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 September 30, 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 October 31, 2001, the number of shares of common stock of Triad Hospitals,
Inc. outstanding was 72,044,520.
Part I: Financial Information
Item 1: Financial Statements
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the periods ended September 30, 2001 and 2000
Unaudited
(Dollars in millions, except per share amounts)
For the three For the nine
months ended months ended
------------------ --------------------
2001 2000 2001 2000
------ ------ -------- -------
Revenues........................................... $829.5 $301.3 $1,838.5 $915.4
Salaries and benefits.............................. 369.4 125.4 802.0 376.2
Supplies........................................... 127.3 44.7 285.3 136.9
Other operating expenses........................... 155.1 63.4 348.2 192.7
Provision for doubtful accounts.................... 66.3 28.4 171.7 78.1
Depreciation....................................... 44.8 19.2 102.6 57.0
Amortization....................................... 10.5 1.7 19.8 5.1
Interest expense................................... 39.9 16.0 89.8 47.4
Interest income.................................... (0.4) (1.6) (1.1) (4.5)
ESOP expense....................................... 2.5 2.0 6.9 4.7
Gain on sale of assets............................. (0.7) (0.2) (1.1) (4.6)
Impairment of long-lived assets.................... -- -- -- 0.9
------ ------ -------- ------
Total operating expenses........................... 814.7 299.0 1,824.1 889.9
------ ------ -------- ------
Income from continuing operations before minority
interests, equity in earnings and income tax
provision..................................... 14.8 2.3 14.4 25.5
Minority interests in earnings of consolidated
entities.......................................... (2.5) (1.9) (6.5) (6.3)
Equity in earnings (loss) of affiliates............ 4.7 (0.2) 8.1 (0.6)
------ ------ -------- ------
Income from continuing operations before income tax
provision...................................... 17.0 0.2 16.0 18.6
Income tax provision............................... (10.5) (1.2) (20.6) (10.5)
------ ------ -------- ------
Income (loss) from continuing operations........... 6.5 (1.0) (4.6) 8.1
Extraordinary loss on retirement of debt, net of
income tax benefit of $1.5 million................ -- -- (2.4) --
------ ------ -------- ------
Net income (loss).................................. $ 6.5 $ (1.0) $ (7.0) $ 8.1
====== ====== ======== ======
Income (loss) per common share:
Basic
Continuing operations.......................... $ 0.09 $(0.03) $ (0.09) $ 0.26
Extraordinary loss on retirement of debt....... $ -- $ -- $ (0.04) $ --
------ ------ -------- ------
Net............................................ $ 0.09 $(0.03) $ (0.13) $ 0.26
====== ====== ======== ======
Diluted
Continuing operations.......................... $ 0.09 $(0.03) $ (0.09) $ 0.24
Extraordinary loss on retirement of debt....... $ -- $ -- $ (0.04) $ --
------ ------ -------- ------
Net............................................ $ 0.09 $(0.03) $ (0.13) $ 0.24
====== ====== ======== ======
See notes to the condensed consolidated financial statements.
2
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in millions)
September 30, December 31,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents............................................................ $ 21.0 $ 6.7
Restricted cash...................................................................... 5.7 ---
Accounts receivable, less allowances for doubtful accounts of
$213.9 at September 30, 2001 and $122.9 at December 31, 2000...................... 475.0 171.1
Inventories.......................................................................... 82.3 34.7
Deferred income taxes................................................................ 34.8 40.5
Prepaid expenses..................................................................... 27.8 9.2
Other................................................................................ 104.1 66.0
-------- --------
750.7 328.2
Property and equipment, at cost:
Land................................................................................ 142.9 71.9
Buildings and improvements.......................................................... 1,015.2 540.7
Equipment........................................................................... 1,167.2 662.2
Construction in progress............................................................ 152.8 51.1
-------- --------
2,478.1 1,325.9
Accumulated depreciation ....................................................... (662.8) (572.9)
-------- --------
1,815.3 753.0
Intangible assets, net of accumulated amortization of $76.9 million at September 30,
2001 and $61.1 million at December 31, 2000............................................. 1,270.2 227.8
Investment in and advances to affiliates ............................................... 194.5 79.4
Other.................................................................................... 99.6 12.1
-------- --------
Total assets............................................................................. $4,130.3 $1,400.5
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable..................................................................... $ 119.2 $ 67.4
Accrued salaries ................................................................... 77.1 31.8
Current portion of long-term debt.................................................... 18.0 9.0
Other current liabilities .......................................................... 156.6 28.1
-------- --------
370.9 136.3
Long-term debt ......................................................................... 1,796.2 581.7
Other liabilities........................................................................ 62.2 9.6
Deferred taxes ........................................................................ 84.6 49.2
Minority interests in equity of consolidated entities .................................. 113.3 50.0
Stockholders' equity:
Common stock .01 par value: 120,000,000 shares authorized, 71,973,303 and
34,783,816 shares issued and outstanding at September 30, 2001 and December 31,
2000, respectively................................................................ 0.7 0.4
Additional paid-in capital........................................................... 1,792.4 659.3
Unearned ESOP compensation and stockholder notes receivable.......................... (33.7) (36.7)
Accumulated deficit.................................................................. (56.3) (49.3)
-------- --------
Total stockholders' equity........................................................... 1,703.1 573.7
-------- --------
Total liabilities and stockholders' equity............................................... $4,130.3 $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 September 30, 2001 and 2000
Unaudited
(Dollars in millions)
For the nine
months ended
-----------------------------
2001 2000
--------- -------
Cash flows from operating activities
Net income (loss)................................................................ $ (7.0) $ 8.1
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Provision for doubtful accounts................................................ 171.7 78.1
Depreciation and amortization.................................................. 122.4 62.1
ESOP expense................................................................... 6.9 4.7
Minority interests............................................................. 6.5 6.3
Equity in (earnings) loss of affiliates........................................ (8.1) 0.6
Debt issue cost amortization................................................... 5.4 0.8
Non-cash stock option expense.................................................. 5.5 ---
Deferred income taxes.......................................................... 20.6 10.5
Gain on sale of assets......................................................... (1.1) (4.6)
Impairment of long-lived assets................................................ -- 0.9
Extraordinary loss, net of tax benefit......................................... 2.4 --
Increase (decrease) in cash from operating assets and liabilities
Accounts receivable.......................................................... (136.8) (72.4)
Inventories and other assets................................................. 2.0 (14.9)
Accounts payable and other current liabilities............................... 48.7 (25.5)
Other........................................................................ 2.3 7.7
--------- -------
Net cash provided by operating activities........................................ 241.4 62.4
Cash flows from investing activities
Purchases of property and equipment............................................ (114.2) (57.2)
Payments for acquisitions, net of cash acquired................................ (1,379.9) (70.1)
Proceeds received on sale of assets............................................ 72.0 4.4
Investment in and advances to affiliates....................................... 9.0 23.0
Investment in restricted cash.................................................. (5.7) --
Other.......................................................................... 3.7 (1.8)
--------- -------
Net cash used in investing activities............................................ (1,415.1) (101.7)
Cash flows from financing activities
Payments of long-term debt..................................................... (470.8) (14.7)
Proceeds from long-term debt................................................... 1,690.0 --
Payment of debt issue cost..................................................... (47.4) --
Proceeds from issuance of common stock......................................... 22.6 7.9
Distributions to minority partners............................................. (6.4) (6.7)
--------- -------
Net cash provided by (used in) financing activities............................. 1,188.0 (13.5)
--------- -------
Change in cash and cash equivalents.............................................. 14.3 (52.8)
Cash and cash equivalents at beginning of period................................. 6.7 70.9
--------- -------
Cash and cash equivalents at end of period....................................... $ 21.0 $ 18.1
========= =======
Interest payments................................................................ $ 52.6 $ 39.0
Income tax payments.............................................................. $ 0.5 $ 0.7
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 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--ACQUISITIONS
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. Triad is the acquiror for accounting purposes based on several
considerations, including, in particular, that the former Quorum shareholders
are not able to replace a majority of Triad's board of directors until at least
the 2003 annual meeting of shareholders. Under the terms of the merger
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 preliminary 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 calculation is summarized below (in millions, except
for share amounts):
Shares issued.............................................................. 35,786,380
Average stock price........................................................ $ 29.89
-----------
$ 1,069.7
Cash paid to Quorum shareholders........................................... 305.0
Fair value of converted options............................................ 31.4
Quorum indebtedness paid at closing........................................ 856.5
Direct merger costs and other.............................................. 78.2
Quorum government investigation settlement paid............................ 88.7
-----------
$ 2,429.5
===========
The merger was accounted for under the purchase method of accounting
and the results of operations for Quorum are included in Triad's results of
operations beginning May 1, 2001. The purchase price will be allocated to
assets acquired and liabilities assumed based on estimated fair values. Triad
is in the process of obtaining independent appraisals of acquired property and
equipment and identifiable intangible assets and their remaining useful lives.
Triad is also reviewing and determining the fair value of other assets and
liabilities assumed. Therefore, the allocation of the purchase price is subject
to revision based on the final determination of the appraisals and other fair
value determinations. The preliminary estimated fair values of the assets
acquired and liabilities assumed relating to the acquisition are summarized
below (in millions):
5
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 2--ACQUISITIONS (continued)
Working capital............................................................ $ 260.5
Property and equipment..................................................... 972.0
Other assets............................................................... 221.0
Net investment in held for sale assets..................................... 67.1
Long-term debt............................................................. (2.9)
Other non-current liabilities.............................................. (81.5)
Minority interests......................................................... (62.0)
Preliminary purchase price in excess of net assets acquired................ 1,055.3
--------
$2,429.5
========
The preliminary purchase price in excess of net assets acquired (included in
"Intangible assets" on the Condensed Consolidated Balance Sheets) is being
amortized on a straight-line basis over 30 years. Amortization of the
preliminary purchase price in excess of net assets acquired was $13.0 million in
the nine months ended September 30, 2001.
On May 2, 2001, Triad sold two acute care hospitals in Minot, North Dakota
acquired in the merger with Quorum for $38.0 million plus $8.2 million for
working capital. Additionally, two hospitals acquired in the merger with Quorum
were designated as held for sale prior to the completion of the merger. The
preliminary purchase price allocated to these assets is equal to the estimated
sales prices of the hospitals plus the anticipated cash flows for the estimated
holding period and the estimated interest expense on the incremental debt
incurred for the purchase of the hospitals. On August 7, 2001, Triad sold to an
affiliate of one member of Triad's board of directors its hospital in Baton
Rouge, Louisiana for $19.0 million plus assumption of liabilities of $2.3
million. The results of operations of this entity are not included in Triad's
results of operations. The pre-tax loss from continuing operations for this
hospital and the associated interest expense excluded was $0.4 million and $0.5
million, respectively, during the nine months ended September 30, 2001. Triad
has decided not to sell the remaining hospital that was originally designated as
held for sale. The assets of this hospital have been reallocated as if the
hospital had never been designated as held for sale. The cumulative effect of
this hospital's results of operations from May 1, 2001 through June 30, 2001 are
included in Triad's results of operations in the three months ended September
30, 2001. The cumulative effect was not significant to pre-tax income from
continuing operations.
