<PAGE>
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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-29816
Triad Hospitals, Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-2816101
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13455 Noel Road, Suite 2000
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
(972) 789-2700
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock of the latest practical date.
33,870,312
----------
(As of August 3, 1999)
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
TRIAD HOSPITALS, INC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the periods ending June 30, 1999 and 1998
Unaudited
(Dollars in millions, except per share amounts)
<TABLE>
1 For the three For the six
months ended months ended
--------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues...................................... $ 340.1 $ 399.8 $ 707.7 $ 813.8
Salaries and benefits......................... 146.6 174.3 303.5 352.4
Supplies...................................... 48.5 59.0 102.6 123.0
Other operating expenses...................... 79.1 93.0 161.0 181.4
Provision for doubtful accounts............... 33.1 35.7 67.6 72.6
Depreciation and amortization................. 26.3 26.6 54.3 52.8
Interest expense allocated from Columbia/HCA.. 4.2 13.7 18.5 26.2
Interest expense.............................. 9.9 3.6 13.6 7.2
ESOP expense.................................. 0.5 -- 0.5 --
Management fees allocated from Columbia/HCA... 2.1 7.4 8.9 15.0
Impairment of long-lived assets............... -- -- 33.9 --
----------- ----------- ----------- -----------
Total operating expenses...................... 350.3 413.3 764.4 830.6
----------- ----------- ----------- -----------
Loss from continuing operations before
minority interest, equity in earnings and
income tax benefit........................... (10.2) (13.5) (56.7) (16.8)
Minority interests in earnings of
consolidated entities........................ (2.5) (2.5) (4.7) (6.5)
Equity in earnings (loss) of
unconsolidated subsidiaries.................. (1.9) 1.1 (1.5) 2.5
Income tax benefit............................ 5.1 4.4 17.5 6.2
----------- ----------- ----------- -----------
Loss from continuing operations............... (9.5) (10.5) (45.4) (14.6)
Income from operations of discontinued
businesses, net of income tax provision of
$0.6 for the three months ended 1998......... -- 0.4 -- --
----------- ----------- ----------- -----------
Net loss...................................... $ (9.5) $ (10.1) $ (45.4) $ (14.6)
=========== =========== =========== ===========
Loss per common share:
Loss from continuing operations.............. $ (0.31) $ (0.34) $ (1.51) $ (0.49)
Income from operations of discontinued
business.................................... -- 0.01 -- --
----------- ----------- ----------- -----------
Net loss...................................... $ (0.31) $ (0.33) $ (1.51) $ (0.49)
=========== =========== =========== ===========
Weighted average shares used in loss per
share calculations........................... 30,300,016 30,300,016 30,111,116 30,111,116
</TABLE>
See notes to the condensed consolidated financial statements.
2
<PAGE>
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current assets
--------------
Cash and cash equivalents............................ $ 55.6 $ --
Accounts receivable, less allowance for
doubtful accounts of $179.8 at
June 30, 1999 and $155.9 at December 31, 1998...... 182.5 199.3
Inventories.......................................... 39.4 44.8
Income taxes......................................... 43.2 37.9
Other................................................ 56.8 23.9
-------- --------
Total current assets................................. 377.5 305.9
Property and equipment, at cost:
Land................................................. 81.9 82.0
Buildings............................................ 604.0 604.9
Equipment............................................ 727.9 712.0
Construction in progress............................. 71.9 63.7
-------- --------
1,485.7 1,462.6
Accumulated depreciation............................. (711.4) (703.1)
-------- --------
774.3 759.5
Intangible assets, net of accumulated
amortization of $54.8 at June 30, 1999 and
$50.2 at December 31, 1998.......................... 244.4 272.9
Investment in equity of affiliates................... 79.7 24.3
Other................................................ 19.6 8.7
-------- --------
Total assets......................................... $1,495.5 $1,371.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Accounts payable..................................... $ 51.1 $ 47.5
Current portion of long-term debt.................... 93.4 0.9
Accrued salaries..................................... 33.7 34.8
Other current liabilities............................ 57.5 37.8
-------- --------
Total current liabilities............................ 235.7 121.0
Intercompany balances payable to Columbia/HCA........ -- 613.7
Long-term debt....................................... 575.4 13.4
Deferred taxes and other liabilities................. 61.7 62.5
Minority interests in equity of consolidated.........
entities............................................ 52.1 60.0
-------- --------
Total liabilities.................................... 924.9 870.6
Stockholders equity
-------------------
Equity, investments by Columbia/HCA.................. -- 500.7
Common stock $.01 per value; 90,000,000 shares
authorized; 33,869,851 shares outstanding at
June 30, 1999....................................... 0.3 --
Additional paid-in capital........................... 607.8 --
Unearned ESOP compensation........................... (34.0) --
Retained deficit..................................... (3.5) --
-------- --------
Total stockholders' equity........................... 570.6 500.7
Total liabilities and stockholders' equity........... $1,495.5 $1,371.3
======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE>
TRIAD HOSPITALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the periods ending June 30, 1999 and 1998
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
For the three For the six
months ended months ended
---------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------ -------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net loss...................................... $ (9.5) $(10.1) $ (45.4) $(14.6)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Provision for doubtful accounts............... 33.1 35.7 67.6 72.6
ESOP expense.................................. 0.5 -- 0.5 --
Depreciation and amortization................. 26.3 26.6 54.3 52.8
Deferred income tax benefit................... (5.1) (4.4) (17.5) (6.2)
Impairment of long-lived assets............... -- -- 33.9 --
Income from discontinued operations........... -- (0.4) -- --
Increase (decrease) in cash from
operating assets and liabilities
Accounts receivable........................... (27.5) (25.1) (53.1) (67.3)
Inventories and other assets.................. (0.9) (3.3) 8.4 (7.5)
Accounts payable and other current
liabilities.................................. 21.2 5.4 22.4 (6.2)
Other......................................... - (0.5) (8.5) (12.2)
------ ------ ------- ------
Net cash provided by operating activities..... 38.1 23.9 62.6 11.4
Cash flows from investing activities
Purchases of property and equipment........... (46.2) (19.3) (66.0) (47.3)
Proceeds received on sale of assets........... 4.3 -- 4.3 --
Investment in and advances to affiliates...... (54.3) (3.6) (55.4) (5.8)
Other......................................... 11.9 7.8 15.0 16.6
------ ------ ------- ------
Net cash used in investing activities......... (84.3) (15.1) (102.1) (36.5)
Cash flows from financing activities
Payments of long-term debt.................... (5.0) -- (11.1) (0.5)
Increase (decrease) in intercompany
balances with Columbia/HCA, net.............. 106.8 (8.8) 106.2 25.6
------ ------ ------- ------
Net cash provided by (used in)
financing activities......................... 101.8 (8.8) 95.1 25.1
------ ------ ------- ------
Change in cash and cash equivalents........... 55.6 -- 55.6 --
Cash and cash equivalents at
beginning of period.......................... -- -- -- --
------ ------ ------- ------
Cash and cash equivalents at end of period.... $ 55.6 $ -- $ 55.6 $ --
====== =================== ======= ===============
Interest payments............................. $ 8.0 $ 17.3 $ 26.0 $ 33.5
Income tax payments........................... $ -- $ -- $ -- $ --
</TABLE>
4
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. (the "Company"). In the opinion of
management, all adjustments considered 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 combined financial statements
and notes thereto for the year ended December 31, 1998 included in the Company's
Registration Statement on Form 10.
The balance sheet at December 31, 1998 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--SPIN-OFF OF TRIAD HOSPITALS, INC.
On May 11, 1999, Columbia/HCA Healthcare Corporation ("Columbia/HCA")
completed the spin-off of the Company to its shareholders (the "Spin-off") by a
pro rata distribution of 29,898,688 shares of common stock. The accompanying
financial statements for the periods prior to the Spin-off were prepared on the
push down basis of the historical cost to Columbia/HCA and represent the
combined financial position, results of operations and cash flows of the Company
for those periods.
The consolidated balance sheet as of June 30, 1999 includes adjustments to
reflect certain transactions in connection with the Spin-off. The changes to
stockholders' equity from the Spin-off are as follows:
<TABLE>
<CAPTION>
Additional Unearned Equity Total
Common Paid-in ESOP Retained Investments by Stockholders'
Stock Capital Compensation Deficit Columbia/HCA Equity
----- ------- ------------ ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 $ -- $ -- $ -- $ -- $ 500.7 $ 500.7
Distribution of common stock 0.3 43.6 -- -- -- 43.9
Executive Stock Purchase
Plan loans -- (9.1) -- -- -- (9.1)
Recapitalization upon
distribution -- 545.3 -- -- (500.7) 44.6
Elimination of intercompany
balances -- 719.9 -- -- -- 719.9
Assumption of long-term debt -- (665.0) -- -- -- (665.0)
Debt issue costs -- 15.0 -- -- -- 15.0
Issuance of note receivable
from ESOP -- -- (34.5) -- -- (34.5)
ESOP compensation earned -- -- 0.5 -- -- 0.5
Net loss prior to Spin-off -- (41.9) -- -- -- (41.9)
Net loss-post Spin-off -- -- -- (3.5) -- (3.5)
------- --------- ---------- ---------- --------- ----------
Balance June 30, 1999 $ 0.3 $ 607.8 $ (34.0) $ (3.5) $ -- $ 570.6
======= ========= ========== ========== ========= ==========
</TABLE>
The consolidated financial statements included herein may not necessarily be
indicative of the results of operations, financial position and cash flows of
the Company in the future or had it operated as a separate, independent company
during those periods prior to the spin-off. The combined consolidated financial
statements included herein do not reflect any all of the changes that have
occurred or may occur in the financing and operations of the Company as a result
of the Spin-off.
On May 11, 1999, Columbia/HCA also completed the spin-off of a separate,
independent company, LifePoint Hospitals, Inc. ("LifePoint").
Information regarding Columbia/HCA included in this Report on Form 10-Q is
derived from reports and other information filed by Columbia/HCA with the
Securities and Exchange Commission.
5
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
In addition, the Company has entered into various agreements with Columbia/HCA
which are intended to facilitate orderly changes for both companies in a way
which will be minimally disruptive to each entity (see NOTE 9).
NOTE 3--COMPANY OPERATIONS
As of January 1, 1999, the Company owned or operated 39 hospitals (including
two facilities the Company is leasing from others and an investment in one
hospital that is accounted for using the equity method), 19 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 located in eleven western, southwestern and southcentral states. During
the six months ended June 30, 1999, the Company sold two hospitals, the proceeds
of which were retained by Columbia/HCA, and ceased operations of one hospital.
Also, on January 1, 1999, the Company transferred two acute care hospitals and
three ambulatory surgery centers located in the Kansas City, Missouri area to an
unaffiliated third party pursuant to a long-term lease which provides for
payment to the Company of rental amounts approximating $16.0 million per year.
The Company also opened one new hospital that is accounted for using the equity
method.
On June 1, 1999, the Company completed the exchange of one hospital located in
Laredo, Texas for one hospital located in Victoria, Texas and $4.4 million in
cash. The assets received were recorded at book value of the assets exchanged
plus a proportionate share of cash received to the estimated fair value of
assets received. No gain or loss was recognized during the three month period
ended June 30, 1999. The Company is currently in the process of finalizing an
appraisal of the Victoria, Texas hospital. The Company expects the finalized
appraisal to be completed during the third quarter of 1999 and any gain or loss
will be recognized at that time, although the gain or loss should be minimal.
NOTE 4--IMPAIRMENT OF LONG-LIVED ASSETS
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting of the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed of ("SFAS 121"). SFAS 121 addresses accounting for
the impairment of long-lived assets and long-lived assets to be disposed of,
certain identifiable intangibles and goodwill related to those assets, and
provides guidance for recognizing and measuring impairment losses. The
statement requires that the carrying amount of impaired assets be reduced to
fair value.
