash flows from investing activities
Purchases of property and equipment............................................ (23.0) (15.2)
Payments for acquisitions, net of cash acquired................................ (43.9) ---
Proceeds received on sale of assets............................................ 0.4 4.0
Investment in and advances to affiliates....................................... 2.5 27.8
Investment in restricted cash.................................................. (5.7) ---
Other.......................................................................... (2.0) 2.6
------ ------
Net cash provided by (used in) investing activities.............................. (71.7) 19.2
Cash flows from financing activities
Payments of long-term debt..................................................... (2.2) (5.5)
Proceeds from long-term debt................................................... 32.0 ---
Proceeds from issuance of common stock......................................... 1.1 0.7
Distributions to minority partners............................................. (1.4) (1.5)
------ ------
Net cash provided by (used in) financing activities............................. 29.5 (6.3)
------ ------
Change in cash and cash equivalents.............................................. 9.3 25.8
Cash and cash equivalents at beginning of period................................. 6.7 70.9
------ ------
Cash and cash equivalents at end of period....................................... $ 16.0 $ 96.7
====== ======
Interest payments................................................................ $ 7.1 $ 6.2
Income tax payments.............................................................. $ 0.2 $ --
See notes to the condensed consolidated financial statements
4
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1--BASIS OF PRESENTATION
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 notes required by generally accepted accounting principles for complete
financial statements of Triad Hospitals, Inc. ("Triad"). In the opinion of
management, all adjustments consisting only of normal recurring adjustments
necessary for a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for the year. The
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 2000 included in Triad's Form 10-K.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements.
NOTE 2--SUBSEQUENT EVENTS
On April 27, 2001, Triad completed the previously announced merger of
Quorum Health Group, Inc. ("Quorum") with and into Triad with Triad being the
surviving corporation. Under the terms of the merger, Quorum shareholders
received $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. In addition, each outstanding option to purchase shares of
Quorum common stock, whether or not vested or exercisable, was converted at the
holder's election into either a fully vested and exercisable option to purchase
shares of Triad common stock or cash and shares of Triad common stock. Triad
issued 35,786,380 shares, paid $305.0 million in cash and issued 1,638,479
options to Quorum option holders in connection with the merger. The purchase
price for the merger was determined using the average stock price at the time
the merger was announced, cash paid, fair value of options converted and direct
costs associated with the merger. The preliminary purchase price is
approximately $1.4 billion.
Subsequent to the merger, Triad sold one of Quorum's acute care hospitals
for $38.0 million plus $8.2 million for working capital. Additionally, two
Quorum hospitals have been designated as held for sale. Accordingly, the
purchase price allocation of these entities will include their anticipated cash
flows for their estimated holding period, including cash flows from operations,
and the results of operations of these entities will not be included in Triad's
results of operations after the merger.
The merger will be accounted for under the purchase method of accounting
and therefore the purchase price will be allocated to assets acquired and
liabilities assumed based on estimated fair values. The results of operations
for Quorum will be included in Triad's results of operations beginning May 1,
2001.
Subsequent to the merger, Triad expects to record a charge of approximately
$20 to $30 million associated with coordinating Quorum's accounting policies,
practices and estimation processes with those of Triad.
In connection with the merger, Triad's board of directors was increased by
the addition of two former members of Quorum's board.
On October 20, 2000, a purported class action, Samuel Brand v. Colleen
Conway Welch, et al., Case No.: OCC-3066, was filed against Triad and members of
the board of directors of Quorum in the Circuit Court of Davidson County,
Tennessee, on behalf of all public stockholders of Quorum. The complaint
alleges, among other things, that Quorum's directors beached their fiduciary
duties to Quorum and its stockholders in agreeing to the merger at an unfair
price. Triad believes the claims asserted in the complaint are without merit.
5
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 2--SUBSEQUENT EVENTS (continued)
In April 2001, the parties negotiated a settlement that will result in the
dismissal of the action. The settlement is subject to a number of conditions,
including completion of definitive documentation relating to the settlement and
Court approval.
As part of the merger, Triad refinanced its Tranche A term loan, Tranche B
term loan, Delay Draw term loan, and Quorum's indebtedness with new indebtedness
totaling $1.8 billion. This indebtedness consists of a Tranche A term loan of
$250 million presently bearing interest at LIBOR plus 3.0% with principal
amounts due beginning 2001 through 2007, a Tranche B term loan of $550 million
presently bearing interest at LIBOR plus 3.0% with principal amounts due
beginning 2001 through 2008, an Asset Sale term loan of $150 million presently
bearing interest at LIBOR plus 3.0% with principal amounts due in 2003 and $600
million of senior notes bearing interest at 8.75% with principal amounts due in
2009. Triad also obtained a $250 million revolving credit line, of which $42.0
million was drawn on the closing, that presently bears interest at LIBOR plus
3.0% with principal amounts due in 2007.
Triad repaid $45.6 million on the Asset Sale term loan on May 4, 2001 from
the proceeds received on the facility sale described previously.
Triad's term loans and revolving lines of credit are collateralized by a
pledge of substantially all of its assets other than real estate associated with
the Quorum facilities. The debt agreements require that Triad comply with
various financial ratios and tests and have restrictions on new indebtedness,
assets sales and use of proceeds therefrom, capital expenditures and dividends.
In connection with the debt financing, Triad incurred approximately $46
million in debt issue costs, which will be amortized over the period the
indebtedness is outstanding.
On May 11, 2001, Triad filed a Form 8-K regarding the Quorum merger, which
included pro forma financial statements as of December 31, 2000.
NOTE 3--ACQUISITIONS
On February 5, 2001, Triad acquired the remaining 50% interest in the
entity that owns SouthCrest Hospital in Tulsa, Oklahoma from its not-for-profit
partner, Hillcrest Healthcare System ("Hillcrest"), for $44.6 million, the
amount of Hillcrest's investment in the entity. The acquisition consolidated
100% ownership and control of the hospital in Triad effective January 1, 2001.
Triad has an option to acquire an adjacent 26-acre parcel of land from Hillcrest
for future expansion. SouthCrest Hospital will continue to participate in
Hillcrest's joint contracting network that includes other Hillcrest hospitals in
Tulsa. Under certain conditions and for a limited time, Hillcrest will have an
option to repurchase a 49% interest in SouthCrest Hospital at the then fair
market value, subject to minimum valuations and minimum returns on investment to
Triad; if Hillcrest were to exercise the option, Triad would retain governance
of the facility and continue consolidating the facility for financial reporting.
The acquisition was recorded under the purchase method of accounting and,
therefore, the purchase price has been allocated to assets acquired and
liabilities assumed based on estimated fair values. The results of operations
have been included in Triad's consolidated results of operations since January
1, 2001. The estimated fair values of the assets acquired and liabilities
assumed relating to the acquisition is summarized below (in millions):
Working capital............ $ 5.5
Property and equipment..... 86.4
Minority interests......... (0.9)
-----
Purchase price allocation.. $91.0
=====
The purchase price consists of the $44.6 million in cash paid plus $46.4
million equity investment Triad had recorded prior to the acquisition.
6
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 3--ACQUISITIONS (continued)
The following unaudited pro forma data summarizes the results of operations
of the period indicated as if the acquisition had been completed as of the
beginning of the period presented. The pro forma results of operations gives
effect to actual operating results prior to the acquisition, adjusted to include
the pro forma effect of interest expense and income taxes. The pro forma
results do not purport to be indicative of the results that would have actually
been obtained if the acquisition occurred as of the beginning of the period
presented or that may be obtained in the future.
For the three months
ended March 31,
2000
------
Revenues................................ $ 325.8
Net income.............................. $ 7.0
Income per share:
Basic............................... $ 0.22
Diluted............................. $ 0.22
NOTE 4--SALES AND CLOSURES
On February 11, 2000, Triad closed its acute care hospital in Roseburg,
Oregon, which was designated as held for sale. As of March 31, 2001, the
carrying value of this facility was $5.2 million. For the three months ended
March 31, 2000, this facility had net revenues of $1.8 million and pre-tax
losses before impairment charges and income tax benefit of $3.2 million.
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.
NOTE 5 - IMPAIRMENT OF LONG-LIVED ASSETS
During the quarter ended March 31, 2000, Triad entered into negotiations to
cancel one of its physician management contracts which has been completed.
Accordingly, the carrying value of the long-lived assets related to this entity
of approximately $1.0 million was reduced to fair value, based on estimated
disposal value, resulting in a non-cash charge of $0.9 million. For the three
months ended March 31, 2000, this entity contributed revenues of $0.9 million
and losses before impairment charges and income taxes of $0.8 million.
NOTE 6--LONG-TERM DEBT
As of March 31, 2001, Triad Hospital Holdings Inc.'s senior subordinated
notes were guaranteed by substantially all operating subsidiaries of Triad (the
"Subsidiary Guarantors"). Triad Hospitals Holdings, Inc. was a subsidiary of
Triad. As part of the merger with Quorum and related financing transactions (See
NOTE 2), subsequent to March 31, 2001, Triad Hospitals Holdings, Inc. was merged
into Triad and all of its existing debt, including the senior subordinated
notes, was assumed by Triad. The guarantee obligations of the Subsidiary
Guarantors are full, unconditional and joint and several.
