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 June 30, 2000
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_____
-----
Commission file number 333-84743
Triad Hospitals Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0389776
(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 or address, 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 July 31, 2000, the number of shares of common stock of Triad Hospitals,
Inc. outstanding was 34,288,499, and all of the shares of common stock of Triad
Hospitals Holdings, Inc. were owned by Triad Hospitals, Inc.
Part I: Financial Information
Item 1: Financial Statements
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the periods ended June 30, 2000 and 1999
Unaudited
(Dollars in millions, except per share amounts)
For the three For the six
months ended months ended
------------- ------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Revenues....................................... $ 302.5 $ 340.1 $ 614.1 $ 707.7
Salaries and benefits.......................... 124.4 146.6 250.8 303.5
Supplies....................................... 45.3 48.5 92.2 102.6
Other operating expenses....................... 65.8 79.3 129.3 161.0
Provision for doubtful accounts................ 25.1 33.1 49.7 67.6
Depreciation................................... 18.7 23.9 37.8 49.3
Amortization................................... 1.7 2.4 3.4 5.0
Interest expense allocated from HCA............ -- 5.0 -- 22.7
Interest expense............................... 15.4 9.5 31.4 10.0
Interest income................................ (1.8) (0.6) (2.9) (0.6)
ESOP expense................................... 1.5 0.5 2.7 0.5
Management fees allocated from HCA............. -- 2.1 -- 8.9
Gain on sale of assets......................... (0.2) -- (4.4) --
Impairment of long-lived assets................ -- -- 0.9 33.9
----------- ----------- ----------- -----------
Total operating expenses....................... 295.9 350.3 590.9 764.4
----------- ----------- ----------- -----------
Income (loss) before minority interests,
equity in earnings and income tax (provision)
benefit...................................... 6.6 (10.2) 23.2 (56.7)
Minority interests in earnings of consolidated (2.1) (2.5) (4.4) (4.7)
entities......................................
Equity in earnings (loss) of affiliates........ (0.8) (1.9) (0.4) (1.5)
----------- ----------- ----------- -----------
Income (loss) before income tax (provision) 3.7 (14.6) 18.4 (62.9)
benefit.......................................
Income tax (provision) benefit................. (2.6) 5.1 (9.3) 17.5
----------- ----------- ----------- -----------
Net income (loss).............................. $ 1.1 $ (9.5) $ 9.1 $ (45.4)
=========== =========== =========== ===========
Income (loss) per common share:
Basic...................................... $ 0.03 $ (0.31) $ 0.29 $ (1.51)
=========== =========== =========== ===========
Diluted.................................... $ 0.03 $ (0.31) $ 0.27 $ (1.51)
=========== =========== =========== ===========
Weighted average shares used in income (loss)
per share calculations
Basic...................................... 31,467,170 30,300,016 31,403,514 30,111,116
Diluted.................................... 33,680,419 30,300,016 33,133,075 30,111,116
See notes to the condensed consolidated financial statements.
2
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in millions)
June 30, December 31,
ASSETS 2000 1999
-------- --------
Current assets
--------------
Cash and cash equivalents..................................................... $ 81.7 $ 70.9
Accounts receivable, less allowance for doubtful accounts
of $136.2 at June 30, 2000 and $156.7 at December 31, 1999.................. 138.9 150.6
Inventories................................................................... 32.8 32.5
Deferred income taxes......................................................... 42.4 46.5
Other......................................................................... 60.3 52.9
-------- --------
Total current assets.......................................................... 356.1 353.4
Property and equipment, at cost:
Land.......................................................................... 66.0 63.4
Buildings..................................................................... 498.3 485.8
Equipment..................................................................... 641.7 626.5
Construction in progress...................................................... 44.5 44.8
-------- --------
1,250.5 1,220.5
Accumulated depreciation...................................................... (549.9) (520.8)
-------- --------
700.6 699.7
Intangible assets, net of accumulated amortization............................ 172.4 175.9
Investment in and advances to affiliates...................................... 76.1 103.0
Other......................................................................... 10.1 9.1
-------- --------
Total assets.................................................................. $1,315.3 $1,341.1
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Accounts payable.............................................................. $ 48.5 $ 57.7
Accrued salaries.............................................................. 31.5 32.1
Current portion of long-term debt............................................. 13.4 18.3
Other current liabilities..................................................... 27.9 57.7
-------- --------
Total current liabilities..................................................... 121.3 165.8
Long-term debt................................................................ 530.9 537.1
Deferred taxes and other liabilities.......................................... 40.9 31.3
Minority interests in equity of consolidated entities......................... 47.8 47.0
Stockholders' equity
--------------------
Common stock $.01 par value; 90,000,000 shares authorized; 34,220,198
shares outstanding at June 30, 2000........................................ 0.3 0.3
Additional paid-in capital.................................................... 657.1 653.4
Unearned ESOP compensation and stockholder notes receivable................... (38.4) (40.1)
Accumulated deficit........................................................... (44.6) (53.7)
-------- --------
Total stockholders' equity.................................................... 574.4 559.9
-------- --------
Total liabilities and stockholders' equity.................................... $1,315.3 $1,341.1
======== ========
See notes to the condensed consolidated financial statements.
3
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the periods ended June 30, 2000 and 1999
Unaudited
(Dollars in millions)
For the six
months ended
------------
2000 1999
------ -------
Cash flows from operating activities
Net income (loss)..................................................... $ 9.1 $ (45.4)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Provision for doubtful accounts..................................... 49.7 67.6
ESOP expense........................................................ 2.7 0.5
Minority interests.................................................. 4.4 4.7
Equity in earnings of affiliates.................................... 0.4 1.5
Depreciation and amortization....................................... 41.2 54.3
Deferred income taxes............................................... 9.3 (17.5)
Impairment of long-lived assets..................................... 0.9 33.9
Gain on sale of assets.............................................. (4.4) --
Increase (decrease) in cash from operating assets and liabilities
Accounts receivable............................................... (40.3) (53.1)
Inventories and other assets...................................... (7.5) 8.4
Accounts payable and other current liabilities.................... (38.9) 22.4
Other............................................................. 5.0 4.3
------ -------
Net cash provided by operating activities............................. 31.6 81.6
Cash flows from investing activities
Purchases of property and equipment................................. (35.7) (66.0)
Investment in and advances to affiliates............................ 27.5 (53.9)
Proceeds received on sale of assets................................. 4.0 4.3
Other............................................................... (3.8) 7.2
------ -------
Net cash used in investing activities................................. (8.0) (108.4)
Cash flows from financing activities
Payments of long-term debt.......................................... (11.6) (11.1)
Proceeds from issuance of common stock.............................. 3.0 --
Distributions to minority partners.................................. (4.2) (12.7)
Decrease in intercompany balances with HCA, net..................... -- 106.2
------ -------
Net cash provided by (used in) financing activities.................. (12.8) 82.4
------ -------
Change in cash and cash equivalents................................... 10.8 55.6
Cash and cash equivalents at beginning of period...................... 70.9 --
------ -------
Cash and cash equivalents at end of period............................ $ 81.7 $ 55.6
====== =======
Interest payments..................................................... $ 29.1 $ 26.0
Income tax payments................................................... $ -- $ --
See notes to the condensed consolidated financial statements.
4
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements of Triad Hospitals, Inc. ("Triad"). In the opinion of
management, all adjustments consisting only of normal recurring adjustments
necessary for a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for the year. The
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 1999 included in Triad's Form 10-K.
The balance sheet at December 31, 1999 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.
Certain prior amounts have been reclassified to conform to the current
presentation.
NOTE 2--COMPANY OPERATIONS
As of January 1, 2000, Triad owned or operated 30 hospitals (including one
facility that is leased from others, two facilities that are leased to others
and an investment in two hospitals that are accounted for using the equity
method), 14 free-standing ambulatory surgery centers (including two investments
in ambulatory surgery centers that are accounted for using the equity method)
and related health care entities. Two of these hospitals were designated as held
for sale and Triad expects to complete the sales of these facilities by December
31, 2000.
On February 11, 2000, Triad closed its acute care hospital in Roseburg,
Oregon, which was designated as held for sale. As of June 30, 2000, the carrying
value of this facility was $7.3 million. For the three months ended June 30,
2000 and 1999, this facility had net revenues of $0.1 million and $5.3 million,
respectively, and losses before impairment charges and income tax benefit of
$0.4 million and $1.0 million, respectively. For the six months ended June 30,
2000 and 1999, this facility had net revenues of $1.9 million and $11.6 million,
respectively, and losses before impairment charges and income tax benefit of
$3.6 million and $1.6 million, respectively.
Triad received loan payments from one of its hospital joint ventures of
$37.0 million on February 28, 2000 and $3.7 million on April 11, 2000.
On March 31, 2000, Triad sold its limited partnership interest in a
rehabilitation hospital located in Tucson, Arizona for $4.0 million. A gain of
$4.2 million was recognized on the sale.
On June 1, 2000, Triad's partner in an ambulatory surgery center joint
venture in Arizona contributed the assets of an ambulatory surgery center to the
joint venture. Triad paid its partner $0.6 million for a majority interest in
these assets.