As discussed previously, during the six months ended June 30, 1999, the
Company sold two hospitals and ceased to operate another hospital. The Company
intends to sell eight additional facilities (7 general, acute care hospitals and
one psychiatric hospital) that were identified as not compatible with the
Company's operating plans, based upon management's review of all facilities, and
giving consideration to current and expected competition in each market,
expected population trends in each market and the current and expected capital
needs in each market. At June 30, 1999, the carrying value of the long-lived
assets relating to the remaining eight facilities to be sold and the one
facility where operations were ceased was $101.4 million. The eight facilities
to be sold and the three facilities that were either sold or closed contributed
net revenues of $61.8 million, and $81.4 million for the three months ended June
30, 1999 and 1998, respectively and $138.8 million, and $175.0 million for the
six months ended June 30, 1999 and 1998, respectively. These facilities also
contributed losses before impairment charges and income tax benefit of $17.2
million and $16.6 million for the three months ended June 30, 1999 and 1998,
respectively and $24.6 million and $26.0 million, for the six months ended June
30, 1999 and 1998, respectively. The Company expects to complete the sales of
the remaining eight facilities and the one hospital where operations were ceased
over the next twelve months. The Company is required to use sales proceeds on
the remaining facilities to retire certain outstanding indebtedness (see NOTE
5).
In the six months ended June 30, 1999, the carrying value of the long-lived
assets related to certain of these facilities (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. These three
facilities had net revenues of approximately $21.7 million and $23.0 million for
the three months ended June 30, 1999 and 1998, respectively and $46.7 million
and $47.9 million for the six months ended June 30, 1999 and 1998, respectively.
These facilities also contributed losses from continuing operations before
income tax benefit and the asset impairment charge of
6
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
approximately $4.7 million, and $3.9 million, for the three months ended June
30, 1999 and 1998, respectively and $8.2 million for each of the six months
ended June 30, 1999 and 1998.
During the six months ended June 30, 1999, the Company 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 will
continue to be used and are now recorded at estimated fair value, based upon
discounted, estimated future cash flows.
The impairment charges, totaling $33.9 million, did not have a significant
impact on the Company's cash flows and are not expected to significantly impact
cash flows for future periods. As a result of the write-downs, depreciation and
amortization expense related to these assets will decrease in future periods. In
the aggregate, the net effect of the change in depreciation and amortization
expense is not expected to have material effect on operating results for future
periods.
NOTE 5--LONG-TERM DEBT
In connection with the Spin-off, the Company assumed $673.8 million of debt
financing from Columbia/HCA. The debt consisted originally of a $75.0 million
asset sale bridge loan bearing interest at LIBOR plus 3.25% (8.44% per annum at
July 31, 1999) due May 11, 2000, a $65.0 million Tranche A term loan bearing
interest at LIBOR plus 3.25% (8.44% per annum at July 31, 1999) with principal
amounts due beginning in 1999 through 2004, a $200.0 million Tranche B term loan
bearing interest at LIBOR plus 4% (9.19% per annum at July 31, 1999) with
principal amounts due beginning in 1999 through 2005, and $325.0 million senior
subordinated notes bearing interest at 11% due in 2009 with interest payments
due semi-annually. The Company also assumed various indebtedness of Columbia/HCA
related to specific hospitals in the aggregate amount of $8.8 million with
interest rates averaging 5.7% maturing over five years.
The Company's bank debt is secured by a pledge of substantially all of its
assets. The debt agreements require that the Company comply with various
financial ratios and tests and have restrictions on new indebtedness, asset
sales and use of proceeds therefrom, capital expenditures and dividends.
The Company made a $5.0 million principal payment on the asset sale bridge
loan in June 1999.
The Company's senior subordinated notes are guaranteed by all operating
subsidiaries of the Company (the "Subsidiary Guarantors"). The guarantee
obligations of the Subsidiary Guarantors are full, unconditional and joint and
several. The Company is currently in the process of registering the senior
subordinated notes with the Securities and Exchange Commission. The aggregate
assets, liabilities, equity and earnings of the Subsidiary Guarantors are
substantially equivalent to the total assets, liabilities, equity and earnings
of the Company and its subsidiaries on a consolidated basis. Separate financial
statements of the Subsidiary Guarantors are not included in the accompanying
financial statements because management of the Company has determined that
separate financial statements would not be material to investors.
The Company 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
ownership percentages of the Company and its subsidiaries in these Company-
controlled entities range from 51% to 95%.
Separate financial statements of the non-wholly owned Subsidiary Guarantors
have not been presented because management has determined that they would not be
material to investors. However, summarized combined financial information for
the non-wholly owned Subsidiary Guarantors are as follows:
7
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
June 30, December 31,
1999 1998
---- ----
Summarized Balance Sheets
- -------------------------
Current assets........................................ $18.0 $20.0
Non-current assets.................................... 59.8 55.5
----- -----
Total assets.......................................... $77.8 $75.5
===== =====
Current liabilities................................... $ 5.3 $ 4.4
Non-current liabilities............................... 4.3 4.2
Equity................................................ 68.2 66.9
----- -----
Total liabilities and equity.......................... $77.8 $75.5
===== =====
<TABLE>
<CAPTION>
For the three months ended For the six months ended
--------------------------- -------------------------
June 30, June 30 June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Summarized Statement of Income
- ------------------------------
<S> <C> <C> <C> <C>
Net revenues....................... $21.1 $24.0 $41.9 $47.5
Income from continuing operations.. $ 5.4 $ 5.5 $10.3 $11.8
Net income......................... $ 5.4 $ 5.5 $10.3 $11.8
</TABLE>
Non-current assets shown above include intercompany receivables of $11.3
million and $7.1 million as of June 30, 1999 and December 31, 1998,
respectively.
The Company also assumed a $125.0 million revolving line of credit bearing
interest at LIBOR plus 3.25% due in 2004. No amounts were outstanding as of July
31, 1999.
A five-year maturity schedule is as follows (in millions):
1999 $ 92.9
2000 14.0
2001 13.4
2002 20.9
2003 57.9
Thereafter 469.7
------
$668.8
======
As part of the assumption of the above reference debt financing, the Company
also assumed approximately $15.0 million in debt issue costs, which will be
amortized over the lives of the loans. Accumulated amortization of the debt
issue costs was $0.5 million at June 30, 1999.
NOTE 6--STOCK BENEFIT PLANS
In connection with the Spin-off, the Company adopted the 1999 Long-Term
Incentive Plan, for which 5,350,000 shares of the Company's common stock have
been reserved for issuance. The 1999 Long-Term Incentive Plan authorizes the
grant of stock options, stock appreciation rights and other stock based awards
to officers and employees of the Company. On the Spin-off date, 554,921 stock
options were granted under this plan, relating to pre-existing vested
Columbia/HCA options. These options have varying prices based on the exercise
price of the pre-existing Columbia/HCA options and were exercisable
on the date of the grant. On June 10, 1999, 2,897,126 stock options were
granted under this plan with an exercise price of the market price on the date
of the grant. These options are exercisable beginning in part from date of
grant to four years after the grant. All options granted under this plan expire
in 10 years from date of grant.
The Company has also adopted the Executive Stock Purchase Plan, for which
1,000,000 shares of the Company's common stock were reserved for issuance. The
Executive Stock Purchase Plan grants to specified executives of the Company a
right to purchase shares of common stock from the Company. The Company loaned
8
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
each participant in the plan 100% of the purchase price of the Company's common
stock, on a full recourse basis. The principal and interest of the loans will
mature on the fifth anniversary following the purchase of the shares,
termination of the participants' employment or bankruptcy of the participant. In
addition, the Committee has granted to such executives stock options equal to
three-quarters of a share for each share purchased. The exercise price of these
stock options is to equal the purchase price of the shares and expire in 10
years. 970,000 shares have been purchased by participants in the plan and
options to purchase an additional 727,500 shares were issued in connection with
such purchased shares. The options are exercisable 50% on the grant date and 50%
two years from grant date. The total amount, which has been loaned to
participants to purchase shares under the plan, is $9.1 million which was
recorded as a reduction to additional paid-in capital.
Also, the Company adopted various other plans for which 500,000 shares of the
Company's common stock have been reserved for issuance. On June 10, 1999, the
Company granted under such plans 120,000 options to non-employee directors,
which are exercisable over a four year period. The company also granted 340,000
options to Columbia/HCA executives with the exercise price of such options at
market price on the date of grant and were exercisable on the date of grant.
Columbia/HCA agreed to pay the Company $1.5 million in exchange for the issuance
of these options. All of these options expire 10 years after grant.
The following table summarizes information regarding the options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Weighted Average Weighted Number Average
Outstanding Remaining Average Exercisable Exercise
at 6/30/99 Contractual Life Exercise Price at 6/30/99 Price
---------- ---------------- -------------- ---------- -----
Range of Exercise Prices
- -----------------------------
<S> <C> <C> <C> <C> <C>
$0.07 to $18.84 4,639,547 10 years $11.27 1,437,396 $11.28
</TABLE>
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, but continues to measure stock-based compensation cost in
accordance with Accounting Principles Board Opinion No. 25 and its related
interpretations. If the Company had measured compensation cost for the stock
options granted to its employees under the fair value based method prescribed by
SFAS 123, the net loss would have been changed to the pro forma amounts set
forth below (dollars in millions):
For the For the
three months six months
ended ended
June 30, 1999 June 30,1999
------------- -------------
Net loss
As reported.......... $ (9.5) $(45.4)
Pro forma............ $(16.1) $(52.0)
Basic loss per share:
As reported.......... $(0.31) $(1.51)
Pro forma............ $(0.53) $(1.73)
The fair values of stock options granted to the Company's employees used to
compute pro forma net loss disclosures were estimated on the date of grant using
the Black-Scholes option-pricing model based on the following weighted average
assumptions:
Risk free interest rate.......................................... 6.16%
Expected life ................................................... 10 years
Expected volatility.............................................. 23.90%
Expected dividend yield.......................................... --
The weighted-average fair values of stock options granted to Triad employees
during the six months ended June 30, 1999, was $11.05 per option.
9
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
In connection with the Spin-off, the Company established an Employee Stock
Ownership Plan ("ESOP") for substantially all of its employees. The ESOP
purchased from the Company, at fair market value, 3,000,000 shares of the
Company's common stock. The purchase was primarily financed by the ESOP
issuing a promissory note to the Company, which will be repaid annually in equal
installments over a 10-year period beginning December 31, 1999. The Company will
make contributions to the ESOP which the ESOP will use to repay the loan. The
Company's stock acquired by the ESOP is held in a suspense account and will be
allocated to participants at market value from the suspense account as the loan
is repaid.
The loan to the ESOP is recorded as unearned ESOP compensation on the
Company's Condensed Consolidated Balance Sheets. Reductions are made to
unearned ESOP compensation as shares are committed to be released to
participants at cost. Recognition of ESOP expense is based on the average
market price of shares committed to be released to participants. Shares are
deemed to be committed to be released ratably during each period as the
employees perform services. The difference between average market price and
cost of the shares are shown as a change in additional paid-in capital. As the
shares are committed to be released, the shares become outstanding for earnings
per share calculations. The Company recognized ESOP expense of $0.5 million
during the three months ended June 30, 1999.
The ESOP shares as of June 30, 1999 were as follows:
Shares committed to be released 42,857
Unreleased shares 2,957,143
---------
Total ESOP shares 3,000,000
=========
Fair value of unreleased shares $39.9 million
NOTE 7--LOSS PER SHARE
Loss per common share is based on the weighted average number of shares
outstanding assuming the shares issued at the Spin-off were outstanding at the
beginning of each period through June 30, 1999, adjusted for the shares issued
to the ESOP (see NOTE 6). Weighted average shares for the three and six months
ended June 30, 1999 are as follows:
<TABLE>
<CAPTION>
For the three For the six
months ended months ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
Weighted average shares exclusive of ESOP 30,278,587 30,089,687
Average of ESOP shares committed to be released 21,429 21,429
---------- ----------
Weighted average shares outstanding 30,300,016 30,111,116
========== ==========
</TABLE>
Loss per common share for the three and six month periods ended June 30, 1998
is presented as if the weighted average shares referenced above had been
outstanding for each period.