As of March 31, 2001, Triad did not wholly own certain Subsidiary
Guarantors, although all assets, liabilities, equity and earnings of these
entities fully and unconditionally, jointly and severally guarantee the senior
subordinated notes. The percentages of these entities owned by Triad range from
70% to 95%. Separate financial statements of the non-wholly owned Subsidiary
Guarantors have not been presented because management has determined that they
are inconsequential. As of March 31, 2001, one non-wholly owned operating
subsidiary did not guarantee the notes (the "Non-Guarantor Subsidiary").
Condensed unaudited consolidating financial statements for Triad and its
subsidiaries including the financial statements of Triad Hospitals, Inc. (parent
only), Triad Hospitals Holdings, Inc., the combined Guarantor Subsidiaries and
the Non-Guarantor Subsidiary are as follows:
7
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 6--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the three months ended March 31, 2001
Unaudited
(dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
---------------- -------------- ------------ ---------- ------------ ------------
Revenues................................ $ --- $ --- $ 351.5 $ 14.3 $ --- $ 365.8
Salaries and benefits................... 0.3 --- 139.5 4.1 --- 143.9
Supplies................................ --- --- 53.3 3.7 --- 57.0
Other operating expenses................ --- --- 67.7 2.5 --- 70.2
Provision for doubtful accounts......... --- --- 35.8 0.4 --- 36.2
Depreciation............................ --- --- 20.9 0.5 --- 21.4
Amortization............................ --- --- 1.9 0.1 --- 2.0
Interest expense allocated.............. --- --- 0.1 (0.1) --- ---
Interest expense, net................... --- 16.8 (0.5) --- --- 16.3
ESOP expense............................ 2.3 --- --- --- --- 2.3
Management fees......................... --- --- (0.1) 0.1 --- ---
Gain on sale of assets.................. --- --- (0.4) --- --- (0.4)
Impairment of long-lived assets......... --- --- --- --- --- ---
----- ------ ------ ----- ------------ ------
Total operating expenses................ 2.6 16.8 318.2 11.3 --- 348.9
----- ------ ------ ----- ------------ ------
Income (loss) before minority interest,
equity in earnings and income tax
provision............................ (2.6) (16.8) 33.3 3.0 --- 16.9
Minority interests...................... --- --- (1.7) --- --- (1.7)
Equity in earnings of affiliates........ 10.4 34.6 3.0 --- (48.0) ---
----- ------ ------ ----- ------------ ------
Income before income tax provision...... 7.8 17.8 34.6 3.0 (48.0) 15.2
Income tax provision.................... --- (7.4) --- --- --- (7.4)
----- ------ ------ ----- ------------ ------
Net income.............................. $ 7.8 $ 10.4 $ 34.6 $ 3.0 $(48.0) $ 7.8
===== ====== ====== ===== ============ ======
8
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 6--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the three months ended March 31, 2000
Unaudited
(dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
--------------- -------------- ------------ ---------- ------------ -------------
Revenues................................ $ --- $ --- $ 298.8 $ 12.9 $ (0.1) $ 311.6
Salaries and benefits................... --- --- 123.3 3.1 --- 126.4
Supplies................................ --- --- 43.9 3.0 --- 46.9
Other operating expenses................ --- --- 61.1 2.0 --- 63.1
Provision for doubtful accounts......... --- --- 24.2 0.4 --- 24.6
Depreciation............................ --- --- 18.6 0.5 --- 19.1
Amortization............................ --- --- 1.6 0.1 --- 1.7
Interest expense allocated.............. --- --- --- --- --- ---
Interest expense, net................... --- 15.8 (0.9) --- --- 14.9
ESOP expense............................ 1.2 --- --- --- --- 1.2
Management fees......................... --- --- --- 0.1 (0.1) ---
Gain on sale of assets.................. --- --- (4.2) --- --- (4.2)
Impairment of long-lived assets......... --- --- 0.9 --- --- 0.9
----- ------ ------ ----- ------ ------
Total operating expenses................ 1.2 15.8 268.5 9.2 (0.1) 294.6
----- ------ ------ ----- ------ ------
Income (loss) before minority interest,
equity in earnings and income tax
provision............................ (1.2) (15.8) 30.3 3.7 --- 17.0
Minority interests...................... --- --- (2.3) --- --- (2.3)
Equity in earnings of affiliates........ 9.2 31.7 3.7 --- (44.6) ---
----- ------ ------ ----- ------ ------
Income before income tax provision...... 8.0 15.9 31.7 3.7 (44.6) 14.7
Income tax provision.................... --- (6.7) --- --- --- (6.7)
----- ------ ------ ----- ------ ------
Net income.............................. $ 8.0 $ 9.2 $ 31.7 $ 3.7 $(44.6) $ 8.0
===== ====== ====== ===== ====== ======
9
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 6 - LONG-TERM DEBT (continued)
Condensed Consolidating Balance Sheets
March 31, 2001
Unaudited
(dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
Assets --------------- -------------- ------------ ---------- ------------ ------------
Current assets
Cash and cash equivalents......... $ --- $ --- $ 15.8 $ 0.2 $ --- $ 16.0
Restricted cash................... --- 5.7 --- --- --- 5.7
Accounts receivable, net.......... --- --- 169.7 8.4 --- 178.1
Other current assets.............. --- 36.8 106.7 1.4 --- 144.9
------ -------- -------- ----- --------- --------
Total current assets.................. --- 42.5 292.2 10.0 --- 344.7
Net property and equipment, at cost... --- --- 830.3 10.9 --- 841.2
Investments in subsidiaries........... 573.3 1,362.6 85.5 --- (1,990.5) 30.9
Due from affiliates................... 11.8 --- 114.6 27.5 (153.9) ---
Other assets.......................... --- 4.3 224.4 11.3 --- 240.0
------ -------- -------- ----- --------- --------
Total assets.......................... $ 585.1 $1,409.4 $1,547.0 $59.7 $(2,144.4) $1,456.8
====== ======== ======== ===== ========= ========
Liabilities and Equity
Current liabilities................... $ --- $ 22.2 $ 118.5 $ 2.9 $ --- $ 143.6
Due to affiliates..................... --- 153.9 --- --- (153.9) ---
Long-term debt........................ --- 607.1 4.3 --- --- 611.4
Deferred taxes and other liabilities.. --- 52.9 10.4 2.2 --- 65.5
Minority interests in equity of
consolidated entities............. --- --- 51.2 --- --- 51.2
Equity................................ 585.1 573.3 1,362.6 54.6 (1,990.5) 585.1
------ -------- -------- ----- --------- --------
Total liabilities and equity.......... $ 585.1 $1,409.4 $1,547.0 $59.7 $(2,144.4) $1,456.8
====== ======== ======== ===== ========= ========
Condensed Consolidating Balance Sheets
December 31, 2000
Unaudited
(dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
--------------- -------------- ------------ ---------- ------------- ------------
Assets
Current assets
Cash and cash equivalents.......... $ --- $ --- $ 6.4 $ 0.3 $ --- $ 6.7
Accounts receivable, net........... --- --- 163.2 7.9 --- 171.1
Other current assets............... --- 41.9 107.1 1.4 --- 150.4
------ -------- -------- ----- --------- --------
Total current assets.................. --- 41.9 276.7 9.6 --- 328.2
Net property and equipment, at cost... --- --- 743.8 9.2 --- 753.0
Investments in subsidiaries........... 563.0 1,326.7 133.7 --- (1,944.0) 79.4
Due from affiliates................... 10.7 --- 133.0 27.3 (171.0) ---
Other assets.......................... --- 4.7 223.4 11.8 --- 239.9
------ -------- -------- ----- --------- --------
Total assets.......................... $ 573.7 $1,373.3 $1,510.6 $57.9 $(2,115.0) $1,400.5
====== ======== ======== ===== ========= ========
Liabilities and Equity
Current liabilities................... $ --- $ 13.4 $ 121.5 $ 1.4 $ --- $ 136.3
Due to affiliates..................... --- 171.0 --- --- (171.0) ---
Long-term debt........................ --- 576.7 5.0 --- --- 581.7
Deferred taxes and other liabilities.. --- 49.2 7.4 2.2 --- 58.8
Minority interests in equity of
consolidated entities.............. --- --- 50.0 --- --- 50.0
Equity................................ 573.7 563.0 1,326.7 54.3 (1,944.0) 573.7
------ -------- -------- ----- --------- --------
Total liabilities and equity.......... $ 573.7 $1,373.3 $1,510.6 $57.9 $(2,115.0) $1,400.5
====== ======== ======== ===== ========= ========
10
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 6 - LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Cash Flows
For the three months ended March 31, 2001
Unaudited
(dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
--------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in) operating
activities............................. $ --- $ (9.0) $ 56.1 $ 4.4 $ --- $ 51.5
Cash flows from investing activities
Purchases of property and equipment... --- --- (20.6) (2.4) --- (23.0)
Payments for acquisitions............. --- --- (43.9) --- --- (43.9)
Investment in and advances to
affiliates.......................... (0.2) (1.4) 4.1 --- --- 2.5
Proceeds received on sale of assets... --- --- 0.4 --- --- 0.4
Investment in restricted cash......... --- (5.7) --- --- --- (5.7)
Other................................. --- 0.4 (3.0) 0.6 --- (2.0)
----- ------ ------ ----- ------------ ------
Net cash used in investing activities..... (0.2) (6.7) (63.0) (1.8) --- (71.7)
Cash flows from financing activities
Payments of long-term debt............ --- (1.8) (0.4) --- --- (2.2)
Proceeds from issuance of long-term
debt................................ --- 32.0 --- --- --- 32.0
Proceeds from issuance of common
stock............................... 1.1 --- --- --- --- 1.1
Distributions to minority partners.... --- --- (1.4) --- --- (1.4)
Net change in due to (from) affiliate. (0.9) (14.5) 18.1 (2.7) --- ---
----- ------ ------ ----- ------------ ------
Net cash provided by (used in) financing
activities............................ 0.2 15.7 16.3 (2.7) --- 29.5
----- ------ ------ ----- ------------ ------
Change in cash and cash equivalents....... --- --- 9.4 (0.1) --- 9.3
