<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 September 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____
-----
Commission file number 333-84743
Triad Hospitals Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0389776
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13455 Noel Road, Suite 2000
Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
(972) 789-2700
(Registrant's telephone number, including area code)
Not Applicable
(Former name or address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock of the latest practical date.
As of October 29, 1999, the number of shares of common stock of Triad Hospitals,
Inc. outstanding was 33,872,137, and all of the shares of common stock of Triad
Hospitals Holdings, Inc. were owned by Triad Hospitals, Inc.
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
TRIAD HOSPITALS, INC.
CONSENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the periods ending September 30, 1999 and 1998
Unaudited
(Dollars in millions, exept per share amounts)
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
-------------------------- --------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues............................................................. $ 321.3 $ 389.6 $ 1,029.0 $ 1,203.4
Salaries and benefits................................................ 134.8 170.2 438.3 522.6
Supplies............................................................. 48.7 60.0 151.3 183.0
Other operating expenses............................................. 72.2 88.2 233.2 269.6
Provision for doubtful accounts...................................... 26.0 31.2 93.6 103.8
Depreciation and amortization........................................ 24.4 27.5 78.7 80.3
Interest expense allocated from Columbia/HCA......................... -- 16.5 22.5 48.8
Interest expense..................................................... 18.7 0.5 28.3 1.6
ESOP expense......................................................... 1.6 -- 2.1 --
Management fees allocated from Columbia/HCA.......................... -- 7.2 8.9 22.2
Gain on sale of assets............................................... (16.9) -- (16.9) --
Impairment of long-lived assets...................................... 4.6 19.3 38.5 19.3
----------- ----------- ----------- -----------
Total operating expenses............................................. 314.1 420.6 1,078.5 1,251.2
----------- ----------- ----------- -----------
Income (loss) from continuing operations before minority interests,
equity in earnings (loss) and income tax (provision) benefit..... 7.2 (31.0) (49.5) (47.8)
Minority interests in earnings of consolidated entities.............. (2.3) (1.9) (7.0) (8.4)
Equity in earnings (loss) of unconsolidated subsidiaries............. (0.9) 2.0 (2.4) 4.5
Income tax (provision) benefit....................................... (2.2) 10.1 15.3 16.3
----------- ----------- ----------- -----------
Income (loss) from continuing operations............................. 1.8 (20.8) (43.6) (35.4)
Loss from operations of discontinued businesses,
net of income tax benefit of $0.8 for the three
and nine months ended 1998....................................... -- (1.3) -- (1.3)
----------- ----------- ----------- -----------
Net income (loss).................................................... $ 1.8 $ (22.1) $ (43.6) $ (36.7)
=========== =========== =========== ===========
Income (loss) per common share:
Income (loss) from continuing operations............................ $ 0.06 $ (0.67) $ (1.43) $ (1.16)
Loss from operations of discontinued business....................... -- (0.04) -- (0.04)
----------- ----------- ----------- -----------
Net income (loss).................................................... $ 0.06 $ (0.71) $ (1.43) $ (1.20)
=========== =========== =========== ===========
Weighted average shares used in income (loss) per share calculations 30,956,415 30,956,415 30,438,600 30,438,600
</TABLE>
See notes to the condensed consolidated financial statements.
2
<PAGE>
TRIAD HOSPITALS, INC.
CONSENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------------ ------------------
<S> <C> <C>
Current assets
--------------
Cash and cash equivalents.......................................................... $ 62.2 $ --
Accounts receivable, less allowance for doubtful accounts
of $153.5 at September 30, 1999 and $155.9 at December 31, 1998.................. 161.5 199.3
Inventories........................................................................ 36.1 44.8
Income taxes....................................................................... 42.2 37.9
Other.............................................................................. 67.9 23.9
-------- --------
Total current assets............................................................... 369.9 305.9
Property and equipment, at cost:
Land............................................................................... 69.1 82.0
Buildings.......................................................................... 540.8 604.9
Equipment.......................................................................... 674.4 712.0
Construction in progress........................................................... 56.4 63.7
-------- --------
1,340.7 1,462.6
Accumulated depreciation........................................................... (601.2) (703.1)
-------- --------
739.5 759.5
Intangible assets, net of accumulated amortization of $49.9 at
September 30, 1999 and $50.2 at December 31, 1998............................... 226.0 272.9
Investment in equity of affiliates................................................. 84.6 24.3
Other.............................................................................. 18.2 8.7
-------- --------
Total assets....................................................................... $1,438.2 $1,371.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Accounts payable................................................................... $ 35.9 $ 47.5
Current portion of long-term debt.................................................. 20.7 0.9
Accrued salaries................................................................... 30.0 34.8
Other current liabilities.......................................................... 74.9 37.8
-------- --------
Total current liabilities.......................................................... 161.5 121.0
Intercompany balances payable to Columbia/HCA...................................... -- 613.7
Long-term debt..................................................................... 571.4 13.4
Deferred taxes and other liabilities............................................... 64.6 62.5
Minority interests in equity of consolidated entities.............................. 49.4 60.0
-------- --------
Total liabilities.................................................................. 846.9 870.6
Stockholders' equity
--------------------
Equity, investments by Columbia/HCA................................................ -- 500.7
Common stock $.01 per value; 90,000,000 shares authorized; 33,871,862
shares outstanding at September 30, 1999........................................ 0.3 --
Additional paid-in capital......................................................... 625.1 --
Unearned ESOP compensation......................................................... (32.4) --
Retained deficit................................................................... (1.7) --
-------- --------
Total stockholders' equity......................................................... 591.3 500.7
Total liabilities and stockholders' equity......................................... $1,438.2 $1,371.3
======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
3
<PAGE>
TRIAD HOSPITALS, INC.
CONSENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the periods ending September 30, 1999 and 1998
Unaudited
(Dollars in millions)
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
----------------- ------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss).................................................... $ 1.8 $(22.1) $(43.6) $ (36.7)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Provision for doubtful accounts.................................... 26.0 31.2 93.6 103.8
ESOP expense....................................................... 1.6 -- 2.1 --
Depreciation and amortization...................................... 24.4 27.5 78.7 80.3
Deferred income taxes.............................................. 2.2 (10.1) (15.3) (16.3)
Impairment of long-lived assets.................................... 4.6 19.3 38.5 19.3
Gain on sale of assets............................................. (16.9) -- (16.9) --
Loss from discontinued operations.................................. -- 1.3 -- 1.3
Increase (decrease) in cash from operating assets and liabilities
Accounts receivable.............................................. (22.9) (45.8) (76.0) (113.1)
Inventories and other assets..................................... 3.0 (0.9) 11.4 (8.4)
Accounts payable and other current liabilities................... 27.3 (3.5) 49.7 (9.7)
Other............................................................ (1.4) 1.8 (9.9) (10.4)
------ ------ ------ -------
Net cash provided by (used in) operating activities................ 49.7 (1.3) 112.3 10.1
Cash flows from investing activities
Purchases of property and equipment................................ (29.8) (33.1) (95.8) (80.4)
Proceeds received on sale of assets................................ 66.5 -- 70.8 --
Investment in and advances to affiliates........................... (4.9) 0.9 (60.3) (4.9)
Other.............................................................. 1.6 (1.3) 16.6 15.3
------ ------ ------ -------
Net cash provided by (used in) investing activities.................. 33.4 (33.5) (68.7) (70.0)
Cash flows from financing activities
Payments of long-term debt........................................... (76.5) (0.2) (87.6) (0.7)
Increase in intercompany balances with
Columbia/HCA, net.................................................. -- 35.0 106.2 60.6
------ ------ ------ -------
Net cash provided by (used in) financing activities................. (76.5) 34.8 18.6 59.9
------ ------ ------ -------
Change in cash and cash equivalents.................................. 6.6 -- 62.2 --
Cash and cash equivalents at beginning of period..................... 55.6 -- -- --
------ ------ ------ -------
Cash and cash equivalents at end of period........................... $ 62.2 $ -- $ 62.2 $ --
====== ====== ====== =======
Interest payments.................................................... $ 9.8 $ 16.9 $ 35.8 $ 50.4
Income tax payments.................................................. $ -- $ -- $ -- $ --
</TABLE>
4
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements of Triad Hospitals, Inc. (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 September 30, 1999 includes
adjustments to reflect certain transactions in connection with the Spin-off. The
changes to stockholders' equity 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 relating to
distribution -- 562.6 -- -- (500.7) 61.9
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 -- -- 2.1 -- -- 2.1
Net loss prior to Spin-off -- (41.9) -- -- -- (41.9)
Net loss-post Spin-off -- -- -- (1.7) -- (1.7)
------- ------- ------ ------- ------- -------
Balance September 30, 1999 $0.3 $ 625.1 $(32.4) $ (1.7) $ -- $ 591.3
======= ======= ====== ======= ======= =======
</TABLE>
The combined 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").
5
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
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.
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 nine months ended September 30, 1999, the Company sold one seven hospitals,
including two sales prior to the Spin-off where the proceeds were retained by
Columbia/HCAs. 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. During the three months ended June 30, 1999, the 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 the book value of the assets
exchanged plus the a proportionate share of cash received to the estimated fair
value of assets received. A gain of $0.2 million was recognized during the
three month period ended September 30, 1999.
The Company sold its joint venture facility in Amarillo, Texas on September
1, 1999 with the Company receiving $23.1 million in proceeds. A gain on the sale
of $14.5 million was recognized during the three months ended September 30,
1999. The Company retained the accounts receivable and certain liabilities with
a net book value of $0.5 million at September 30, 1999. For the three months and
nine months ended September 30, 1999, this facility had net revenues of $1.7
million and $6.7 million, respectively, and pre-tax income of $0.4 million and
$0.6 million, respectively. For the three months and nine months ended September
30, 1998, this facility had net revenues of $2.2 million and $7.8 million,
respectively, and pre-tax income of $0.3 million and $1.2 million, respectively.
The Company sold all of its assets in its acute care hospitals in Anaheim,
California and Huntington Beach, California and its interest in an ambulatory
surgery center in Anaheim, California on September 3, 1999 for $43.3 million. A
gain of $2.2 million on the sale was recognized during the three months ended
September 3, 1999. For the three months ended September 30, 1999 and 1998,
these facilities had net revenues of $16.2 million and $22.7 million,
respectively, and pre-tax losses of $1.2 million and $1.1 million respectively.
For the nine months ended September 30, 1999 and 1998, these facilities had net
revenues of $66.3 million and $74.5 million, respectively, and pre-tax losses of
$2.3 million and $5.6 million respectively.
The Company sold its acute care hospitals in Beaumont, Texas and Silsbee,
Texas and its interest in an ambulatory surgery center in Beaumont, Texas
effective September 30, 1999 for $13.7 million. The proceeds of the sale were
received subsequent to September 30, 1999 and, at September 30, 1999, the
Company recorded the proceeds in other current assets. The Company retained the
accounts receivable and certain liabilities with a net book value of $2.4
million at September 30, 1999. A minimal gain on the sale was recognized during
the three months ended September 30, 1999. For the three months ended September
30, 1999 and 1998, these facilities had net revenues of $10.5 million and $14.7
million, respectively, and pre-tax losses of $2.1 million and $3.0 million
respectively. For the nine months ended September 30, 1999 and 1998, these
facilities had net revenues of $37.1 million and $43.7 million, respectively,
and pre-tax losses of $9.1 million and $8.3 million respectively.
Subsequent to September 30, 1999 the Company sold its stock interest in a
psychiatric hospital in Kansas City, Missouri for $4.3 million. The net book
value of this facility was $3.4 million at September 30, 1999. For the
6
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
three months ended September 30, 1999 and 1998, this facility had net revenues
of $2.2 million for each period and pretax losses of $0.1 million and $0.0
million, respectively. For the nine months ended September 30, 1999 and 1998,
this facility had net revenues of $7.1 million and $7.8 million, respectively,
and pretax income of $0.0 million and $0.8 million, respectively.
The Company used the proceeds of the sales to retire certain outstanding
indebtedness (see NOTE 5).
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 ("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 nine months ended September 30,
1999, the Company sold seven hospitals. Subsequent to September 30, 1999, the
Company sold its psychiatric hospital and the Company intends to sell four
general, acute care hospitals. These hospitals 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 September 30, 1999, the carrying value of the
long-lived assets relating to the one facility that was sold subsequent to
September 30, 1999 and the remaining four facilities to be sold was $77.5
million. The four facilities to be sold, the one facility sold subsequent
to September 30, 1999 and the seven facilities that were sold contributed net
revenues of $53.5 million, and $75.1 million, for the three months ended
September 30, 1999 and 1998, respectively, and $197.3 million, and $255.6
million for the nine months ended September 30, 1999 and 1998, respectively.
These facilities had losses before impairment charges, gain on sale of assets
and income tax benefit of $8.5 million and $8.0 million for the three months
ended September 30, 1999 and 1998, respectively and $24.5 million and $20.3
million for the nine months ended September 30, 1999 and 1998, respectively. The
Company expects to complete the sales of the remaining four facilities 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).
The carrying value of the long-lived assets related to two facilities
during the three months ended September 30, 1999 and five facilities during the
nine months ended September 30, 1999 were reduced to fair value, based on
estimates of selling values, for a total non-cash charge of $4.6 million and
$35.4 million, respectively. The carrying value of the facilities at the time of
the impairments were approximately $12.5 million and $63.1 million,
respectively. Three of these facilities were sold in the three months ended
September 30, 1999 and one of these facilities was sold subsequent to September
30, 1999. These five facilities had net revenues of approximately $21.6
million, and $28.5 million, for the three months ended September 30, 1999 and
1998, respectively and $80.0 million and $88.3 million for the nine months ended
September 30, 1999 and 1998, respectively. These facilities also contributed
losses from continuing operations before income tax benefit and the asset
impairment charge of approximately $3.6 million, and $3.2 million, for the three
months ended September 30, 1999 and 1998, respectively and $10.5 million, and
$7.2 million for the nine months ended September 30, 1999 and 1998,
respectively. and $8.2 million.