On June 23, 2000, Triad signed a definitive purchase agreement to acquire
hospitals in Denton, Texas and Lewisburg, West Virginia from NetCare Health
Systems, Inc. for a cash price of approximately $107.0 million plus
approximately $10.0 million in working capital. The definitive agreement also
includes the acquisition of a hospital in Statesville, North Carolina, but Triad
has assigned the rights to acquire this hospital to a third party in a
simultaneous closing. Triad expects that the transaction to become effective on
or about October 1, 2000.
NOTE 3 - IMPAIRMENT OF LONG-LIVED ASSETS
During the quarter ended March 31, 2000, Triad entered into negotiations to
cancel one of its physician management contracts, which negotiations are still
ongoing. Accordingly, the carrying value of the long-lived assets associated
with this contract of approximately $1.0 million was reduced to fair value,
based on estimated disposal value, resulting in a non-cash charge of $0.9
million. For the three months ended June 30, 2000 and 1999, this entity
5
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 3 - IMPAIRMENT OF LONG-LIVED ASSETS (continued)
contributed revenues of $0.8 million and $0.9 million respectively, and losses
before impairment charges and income taxes of $0.8 million and $1.4 million,
respectively. For six months ended June 30, 2000 and 1999, this entity
contributed revenues of $1.7 million and $2.0 million, respectively, and losses
before impairment charges and income taxes of $1.6 million and $2.1 million,
respectively.
In the quarter ended March 31, 1999, the carrying value of the long-lived
assets related to certain facilities that were sold during 1999 (3 hospital
facilities), of approximately $50.6 million, was reduced to fair value, based on
estimates of selling values, for a total non-cash charge of $30.8 million. For
the three and six months ended June 30, 1999, these three facilities had net
revenues of approximately $21.7 million and $46.7 million, respectively, and
incurred losses before income tax benefit and the asset impairment charge of
approximately $4.7 million and $8.2 million, respectively.
During the quarter ended March 31, 1999, Triad recorded further impairment
losses of $3.1 million related to one hospital facility where the recorded asset
values were not deemed to be fully recoverable based upon the operating results,
trends and projected future cash flows. These assets are continuing to be used
and are now recorded at estimated fair value, based upon discounted, estimated
future cash flows.
The impairment charges for the six months ended June 30, 2000 and 1999,
totaling $0.9 million and $33.9 million, respectively, did not have a
significant impact on Triad's cash flows and are not expected to significantly
impact cash flows for future periods.
NOTE 4--LONG-TERM DEBT
Triad Hospital Holdings Inc.'s senior subordinated notes were guaranteed by
all operating subsidiaries (the "Subsidiary Guarantors"). The guarantee
obligations of the Subsidiary Guarantors are full, unconditional and joint and
several. Triad does not wholly own certain Subsidiary Guarantors, although all
assets, liabilities, equity and earnings of these entities fully and
unconditionally joint and severally guarantee the senior subordinated notes. The
percentages of these entities owned by Triad range from 70% to 95%. On June 26,
2000, Triad obtained a release of the guarantee of one of the non-wholly owned
Subsidiary Guarantors (the "Non-Guarantor Subsidiary"). Separate financial
statements of the non-wholly owned Subsidiary Guarantors have not been presented
because management has determined that they are inconsequential.
Condensed unaudited consolidating financial statements for Triad and its
subsidiaries including the financial statements of Triad Hospitals, Inc. (parent
only), Triad Hospitals Holdings, Inc., the combined Guarantor Subsidiaries and
the Non-Guarantor Subsidiary are as follows:
6
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 4 - LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the three months ended June 30, 2000
Unaudited
(Dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals,Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- ------------ ---------- ------------ ------------
Revenues............................ $ -- $ -- $ 289.3 $ 13.1 $ 0.1 $ 302.5
Salaries and benefits............... 0.3 -- 120.6 3.5 -- 124.4
Supplies............................ -- -- 42.1 3.2 -- 45.3
Other operating expenses............ -- -- 63.9 1.9 -- 65.8
Provision for doubtful accounts..... -- -- 24.8 0.3 -- 25.1
Depreciation........................ -- -- 18.2 0.5 -- 18.7
Amortization........................ -- -- 1.6 0.1 -- 1.7
Interest expense allocated.......... -- -- -- (0.1) 0.1 --
Interest expense.................... -- 15.1 (1.5) -- -- 13.6
ESOP expense........................ 1.5 -- -- -- -- 1.5
Management fees..................... -- -- (0.1) 0.1 -- --
Gain on sale of assets.............. -- -- (0.2) -- -- (0.2)
Impairment of long lived assets..... -- -- -- -- -- --
-------------- -------------- ------------ ---------- ------------ ------------
Total operating expenses............ 1.8 15.1 269.5 9.4 0.1 295.9
-------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before minority
interest, equity in earnings
and income tax (provision)
benefit........................... (1.8) (15.1) 19.9 3.6 -- 6.6
Minority interests.................. -- -- (2.1) -- -- (2.1)
Equity in earnings of affiliates.... 2.9 20.6 2.8 -- (27.1) (0.8)
-------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before income tax
(provision) benefit................ 1.1 5.5 20.6 3.6 (27.1) 3.7
Income tax (provision) benefit...... -- (2.6) -- -- -- (2.6)
-------------- -------------- ------------ ---------- ------------ ------------
Net income (loss)................... $ 1.1 $ 2.9 $ 20.6 $ 3.6 $ (27.1) $ 1.1
============== ============== ============ ========== ============ ============
7
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 4 - LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the three months ended June 30, 1999
Unaudited
(Dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- ------------ ---------- ------------ ------------
Revenues............................ $ -- $ -- $ 327.3 $ 12.8 $ -- $ 340.1
Salaries and benefits............... -- -- 143.3 3.3 -- 146.6
Supplies............................ -- -- 45.5 3.0 -- 48.5
Other operating expenses............ -- -- 77.3 2.0 -- 79.3
Provision for doubtful accounts..... -- -- 32.9 0.2 -- 33.1
Depreciation........................ -- -- 23.3 0.6 -- 23.9
Amortization........................ -- -- 2.3 0.1 -- 2.4
Interest expense allocated.......... -- -- 5.7 (0.7) -- 5.0
Interest expense.................... -- 9.1 (0.2) -- -- 8.9
ESOP expense........................ 0.5 -- -- -- -- 0.5
Management fees..................... -- -- 2.0 0.1 -- 2.1
(Gain) loss on sale of assets....... -- -- -- -- -- --
Impairment of long lived assets..... -- -- -- -- -- --
-------------- -------------- ------------ ---------- ------------ ------------
Total operating expenses............ 0.5 9.1 332.2 8.5 -- 350.3
-------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before minority
interest, equity in earnings
and income tax (provision)
benefit........................... (0.5) (9.1) (4.9) 4.3 -- (10.2)
Minority interests.................. -- -- (2.5) -- -- (2.5)
Equity in earnings of affiliates.... (9.0) (17.4) 2.4 -- 22.1 (1.9)
-------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before income tax
(provision) benefit................ (9.5) (26.5) (5.0) 4.3 22.1 (14.6)
Income tax (provision) benefit...... -- 17.5 (12.4) -- -- 5.1
-------------- -------------- ------------ ---------- ------------ ------------
Net income (loss) $ (9.5) $ (9.0) $ (17.4) $ 4.3 $ 22.1 $ (9.5)
============== ============== ============ ========== ============ ============
8
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 4 - LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the six months ended June 30, 2000
Unaudited
(Dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- ------------ ---------- ------------ ------------
Revenues............................ $ -- $ -- $ 588.2 $ 25.9 $ -- $ 614.1
Salaries and benefits............... 0.3 -- 243.9 6.6 -- 250.8
Supplies............................ -- -- 86.0 6.2 -- 92.2
Other operating expenses............ -- -- 125.3 4.0 -- 129.3
Provision for doubtful accounts..... -- -- 49.1 0.6 -- 49.7
Depreciation........................ -- -- 36.8 1.0 -- 37.8
Amortization........................ -- -- 3.2 0.2 -- 3.4
Interest expense allocated.......... -- -- -- (0.1) 0.1 --
Interest expense, net............... -- 30.9 (2.4) -- -- 28.5
ESOP expense........................ 2.7 -- -- -- -- 2.7
Management fees..................... -- -- -- 0.1 (0.1) --
Gain on sale of assets.............. -- -- (4.4) -- -- (4.4)
Impairment of long lived assets..... -- -- 0.9 -- -- 0.9
-------------- -------------- ------------ ---------- ------------ ------------
Total operating expenses............ 3.0 30.9 538.4 18.6 -- 590.9
-------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before minority
interests, equity in earnings
and income tax provision.......... (3.0) (30.9) 49.8 7.3 -- 23.2
Minority interests.................. -- -- (4.4) -- -- (4.4)
Equity in earnings (loss) of
affiliates........................ 12.1 52.3 6.9 -- (71.7) (0.4)
-------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before income tax
provision........................ 9.1 21.4 52.3 7.3 (71.7) 18.4
Income tax provision................ -- (9.3) -- -- -- (9.3)
-------------- -------------- ------------ ---------- ------------ ------------
Net income (loss)................... $ 9.1 $ 12.1 $ 52.3 $ 7.3 $ (71.7) $ 9.1
============== ============== ============ ========== ============ ============
9
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 4 - LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the six months ended June 30, 1999
Unaudited
(Dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- ------------ ---------- ------------ ------------
Revenues............................ $ -- $ -- $ 683.6 $ 24.8 $ (0.7) $ 707.7
Salaries and benefits............... -- -- 297.1 6.4 -- 303.5
Supplies............................ -- -- 96.9 5.7 -- 102.6
Other operating expenses............ -- -- 157.2 3.8 -- 161.0
Provision for doubtful accounts..... -- -- 67.2 0.4 -- 67.6
Depreciation........................ -- -- 48.1 1.2 -- 49.3
Amortization........................ -- -- 4.7 0.3 -- 5.0
Interest expense allocated.......... -- -- 24.7 (1.3) (0.7) 22.7
Interest expense net................ -- 9.1 0.3 -- -- 9.4
ESOP expense........................ 0.5 -- -- -- -- 0.5
Management fees..................... -- -- 8.8 0.1 -- 8.9
Gain on sale of assets.............. -- -- -- -- -- --
Impairment of long lived assets..... -- -- 30.8 3.1 -- 33.9
-------------- -------------- ------------ ---------- ------------ ------------
Total operating expenses............ 0.5 9.1 735.8 19.7 (0.7) 764.4
-------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before minority
interests, equity in earnings
and income tax benefit............ (0.5) (9.1) (52.2) 5.1 -- (56.7)
Minority interests.................. -- -- (4.7) -- -- (4.7)
Equity in earnings (loss) of
affiliates........................ (9.0) (17.4) 3.6 -- 21.3 (1.5)
-------------- -------------- ------------ ---------- ------------ ------------
Income (loss) before income tax
benefit........................... (9.5) (26.5) (53.3) 5.1 21.3 (62.9)
Income tax benefit.................. -- 17.5 -- -- -- 17.5
-------------- -------------- ------------ ---------- ------------ ------------
Net income (loss)................... $ (9.5) $ (9.0) $ (53.3) $ 5.1 $ 21.3 $ (45.4)
============== ============== ============ ========== ============ ============
Condensed Consolidating Balance Sheets
June 30, 2000
Unaudited
(Dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- ------------ ---------- ------------ ------------
Assets
Current assets
Cash and cash equivalents........ $ -- $ -- $ 81.7 $ -- $ -- $ 81.7
Accounts receivable, net......... -- -- 131.8 7.1 -- 138.9
Other current assets............. -- 42.4 91.9 1.2 -- 135.5
-------------- -------------- ------------ ---------- ------------ ------------
Total current assets................ -- 42.4 305.4 8.3 -- 356.1
Net property and equipment, at
cost.............................. -- -- 693.5 7.1 -- 700.6
Investments in subsidiaries......... 570.7 1,286.9 127.6 -- (1,909.1) 76.1
Due from affiliates................. 3.7 -- 150.9 29.7 (184.3) --
Other assets........................ -- 3.7 168.0 10.8 -- 182.5
-------------- -------------- ------------ ---------- ------------ ------------
Total assets........................ $ 574.4 $ 1,333.0 $1,445.4 $ 55.9 $ (2,093.4) $ 1,315.3
============== ============== ============ ========== ============ ============
Liabilities and Equity
Current liabilities................. $ -- $ 17.4 $ 100.3 $ 3.6 $ -- $ 121.3
Due to affiliates................... -- 184.3 -- -- (184.3) --
Long-term debt...................... -- 525.4 5.5 -- -- 530.9
Deferred taxes and other
liabilities....................... -- 35.2 4.9 0.8 -- 40.9
Minority interests in equity of
consolidated entities............ -- -- 47.8 -- -- 47.8
Equity.............................. 574.4 570.7 1,286.9 51.5 (1,909.1) 574.4
-------------- -------------- ------------ ---------- ------------ ------------
Total liabilities and equity........ $ 574.4 $ 1,333.0 $ 1,445.4 $ 55.9 $ (2,093.4) $ 1,315.3
============== ============== ============ ========== ============ ============
10
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 4 - LONG-TERM DEBT (continued)
Condensed Consolidating Balance Sheets
December 31, 1999
Unaudited
(Dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- ------------ ---------- ------------ ------------
Assets
Current assets
Cash and cash equivalents....... $ -- $ -- $ 70.8 $ 0.1 $ -- $ 70.9
Accounts receivable, net........ -- -- 144.3 6.3 -- 150.6
Other current assets............ -- 46.3 84.3 1.3 -- 131.9
-------------- -------------- ------------ ---------- ------------ ------------
Total current assets................ -- 46.3 299.4 7.7 -- 353.4
Net property and equipment, at
cost.............................. -- -- 692.3 7.4 -- 699.7
Investments in subsidiaries......... 559.1 1,236.0 152.7 -- (1,844.8) 103.0
Due from affiliates................. 0.8 -- 115.0 27.0 (142.8) --
Other assets........................ -- 4.1 170.2 10.7 -- 185.0
-------------- -------------- ------------ ---------- ------------ ------------
Total assets........................ $ 559.9 $ 1,286.4 $ 1,429.6 $ 52.8 $ (1,987.6) $ 1,341.1
============== ============== ============ ========== ============ ============
Liabilities and Equity
Current liabilities................. $ -- $ 23.0 $ 140.4 $ 2.4 $ -- $ 165.8
Due to affiliates................... -- 142.8 -- -- (142.8) --
Long-term debt...................... -- 530.9 6.2 -- -- 537.1
Deferred taxes and other
liabilities....................... -- 30.6 -- 0.7 -- 31.3
Minority interests in equity of
consolidated entities........... -- -- 47.0 -- -- 47.0
Equity.............................. 559.9 559.1 1,236.0 49.7 (1,844.8) 559.9
-------------- -------------- ------------ ---------- ------------ ------------
Total liabilities and equity........ $ 559.9 $ 1,286.4 $1,429.6 $ 52.8 $ (1,987.6) $ 1,341.1
============== ============== ============ ========== ============ ============
Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2000
Unaudited
(Dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in)
operating activities............ $ (0.5) $ (29.4) $ 52.3 $ 9.2 $ -- $ 31.6
--
Cash flows from investing
activities
Purchases of property and
equipment...................... -- -- (35.4) (0.3) -- (35.7)
Investment in and advances to
affiliates................... 0.4 (1.5) 35.3 (6.7) -- 27.5
Proceeds received on sale of
assets........................ -- -- 4.0 -- -- 4.0
Other........................... -- 0.4 (4.6) 0.4 -- (3.8)
-------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in)
investing activities............ 0.4 (1.1) (0.7) (6.6) -- (8.0)
Cash flows from financing
activities
Payments of long-term debt...... -- (11.0) (0.6) -- -- (11.6)
Proceeds from issuance of
common stock................ 3.0 -- -- -- -- 3.0
Distributions to minority
partners.................... -- -- (4.2) -- -- (4.2)
Net change in due to (from)
affiliate................... (2.9) 41.5 (35.9) (2.7) -- --
-------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in)
financing activities............ 0.1 30.5 (40.7) (2.7) -- (12.8)
-------------- -------------- ------------ ---------- ------------ ------------
Change in cash and cash
equivalents..................... -- -- 10.9 (0.1) -- 10.8
Cash and cash equivalents at
beginning of period............... -- -- 70.8 0.1 -- 70.9
-------------- -------------- ------------ ---------- ------------ ------------
Cash and cash equivalents at end
of period......................... $ -- $ -- $ 81.7 $ -- $ -- $ 81.7
============== ============== ============ ========== ============ ============
11
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 4 - LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 1999
Unaudited
(Dollars in millions)
Non-
Triad Triad Hospitals Guarantor Guarantor
Hospitals, Inc. Holdings, Inc. Subsidiaries Subsidiary Eliminations Consolidated
-------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in)
operating activities.............. $ -- $ (2.5) $ 83.1 $ 1.0 $ -- $ 81.6
Cash flows from investing
activities
Purchases of property and
equipment...................... -- -- (64.8) (1.2) -- (66.0)
Investment in and advances to
affiliates..................... 0.8 -- (53.9) (1.9) 1.1 (53.9)
Proceeds received on sale of
assets......................... -- -- 4.3 -- -- 4.3
Other............................ -- -- 7.4 (0.2) -- 7.2
-------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in)
investing activities.............. 0.8 -- (107.0) (3.3) 1.1 (108.4)
Cash flows from financing activities
Payments of long-term debt...... -- (5.0) (6.1) -- -- (11.1)
Proceeds from issuance of common
stock -- -- -- -- -- --
Distributions to minority
partners..................... -- -- (12.7) -- -- (12.7)
Net change in due to (from)
affiliate.................... (0.8) 7.5 98.1 2.5 (1.1) 106.2
-------------- -------------- ------------ ---------- ------------ ------------
Net cash provided by (used in)
financing activities............ (0.8) 2.5 79.3 2.5 (1.1) 82.4
-------------- -------------- ------------ ---------- ------------ ------------
Change in cash and cash
equivalents..................... -- -- 55.4 0.2 -- 55.6
Cash and cash equivalents at
beginning of period............. -- -- -- -- -- --
-------------- -------------- ------------ ---------- ------------ ------------
Cash and cash equivalents at end
of period......................... $ -- $ -- $ 55.4 $ 0.2 $ -- $ 55.6
============== ============== ============ ========== ============ ============
NOTE 5--STOCK BENEFIT PLANS
On February 18, 2000, Triad granted 1,009,000 stock options under the 1999
Long-Term Incentive Plan with an exercise price equal to the market price on the
date of the grant. On April 28, 2000, Triad granted 900,056 stock options under
the 1999 Long-Term Incentive Plan with an exercise price of $17.07, which was
the market price of the common stock on the effective date of grant, contingent
on shareholder approval of an amendment to the 1999 Long-Term Incentive Plan
increasing the numbers of shares available to 6,500,000. Shareholder approval
was granted on May 23, 2000. Compensation expense of $0.3 million was
recognized in the three months ended June 30, 2000 based on the difference
between market price of the common stock on the date of shareholder approval and
the market price of the common stock on date of grant. All options granted are
exercisable over a four-year period and expire 10 years from the date of the
grant.