Cash and cash equivalents at beginning
of period............................. --- --- 6.4 0.3 --- 6.7
----- ------ ------ ----- ------------ ------
Cash and cash equivalents at end of
period................................ $ --- $ --- $ 15.8 $ 0.2 $ --- $ 16.0
============= ============= ====== ===== ============ ======
Condensed Consolidating Statements of Cash Flows
For the three months ended March 31, 2000
Unaudited
(dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
--------------- -------------- ------------- ---------- ------------ ------------
Net cash provided by (used in) operating
activities............................ $ --- $(9.2) $ 17.1 $ 5.0 $ --- $ 12.9
Cash flows from investing activities
Purchases of property and equipment.... --- --- (14.9) (0.3) --- (15.2)
Proceeds received on sale of assets.... --- --- 4.0 --- --- 4.0
Investment in and advances to
affiliates........................... (0.1) 2.8 27.7 (2.6) --- 27.8
Other................................... --- --- 2.4 0.2 --- 2.6
----- ----- ------ ----- ------------ ------
Net cash provided by (used in) investing
activities............................ (0.1) 2.8 19.2 (2.7) --- 19.2
Cash flows from financing activities
Payments of long-term debt............ --- (5.5) --- --- --- (5.5)
Proceeds from issuance of common
stocks............................... 0.7 --- --- --- --- 0.7
Distributions to minority partners.... --- --- (1.5) --- --- (1.5)
Net change in due to (from) affiliate. (0.6) 11.9 (9.0) (2.3) --- ---
----- ----- ------ ----- ------------ ------
Net cash provided by (used in) financing
activities............................. 0.1 6.4 (10.5) (2.3) --- (6.3)
----- ----- ------ ----- ------------ ------
Change in cash and cash equivalents....... --- --- 25.8 --- --- 25.8
Cash and cash equivalents at beginning
of period............................. --- --- 70.8 0.1 --- 70.9
----- ----- ------ ----- ------------ ------
Cash and cash equivalents at end of
period................................. $ --- $ --- $ 96.6 $ 0.1 $ --- $ 96.7
=========== ======= ====== ===== ============ =======
11
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 7--STOCK BENEFIT PLANS
During the three months ended March 31, 2001, 19,107 shares of common
stock, net of cancellations, were issued through the Management Stock Purchase
Plan and Triad received proceeds of $0.5 million. Additionally during the three
months ended March 31, 2001, 40,293 stock options were exercised for proceeds of
$0.6 million.
The merger of Triad and Quorum (See NOTE 2) constituted a "change of
control" under the terms of the Triad 1999 Long-Term Incentive Plan, the Triad
Management Stock Purchase Plan, the Triad Executive Stock Purchase Plan and all
other similar plans. All of the outstanding, unvested stock options became
vested and exercisable at the effective time of the merger; however, certain
executive officers of Triad waived the vesting of certain stock options in
connection with the merger. In addition, restrictions lapsed on shares of Triad
restricted common stock held by Triad executive officers and these shares became
fully vested and transferable and no longer are subject to forfeiture.
On April 26, 2001, shareholders approved an amendment to the 1999 Long-Term
Incentive Plan increasing the number of shares available to 14,000,000.
On April 27, 2001, 2,553,000 stock options were granted under the 1999
Long-Term Incentive Plan with an exercise price equal to the market price at the
date of grant. The options are exercisable over a four-year period and expire
ten years from date of grant.
NOTE 8--INCOME PER SHARE
Income per common share is based on the weighted average number of shares
outstanding adjusted for the shares issued to Triad's Employee Stock Ownership
Plan ("ESOP"). Diluted weighted average shares outstanding is calculated by
adjusting basic weighted average shares outstanding by all potentially dilutive
stock options. Weighted average shares for the three months ended March 31, 2001
and 2000 are as follows:
For the three For the three
months ended months ended
March 31, 2001 March 31, 2000
-------------- --------------
Weighted average shares exclusive of unreleased ESOP shares............ 32,419,431 31,302,359
Average of ESOP shares committed to be released........................ 37,500 37,500
---------- ----------
Basic weighted average shares outstanding.............................. 32,456,931 31,339,859
Effect of dilutive securities - employee stock options................. 3,120,711 1,245,873
---------- ----------
Diluted weighted average shares outstanding............................ 35,577,642 32,585,732
========== ==========
12
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 9 - SEGMENT AND GEOGRAPHIC INFORMATION
The distribution of Triad's revenues and EBITDA (which is used by
management for operating performance review, see (a)) are summarized in the
following table (dollars in millions):
For the three months
ended March 31,
2001 2000
------ ------
Revenues:
East Division............................................................. $132.2 $123.8
West Division............................................................. 82.9 67.9
Central Division.......................................................... 129.0 85.7
Ambulatory Surgery Centers................................................ 14.3 12.9
Sold and Held for Sale.................................................... 1.0 15.8
Corporate and other....................................................... 6.4 5.5
------ ------
$365.8 $311.6
====== ======
EBITDA (a):
East Division............................................................. $22.6 $22.1
West Division............................................................. 15.9 12.6
Central Division.......................................................... 18.1 15.7
Ambulatory Surgery Centers................................................ 3.4 4.2
Sold and Held for Sale.................................................... 0.8 (2.6)
Corporate and other....................................................... (2.3) (1.4)
----- -----
$58.5 $50.6
===== =====
(a) EBITDA is defined as net income before depreciation, amortization, interest
expense, interest income, ESOP expense, gain on sale of assets, impairment of
long-lived assets, minority interest 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 are significant components in understanding and assessing
financial performance. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operating, investing or
financing activities or financial statement data presented in the condensed
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.
NOTE 10--CONTINGENCIES
HCA Litigation and Investigations
HCA is currently the subject of several Federal investigations into certain
of its business practices, as well as governmental investigations by various
states. HCA is cooperating in these investigations and understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, HCA expects additional
subpoenas and other investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. HCA is the subject of a formal order of
investigation by the SEC. HCA understands that the SEC's investigation includes
the anti-fraud, insider trading, periodic reporting and internal accounting
control provisions of the Federal securities laws.
HCA is a defendant in several qui tam actions, or actions brought by
private parties, known as relators, on behalf of the United States of America,
which have been unsealed and served on HCA. The actions allege, in general,
that HCA and certain subsidiaries and/or affiliated partnerships violated the
False Claims Act, 31 U.S.C. (S) 3729 et seq., by submitting improper claims to
the government for reimbursement. The lawsuits seek three times the amount of
damages caused to the United States by the submission of any Medicare or
Medicaid false claims presented by the defendants to the Federal government,
civil penalties of not less than $5,000 nor more than $10,000 for each such
Medicare or Medicaid claim, attorneys' fees and costs. HCA has disclosed that
on March 15, 2001,
13
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 10--CONTINGENCIES (continued)
the Department of Justice filed a status report setting forth the government's
decisions regarding intervention in existing qui tam actions against HCA and
filed formal complaints in those suits in which the government has intervened.
Of the original 30 qui tam actions, the Department of Justice remains active in
and has elected to intervene in 8 actions. HCA has also disclosed that it is
aware of additional qui tam actions that remain under seal and believes that
there may be other sealed qui tam cases of which it is unaware.
The investigations, actions and claims affecting HCA relate to HCA and its
subsidiaries, including subsidiaries that, prior to the spin-off, owned
facilities now owned by Triad. On May 5, 2000, Triad was advised that one of
the qui tam cases which had been unsealed listed three of Triad's hospitals as
defendants. This qui tam action alleges various violations arising out of the
relationship between Curative Health Services and the other defendants,
including allegations of false claims relating to contracts with Curative Health
Services for the management of certain wound care centers and excessive and
unreasonable management fees paid to Curative Health Services and submitted for
reimbursement. Two of the three Triad hospitals named as defendants terminated
their relationship with Curative Health Services prior to the spin-off and the
third hospital continues to maintain an ongoing relationship with Curative
Health Services.
In July 1999, Olsten Corporation and its subsidiary, Kimberly Home Health
(neither of which is affiliated with HCA), announced that they would pay $61
million to settle allegations that both companies defrauded the Medicare
program. Kimberly pled guilty to three separate felony charges (conspiracy,
mail fraud and violating the Medicare Anti-Kickback statute) filed by the U.S.