During the nine months ended September 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 carrying value of the long-lived assets related to four facilities
during the three months ended September 30, 1998 were reduced to fair value,
based on estimates of selling values, for a total non-cash charge of $19.3
million. The carrying value of the four facilities at the time of the
impairments were $61.1 million. All four of these facilities have been sold as
of September 30, 1999. These facilities had net revenues of $10.5 million and
$20.0 million for the three months ended September 30, 1999 and 1998,
respectively, and $38.7 million and $61.2 million for the nine months ended
September 30, 1999 and 1998, respectively. These facilities had losses from
continuing operations before income tax benefit and asset impairment charge of
$2.1 million and $4.8 million for the
7
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
three months ended September 30, 1999 and 1998, respectively, and $11.2 million
and $11.4 million for the nine months ended September 30, 1999 and 1998,
respectively.
The impairment charges, totaling $38.5 million and $19.3 million for the
nine months ended September 30, 1999 and 1998, respectively, 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% due May 11, 2000
which the company has repaid with the proceeds received from the sale of assets
(see NOTE 3), a $65.0 million Tranche A term loan bearing interest at LIBOR plus
3.25% (8.66% per annum at October 31, 1999) with principal amounts due beginning
in 1999 through 2004, a $200.0 million Tranche B term loan bearing interest at
LIBOR plus 4.0% (9.41% per annum at October 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'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 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%. One of these non-wholly owned
Subsidiary Guarantors was sold subsequent to September 30, 1999.
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:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
Summarized Balance Sheets
- -------------------------
<S> <C> <C>
Current assets................................ $12.9 $16.7
Non-current assets............................ 56.7 52.8
----- -----
Total assets.................................. $69.6 $69.5
===== =====
Current liabilities........................... $ 3.4 $ 3.5
Non-current liabilities....................... 6.8 4.2
Equity........................................ 59.4 61.8
----- -----
Total liabilities and equity.................. $69.6 $69.5
===== =====
</TABLE>
8
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
----------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Summarized Statement of Income
- ------------------------------
Net revenues................................... $16.6 $18.0 $50.8 $55.6
Income from continuing operations.............. $ 4.4 $ 4.1 $13.7 $14.2
Net income..................................... $ 4.4 $ 4.1 $13.7 $14.2
</TABLE>
Non-current assets shown above include intercompany receivables of $16.4
million and $11.8 million as of September 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
October 31, 1999.
A five-year maturity schedule is as follows (in millions):
1999 $ 6.1
2000 18.3
2001 13.4
2002 17.2
2003 16.4
Thereafter 520.7
------
$592.1
======
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 $2.5 million at September 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, 557,003 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 HCAColumbia/HCA options and were exercisable
on the date of the grant. As of September 30, 1999, 4,047 of these options were
exercised and 27,591 of these options were cancelled. 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
each participant in the plan approximately 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
9
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
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 September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Number Weighted Average Weighted Average Number Average
Outstanding at Remaining Exercise Price Exercisable at Exercise
9/30/99 Contractual Life 9/30/99 Price
-------------- ---------------- ---------------- -------------- --------
<S> <C> <C> <C> <C> <C>
Range of Exercise Prices
- --------------------------
$0.07 to $18.84 4,609,991 10 years $11.25 1,407,840 $11.22
</TABLE>
10
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
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 income (loss) would have been changed to the pro forma amounts
set forth below (dollars in millions):
<TABLE>
<CAPTION>
For the For the
three months nine months
ended ended
September 30, September 30,
1999 1999
------------- --------------
<S> <C> <C>
Net income (loss)
As reported................... $ 1.8 $(43.6)
Pro forma..................... $ 0.9 $(52.3)
Basic income (loss) per share:
As reported................... $0.06 $(1.43)
Pro forma..................... $0.03 $(1.72)
</TABLE>
The fair values of stock options granted to the Company's employees used to
compute pro forma net income (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 nine months ended September 30, 1999, was $11.06 per
option.
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
by 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
11
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
outstanding for earnings per share calculations. The Company recognized ESOP
expense of $2.1 million during the nine months ended September 30, 1999.
The ESOP shares as of September 30, 1999 were as follows:
Shares committed to be released 128,572
Unreleased shares 2,871,428
---------
Total ESOP shares 3,000,000
=========
Fair value of unreleased shares $29.1 million
NOTE 7--INCOME (LOSS) PER SHARE
Income (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 September 30, 1999, adjusted
for the shares issued to the ESOP (see NOTE 6). Weighted average shares for the
three and nine months ended September 30, 1999 are as follows:
<TABLE>
<CAPTION>
For the three For the nine
months ended months ended
September 30, September 30,
1999 1999
---- ----
<S> <C> <C>
Weighted average shares exclusive of ESOP 30,870,701 30,352,886
Average of ESOP shares committed to be released 85,714 85,714
---------- ----------
Weighted average shares outstanding 30,956,415 30,438,600
========== ==========
</TABLE>
Income (loss) per common share for the three and nine month periods ended
September 30, 1998 is presented as if the weighted average shares referenced
above had been outstanding for each period.
Stock options outstanding of 4,609,991 at September 30, 1999 were not
included for diluted income (loss) per share calculation since the impact is
antidilutive.
NOTE 8--DISCONTINUED OPERATIONS
During the three and nine months ended September 30, 1998, the Company
recorded losses from discontinued operations related to the divestiture of home
health businesses of $1.3 million in each period (net of income tax benefit).
Revenues for the home health businesses disposed of were approximately $8.4
million and $35.7 million for the three and nine months ended September 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.
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
12
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
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 $36.2 million at September 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 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.
13
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
CIS will 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, the Company 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 will assumed responsibility for
its employees from and after the date of the Spin-off, and that Columbia/HCA
will 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 will 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 will 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 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
14
<PAGE>
TRIAD HOSPITALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
(continued)
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. This employee agreed to a settlement of charges in September 1999.
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.
15
<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, marked 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 southcentral states.
During the nine months ended September 30, 1999, the Company sold seven
hospitals and two ambulatory surgery centers, including two sales prior to the
Spin-off where the proceeds were retained by Columbia/HCA. 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. Subsequent to September 30, 1999, the Company sold one hospital.