NOTE 8--DISCONTINUED OPERATIONS
During the three months ended June 30, 1998, the Company recorded income
from discontinued operations related to the divestiture of home health
businesses of $0.4 million (net of income tax benefit). The Company recorded a
loss from discontinued operations relating to these divestitures of $0.4 million
(net of income tax benefit) for the three months ended March 31, 1998. Revenues
for the home health businesses disposed of were approximately $12.5 million and
$27.3 million for the three and six months ended June 30, 1998. Columbia/HCA
and the Company completed the divestiture and received proceeds of approximately
$3.9 million, which approximated the carrying value of the net assets of
discontinued operations during the fourth quarter of 1998. The consolidated
financial statements reflect the results of operations and net assets of the
home health businesses as discontinued operations.
10
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
NOTE 9--AGREEMENTS WITH COLUMBIA/HCA
As described below, the Company has entered into several agreements with
Columbia/HCA to facilitate an orderly change after the Spin-off.
Columbia/HCA, the Company and LifePoint have entered into a distribution
agreement providing for certain arrangements among Columbia/HCA, the Company and
LifePoint subsequent to the date of the Spin-off. The distribution agreement
generally provides that the Company will be financially responsible for
liabilities arising out of or in connection with the assets and entities that
constitute the Company. The distribution agreement provides, however, that
Columbia/HCA will indemnify the Company for any losses, which it incurs arising
from the pending governmental investigations of certain of Columbia/HCA's
business practices. The distribution agreement further provides that
Columbia/HCA will indemnify the Company for any losses which it may incur
arising from stockholder actions and other legal proceedings related to the
governmental investigations which are currently pending against Columbia/HCA,
and from proceedings which may be commenced by governmental authorities or by
private parties in the future that arise from acts, practices or omissions
engaged in prior to the date of the Spin-off and related to such proceedings.
Columbia/HCA has also agreed that, in the event that any hospital owned by the
Company as of the date of the Spin-off is permanently excluded from
participation in the Medicare and Medicaid programs as a result of the
proceedings described above, then Columbia/HCA will make a cash payment to the
Company 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 less the net proceeds of the sale or other
disposition of the excluded hospital. Columbia/HCA will not indemnify the
Company for losses relating to any acts, practices and omissions engaged in by
the Company after the date of the Spin-off, whether or not the Company is
indemnified for similar acts, practices and omissions occurring prior to the
date of the Spin-off.
Columbia/HCA is negotiating one or more compliance agreements setting forth
certain agreements to comply with applicable laws and regulations. The Company
is obligated to participate with Columbia/HCA in these negotiations.
In connection with the Spin-off, Columbia/HCA also agreed to indemnify the
Company 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 the Company agreed to indemnify Columbia/HCA for
and pay to Columbia/HCA any payments received by it relating to such cost
reports. The Company will be responsible for the filing of these cost reports
and any terminating cost reports. The Company has recorded a receivable from
Columbia/HCA of $37.5 million at June 30, 1999 relating to the indemnification.
Columbia/HCA, the Company and LifePoint entered into a tax sharing and
indemnification agreement, which allocates tax liabilities among Columbia/HCA,
the Company and LifePoint, and addresses certain other tax matters such as
responsibility for filing tax returns, control of and cooperation in tax
litigation and qualification of the Spin-off as a tax-free transaction.
Generally, Columbia/HCA will be responsible for taxes that are allocable to
periods prior to the Spin-off, and Columbia/HCA, the Company and LifePoint will
each be responsible for its own tax liabilities (including its allocable share
of taxes shown on any consolidated, combined or other tax return filed by
Columbia/HCA) for periods after the Spin-off. The tax sharing and
indemnification agreement prohibits the Company from taking actions that could
jeopardize the tax treatment of either the Spin-off or the internal
restructuring of Columbia/HCA that preceded the Spin-off, and requires the
Company to indemnify Columbia/HCA for any taxes or other losses that result from
any such actions.
Prior to the date of the Spin-off, Columbia/HCA maintained various insurance
policies for the benefit of the Company and LifePoint. In connection with the
Spin-off, Columbia/HCA, the Company and LifePoint entered into an agreement
relating to insurance matters which provides that any claims against insurers
outstanding at the Spin-off will be for the benefit of the party who will own
the asset which is the basis for the claim, or, in the case of liability claim,
which is the owner of the facility at which the activity which is the subject of
the claim occurred. Columbia/HCA will pay the Company any portion of such a
claim that is unpaid by an insurer to satisfy deductible, co-insurance or self-
insurance amounts (unless such amounts were paid to or accounted for by the
affected entity prior to the Spin-off). Columbia/HCA and the Company have
ensured that all of the insurance policies in effect after the Spin-off provide
the same coverage to the Company that were available prior to the Spin-off. The
Company has
11
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
purchased continuous coverage under extensions or renewals of existing, or new,
policies issued by Health Care Indemnity, Inc., a subsidiary of Columbia/HCA.
Any retroactive rate adjustments for periods ending on or before the Spin-off,
in respect of such insurance policies, will be paid or received by Columbia/HCA.
Columbia/HCA's wholly owned subsidiary Columbia Information Services, Inc.
("CIS"), entered into a computer and data processing services agreement with the
Company. Pursuant to this agreement, CIS will provide computer installation,
support, training, maintenance, data processing and other related services to
the Company. The initial term of the agreement is seven years, which will be
followed by a wind-down period of up to one year. CIS charges the Company
approximately $19.0 million per year for services provided under this agreement.
In the event the agreement is terminated by the Company, it will be required to
pay a termination fee equal to the first month's billed fees, multiplied by the
remaining number of months in the agreement. CIS does not warrant that the
software and hardware used by CIS in providing services to the Company will be
Year 2000 ready, although CIS is currently making efforts in a professional,
timely and workmanlike manner that it deems reasonable to address Year 2000
issues with respect to the software licensed to the Company under the computer
and data processing services agreements. Pursuant to a Year 2000 professional
services agreement, Columbia/HCA also will continue its ongoing program of
inspecting medical equipment at Triad's hospitals to assure Year 2000
compliance. Under such agreement, Triad remains solely responsible for any lack
of Year 2000 compliance. The agreement terminates June 30, 2000.
Columbia/HCA, the Company and LifePoint entered into an agreement relating to
benefit and employment matters which allocates responsibilities for employment
compensation, benefits, labor, benefit plan administration and certain other
employment matters on and after the date of the Spin-off. The agreement
generally provides that the Company assumed responsibility for its employees
from and after the date of the Spin-off, and that Columbia/HCA retains the
liabilities with respect to former employees associated with the facilities and
operations of the Company who terminated employment on or prior to the date of
the Spin-off. Benefit plans established by the Company generally recognize past
service with Columbia/HCA.
Columbia/HCA also entered into an agreement with the Company, pursuant to
which the Company sub-leases from Columbia/HCA its principal executive offices
(at the same price per square foot as is payable under the existing Columbia/HCA
lease). The Company's sub-lease will terminate on January 31, 2003.
Columbia/HCA also entered into a transitional service agreement with the
Company pursuant to which Columbia/HCA will continue to furnish various
administrative services to the Company. These services will include support in
various aspects of payroll processing and tax reporting for employees of the
Company, real estate design and construction management, legal, human resources,
insurance and accounting matters on an as needed basis. Each agreement will
terminate on December 31, 2000, but may be terminated by the Company as to
specific services before December 31, 2000. The Company pays fees to
Columbia/HCA for services provided in amounts equal to Columbia/HCA's costs
incurred in providing such services.
The Company is a partner along with Columbia/HCA and LifePoint, in a group
purchasing organization which makes certain national supply and equipment
contracts available to their respective facilities.
Columbia/HCA entered into agreements with the Company whereby Columbia/HCA
will share telecommunications services with the Company under Columbia/HCA's
agreements with its telecommunications services provider and whereby
Columbia/HCA will make certain account collection services available to the
Company.
NOTE 10--CONTINGENCIES
Columbia/HCA Investigations
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Columbia/HCA is cooperating in these investigations and
understands that it is a target in these investigations. Given the breadth of
the ongoing investigations, Columbia/HCA expects additional subpoenas and other
investigative and prosecutorial activity to occur in these and other
jurisdictions in the future. Columbia/HCA is a defendant in several qui tam
actions brought
12
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
by private parties on behalf of the United States of America, which have been
unsealed and served on Columbia/HCA. The actions allege, in general, that
Columbia/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
the Company's knowledge, the government has intervened in at least seven qui tam
actions against Columbia/HCA. Columbia/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.
According to published reports, on July 2, 1999, a federal jury in Tampa,
Florida found two Columbia/HCA employees guilty of conspiracy and making false
statements on Medicare and Champus cost reports for years 1992 and 1993 and a
Medicaid cost report for 1993. Both were found not guilty of obstructing a
federal auditor. One other employee was acquitted of all counts for which he had
been charged and the jury was unable to reach a verdict with respect to another
employee.
Columbia/HCA is a defendant in a number of other suits, which allege, in
general, improper and fraudulent billing, overcharging, coding and physician
referrals, as well as other violations of law. Certain of the suits have been
conditionally certified as class actions.
It is too early to predict the effect of outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigations will be commenced. If Columbia/HCA is found to
have violated Federal or state laws relating to Medicare, Medicaid or similar
programs, Columbia/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 Columbia/HCA could be subject to substantial
costs resulting from an adverse outcome of one or more of such actions.
In connection with the Spin-off, Columbia/HCA has agreed to indemnify the
Company in respect of any losses which it may incur as a result of the
proceedings described above (see the description of the distribution agreement
in NOTE 9 for a description of such indemnification arrangement). If any of such
indemnified matters were successfully asserted against the Company, or any of
its facilities, and Columbia/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 the Company. Columbia/HCA will
not indemnify the Company for losses relating to any acts, practices and
omissions engaged in by the Company after the date of the Spin-off, whether or
not the Company is indemnified for similar acts, practices and omissions
occurring prior to the date of the Spin-off.
General Liability Claims
The Company 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 the Company, 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 the Company's results of operations or financial position.
NOTE 11--DERIVATIVES
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 year beginning after June 15, 2000. Because of the Company'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 the Company.
13
<PAGE>
Part I: Financial Information
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company owns and operates the health care service business which comprised
the Pacific Group of Columbia/HCA until the distribution by Columbia/HCA to its
shareholders of all of the shares of outstanding common stock of the Company
(the "Spin-off"). The Spin-off, which occurred on May 11, 1999, marks the
beginning of the Company's operations as an independent, publicly traded
company. As such, the historical financial statements of the Company prior to
the Spin-off may not necessarily be indicative of the Company's future
performance, nor do they necessarily reflect what the financial position and
results of operations of the Company would have been if it had operated as a
separate, stand-alone entity during the entire periods covered.
As of January 1, 1999 the Company owned or operated 39 hospitals (including
two facilities the Company is leasing from others and an investment in one
hospital that is accounted for using the equity method), 19 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 located in eleven western, southwestern and south-central states.
During the six months ended June 30, 1999, the Company sold two hospitals, the
proceeds of which were retained by Columbia/HCA, and ceased operations of one
hospital. The Company transferred, on January 1, 1999, two acute care hospitals
and three ambulatory surgery centers located in the Kansas City, Missouri area
to an unaffiliated third party pursuant to a long-term lease which provides for
payment to the Company of rental amounts approximating $16.0 million per year.
Also, in May 1999, the Company opened one new hospital, which is accounted for
using the equity method.