On June 22, 2000, 85,561 shares of common stock were issued through the
Employee Stock Purchase Plan. Proceeds from the issuance of these shares was
$0.9 million. During the three and six months ended June 30, 2000, 124,990 and
149,354 stock options were exercised for proceeds of $1.4 million and $1.7
million, respectively.
Subsequent to June 30, 2000, 29,943 shares of common stock were issued
pursuant to the Management Stock Purchase Plan.
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 are equal to the market price on the grant date. The stock options are
immediately vested upon receipt of the IRS approval and expire 10 years from
that date.
12
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL SYSTEMS
Unaudited
NOTE 6--INCOME (LOSS) PER SHARE
Income (loss) per common share is based on the weighted average number
of shares outstanding adjusted for the shares issued to Triad's Employee Stock
Ownership Plan ("ESOP"). The weighted average number of shares outstanding for
the three and six months ended June 30, 1999 assumes the shares issued at the
spin-off from HCA - The Healthcare Company ("HCA") of Triad on May 11, 1999
(the "Spin-off") were outstanding at the beginning of 1999. Diluted weighted
average shares outstanding is calculated by adjusting basic weighted average
shares outstanding by all potentially dilutive stock options. Stock options
outstanding of 4,639,547 as of June 30, 1999 were not included for diluted loss
per share calculations since the impact was antidilutive. Weighted average
shares for the three and six months ended June 30, 2000 and 1999 are as follows:
For the three months ended For the six months
June 30, ended June 30,
------------------------- ----------------------
2000 1999 2000 1999
----------- --------- ---------- ----------
Weighted average shares exclusive of unreleased ESOP shares....... 31,354,670 30,278,587 31,328,514 30,089,687
ESOP shares committed to be released.............................. 112,500 21,429 75,000 21,429
---------- ---------- ---------- ----------
Basic weighted average shares outstanding......................... 31,467,170 30,300,016 31,403,514 30,111,116
Effect of dilutive securities - employee stock options............ 2,213,249 -- 1,729,561 --
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding....................... 33,680,419 30,300,016 33,133,075 30,111,116
========== ========== ========== ==========
NOTE 7 - SEGMENT AND GEOGRAPHIC INFORMATION
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 For the six months
ended June 30, ended June 30,
-------------------- ------------------
2000 1999 2000 1999
---------- -------- ------ ------
Revenues:
East Division................................................ $124.3 $105.9 $248.1 $215.3
West Division................................................ 69.3 67.3 144.6 139.4
Central Division............................................. 86.4 77.0 172.1 152.5
Ambulatory Surgery Centers................................... 13.0 12.8 25.9 24.8
Sold and Held for Sale....................................... 9.5 75.8 17.9 169.5
Corporate and other.......................................... -- 1.3 5.5 6.2
------ ------ ------ ------
$302.5 $340.1 $614.1 $707.7
====== ====== ====== ======
EBITDA (a):
East Division................................................ $24.6 $17.0 $46.7 $ 38.2
West Division................................................ 2.9 9.3 16.1 21.8
Central Division............................................. 12.3 6.6 28.0 12.8
Ambulatory Surgery Centers................................... 4.1 4.1 8.3 7.9
Sold and Held for Sale....................................... 3.0 (0.1) (0.2) 5.8
Corporate and other.......................................... (5.8) (6.2) (7.2) (15.0)
------ ------ ------ ------
$41.1 $30.7 $91.7 $ 71.5
====== ====== ====== ======
(a) EBITDA is defined as net income (loss) before depreciation, amortization,
interest expense, interest income, ESOP expense, gain on sale of assets,
management fees, impairment of long-lived assets, minority interest, and
income taxes. EBITDA is commonly used as an analytical indicator within the
health care industry, and also serves as a measure of leverage capacity and
debt service ability. EBITDA should not be considered as a measure of
financial performance under generally accepted accounting principles, and
the items excluded from EBITDA should not be considered in isolation or as
an alternative to net income (loss), 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
13
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 7 - SEGMENT AND GEOGRAPHIC INFORMATION (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.
NOTE 8--CONTINGENCIES
HCA Investigations
HCA is currently the subject of several federal investigations into certain
of its business practices, as well as governmental investigations by various
states. Management understands that HCA is cooperating in these investigations
and that HCA believes through written notice and other means, that it is a
target in these investigations. Given the breadth of the ongoing investigations,
management understands that HCA expects additional subpoenas and other
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future. HCA is a defendant in several qui tam actions
brought by private parties 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 for improper claims submitted to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving 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. To Triad's
knowledge, the government has intervened in at least seven qui tam actions
against HCA. HCA is aware of additional qui tam actions that remain under seal
and believes that there are other sealed qui tam cases of which it is unaware.
On May 5, 2000, Triad was advised that one of such qui tam actions which had
recently been unsealed, United States of America (ex.rel.Lanni) v. Curative
Health Services. et. al. (98 Civ. 2501, S.D.N.Y., August 24, 1999), listed three
of its hospitals as among the various named defendants. This qui tam action
alleges various violations arising out of relationships between Curative Health
Services and the other defendants. Two of the three Triad hospitals included as
defendants ended their relationship with Curative Health Services prior to the
Spin-off, while the third hospital maintains an ongoing relationship with
Curative.
On May 18, 2000, HCA announced that it had reached an understanding with
the Civil Division of the United States Department of Justice to recommend to
settle, subject to certain conditions, the civil claims against HCA relating to
diagnosis related group coding, outpatient laboratory billing and home health
issues. The understanding with the Department of Justice would require HCA to
pay $745 million in compensation to the government, with interest at a fixed
rate of 6.5% per annum 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. It remains too early to predict the effect of the
outcome of any of the ongoing investigations or qui tam and other actions, or
whether any additional investigations or litigations will be commenced. If HCA
is found to have violated federal or state laws relating to Medicare, Medicaid
or similar programs, HCA could be subject to substantial monetary fines, civil
and criminal penalties, and exclusion from participation in the Medicare and
Medicaid programs. Similarly, the amounts claimed in the qui tam and other
actions may be substantial, and HCA could be subject to substantial costs
resulting from an adverse outcome of one or more of such actions.
HCA is a defendant in a number of other suits, which allege, in general,
improper and fraudulent billing, overcharging, coding and physician referrals
(including the investigations not covered by the understanding), as well as
other violations of law. Certain of the suits have been conditionally certified
as class actions.
In connection with the Spin-off, HCA has agreed to indemnify Triad in
respect of any losses which it may incur as a result of the proceedings
described above, and Triad would not be required to contribute any part of HCA's
payment pursuant to the settlement understanding. If any of such indemnified
matters were successfully asserted against Triad, or any of its facilities, and
HCA failed to meet its indemnification obligations then such losses could have a
material adverse effect on the business, financial position, results of
operations or prospects of Triad. HCA will not indemnify Triad for losses
relating to any acts, practices and omissions engaged in by Triad after the date
of the Spin-off, whether or not Triad is indemnified for similar acts, practices
and omissions occurring prior to the date of the Spin-off.
14
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 8--CONTINGENCIES (continued)
HCA has also agreed to indemnify Triad in respect of any losses which it may
incur as a result of proceedings which may be commenced by government
authorities or by private parties in the future that arise from acts, practices
or omissions engaged in prior to the Spin-off and related to the proceedings
described above. HCA has also agreed that, in the event that any hospital owned
by Triad is permanently excluded from participation in the Medicare and Medicaid
programs as a result of the proceedings described above, then HCA will make a
cash payment to Triad in an amount, if positive, equal to five times the
excluded hospital's 1998 income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-lived
assets, minority interests and income taxes, as set forth on a schedule to the
distribution agreement, less the net proceeds of the sale or other disposition
of the excluded hospital. Triad has agreed that, in connection with the pending
governmental investigations described above, it will participate with HCA in
negotiating one or more compliance agreements setting forth each of their
agreements to comply with applicable laws and regulations (and one of the
conditions to the settlement understanding is the execution by HCA and the
federal government of a corporate integrity agreement). If any of such
indemnified matters were successfully asserted against Triad, or any of its
facilities, and HCA failed to meet its indemnification obligations, then such
losses could have a material adverse effect on the business, financial position,
results of operations or prospects of Triad. HCA will not indemnify Triad for
losses relating to any acts, practices and 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.