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
16
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
During the three and nine months ended September 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 announced divestitures of hospitals in certain
markets, the disposition of seven acute care hospitals and two ambulatory
surgery centers, 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 36.9% and 40.5% of total net patient revenues for the
three months ended September 30, 1999 and 1998, respectively, and 39.8% and
42.3% for the nine months ended September 30, 1999 and 1998, respectively. Net
patient revenues related to managed care plan patients were 33.1% and 27.9% of
total net patient revenues for the three months ended September 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. In addition, the Company sold one
general, acute care hospital, which was not included in eleven facilities
referenced previously. During the nine months ended September 30, 1999, the
Company and Columbia/HCA sold seven hospitals which had net revenues of $28.4
million and $45.7 million for the three months ended September 30, 1999 and
1998, respectively and $114.9 million and $145.2 million for the nine months
ended September 30, 1999 and 1998, respectively. These seven hospitals incurred
losses before impairment charges, gain on sale of assets and income tax benefit
of $2.5 million and $6.5 million for the three months ended September 30, 1999
and 1998, respectively, and $15.2 million and $20.1 million for the nine months
ended September 30, 1999 and 1998, respectively. Of the five remaining
facilities, one facility was sold subsequent to September 30, 1999 and the sale
of the remaining four facilities is expected to be completed over the next
twelve months. For the three months ended September 30, 1999 and 1998, the
twelve facilities divested or to be divested contributed net revenues of $53.4
million and $77.2 million and losses before impairment charges, gain on sale of
assets and income tax benefit of $8.3 million and $17.3 million, respectively.
For the nine months ended September 30, 1999 and 1998, these twelve facilities
contributed net revenues of $198.3 and $260.5 million and losses before
impairment charges, gain on sale of assets and income tax benefit of $36.1
million and $47.0 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
September 30, 1999 and 1998, these leased facilities contributed net revenues,
exclusive of $4.2 million in lease payments, of $(0.7) million and $49.9 million
and income (loss) before impairment charges and income tax benefit of $(0.8)
million and $2.3 million, respectively. For the nine months ended September 30,
1999 and 1998, the leased facilities contributed net revenues, exclusive of the
$12.5 million lease payments, of $(4.7) million and
17
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
$147.1 million and income (loss) before impairment charges and income tax
benefit of $(17.7) million and $4.5 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. Net outpatient revenues were 51.1%
and 48.7% of net patient revenues for the three and nine months ended September
30, 1999 respectively, compared to 51.6% and 48.6% for the three and nine months
ended September 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 was of $36.2 million as of
September 30, 1999.
18
<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 nine months ended September 30, 1999 and 1998 (dollars in millions, except
per share amounts and ratios):
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- -------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
Per- Per- Per- Per-
Amount centage Amount centage Amount centage Amount centage
------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................................ $321.3 100.0 $389.6 100.0 $1,029.0 100.0 $1,203.4 100.0
Salaries and benefits ................................. 134.8 42.0 170.2 43.7 438.3 42.6 522.6 43.4
Supplies................................................ 48.7 15.2 60.0 15.4 151.3 14.7 183.0 15.2
Other operating expenses................................ 72.2 22.5 88.2 22.6 233.2 22.7 269.6 22.4
Provision for doubtful accounts......................... 26.0 8.1 31.2 8.0 93.6 9.1 103.8 8.6
Depreciation and amortization........................... 24.4 7.6 27.5 7.1 78.7 7.6 80.3 6.7
Interest expense allocated from Columbia/HCA............ -- -- 16.5 4.2 22.5 2.2 48.8 4.1
Interest expense........................................ 18.7 5.8 0.5 0.1 28.3 2.7 1.6 0.1
ESOP expense............................................ 1.6 0.5 -- -- 2.1 0.2 -- --
Management fees allocated from Columbia/HCA............. -- -- 7.2 1.8 8.9 0.9 22.2 1.9
Gain on sale of assets.................................. (16.9) (5.3) -- -- (16.9) (1.6) -- --
Impairment of long-lived assets......................... 4.6 1.4 19.3 5.0 38.5 3.7 19.3 1.6
------ ----- ------ ----- -------- ----- -------- -----
314.1 97.8 420.6 107.9 1,078.5 104.8 1,251.2 104.0
------ ----- ------ ----- -------- ----- -------- -----
Income (loss) from continuing operations before
minority interests, equity in earnings (losses) and
income tax (provision) benefit...................... 7.2 2.2 (31.0) (7.9) (49.5) (4.8) (47.8) (4.0)
Minority interests in earnings of consolidated entities. (2.3) (0.7) (1.9) (0.5) (7.0) (0.7) (8.4) (0.7)
Equity in earnings (loss) of non-consolidating entities. (0.9) (0.3) 2.0 0.5 (2.4) (0.2) 4.5 0.4
------ ----- ------ ----- -------- ----- -------- -----
Income (loss) from continuing operations before
income tax (provision) benefit...................... 4.0 1.2 (30.9) (7.9) (58.9) (5.7) (51.7) (4.3)
Income tax (provision) benefit ........................ (2.2) (0.7) 10.1 2.6 15.3 1.5 16.3 1.4
------ ----- ------ ----- -------- ----- -------- -----
Income (loss) from continuing operations................ $ 1.8 0.5 $(20.8) (5.3) $ (43.6) (4.2) $ (35.4) (2.9)
====== ===== ====== ===== ======== ===== ======== =====
Income (loss) per common share from continuing
operations........................................... $ 0.06 $ (0.67) $ (1.43) $ (1.16)
EBITDA (a)........................................... $ 38.7 $ 42.0 $ 110.2 $ 128.9
Number of hospitals at end of period (b)
Owned and managed.................................. 29 38 29 38
Joint ventures..................................... 2 1 2 1
Leased to others................................... 2 -- 2 --
-------- -------- -------- ----------
Total.............................................. 33 39 33 39
Licensed beds at end of period (c)................... 4,134 5,902 4,134 5,902
Available beds at end of period (d).................. 3,754 5,202 3,754 5,202
Admissions (e)
Owned and managed.................................. 34,332 40,954 113,526 128,255
Joint ventures..................................... 1,958 1,409 5,429 4,563
Leased to others................................... -- 4,568 -- 13,823
-------- -------- -------- ----------
Total.............................................. 36,290 46,931 118,955 146,641
Adjusted admissions (f).............................. 58,093 68,454 186,405 208,198
Patient days (g) .................................. 155,071 195,869 522,004 627,886
Adjusted patient days (h) .......................... 262,396 327,390 857,108 1,019,254
Outpatient visits.................................... 247,046 297,560 729,280 883,761
Emergency room visits................................ 118,298 139,611 405,127 434,182
Average length of stay (i) ......................... 4.5 4.8 4.6 4.9
Average daily census (j)............................. 1,686 2,129 1,912 2,300
Occupancy rate (k)................................... 44.9% 40.9% 50.9% 44.2%
Net patient revenue per adjusted patient days........ 1,186 1,157 1,163 1,151
Gross inpatient revenue.............................. $ 423.1 $ 487.1 $1,384.5 $ 1,558.2
Gross outpatient revenue............................. $ 292.8 $ 327.1 $ 888.8 $ 971.3
Gross outpatient revenue percentage.................. 40.9% 40.2% 39.1% 38.4%
Net inpatient revenue................................ $ 152.0 $ 183.2 $ 511.6 $ 603.0
Net outpatient revenue............................... $ 159.1 $ 195.6 $ 485.4 $ 570.0
Net outpatient revenue percentage.................... 51.1% 51.6% 48.7% 48.6%
Net inpatient revenue per patient days............... 980 935 980 960
Net outpatient revenue per total
outpatient visits.................................. 436 448 428 433
Operating expenses per adjusted
patient days (l)................................... 1,074 1,068 1,069 1,059
Total salaries and benefits per FTE.................. 11,071 10,060 35,997 30,888
</TABLE>
19
<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 consolidated financial
statements as an indicator of financial performance or liquidity. Because
EBITDA is not a measurement determined in accordance with generally
accepted accounting principles and is thus susceptible to varying
calculations, EBITDA as presented may not be comparable to other similarly
titled measures of other companies.