Attorneys in the Middle and Southern Districts of Florida and the Northern
District of Georgia. While HCA was not specifically named in these guilty
pleas, the guilty pleas refer to the involvement of a "Company A" or a "company
not named as a defendant." HCA has disclosed that it believes these references
refer to HCA or its subsidiaries.
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. Since April 1997, numerous securities
class action and derivative lawsuits have been filed in the United States
District Court for the Middle District of Tennessee against HCA and a number of
its current and former directors, officers and/or employees. Several derivative
actions have been filed in state 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
second quarter of 2001. HCA also entered into a corporate integrity agreement
with the Health and Human Services Office of the Inspector General. HCA is in
continuing discussions with the government regarding civil issues relating to
cost reporting and physicial relations.
On December 14, 2000, HCA also announced that it had signed an agreement
with the Criminal Division of the Department of Justice to resolve pending
Federal criminal actions against HCA. HCA received a full release from criminal
liability for conduct arising from or relating to billing and reimbursement for
services provided pursuant to Federal health care benefit programs regarding:
Medicare cost reports; violations of the anti-kickback statute or prohibitions
against physician self-referrals, and any other conduct involving relations with
referral sources and those in a position to influence referral sources;
diagnosis related group billing; laboratory billing; the acquisition of home
health agencies; and the provision of services by home health agencies. In
addition, the government agreed not to prosecute HCA for other possible criminal
offenses which are or have been under
14
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 10--CONTINGENCIES (continued)
investigation by the Department of Justice arising from or relating to billing
and reimbursement for services provided pursuant to Federal health care benefit
programs. As part of the criminal agreement, HCA paid the government $95
million and entered certain pleas in respect of the criminal actions. HCA also
stated that representatives of state attorneys general have agreed to recommend
to state officials that HCA be released from corresponding criminal liability in
all states in which it conducts business.
The agreements announced on December 14, 2000 relate only to conduct that
was the subject of the Federal investigations resolved in the agreements, and
HCA has stated publicly that it continues to discuss civil claims relating to
cost reporting and physician relations with the government. These agreements
with the government do not resolve various qui tam actions filed by private
parties against HCA, or any pending state actions. In addition to other claims
not covered by these agreements, the government also reserved its rights under
these agreements to pursue any claims it may have for:
. any civil, criminal or administrative liability under the Internal
Revenue Code;
. any other criminal liability;
. 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 express or implied warranty claims or other claims for defective
or deficient products or services, including quality of goods and
services, provided by HCA;
. any claims for personal injury or property damage or for other similar
consequential damages arising from the conduct subject to the
investigation; and
. any civil or administrative claims of the United States against
individuals.
In addition, 14 of Triad's current and former hospitals received notices in
early 2001 from the Health Care Financing Administration, a United States
government agency that runs the Medicare and Medicaid programs, that it was re-
opening for examination cost reports for Medicare and Medicaid reimbursement
filed by these hospitals for periods between 1993 and 1998, which pre-dates
Triad's spin-off from HCA. Furthermore, two of Quorum's current owned hospitals
have received such notices. HCA or its predecessors owned these Quorum
hospitals during the period covered by the notices. HCA is obligated to
indemnify Quorum for liabilities arising out of cost reports filed during these
periods.
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 spin-
off, 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
spin-off and that relate to the proceedings described above. HCA has also
agreed that, in the event that any hospital owned by Triad at the time of the
spin-off is permanently excluded from participation in the Medicare and Medicaid
programs as a result of the proceedings described above, then HCA will make a
cash payment to 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
government investigations described above, it will participate with HCA in
negotiating one or more compliance agreements setting forth each of HCA's and
Triad's agreements to comply with applicable laws and regulations.
15
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 10--CONTINGENCIES (continued)
HCA will not indemnify Triad under the distribution agreement for losses
relating to any acts, practices or omissions engaged in by Triad after the spin-
off, whether or not Triad is indemnified for similar acts, practices and
omissions occurring prior to the spin-off. HCA also will not indemnify Triad
under the distribution agreement for similar qui tam litigation, governmental
investigations and other actions to which Quorum was subject, some of which are
described below. If indemnified matters were asserted successfully against
Triad or any of its facilities, and HCA failed to meet its indemnification
obligations, then this event could have a material adverse effect on Triad's
business, financial condition, results of operations or prospects.
The extent to which Triad may or may not continue to be affected by the
ongoing investigations of HCA and the initiation of additional investigations,
if any, cannot be predicted. These matters could have a material adverse effect
on Triad's business, financial condition, results of operations or prospects in
future periods.
Quorum Litigation and Investigations
Tampa Qui Tam Lawsuit
Prior to the merger, Quorum and its subsidiary, Quorum Health Resources,
along with subsidiaries that owned hospitals from 1990 through February 24,
1999, were named as defendants in a qui tam lawsuit in U.S. District Court in
Tampa, Florida. The United States government elected to intervene in, or join,
the lawsuit and on February 24, 1999, the government filed its own complaint in
the case. The new complaint alleged that Quorum, on behalf of hospitals it
managed between 1985 and 1995 and hospitals it owned from 1990 to the date of
the complaint, violated the False Claims Act by knowingly submitting or causing
to be submitted false Medicare cost reports, resulting in the submission of
false claims to Federal health care programs. The government asserted that the
false claims in cost reports were reflected, in part, in "reserve analyses"
created by Quorum. The complaint also alleged that these cost report filings
were prepared as a result of company policy. This qui tam action sought three
times the amount of damages caused to the United States by the submission of any
alleged false claims to the government, civil penalties of not less than $5,000
nor more than $10,000 for each false claim, and the relator's attorneys' fees
and costs.
On April 23, 2001, a settlement agreement was signed and a stipulation of
dismissal was filed with the court dismissing all claims against Quorum, Quorum
Health Resources and the other Quorum subsidiaries named in the lawsuit. The
settlement provided for a payment of $82.5 million to the government, plus
interest accruing on $77.5 million at 7.25% per annum from October 2, 2000 (the
date on which an understanding with the government to settle this lawsuit was
reached) to the payment date. The settlement was paid on April 30, 2001. The
settlement agreement also provides for a release, on certain conditions, of all
hospitals currently or formerly managed by Quorum Health Resources electing to
participate in the settlement.
In connection with the settlement, Quorum entered into a corporate
integrity agreement with the Office of Inspector General containing, among other
things, an affirmative obligation to report certain violations of applicable
laws and regulations. This obligation could result in greater scrutiny by
regulatory authorities. Complying with the corporate integrity agreement may
impose expensive and burdensome requirements on certain of Triad's operations
which could have a material adverse impact on Triad. Failure to comply with the
terms of the corporate integrity agreement could subject the Quorum hospitals to
significant monetary penalties and/or exclusion from Medicare, Medicaid and
other governmental reimbursement programs.
Flowers Qui Tam Lawsuit
On October 26, 2000, Quorum completed settlement of a qui tam lawsuit which
primarily involved allegedly improper allocation of costs at Flowers Hospital,
Dothan, Alabama, to its home health agency. Quorum paid to the government on
October 26, 2000 approximately $18 million in connection with this settlement.
In addition to the settlement agreement, Quorum entered into a five-year
corporate integrity agreement covering Flowers Hospital with the HHS Office of
the Inspector General, which will be terminated upon the effective date of the
corporate integrity agreement entered into in connection with the settlement of
the Tampa qui tam lawsuit discussed above. The government always reserves the
right to investigate and pursue other allegations made by a relator under a
16
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 10--CONTINGENCIES (continued)
complaint. However, under the settlement agreement, the relator is prohibited
from pursuing these additional allegations.
Other Qui Tam Lawsuits
As a result of its ongoing discussions with the government prior to the
merger, Quorum learned that there are two additional unrelated qui tam
complaints against it alleging violations of the False Claims Act for claims
allegedly submitted to the government involving one owned and two managed
hospitals. Both matters remain under seal. With respect to the matter
involving the two managed hospitals, the government has requested that Quorum
conduct a self audit with respect to one Medicare cost report for one managed
hospital and three other specific issues. The government could undertake
additional investigative efforts. The government has stated that it intends to
investigate certain other allegations. Quorum also is a defendant in certain
other qui tam complaints, in which the government has declined to intervene.
Neither the merger agreement nor the distribution agreement entered into
with HCA in connection with the spin-off will provide indemnification to Triad
in respect of the Quorum litigation and investigations described above. Based
on due diligence and discussions with various parties including the Department
of Justice, the estimate of the liability for Quorum's qui tam lawsuits was
increased by approximately $16 million prior to the merger, including the $5
million paid to settle the Tampa qui tam lawsuit discussed above, in addition to
the originally estimated settlement amount accrued by Quorum. If Triad incurs
material liabilities as a result of other qui tam litigation or governmental
investigations, these matters could have a material adverse effect on Triad's
business, financial condition, results of operations or prospects.
From time to time Triad may be the subject of additional investigations or
a party to additional litigation which alleges violations of law. Triad may not
know about those investigations, or about qui tam actions filed against it. If
any of those matters were successfully asserted against Triad, there could be a
material adverse effect on Triad's business, financial position, results of
operations or prospects.