Information regarding Columbia/HCA included in this Report on Form 10-Q is
derived from reports and other information filed by Columbia/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 the Company 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 the Company. These factors include,
but are not limited to, (i) the highly competitive nature of the health care
business, (ii) the efforts of insurers, health care providers 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 the Company's common stock, (ix) the departure of key executive
officers from the Company, (x) changes in accounting practices, (xi) changes in
general economic conditions, (xii) future divestitures which may result in
additional charges, (xiii) the complexity of integrated computer systems and the
success and expense of the remediation efforts of the Company and relevant third
parties in achieving Year 2000 readiness, (xiv) the ability to enter into
managed care provider arrangements on acceptable terms, (xv) the availability
and terms of capital to fund the expansion of the Company's business, (xvi)
changes in business strategy or development plans, (xvii) timeliness of
reimbursement payments received under government programs and (xviii) 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 the Company. You 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
During the three and six months ended June 30, 1999, the Company experienced
declines in revenue and volumes. Management believes six factors have
contributed to the declines in revenue: the impact of reductions in Medicare
payments mandated by the Federal Balanced Budget Act of 1997 (the "Balanced
Budget Act"), the
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
announced divestitures of hospitals in certain markets, the disposition of two
acute care hospitals and cessation of operations of one acute care hospital, the
transfer pursuant to a long-term lease to an unaffiliated third party of two
acute care hospitals and three ambulatory surgery centers, the continuing trend
toward the conversion of more services to an outpatient basis and the impact of
the governmental investigations of Columbia/HCA. In the healthcare industry,
operations are subject to certain seasonal fluctuations, including decreases in
patient utilization during holiday periods and increases in patient utilization
during the cold weather months.
The Company'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. The Company
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 Balanced Budget Act, the Company's reimbursement from
Medicare and Medicaid programs was reduced in 1999 and 1998 and will be further
reduced as reductions in reimbursement levels are phased in over the next two
years. 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. The Company generally receives lower payments
per patient under managed care plans than under traditional indemnity insurance
plans. With an increasing proportion of services being reimbursed based upon
fixed payment amounts (where the payment is based upon the diagnosis, regardless
of the cost incurred or level of service provided), revenues, earnings and cash
flows are being significantly reduced. Net patient revenues related to Medicare
and Medicaid patients were 38.5% and 41.7% of total net patient revenues for the
three months ended June 30, 1999 and 1998, respectively, and 41.2% and 42.8% for
the six months ended June 30, 1999 and 1998, respectively. Net patient revenues
related to managed care plan patients were 34.6 and 24.6% of total net patient
revenues for the three months ended June 30, 1999 and 1998, respectively, and
31.7% and 25.2% for the six months ended June 30, 1999 and 1998, respectively.
Net patient revenues from capitation arrangements (prepaid health service
agreements) are less than 1% of net patient revenues.
Management of the Company has focused on streamlining the Company's portfolio
of facilities to eliminate those with poor financial performance, weak
competitive market positions or locations in certain urban markets. As a result,
management determined that eleven of the facilities (10 general, acute care
hospitals and one psychiatric hospital) which were part of the Columbia/HCA
Pacific Group as of January 1, 1999, did not meet the Company's strategic plan
and decided to divest these facilities. During the first six months of 1999,
Columbia/HCA sold two hospitals and ceased operations of one hospital, which had
net revenues of $1.6 million and $10.4 million for the three months ended June
30, 1999 and 1998, respectively and $9.8 million and $22.0 million for the six
months ended June 30, 1999 and 1998, respectively, and losses before impairment
charges and income tax benefit of $2.3 million and $4.6 million for the three
months ended June 30, 1999 and 1998, respectively, and $7.8 million and $8.2
million for the six months ended June 30, 1999 and 1998, respectively. The sale
of the eight remaining facilities and the one facility which operations were
ceased is expected to be completed over the next twelve months. For the three
months ended June 30, 1999 and 1998, the eleven facilities divested or to be
divested contributed net revenues of $62.9 million and $86.9 million and losses
before impairment charges and income tax benefit of $10.4 million and $18.3
million, respectively. For the six months ended June 30, 1999 and 1998, these
eleven facilities contributed net revenues of $140.0 and $183.6 million and
losses before impairment changes and income tax benefit of $28.3 million and
$30.9 million, respectively. On January 1, 1999, the Company transferred two
acute care hospitals and three ambulatory surgery centers located in the Kansas
City, Missouri area to an unaffiliated third party pursuant to a long-term lease
which provides for payment to the Company of rental amounts approximating $16.0
million per year. For the three months ended June 30, 1999 and 1998, these
leased facilities contributed net revenues, exclusive of the $4.0 million lease
payments, of $(2.4) million and $50.3 million and income (loss) before
impairment charges and income tax benefit of $(3.7) million and $5.3 million,
respectively. For the six months ended June 30, 1999 and 1998, the leased
facilities contributed net revenues, exclusive of the $8.0 million lease
payments, of $(4.4) million and $100.2 million and income (loss) before
impairment charges and income tax benefit of $(12.4) million and $7.9 million,
respectively. These leased hospitals, along with the facilities divested and to
be divested, accounted for a majority of the decrease in revenue and volume for
the Company.
The Company'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.
15
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
Net outpatient revenues grew to 49.8% and 47.6% of net patient revenues for the
three and six months ended June 30, 1999 respectively, compared to 49.6% and
47.2% for the three and six months ended June 30, 1998.
Management also believes that the impact of the ongoing governmental
investigations of certain Columbia/HCA business practices and the related media
coverage may have created uncertainties with physicians, patients and payers in
certain of the Company's markets.
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 the Company's inability to
control these trends and the associated risks. To maintain and improve its
operating margins in future periods, the Company must increase patient volumes
while controlling the costs of providing services. If the Company 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, Columbia/HCA agreed to indemnify the Company
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 the Company agreed to indemnify Columbia/HCA for and pay to
Columbia/HCA any payments received by it relating to such cost reports. The
Company will be responsible for the filing of these cost reports and any
terminating cost reports. The Company has recorded a receivable from
Columbia/HCA relating to the indemnification of $37.5 million as of June 30,
1999.
16
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
Operating Results Summary
The following is a summary of results from continuing operations for the
three and six months ended June 30, 1999 and 1998 (dollars in millions,
except per share amounts and ratios):
<TABLE>
<CAPTION>
For the three months ended For the six months ended
-------------------------- ------------------------
1999 1998 1999 1998
------------------- ------------------ ------------------- -----------------
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $340.1 100.0 $399.8 100.0 $707.7 100.0 $813.8 100.0
Salaries and benefits......... 146.6 43.1 174.3 43.6 303.5 42.9 352.4 43.3
Supplies...................... 48.5 14.3 59.0 14.8 102.6 14.5 123.0 15.1
Other operating expenses...... 79.1 23.3 93.0 23.3 161.0 22.7 181.4 22.3
Provision for doubtful
accounts..................... 33.1 9.7 35.7 8.9 67.6 9.5 72.6 8.9
Depreciation and
amortization................. 26.3 7.7 26.6 6.7 54.3 7.7 52.8 6.5
Interest expense allocated
from Columbia/HCA............ 4.2 1.2 13.7 3.4 18.5 2.6 26.2 3.2
Interest expense.............. 9.9 2.9 3.6 0.9 13.6 1.9 7.2 0.9
ESOP expense.................. 0.5 0.1 -- -- 0.5 0.1 -- --
Management fees allocated
from Columbia/HCA............ 2.1 0.6 7.4 1.9 8.9 1.3 15.0 2.1
Impairment of long-lived
assets....................... -- -- -- -- 33.9 4.8 -- --
------ ----- ------ ----- ------ ----- ------ -----
350.3 103.0 413.3 103.4 764.4 108.0 830.6 102.1
------ ----- ------ ----- ------ ----- ------ -----
Loss from continuing
operations before minority
interests, equity in
earnings, and income
tax benefit............... (10.2) (3.0) (13.5) (3.4) (56.7) (8.0) (16.8) (2.1)
Minority interests in
earnings of consolidated
entities..................... (2.5) (0.7) (2.5) (0.6) (4.7) (0.7) (6.5) (0.8)
Equity in earnings (loss)
of non-consolidating
entities..................... (1.9) (0.6) 1.1 0.3 (1.5) (0.2) 2.5 0.3
------ ----- ------ ----- ------ ----- ------ -----
Loss from continuing
operations before
income tax benefit........ (14.6) (4.3) (14.9) (3.7) (62.9) (8.9) (20.8) (2.6)
Income tax benefit............ 5.1 1.5 4.4 1.1 17.5 2.5 6.2 0.8
------ ----- ------ ----- ------ ----- ------ -----
Loss from continuing
operations................... $ (9.5) (2.8) $(10.5) (2.6) $(45.4) (6.4) $(14.6) (1.8)
====== ===== ====== ===== ====== ===== ====== =====
Loss per common share from
continuing operations........$ (0.31) $(0.34) $(1.51) $(0.49)
EBITDA (a)....................$ 30.9 $38.9 $71.5 $86.9
Number of hospitals at end
of period (b)................ 38 39 38 39
Licensed beds at end of
period (c)................... 4,974 5,907 4,974 5,907
Available beds at end of
period (d)................... 4,452 5,192 4,452 5,192
Admissions (e)................ 36,756 41,789 79,194 87,268
Adjusted admissions (f)....... 60,650 68,976 128,285 139,752
Patient days (g).............. 168,707 202,607 366,933 432,017
Adjusted patient days (h).... 278,381 334,420 594,390 691,836
Emergency room visits......... 133,590 147,493 286,329 294,571
Average length of stay (i).... 4.6 4.9 4.6 5.0
Average daily census (j)...... 1,875 2,251 2,039 2,400
Occupancy rate (k)............ 42.1% 43.4% 45.8% 46.2%
Net patient revenue per
adjusted patient day......... 1,184 1,156 1,154 1,176
Gross inpatient revenue....... $453.1 $506.2 $961.4 $1,071.1
Gross outpatient revenue...... $294.6 $329.3 $595.9 $644.2
Gross outpatient revenue
percentage................... 39.4% 39.4% 38.3% 37.6%
Net inpatient revenue......... $165.6 $195.0 $359.6 $419.6
Net outpatient revenue........ $164.1 $191.7 $326.3 $374.7
Net outpatient revenue
percentage................... 49.8% 49.6% 47.6% 47.2%
</TABLE>
17
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
(a) EBITDA is defined as income from continuing operations before depreciation
and amortization, interest expense, management fees, impairment of long-
lived assets, minority interests in earnings of consolidated entities and
income tax benefit. 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 combined consolidated financial
statements as an indicator of financial performance or liquidity. Because
EBITDA is not a measurement determined in accordance with generally
accepted accounting principles and is thus susceptible to varying
calculations, EBITDA as presented may not be comparable to other similarly
titled measures of other companies.
(b) Number of hospitals include two facilities which are leased to a third
party and two hospitals not consolidated for financial reporting purposes
for each period in 1999. This table does not include any operating
statistics for these facilities.
(c) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(d) Available beds are those beds a facility actually has in use.
(e) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's facilities and is used by
management and certain investors as a general measure of inpatient volume.
(f) Adjusted admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(g) Represents the total number of days each patient stays in the Company's
hospitals.
(h) Adjusted patient days is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
patient days are computed by multiplying patient days (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
patient days computation "equates" outpatient revenue to the volume measure
(patient days) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(i) Represents the average number of days an admitted patient stays in the
Company'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.
(j) Represents the average number of patients in the Company's hospital beds
each day.
(k) Represents the percentage of hospital available beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
Three Months Ended June 30, 1999 and 1998
Losses from continuing operations before income tax benefit decreased to $14.6
million in the three months ended June 30, 1999 from $14.9 million in the three
months ended June 30, 1998. The decrease in pretax loss was attributable to
actual interest expense and corporate overhead incurred being $5.0 million less
than the allocation of interest expense and management fee from Columbia/HCA.
Additional factors contributing to the decrease were $4.0 million of lease
income from the leased facilities (which commenced January 1999) that was
received in the three months ended June 30, 1999, decreases in losses of $1.3
million in the facilities that were divested and the $2.0 million in
improvements in operations at the facilities that will remain after the planned
divestitures. The decreases were partially offset by a $9.7 million reduction
of pretax income relating to the leased facilities in Kansas City, Missouri,
$1.8 million of favorable cost report settlements in 1998 and $3.0 million
reduction in equity in earning at non-consolidating entities due to the start up
of operations of a hospital that opened in May 1999.