(b) This table does not include any operating statistics, except for
admissions, for the joint ventures and facilities leased to others.
(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.
(l) Operating expenses are defined as salaries and benefits, supplies,
provision for doubtful accounts and other operating expenses.
Three Months Ended September 30, 1999 and 1998
Income from continuing operations before income tax benefit increased to
$4.0 million in the three months ended September 30, 1999 from a loss from
continuing operations of $30.9 million in the three months ended September 30,
1998. The increase in pretax income was attributable primarily to a $16.9
million gain on sale of five facilities during the three months ended September
30, 1999 and impairment charges of $4.6 million compared to $19.3 million in the
three months ended September 30, 1999 and 1998, respectively. Additional factors
contributing to the increase were $4.2 million of lease income from the leased
facilities (which commenced January 1999) that was received in the three months
ended September 30, 1999, decreases in losses of $1.2 million in the facilities
that
20
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
were divested, $1.3 million decrease in losses in the facilities either divested
subsequent to September 30, 1999 or to be divested and the $1.5 million in
improvements in operations at the facilities that will remain after the planned
divestitures. The increases were partially offset by a $4.8 million reduction of
pretax income relating to the leased facilities in Kansas City, Missouri and
$1.2 million of favorable cost report settlements in 1998.
Revenues decreased 17.5% to $321.3 million in the three months ended
September 30, 1999 compared to $389.6 million in the three months ended
September 30, 1998. Inpatient admissions decreased 16.2% and adjusted admissions
(adjusted to reflect combined inpatient and outpatient volume) decreased 15.1%
in the three months ended September 30, 1999 compared to the three months
ended September 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 September 30, 1998, these facilities had revenues of $49.9
million, admissions of 4,568 and adjusted admissions of 7,218. Other factors
contributing to the reduction of revenues in the three months ended September
30, 1999 compared to the three months ended September 30, 1998 include an $17.3
million reduction relating to the sale of seven hospitals, reduction of $6.5
million relating to the facilities that sold subsequent to September 30, 1999 or
that management intends to divest and $1.2 million of favorable cost report
settlements in 1998. These were partially offset by $4.2 million of lease
income from the leased facilities in the three months ended September 30, 1999
and increases of $2.2 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 September 30, 1999 revenues by approximately
$3.0 million compared to $1.4 million during the three months ended September
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 33.1% in the three months ended September 30, 1999 compared to 27.9% during
the three months ended September 30, 1998).
Salaries and benefits, as a percentage of revenues, decreased to 42.0% in
the three months ended September 30, 1999 from 43.7% in the three months ended
September 30, 1998. The decrease was primarily attributable to the leased
facilities and the facilities which were sold, which had a higher percentage of
salaries and benefits to net revenue.
Supply costs decreased as a percentage of revenues to 15.2% in the three
months ended September 30, 1999 from 15.4% in the three months ended September
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 relatively unchanged as a
percentage of revenues in the three months ended September 30, 1999 compared to
the three months ended September 30, 1998.
Provision for doubtful accounts, as a percentage of revenues, remained
relatively unchanged in the three months ended September 30, 1999 compared to
the three months ended September 30, 1998.
Depreciation and amortization increased as a percentage of revenues to
7.6% in the three months ended September 30, 1999 from 7.1% in the three months
ended September 30, 1998, primarily due to 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, was $16.5
million in the three months ended September 30, 1998. The intercompany balances
were eliminated at the Spin-off.
Interest expense, which is offset by $0.8 million of interest income,
increased to $18.7 million in the three months ended September 30, 1999 from
$0.5 million in the three months ended September 30, 1998 due to the assumption
of additional debt from Columbia/HCA in the Spin-off.
21
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Management fees allocated from Columbia/HCA were $7.2 million during the
three months ended September 30, 1998. No management fees were allocated during
the three months ended September 30, 1999 due to the Spin-off from Columbia/HCA.
Gain on sale of assets were $16.9 million during the three months ended
September 30, 1999 due primarily to the sale of five facilities during the
quarter.
Impairments on long-lived assets were $4.5 million and $19.3 million
during the three months ended September 30, 1999 and 1998 due to the estimated
sales prices of facilities that the Company decided to divest were reduced to
fair value, based on estimates of selling values.
Minority interests, which are primarily related to one ambulatory surgery
center joint venture in Arizona, as a percentage of revenues increased to 0.7%
in the three months ended September 30, 1999 from 0.5% in the three months ended
September 30, 1998.
Equity in earnings (loss) of non-consolidated entities, as a percentage of
net revenue, decreased to (0.3)% from 0.5% for the three months ended September
30, 1999 and 1998, respectively, due primarily to the start up of operations of
one non-consolidated facility in May 1999.
Nine Months Ended September 30, 1999 and 1998
Losses from continuing operations before income tax benefit increased to
$58.9 million in the nine months ended September 30, 1999 from $51.7 million in
the nine months ended September 30, 1998. The increase in pretax loss was
primarily attributable to impairment charges of $38.5 million recorded in the
nine months ended September 30, 1999 compared to $19.3 million in the nine
months ended September 30, 1998 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 $25.9
million in the nine months ended September 30, 1999 compared to the nine months
ended September 30, 1998, $7.0 million of favorable cost report settlements in
1998 and $6.9 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 a $16.9 million gain on sale of five
facilities, $12.2 million of lease income from the leased facilities, a $12.9
million reduction in interest expense and corporate overhead compared to the
allocation of interest expense and management fees from Columbia/HCA and $9.3
million improvement in the operations of facilities that will remain after the
planned divestiture.