Subsequent to the merger, Triad recorded charges of approximately $31.8
million associated with coordinating Quorum's accounting policies, practices and
estimation processes with those of Triad. These charges included an $8.3
million pre-tax reduction to revenue, $18.5 million pre-tax increase in
provision for doubtful accounts and $5.0 million additional income tax
provision.
In connection with the merger, Triad's board of directors was increased by
the addition of two former members of Quorum's board.
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 of SouthCrest Hospital 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 are summarized
below (in millions):
6
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 2--ACQUISITIONS (continued)
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.
The following unaudited pro forma data summarizes the results of operations
of the periods indicated as if the acquisitions discussed previously had been
completed as of the beginning of the periods presented. The pro forma results
of operations gives effect to actual operating results prior to the
acquisitions, adjusted to include the pro forma effect of the acquisitions. The
pro forma results do not purport to be indicative of the results that would have
actually been obtained if the acquisitions occurred as of the beginning of the
periods presented or that may be obtained in the future.
For the nine months
ended September 30,
---------------------------------
2001 2000
-------- --------
Revenues.......................................................... $2,470.1 $2,312.5
Net loss.......................................................... $ (15.9) $ (40.6)
Net loss per share:
Basic......................................................... $ (0.23) $ (0.60)
Diluted....................................................... $ (0.23) $ (0.60)
NOTE 3--SALES AND CLOSURES
On November 1, 2001, Triad sold its acute care hospital in Phoenix, Arizona
for $55.3 million, including working capital. As of September 30, 2001, the
book value of this facility was $33.2 million. This facility had revenues of
$16.9 million and $15.9 million for the three months ended September 30, 2001
and 2000, respectively, and $52.9 million and $48.3 million for the nine months
ended September 30, 2001 and 2000, respectively. This facility had pre-tax
income (losses) before income tax benefit of $0.0 million and $(1.0) million for
the three months ended September 30, 2001 and 2000, respectively, and $1.0
million and $(1.0) million for the nine months ended September 30, 2001 and
2000, respectively.
Triad closed its acute care hospital in San Diego, California on November
30, 2000. On June 29, 2001, Triad sold the remaining assets of this facility
for a net sales price of $6.6 million and recognized a minimal gain on the sale.
As discussed in NOTE 2, Triad sold two acute care hospitals in Minot, North
Dakota and one acute care hospital in Baton Rouge, Louisiana.
On February 11, 2000, Triad closed its acute care hospital in Roseburg,
Oregon, which was designated as held for sale. As of September 30, 2001, the
carrying value of this facility was $5.2 million. For the three and nine months
ended September 30, 2000, this facility had revenues of $0.3 million, and $2.2
million, respectively, and pre-tax losses before impairment charges and income
tax benefit of $0.2 million, and $4.0 million, respectively.
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 4 - IMPAIRMENT OF LONG-LIVED ASSETS
During the quarter ended March 31, 2000, Triad entered into negotiations,
which were subsequently completed, to cancel one of its physician management
contracts. 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 and nine months ended September 30, 2000, this
7
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 4 - IMPAIRMENT OF LONG-LIVED ASSETS (continued)
entity contributed revenues of $1.0 million and $2.7 million, respectively, and
losses before impairment charges and income taxes of $0.7 million and $2.3
million, respectively.
NOTE 5--LONG-TERM DEBT
As part of the merger with Quorum (See NOTE 2), 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
consisted of a Tranche A term loan of $250 million presently bearing interest at
LIBOR plus 3.0% (6.53% at September 30, 2001) with principal amounts due
beginning 2001 through 2007, a Tranche B term loan of $550 million presently
bearing interest at LIBOR plus 3.0% (6.53% at September 30, 2001) with principal
amounts due beginning 2001 through 2008, an Asset Sale term loan of $150 million
presently bearing interest at LIBOR plus 3.0% (6.53% at September 30, 2001) 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 $10 million was outstanding at September 30,
2001, that presently bears interest at LIBOR plus 3.0% (5.67% at September 30,
2001). The revolving credit line reduces to $225 million in 2004, $200 million
in 2005 and matures in 2007. As of September 30, 2001, Triad had $2.5 million
in letters of credit outstanding which reduce the amount available under the
revolving credit line.
Triad repaid $71.0 million on the Asset Sale term loan from the
proceeds received on the facility sales described in NOTE 2 and NOTE 3. On
November 1, 2001, Triad repaid an additional $56.3 million on the Asset Sale
term loan primarily from proceeds received on the sale of the acute care
hospital in Phoenix, Arizona described in NOTE 3.
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 including, but not
limited to, new indebtedness, asset sales and use of proceeds therefrom, capital
expenditures and dividends.
In connection with the debt financing, Triad incurred $47.4 million in
debt issue costs, which will be amortized over the period the indebtedness is
outstanding.
As a result of the debt refinancing, an extraordinary loss of $2.4
million was incurred during the second quarter of 2001 from the write-off of
$3.9 million of associated debt issue costs, net of a tax benefit of $1.5
million.
Triad's senior subordinated notes and senior notes are guaranteed by
all wholly owned operating subsidiaries of Triad (the "Subsidiary Guarantors").
Triad Hospitals Holdings, Inc. was the primary obligor on the senior
subordinated notes until the merger with Quorum. As part of the merger (see NOTE
2) and related financing transactions, Triad Hospitals Holdings, Inc. was merged
into Triad and all of its existing debt was assumed by Triad. The guarantee
obligations of the Subsidiary Guarantors are full, unconditional and joint and
several. Triad's non-wholly owned operating subsidiaries do not guarantee the
notes (the "Non-Guarantor Subsidiaries").
Condensed unaudited consolidating financial statements for Triad and
its subsidiaries including the financial statements of Triad Hospitals, Inc.
(parent only), the combined Guarantor Subsidiaries and the combined Non-
Guarantor Subsidiaries are as follows:
8
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the three months ended September 30, 2001
Unaudited
(dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Revenues.................................................. $ -- $686.5 $145.8 $ (2.8) $829.5
Salaries and benefits..................................... -- 298.2 71.2 -- 369.4
Supplies.................................................. -- 107.0 20.3 -- 127.3
Other operating expenses.................................. -- 128.4 26.7 -- 155.1
Provision for doubtful accounts........................... -- 56.2 10.1 -- 66.3
Depreciation.............................................. -- 38.2 6.6 -- 44.8
Amortization.............................................. -- 8.8 1.7 -- 10.5
Interest expense allocated................................ -- -- 2.0 (2.0) --
Interest expense, net..................................... 36.3 3.2 -- -- 39.5
ESOP expense.............................................. 2.5 -- -- -- 2.5
Management fees........................................... -- -- 0.8 (0.8) --
Gain on sale of assets.................................... -- (0.7) -- -- (0.7)
------ ------ ------ ------ ------
Total operating expenses.................................. 38.8 639.3 139.4 (2.8) 814.7
------ ------ ------ ------ ------
Income (loss) from continuing operations before minority
interest, equity in earnings and income tax provision... (38.8) 47.2 6.4 -- 14.8
Minority interests........................................ -- (3.6) 1.1 -- (2.5)
Equity in earnings of affiliates.......................... 55.8 12.2 -- (63.3) 4.7
------ ------ ------ ------ ------
Income from continuing operations before income tax
provision.............................................. 17.0 55.8 7.5 (63.3) 17.0
Income tax provision...................................... (10.5) -- -- -- (10.5)
------ ------ ------ ------ ------
Net income................................................ $ 6.5 $ 55.8 $ 7.5 $(63.3) $ 6.5
====== ====== ====== ====== ======
9
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the three months ended September 30, 2000
Unaudited
(dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Revenues..................................................... $ -- $286.8 $14.6 $ (0.1) $301.3
Salaries and benefits........................................ 0.3 121.3 3.8 -- 125.4
Supplies..................................................... -- 41.1 3.6 -- 44.7
Other operating expenses..................................... -- 61.5 1.9 -- 63.4
Provision for doubtful accounts.............................. -- 28.1 0.3 -- 28.4
Depreciation................................................. -- 18.4 0.8 -- 19.2
Amortization................................................. -- 1.6 0.1 -- 1.7
Interest expense allocated................................... -- -- -- -- --
Interest expense, net........................................ 15.7 (1.3) -- -- 14.4
ESOP expense................................................. 2.0 -- -- -- 2.0
Management fees.............................................. -- -- 0.1 (0.1) --
Gain on sale of assets....................................... -- (0.2) -- -- (0.2)
Impairment of long-lived assets.............................. -- -- -- -- --
------ ------ ----- ------ ------
Total operating expenses..................................... 18.0 270.5 10.6 (0.1) 299.0
------ ------ ----- ------ ------
Income (loss) from continuing operations before minority
interest, equity in earnings and income tax provision...... (18.0) 16.3 4.0 -- 2.3
Minority interests........................................... -- (1.9) -- -- (1.9)
Equity in earnings (loss) of affiliates...................... 18.2 3.8 -- (22.2) (0.2)
------ ------ ----- ------ ------
Income from continuing operations before income tax
provision.................................................. 0.2 18.2 4.0 (22.2) 0.2
Income tax provision......................................... (1.2) -- -- -- (1.2)
------ ------ ----- ------ ------
Net income (loss)............................................ $ (1.0) $ 18.2 $ 4.0 $(22.2) $ (1.0)
====== ====== ===== ====== ======
10
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2001
Unaudited
(dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Revenues............................................... $ -- $1,593.3 $249.9 $ (4.7) $1,838.5
Salaries and benefits.................................. 5.6 678.8 117.6 -- 802.0
Supplies............................................... -- 247.9 37.4 -- 285.3
Other operating expenses............................... -- 303.2 45.0 -- 348.2
Provision for doubtful accounts........................ -- 155.6 16.1 -- 171.7
Depreciation........................................... -- 91.2 11.4 -- 102.6
Amortization........................................... -- 17.6 2.2 -- 19.8
Interest expense allocated............................. -- -- 3.3 (3.3) --
Interest expense, net.................................. 88.2 0.5 -- -- 88.7
ESOP expense........................................... 6.9 -- -- -- 6.9
Management fees........................................ -- -- 1.4 (1.4) --
Gain on sale of assets................................. -- (1.1) -- -- (1.1)
------- -------- ------ ------- --------