18
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Revenues decreased 14.9% to $340.1 million in the three months ended June 30,
1999 compared to $399.8 million in the same period of 1998. Inpatient admissions
decreased 12.0% and adjusted admissions (adjusted to reflect combined inpatient
and outpatient volume) decreased 12.1% in the three months ended June 30, 1999
compared to the three months ended June 30, 1998. Revenues, admissions and
adjusted admissions declined primarily as a result of the facilities that were
leased in January 1999. In the three months ended June 30, 1998, these
facilities had revenues of $50.3 million, admissions of 4,512 and adjusted
admissions of 7,344. Other factors contributing to the reduction of revenues
include an $8.8 million reduction relating to the sale of two hospitals and
cessation of operations of one hospital, reduction of $12.2 million relating to
the facilities that management intends to divest in the three months ended June
30, 1999 compared to the three months ended June 30, 1998 and $1.8 million of
favorable cost report settlements in 1998. These were partially offset by $4.0
million of lease income from the leased facilities in the three months ended
June 30, 1999 and increases of $11.4 million for the facilities that will remain
after the planned divestitures.
Revenues have been decreasing over the past several years due to several
factors. These factors include decreases in Medicare rates of reimbursement
mandated by the Balanced Budget Act which became effective October 1, 1997
(lowering the three months ended June 30, 1999 revenues by approximately $3.0
million compared to $1.4 million during the three months ended June 30, 1998)
and continued increases in discounts from the growing number of managed care
payers (managed care as a percent of net patient revenues increased to 34.6% in
the three months ended June 30, 1999 compared to 24.6% during the three months
ended June 30, 1998).
Salaries and benefits, as a percentage of revenues, decreased to 43.1% in the
three months ended June 30, 1999 from 43.6% in the three months ended June 30,
1998. The decrease was primarily attributable to the leased facilities, which
had a higher percentage of salaries and benefits to net revenue. This decrease
was partially offset by $2.0 million in bonuses, relating to pre-spin
activities, that were incurred during the three months ended June 30, 1999.
Supply costs decreased as a percentage of revenues to 14.3% in the three
months ended June 30, 1999 from 14.8% in the three months ended June 30, 1998
due to the leased facilities having a higher percentage of supply costs to net
revenue.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes), remained relatively unchanged as a percentage
of revenues in the three months ended June 30, 1999 compared to the three months
ended June 30, 1998.
Provision for doubtful accounts, as a percentage of revenues, increased to
9.7% in the three months ended June 30, 1999 from 8.9% in the three months ended
June 30, 1998 due to the reductions in net revenues relating to the leased
facilities. Additionally, the uncertain status of the held for sale facilities
contributed to the increase.
Depreciation and amortization increased as a percentage of revenues to 7.87%
in the three months ended June 30, 1999 from 6.7% in the three months ended June
30, 1998, primarily due to the increased capital expenditures and to the
decrease in net revenues.
Interest expense allocated from Columbia/HCA, which was represented by
interest incurred on the net intercompany balance with Columbia/HCA, decreased
to $4.2 million in the three months ended June 30, 1999 compared to $13.7
million in the three months ended June 30, 1998 due to of the Spin-off which
eliminated the intercompany balances.
Interest expense, which is offset by $0.4 million of interest income,
increased to $9.9 million in the three months ended June 30, 1999 from $3.6
million in the three months ended June 30, 1998 due to the assumption of an
additional $665.0 million in debt from Columbia/HCA in the Spin-off.
Management fees allocated from Columbia/HCA decreased to $2.1 million from
$7.4 million during the three months ended June 30, 1999 compared to the three
months ended June 30, 1998 due to the Spin-off from Columbia/HCA.
Minority interests, which are primarily related to one ambulatory surgery
center joint venture in Arizona, remained unchanged as a percentage of revenues
in the three months ended June 30, 1999 compared to the three months ended June
30, 1998.
19
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Six Months Ended June 30, 1999 and 1998
Losses from continuing operations before income tax benefit increased to $62.9
million in the six months ended June 30, 1999 from $20.8 million in the six
months ended June 30, 1998. The increase in pretax loss was primarily
attributable to impairment charges of $33.9 million recorded in the first
quarter of 1999 due to the management reassessment of the facilities that would
not be part of the Company's core markets. Other increases in pretax loss were
attributable to reduction of pretax income relating to the leased facilities in
the Kansas City, Missouri area of $22.2 million in the six months ended June 30,
1999 compared to the six months ended June 30, 1998, $1.8 million of favorable
cost report settlements in 1998 and $4.0 million reduction in equity in earnings
of non-consolidating entities due to the start up of operations of a hospital
that opened in May 1999. These were partially offset by $8.0 million of lease
income from the leased facilities, a $3.5 million reduction in interest expense
and corporate overhead compared to the allocation of interest expense and
management fees from Columbia/HCA and $10.0 million improvement in the
operations of facilities that will remain after the planned divestiture.
Revenues decreased 13.0% to $707.87 million in the six months ended June
30, 1999 compared to $813.8 million in the six months ended June 30, 1998.
Inpatient admissions decreased 9.2% and adjusted admissions (adjusted to reflect
combined inpatient and outpatient volume) decreased 8.2% in the six months ended
June 30, 1999 compared to the six months ended June 30, 1998. Revenues,
admissions and adjusted admissions declined primarily as a result of the
facilities that were leased in January 1999. In the six months ended June 30,
1998, these facilities had revenues of $100.2 million, admissions of 9,255 and
adjusted admissions of 14,682. Other factors contributing to the reduction of
revenues include a $12.2 million reduction relating to the sale of two hospitals
and cessation of operations of one hospital in the six months ended June 30,
1999 compared to the six months ended June 30, 1998 and $1.8 million of
favorable cost report settlements in 1998. These were partially offset by $8.0
million of lease income from the leased facilities in the six months ended June
30, 1999 and improvement in the operations of facilities that will remain after
the planned divestitures.
Revenues have been decreasing over the past several years due to several
factors. These factors include decreases in Medicare rates of reimbursement
mandated by the Balanced Budget Act which became effective October 1, 1997
(lowering revenues by approximately $6.0 million compared to $2.8 million during
the six months ended June 30, 1999 and 1998, respectively) and continued
increases in discounts from the growing number of managed care payers (managed
care as a percent of net revenues increased to 31.7% compared to 25.1% during
the six months ended June 30, 1999 and 1998, respectively).
Salaries and benefits, as a percentage of revenues, decreased to 42.9% in
the six months ended June 30, 1999 from 43.3% in the six months ended June 30,
1998. The decrease was primarily attributable to the leased facilities, which
had a higher percentage of salaries and benefits to net revenue. This decrease
was partially offset by $2.0 million in bonuses, relating to pre-spin
activities, that were incurred in 1999.
Supply costs decreased as a percentage of revenues to 14.5% in the first
quarter of 1999 from 15.1% in the first quarter of 1998 due to the leased
facilities having a higher percentage of supply costs to net revenue.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes), as a percentage of revenues, increased to
22.87% in the six months ended June 30, 1999 from 22.3% in the six months ended
June 30, 1998 due primarily to the collection fees relating to collection
efforts on the remaining accounts receivable of the leased facilities in 1999.
Provision for doubtful accounts, as a percentage of revenues, increased to
9.5% in the six months ended June 30, 1999 from 8.9% in the six months ended
June 30, 1998 due to $3.6 million of certain write offs and adjustments relating
to the leased facilities in the first quarter of 1999 and a $2.0 million
adjustment that was made at one facility in the first quarter of 1999 to reflect
deterioration in accounts receivable. Additionally, the uncertain status of the
held for sale facilities contributed to the increase.
Depreciation and amortization increased as a percentage of revenues to 7.7% in
the six months ended June 30, 199 from 6.5% in the six months ended June 30,
1998, primarily due to the increased capital expenditures and to the decrease in
net revenues.
Interest expense allocated from Columbia/HCA which was represented by interest
incurred on the net intercompany balance with Columbia/HCA, decreased to $18.5
million in the six months ended June 30, 1999 compared to $26.2 million in the
six months ended June 30, 1998 due to the Spin-off which eliminated the
intercompany balances.
20
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Interest expense, which includes $0.6 million of interest income, increased to
$13.6 million in the six months ended June 30, 1999 from $7.2 million in the six
months ended June 30, 1998 due to the assumption of an additional $665.0 million
in debt from Columbia/HCA in the Spin-off.
Management fees allocated from Columbia/HCA decreased to $8.9 million from
$15.0 million during the six months ended June 30, 1999 compared to the six
months ended June 30, 1998, due to the Spin-off from Columbia/HCA.
Impairments on long-lived assets were $33.9 million during the six months
ended June 30, 1999 due to the management reassessment of certain facilities
that would not be part of the core markets that the Company would go forward
with after the Spin-off. Management determined that the potential sales prices
of these facilities would not cover the book value of the facilities and a write
down would be necessary.
Minority interests, which are primarily related to one ambulatory surgery
center joint venture in Arizona, decreased slightly as a percentage of revenues
to 0.7% in the six months ended June 30, 1999 from 0.8% in the six months ended
June 30, 1998.
PRO FORMA OPERATING RESULTS SUMMARY
The following is a summary of pro forma results from continuing operations for
the three and six months ended June 30, 1999 and 1998 (dollars in millions,
except per share amounts and ratios). The pro forma operating results from
continuing operations reflect the following adjustments at the beginning of each
period:
(1) To reflect the following completed divestiture and cessation of operations
and planned divestitures in 1999:
(a) elimination of three and six months of 1999 and 1998 results of
operations of two acute care hospitals which was sold during the
first six months of 1999 (the proceeds of such sales were retained
by Columbia/HCA);
(b) elimination of three and six months of 1999 and 1998 results of
operation of seven acute care hospitals and one psychiatric
hospital for which the Company's management believes dispositions
over the next twelve months are probable; and
(c) elimination of three and six months 1999 and 1998 results of
operations of one acute care hospital which the Company ceased to
operate on May 31, 1999.
(2) To reflect the long term lease payment of $16.0 million per year and
elimination of operations in the three and six months of 1999 and 1998 of
two acute care hospitals and three ambulatory surgery centers in the Kansas
City, Missouri area which commenced in January 1999 as though such lease
had commenced at the beginning of each period.
(3) To adjust to the estimated, incremental general and administrative costs of
an annual amount of $22.4 million for the periods prior to the Spin-off in
1999 and three and six months of 1998 (in addition to $5.3 million and $7.6
million in the three and six months of 1999, respectively, and $1.8 million
and $3.7 million in the three and six months of 1998, respectively, in
costs already included in the consolidated statements of operations) that
would have been incurred if the Company had managed comparable general and
administrative functions and to eliminate the management fee allocated from
Columbia/HCA.
(4) To adjust historical retirement plan expenses recorded as a component of
salaries and wages and record the estimated annual Triad Hospitals, Inc.
Retirement Savings Plan (the "ESOP") expense. The Company's ESOP was
established on June 10, 1999 and the ESOP purchased 3.0 million newly
issued shares of the Company's common stock. The ESOP shares will be
released from a suspense account and allocated to the Company's
participating employees over a 10-year period. The non-cash ESOP expense
will be recognized as the shares are released and allocated to the
participants and is based upon the fair value of the shares
released.
(5) To adjust interest expense to an annual amount of $69.6 million for the
periods prior to the Spin-off in 1999 and three and six months of 1998. The
interest expense adjustment is based on the elimination of all intercompany
amounts payable to Columbia/HCA and the assumption of certain indebtedness
from Columbia/HCA in the aggregate amount of approximately $673.8 million
at an assumed average interest rate of 9.83% and approximately $1.5 million
in amortization of the estimated loan issuance costs.
(6) To adjust provision for income taxes for the estimated impact of the pro
forma adjustments.
(7) Pro forma income (loss) per share was computed using the weighted average
shares outstanding for the three and six months ended June 30, 1999.