General Liability Claims
Triad is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of, or
interference with, physicians' staff privileges. In certain of these actions the
claimants may seek punitive damages against Triad, which are usually not covered
by insurance. It is management's opinion that the ultimate resolution of these
pending claims and legal proceedings will not have a material adverse effect on
Triad's results of operations or financial position.
NOTE 11 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which was required to be adopted in years
beginning after June 15, 1999. In May 1999, the effective date of SFAS 133 was
deferred until years beginning after June 15, 2000. Because of Triad's minimal
use of derivatives, the adoption of SFAS 133 did not have a significant effect
on the results of operations or the financial position of Triad.
17
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
During 2000, Triad sold one hospital, ceased operations of two hospitals
and purchased two hospitals. Triad sold its partnership interest in a
rehabilitation hospital on March 31, 2000. On February 5, 2001, Triad acquired
the remaining 50% interest in one of its joint ventures effective January 1,
2001.
The above described events significantly affect the comparability of the
results of operations for the three months ending March 31, 2001 to the three
months ending March 31, 2000.
Information regarding HCA included in this Report on Form 10-Q is derived
from reports and other information filed by HCA with the Securities and Exchange
Commission.
SUBSEQUENT EVENTS
On April 27, 2001, Triad completed the previously announced merger of
Quorum Health Group, Inc. ("Quorum") with and into Triad with Triad being the
surviving corporation. Under the terms of the agreement, Quorum shareholders
received $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. In addition, each outstanding option to purchase shares of
Quorum common stock, whether or not vested or exercisable, was converted at the
holder's election into either a fully vested and exercisable option to purchase
shares of Triad common stock or cash and shares of Triad common stock. Triad
issued 35,786,380 shares, paid $305.0 million in cash and issued 1,638,479
options to Quorum option holders in connection with the merger. The purchase
price for the merger was determined using the average stock price at the time
the merger was announced, cash paid, fair value of options converted and direct
costs associated with the merger. The preliminary purchase price is
approximately $1.4 billion.
Subsequent to the merger, Triad sold one of Quorum's acute care hospitals
for $38.0 million plus $8.2 million for working capital. Additionally, two
Quorum hospitals have been designated as held for sale. Accordingly, the
purchase price allocation of these entities will include their anticipated cash
flows for their estimated holding period, including cash flows from operations,
and the results of operations of these entities will not be included in Triad's
results of operations after the merger.
Subsequent to the merger, Triad expects to record a charge of approximately
$20 to $30 million associated with coordinating Quorum's accounting policies,
practices and estimation processes with those of Triad.
Prior to the merger, Quorum provided health care services through 21
general acute care hospitals located in 9 states. The merger creates the
third-largest publicly owned hospital company in the United States, with 49
hospitals (after the sale of one Quorum hospital subsequent to the acquisition)
and 14 ambulatory surgery centers in 17 states.
As part of the merger, Triad refinanced its Tranche A term loan, Tranche B
term loan, Delay Draw term loan, and Quorum's indebtedness with new indebtedness
totaling $1.8 billion. This indebtedness consists of a Tranche A term loan of
$250 million presently bearing interest at LIBOR plus 3.0% with principal
amounts due beginning 2001 through 2007, a Tranche B term loan of $550 million
presently bearing interest at LIBOR plus 3.0% with principal amounts due
beginning 2001 through 2008, an Asset Sale term loan of $150 million presently
bearing interest at LIBOR plus 3.0% with principal amounts due in 2003 and $600
million of senior notes bearing interest at 8.75% with principal amounts due in
2009. Triad also obtained a $250 million revolving credit line, of which $42.0
million was drawn on the closing, that presently bears interest at LIBOR plus
3.0% with principal amounts due in 2007.
Triad repaid $45.6 million on the Asset Sale term loan on May 4, 2001 from
the proceeds received on the facility sale described previously.
Triad's term loans and revolving lines of credit are collateralized by a
pledge of substantially all of its assets other than real estate associated with
the Quorum facilities. The debt agreements require that Triad comply with
various financial ratios and tests and have restrictions on new indebtedness,
assets sales and use of proceeds therefrom, capital expenditures and dividends.
18
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
In connection with the debt financing, Triad incurred approximately $46
million in debt issue costs, which will be amortized over the period the
indebtedness is outstanding.
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 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,
. the highly competitive nature of the health care business,
. the efforts of insurers, employers 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 regulations 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 ability to integrate effectively Triad's and Quorum's information
systems, operations and personnel in a timely and efficient manner,
. 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's common stock,
. changes in accounting practices,
. changes in general economic conditions,
. future divestitures which may result in additional charges,
. the ability to enter into managed care provider arrangements on
acceptable terms,
. the availability and terms of capital to fund the expansion of Triad's
business,
. changes in business strategy or development plans,
. timeliness of reimbursement payments received under government
programs,
. potential adverse impact of known and unknown government
investigations and
. 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 Triad. Investors 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."
RESULTS OF OPERATIONS
Revenue/Volume Trends
Triad'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. Triad expects
patient volumes from Medicare and Medicaid to continue to increase due to the
general aging of the population and expansion of state Medicaid programs.
However, under the Federal Balanced Budget Act of 1997 (the "Balanced Budget
Act"), Triad's reimbursement from Medicare and Medicaid programs has been
reduced. Certain of the reductions from the Balanced Budget Act have been
mitigated by the Balanced Budget Refinement Act of 1999 and will be further
mitigated by the Benefits Improvement Protection Act of 2000 ("BIPA"). Triad
anticipates receiving approximately $13.0 to 16.0 million in additional
reimbursement from BIPA during the remainder of 2001, which includes the impact
of the Quorum facilities. The Balanced Budget Act has accelerated a shift, by
certain Medicare beneficiaries, from traditional Medicare coverage to medical
coverage that is
19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
provided under managed care plans. Triad 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
fixed payment amounts (where the payment is based upon the diagnosis, regardless
of the cost incurred or level of service provided), revenues, earnings and cash
flows are being impacted. Patient revenues related to Medicare and Medicaid
patients were 38.8% and 36.7% of total patient revenues for the three months
ended March 31, 2001 and 2000, respectively. Patient revenues related to managed
care plan patients were 32.1% and 34.4% of total patient revenues for the three
months ended March 31, 2001 and 2000, respectively. Patient revenues from
capitation arrangements (prepaid health service agreements) are less than 1% of
net patient revenues.
As discussed previously, Triad sold one hospital and ceased operations of
two hospitals during 2000. These hospitals had revenues of $15.6 million for the
three months ended March 31, 2000, and losses before gain on sales of assets,
impairment charges and income taxes of $2.4 million. Triad also acquired two
hospitals in the fourth quarter of 2000 and the remaining 50% interest in one of
its joint ventures effective January 1, 2001. These hospitals had net revenues
of $43.9 million and income before income taxes of $4.7 million in the three
months ended March 31, 2001.
Triad's revenues have been affected by the trend toward certain services
being performed more frequently on an outpatient basis. 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. Outpatient revenues were 41.5% and 44.5% of patient revenues for
the three months ended March 31, 2001 and 2000, respectively.
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
increasing percentages of 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 increased operational
efficiencies, and the trend toward declining reimbursements and payments
continues, results of operations and cash flows will deteriorate.
Management believes that the proper response to these challenges includes
the delivery of a broad range of quality health care services to physicians and
patients with operating decisions being primarily made by the local management
teams and local physicians.
In connection with the spin-off, HCA agreed to indemnify Triad for any
payments which it is required to make in respect of Medicare, Medicaid and Blue
Cross cost reports relating to periods ending on or prior to the date of the
spin-off, and Triad agreed to indemnify HCA for and pay to HCA any payments
received by it relating to such cost reports. 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 $27.5 million
as of March 31, 2001.