Total operating expenses............................... 100.7 1,493.7 234.4 (4.7) 1,824.1
------- -------- ------ ------- --------
Income (loss) from continuing operations before
minority interest, equity in earnings and income tax
provision............................................ (100.7) 99.6 15.5 -- 14.4
Minority interests..................................... -- (8.3) 1.8 -- (6.5)
Equity in earnings of affiliates....................... 116.7 25.4 -- (134.0) 8.1
------- -------- ------ ------- --------
Income from continuing operations before income tax
provision........................................... 16.0 116.7 17.3 (134.0) 16.0
Income tax provision................................... (20.6) -- -- -- (20.6)
------- -------- ------ ------- --------
Income (loss) from continuing operations............... (4.6) 116.7 17.3 (134.0) (4.6)
Extraordinary loss on retirement of debt, net of tax... (2.4) -- -- -- (2.4)
------- -------- ------ ------- --------
Net income (loss)...................................... $ (7.0) $ 116.7 $ 17.3 $(134.0) $ (7.0)
======= ======== ====== ======= ========
11
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the nine months ended September 30, 2000
Unaudited
(dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Revenues............................................... $ -- $871.9 $43.9 $ (0.4) $915.4
Salaries and benefits.................................. 0.6 364.6 11.0 -- 376.2
Supplies............................................... -- 126.6 10.3 -- 136.9
Other operating expenses............................... -- 186.4 6.3 -- 192.7
Provision for doubtful accounts........................ -- 77.2 0.9 -- 78.1
Depreciation........................................... -- 54.9 2.1 -- 57.0
Amortization........................................... -- 4.7 0.4 -- 5.1
Interest expense allocated............................. -- 0.1 (0.1) -- --
Interest expense, net.................................. 46.6 (3.7) -- -- 42.9
ESOP expense........................................... 4.7 -- -- -- 4.7
Management fees........................................ -- -- 0.4 (0.4) --
Gain on sale of assets................................. -- (4.6) -- -- (4.6)
Impairment of long-lived assets........................ -- 0.9 -- -- 0.9
------ ------ ----- ------ ------
Total operating expenses............................... 51.9 807.1 31.3 (0.4) 889.9
------ ------ ----- ------ ------
Income (loss) from continuing operations before
minority interest, equity in earnings and income tax
provision........................................... (51.9) 64.8 12.6 -- 25.5
Minority interests..................................... -- (6.2) (0.1) -- (6.3)
Equity in earnings (loss) of affiliates................ 70.5 11.9 -- (83.0) (0.6)
------ ------ ----- ------ ------
Income from continuing operations before income tax
provision............................................ 18.6 70.5 12.5 (83.0) 18.6
Income tax provision................................... (10.5) -- -- -- (10.5)
------ ------ ----- ------ ------
Net income............................................. $ 8.1 $ 70.5 $12.5 $(83.0) $ 8.1
====== ====== ===== ====== ======
12
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5 - LONG-TERM DEBT (continued)
Condensed Consolidating Balance Sheets
September 30, 2001
Unaudited
(dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Assets
Current assets
Cash and cash equivalents....................... $ -- $ 21.0 $ -- $ -- $ 21.0
Restricted cash................................. 5.7 -- -- -- 5.7
Accounts receivable, net........................ -- 380.6 94.4 -- 475.0
Other current assets............................ 36.7 195.1 17.2 -- 249.0
-------- -------- ------ --------- --------
Total current assets................................ 42.4 596.7 111.6 -- 750.7
Net property and equipment, at cost................. -- 1,545.8 269.5 -- 1,815.3
Due from affiliates................................. 455.6 -- -- (455.6) --
Intangible assets................................... -- 1,221.9 48.3 -- 1,270.2
Investments in subsidiaries......................... 3,092.3 482.0 -- (3,379.8) 194.5
Other assets........................................ 44.8 42.7 12.1 -- 99.6
-------- -------- ------ --------- --------
Total assets........................................ $3,635.1 $3,889.1 $441.5 $(3,835.4) $4,130.3
======== ======== ====== ========= ========
Liabilities and Equity
Current liabilities................................. $ 56.8 $ 275.0 $ 39.1 $ -- $ 370.9
Due to affiliates................................... -- 395.8 59.8 (455.6) --
Long-term debt...................................... 1,790.6 5.4 0.2 -- 1,796.2
Deferred taxes and other liabilities................ 84.6 59.6 2.6 -- 146.8
Minority interests in equity of
consolidated entities........................... -- 61.0 52.3 -- 113.3
Equity.............................................. 1,703.1 3,092.3 287.5 (3,379.8) 1,703.1
-------- -------- ------ --------- --------
Total liabilities and equity........................ $3,635.1 $3,889.1 $441.5 $(3,835.4) $4,130.3
======== ======== ====== ========= ========
Condensed Consolidating Balance Sheets
December 31, 2000
Unaudited
(dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------- ------------
Assets
Current assets
Cash and cash equivalents........................... $ -- $ 6.4 $ 0.3 $ -- $ 6.7
Accounts receivable, net............................ -- 162.5 8.6 -- 171.1
Other current assets................................ 41.9 106.9 1.6 -- 150.4
-------- -------- ----- --------- --------
Total current assets................................... 41.9 275.8 10.5 -- 328.2
Net property and equipment, at cost.................... -- 738.3 14.7 -- 753.0
Investments in subsidiaries............................ 1,326.7 136.2 -- (1,383.5) 79.4
Due from affiliates.................................... -- 137.1 23.2 (160.3) --
Intangible assets...................................... -- 215.6 12.2 -- 227.8
Other assets........................................... 4.7 7.4 -- -- 12.1
-------- -------- ----- --------- --------
Total assets........................................... $1,373.3 $1,510.4 $60.6 $(1,543.8) $1,400.5
======== ======== ===== ========= ========
Liabilities and Equity
Current liabilities.................................... $ 13.4 $ 121.3 $ 1.6 $ -- $ 136.3
Due to affiliates...................................... 160.3 -- -- (160.3) --
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 1,326.7 56.8 (1,383.5) 573.7
-------- -------- ----- --------- --------
Total liabilities and equity........................... $1,373.3 $1,510.4 $60.6 $(1,543.8) $1,400.5
======== ======== ===== ========= ========
13
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 5 - LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2001
Unaudited
(dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ -------------
Net cash provided by (used in) operating activities....... $ (42.1) $ 264.5 $ 19.0 $ -- $ 241.4
Cash flows from investing activities
Purchases of property and equipment................... -- (82.5) (31.7) -- (114.2)
Payments for acquisitions............................. (1,336.0) (43.9) -- -- (1,379.9)
Proceeds received on sale of assets................... -- 72.0 -- -- 72.0
Investment in and advances to affiliates.............. 59.1 (47.8) (2.3) -- 9.0
Investment in restricted cash......................... (5.7) -- -- -- (5.7)
Other................................................. -- 3.7 -- -- 3.7
---------- ------- ------ ------------ ---------
Net cash used in investing activities..................... (1,282.6) (98.5) (34.0) -- (1,415.1)
Cash flows from financing activities
Payments of long-term debt............................ (468.4) (2.4) -- -- (470.8)
Proceeds from issuance of long-term debt.............. 1,690.0 -- -- -- 1,690.0
Payment of debt issue costs........................... (47.4) -- -- -- (47.4)
Proceeds from issuance of common stock................ 22.6 -- -- -- 22.6
Distributions to minority partners.................... -- (6.1) (0.3) -- (6.4)
Net change in due to (from) affiliate................. 127.9 (142.9) 15.0 -- --
---------- ------- ------ ------------ ---------
Net cash provided by (used in) financing activities....... 1,324.7 (151.4) 14.7 -- 1,188.0
---------- ------- ------ ------------ ---------
Change in cash and cash equivalents....................... -- 14.6 (0.3) -- 14.3
Cash and cash equivalents at beginning of period.......... -- 6.4 0.3 -- 6.7
---------- ------- ------ ------------ ---------
Cash and cash equivalents at end of period................ $ -- $ 21.0 $ -- $ -- $ 21.0
========== ======= ====== ============ =========
Condensed Consolidating Statements of Cash Flows
For the nine months ended September 30, 2000
Unaudited
(dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Elimination Consolidated
--------------- ------------ ------------ ----------- ------------
Net cash provided by (used in) operating activities......... $(41.0) $ 88.9 $ 14.5 $ -- $ 62.4
Cash flows from investing activities
Purchases of property and equipment...................... -- (57.2) -- -- (57.2)
Payments for acquisitions................................ -- (70.1) -- -- (70.1)
Proceeds received on sale of assets...................... -- 4.4 -- -- 4.4
Investment in and advances to affiliates................. 3.5 35.2 (15.7) -- 23.0
Other.................................................... (0.8) (1.4) 0.4 -- (1.8)
------ ------ ------ ----------- -------
Net cash provided by (used in) investing activities......... 2.7 (89.1) (15.3) -- (101.7)
Cash flows from financing activities
Payments of long-term debt.............................. (14.0) (0.7) -- -- (14.7)
Proceeds from issuance of common stock.................. 7.9 -- -- -- 7.9
Distributions to minority partners...................... -- (6.7) -- -- (6.7)
Net change in due to (from) affiliate................... 44.4 (45.4) 1.0 -- --
------ ------ ------ ----------- -------
Net cash provided by (used in) financing activities......... 38.3 (52.8) 1.0 -- (13.5)
------ ------ ------ ----------- -------
Change in cash and cash equivalents......................... -- (53.0) 0.2 -- (52.8)
Cash and cash equivalents at beginning of period............ -- 70.8 0.1 -- 70.9
------ ------ ------ ----------- -------
Cash and cash equivalents at end of period.................. $ -- $ 17.8 $ 0.3 $ -- $ 18.1
====== ====== ====== =========== =======
NOTE 6--STOCK BENEFIT PLANS
During the nine months ended September 30, 2001, 107,173 shares of common
stock, net of cancellations, were issued through the Management Stock Purchase
Plan and the Employee Stock Purchase Plan. Triad received proceeds of $2.2
million on these issuances. Additionally during the nine months ended September
30, 2001, 1,295,934 stock options were exercised for proceeds of $20.4 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
14
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 6--STOCK BENEFIT PLANS (continued)
certain stock options in connection with the merger. The waivers ended June 29,
2001. 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. As a result of the above
referenced vesting, Triad recorded non-cash stock option expense of $3.8 million
during the three months ended June 30, 2001. On September 26, 2001, one
participant in the Executive Stock Purchase Plan repaid his $0.4 million loan
under the plan.
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, 2,713,000 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. On June 21, 2001, 102,000 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. On September 14, 2001, 100,000 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. All options become exercisable over a four-year
period and expire ten years from date of grant.
On May 29, 2001, shareholders approved an amendment to the Outside
Directors Stock and Incentive Compensation Plan increasing the numbers of shares
available to 400,000. On May 29, 2001, 220,000 stock options were granted under
this plan with an exercise price equal to the market price at the date of grant.
The options become exercisable over a four-year period and expire ten years from
date of grant.