General Liability Claims
Triad is, from time to time, subject to claims and suits arising in the
ordinary course of business, including claims for damages for personal injuries,
breaches of contract or for wrongful restriction of, or interference with,
physician's staff privileges. In certain of these actions, claimants have asked
for punitive or other damages against Triad that may not be covered by
insurance. Triad is currently not a party to any such proceeding which, in
management's opinion, would have a material adverse effect on Triad's business,
financial condition or results of operations.
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, financial position or cash flows.
NOTE 9 - NEW 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, management does not anticipate that the adoption of the new
statement will have a significant effect on the results of operations or the
financial position of Triad.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"), which was required to be adopted in the first quarter of years beginning
after December 15, 1999. In June 2000, the effective date of SAB 101 was
delayed until the fourth quarter of 2000 for years beginning after December 15,
1999. Management does not anticipate that the application of SAB 101 will have
a significant effect on the results of operations or the financial position of
Triad.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation-an interpretation of APB Opinion No.
25" ("FIN 44"), which became effective on July 1, 2000 covering transactions
occurring after December 15, 1998. FIN 44 clarifies the application of APB
Opinion No. 25 relating to the definition of an employee, criteria for
determining whether a plan qualifies as a noncompensatory plan, accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. Management does not anticipate that the application
of FIN 44 will have a significant effect on the results of operations or the
financial position of Triad.
15
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Triad owns and operates the health care service business which comprised
the Pacific Group of HCA until the Spin-off. The Spin-off, which occurred on May
11, 1999, marked the beginning of Triad's operations as an independent, publicly
traded company.
During 1999, Triad sold ten hospitals and two ambulatory surgery centers
and opened one new hospital, which is accounted for using the equity method. On
February 11, 2000, Triad ceased operations of one hospital and, on March 31,
2000, sold its partnership interest in a rehabilitation hospital. On June 1,
2000, Triad purchased a majority interest in the assets of an ambulatory surgery
center.
The Spin-off, the sales of ten facilities and its partnership interest,
cessation of operations of one facility and the opening of one joint venture
facility significantly affects the comparability of the results of operations
for the three and six months ending June 30, 2000 to the three and six months
ending June 30, 1999.
Information regarding HCA included in this Report on Form 10-Q is derived
from reports and other information filed by HCA with the Securities and Exchange
Commission.
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, (i) the highly competitive nature of
the health care business, (ii) the efforts of insurers, employers and others to
contain health care costs, (iii) possible changes in the Medicare and Medicaid
programs that may further limit reimbursements to health care providers and
insurers, (iv) changes in Federal, state or local regulations affecting the
health care industry, (v) the possible enactment of Federal or state health care
reform, (vi) the ability to attract and retain qualified management and
personnel, including physicians, (vii) claims and legal actions relating to
professional liabilities and other matters, (viii) fluctuations in the market
value of Triad's common stock, (ix) the departure of key executive officers from
Triad, (x) changes in accounting practices, (xi) changes in general economic
conditions, (xii) future divestitures which may result in additional charges,
(xiii) the ability to enter into managed care provider arrangements on
acceptable terms, (xiv) the availability and terms of capital to fund the
expansion of Triad's business, (xv) changes in business strategy or development
plans, (xvi) timeliness of reimbursement payments received under government
programs and (xvii) other risk factors. As a consequence, current plans,
anticipated actions and future financial condition and results may differ from
those expressed in any forward-looking statements made by or on behalf of Triad.
Investors are cautioned not to unduly rely on such forward-looking statements
when evaluating the information presented in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RESULTS OF OPERATIONS
Revenue/Volume Trends
Triad's revenues continue to be affected by an increasing proportion of
revenue being derived from fixed payment, higher discount sources, including
Medicare, Medicaid and managed care plans. In addition, insurance companies,
government programs (other than Medicare) and employers purchasing health care
services for their employees are also negotiating discounted amounts that they
will pay health care providers rather than paying standard prices. Triad expects
patient volumes from Medicare and Medicaid to continue to increase due to the
general aging of the population and expansion of state Medicaid programs.
However, under the Federal Balanced Budget Act of 1997 (the "Balanced Budget
Act"), Triad's reimbursement from Medicare and Medicaid programs was reduced in
2000 and 1999 and will be further reduced with the phasing in of reductions in
reimbursement levels. Certain of the reductions from the Balanced Budget Act
will be mitigated by the Balanced Budget Refinement Act of 1999. 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
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
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 reduced. Patient revenues related to Medicare
and Medicaid patients were 37.8% and 38.5% of total patient revenues for the
three months ended June 30, 2000 and 1999, respectively, and 37.3% and 41.2% of
total patient revenues for the six months ended June 30, 2000 and 1999,
respectively. Patient revenues related to managed care plan patients were 37.2%
and 34.6% of total patient revenues for the three months ended June 30, 2000 and
1999, respectively, and 35.8% and 31.7% of total patient revenues for the six
months ended June 30, 2000 and 1999, respectively. Patient revenues from
capitation arrangements (prepaid health service agreements) are less than 1% of
net patient revenues.
As discussed previously, Triad sold ten hospitals during 1999 and ceased
operations of one hospital on February 11, 2000. These hospitals had revenues of
$61.0 million for the three months ended June 30, 1999 and losses before gain on
sales of assets, impairment charges and income taxes of $13.3 million. These
hospitals had revenues of $139.4 million for the six months ended June 30, 1999
and losses before gain on sales of assets, impairment charges and income taxes
of $35.5 million.
Triad's revenues also continue to be affected by the trend toward certain
services being performed more frequently on an outpatient basis. Growth in
outpatient services is expected to continue in the health care industry as
procedures performed on an inpatient basis are converted to outpatient
procedures through continuing advances in pharmaceutical and medical
technologies. The redirection of certain procedures to an outpatient basis is
also influenced by pressures from payers to perform certain procedures as
outpatient care rather than inpatient care. Outpatient revenues were 47.1% and
45.7% of patient revenues for the three months ended June 30, 2000 and 1999,
respectively, and 45.8% and 45.0% for the six months ended June 30, 2000 and
1999, 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 is 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 $28.9 million
as of June 30, 2000.
17
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 six months
ended June 30, 2000 and 1999 (dollars in millions, except per share amounts and
ratios):
For the three months ended For the six months ended
-------------------------- ------------------------
2000 1999 2000 1999
---- ---- ---- ----
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------- ---------- ------- ---------- ------- ---------- ------- ----------
Revenues............................. $ 302.5 100.0 $ 340.1 100.0 $ 614.1 100.0 $ 707.7 100.0
Salaries and benefits................ 124.4 41.1 146.6 43.1 250.8 40.8 303.5 42.9
Supplies............................. 45.3 15.0 48.5 14.3 92.2 15.0 102.6 14.5
Other operating expenses............. 65.8 21.7 79.3 23.3 129.3 21.1 161.0 22.7
Provision for doubtful accounts...... 25.1 8.3 33.1 9.7 49.7 8.1 67.6 9.6
Depreciation and amortization........ 20.4 6.8 26.3 7.7 41.2 6.8 54.3 7.7
Interest expense allocated from HCA.. -- -- 5.0 1.5 -- -- 22.7 3.2
Interest expense, net................ 13.6 4.5 8.9 2.6 28.5 4.6 9.4 1.3
ESOP expense......................... 1.5 0.5 0.5 0.1 2.7 0.4 0.5 0.1
Management fees allocated from HCA... -- -- 2.1 0.6 -- -- 8.9 1.2
Gain on sale of assets............... (0.2) (0.1) -- -- (4.4) (0.7) -- --
Impairment of long-lived assets...... -- -- -- -- 0.9 0.1 33.9 4.8
------- ---------- ------- ---------- ------- ---------- ------- ----------
295.9 97.8 350.3 103.0 590.9 96.2 764.4 108.0
------- ---------- ------- ---------- ------- ---------- ------- ----------
Income (loss) before minority
interests, equity in earnings
and income tax (provision) benefit.. 6.6 2.2 (10.2) (3.0) 23.2 3.8 (56.7) (8.0)
Minority interests in earnings of
consolidated entities............... (2.1) (0.7) (2.5) (0.7) (4.4) (0.7) (4.7) (0.7)
Equity in earnings (loss) of
affiliates.......................... (0.8) (0.3) (1.9) (0.6) (0.4) (0.1) (1.5) (0.2)
------- ---------- ------- ---------- ------- ---------- ------- ----------
Income (loss) before income tax
(provision) benefit................. 3.7 1.2 (14.6) (4.3) 18.4 3.0 (62.9) (8.9)
Income tax (provision) benefit....... (2.6) (0.8) 5.1 1.5 (9.3) (1.5) 17.5 2.5
------- ---------- ------- ---------- ------- ---------- ------- ----------
Net income (loss).................... $ 1.1 0.4 $ (9.5) (2.8) $ 9.1 1.5 $(45.4) (6.4)
======= ========== ======= ========== ======= ========== ======= ==========
Income (loss) per common share
Basic.............................. $ 0.03 $ (0.31) $ 0.29 $ (1.51)
Diluted............................ $ 0.03 $ (0.31) $ 0.27 $ (1.51)
EBITDA (a)........................... $ 41.1 $ 30.7 $ 91.7 $ 71.5
Number of hospitals at end of
period (b)
Owned and managed.................. 25 34 25 34
Joint ventures..................... 2 2 2 2
Leased to others................... 2 2 2 2
------- ------- ------- -------
Total.............................. 29 38 29 38
Ongoing operations: (c)
Licensed beds at end of period (d)... 3,634 3,625 3,634 3,625
Available beds at end of period (e).. 3,188 3,285 3,188 3,285
Admissions (f)
Owned and managed.................. 30,748 29,369 64,329 62,623
Joint ventures..................... 2,634 1,758 5,315 3,283
------- ------- ------- -------
Total.............................. 33,382 31,127 69,644 65,906
Adjusted admissions (g).............. 53,761 50,397 109,862 104,995
Outpatient visits.................... 306,445 301,295 637,086 620,625
Surgeries............................ 52,766 48,433 104,475 96,255
Average length of stay (h)........... 4.3 4.5 4.4 4.5
Outpatient revenue percentage........ 47.1% 45.7% 45.8% 45.0%
Inpatient revenue per admission...... $ 4,971 $ 4,995 $ 4,962 $ 4,839
Outpatient revenue per outpatient
visit.............................. $ 445 $ 410 $ 423 $ 399
Patient revenue per adjusted
admission.......................... $ 5,378 $ 5,361 $ 5,355 $ 5,246
(a) EBITDA is defined as net income (loss) before depreciation and amortization,
interest expense, ESOP expense, gain on sale of assets, management fees,
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 other financial statement data presented in the condensed consolidated
financial statements as an indicator of financial performance or liquidity.