Revenues decreased 14.5% to $1,029.0 million in the nine months ended
September 30, 1999 compared to $1,203.4 million in the nine months ended
September 30, 1998. Inpatient admissions decreased 11.5% and adjusted
admissions (adjusted to reflect combined inpatient and outpatient volume)
decreased 10.5% in the nine months ended September 30, 1999 compared to the nine
months ended September 30, 1998. Revenues, admissions and adjusted admissions
declined primarily as a result of the facilities that were leased in January
1999. In the nine months ended September 30, 1998, these facilities had revenues
of $145.0 million, admissions of 13,823 and adjusted admissions of 21,853. Other
factors contributing to the reduction of revenues in the nine months ended
September 30, 1999 compared to the nine months ended September 30, 1998 include
a $30.3 million reduction relating to the sale of seven hospitals and $31.9
million relating to the facilities that were either sold subsequent to September
30, 1999 or management intends to divest and $7.0 million of favorable cost
report settlements in 1998. These were partially offset by $12.2 million of
lease income from the leased facilities in the nine months ended September 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 $9.0 million compared to $4.2 million during
the nine months ended September 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 32.2% compared to 26.0% during
the nine months ended September 30, 1999 and 1998, respectively).
22
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
Salaries and benefits, as a percentage of revenues, decreased to 42.6% in
the nine months ended September 30, 1999 from 43.4% in the nine months ended
September 30, 1998. The decrease was primarily attributable to the leased
facilities and the facilities which were sold, which had a higher percentage of
salaries and benefits to net revenue.
Supply costs decreased as a percentage of revenues to 14.7% in the nine
months ended September 30, 1999 from 15.2% in the nine months ended September
30, 1998 due to the leased facilities and the facilities which were sold 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 22.7%
in the nine months ended September 30, 1999 from 22.4% in the nine months ended
September 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
9.1% in the nine months ended September 30, 1999 from 8.6% in the nine months
ended September 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 7.6%
in the nine months ended September 30, 1999 from 6.7% in the nine months ended
September 30, 1998, primarily due to 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 $22.5 million in the nine months ended September 30, 1999 compared to $48.8
million in the nine months ended September 30, 1998 due to the Spin-off which
eliminated the intercompany balances.
Interest expense, which includes $1.5 million of interest income, increased
to $28.3 million in the nine months ended September 30, 1999 from $1.6 million
in the nine months ended September 30, 1998 due to the assumption of debt from
Columbia/HCA in the Spin-off.
Management fees allocated from Columbia/HCA decreased to $8.9 million from
$22.2 million during the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998, due to the Spin-off from Columbia/HCA.
Gain on sale of assets were $16.9 million during the nine months ended
September 30, 1999 due primarily to the sale of five facilities during the third
quarter.
Impairments on long-lived assets were $38.5 million during the nine months
ended September 30, 1999 compared to $19.3 million during the nine months ended
September 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, remained unchanged as a percentage of revenues
in the nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998.
Equity in earnings (loss) of non-consolidated entities, as a percentage of
net revenue decreased to (0.2)% from 0.4% for the nine months ended September
30, 1999 and 1998, respectively, due primarily to the start up of operations of
one non-consolidated facility in May 1999.
PRO FORMA OPERATING RESULTS SUMMARY
23
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
The following is a summary of pro forma results from continuing operations
for the three and nine months ended September 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 planned divestitures in
1999:
(a) elimination of three and nine months ended September 30, 1999 and 1998
results of operations of seven acute care hospitals which were sold
during the nine months ended September 30, 1999 (the proceeds of two
sales were retained by Columbia/HCA);
(b) elimination of three and nine months ended September 30, 1999 and 1998
results of operations of four acute care hospitals for which the
Company's management believes dispositions over the next twelve months
are probable and one psychiatric hospital that was sold subsequent to
September 30, 1999; and
(c) elimination of three and nine months ended September 30, 1999 and 1998
results of operations of one acute care hospital which the Company
swapped for another facility on June 1, 1999.
(d) inclusion of the first five months of 1999 and the nine months ended
September 30, 1998 results of operations of one acute care hospital
which the Company received in a swap of another facility on June 1,
1999.
(2) To reflect the long term lease payment of $16.0 million per year and
elimination of operations in the three and nine months ended September 30,
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 nine months ended September 30, 1998 (in addition to
$7.5 million in the nine months ended September 30, 1999, and $1.9 million
and $5.6 million in the three and nine months ended September 30, 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 will be 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 nine 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 nine months ended September 30, 1999.
24
<PAGE>
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
-------------------------- -------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
Per- Per- Per- Per-
Amount centage Amount centage Amount centage Amount centage
------ ------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................................ $269.4 100.0 $259.5 100.0 $828.6 100.0 $800.1 100.0
Salaries and benefits................................... 110.0 40.8 106.5 41.0 338.4 40.9 328.5 41.1
Supplies................................................ 41.0 15.2 39.2 15.1 121.7 14.7 113.9 14.2
Other operating expenses................................ 57.9 21.5 59.3 22.9 179.1 21.6 182.7 22.8
Provision for doubtful accounts......................... 22.7 8.4 22.1 8.5 68.3 8.2 70.1 8.8
Depreciation and amortization........................... 19.1 7.1 19.9 7.7 60.3 7.3 59.3 7.4
Interest expense........................................ 18.7 7.0 17.4 6.7 52.9 6.4 52.2 6.5
ESOP expense............................................ 1.1 0.4 1.1 0.4 3.3 0.4 3.3 0.4
------ ----- ------ ----- ------ ----- ------ -----
270.5 100.4 265.5 102.3 824.0 99.5 810.0 101.2
------ ----- ------ ----- ------ ----- ------ -----
Income (loss) from continuing operations before
minority interests, equity in earnings (losses) and
income tax benefit.................................. (1.1) (0.4) (6.0) (2.3) 4.6 0.5 (9.9) (1.2)
Minority interests in earnings of consolidated entities. (2.2) (0.8) (1.8) (0.7) (6.8) (0.8) (7.3) (0.9)
Equity in earnings (loss) of unconsolidated
subsidiaries........................................ (0.9) (0.4) 2.0 0.8 (2.4) (0.3) 4.4 0.5
------ ----- ------ ----- ------ ----- ------ -----
Loss from continuing operations before
income taxes........................................ (4.2) (1.6) (5.8) (2.2) (4.6) (0.6) (12.8) (1.6)
Income tax benefit...................................... 1.0 0.4 1.8 0.7 -- -- 3.4 0.4
------ ----- ------ ----- ------ ----- ------ -----
Loss from continuing operations......................... $ (3.2) (1.2) $ (4.0) (1.5) $ (4.6) (0.6) $ (9.4) (1.2)
====== ===== ====== ===== ====== ===== ====== =====
Loss per common share from continuing operations...... $ (0.10) $ (0.13) $ (0.15) $ (0.31)
Pro forma EBITDA (a).................................. $ 36.9 $ 34.4 $ 118.7 $ 109.3
Number of hospitals at end of period (b)
Owned and managed................................... 24 24 24 24