21
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
PRO FORMA OPERATING RESULTS SUMMARY (continued)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
Amount Percentage Amount Percentage Amount Percentage Amount Percentage
------ ---------- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $279.8 100.0 $268.4 100.0 $571.9 100.0 $542.8 100.0
Salaries and benefits......... 115.1 41.1 108.1 40.3 231.1 40.4 217.8 40.1
Supplies...................... 40.7 14.6 37.2 13.9 83.5 14.6 76.7 14.1
Other operating expenses...... 61.0 21.8 63.0 23.5 123.0 21.5 123.0 22.7
Provision for doubtful
accounts..................... 24.0 8.6 23.8 8.9 47.3 8.3 48.9 9.0
Depreciation and amortization. 20.5 7.3 19.7 7.4 41.6 7.3 39.5 7.3
Interest expense.............. 16.8 6.0 17.4 6.5 34.0 6.0 34.8 6.4
ESOP expense.................. 1.1 0.4 1.1 0.4 2.2 0.4 2.2 0.4
------ ----- ------ ----- ------ ----- ------ -----
279.2 99.8 270.3 100.9 562.7 98.4 542.9 100.0
------ ----- ------ ----- ------ ----- ------ -----
Income from continuing
operations before minority
interests, equity in
earnings, and income
taxes....................... 0.6 0.2 (1.9) (0.7) 9.2 1.6 (0.1) --
Minority interests in
earnings of consolidated
entities..................... (2.6) (0.9) (2.1) (0.8) (4.8) (0.8) (5.7) (1.1)
Equity in earnings (loss) of
unconsolidated subsidiaries.. (1.9) (0.7) 1.1 0.4 (1.5) (0.3) 2.4 0.5
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
continuing operations before
income taxes................. (3.9) (1.4) (2.9) (1.1) 2.9 0.5 (3.4) (0.6)
Income tax (provision)
benefit...................... 0.9 0.3 0.5 0.2 (2.5) (0.4) 0.1 --
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from
continuing operations........ $ (3.0) (1.1) $ (2.4) (0.9) $ 0.4 0.1 $ (3.3) (0.6)
====== ===== ====== ===== ====== ===== ====== =====
Income (loss) per common
share from continuing
operations................... $(0.10) $(0.08) $0.01 $(0.11)
Pro forma EBITDA (a).......... $37.1 $37.5 $85.5 $78.9
Number of hospitals at end
of period (b)................ 29 28 29 28
Licensed beds at end of
period (c)................... 3,522 3,506 3,522 3,506
Available beds at end of
period (d)................... 3,196 3,059 3,196 3,059
Admissions (e)................ 28,916 27,774 61,446 57,800
Adjusted admissions (f)....... 49,797 48,400 103,859 97,551
Patient days (g).............. 129,556 127,709 278,273 272,173
Adjusted patient days (h)..... 223,111 222,551 470,350 459,357
Emergency room visits......... 105,704 103,773 225,209 208,296
Average length of stay (i).... 4.5 4.6 4.5 4.7
Average daily census (j)...... 1,440 1,419 1,546 1,512
Occupancy rate (k)............ 45.0% 46.4% 48.4% 49.4%
Net patient revenue per
adjusted patient day......... 1,213 1,140 1,177 1,181
Gross inpatient revenue....... $339.4 $301.4 $706.8 $634.5
Gross outpatient revenue...... $245.1 $223.8 $487.9 $436.4
Gross outpatient revenue
percentage................... 41.9% 42.6% 40.8% 40.8%
Net inpatient revenue......... $128.5 $112.7 $266.7 $243.9
Net outpatient revenue........ $142.2 $141.0 $287.1 $275.2
Net outpatient revenue
percentage................... 52.6% 55.6% 51.8% 53.0%
</TABLE>
___________
(a) Pro forma EBITDA is EBITDA, as defined previously, adjusted (i) as if the
Spin-off and the divestitures of certain facilities that the Company
intends to divest or cease to operate during 1999 had occurred at the
beginning of each period, (ii) as if the long term lease of the Kansas
City facilities in January 1999 had occurred at the beginning of each
period, (iii) to exclude non-cash ESOP expense and (iv) to include the
Company's management's estimated corporate overhead costs of $22.4 million
on an annual basis that are recorded in the Pro Forma Operating Results
Summary to replace the management fees allocated by Columbia/HCA. Pro forma
EBITDA is commonly used as an analytical indicator of leverage capacity and
debt service ability. Pro forma EBITDA should not be considered as a
measure of financial performance under generally accepted accounting
principles, and the items excluded from pro forma EBITDA are significant
components in understanding and assessing financial performance. Pro forma
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 combined
financial statements as an indicator of financial performance or liquidity.
Because pro forma EBITDA is not a measurement determined in accordance with
generally accepted accounting principles and is thus susceptible to varying
calculations, pro forma EBITDA as presented may not be comparable to other
similarly titled measures of the companies.
22
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
PRO FORMA OPERATING RESULTS SUMMARY (CONTINUED)
(b) Number of hospitals include two facilities which are leased to a third
party and two hospitals not consolidated for financial reporting purposes
for each period. This table does not include any operating statistics for
these facilities.
(c) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(d) Available beds are those beds a facility actually has in use.
(e) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to the Company's facilities and is used by
management and certain investors as a general measure of inpatient volume.
(f) Adjusted admissions is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "equates" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(g) Represents the total number of days each patient stays in the Company's
hospitals.
(h) Adjusted patient days is used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
patient days are computed by multiplying patient days (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
patient days computation "equates" outpatient revenue to the volume measure
(patient days) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(i) Represents the average number of days an admitted patient stays in the
Company'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.
(j) Represents the average number of patients in the Company's hospital beds
each day.
(k) Represents the percentage of hospital available beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms. The declining occupancy rate is primarily
attributed to the trend toward more services, that were previously
performed in an inpatient setting, being performed on an outpatient basis
and the decline in average length of stay per admission.
Pro Forma Comparisons of the Three Months Ended June 30, 1999 and 1998
The following discussion compares the results of the three months ended June
30, 1999 on a pro forma basis to the results of the three months ended June 30,
1998 on a pro forma basis, in each case giving effect to the assumptions set
forth above the summary table of pro forma results from continuing operations
for the three months ended June 30, 1999 and June 30, 1998.
On a pro forma basis, loss from continuing operations before income taxes
increased to $3.9 million in the three months ended June 30, 1999 from $2.9
million in the three months ended June 30, 1998. The pro forma increase was
primarily due to start-up of operations at one facility (that is accounted for
using the equity method) which opened in May 1999 and $1.8 million of favorable
cost report settlements in 1998. This was partially offset by improved
operations of the facilities that will remain after the planned divestitures.
On a pro forma basis, revenues increased 4.2% to $279.8 million in the three
months ended June 30, 1999 compared to $268.4 million in the three months ended
June 30, 1999. Inpatient admissions increased 4.1% and adjusted admissions
increased 2.9% in the three months ended June 30, 1999 compared to the three
months ended June 30, 1998 on a pro forma basis. The increase in revenues, on a
pro forma basis, was due primarily to increased focus by management on the
markets that met the Company's strategic plans as the Company progressed toward
and completed the Spin-off and $1.8 million of favorable cost report settlements
in 1998. That increased management attention decreased the uncertainty in the
affected markets as to the eventual disposition of the facilities.
On a pro forma basis, salaries and benefits, as a percentage of net revenue,
increased to 41.1% in the three months ended June 30, 1999 from 40.3% in the
three months ended June 30, 1998 due to $2.0 million in bonuses, relating to
pre-spin activities, that were incurred during the three months ended June 30,
1999.
23
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
On a pro forma basis, supplies as a percentage of net revenue, increased to
14.6% compared to 13.9% in the three months ended June 30, 1999 and 1998,
respectively. The increase was due to increase in the purchases of higher cost
items due to higher acute care patients and increases in prices.
On a pro forma basis, provision for doubtful accounts, as a percentage of net
revenue, decreased to 8.6% in the three months ended June 30, 1999 from 8.9% in
the three months ended June, 1998 due to increased focus by management on the
core facilities that will remain with the Company after the planned
divestitures.
On a pro forma basis, other operating expenses, as a percentage of net
revenues, decreased to 21.8% from 23.5% for the three months ended June 30, 1999
and 1998, respectively. This was primarily due to the Company reducing the use
of outside contract services.
On a pro forma basis, depreciation and amortization, interest expense and
minority interests in earnings of consolidated entities remained relatively
unchanged for the three months ended June 30, 1999 compared June 30, 1998.
Pro Forma Comparisons of the Six Months Ended June 30, 1999 and 1998
The following discussion compares the results of the six months ended June
30, 1999 on a pro forma basis to the results of the six months ended June 30,
1998 on a pro forma basis, in each case giving effect to the assumptions set
forth above the summary table of pro forma results from continuing operations
for the six months ended June 30, 1999 and June 30, 1998.
On a pro forma basis, income from continuing operations before income taxes
increased to $2.9 million in the six months ended June 30, 1999 from a loss
from continuing operations before income taxes of $3.4 million in the six
months ended June 30, 1998. The pro forma increase was primarily due to improved
operations of the facilities that will remain after the planned divestitures.
This was partially offset by start-up of operations at one facility (that is
accounted for using the equity method) which opened in May 1999 and $1.8 million
of favorable cost report settlements in the six months ended June 30, 1998.
On a pro forma basis, revenues increased 5.4% to $571.9 million in the six
months ended June 30, 1999 compared to $542.8 million in the six months ended
June 30, 1998. Inpatient admissions increased 6.3% and adjusted admissions
increased 6.5% in the six months ended June 30, 1999 compared to the six months
ended June 30, 1998 on a pro forma basis. The increase in revenues, on a pro
forma basis, was due primarily to increased focus by management on the markets
that met the Company's strategic plan as the Company progressed toward and
completed the Spin-off. That increased management attention decreased the
uncertainty in the affected markets as to the eventual disposition of the
facilities. The increase was partially offset by $1.8 million of favorable cost
report settlements in the six months ended June 30, 1998.
On a pro forma basis, salaries and benefits, as a percentage of net revenue,
increased to 40.4% in the six months ended June 30, 1999 from 40.1% in the six
months ended June 30, 1998 due to $2.0 million bonuses, relating to pre-spin
activities, that were incurred during the six months ended June 30, 1999.
On a pro forma basis, supplies, as a percentage of net revenue, increased to
14.6% compared to 14.1% in the six months ended June 30, 1999 and 1998,
respectively. The increase was due to increase in the purchases of higher cost
items due to higher acute care patients and increases in prices.
On a pro forma basis, provision for doubtful accounts, as a percentage of net
revenue, decreased to 8.3% in the six months ended June 30, 1999 from 9.0% in
the six months ended June 30, 1998 due to increased focus by management on the
core facilities that will remain with the Company after the planned
divestitures.
On a pro forma basis, other operating expenses, as a percentage of net
revenue, decreased to 21.5% from 22.7% for the six months ended June 30, 1999
and 1998, respectively. This was primarily due to the Company reducing the use
of outside contract services.
On a pro forma basis, depreciation and amortization, interest expense and
minority interests in earnings of consolidated entities remained relatively
unchanged for the six months ended June 30, 1999 compared to June 30, 1998.
24
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Spin-off, the Company previously relied upon Columbia/HCA for
liquidity and sources of capital to supplement any needs not met by operations.
Subsequent to the Spin-off, as an independent, publicly traded company, the
Company has direct access to the capital markets and the ability to enter into
its own borrowing arrangements. At June 30, 1999, the Company had working
capital of $141.8 million.
Cash provided by continuing operating activities was $62.6 million in the six
months ended June 30, 1999 compared to $11.4 million in the six months ended
June 30, 1998. The increase was due to an increase in accounts payable and
other current liabilities, decrease in inventories and other assets and a
smaller increase in accounts receivable in 1999 than 1998.
Cash used in investing activities increased to $102.1 million in the six
months ended June 30, 1999 from $36.5 million in the six months ended June 30,
1998. This was due to an increase of construction projects in the six months
ended June 30, 1999 compared to the six months ended June 30, 1998 and
investments in a new hospital (which is not consolidated for financial reporting
purposes), that opened in May 1999. The Company expects to expend approximately
$120 million ($90 million for expansion) in capital expenditures from the date
of the Spin-off through the end of 1999, of which $7.4 million has been spent,
and approximately $90 million ($50 million for expansion) in 2000.
Cash provided by financing activities was $95.1 million in the six months
ended June 30, 1999 compared to $25.1 million in the six months ending June 30,
1998. This was due primarily to changes in the intercompany balances with
Columbia/HCA.