Because EBITDA is not
18
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, except for
admissions, for the joint ventures and facilities leased to others.
(c) Ongoing operations exclude facilities that were sold or closed.
(d) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(e) Available beds are those beds a facility actually has in use.
(f) 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.
(g) Adjusted admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(h) Represents the average number of days an admitted patient stays in Triad's
hospitals. Average length of stay has declined due to the continuing
pressures from managed care and other payers to restrict admissions and
reduce the number of days that are covered by the payers for certain
procedures, and by technological and pharmaceutical improvements.
Three Months Ended June 30, 2000 and 1999
Income before income taxes increased to $3.7 million in the three months
ended June 30, 2000 from a loss of $14.6 million in the three months ended June
30, 1999. The increase in pretax income was attributable to losses of $13.3
million from the facilities that were divested during the three months ended
June 30, 1999, $7.8 million favorable prior year cost report settlements and
contractual estimates during the three months ended June 30, 2000, a $0.4
million favorable change in estimates relating to Triad's retirement plan during
the three months ended June 30, 2000 and improvement in the operations of the
facilities that comprise ongoing operations of $1.8 million. Additionally,
equity in earnings increased $2.2 million at a non-consolidating entity which
opened in May 1999. These increases were partially offset by $5.2 million
unfavorable changes in estimate for contractual adjustments at one facility,
$2.4 million of unfavorable adjustments at one facility from write-offs of
certain expenditures that were previously capitalized and other adjustments and
$1.1 million of unfavorable adjustments in equity in earnings at a non-
consolidating entity from various changes of estimates and other adjustments.
Revenues decreased 11.1% to $302.5 million in the three months ended June
30, 2000 compared to $340.1 million in the three months ended June 30, 1999.
Revenues declined primarily as a result of the facilities that were sold or
closed. These facilities had revenues of $61.0 million in the three months ended
June 30, 1999. For the three months ended June 30, 2000 the facilities that were
sold or closed had revenues which included $3.1 million in favorable prior year
cost report settlements and contractual estimates. The decrease in revenues was
partially offset by increases of $20.6 million for the facilities that comprise
ongoing operations. For the three months ended June 30, 2000 compared to the
three months ended June 30, 1999, admissions for the ongoing operations
increased 4.7%, adjusted admissions increased 6.7% for ongoing operations, and
revenues per adjusted admissions from ongoing operations increased 0.3%. In
addition, outpatient visits increased 1.7%, outpatient revenues per outpatient
visit increased 8.5% and surgeries increased 9.0%. Another factor in the
increase was $4.7 million in favorable prior year cost report settlements and
contractual estimates during the three months ended June 30, 2000. The increases
were partially offset by an unfavorable $5.2 million changes in estimate for
contractual discounts at one facility.
Salaries and benefits, as a percentage of revenues, decreased to 41.1% in
the three months ended June 30, 2000 from 43.1% in the three months ended June
30, 1999. For the three months ended June 30, 1999, salaries and benefits for
the facilities sold or closed were $31.3 million. Salaries and benefits for
ongoing operations increased 0.2% as a percentage of revenue in the three months
ended June 30, 2000 compared to the three months ended June 30, 1999. Costs per
full time equivalent increased 4.0% in the three months ended June 30, 2000
compared to June 30, 1999. Additionally, there were $2.0 million in pre-Spin-
off bonuses during the three months ended June 30, 1999.
19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Supply costs increased as a percentage of revenues to 15.0% in the three
months ended June 30, 2000 from 14.3% in the three months ended June 30, 1999.
For the three months ended June 30, 1999, supplies for the facilities sold or
closed were $8.6 million. Supplies for ongoing operations increased 0.8% as a
percentage of revenue in the three months ended June 30, 2000 compared to the
three months ended June 30, 1999. This increase was attributable to unfavorable
adjustments of $1.6 million at one facility from write-offs of certain
expenditures that were previously capitalized and increases in prices.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes), decreased as a percentage of revenues to 21.7%
in the three months ended June 30, 2000 compared to 23.3% in the three months
ended June 30, 1999. For the three months ended June 30, 1999, other operating
expenses for the facilities sold or closed were $18.4 million. Other operating
expenses for ongoing operations remained relatively unchanged as a percentage of
revenue in the three months ended June 30, 2000 compared to the three months
ended June 30, 1999.
Provision for doubtful accounts, as a percentage of revenues, decreased to
8.3% in the three months ended June 30, 2000 compared to 9.7% in the three
months ended June 30, 1999. Provision for doubtful accounts for the facilities
sold or closed decreased $9.7 million in the three months ended June 30, 2000
compared to the three months ended June 30, 1999. Provision for doubtful
accounts for ongoing operations remained relatively unchanged as a percentage of
revenue in the three months ended June 30, 2000 compared to the three months
ended June 30, 1999.
Depreciation and amortization decreased as a percentage of revenues to 6.8%
in the three months ended June 30, 2000 from 7.7% in the three months ended June
30, 1999, primarily due to $5.8 million in 1999 depreciation for the facilities
sold or closed.
Interest expense allocated from HCA, which was represented by interest
incurred on the net intercompany balance with HCA, was $5.0 million in the three
months ended June 30, 1999. The intercompany balances were eliminated at the
Spin-off.
Interest expense, which is offset by $1.8 million and $0.6 million of
interest income in the three months ended June 30, 2000 and 1999, respectively,
increased to $13.6 million in the three months ended June 30, 2000 from $8.9
million in the three months ended June 30, 1999 due to the assumption of
additional debt from HCA in the Spin-off.
Management fees allocated from HCA were $2.1 million during the three
months ended June 30, 1999. No management fees were allocated during the three
months ended June 30, 2000 due to the Spin-off from HCA.
Minority interests, which are primarily related to one joint venture in
Arizona that includes 9 ambulatory surgery centers, as a percentage of revenues
remained relatively unchanged in the three months ended June 30, 2000 compared
to the three months ended June 30, 1999.
Equity in earnings (loss) of affiliates was $(0.8) million for the three
months ended June 30, 2000 compared to $(1.9) million for the three months ended
June 30, 1999. This was due to reduction in losses of $2.2 million for one non-
consolidating entity which opened in May, 1999. This was offset by $1.1 million
of unfavorable adjustments for various changes of estimates and other
adjustments at one non-consolidating entity.
Six Months Ended June 30, 2000 and 1999
Income before income taxes increased to $18.4 million in the six months
ended June 30, 2000 from a loss of $62.9 million in the six months ended June
30, 1999. The increase in pretax income was attributable to a $4.2 million gain
on sale of a joint venture interest during the six months ended June 30, 2000
and impairment charges of $33.9 million in the six months ended June 30, 1999.
Additional factors contributing to the increase were losses before impairment
charges of $35.5 million for the six months ended June 30, 1999 in the
facilities that were divested and improvement in the operations of the
facilities that comprise ongoing operations of $8.0 million, $7.8 million
favorable prior year cost report settlements and contractual estimates during
the six months ended June 30, 2000 and a $2.2 million increase in equity in
earnings of one non-consolidating entity which opened in May, 1999. These
increases were partially offset during the six months ended June 30, 2000 by
$5.2 million unfavorable changes in estimate for contractual adjustments at one
facility, $1.5 million of unfavorable adjustments at one facility from write-
offs of certain expenses that were previously capitalized and other adjustments
and $1.1 million of unfavorable adjustments in equity in earnings at a non-
consolidating entity from various changes of estimates and other adjustments.