Joint ventures...................................... 2 1 2 1
Leased to others.................................... 2 2 2 2
-------- -------- -------- --------
Total............................................... 28 27 28 27
Licensed beds at end of period (c).................... 3,501 3,545 3,501 3,545
Available beds at end of period (d)................... 3,087 3,056 3,087 3,056
Admissions (e)
Owned and managed................................... 27,921 26,725 88,458 83,523
Joint ventures...................................... 1,958 1,409 6,996 4,563
-------- -------- -------- --------
Total............................................... 29,879 28,134 95,454 88,086
Adjusted admissions (f)............................... 48,688 47,020 150,483 143,282
Patient days (g)...................................... 122,497 121,518 398,107 391,469
Adjusted patient days (h)............................. 213,609 213,799 677,250 671,558
Outpatient visits..................................... 208,800 195,047 601,238 563,380
Emergency room visits................................. 95,669 94,873 318,273 299,454
Average length of stay (i)............................ 4.4 4.5 4.5 4.7
Average daily census (j).............................. 1,332 1,321 1,458 1,434
Occupancy rate (k).................................... 43.1% 43.2% 47.2% 46.9%
Net patient revenue per adjusted patient days......... 1,220 1,183 1,184 1,146
Gross inpatient revenue............................... $ 333.4 $ 291.8 $1,030.5 $ 919.7
Gross outpatient revenue.............................. $ 247.9 $ 221.6 $ 722.5 $ 658.0
Gross outpatient revenue percentage................... 42.7% 43.2% 41.2% 41.7%
Net inpatient revenue................................. $ 123.0 $ 109.9 $ 386.7 $ 350.5
Net outpatient revenue................................ $ 137.7 $ 143.0 $ 415.3 $ 419.4
Net outpatient revenue percentage..................... 52.8% 56.5% 51.8% 54.5%
Net inpatient revenue per patient days................ 1,004 904 971 895
Net outpatient revenue per total outpatient visits.... 452 493 452 486
Operating expenses per adjusted patient day (l)....... 1,084 1,062 1,045 1,035
Total salaries and benefits per FTE................... 10,501 9,637 32,300 29,714
</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 has
divested or intends to divest 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
25
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
PRO FORMA OPERATING RESULTS SUMMARY (continued)
beginning of each period, (iii) the swap of facilities in June 1999 had
occurred at the beginning of each period, (iv) to exclude non-cash ESOP
expense and (v) 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.
(b) This table does not include any operating statistics, except for
admissions, for the joint ventures and facilities leased to others.
(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.
(l) Operating expenses are defined as salaries and benefits, supplies,
provision for doubtful accounts and other operating expenses.
Pro Forma Comparisons of the Three Months Ended September 30, 1999 and 1998
The following discussion compares the results of the three months ended
September 30, 1999 on a pro forma basis to the results of the three months ended
September 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 September 30, 1999 and
September 30, 1998.
On a pro forma basis, loss from continuing operations before income taxes
decreased to $4.2 million in the three months ended September 30, 1999 from $5.8
million in the three months ended September 30, 1998. The pro
26
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
PRO FORMA OPERATING RESULTS SUMMARY (continued)
forma decrease was primarily due to improved operations of the facilities that
will remain after the planned divestitures. This was partially offset by $1.2
million write off of deferred loan costs from the early payoff of debt and $1.5
million of favorable cost report settlements in 1998.
On a pro forma basis, revenues increased 3.8% to $269.4 million in the
three months ended September 30, 1999 compared to $259.5 million in the three
months ended September 30, 1998. Inpatient admissions increased 4.5% and
adjusted admissions increased 3.5% in the three months ended September 30, 1999
compared to the three months ended September 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 following
completion of 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 $1.5 million of favorable cost
report settlements in 1998.
On a pro forma basis, salaries and benefits, as a percentage of net
revenue, decreased to 40.8% in the three months ended September 30, 1999
compared to 41.0% in the three months ended September 30, 1998 due to improved
utilization of labor costs.
On a pro forma basis, supplies as a percentage of net revenue, remained
relatively unchanged in the three months ended September 30, 1999 compared to in
the three months ended September 30, 1998.
On a pro forma basis, provision for doubtful accounts, as a percentage of
net revenue, remained relatively unchanged in the three months ended September
30, 1999 compared to the three months ended September 1998.
On a pro forma basis, other operating expenses, as a percentage of net
revenues, decreased to 21.5% from 22.9% for the three months ended September 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, as a percentage of
net revenue, decreased to 7.1% compared to 7.7% in the three months ended
September 30, 1999 and 1998, respectively, due primarily to the increase in net
revenues.
On a pro forma basis, interest expense increased to $18.7 million compared
to $17.4 million in the three months ended September 30, 1999 and 1998,
respectively, due primarily to $1.2 million write off of deferred loan costs
associated with the early payoff of debt.
On a pro forma basis, minority interests in earnings of consolidated
entities remained relatively unchanged for the three months ended September 30,
1999 compared to September 30, 1998.
On a pro forma basis, equity in earnings (loss) of non-consolidated
entities, as a percentage of net revenue, decreased to (0.4)% from 0.8% for the
three months ended September 30, 1999 and 1998, respectively, due primarily to
the start up of operations of one non-consolidated facility in May 1999.
Pro Forma Comparisons of the Nine Months Ended September 30, 1999 and 1998
The following discussion compares the results of the nine months ended
September 30, 1999 on a pro forma basis to the results of the nine months ended
September 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 nine months ended September 30, 1999 and September
30, 1998.
On a pro forma basis, loss from continuing operations before income
taxes decreased to $4.6 million in the nine months ended September 30, 1999
from $12.8 million in the nine months ended September 30, 1998. The pro forma
decrease was primarily due to improved operations of the facilities that will
remain after the planned divestitures. This was partially offset by $6.8
million related to start-up of operations at one facility (that is accounted for
using the equity method) which opened in May 1999 and $4.6 million of favorable
cost report settlements in the nine months ended September 30, 1998.
27
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
PRO FORMA OPERATING RESULTS SUMMARY (continued)
On a pro forma basis, revenues increased 3.6% to $828.6 million in the
nine months ended September 30, 1999 compared to $800.1 million in the nine
months ended September 30, 1998. Inpatient admissions increased 5.9% and
adjusted admissions increased 5.0% in the nine months ended September 30, 1999
compared to the nine months ended September 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 $4.6 million
of favorable cost report settlements in the nine months ended September 30,
1998.
On a pro forma basis, salaries and benefits, as a percentage of net
revenue, decreased to 40.9% in the nine months ended September 30, 1999 from
41.1% in the nine months ended September 30, 1998 due to improved utilization of
labor costs.
On a pro forma basis, supplies, as a percentage of net revenue, increased
to 14.7% compared to 14.2% in the nine months ended September 30, 1999 and 1998,
respectively. The increase was due to increase in the purchases of higher cost
items due to higher acuity patients and increases in prices.