As anticipated at the time of the spin-off from HCA, Inc. ("HCA") on May
11, 1999, Triad entered into a stock option pledge agreement with a charitable
corporation granting 100,000 stock options on July 11, 2000 subject to approval
by the Internal Revenue Service (the "IRS"). The exercise price of these stock
options is equal to the market price on the grant date. The stock options
become immediately exercisable upon receipt of the IRS approval and expire 10
years from that date. Triad waived the IRS approval provision on June 27, 2001
and the options are now exercisable. Non-cash stock option expense of $1.4
million was recorded under Statement of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" using the fair value of these options.
Since the options are immediately exercisable, no additional non-cash stock
option expense will be recorded.
NOTE 7--INCOME (LOSS) PER SHARE
Basic weighted average shares outstanding 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. Stock options outstanding of 8,952,822 as
of September 30, 2001 were not included for diluted loss per share calculations
in the nine months ended September 30, 2001 since the impact was antidilutive.
Stock options outstanding of 5,794,358 as of September 30, 2000 were not
included for diluted loss per share calculations in the three months ended
September 30, 2000 since the impact was antidilutive. Weighted average shares
for the three and nine months ended September 30, 2001 and 2000 are as follows:
For the three months ended For the nine months ended
---------------------------- ----------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Weighted average shares exclusive of
unreleased ESOP shares......................... 69,218,457 31,696,120 53,410,162 31,452,145
Weighted average of ESOP shares committed to
be released..................................... 187,500 187,500 112,500 112,500
---------- ---------- ---------- ----------
Basic weighted average shares outstanding....... 69,405,957 31,883,620 53,522,662 31,564,645
Effect of dilutive securities - employee stock
options......................................... 3,598,490 -- -- 2,116,727
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding..... 73,004,447 31,883,620 53,522,662 33,681,372
========== ========== ========== ==========
15
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION
In connection with the merger with Quorum (See NOTE 2), Triad reorganized
its segment information into four segments. The segment information for the
prior periods has been restated to conform to the current segment structure.
The hospital operations segment includes Triad's acute care hospitals that it
intends to operate on an ongoing basis. The management services segment
includes the newly acquired management services business, which provides
executive management services to smaller not-for-profit acute care hospitals.
The ambulatory surgery center segment includes Triad's freestanding ambulatory
surgery centers. The sold and held for sale segment is comprised of acute care
hospitals that Triad has sold or has designated as held for sale. During the
three months ended September 30, 2001, Triad decided not to sell one hospital
that was acquired in the merger with Quorum (see NOTE 2) that was designated as
held for sale. This hospital is now in the hospital operations segment. On
November 1, 2001, Triad sold its hospital in Phoenix, Arizona (see NOTE 3).
This hospital has been reclassified to the sold and held for sale segment from
the hospital operations segment. Prior periods have been restated to reflect
this change.
The distribution of Triad's revenues and EBITDA (which is used by
management for operating performance review, see (a)) is summarized in the
following table (dollars in millions):
For the three months
ended September 30,
2001 2000
------ ------
Revenues:
Hospital operations....................................................... $756.0 $259.4
Management services....................................................... 36.0 --
Ambulatory surgery centers................................................ 15.1 12.7
Sold and held for sale.................................................... 16.9 24.0
Corporate and other....................................................... 5.5 5.2
------ ------
$829.5 $301.3
====== ======
EBITDA (a):
Hospital operations....................................................... $115.6 $35.4
Management services....................................................... 6.1 --
Ambulatory surgery centers................................................ 3.7 3.5
Sold and held for sale.................................................... -- (0.8)
Corporate and other....................................................... (9.3) 1.1
------ -----
$116.1 $39.2
====== =====
For the nine months
ended September 30,
2001 2000
-------- ------
Revenues:
Hospital operations....................................................... $1,664.1 $790.2
Management services....................................................... 60.9 ---
Ambulatory surgery centers................................................ 45.4 38.6
Sold and held for sale.................................................... 53.9 75.9
Corporate and other....................................................... 14.2 10.7
-------- ------
$1,838.5 $915.4
======== ======
EBITDA (a):
Hospital operations....................................................... $ 239.5 $125.9
Management services....................................................... 11.5 --
Ambulatory surgery centers................................................ 11.9 11.8
Sold and held for sale.................................................... 3.0 (0.7)
Corporate and other....................................................... (26.5) (6.1)
-------- ------
$239.4 $130.9
======== ======
16
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION (continued)
September 30, December 31,
2001 2000
-------- -------
Assets:
Hospital operations..................................................... $3,631.4 $1,178.8
Management services..................................................... 150.0 --
Ambulatory surgery centers.............................................. 67.2 53.6
Sold and held for sale.................................................. 45.5 31.3
Corporate and other..................................................... 236.2 136.8
-------- --------
$4,130.3 $1,400.5
======== ========
EBITDA for hospital operations includes equity in earnings (loss) of affiliates
of $4.7 million and $(0.2) million in the three months ended September 30, 2001
and 2000, respectively, and $8.1 million and $(0.6) million in the nine months
ended September 30, 2001 and 2000, respectively.
The following tables restate the annual segment disclosures to incorporate
the changes discussed above:
For the year ended December 31,
-------------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
Hospital operations.................................................... $1,044.4 $ 967.5 $ 901.5
Management services.................................................... -- -- --
Ambulatory surgery centers............................................. 52.4 49.1 48.4
Sold and held for sale................................................. 121.4 298.4 428.3
Corporate and other.................................................... 17.2 14.1 210.5
-------- -------- --------
$1,235.5 $1,329.1 $1,588.7
======== ======== ========
2000 1999 1998
------ ------ ------
EBITDA (a):
Hospital operations.................................................... $164.0 $151.5 $106.2
Management services.................................................... -- -- --
Ambulatory surgery centers............................................. 16.1 15.7 15.0
Sold and held for sale................................................. (9.3) (26.5) 20.0
Corporate and other.................................................... 3.2 (16.2) 7.8
------ ------ ------
$174.0 $124.5 $149.0
====== ====== ======
December 31,
2000 1999
-------- --------
Assets:
Hospital operations.......................................................... $1,178.8 $1,076.5
Management services.......................................................... -- --
Ambulatory surgery centers................................................... 53.6 84.1
Sold and held for sale....................................................... 31.3 59.2
Corporate and other.......................................................... 136.8 121.3
-------- --------
$1,400.5 $1,341.1
======== ========
(a) EBITDA is defined as income (loss) from continuing operations before
depreciation, amortization, interest expense, interest income, 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 (loss), 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
17
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 8 - SEGMENT AND GEOGRAPHIC INFORMATION (continued)
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 9 -- CONTINGENCIES
Merger Litigation
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
alleged, among other things, that Quorum's directors breached their fiduciary
duties to Quorum and its stockholders in agreeing to the merger at an unfair
price.
In April 2001, the parties negotiated a settlement that would result in the
dismissal of the action. The settlement was subject to a number of conditions,
including Court approval. Court approval was obtained, and on October 22, 2001
the court dismissed the action pursuant to the terms of the agreed upon
settlement which was not material to Triad's financial position or results of
operations.
False Claims Act Litigation
At a meeting in September 1998, Quorum learned from the government that the
government would likely join in a lawsuit filed against Quorum under the False
Claims Act. The suit was filed in January 1993 by a former employee of a
hospital managed by a Quorum subsidiary. These lawsuits, commonly known as qui
tam actions, are filed "under seal." That means that the claims are kept secret
until the government decides whether to join the case. The person who files the
lawsuit is called a "relator." The government joined the case against Quorum in
October 1998. The relator's lawsuit named Quorum, Quorum Health Resources, Inc.
("QHR") a subsidiary of Quorum, HCA and all hospitals that Quorum or HCA owned,
operated or managed from 1984 through 1997, as defendants. The unsealed
complaint, prepared by the relator, alleged that Quorum knowingly prepared and
caused to be filed cost reports which claimed payments from Medicare and other
government payment programs greater than the amounts due.
The United States government elected to intervene in, or join, the lawsuit;
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.
On April 23, 2001, a settlement agreement was signed and a stipulation of
dismissal was filed with the court dismissing all claims against Quorum, QHR 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 in April 2001. The settlement agreement
also provides, on certain conditions, for a release of all hospitals currently
or formerly managed by QHR 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
18
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 9 -- CONTINGENCIES (continued)
agreement could subject the Quorum hospitals to significant monetary penalties
and/or exclusion from Medicare, Medicaid and other governmental reimbursement
programs.
On August 10, 2001, the Office of Inspector General agreed to suspend
Quorum's obligations under this corporate integrity agreement until November 1,
2001, in exchange for Triad's agreement to negotiate a corporate integrity
agreement that would also include the hospitals owned by Triad at the time of
its merger with Quorum, as well as hospitals Triad might subsequently acquire.
(In the distribution agreement with HCA at the time of its spin-off, Triad
agreed to participate in the negotiation of a corporate integrity agreement with
the Office of Inspector General.) These negotiations of a "combined" corporate
integrity agreement were concluded and the agreement became effective on
November 1, 2001.
Other Qui Tam Actions and Related Investigations
In May 1998, Quorum was informed that it was a defendant in another qui tam
action involving home health services provided by two of its owned hospitals and
alleging that Quorum had violated Medicare laws. This action was filed under
seal in June 1996 by a former employee, whom Quorum fired in April 1996. The
United States Attorney's Office allowed Quorum an opportunity to review the
results of the government's investigations and discuss the allegations made in
the action prior to the government making a decision to intervene as a
plaintiff. Quorum cooperated fully with the United States Attorney's Office and
provided additional information and made employees available for interviews.
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 Office of the
Inspector General, which was terminated upon the effective date of the corporate
integrity agreement entered into in connection with the False Claims Act
litigation 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.
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. Quorum accrued $3.5 million on these items prior to the merger.
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. As Quorum's successor, Triad is also a defendant in certain other
qui tam complaints, in which the government has declined to intervene. At this
time Triad cannot take a position on how it will respond on these matters.
Stockholder Class Action Regarding the Securities Exchange Act of 1934
In October and November 1998, some of Quorum's stockholders filed lawsuits
against Quorum in the U.S. District Court for the Middle District of Tennessee.
In January 1999, the court consolidated these cases into a
19
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 9 -- CONTINGENCIES (continued)
single lawsuit (M.D. Tenn. No. 3-98-1004). The plaintiffs filed an amended
complaint in March 1999. The plaintiffs seek to represent a class of plaintiffs
who purchased Quorum's common stock from October 25, 1995 through October 21,
1998, except for Quorum's insiders and their immediate families. The
consolidated complaint names Quorum, several of Quorum's former officers, and
one of Quorum's former outside directors, as defendants.