20
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Revenues decreased 13.2% to $614.1 million in the six months ended June 30,
2000 compared to $707.7 million in the six months ended June 30, 1999. Revenues
declined primarily as a result of the facilities that were sold or closed. In
the six months ended June 30, 1999, these facilities had revenues of $139.4
million. For the six months ended June 30, 2000 the facilities that were sold or
closed had revenues which included $3.1 million in favorable prior year cost
report settlements and contractual estimates. The decrease in revenues was
partially offset by increases of $41.7 million for the facilities that comprise
ongoing operations. For the six months ended June 30, 2000 compared to the six
months ended June 30, 1999, admissions for the ongoing operations increased
2.7%, adjusted admissions from ongoing operations increased 4.6%, and revenues
per adjusted admissions from ongoing operations increased 2.1%. Additionally,
outpatient visits increased 2.7%, outpatient revenues per visit increased 6.0%
and surgeries increased 8.5%. Another factor in the increase was $4.7 million in
favorable prior year cost report settlements and contractual estimates during
the six months ended June 30, 2000. The increases were partially offset by an
unfavorable $5.2 million change in estimate for contractual discounts at one
facility.
Salaries and benefits, as a percentage of revenues, decreased to 40.8% in
the six months ended June 30, 2000 from 42.9% in the six months ended June 30,
1999. For the six months ended June 30, 2000 and 1999, salaries and benefits for
the facilities sold or closed were $2.4 million and $71.8 million, respectively.
The salaries and benefits for the sold and closed facilities during the six
months ended June 30, 2000 were primarily related to severance costs associated
with the closure of one facility in February 2000. Salaries and benefits for
ongoing operations remained relatively constant as a percentage of revenue in
the six months ended June 30, 2000 compared to the six months ended June 30,
1999. Salaries and benefits decreased $2.8 million from a favorable adjustment
relating to Triad's retirement plan contributions during the six months ended
June 30, 2000. These decreases were partially offset by a 3.4% increase in costs
per full time equivalent, $2.0 million of pre-Spin-off bonuses during the six
months ended June 30, 1999 and the addition of corporate staff after the Spin-
off in the six months ended June 30, 2000 compared to the six months ended June
30, 1999.
Supply costs increased as a percentage of revenues to 15.0% in the six
months ended June 30, 2000 from 14.5% in the six months ended June 30, 1999. For
the six months ended June 30, 1999, supplies for the facilities sold or closed
were $21.1 million. Supplies for ongoing operations increased 0.8% as a
percentage of revenue in the six months ended June 30, 2000 compared to the six
months ended June 30, 1999. This increase was attributable to higher patient
acuity and price increases. Additionally, an unfavorable adjustment of $1.1
million was recorded at one facility from write-offs of certain expenses that
were previously capitalized during the six months ended June 30, 2000.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes), decreased as a percentage of revenues to 21.1%
in the six months ended June 30, 2000 compared to 22.7% in the six months ended
June 30, 1999. For the six months ended June 30, 1999, other operating expenses
for the facilities sold or closed were $38.7 million. Other operating expenses
for ongoing operations decreased 0.5% as a percentage of revenue in the six
months ended June 30, 2000 compared to the six months ended June 30, 1999. This
decrease was due primarily to the increase in revenues.
Provision for doubtful accounts, as a percentage of revenues, decreased to
8.1% in the six months ended June 30, 2000 compared to 9.6% in the three months
ended June 30, 1999. Provision for doubtful accounts for the facilities sold or
closed decreased $20.3 million in the six months ended June 30, 2000 compared to
the six months ended June 30, 1999. Provision for doubtful accounts for ongoing
operations decreased 0.2% as a percentage of revenue in the six months ended
June 30, 2000 compared to the six months ended June 30, 1999. This was due
primarily to improved collections on accounts as a result of an increased focus
by management after the Spin-off.
Depreciation and amortization decreased as a percentage of revenues to 6.8%
in the six months ended June 30, 2000 from 7.7% in the six months ended June 30,
1999, primarily due to $12.7 million in 1999 depreciation for the facilities
sold or closed.
Interest expense allocated from HCA, which was represented by interest
incurred on the net intercompany balance with HCA, was $22.7 million in the six
months ended June 30, 1999. The intercompany balances were eliminated at the
Spin-off.
21
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Interest expense, which is offset by $2.9 million and $0.6 million of
interest income in the six months ended June 30, 2000 and 1999, respectively,
increased to $28.5 million in the six months ended June 30, 2000 from $9.4
million in the six months ended June 30, 1999 due to the assumption of
additional debt from HCA in the Spin-off.
Management fees allocated from HCA were $8.9 million during the six months
ended June 30, 1999. No management fees were allocated during the six months
ended June 30, 2000 due to the Spin-off from HCA.
Gain on sale of assets were $4.4 million during the six months ended June
30, 2000 primarily due to the sale of Triad's partnership interest in a
rehabilitation hospital during the quarter.
Impairments on long-lived assets were $0.9 million and $33.9 million during
the six months ended June 30, 2000 and 1999, respectively. The impairments
during 2000 were due to the carrying value of the long-lived assets related to
one physician management contract being reduced to fair value, based on
estimated disposal value. The impairments during 1999 were due to reductions of
the book value of certain facilities that Triad divested during 1999 to fair
value, based on estimates of selling values.
Minority interests, which are primarily related to one joint venture in
Arizona that includes 9 ambulatory surgery centers, as a percentage of revenues
remained relatively unchanged in the six months ended June 30, 2000 compared to
the six months ended June 30, 1999.
Equity in earnings (loss) of affiliates was $(0.4) for the six months ended
June 30, 2000 compared to $(1.5) for the six months ended June 30, 1999. This
was due to reduction in losses of $2.2 million for one non-consolidating entity
which opened in May 1999. This was offset by $1.1 million of unfavorable
adjustments for various changes of estimates and other adjustments at one non-
consolidating entity during the six months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $31.6 million in the six months
ended June 30, 2000 compared to $81.6 million in the six months ended June 30,
1999. The decrease was due to a decrease in accounts payable and other current
liabilities and an increase in inventories and other assets. This was offset by
a smaller increase in accounts receivable in the six months ended June 30, 2000
than in the six months ended June 30, 1999.
Cash used in investing activities was $8.0 million in the six months ended
June 30, 2000 compared to $108.4 million in the six months ended June 30, 1999.
This was due to $40.7 million of loan repayments from one of Triad's hospital
joint ventures during the six months ended June 30, 2000 compared to $43.7
million in advances to this hospital joint venture during the six months ended
June 30, 1999. Additionally, capital expenditures decreased $30.3 million from
the six months ended June 30, 2000 compared to the six months ended June 30,
1999. Triad expects to expend approximately $70 million ($50 million for
expansion) in capital expenditures for the remainder of 2000.
Cash used in financing activities was $12.8 million in the six months ended
June 30, 2000 compared to cash provided by financing activities of $82.4 million
in the six months ending June 30, 1999. This was due to changes in the
intercompany balances with HCA during the six months ended June 30, 1999. This
was partially offset by an $8.5 million decrease in distributions to minority
partners.
Triad received loan repayments from one of its hospital joint ventures of
$37.0 million on February 28, 2000 and $3.7 million on April 11, 2000.
On March 31, 2000 Triad sold its limited partnership interest in a
rehabilitation hospital located in Tucson, Arizona for $4.0 million. A gain of
$4.2 million was recognized on the sale.
On April 28, 2000, Triad purchased 28.7 acres of land for $2.5 million in
Las Cruces, New Mexico for future development.
On June 1, 2000, Triad's partner in an ambulatory surgery center joint
venture in Arizona contributed the assets of an ambulatory surgery center to the
joint venture. Triad purchased a majority interest in these assets for $0.6
million.
22
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
On June 23, 2000, Triad signed a definitive purchase agreement to acquire
hospitals in Denton, Texas and Lewisburg, West Virginia from NetCare Health
Systems Inc. for a cash price of approximately $107.0 million plus working
capital. The definitive agreement also includes the acquisition of a hospital in
Statesville, North Carolina, but Triad has assigned the rights to acquire this
hospital to a third party in a simultaneous closing. Triad expects that the
transaction to become effective on or about October 1, 2000.
On July 27, 2000, Triad purchased 47 acres of undeveloped land in Sherman,
Texas for $2.0 million.
Triad has a $125.0 million line of credit which bears interest at LIBOR
plus 3.0%. No amounts were outstanding under the revolving credit facility at
June 30, 2000.
In January 1999, Triad entered into a fifteen year lease with an
unaffiliated party for the operations of two acute care hospitals and three
ambulatory surgery centers, with lease payments of approximately $17.0 million
per year. The lessee has an option to purchase the facilities exercisable
annually beginning in January 2001 for approximately $130.0 million in January
2001. The lessee has notified Triad that it does not intend to exercise its
option in January 2001, although it may do so in the future.
At June 30, 2000, Triad had working capital of $234.8 million. Management
expects that operations and working capital facilities will provide sufficient
liquidity for the remainder of fiscal 2000.