In connection with the Spin-off, all intercompany accounts payable by the
Company to Columbia/HCA were eliminated and the Company assumed $673.8 million
of debt obligations from Columbia/HCA. The debt consisted originally of a $75.0
million asset sale bridge loan bearing interest at LIBOR plus 3.25% per annum
due May 11, 2000, a $65.0 million Tranche A loan bearing interest at LIBOR plus
3.25% with principal amounts due beginning in 1999 through 2004, a $200.0
million Tranche B loan bearing interest at LIBOR plus 4.00% with principal
amounts due beginning in 1999 through 2005, and a $325.0 million senior
subordinated note bearing interest at 11% due in 2009. The Company also assumed
various indebtedness of Columbia/HCA related to specific hospitals in the
aggregate amount of approximately $8.8 million with interest rates averaging
5.7% maturing over five years. The Company also assumed a $125.0 million
revolving line of credit bearing interest at LIBOR plus 3.25% due in 2004. No
amounts were outstanding under the revolving credit facility as of July 31,
1999. The Company made a $5.0 million principal payment on the asset sale bridge
loan in June 1999. The Company's bank debt is secured by a pledge of
substantially all of its assets. The bank debt agreements require that the
Company comply with various financial ratios and tests, including a minimum net
worth test, a total funded debt to EBITDA ratio, a senior funded debt to EBITDA
ratio, and a minimum fixed charge coverage ratio, all as defined in the bank
debt agreements. The bank debt agreements and the indenture relating to the 11%
Senior Subordinated Notes also contain covenants that, among other things, limit
the ability of the Company to incur additional indebtedness, pay dividends on,
redeem or purchase its capital stock, make investments and capital expenditures,
engage in transactions with affiliates, create certain liens, sell assets, and
consolidate, merge or transfer assets.
As previously discussed, based upon a review of all facilities and trends in
each market, management of the Company has determined that 10 acute care
hospitals and one psychiatric hospital are not compatible with the Company's
strategic plans. Of the facilities to be divested, two acute care hospitals were
sold during the six months ended June 30, 1999, the proceeds of which were
retained by Columbia/HCA, and the operations of one acute care hospital were
ceased. The Company is required to use future sales proceeds on the remaining
facilities to retire certain outstanding indebtedness.
In January 1999, the Company entered into a fifteen year lease with an
unaffiliated party for the operations of two acute care hospitals and three
ambulatory surgery centers located in the Kansas City, Missouri area. The lease
payments are approximately $16.0 million per year. In January 2001, the lessee
has an option to purchase the facilities for approximately $130.0 million. As of
June 30, 1999, these facilities assets had a carrying value of $86.5 million.
On June 1, 1999 the Company completed a swap of its facility in Laredo, Texas
for a facility in Victoria, Texas and $4.4 million in cash. Management expects
that this transaction will reduce pre-tax earnings for the
25
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
remainder of the fiscal year by approximately $3.0 million. No gain or loss was
recorded during the second quarter of 1999 relating to the swap. The Company is
currently finalizing an appraisal of the Victoria, Texas hospital and expects
the appraisal to be completed during the third quarter. Any gain or loss as a
result of final appraisal will be recognized during the third quarter, although
the gain or loss should be minimal.
The Company has entered into a contract to sell its joint venture facility in
Amarillo, Texas, which is not part of the facilities that are identified
elsewhere in this document as held for sale, for approximately $28.0 million.
The Company's share of the proceeds will be approximately $23.0 million less
approximately $1.0 million of franchise tax incurred on the sale. The sale is
expected to close by the end of August 1999. As of June 30, 1999, the carrying
value of this facility was $8.5 million. For the three and six months ended
June 30, 1999, this facility had net revenues of $2.3 million and $5.0 million,
respectively, and pre-tax income of $0.0 million and $0.3 million, respectively.
For the three and six months ended June 30, 1998, net revenues were $2.9 million
and $5.5 million, and pre-tax income was $0.5 million and $1.0 million,
respectively.
In connection with the Spin-off, the Company established an ESOP, which
purchased from the Company at fair market value 3.0 million shares of the
Company's common stock. The ESOP has financed the purchase primarily by issuing
a promissory note to the Company, which will be repaid annually in equal
installments over 10 years beginning December 31, 1999. ESOP expense will be
recognized based on the number of shares to be released based on loan repayments
during each year multiplied by the average share price during that year. ESOP
shares outstanding for the earnings per share calculation will be the average
number of shares to be released.
Although the Company's indebtedness will be more substantial than was
historically the case for its predecessor entities, management expects that
operations and working capital facilities will provide sufficient liquidity for
the remainder of fiscal 1999 and for the next several years.
CONTINGENCIES
Columbia/HCA is currently the subject of several Federal investigations into
certain of its business practices, as well as governmental investigations by
various states. Management understand that Columbia/HCA is cooperating in these
investigations and that Columbia/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 Columbia/HCA expects
additional subpoenas and other investigative and prosecutorial activity to occur
in these and other jurisdictions in the future.
According to published reports, on July 2, 1999, a federal jury in Tampa,
Florida found two Columbia/HCA employees guilty of conspiracy and making false
statements on Medicare and Champus cost reports for years 1992 and 1993 and a
Medicaid cost report for 1993. Both were found not guilty of obstructing a
federal auditor. One other employee was acquitted of all counts for which he had
been charged and the jury was unable to reach a verdict with respect to another
employee.
Management believes that the ongoing governmental investigations and related
media coverage may have had a negative effect on Columbia/HCA's results of
operations (which includes the Company for the periods prior to the Spin-off
which are presented herein). The extent to which the Company may or may not
continue to be affected by the ongoing investigations of Columbia/HCA, the
initiation of additional investigations, if any, and the related media coverage
cannot be predicted.
In connection with the Spin-off, Columbia/HCA has agreed to indemnify the
Company in respect of any losses which it may incur arising from the
governmental investigations described above and from stockholder actions and
other legal proceedings related to the governmental investigations which are
currently pending against Columbia/HCA. Columbia/HCA has also agreed to
indemnify the Company 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 distribution date and related to the proceedings described above.
Columbia/HCA has also agreed that, in the event that any hospital owned by the
Company as of the date of the Spin-off is permanently excluded from
participation in the Medicare and Medicaid programs as a result of the
proceedings described above, then Columbia/HCA will make a cash payment to the
Company 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 less the net proceeds of the sale or other
disposition of the excluded
26
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
hospital. The Company has agreed that, in connection with the pending
governmental investigations of Columbia/HCA, it will participate with
Columbia/HCA in negotiating one or more compliance agreements setting forth each
of their agreements to comply with applicable laws and regulations. If any such
indemnified matters were successfully asserted against the Company, or any of
its facilities, and Columbia/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 the Company. Columbia/HCA will
not indemnify the Company for losses relating to any acts, practices and
omissions engaged in by the Company after the Spin-off date, whether or not the
Company is indemnified for similar acts, practices and omissions occurring prior
to the Spin-off date.
The Company 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 the Company, 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 the Company's results of operations or financial position.
IMPACT OF YEAR 2000 COMPUTER ISSUES
The Year 2000 problem is the result of two potential malfunctions that could
have an impact on Columbia/HCA's systems, including systems and equipment on
which the Company relies. The first problem arises due to computers being
programmed to use two rather than four digits to define the applicable year. The
second problem arises in embedded chips, where microchips and microcontrollers
have been designed using two rather than four digits to define the applicable
year. Certain of the Company's computer programs, building infrastructure
components (e.g., alarm systems and HVAC systems) and medical devices that are
date sensitive, may recognize a date using "00" as the year 1900 rather than the
year 2000. If uncorrected, the problem could result in computer system and
program failures that could result in a disruption of the Company's business
operations or equipment and medical device malfunctions that could affect
patient diagnosis and treatment.
Columbia/HCA and the Company entered into a computer and data processing
services agreement (see NOTE 9 to the Condensed Combined Financial Statements)
with the Company. Pursuant to this agreement, Columbia/HCA will provide
computer installation, support, training, maintenance, data processing and other
related services to the Company. Columbia/HCA does not warrant that the
software and hardware used by Columbia/HCA in providing services to the Company
will be Year 2000 ready, although Columbia/HCA is currently making efforts in a
professional, timely, and workmanlike manner that it deems reasonable to address
Year 2000 issues with respect to the software licensed to the Company under the
computer and data processing services agreements. In connection with its
participation in Columbia/HCA's Year 2000 project, the Company has made and will
continue to make certain expenditures related to software systems and
applications not obtained from Columbia/HCA and non-information technology
systems (e.g., vendor products, medical equipment and other related equipment
with embedded chips) to ensure that they are Year 2000 ready.
Pursuant to the computer and data processing services agreement, the Company
relies upon Columbia/HCA to support virtually all of its computer and
information technology services. Columbia/HCA and the Company also are
continuing an ongoing program to inspect medical equipment at the Company
facilities for Year 2000 readiness. The Company is dependent upon Columbia/HCA
in substantially all respects for the Year 2000 readiness of its information
technology and non-information technology systems and for contingency planning
in respect of Year 2000-related risks. Any failure by Columbia/HCA to adequately
address such matters could have a material adverse effect on the business,
financial condition, results of operations or prospects of the Company.
Columbia/HCA is utilizing both internal and external resources to manage and
implement its Year 2000 program. With the assistance of external resources,
Columbia/HCA has undertaken development of contingency plans in the event that
its Year 2000 efforts, or the Year 2000 efforts of third-parties upon which
Columbia/HCA and the Company rely, are not accurately or timely completed. The
Company management consults regularly with Columbia/HCA personnel for
development of such contingency plans. Columbia/HCA has developed a contingency
planning methodology and will implement contingency plans throughout 1999.
With respect to the information technology ("IT") systems portions of the
Columbia/HCA Year 2000 project, which address the inventory, assessment,
remediation, testing and implementation of internally developed software,
Columbia/HCA has identified various software applications that are being
addressed on separate time lines. Columbia/HCA has begun remediating these
software applications and is testing the software applications
27
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
where remediation has been completed. Columbia/HCA has also completed the
assessment of mission critical third party software (i.e., that software which
is essential for day-to-day operations) and has developed testing and
implementation plans with separate time lines. Columbia/HCA has completed and
placed into production 99% of software applications and anticipates completing,
in all material respects, remediation, testing and implementation for internally
developed and mission critical third party software by October 1, 1999, revised
from June 30, 1999. Remediation, testing and implementation of various software
applications will be complete in the fourth quarter of 1999. These exceptions to
IT systems goals should not have a material effect on Columbia/HCA's readiness
and accordingly the Company's. The IT systems portion of the Columbia/HCA Year
2000 project is currently on schedule in all material respects.
With respect to the IT infrastructure portion of the Columbia/HCA Year 2000
project, Columbia/HCA has undertaken a program to inventory, assess and correct,
replace or otherwise address impacted, vendor-supplied products (hardware,
systems software, business software, and telecommunication equipment).
Columbia/HCA has implemented a program to contact vendors, analyze information
provided, and to remediate, replace or otherwise address IT products that pose a
material Year 2000 impact. Columbia/HCA anticipates completion, in all material
respects, of the IT infrastructure portion of its program by September 30, 1999
(revised from an expected completion date of June 30, 1999). With respect to
such revised date, the IT infrastructure portion of the Columbia/HCA Year 2000
project is currently on schedule in all material respects.
Columbia/HCA presently believes that with modifications to existing software
or the installation of upgraded software under the IT infrastructure portion,
the Year 2000 will not pose material operational problems for the its computer
systems. However, if such modifications or upgrades are not accomplished in a
timely manner, Year 2000 related failures may present a material adverse impact
on the operations of the Company.
With respect to the non-IT infrastructure portion of Columbia/HCA's Year 2000
project, the Columbia/HCA has undertaken a program to inventory, assess and
correct, replace or otherwise address impacted vendor products, medical
equipment and other related equipment with embedded chips. Columbia/HCA has
implemented a program to contact vendors, analyze information provided, and to
remediate, replace or otherwise address devices or equipment that pose a
material Year 2000 impact. Columbia/HCA anticipates completion, in all material
respects, of the non-IT infrastructure portion of its program by September 30,
1999 (revised from an expected completion date of June 30, 1999). With respect
to such revised date, the non-IT infrastructure portion of Columbia/HCA Year
2000 project is currently on schedule in all material respects.