The complaint alleges that defendants violated the Securities Exchange Act
of 1934. The plaintiffs claim that Quorum materially inflated Quorum's net
revenues during the class period by including in those net revenues amounts
received from the settlement of cost reports that had allegedly been filed in
violation of applicable Medicare regulations years earlier and that, because of
this practice, this statement, which first appeared in Quorum's Form 10-K filed
in September 1996, was false: "The Company believes that its owned hospitals are
in substantial compliance with current federal, state, local, and independent
review body regulations and standards." In May 1999, Quorum filed a motion to
dismiss the complaint. On November 13, 2000, the judge denied Quorum's motion
to dismiss the complaint against Quorum and James E. Dalton, Jr., Quorum's
former President/CEO. The judge granted Quorum's motion to dismiss as to all
other defendants. The judge has heard oral argument on Mr. Dalton's motion to
reconsider the judge's denial of Mr. Dalton's motion to dismiss and on April 19,
2001 granted Mr. Dalton's motion to dismiss. As Quorum's successor, Triad
intends to vigorously defend the claims and allegations in this action.
At this time, Triad cannot predict the final effect or outcome of any of
the ongoing investigations, settlement negotiations or the class or qui tam
actions. If Quorum's hospitals are found to have violated Federal or state laws
relating to Medicare, Medicaid or other government programs, then Triad may be
required to pay substantial fines and civil and criminal penalties and also may
be excluded from participation in the Medicare and Medicaid programs and other
government programs. Similarly, the amount of damages sought in the qui tam
actions are or in the future may be substantial. Triad could be subject to
substantial costs resulting from defending, or from an adverse outcome in any
current or future investigations, administrative proceedings or litigation. In
an effort to resolve one or more of these matters, Triad may choose to negotiate
a settlement. Amounts paid to settle any of these matters may be material.
Agreements entered into as a part of any settlement could also materially
adversely affect Triad. Any current or future investigations or actions could
have a material adverse effect on Triad's results of operations or financial
position.
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, and results of
operations or prospects.
Income Taxes
The IRS is in the process of conducting an examination of the federal
income tax return of Triad for the calendar year ended December 31, 1999, the
federal income tax returns of Quorum for the fiscal years ended June 30, 1996
through 2000 and the partnership returns of income for certain joint ventures
where Quorum owns a majority interest for the fiscal years ended June 30, 1997
and 1998. The IRS has proposed adjustments with respect to the fiscal years
ended June 30, 1996 through 1998 but, to date, has not proposed adjustments with
respect to any other years. The most significant adjustments proposed involve
the tax accounting methods adopted for computing bad debt expense, the valuation
of purchased hospital property and equipment and related depreciable lives,
income recognition related to estimated cost report settlements and the loss
calculation on a taxable liquidation of a subsidiary. The IRS has recently
proposed a settlement with respect to the examination of the federal income tax
returns of Quorum for the fiscal years ended June 30, 1996 through June 30,
1998, which Triad is currently considering. Triad will protest substantially all
of the proposed adjustments that are not settled both on behalf of itself and as
successor-in-interest to Quorum and on behalf of the joint ventures through the
appeals process of the IRS.
In the opinion of management, the ultimate outcome of the IRS examinations
currently under way will not have a material effect on Triad's results of
operations or financial position.
20
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 9 -- CONTINGENCIES (continued)
HCA Litigation and Investigations
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 below. 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 below.
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 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, 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 terminated its contract thereafter.
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
21
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 9 -- CONTINGENCIES (continued)
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. On July 31, 2001, the government filed a
motion to order payment of the settlement amount by HCA. On August 7, 2001, an
order was entered approving the settlement and directing the payment. On August
10, 2001, the payment was made by HCA. 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 provided
pursuant to Federal health care benefit programs. As part of the criminal
agreement, HCA paid the government $95 million and two non-operating
subsidiaries of HCA 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 Centers for Medicare and Medicaid Services (formerly known
as the Health Care Financing Administration), a United States
22
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 9 -- CONTINGENCIES (continued)
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 Triad's hospitals formerly owned
by Quorum have received such notices. HCA or its predecessors owned these
hospitals during the period covered by the notices. HCA is obligated to
indemnify Triad for liabilities arising out of cost reports filed during these
periods.
HCA has 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 above. 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, and results of operations or prospects.
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. 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, and results of operations or prospects in future periods.
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 10 - 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.
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141")
and Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"), which are required to be adopted in fiscal
years beginning after December 15, 2001. SFAS 141 supersedes Accounting
Principles Board Opinion No. 16 "Business Combinations" and Statement of
Financial Accounting Standards No. 28 "Accounting for Preacquisition
Contingencies of Purchased Enterprises" and eliminates pooling of interests
accounting for business combinations for transactions entered into after July 1,
2001. The adoption of SFAS 141 will not have a significant impact on the
results of operations or the financial condition of Triad. SFAS 142 supersedes
Accounting Principles Board Opinion
23
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS (continued)
No. 17 "Intangible Assets" which changes the accounting for goodwill. The
adoption of SFAS 142 will eliminate the periodic amortization of goodwill and
institute an annual review of the fair value of goodwill. Impairment of
goodwill would be recorded if the fair value of the goodwill is less than the
book value. Goodwill amortization was $10.5 million and $1.7 million for the
three months ended September 30, 2001 and 2000, respectively, and $19.8 million
and $5.1 million for the nine months ended September 30, 2001 and 2000,
respectively.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which is required to be adopted in
fiscal years beginning after December 15, 2001 with early application
encouraged. SFAS 144 supercedes Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" for the disposal of
a segment of a business. SFAS 144 establishes a single accounting model, based
on the framework established in SFAS 121, for long-lived assets to be disposed
of by sale and resolves implementation issues related to SFAS 121 by removing
goodwill from its scope. Triad has not yet determined the effect on results of
operations or the financial condition of adoption of SFAS 144.
24
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
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. Triad is the acquiror for accounting purposes based on several
considerations including, in particular, that the former Quorum shareholders are
not able to replace a majority of Triad's board of directors until at least the
2003 annual meeting of shareholders. Under the terms of the merger 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 preliminary 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 was approximately $2.4 billion.
On May 2, 2001, Triad sold two of the acute care hospitals acquired in the
merger with Quorum for $38.0 million plus $8.2 million for working capital.
Additionally, two hospitals acquired in the merger with Quorum were designated
as held for sale prior to the completion of the merger. The preliminary
purchase price allocation of these assets is equal to the estimated sales prices
of the hospitals plus the anticipated cash flows for their estimated holding
period and the estimated interest expense on the incremental debt incurred for
the purchase of the hospitals. On August 7, 2001, Triad sold one of the two
hospitals. The results of operations of this entity are not included in Triad's
results of operations. Triad has decided not to sell the remaining hospital
that was originally designated as held for sale. The assets of this hospital
have been reallocated as if the hospital had never been designated as held for
sale. The cumulative effect of this hospital's results of operations from May
1, 2001 through June 30, 2001 are included in Triad's results of operations in
the three months ended September 30, 2001. The cumulative effect was not
significant to pre-tax income from continuing operations.
Subsequent to the merger, Triad recorded charges of approximately $31.8
million associated with coordinating Quorum's accounting policies, practices and
estimation processes with those of Triad. These charges included an $8.3 million
pre-tax reduction to revenue, $18.5 million pre-tax increase in provision for
doubtful accounts and $5.0 million additional income tax provision.
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 47 hospitals (after
the sale of three Quorum hospitals subsequent to the acquisition) and 14
ambulatory surgery centers in 17 states.
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 and nine months ended September 30, 2001 to
the three and nine months ended September 30, 2000.
Information regarding HCA included in this Report on Form 10-Q is derived
from public statements made by HCA and reports and other information filed by
HCA with the Securities and Exchange Commission.
FORWARD LOOKING STATEMENTS
This "Management's Discussion and Analysis of Financial Condition and Results
of Operations" contains disclosures which are "forward-looking statements."
Forward-looking statements include all statements that do not relate solely to
historical or current facts, and can be identified by the use of words such as
"may", "believe", "will", "expect", "project", "estimate", "anticipate", "plan"
or "continue". These forward-looking statements are based on the current plans
and expectations of 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,
25
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
. 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 and nurses,
. 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 principles,
. 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,
. the ability to obtain adequate levels of general and professional liability
insurance,
. 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
As discussed previously, Triad completed the merger with Quorum on April
27, 2001. The effective date of the transaction for accounting purposes was May
1, 2001. Triad also acquired the remaining 50% interest in one of its joint
ventures effective January 1, 2001 and two hospitals in the fourth quarter of
2000. The acquisitions contributed net revenue of $510.4 million and $882.0
million in the three and nine months ended September 30, 2001, respectively.
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 were further
mitigated by the Benefits Improvement Protection Act of 2000 ("BIPA").
Additional reimbursement from BIPA was approximately $6.0 million and $11.0
million in the three and nine months ended September 30, 2001, respectively, and
Triad anticipates receiving approximately $6.0 million in additional
reimbursement during the remainder of 2001. The Balanced Budget Act has
accelerated a shift by certain Medicare beneficiaries from traditional Medicare
coverage to medical coverage that is 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.
26
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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. The Balanced Budget Act contained provisions requiring a
prospective payment system (PPS) to be implemented for outpatient hospital
services. Outpatient PPS was implemented on August 1, 2000, and the effect
reduced reimbursement rates for outpatient services in 2001 compared to 2000.
Outpatient revenues were 47.0% and 44.7% of patient revenues for the three
months ended September 30, 2001 and 2000, respectively, and 45.8% and 45.3% of
patient revenues for the nine months ended September 30, 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 $23.9 million
as of September 30, 2001.