20
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Operating Results Summary
The following is a summary of operating results for the three months ended
March 31, 2001 and 2000 (dollars in millions, except per share amounts and
ratios):
For the three months ended
----------------------------------------------
2001 2000
------ ------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
Revenues................................................. $365.8 100.0 $311.6 100.0
Salaries and benefits.................................... 143.9 39.3 126.4 40.6
Supplies................................................. 57.0 15.6 46.9 15.1
Other operating expenses................................. 70.2 19.2 63.1 20.3
Provision for doubtful accounts.......................... 36.2 9.9 24.6 7.9
Depreciation and amortization............................ 23.4 6.4 20.8 6.7
Interest expense, net.................................... 16.3 4.5 14.9 4.8
ESOP expense............................................. 2.3 0.6 1.2 0.4
Gain on sale of assets................................... (0.4) (0.1) (4.2) (1.3)
Impairment of long-lived assets.......................... --- --- 0.9 0.3
------ ----- ------ -----
348.9 95.4 294.6 94.6
------ ----- ------ -----
Income before minority interests and income tax provision
16.9 4.6 17.0 5.4
Minority interests in earnings of consolidated entities.. (1.7) (0.5) (2.3) (0.7)
------ ----- ------ -----
Income before income tax provision....................... 15.2 4.1 14.7 4.7
Income tax provision..................................... (7.4) (2.0) (6.7) (2.1)
------ ----- ------ -----
Net income............................................... $ 7.8 2.1 $ 8.0 2.6
====== ===== ====== =====
Income per common share
Basic.................................................. $ 0.24 $ 0.26
Diluted................................................ $ 0.22 $ 0.25
EBITDA (a)............................................... $ 58.5 $ 50.6
Number of hospitals at end of period (b)
Owned and managed...................................... 26 25
Joint ventures......................................... 1 2
Leased to others....................................... 2 2
-------- --------
Total.................................................. 29 29
Licensed beds at end of period (c)....................... 3,698 3,610
Available beds at end of period (d)...................... 3,291 3,177
Admissions (e)
Owned and managed...................................... 37,582 33,716
Joint ventures......................................... 1,576 2,681
-------- --------
Total.................................................. 39,158 36,397
Adjusted admissions (f).................................. 61,528 56,339
Outpatient visits........................................ 358,712 334,132
Surgeries................................................ 56,223 51,795
Average length of stay (g)............................... 4.4 4.5
Outpatient revenue percentage............................ 41.5% 44.5%
Inpatient revenue per admission.......................... $ 5,489 $ 4,944
Outpatient revenue per outpatient visit.................. $ 409 $ 400
Patient revenue per adjusted admission................... $ 5,735 $ 5,332
(a) EBITDA is defined as net income before depreciation and amortization,
interest expense, ESOP expense, gain on sale of assets, impairment of long-
lived assets, minority interests 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 are significant components in understanding
and assessing financial performance. EBITDA should not be considered in
isolation or as an alternative to net income, cash flows generated by
operating, investing or financing activities or other financial statement
data presented in the condensed 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.
(b) This table does not include any operating statistics, except for
admissions, for the joint ventures and facilities leased to others.
21
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(c) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state-licensing agency.
(d) Available beds are those beds a facility actually has in use.
(e) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's facilities and is used by
management and certain investors as a general measure of inpatient volume.
(f) Adjusted admissions is 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 "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(g) Represents the average number of days an admitted patient stays 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.
Three Months Ended March 31, 2001 and 2000
Income before income taxes increased to $15.2 million in the three months
ended March 31, 2001 from $14.7 million in the three months ended March 31,
2000. The increase in pretax income was attributable to decreases in losses of
$2.4 million in the facilities that were divested and $4.7 million income before
income taxes from facility acquisitions. This was offset by a $4.2 million gain
on sale of a joint venture interest during the three months ended March 31, 2000
and $1.4 million increase in interest expense from new borrowings.
Revenues increased 17.4% to $365.8 million in the three months ended March
31, 2001 compared to $311.6 million in the three months ended March 31, 2000.
Same facility revenues increased $24.9 million or 8.4% in the three months ended
March 31, 2001 compared to March 31, 2000. Same facility is defined as
facilities that were owned and consolidated in both periods. For the three
months ended March 31, 2001 compared to the three months ended March 31, 2000,
same facility admissions increased 4.6%, adjusted admissions increased 3.5%, and
revenues per adjusted admissions increased 4.8%. Outpatient visits increased
4.8%, outpatient revenue per visit decreased 1.8% and surgeries increased 3.3%.
Another factor in the increase in revenues was $3.7 million in favorable prior
year cost report settlements during 2001. Revenues for facilities acquired were
$43.9 million in the three months ended March 31, 2001. These facilities had
admissions of 4,327, adjusted admissions of 6,611, outpatient visits of 30,939
and surgeries of 4,876. The increase in revenues was partially offset by the
facilities that were sold or closed. In the three months ended March 31, 2000,
these facilities had revenues of $15.6 million, admissions of 1,929, adjusted
admissions of 3,294, outpatient visits of 21,504 and surgeries of 2,069.
Salaries and benefits, as a percentage of revenues, decreased to 39.3% in
the three months ended March 31, 2001 from 40.6% in the three months ended March
31, 2000. For the three months ended March 31, 2000, salaries and benefits for
the facilities sold or closed were $9.6 million which included $1.0 million of
severance costs for one facility closed in February 2000. Same facility
salaries and benefits increased 0.6% as a percentage of revenue in the three
months ended March 31, 2001 compared to the three months ended March 31, 2000.
This was due primarily to a smaller favorable adjustment relating to Triad's
retirement plan contributions of $1.3 million in 2001 compared to $2.8 million
in 2000. Salaries and benefits for the acquired facilities, as a percentage of
revenue, was 33.9% in the three months ended March 31, 2001.
Supply costs increased as a percentage of revenues to 15.6% in the three
months ended March 31, 2001 from 15.1% in the three months ended March 31, 2000.
For the three months ended March 31, 2000, supplies for the facilities sold or
closed were $2.2 million. Same facility supplies remained relatively constant as
a percentage of revenue in the three months ended March 31, 2001 compared to the
three months ended March 31, 2000. Supplies for the acquired facilities, as a
percentage of revenue, was 18.9% in the three months ended March 31, 2001.
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 19.2%
in the three months ended March 31, 2001 compared to 20.3% in the three months
ended March 31, 2000. For the three months ended March 31, 2000, other operating
expenses for the facilities sold or closed were $4.5 million. Same facility
other operating expenses decreased 0.6% as a percentage of revenue in the three
months ended March 31, 2001 compared to the three months ended March 31, 2000.
This decrease was due primarily to the
22
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
increase in revenues. Other operating expenses for the acquired facilities, as a
percentage of revenue, was 19.1% in the three months ended March 31, 2001.
Provision for doubtful accounts, as a percentage of revenues, increased to
9.9% in the three months ended March 31, 2001 compared to 7.9% in the three
months ended March 31, 2000. For the three months ended March 31, 2000,
provision for doubtful accounts for the facilities sold or closed was $1.3
million. Same facility provision for doubtful accounts increased 1.9% as a
percentage of revenue in the three months ended March 31, 2001 compared to the
three months ended March 31, 2000. This was due, in part, to an increase in
emergency room visits, primarily in Texas, which typically have a higher
incidence of uninsured accounts. Provision for doubtful accounts for the
acquired facilities, as a percentage of revenue, was 10.7% in the three months
ended March 31, 2001.
Depreciation and amortization decreased as a percentage of revenues to 6.4%
in the three months ended March 31, 2001 from 6.7% in the three months ended
March 31, 2000, primarily due to the increase in revenues.
Interest expense, which is offset by $0.4 million and $1.2 million of
interest income in the three months ended March 31, 2001 and 2000, respectively,
increased to $16.3 million in the three months ended March 31, 2001 from $14.9
million in the three months ended March 31, 2000 due to a decrease in interest
income and additional debt outstanding from draws on the delay draw term loan to
finance the facility acquisitions.
Gain on sale of assets was $4.2 million during the three months ended March
31, 2000 due to the sale of Triad's partnership interest in a rehabilitation
hospital during the quarter.
Impairments on long-lived assets were $0.9 million during the three months
ended March 31, 2000. The impairments during 2000 were due to the carrying
value of the long-lived assets related to one physician management contract
which was reduced to fair value, based on estimated disposal value.
Minority interests, which are primarily related to one ambulatory surgery
center joint venture in Arizona, decreased to $1.7 million in the three months
ended March 31, 2001 from $2.3 million in the three months ended March 31, 2000
due to decreases in operations of the joint venture.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $51.5 million in the three months
ended March 31, 2001 compared to $12.9 million in the three months ended March
31, 2000. The increase was due to improved operations in 2001 compared to 2000
and a decrease in accounts payable and other current liabilities during the
three months ended March 31, 2000 from payments made to HCA for capital
expenditures funded by HCA in 1999. This was offset by an increase in accounts
receivable in the three months ended March 31, 2001 compared to the three months
ended March 31, 2000.
Cash used in investing activities was $71.7 million in the three months
ended March 31, 2001 compared to cash provided by investing activities of $19.2
million in the three months ended March 31, 2000. This was due to $43.9 million,
net of cash acquired, paid for the acquisition of SouthCrest Hospital, which is
discussed below. This was offset by a $37.0 million loan repayment from
SouthCrest Hospital during the three months ended March 31, 2000. Also, Triad
received $4.0 million in proceeds on the sale of its partnership interest in a
rehabilitation hospital during the three months ended March 31, 2000. Triad
anticipates expending approximately $200 to $225 million ($150 to $175 million
for expansion) in capital expenditures for the remainder of 2001, including the
Quorum facilities.
Cash provided by financing activities was $29.5 million in the three months
ended March 31, 2001 compared to cash used in financing activities of $6.3
million in the three months ending March 31, 2000. This was due to advances
under the delay draw term loan.
As of March 31, 2001 the delay draw term loan bore interest at LIBOR plus
2.75%. Advances of $83.0 million were made as of March 31, 2001 under Triad's
delay draw term loan.
As of March 31, 2001 Triad had a $125.0 million line of credit which bears
interest at LIBOR plus 2.75% of which approximately $2.0 million was allocated
to letters of credit securing certain lease obligations. No amounts were
outstanding under the revolving credit facility at March 31, 2001.
23
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
All of Triad's bank credit facilities, including the delay draw term loan
and the line of credit, were refinanced subsequent to March 31, 2001 as part of
the merger, which was discussed previously (See SUBSEQUENT EVENTS).