Columbia/HCA is prioritizing its non-IT infrastructure efforts by focusing on
equipment and medical devices that will have a direct impact on patient care.
Columbia/HCA is directing substantial efforts to repair, replace, upgrade or
otherwise address this equipment and these medical devices in order to minimize
risk to patient safety and health. Columbia/HCA is relying on information that
is being provided to it by equipment and medical device manufacturers regarding
the Year 2000 status of their products. While Columbia/HCA is attempting to
evaluate information provided by its previous and current vendors, there can be
no assurance that in all instances accurate information is being provided.
Columbia/HCA also cannot in all instances guarantee that the repair, replacement
or upgrade of all non-IT infrastructure systems will occur on a timely basis or
that such repairs, replacements or upgrades will avoid all Year 2000 problems.
Columbia/HCA has initiated communications with the Company's major third party
payers and intermediaries, including government payers and intermediaries. The
Company relies on these entities for accurate and timely reimbursement of
claims, often through the use of electronic data interfaces. Columbia/HCA has
not received assurances that these interfaces will be timely converted. Testing
with payers and intermediaries was not completed by June 30, 1999 because the
payers and intermediaries are not ready to test with Columbia/HCA systems. These
tests should be completed by September 30, 1999. Failure of these third party
systems could have a material adverse affect on the Company's cash flow and
results of operations.
Columbia/HCA also has initiated communications with the Company's mission
critical suppliers and vendors (i.e., those suppliers and vendors whose products
and services are essential for day-to-day operations) to verify their ability to
continue to deliver goods and services through the Year 2000. Columbia/HCA has
not received assurances from all mission critical suppliers and vendors that
they will be able to continue to deliver goods and services through the Year
2000, but Columbia/HCA is continuing its efforts to obtain such assurances.
Failure of these third parties could have a material impact on operations and/or
the ability to provide health care services.
28
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(continued)
With the assistance of external resources, Columbia/HCA has undertaken the
development of contingency plans in the event that its Year 2000 efforts, or the
efforts of third parties upon which the Company relies, are not accurately or
timely completed. Columbia/HCA has developed a contingency planning methodology
and will implement contingency plans throughout 1999.
While Columbia/HCA is developing contingency plans to address possible failure
scenarios, the Company recognizes that there are "worst case" scenarios which
may develop and are largely outside Columbia/HCA's control. The Company
recognizes the risks associated with extended infrastructure (power, water,
telecommunications) failure, the interruption of insurance payments to the
Company and the failure of equipment or software that could impact patient
safety or health despite the assurances of third parties. Columbia/HCA is
addressing these and other failure scenarios in its contingency planning effort
and is engaging third parties in discussions regarding how to manage common
failure scenarios, but the Company cannot currently estimate the likelihood or
the potential cost of such failures. Currently, the Company does not believe
that any reasonably likely worst case scenario will have a material impact on
the Company's revenues or operations. Those reasonably likely worst case
scenarios include continued expenditures for remediation, continued expenditures
for replacement or upgrade of equipment, continued efforts regarding contingency
planning, increased staffing for the periods immediately preceding and after
January 1, 2000, and possible payment delays from the Company's payers.
The Year 2000 project costs incurred by Columbia/HCA will have an impact on
the computer and data processing services agreement with the Company. The
Company is not currently able to reasonably estimate the ultimate cost to be
incurred by it for the assessment, remediation, upgrade, replacement and testing
of its impact non-information technology systems. The majority of the costs
(except the cost of new equipment) related to the Year 2000 project will be
expensed as incurred and are expected to be funded through operating cash flows.
The estimated completion dates for the Year 2000 modifications are based on
Columbia/HCA's management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, third party modification plans and other factors. However,
there can be no guarantees that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area and the ability to
locate and correct all relevant computer codes and all medical equipment.
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 the Company'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 the Company 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 the Company will not be adopted.
29
<PAGE>
Part II: Other Information
Item 6: Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
Exhibit Number Description
- -------------- -----------
2.1 Distribution Agreement dated May 11, 1999 by and among
Columbia/HCA Healthcare Corporation, LifePoint
Hospitals, Inc. and the Company. Incorporated by
reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
3.1 Certificate of Incorporation of the Company.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
3.2 By-Laws of the Company. Incorporated by reference from
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
4.1 Rights Agreement dated as of May 11, 1999 between the
Company and National City Bank as Rights Agent.
Incorporated by reference from the Company's Quarterly
Report on Form 10Q for the quarter ended March 31, 1999.
4.2(a) 11% Senior Subordinated Notes due 2009 Indenture dated
as of May 11, 1999 by and between Healthtrust, Inc.- The
Hospital Company and Citibank N.A. as Trustee.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
4.2(b) Form of Senior Subordinated Note due 2009 (filed as part
of Exhibit 4.2 (a)).
10.1 Tax Sharing and Indemnification Agreement dated May 11,
1999 by and among Columbia/HCA Healthcare Corporation,
LifePoint Hospitals, Inc. and the Company. Incorporated
by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
10.2 Benefits and Employment Matters Agreement dated May 11,
1999 by and among Columbia/HCA Healthcare Corporation,
LifePoint Hospitals, Inc. and the Company. Incorporated
by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
10.3 Insurance Allocation and Administration Agreement dated
May 11, 1999 by and among Columbia/HCA Healthcare
Corporation, LifePoint Hospitals, Inc. and the Company.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
10.4 Transitional Services Agreement dated May 11, 1999 by
and between Columbia/HCA Healthcare Corporation and the
Company. Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
10.5 Computer and Data Processing Services Agreement dated
May 11, 1999 by and between Columbia Information
Systems, Inc. and the Company. Incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.6 Agreement to Share Telecommunications Services dated May
11, 1999 by and between Columbia Information Systems,
Inc. and the Company. Incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
10.7 Year 2000 Professional Services Agreement dated May 11,
1999 by and between CHCA Management Services, L.P. and
the Company. Incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
30
<PAGE>
Exhibit Number Description
- -------------- -----------
10.8 Sub-Lease Agreement dated May 11, 1999 by and between
Med-Point LLC and the Company. Incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.9 Sub-Lease Agreement dated May 11, 1999 by and between
Healthtrust, Inc. - The Hospital Company and the
Company. Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
10.10* Triad Hospitals, Inc. 1999 Long-Term Incentive Plan.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
10.11* Triad Hospitals, Inc. Executive Stock Purchase Plan.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
10.12* Triad Hospitals, Inc. Management Stock Purchase Plan.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
10.13* Triad Hospitals, Inc. Outside Directors Stock and
Incentive Compensation Plan. Incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.14 Credit Agreement, dated as of May 11, 1999 among
Healthtrust, Inc. - The Hospital Company and Certain
Subsidiaries from time to time party thereto, as
Borrower, the Several Lenders from time to time parties
thereto, Citicorp USA, Inc. and The Chase Manhattan Bank
as Syndication Agents, Credit Lyonnais New York Branch
and Societe Generale as Co-Agents, Bank of America
National Trust and Savings Association as Administrative
Agent and NationsBanc Montgomery Securities, LLC as Lead
Arranger and Sole Book Manager. Incorporated by
reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
10.15 Assumption Agreement dated as of May 11, 1999 by and
between Bank of America National Trust and Savings
Association and the Company. Incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.16 Assumption Agreement dated as of May 11, 1999 by and
between Bank of America National Trust and Savings
Association and Triad Hospitals Holdings, Inc.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
27 Financial Data Schedule. (Included in electronic format
only.)
* Compensatory plan or arrangement.
(b) Reports on Form 8-K filed during the quarter ended June 30, 1999:
None
31
<PAGE>
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 12, 1999 By: /s/ Burke W. Whitman
--------------------
Burke W. Whitman
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
32
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
2.1 Distribution Agreement dated May 11, 1999 by and among
Columbia/HCA Healthcare Corporation, LifePoint
Hospitals, Inc. and the Company. Incorporated by
reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
3.1 Certificate of Incorporation of the Company.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
3.2 By-Laws of the Company. Incorporated by reference from
the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
4.1 Rights Agreement dated as of May 11, 1999 between the
Company and National City Bank as Rights Agent.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
4.2(a) 11% Senior Subordinated Notes due 2009 Indenture dated
as of May 11, 1999 by and between Healthtrust, Inc. -
The Hospital Company and Citibank N.A. as Trustee.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
4.2(b) Form of Senior Subordinated Note due 2009 (filed as a
part of Exhibit 4.2(a)).
10.1 Tax Sharing and Indemnification Agreement dated May 11,
1999 by and among Columbia/HCA Healthcare Corporation,
LifePoint Hospitals, Inc. and the Company. Incorporated
by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
10.2 Benefits and Employment Matters Agreement dated May 11,
1999 by and among Columbia/HCA Healthcare Corporation,
LifePoint Hospitals, Inc. and the Company. Incorporated
by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
10.3 Insurance Allocation and Administration Agreement dated
May 11, 1999 by and among Columbia/HCA Healthcare
Corporation, LifePoint Hospitals, Inc. and the Company.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
10.4 Transitional Services Agreement dated May 11, 1999 by
and between Columbia/HCA Healthcare Corporation and the
Company. Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
10.5 Computer and Data Processing Services Agreement dated
May 11, 1999 by and between Columbia Information
Systems, Inc. and the Company. Incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.6 Agreement to Share Telecommunications Services dated May
11, 1999 by and between Columbia Information Systems,
Inc. and the Company. Incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
10.7 Year 2000 Professional Services Agreement dated May 11,
1999 by and between CHCA Management Services, L.P. and
the Company. Incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
33
<PAGE>
Exhibit Number Description
- -------------- -----------
10.8 Sub-Lease Agreement dated May 11, 1999 by and between
Med-Point LLC and the Company. Incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.9 Sub-Lease Agreement dated May 11, 1999 by and between
Healthtrust, Inc. - The Hospital Company and the
Company. Incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999.
10.10* Triad Hospitals, Inc. 1999 Long-Term Incentive Plan.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
10.11* Triad Hospitals, Inc. Executive Stock Purchase Plan.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
10.12* Triad Hospitals, Inc. Management Stock Purchase Plan.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
10.13* Triad Hospitals, Inc. Outside Directors Stock and
Incentive Compensation Plan. Incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.14 Credit Agreement, dated as of May 11, 1999 among
Healthtrust, Inc. - The Hospital Company and Certain
Subsidiaries from time to time party thereto, as
Borrower, the Several Lenders from time to time parties
thereto, Citicorp USA, Inc. and The Chase Manhattan Bank
as Syndication Agents, Credit Lyonnais New York Branch
and Societe Generale as Co-Agents, Bank of America
National Trust and Savings Association as Administrative
Agent and NationsBanc Montgomery Securities, LLC as Lead
Arranger and Sole Book Manager. Incorporated by
reference from the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
10.15 Assumption Agreement dated as of May 11, 1999 by and
between Bank of America National Trust and Savings
Association and the Company. Incorporated by reference
from the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999.
10.16 Assumption Agreement dated as of May 11, 1999 by and
between Bank of America National Trust and Savings
Association and Triad Hospitals Holdings, Inc.
Incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999.
27 Financial Data Schedule. (Included in electronic format
only.)
* Compensatory plan or arrangement.
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF INCOME AND BALANCE SHEETS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 56
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<RECEIVABLES> 363
<ALLOWANCES> 180
<INVENTORY> 39
<CURRENT-ASSETS> 378
<PP&E> 1,486
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<TOTAL-ASSETS> 1,496
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<BONDS> 669
0
0
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<TOTAL-REVENUES> 708
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<TOTAL-COSTS> 407
<OTHER-EXPENSES> 161
<LOSS-PROVISION> 68
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> (63)
<INCOME-TAX> 18
<INCOME-CONTINUING> (45)
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<NET-INCOME> (45)
<EPS-BASIC> (1.51)
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