27
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 and nine
months ended September 30, 2001 and 2000 (dollars in millions, except per share
amounts and ratios):
For the three months ended For the nine months ended
--------------------------- -------------------------
2001 2000 2001 2000
------ ------ ------ ------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ----------
Revenues................................... $829.5 100.0 $301.3 100.0 $1,838.5 100.0 $915.4 100.0
Salaries and benefits...................... 369.4 44.5 125.4 41.6 802.0 43.6 376.2 41.1
Supplies................................... 127.3 15.3 44.7 14.8 285.3 15.5 136.9 14.9
Other operating expenses................... 155.1 18.7 63.4 21.1 348.2 18.9 192.7 21.1
Provision for doubtful accounts............ 66.3 8.0 28.4 9.4 171.7 9.3 78.1 8.5
Depreciation and amortization.............. 55.3 6.7 20.9 6.9 122.4 6.7 62.1 6.8
Interest expense, net...................... 39.5 4.8 14.4 4.8 88.7 4.8 42.9 4.7
ESOP expense............................... 2.5 0.3 2.0 0.7 6.9 0.4 4.7 0.5
Gain on sale of assets..................... (0.7) (0.1) (0.2) (0.1) (1.1) (0.1) (4.6) (0.5)
Impairment of long-lived assets............ -- -- -- -- -- -- 0.9 0.1
------ ----- ------ ----- -------- ----- ------ -----
814.7 98.2 299.0 99.2 1,824.1 99.2 889.9 97.2
------ ----- ------ ----- -------- ----- ------ -----
Income from continuing operations
before minority interests, equity in
earnings and income tax provision...... 14.8 1.8 2.3 0.8 14.4 0.8 25.5 2.8
Minority interests in earnings of
consolidated entities................. (2.5) (0.3) (1.9) (0.6) (6.5) (0.4) (6.3) (0.7)
Equity in earnings (loss) of affiliates.... 4.7 0.6 (0.2) (0.1) 8.1 0.4 (0.6) (0.1)
------ ----- ------ ----- -------- ----- ------ -----
Income from continuing operations
before income tax provision........... 17.0 2.1 0.2 0.1 16.0 0.8 18.6 2.0
Income tax provision....................... (10.5) (1.3) (1.2) (0.4) (20.6) (1.1) (10.5) (1.1)
------ ----- ------ ----- -------- ----- ------ -----
Income (loss) from continuing operations... $ 6.5 0.8 $ (1.0) (0.3) $ (4.6) (0.3) $ 8.1 0.9
====== ===== ====== ===== ======== ===== ====== =====
Income (loss) from continuing
operations per common share
Basic................................... $ 0.09 $ (0.03) $ (0.09) $ 0.26
Diluted................................. $ 0.09 $ (0.03) $ (0.09) $ 0.24
EBITDA (a)................................ $ 116.1 $ 39.2 $ 239.4 $ 130.9
Number of hospitals at end of period (b)
Owned and managed....................... 44 25 44 25
Joint ventures.......................... 1 2 1 2
Leased to others........................ 2 2 2 2
-------- -------- ---------- --------
Total................................... 47 29 47 29
Licensed beds at end of period (c)........ 7,700 3,596 7,700 3,596
Available beds at end of period (d)....... 6,918 3,158 6,918 3,158
Admissions (e)
Owned and managed....................... 70,312 30,924 166,074 95,393
Joint ventures.......................... 1,448 2,917 4,382 8,322
-------- -------- ---------- --------
Total................................... 71,760 33,841 170,456 103,715
Adjusted admissions (f)................... 120,066 54,199 280,493 164,324
Outpatient visits......................... 852,268 322,466 1,903,379 963,043
Inpatient surgeries....................... 26,901 11,249 61,278 33,777
Outpatient surgeries...................... 72,284 39,960 176,227 122,344
Total surgeries........................... 99,185 51,209 237,505 156,121
Average length of stay (g)................ 4.9 4.3 4.7 4.4
Outpatient revenue percentage............. 47.0% 44.7% 45.8% 45.3%
Inpatient revenue per admission........... $ 5,809 $ 5,220 $ 5,624 $ 5,071
Outpatient revenue per outpatient visit... $ 454 $ 405 $ 414 $ 416
Patient revenue per adjusted admission.... $ 6,419 $ 5,387 $ 6,142 $ 5,381
(a) EBITDA is defined as income (loss) from continuing operations 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
28
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 for the joint ventures
and facilities leased to others, except for admissions.
(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 are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "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.
Three Months Ended September 30, 2001 and 2000
Income from continuing operations before income taxes increased to $17.0
million in the three months ended September 30, 2001 from $0.2 million in the
three months ended September 30, 2000. The acquisitions increased pre-tax income
approximately $39.8 million. Pre-tax income from same facility operations
increased $10.0 million. Same facility is defined as facilities that were owned
and consolidated in both periods. The increases were offset by an increase in
interest expense of $25.1 million primarily related to the additional
indebtedness incurred in the acquisition of Quorum. Also, corporate overhead
increased $8.4 million in the three months ended September 30, 2001 compared to
the three months ended September 30, 2000 due primarily to additional staffing
and other costs due to the merger.
Revenues increased to $829.5 million in the three months ended September
30, 2001 from $301.3 million in the three months ended September 30, 2000. Same
facility revenues increased $32.0 million or 11.1% in the three months ended
September 30, 2001 compared to September 30, 2000. For the three months ended
September 30, 2001 compared to the three months ended September 30, 2000, same
facility admissions increased 4.8%, adjusted admissions increased 3.0%, and
revenue per adjusted admissions increased 7.3%. Same facility outpatient visits
increased 1.0%, outpatient revenue per visit increased 12.9% and surgeries
increased 4.0% Revenues for facilities acquired were $510.4 million in the
three months ended September 30, 2001. The acquired facilities had admissions
of 39,578, adjusted admissions of 67,282, outpatient visits of 490,287 and
surgeries of 48,066. The increase in revenues was partially offset by the
facilities that were sold or closed. In the three months ended September 30,
2000, the sold or closed facilities had revenues of $14.2 million. The
facilities that were sold or closed had admissions of 1,596, adjusted admissions
of 2,941, outpatient visits of 17,737 and surgeries of 2,077 in the three months
ended September 30, 2000.
Salaries and benefits (which includes contract nursing), as a percentage of
revenues, increased to 44.5% in the three months ended September 30, 2001 from
41.6% in the three months ended September 30, 2000. Same facility salaries and
benefits increased 0.9% as a percentage of revenue in the three months ended
September 30, 2001 compared to the three months ended September 30, 2000. This
was due primarily to an increase in the number of full time equivalent employees
primarily at the corporate office. This was partially offset by productivity
increases. Salaries and benefits for the acquired facilities, as a percentage
of revenue, were 45.9% in the three months ended September 30, 2001. This
includes approximately $1.4 million in duplicate overhead cost and stay-on
bonuses at the former Quorum corporate office. For the three months ended
September 30, 2000, salaries and benefits for the facilities sold or closed were
$6.8 million.
Supplies increased as a percentage of revenues to 15.3% in the three months
ended September 30, 2001 from 14.8% in the three months ended September 30,
2000. Same facility supplies increased 0.7% as a percentage of revenue in the
three months ended September 30, 2001 compared to the three months ended
September 30, 2000. This was due primarily to higher patient acuity and supply
cost increases. Supplies for the acquired facilities, as a percentage of
revenue, were 15.3% in the three months ended September 30, 2001. For the three
months ended September 30, 2000, supplies for the facilities sold or closed were
$2.1 million.
29
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 18.7%
in the three months ended September 30, 2001 compared to 21.1% in the three
months ended September 30, 2000. Same facility other operating expenses
increased 0.4% as a percentage of revenue in the three months ended September
30, 2001 compared to the three months ended September 30, 2000 due primarily to
an increase in professional fees at the corporate office. Other operating
expenses for the acquired facilities, as a percentage of revenue, were 17.2% in
the three months ended September 30, 2001. For the three months ended September
30, 2000, other operating expenses for the facilities sold or closed were $4.7
million.
Provision for doubtful accounts, as a percentage of revenues, decreased to
8.0% in the three months ended September 30, 2001 compared to 9.4% in the three
months ended September 30, 2000. Same facility provision for doubtful accounts
decreased 1.0% as a percentage of revenue in the three months ended September
30, 2001 compared to the three months ended September 30, 2000. This was due
primarily to adjustments in estimates at three facilities in the three months
ended September 30, 2000. Provision for doubtful accounts for the acquired
facilities, as a percentage of revenue, was 7.6% in the three months ended
September 30, 2001. For the three months ended September 30, 2000, provision
for doubtful accounts for the facilities sold or closed was $0.6 million.
Depreciation and amortization as a percentage of revenues decreased to 6.7%
in the three months ended September 30, 2001 compared to 6.9% in the three
months ended September 30, 2000, due primarily to increased revenues.
Interest expense, which was offset by $0.4 million and $1.6 million of
interest income in the three months ended September 30, 2001 and 2000,
respectively, increased to $39.5 million in the three months ended September 30,
2001 from $14.4 million in the three months ended September 30, 2000, due to a
decrease in interest income and additional debt outstanding primarily from
indebtedness incurred to finance the Quorum acquisition.
Gain on sale of assets was $0.7 million in the three months ended September
30, 2001 as a result of the sale of undeveloped land in Arizona.
Minority interests increased to $2.5 million in the three months ended
September 30, 2001 compared to $1.9 million in the three months ended September
30, 2000, due primarily to the Quorum acquisition.
Equity in earnings (loss) of affiliates increased to $4.7 million in the
three months ended September 30, 2001 from $(0.2) million in the three months
ended September 30, 2000. This was due primarily to the Quorum acquisitions.
Income tax provision was $10.5 million in the three months ended September
30, 2001 compared to $1.2 million in the three months ended September 30, 2000.
Triad's effective tax rate is impacted by the effect of nondeductible goodwill
amortization and ESOP expense.
Nine Months Ended September 30, 2001 and 2000
Income from continuing operations decreased to $16.0 million in the nine
months ended September 30, 2001 from $18.6 million in the nine months ended
September 30, 2000. The change in pre-tax income was attributable primarily to
$26.3 million of charges associated with coordinating Quorum's accounting
policies, practices and estimation processes with those of Triad discussed
previously and an increase in interest expense of $45.8 million primarily
related to the additional indebtedness incurred in the acquisition of Quorum.
Triad incurred $3.8 million of non-cash stock compensation expense relating to
stock option vesting acceleration that was incurred due to the acquisition of
Quorum and $1.4 million of non-cash stock compensation from options granted to a
charitable foundation. Corporate overhead increased $11.8 million in the nine
months ended September 30, 2001 compared to the nine months ended September 30,
2000 due primarily to additional staffing and other costs due to the merger.
Additionally, Triad recognized a $4.2 million gain on sale of a joint venture
interest during the nine months ended September 30, 2000. The decreases were
offset by $69.9 million of pre-tax income from acquisitions, excluding the
charges discussed above from the acquisition of Quorum. Pre-tax income from
same facility operations increased $20.1 million which included $1.5 million of
unfavorable adjustments at one facility from write-offs of certain expenditures
that were previously capitalized in the nine months ended September 30, 2000.
Same facility equity in earnings increased $0.7 million due primarily to $1.1
million of unfavorable adjustments from various changes of estimates and other
adjustments during the nine months ended September 30, 2000.
30
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Revenues increased to $1,838.5 million in the nine months ended September
30, 2001 from $915.4 million in the nine months ended September 30, 2000. Same
facility revenues increased $86.0 million or 9.9% in the nine months ended
September 30, 2001 compared to September 30, 2000. For the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000, same
facility admissions increased 5.5%, adjusted admissions increased 4.0% and
revenues per adjusted admissions increased 5.5%. Outpatient visits increased
3.9%, outpatient revenue per visit increased 4.2% and surgeries increased 3.8%.