At March 31, 2001, Triad had working capital of $201.1 million. Management
expects that operations and working capital facilities will provide sufficient
liquidity for the remainder of fiscal 2001.
On February 5, 2001, Triad acquired the remaining 50% interest in the
entity that owns SouthCrest Hospital in Tulsa, Oklahoma which opened in May
1999, from its not-for-profit partner, Hillcrest Healthcare System
("Hillcrest"), for $44.6 million, the amount of Hillcrest's investment in the
entity. The acquisition consolidated 100% ownership and control of the hospital
in Triad effective January 1, 2001. Triad has an option to acquire an adjacent
26-acre parcel of land from Hillcrest for future expansion and a right of first
refusal on certain other real estate. SouthCrest Hospital will continue to
participate in Hillcrest's joint contracting network that includes other
Hillcrest hospitals in Tulsa. Under certain conditions and for a limited time,
Hillcrest will have an option to repurchase a 49% interest in SouthCrest
Hospital at the then fair market value, subject to minimum valuations and
minimum returns on investment to Triad; if Hillcrest were to exercise the
option, Triad would retain governance of the facility and continue consolidating
it for financial reporting. The purchase was funded with a draw on Triad's
delay draw loan.
Triad has commenced development of a new hospital in Las Cruces, New
Mexico. The projected cost of this development is approximately $62 million
over an 18-month period. As of March 31, 2001, approximately $3.2 million had
been spent for this project. The project will be funded with either operating
cash flows or existing credit facilities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which was required to be adopted in years
beginning after June 15, 1999. In May 1999, the effective date of SFAS 133 was
deferred until years beginning after June 15, 2000. Because of Triad's minimal
use of derivatives, the adoption of SFAS 133 did not have a significant effect
on the results of operations or the financial position of Triad.
CONTINGENCIES
On October 20, 2000, a purported class action, Samuel Brand v. Colleen
Conway Welch, et al., Case No.: OCC-3066, was filed against Triad and members of
the board of directors of Quorum in the Circuit Court of Davidson County,
Tennessee, on behalf of all public stockholders of Quorum. The complaint
alleges, among other things, that Quorum's directors beached their fiduciary
duties to Quorum and its stockholders in agreeing to the merger at an unfair
price. Triad believes the claims asserted in the complaint are without merit.
In April 2001, the parties negotiated a settlement that will result in the
dismissal of the action. The settlement is subject to a number of conditions,
including completion of definitive documentation relating to the settlement and
Court approval.
HCA Litigation and Investigations
HCA is currently the subject of several Federal investigations into certain
of its business practices, as well as governmental investigations by various
states. HCA is cooperating in these investigations and understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, HCA expects additional
subpoenas and other investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. HCA is the subject of a formal order of
investigation by the SEC. HCA understands that the SEC's investigation includes
the anti-fraud, insider trading, periodic reporting and internal accounting
control provisions of the Federal securities laws.
HCA is a defendant in several qui tam actions, or actions brought by
private parties, known as relators, on behalf of the United States of America,
which have been unsealed and served on HCA. The actions allege, in general,
that HCA and certain subsidiaries and/or affiliated partnerships violated the
False Claims Act, 31 U.S.C. (S) 3729 et seq., by submitting improper claims to
the government for reimbursement. The lawsuits seek three times the
24
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
amount of damages caused to the United States by the submission of any Medicare
or Medicaid false claims presented by the defendants to the Federal government,
civil penalties of not less than $5,000 nor more than $10,000 for each such
Medicare or Medicaid claim, attorneys' fees and costs. HCA has disclosed that on
March 15, 2001, the Department of Justice filed a status report setting forth
the government's decisions regarding intervention in existing qui tam actions
against HCA and filed formal complaints in those suits in which the government
has intervened. Of the original 30 qui tam actions, the Department of Justice
remains active in and has elected to intervene in 8 actions. HCA has also
disclosed that it is aware of additional qui tam actions that remain under seal
and believes that there may be other sealed qui tam cases of which it is
unaware.
The investigations, actions and claims affecting HCA relate to HCA and its
subsidiaries, including subsidiaries that, prior to the spin-off, owned
facilities now owned by Triad. On May 5, 2000, Triad was advised that one of
the qui tam cases which had been unsealed listed three of Triad's hospitals as
defendants. This qui tam action alleges various violations arising out of the
relationship between Curative Health Services and the other defendants,
including allegations of false claims relating to contracts with Curative Health
Services for the management of certain wound care centers and excessive and
unreasonable management fees paid to Curative Health Services and submitted for
reimbursement. Two of the three Triad hospitals named as defendants terminated
their relationship with Curative Health Services prior to the spin-off and the
third hospital continues to maintain an ongoing relationship with Curative
Health Services.
In July 1999, Olsten Corporation and its subsidiary, Kimberly Home Health
(neither of which is affiliated with HCA), announced that they would pay $61
million to settle allegations that both companies defrauded the Medicare
program. Kimberly pled guilty to three separate felony charges (conspiracy,
mail fraud and violating the Medicare Anti-Kickback statute) filed by the U.S.
Attorneys in the Middle and Southern Districts of Florida and the Northern
District of Georgia. While HCA was not specifically named in these guilty
pleas, the guilty pleas refer to the involvement of a "Company A" or a "company
not named as a defendant." HCA has disclosed that it believes these references
refer to HCA or its subsidiaries.
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. Since April 1997, numerous securities
class action and derivative lawsuits have been filed in the United States
District Court for the Middle District of Tennessee against HCA and a number of
its current and former directors, officers and/or employees. Several derivative
actions have been filed in state 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
second quarter of 2001. HCA also entered into a corporate integrity agreement
with the Health and Human Services Office of the Inspector General. HCA is in
continuing discussions with the government regarding civil issues relating to
cost reporting and physician relations.
On December 14, 2000, HCA also announced that it had signed an agreement
with the Criminal Division of the Department of Justice to resolve pending
Federal criminal actions against HCA. HCA received a full release from criminal
liability for conduct arising from or relating to billing and reimbursement for
services provided pursuant to Federal health care benefit programs regarding:
Medicare cost reports; violations of the anti-kickback statute or prohibitions
against physician self-referrals, and any other conduct involving relations with
referral sources and those in a position to influence referral sources;
diagnosis related group billing; laboratory billing; the acquisition of home
health agencies; and the provision of services by home health agencies. In
addition, the government agreed not to prosecute HCA for other possible criminal
offenses which are or have been under investigation by the Department of Justice
arising from or relating to billing and reimbursement for services
25
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
provided pursuant to Federal health care benefit programs. As part of the
criminal agreement, HCA paid the government $95 million and entered certain
pleas in respect of the criminal actions. HCA also stated that representatives
of state attorneys general have agreed to recommend to state officials that HCA
be released from corresponding criminal liability in all states in which it
conducts business.
The agreements announced on December 14, 2000 relate only to conduct that
was the subject of the Federal investigations resolved in the agreements, and
HCA has stated publicly that it continues to discuss civil claims relating to
cost reporting and physician relations with the government. These agreements
with the government do not resolve various qui tam actions filed by private
parties against HCA, or any pending state actions. In addition to other claims
not covered by these agreements, the government also reserved its rights under
these agreements to pursue any claims it may have for:
. any civil, criminal or administrative liability under the Internal
Revenue Code;
. any other criminal liability;
. 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 express or implied warranty claims or other claims for defective
or deficient products or services, including quality of goods and
services, provided by HCA;
. any claims for personal injury or property damage or for other similar
consequential damages arising from the conduct subject to the
investigation; and
. any civil or administrative claims of the United States against
individuals.
In addition, 14 of Triad's current and former hospitals received notices in
early 2001 from the Health Care Financing Administration, a United States
government agency that runs the Medicare and Medicaid programs, that it was re-
opening for examination cost reports for Medicare and Medicaid reimbursement
filed by these hospitals for periods between 1993 and 1998, which pre-dates
Triad's spin-off from HCA. Furthermore, two of Quorum's current owned
hospitals have received such notices. HCA or its predecessors owned these
Quorum hospitals during the period covered by the notices. HCA is obligated to
indemnify Quorum for liabilities arising out of cost reports filed during these
periods.
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 spin-
off, 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
spin-off and that relate to the proceedings described above. HCA has also
agreed that, in the event that any hospital owned by Triad at the time of the
spin-off is permanently excluded from participation in the Medicare and Medicaid
programs as a result of the proceedings described above, then HCA will make a
cash payment to 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
government investigations described above, it will participate with HCA in
negotiating one or more compliance agreements setting forth each of HCA's and
Triad's agreements to comply with applicable laws and regulations.
HCA will not indemnify Triad under the distribution agreement for losses
relating to any acts, practices or omissions engaged in by Triad after the spin-
off, whether or not Triad is indemnified for similar acts, practices and
omissions occurring prior to the spin-off. HCA also will not indemnify Triad
under the distribution agreement for similar qui tam litigation, governmental
investigations and other actions to which Quorum was subject, some of which are
described below. If indemnified matters were asserted successfully against Triad
or any of its facilities,
26
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
and HCA failed to meet its indemnification obligations, then this event could
have a material adverse effect on Triad's business, financial condition, results
of operations or prospects.