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, management does not anticipate that the adoption of the new
statement will have a significant effect on the results of operations or the
financial position of Triad.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulleting No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"), which was required to be adopted in the first quarter of years beginning
after December 15, 1999. In June 2000, the effective date of SAB 101 was
delayed until the fourth quarter of 2000 for years beginning after December 15,
1999. Management does not anticipate that the application of SAB 101 will have
a significant effect on the results of operations or the financial position of
Triad.
In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44 "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion No.
25" ("FIN 44"), which became effective on July 1, 2000 covering transactions
occurring after December 15, 1998. FIN 44 clarifies the application of APB
Opinion No. 25 relating to the definition of an employee, criteria for
determining whether a plan qualifies as a noncompensatory plan, accounting
consequences of various modifications to the terms of a previously fixed stock
option or award and the accounting for an exchange of stock compensation awards
in a business combination. Management does not anticipate that the application
of FIN 44 will have a significant effect on the results of operations or the
financial position of Triad.
CONTINGENCIES
HCA is currently the subject of several federal investigations into certain
of its business practices, as well as governmental investigations by various
states. Management understands that HCA is cooperating in these investigations
and that HCA believes, through written notice and other means, that it is a
target in these investigations. Given the breadth of the ongoing investigations,
management understands that HCA expects additional subpoenas and other
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future. HCA is a defendant in several qui tam actions
brought by private parties 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 for improper claims submitted to the government for reimbursement. The
lawsuits seek damages of three times the amount of all Medicare or Medicaid
claims (involving 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. To Triad's
knowledge, the government has intervened in at least seven qui tam actions
against HCA. HCA is aware of additional qui tam actions that remain under seal
and believes that there are other sealed qui tam cases of which it is
23
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
unaware. On May 5, 2000, Triad was advised that one of such qui tam actions
which had recently been unsealed, United States of America (ex.rel.Lanni) v.
Curative Health Services. et. al. (98 Civ. 2501, S.D.N.Y., August 24, 1999),
listed three of its hospitals as among the various named defendants. This qui
tam action alleges various violations arising out of relationships between
Curative Health Services and the other defendants. Two of the three Triad
hospitals included as defendants ended their relationship with Curative Health
Services prior to the Spin-off, while the third hospital maintains an ongoing
relationship with Curative.
On May 18, 2000 HCA announced that it had reached an understanding with 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 would require HCA to
pay $745 million in compensation to the government, with interest accruing
immediately at a fixed rate of 6.5% per annum, and would reduce HCA's existing
letter of credit agreement with the government from $1 billion to $250 million
at the time of payment of the settlement. It remains too early to predict the
effect of the outcome of any of the ongoing investigations or qui tam and other
actions, or whether any additional investigations or litigations will be
commenced. If HCA is found to have violated federal or state laws relating to
Medicare, Medicaid or similar programs, HCA could be subject to substantial
monetary fines, civil and criminal penalties, and exclusion from participation
in the Medicare and Medicaid programs. Similarly, the amounts claimed in the qui
tam and other actions may be substantial, and HCA could be subject to
substantial costs resulting from an adverse outcome of one or more of such
actions.
HCA is a defendant in a number of other suits, which allege, in general,
improper and fraudulent billing, overcharging, coding and physician referrals
(including the investigations not covered by the understanding), as well as
other violations of law. Certain of the suits have been conditionally certified
as class actions.
Management believes that the ongoing governmental investigations and related
media coverage may have had a negative effect on HCA's results of operations,
which includes Triad for the periods prior to the Spin-off which are presented
herein. The extent to which Triad may or may not continue in the future to be
affected by the ongoing investigations of HCA, the initiation of additional
investigations, if any, and the related media coverage cannot be predicted.
Pursuant to the distribution agreement entered into by and among HCA and
Triad in connection with the Spin-off, HCA has agreed to indemnify Triad in
respect of any losses which it may incur as a result of the proceedings
described above, and Triad would not be required to contribute any part of HCA's
payment pursuant to the settlement understanding. If any of such indemnified
matters were successfully asserted against Triad, or any of its facilities, and
HCA failed to meet its indemnification obligations then such losses could have a
material adverse effect on the business, financial position, results of
operations or prospects of Triad. HCA will not indemnify Triad for losses
relating to any acts, practices and omissions engaged in by Triad after the date
of the Spin-off, whether or not Triad is indemnified for similar acts, practices
and omissions occurring prior to the date of the Spin-off.
HCA has also agreed to indemnify Triad in respect of any losses which it may
incur as a result of proceedings which may be commenced by government
authorities or by private parties in the future that arise from acts, practices
or omissions engaged in prior to the Spin-off and related to the proceedings
described above. HCA has also agreed that, in the event that any hospital owned
by Triad is permanently excluded from participation in the Medicare and Medicaid
programs as a result of the proceedings described above, then HCA will make a
cash payment to Triad in an amount, if positive, equal to five times the
excluded hospital's 1998 income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-lived
assets, minority interests and income taxes, as set forth on a schedule to the
distribution agreement, less the net proceeds of the sale or other disposition
of the excluded hospital. Triad has agreed that, in connection with the pending
governmental investigations described above, it will participate with HCA in
negotiating one or more compliance agreements setting forth each of their
agreements to comply with applicable laws and regulations (and one of the
conditions to the settlement understanding is the execution by HCA and the
federal government of a corporate integrity agreement). If any of such
indemnified matters were successfully asserted against Triad, or any of its
facilities, and HCA failed to meet its indemnification obligations, then such
losses could have a material adverse effect on the business, financial position,
results of operations or prospects of Triad. HCA will not indemnify Triad for
losses relating to any acts, practices and 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.
24
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Triad is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of, or
interference with, physicians' staff privileges. In certain of these actions the
claimants may seek punitive damages against Triad, which are usually not covered
by insurance. It is management's opinion that the ultimate resolution of these
pending claims and legal proceedings will not have a material adverse effect on
Triad's results of operations or financial position.
HEALTH CARE REFORM
In recent years, an increasing number of legislative proposals have been
introduced or proposed to Congress and in some state legislatures that would
significantly affect health care systems in Triad's markets. The cost of certain
proposals would be funded, in significant part, by reduction in payments by
government programs, including Medicare and Medicaid, to health care providers
(similar to the reductions incurred as part of the Balanced Budget Act as
previously discussed). While Triad is unable to predict whether any proposals
for health care reform will be adopted, there can be no assurance that proposals
adverse to the business of Triad will not be adopted.
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 $221.0
million of long-term debt at June 30, 2000 is subject to variable rates of
interest, while the remaining balance in long-term debt of $323.3 million at
June 30, 2000 is subject to fixed rates of interest. The estimated fair value of
Triad's total long-term debt was $553.4 million at June 30, 2000. 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 losses in future pretax
earnings would be approximately $2.2 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.
Part II - Other Information
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Triad's annual meeting of stockholders was held on May 23, 2000. The
following matters were voted upon at the meeting:
Votes in Votes Votes Broker
Favor Against Abstained Non-Voting
-------- ------- --------- ----------
1. Election of directors.
Marvin Runyon 25,487,865 -- 144,373 --
Dale V. Kesler 25,489,458 -- 142,780 --
Barbara A. Durand, R.N. 25,489,521 -- 142,717 --
Donald B. Halverstadt, M.D. 25,488,857 -- 143,381 --
2. Ratification of
PricewaterhouseCoopers, LLP as
independent auditors. 25,452,485 61,786 117,967 --
3. Approval of 1999 Long-Term Incentive
Plan, as amended. 11,904,891 4,719,853 123,568 8,883,926
4. Approval of Employee Stock Purchase
Plan. 14,436,699 2,220,853 90,760 8,883,926
25
Item 6: Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation of Triad. Incorporated by reference from Triad
Hospitals' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
3.2 By-Laws of Triad. Incorporated by reference from Triad Hospitals' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
3.3 Certificate of Incorporation of Triad Holdings. Incorporated by reference
from Triad Hospitals' Annual Report on Form 10-K for the year ended December 31,
1999.
3.4 By-Laws of Triad Holdings. Incorporated by reference from Triad Hospitals'
Annual Report on Form 10-K for the year ended December 31, 1999.
27.1 Financial Data Schedule for Triad (for Commission use only).
27.2 Financial Data Schedule for Triad Holdings (for Commission use only).
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000:
None
26
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: August 11, 2000 By: /s/ BURKE W. WHITMAN
----------------------
Burke W. Whitman
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
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 Holdings, Inc.
Date: August 11, 2000 By: /s/ BURKE W. WHITMAN
----------------------
Burke W. Whitman
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
27
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
3.1 Certificate of Incorporation of Triad. Incorporated by reference from Triad
Hospitals' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
3.2 By-Laws of Triad. Incorporated by reference from Triad Hospitals' Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999.
3.3 Certificate of Incorporation of Triad Holdings. Incorporated by reference
from Triad Hospitals' Annual Report on Form 10-K for the year ended December 31,
1999.
3.4 By-Laws of Triad Holdings. Incorporated by reference from Triad Hospitals'
Annual Report on Form 10-K for the year ended December 31, 1999.
27.1 Financial Data Schedule for Triad (for Commission use only).
27.2 Financial Data Schedule for Triad Holdings (for Commission use only).
28