Another factor in the increase in revenues was $4.2 million in favorable prior
year cost report settlements during 2001. Revenues for the nine months ended
September 30, 2000 included $4.7 million in favorable prior year cost report
settlements and contractual estimate adjustments and $5.2 million in unfavorable
changes of estimate for contractual discounts at one facility. Revenues for
facilities acquired were $882.0 million in the nine months ended September 30,
2001. Revenues for facilities acquired were reduced by $8.3 million associated
with coordinating Quorum's accounting policies, practices and estimation
processes with those of Triad as discussed previously. The acquired facilities
had admissions of 70,913, adjusted admissions of 119,805, outpatient visits of
962,005 and surgeries of 81,941. The increase in revenues was partially offset
by the facilities that were sold or closed. In the nine months ended September
30, 2000, the sold or closed facilities had revenues of $46.0 million, which
included $3.1 million in favorable prior year cost report settlements and
contractual estimates. The facilities that were sold or closed had admissions
of 5,164, adjusted admissions of 9,124, outpatient visits of 56,987 and
surgeries of 6,282, in the nine months ended September 30, 2000.
Salaries and benefits (which include contract nursing), as a percentage of
revenues, increased to 43.6% in the nine months ended September 30, 2001 from
41.1% in the nine months ended September 30, 2000. Same facility salaries and
benefits increased 0.8% as a percentage of revenue in the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000. This
was due primarily to $5.5 million in non-cash stock option expense in 2001, an
increase in the number of full time equivalent employees primarily at the
corporate office and a smaller favorable adjustment relating to Triad's
retirement plan contributions of $1.3 million in 2001 compared to $2.8 million
in 2000. This was partially offset by productivity increases. Salaries and
benefits for the acquired facilities, as a percentage of revenue, were 46.1% in
the nine months ended September 30, 2001. This includes approximately $2.0
million in duplicate overhead costs and stay-on bonuses at the former Quorum
corporate office. For the nine months ended September 30, 2000, salaries and
benefits for the facilities sold or closed were $23.2 million, which included
approximately $1.0 million of severance costs for one facility closed in
February 2000.
Supplies increased as a percentage of revenues to 15.5% in the nine months
ended September 30, 2001 from 14.9% in the nine months ended September 30, 2000.
Same facility supplies increased 0.3% as a percentage of revenue in the nine
months ended September 30, 2001 compared to the nine months ended September 30,
2000. This was due primarily to higher patient acuity and supply cost
increases. Additionally, Triad had unfavorable adjustments of $1.1 million at
one facility from write-off of certain expenditures that were previously
capitalized in the nine months ended September 30, 2000. Supplies for the
acquired facilities, as a percentage of revenue, were 15.7% in the nine months
ended September 30, 2001. For the nine months ended September 30, 2000,
supplies for the facilities sold or closed were $6.0 million.
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 18.9%
in the nine months ended September 30, 2001 compared to 21.1% in the nine months
ended September 30, 2000. Same facility other operating expenses decreased 0.4%
as a percentage of revenue in the nine months ended September 30, 2001 compared
to the nine months ended September 30, 2000. This decrease was due primarily to
the increase in revenues. This was partially offset by an increase in
professional fees at the corporate office. Other operating expenses for the
acquired facilities, as a percentage of revenue, were 17.4% in the nine months
ended September 30, 2001. For the nine months ended September 30, 2000, other
operating expenses for the facilities sold or closed were $12.4 million.
Provision for doubtful accounts, as a percentage of revenues, increased to
9.3% in the nine months ended September 30, 2001 compared to 8.5% in the nine
months ended September 30, 2000. Same facility provision for doubtful accounts
increased 0.4% as a percentage of revenue in the nine months ended September 30,
2001 compared to the nine months ended September 30, 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 9.7% in
the nine months ended September 30, 2001. As discussed previously, included in
the provision for doubtful accounts were $18.5 million in charges associated
with coordinating Quorum's accounting policies, practices and estimation process
with those of Triad.
31
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
For the nine months ended September 30, 2000, provision for doubtful accounts
for the facilities sold or closed was $2.4 million.
Depreciation and amortization remained relatively constant as a percentage
of revenues in the nine months ended September 30, 2001 compared to the nine
months ended September 30, 2000.
Interest expense, which was offset by $1.1 million and $4.5 million of
interest income in the nine months ended September 30, 2001 and 2000,
respectively, increased to $88.7 million in the nine months ended September 30,
2001 from $42.9 million in the nine months ended September 30, 2000, due to a
decrease in interest income and additional debt outstanding primarily from
indebtedness incurred to finance the Quorum acquisition.
Gain on sale of assets was $4.6 million during the nine months ended
September 30, 2000, due primarily to the sale of Triad's partnership interest in
a rehabilitation hospital.
Impairments on long-lived assets were $0.9 million during the nine months
ended September 30, 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 remained relatively constant in the nine months ended
September 30, 2001 compared to the nine months ended September 30, 2000.
Equity in earnings (loss) of affiliates increased to $8.1 million in the
nine months ended September 30, 2001 from $(0.6) million in the nine months
ended September 30, 2000, primarily due to the Quorum acquisition and $1.1
million of unfavorable adjustments from various changes of estimates and other
adjustments during the nine months ended September 30, 2000.
Income tax provision was $20.6 million in the nine months ended September
30, 2001 compared to $10.5 million in the nine months ended September 30, 2000.
As discussed previously, included in the income tax provision for the nine
months ended September 30, 2001 was $5.0 million in charges associated with
coordinating Quorum's accounting policies, practices and estimation processes.
Triad's effective tax rate is impacted by the effect of nondeductible goodwill
amortization and ESOP expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $241.4 million in the nine months
ended September 30, 2001 compared to $62.4 million in the nine months ended
September 30, 2000. The increase was due to the acquisition of Quorum, improved
same facility operations in 2001 compared to 2000 and a decrease in accounts
payable and other current liabilities during the nine months ended September 30,
2000 from payments made to HCA for capital expenditures funded by HCA in 1999.
Cash used in investing activities was $1,415.1 million in the nine months
ended September 30, 2001 compared to $101.7 million in the nine months ended
September 30, 2000. This was due to $1,379.9 million, net of cash acquired, paid
for the acquisitions of Quorum and SouthCrest Hospital, which are discussed
elsewhere. This was offset by a $37.0 million loan repayment from the co-
venturer in SouthCrest Hospital during the nine months ended September 30, 2000.
Also, Triad received $71.8 million in proceeds on the sale of three hospitals
acquired from Quorum and one hospital closed during 2000 in the nine months
ended September 30, 2001 compared to $4.0 million in proceeds on the sale of its
partnership interest in a rehabilitation hospital during the nine months ended
September 30, 2000. Triad may expend up to $130 million ($100 million for
expansion) in capital expenditures for the remainder of 2001.
Cash provided by financing activities was $1,188.0 million in the nine
months ended September 30, 2001 compared to cash used in financing activities of
$13.5 million in the nine months ended September 30, 2000. This was due to the
financing activity as part of the Quorum acquisition.
As part of the merger with Quorum, 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 consisted of a Tranche
A term loan of $250 million presently bearing interest at LIBOR plus 3.0% (6.53%
at September 30, 2001) with principal amounts due beginning 2001 through 2007, a
Tranche B term loan of $550 million presently bearing interest at LIBOR plus
3.0% (6.53% at September 30, 2001) with principal amounts due
32
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
beginning 2001 through 2008, an Asset Sale term loan of $150 million presently
bearing interest at LIBOR plus 3.0% (6.53% at September 30, 2001) 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 $10.0 million was outstanding at September 30, 2001, that
presently bears interest at LIBOR plus 3.0% (5.67% at September 30, 2001). The
revolving credit line reduces to $225 million in 2004, $200 million in 2005 and
matures in 2007. As of September 30, 2001, Triad had $2.5 million in letters of
credit outstanding which reduce the amount available under the revolving credit
line. The revolving credit line was repaid in October 2001.
Triad has repaid $71.0 million on the Asset Sale term loan through
September 30, 2001 from the proceeds received on the facility sales described
previously. On November 1, 2001, Triad repaid an additional $56.3 million on
the Asset Sale term loan primarily from the sales proceeds discussed below.
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, including but not
limited to, new indebtedness, asset sales and use of proceeds therefrom, capital
expenditures and dividends.
In connection with the debt financing, Triad incurred $47.4 million in debt
issue costs, which will be amortized over the period the indebtedness is
outstanding.
At September 30, 2001, Triad had working capital of $379.8 million.
Management expects that operations and working capital facilities will provide
sufficient liquidity for the remainder of fiscal 2001.
On November 1, 2001, Triad sold its hospital in Phoenix, Arizona for $55.3
million including working capital. The proceeds from the sale were used to
reduce the Asset Sale term loan. The book value of the facility at September
30, 2001 was $33.2 million. This facility had revenues of $16.9 million and
$15.9 million in the three months ended September 30, 2001 and 2000,
respectively, and $52.9 million and $48.3 million in the nine months ended
September 30, 2001 and 2000, respectively. This facility had pre-tax income
(loss) of $0.0 million and $(1.0) million in the three months ended September
30, 2001 and 2000, respectively, and $1.0 million and $(1.0) million in the nine
months ended September 30, 2001 and 2000, respectively.
On August 7, 2001, Triad sold its hospital in Baton Rouge, Louisiana, that
it acquired in the Quorum transaction and was designated as held for sale, for
$19.0 million plus assumed liabilities of $2.3 million. The purchaser is
affiliated with one member of Triad's board of directors. The sales price was
the amount of the purchase price allocated to the hospital and, therefore, no
gain or loss was recorded.
Triad closed its acute care hospital in San Diego, California on November
30, 2000. On June 29, 2001, Triad sold the remaining assets of this facility
for a net sales price of $6.6 million and recognized a minimal gain on the sale.
As discussed previously, Triad sold two hospitals in Minot, North Dakota
that it acquired from Quorum on May 2, 2001 for $38.0 million plus $8.2 million
in working capital. The sales price was the amount of the purchase price
allocated to the hospitals and, therefore, no gain or loss on the sale was
recorded.
Triad had engaged a financial advisor to assist it in exploring strategic
alternatives with respect to the management services business it acquired in the
Quorum transaction, including a possible sale. After evaluating whether to sell
or continue operating the management service business, Triad determined that the
business is more valuable to Triad than to potential buyers and it will continue
to operate the business.
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
33
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 $67 million and
is expected to be completed by the third quarter of 2002. As of September 30,
2001, approximately $8.5 million had been spent for this project.
Triad is continuing to build a replacement hospital that was initiated by
Quorum in Vicksburg, Mississippi. The total project cost of this facility is
approximately $108 million and the facility is scheduled to be completed in the
first quarter of 2002. As of September 30, 2001, approximately $33 million of
expenditures remain to be made on the project.
Subsequent to September 30, 2001, Triad commenced development of a
replacement hospital in Bentonville, Arkansas, which is expected to be completed
in third quarter of 2003. The anticipated cost of the replacement facility is
approximately $63 million.
The above referenced projects 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.