The extent to which Triad may or may not continue to be affected by the
ongoing investigations of HCA and the initiation of additional investigations,
if any, cannot be predicted. These matters could have a material adverse effect
on Triad's business, financial condition, results of operations or prospects in
future periods.
Quorum Litigation and Investigations
Tampa Qui Tam Lawsuit
Prior to the merger, Quorum and its subsidiary, Quorum Health Resources,
along with subsidiaries that owned hospitals from 1990 through February 24,
1999, were named as defendants in a qui tam lawsuit in U.S. District Court in
Tampa, Florida. The United States government elected to intervene in, or join,
the lawsuit and on February 24, 1999, the government filed its own complaint in
the case. The new complaint alleged that Quorum, on behalf of hospitals it
managed between 1985 and 1995 and hospitals it owned from 1990 to the date of
the complaint, violated the False Claims Act by knowingly submitting or causing
to be submitted false Medicare cost reports, resulting in the submission of
false claims to Federal health care programs. The government asserted that the
false claims in cost reports were reflected, in part, in "reserve analyses"
created by Quorum. The complaint also alleges that these cost report filings
were prepared as a result of company policy. This qui tam action sought three
times the amount of damages caused to the United States by the submission of any
alleged false claims to the government, civil penalties of not less than $5,000
nor more than $10,000 for each false claim, and the relator's attorneys' fees
and costs.
On April 23, 2001, a settlement agreement was signed and a stipulation of
dismissal was filed with the court dismissing all claims against Quorum, Quorum
Health Resources and the other Quorum subsidiaries named in the lawsuit. The
settlement provided for a payment of $82.5 million to the government, plus
interest accruing on $77.5 million at 7.25% per annum from October 2, 2000 (the
date on which an understanding with the government to settle this lawsuit was
reached) to the payment date. The settlement was paid on April 30, 2001. The
settlement agreement also provides for a release, on certain conditions, of all
hospitals currently or formerly managed by Quorum Health Resources electing to
participate in the settlement.
In connection with the settlement, Quorum entered into a corporate
integrity agreement with the Office of Inspector General containing, among other
things, an affirmative obligation to report certain violations of applicable
laws and regulations. This obligation could result in greater scrutiny by
regulatory authorities. Complying with the corporate integrity agreement may
impose expensive and burdensome requirements on certian of Triad's operations
which could have a material adverse impact on Triad. Failure to comply with the
terms of the corporate integrity agreement could subject the Quorum hospitals to
significant monetary penalties and/or exclusion from Medicare, Medicaid and
other governmental reimbursement programs.
Flowers Qui Tam Lawsuit
On October 26, 2000, Quorum completed settlement of a qui tam lawsuit which
primarily involved allegedly improper allocation of costs at Flowers Hospital,
Dothan, Alabama, to its home health agency. Quorum paid to the government on
October 26, 2000 approximately $18 million in connection with this settlement.
In addition to the settlement agreement, Quorum entered into a five-year
corporate integrity agreement covering Flowers Hospital with the HHS Office of
the Inspector General, which will be terminated upon the effective date of the
corporate integrity agreement entered into in connection with the settlement of
the Tampa qui tam lawsuit discussed above. The government always reserves the
right to investigate and pursue other allegations made by a relator under a
complaint. However, under the settlement agreement, the relator is prohibited
from pursuing these additional allegations.
Other Qui Tam Lawsuits
As a result of its ongoing discussions with the government prior to the
merger, Quorum learned that there are two additional unrelated qui tam
complaints against it alleging violations of the False Claims Act for claims
27
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
allegedly submitted to the government involving one owned and two managed
hospitals. Both matters remain under seal. With respect to the matter
involving the two managed hospitals, the government has requested that Quorum
conduct a self audit with respect to one Medicare cost report for one managed
hospital and three other specific issues. The government could undertake
additional investigative efforts. The government has stated that it intends to
investigate certain other allegations. Quorum also is a defendant in certain
other qui tam complaints, in which the government has declined to intervene.
Neither the merger agreement nor the distribution agreement entered into
with HCA in connection with the spin-off will provide indemnification to Triad
in respect of the Quorum litigation and investigations described above. Based
on due diligence and discussions with various parties including the Department
of Justice, the estimate of the liability for Quorum's qui tam lawsuits was
increased by approximately $16 million prior to the merger of Quorum into Triad,
including the $5 million paid to settle the Tampa qui tam lawsuit discussed
above was made prior to the merger, in addition to the originally estimated
settlement amount accrued by Quorum. If Triad incurs material liabilities as a
result of other qui tam litigation or governmental investigations, these matters
could have a material adverse effect on Triad's business, financial condition,
results of operations or prospects.
From time to time Triad may be the subject of additional investigations or
a party to additional litigation which alleges violations of law. Triad may not
know about those investigations, or about qui tam actions filed against it. If
any of those matters were successfully asserted against Triad, there could be a
material adverse effect on Triad's business, financial position, results of
operations or prospects.
General Liability Claims
Triad is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of, or
interference with, physicians' staff privileges. In certain of these actions the
claimants may seek punitive damages against Triad, which are usually not covered
by insurance. It is management's opinion that the ultimate resolution of these
pending claims and legal proceedings will not have a material adverse effect on
Triad's results of operations or financial position.
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 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). While Triad is unable to predict whether any proposals
for health care reform will be adopted, there can be no assurance that proposals
adverse to the business of Triad will not be adopted.
In December 2000, the Health Care Financing Administration acting under the
Health Insurance Portability and Accountability Act of 1996 released final
regulations, which would require compliance by April 2003, relating to adoption
of standards to protect the security and privacy of health-related information.
These regulations would require healthcare providers to implement organizational
and technical practices to protect the security of electronically maintained or
transmitted health-related information. The effective dates of these
regulations were originally postponed by the Bush Administration, but now has
been reestablished. The privacy regulations will extensively regulate the use
and disclosure of individually identifiable health-related information. The
security regulations and the privacy regulations could impose significant costs
on Triad in order to comply with these standards. Violations of the regulations
could result in civil penalties of up to $25,000 per type of violation in each
calendar year and criminal penalties of up to $250,000 per violation.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Triad is exposed to market risk related to changes in interest rates. No
derivatives are currently used to alter the interest rate characteristics of
Triad's debt instruments.
With respect to Triad's interest-bearing liabilities, approximately $297.3
million of long-term debt at March 31, 2001 was subject to variable rates of
interest, while the remaining balance in long-term debt of $323.2 million at
March 31, 2001 was subject to fixed rates of interest. The estimated fair value
of Triad's total long-term debt was $661.1 million at March 31, 2001. The
estimates of fair value are based upon the quoted market prices for
28
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
the same or similar issues of long-term debt with the same maturities. Based on
a hypothetical 1% increase in interest rates, the potential annualized losses in
future pretax earnings would be approximately $3.0 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 Triad's borrowing cost and long-term debt balances. These analyses do
not consider the effects, if any, of the potential changes in Triad'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.
29
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
Exhibit Number Description
-------------- -----------
3.1 Certificate of Incorporation of Triad, as amended as of
April 27, 2001. Incorporated by reference from Exhibit
3.1 to Triad's Post Effective Amendment No. 1 on Form
S-8 to Form S-4.
4.1 Indenture (including form of 8 3/4% Senior Notes due
2009) dated as of April 27, 2001, among Triad, the
guarantors named therein and Citibank N.A. as Trustee.
4.2 Registration Rights Agreement dated as of April 27,
2001 among Triad, the guarantors named therein and the
Initial Purchasers named therein.
10.1 Credit Agreement dated as of April 27, 2001 among
Triad, the Lenders party thereto, Merrill Lynch & Co.
and Banc of America Securities LLC as co-lead
arrangers, Merrill Lynch & Co. as syndication agent and
Bank America, N.A. as administrative agent.
(b) Reports on Form 8-K filed during the quarter ended March 31, 2001:
On January 2, 2001, Triad reported that they had issued a press release
announcing changes to hospital portfolio.
On January 17, 2001, Triad reported that Ernst & Young, LLP had audited
Triad's financial statements for the year ended December 31, 1999.
30
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Triad Hospitals, Inc.
Date: May 15, 2001 By: /s/ BURKE W. WHITMAN
----------------------
Burke W. Whitman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
31
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
3.1 Certificate of Incorporation of Triad, as amended as of
April 27, 2001. Incorporated by reference from Exhibit
3.1 to Triad's Post Effective Amendment No. 1 on Form
S-8 to Form S-4.
4.1 Indenture (including form of 8 3/4% Senior Notes due
2009) dated as of April 27, 2001, among Triad, the
guarantors named therein and Citibank N.A. as Trustee.
4.2 Registration Rights Agreement dated as of April 27,
2001 among Triad, the guarantors named therein and the
Initial Purchasers named therein.
10.1 Credit Agreement dated as of April 27, 2001 among
Triad, the Lenders party thereto, Merrill Lynch & Co.
and Banc of America Securities LLC as co-lead
arrangers, Merrill Lynch & Co. as syndication agent and
Bank America, N.A. as administrative agent.