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141")
and Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"), which are required to be adopted in fiscal
years beginning after December 15, 2001. SFAS 141 supersedes Accounting
Principles Board Opinion No. 16 "Business Combinations" and Statement of
Financial Accounting Standards No. 28 "Accounting for Preacquisition
Contingencies of Purchased Enterprises" and eliminates pooling of interests
accounting for business combinations for transactions entered into after July 1,
2001. The adoption of SFAS 141 will not have a significant impact on the
results of operations or the financial condition of Triad. SFAS 142 supersedes
Accounting Principles Board Opinion No. 17 "Intangible Assets" which changes the
accounting for goodwill. The adoption of SFAS 142 will eliminate the periodic
amortization of goodwill and institute an annual review of the fair value of
goodwill. Impairment of goodwill would be recorded if the fair value of the
goodwill is less than the book value. Goodwill amortization was $10.5 million
and $1.7 million for the three months ended September 30, 2001 and 2000,
respectively, and $19.8 million and $5.1 million for the nine months ended
September 30, 2001 and 2000, respectively.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which is required to be adopted in
fiscal years beginning after December 15, 2001 with early application
encouraged. SFAS 144 supercedes Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") and the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions" for the disposal of
a segment of a business. SFAS 144 establishes a single accounting model, based
on the framework established in SFAS 121, for long-lived assets to be disposed
of by sale and resolves implementation issues related to SFAS 121 by removing
goodwill from its scope. Triad has not yet determined the effect on results of
operations or the financial condition of adoption of SFAS 144.
CONTINGENCIES
Merger Litigation
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
34
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Davidson County, Tennessee, on behalf of all public stockholders of Quorum. The
complaint alleged, among other things, that Quorum's directors breached their
fiduciary duties to Quorum and its stockholders in agreeing to the merger at an
unfair price.
In April 2001, the parties negotiated a settlement that would result in the
dismissal of the action. The settlement was subject to a number of conditions,
including Court approval. Court approval was obtained, and on October 22, 2001
the court dismissed the action pursuant to the terms of the agreed upon
settlement.
False Claims Act Litigation
At a meeting in September 1998, Quorum learned from the government that the
government would likely join in a lawsuit filed against Quorum under the False
Claims Act. The suit was filed in January 1993 by a former employee of a
hospital managed by a Quorum subsidiary. These lawsuits, commonly known as qui
tam actions, are filed "under seal." That means that the claims are kept secret
until the government decides whether to join the case. The person who files the
lawsuit is called a "relator." The government joined the case against Quorum in
October 1998. The relator's lawsuit named Quorum, QHR, HCA and all hospitals
that Quorum or HCA owned, operated or managed from 1984 through 1997, as
defendants. The unsealed complaint, prepared by the relator, alleged that
Quorum knowingly prepared and caused to be filed cost reports which claimed
payments from Medicare and other government payment programs greater than the
amounts due.
The United States government elected to intervene in, or join, the lawsuit;
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.
On April 23, 2001, a settlement agreement was signed and a stipulation of
dismissal was filed with the court dismissing all claims against Quorum, QHR 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 in April 2001. The settlement agreement
also provides, on certain conditions, for a release of all hospitals currently
or formerly managed by QHR 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.
On August 10, 2001, the Office of Inspector General agreed to suspend
Quorum's obligations under this corporate integrity agreement until November 1,
2001, in exchange for Triad's agreement to negotiate a corporate integrity
agreement that would also include the hospitals owned by Triad at the time of
its merger with Quorum, as well as hospitals Triad might subsequently acquire.
(In the distribution agreement with HCA at the time of its spin-off, Triad
agreed to participate in the negotiation of a corporate integrity agreement with
the Office of Inspector General.) These negotiations of a "combined" corporate
integrity agreement were concluded and the agreement became effective on
November 1, 2001.
Other Qui Tam Actions and Related Investigations
In May 1998, Quorum was informed that it was a defendant in another qui tam
action involving home health services provided by two of its owned hospitals and
alleging that Quorum had violated Medicare laws. This
35
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
action was filed under seal in June 1996 by a former employee whom Quorum fired
in April 1996. The United States Attorney's Office allowed Quorum an opportunity
to review the results of the government's investigations and discuss the
allegations made in the action prior to the government making a decision to
intervene as a plaintiff. Quorum cooperated fully with the United States
Attorney's Office and provided additional information and made employees
available for interviews.
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 Office of the
Inspector General, which was terminated upon the effective date of the corporate
integrity agreement entered into in connection with the False Claims Act
litigation 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.
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.
Quorum accrued $3.5 million on these items prior to the merger. 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. As Quorum's successor, Triad is also a defendant in certain other
qui tam complaints, in which the government has declined to intervene. At this
time Triad cannot take a position on how it will respond on these matters.
Stockholder Class Action Regarding the Securities Exchange Act of 1934
In October and November 1998, some of Quorum's stockholders filed lawsuits
against Quorum in the U.S. District Court for the Middle District of Tennessee.
In January 1999, the court consolidated these cases into a single lawsuit (M.D.
Tenn. No. 3-98-1004). The plaintiffs filed an amended complaint in March 1999.
The plaintiffs seek to represent a class of plaintiffs who purchased Quorum's
common stock from October 25, 1995 through October 21, 1998, except for Quorum's
insiders and their immediate families. The consolidated complaint names Quorum,
several of Quorum's former officers, and one of Quorum's former outside
directors, as defendants.
The complaint alleges that defendants violated the Securities Exchange Act
of 1934. The plaintiffs claim that Quorum materially inflated Quorum's net
revenues during the class period by including in those net revenues amounts
received from the settlement of cost reports that had allegedly been filed in
violation of applicable Medicare regulations years earlier and that, because of
this practice, this statement, which first appeared in Quorum's Form 10-K filed
in September 1996, was false: "The Company believes that its owned hospitals are
in substantial compliance with current federal, state, local, and independent
review body regulations and standards." In May 1999, Quorum filed a motion to
dismiss the complaint. On November 13, 2000, the judge denied Quorum's motion
to dismiss the complaint against Quorum and James E. Dalton, Jr., Quorum's
former President/CEO. The judge granted Quorum's motion to dismiss as to all
other defendants. The judge has heard oral argument on Mr. Dalton's motion to
reconsider the judge's denial of Mr. Dalton's motion to dismiss and on April 19,
2001 granted Mr. Dalton's motion to dismiss. As Quorum's successor, Triad
intends to vigorously defend the claims and allegations in this action.
36
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
At this time Triad cannot predict the final effect or outcome of any of the
ongoing investigations, settlement negotiations or the class or qui tam actions.
If Quorum's hospitals are found to have violated Federal or state laws relating
to Medicare, Medicaid or other government programs, then Triad may be required
to pay substantial fines and civil and criminal penalties and also may be
excluded from participation in the Medicare and Medicaid programs and other
government programs. Similarly, the amount of damages sought in the qui tam
actions are or in the future may be substantial. Triad could be subject to
substantial costs resulting from defending, or from an adverse outcome in any
current or future investigations, administrative proceedings or litigation. In
an effort to resolve one or more of these matters, Triad may choose to negotiate
a settlement. Amounts paid to settle any of these matters may be material.
Agreements entered into as a part of any settlement could also materially
adversely affect Triad. Any current or future investigations or actions could
have a material adverse effect on Triad's results or operations or financial
position.
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, and results of
operations or prospects.
Income Taxes
The IRS is in the process of conducting an examination of the federal
income tax return of Triad for the calendar year ended December 31, 1999, the
federal income tax returns of Quorum for the fiscal years ended June 30, 1996
through 2000 and the partnership returns of income for certain joint ventures
where Quorum owns a majority interest for the fiscal years ended June 30, 1997
and 1998. The IRS has proposed adjustments with respect to the fiscal years
ended June 30, 1996 through 1998 but, to date, has not proposed adjustments with
respect to any other years. The most significant adjustments proposed involve
the tax accounting methods adopted for computing bad debt expense, the valuation
of purchased hospital property and equipment and related depreciable lives,
income recognition related to estimated cost report settlements and the loss
calculation on a taxable liquidation of a subsidiary. The IRS has recently
proposed a settlement with respect to the examination of the federal income tax
returns of Quorum for the fiscal years ended June 30, 1996 through June 30,
1998, which Triad is currently considering. Triad will protest substantially all
of the proposed adjustments that are not settled both on behalf of itself and as
successor-in-interest to Quorum and on behalf of the joint ventures through the
appeals process of the IRS.
In the opinion of management, the ultimate outcome of the IRS examinations
currently under way will not have a material effect on Triad's results of
operations or financial position.
HCA Litigation and Investigations
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 below. 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 below.
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 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,
37
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
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 terminated its contract thereafter.
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. On July 31, 2001, the government filed a
motion to order payment of the settlement amount by the HCA. On August 7, 2001,
an order was entered approving the settlement and directing the payment. On
August 10, 2001, the payment was made by HCA. 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
38
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (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 two non-operating subsidiaries of HCA 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 Centers for Medicare and Medicaid Services ("CMS") (formerly
known as 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 Triad's hospitals formerly owned by Quorum have
received such notices. HCA or its predecessors owned these hospitals during the
period covered by the notices. HCA is obligated to indemnify Triad for
liabilities arising out of cost reports filed during these periods.
HCA has 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 above. 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, and results of operations or prospects.
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. 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,
39
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
if any, cannot be predicted. These matters could have a material adverse effect
on Triad's business, financial condition, and results of operations or prospects
in future periods.
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 in or proposed by Congress and 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 a 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, CMS acting under the Health Insurance Portability and
Accountability Act of 1996 released final regulations, which would require
compliance by April 2003, acting under the Health Insurance Portability and
Accountability Act of 1996 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 have 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 $889.0
million of long-term debt at September 30, 2001 was subject to variable rates of
interest, while the remaining balance in long-term debt of $925.2 million at
September 30, 2001 was subject to fixed rates of interest. The estimated fair
value of Triad's total long-term debt was $1,866.0 million at September 30,
2001. The estimates of fair value are based upon the quoted market prices for
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 decrease
in future pre-tax earnings would be approximately $8.9 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.
40
Part II: Other Information
Item 1: LEGAL PROCEEDINGS
Incorporated by reference from NOTE 9 to the Condensed Consolidated Financial
Statements contained in Part I, Item 1.
Item 6: Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
None
(b) Reports on Form 8-K filed during the quarter ended September 30, 2001:
On July 31, 2001, Triad reported that it had issued a press release announcing
their consolidated financial results for the three months ended June 30, 2001.
On August 30, 2001, Triad reported that it had issued a press release announcing
that it would extend its offer to exchange its outstanding unregistered 8 3/4 %
Senior Notes for new 8 3/4 % Series B Senior Notes that have registered under
the Securities Act of 1933, as amended.
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: November 14, 2001 By: /s/BURKE W. WHITMAN
-------------------
Burke W. Whitman
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
41
INDEX TO EXHIBITS
None
42