On a pro forma basis, provision for doubtful accounts, as a percentage of
net revenue, decreased to 8.2% in the nine months ended September 30, 1999 from
8.8% in the nine months ended September 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 21.6% from 22.8% for the nine months ended September 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 and minority interests
in earnings of consolidated entities remained relatively unchanged for the nine
months ended September 30, 1999 compared to September 30, 1998.
On a pro forma basis, interest expense increased to $52.9 million compared
to $52.2 million in the nine months ended September 30, 1999 and 1998,
respectively, due to a $1.2 million write off of deferred loan costs associated
with the early payoff of debt.
On a pro forma basis, equity in earnings (loss) of non-consolidating
entities decrease to (0.3)% from 0.5% for the nine months ended September 30,
1999 and 1998, respectively, due primarily to the start up of operations of one
non-consolidated facility in May 1999.
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 September 30, 1999, the Company had working
capital of $208.4 million.
Cash provided by operating activities was $112.3 million in the nine
months ended September 30, 1999 compared to $10.1 million in the nine months
ended September 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 decreased to $68.7 million in the nine
months ended September 30, 1999 from $70.0 million in the nine months ended
September 30, 1998. This was due to $70.8 million in proceeds received on the
sale of the three facilities in September 1999. The decrease was offset by an
increase of construction projects in the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998 and
28
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
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 $37.2 million has been spent,
and approximately $90 million ($50 million for expansion) in 2000.
Cash provided by financing activities decreased to $18.6 million in the
nine months ended September 30, 1999 compared to $59.9 million in the nine
months ending September 30, 1998. This decrease was due to $75.0 million payoff
of the asset sale bridge loan, which was required from the asset sale proceeds.
This was offset by changes in the intercompany balances with Columbia/HCA prior
to spin-off.
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 originallys 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 October 31,
1999. The Company has repaid the asset sale bridge loan with the proceeds of
the asset sales. 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 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, six acute care hospitals
were sold during the nine months ended September 30, 1999, two of which were
sold prior to the Spin off and the proceeds were retained by Columbia/HCA. In
addition, the Company sold one acute care hospital which was not included in the
facilities referred to previously. The Company used the proceeds received to
retire the asset sale bridge loan. The Company sold its psychiatric hospital
subsequent to September 30, 1999. The Company is required to use a portion of
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 will be 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 September 301, 1999, these facilities assets had a carrying
value of $84.4 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. A gain of $0.2
million was recognized during the three months ended September 30, 1999 on the
swap based on a ratio of cash received to total value of asset received.
Management expects that this transaction will reduce pre-tax earnings for the
remainder of the fiscal year by approximately $1.3 million.
The Company sold its joint venture facility in Amarillo, Texas, which is
not part of the facilities that identified elsewhere in this document as held
for sale, on September 1, 1999 and the Company received proceeds of $23.1
million. The Company recognized a gain on the sale of $14.5 million. The Company
retained the accounts receivables and certain liabilities with a net book value
of $0.5 million at September 30, 1999. For the three and nine months ended
September 30, 1999, this facility had net revenues of $1.7 million and $6.7
million, respectively, and pre-tax income of $0.4 million and $0.6 million,
respectively. For the three and nine months ended September
29
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
30, 1998, net revenues were $2.2 million and $7.8 million, and pre-tax income
was $0.3 million and $1.2 million, respectively.
The Company sold all of its assets in its acute care hospitals in Anaheim,
California and Huntington Beach, California and its interest in an ambulatory
surgery center in Anaheim, California on September 3, 1999 for $43.3 million. A
gain of $2.2 million on the sale was recognized during the three months ended
September 30, 1999. For the three months ended September 30, 1999 and 1998,
these facilities had net revenues of $16.2 million and $22.7 million,
respectively, and pre-tax losses of $1.2 million and $1.1 million respectively.
For the nine months ended September 30, 1999 and 1998, these facilities had net
revenues of $66.3 million and $74.5 million, respectively, and pre-tax losses of
$2.3 million and $5.6 million respectively.
The Company sold its acute care hospitals in Beaumont, Texas and Silsbee,
Texas and its interest in an ambulatory surgery center in Beaumont, Texas
effective September 30, 1999 for $13.7 million. The proceeds were received
subsequent to September 30, 1999. The Company retained the accounts receivable
and certain liabilities with a net book value of $2.4 million at September 30,
1999. A minimal gain on the sale was recognized during the three months ended
September 30, 1999. For the three months ended September 30, 1999 and 1998,
these facilities had net revenues of $10.5 million and $14.7 million,
respectively, and pre-tax losses of $2.1 million and $3.0 million respectively.
For the nine months ended September 30, 1999 and 1998, these facilities had net
revenues of $37.1 million and $43.7 million, respectively, and pre-tax losses of
$9.1 million and $8.3 million, respectively.
The Company received a working capital contribution from its partner in a
non-consolidating joint venture facility of approximately $5.0 million during
the three months ended September 30, 1999.
Subsequent to September 30, 1999, the Company sold its stock interest in a
psychiatric hospital in Kansas City, Missouri for $4.3 million. The net book
value of this facility was $3.4 million at September 30, 1999. For three months
ended September 30, 1999 and 1998, this facility had net revenues of $2.2
million for each period and pre-tax losses of $0.1 million and $0.0 million,
respectively. For the nine months ended September 30, 1999 and 1998, this
facility had net revenues of $7.1 million and $7.8 million, respectively, and
pre-tax income of $0.0 million and $0.8 million, respectively.
The Company has entered into a definitive purchase agreement to sell a
majority of the assets of its acute care hospital in Phoenix, Arizona for
approximately $29.5 million. The Company presently expects the sale of these
assets to be completed during the fourth quarter. The carrying value of the
assets to be sold was $30.1 million at September 30, 1999. The Company will
retain the accounts receivable and certain liabilities with a book value at
September 30, 1999 of $12.6 million. For the three months ended September 30,
1999 and 1998, this facility had net revenues of $9.3 million and $11.7 million,
respectively, and pre-tax losses of $4.0 million and $2.5 million, respectively.
For the nine months ended September 30, 1999 and 1998, this facility had net
revenues of $33.7 million and $54.3 million, respectively, and pre-tax losses of
$8.9 million and $3.4 million, respectively.
The Company is negotiating to sell the assets of its acute care hospital
in DeQueen, Arkansas for approximately $4.5 million. The Company presently
expects the sale of these assets to be completed during the fourth quarter. The
Company will cease operations of this hospital if the sale is not completed. The
carrying value of the assets to be sold was $5.2 million at September 30, 1999.
The Company will retain the accounts receivable and certain liabilities with a
book value at September 30, 1999 of $2.9 million. For three months ended
September 30, 1999 and 1998, this facility had net revenues of $3.0 million and
$3.3 million, respectively, and pre-tax losses of $0.7 million and $0.3 million,
respectively. For the nine months ended September 30, 1999 and 1998, this
facility had net revenues of $9.8 million and $10.9 million, respectively, and
pre-tax income (loss) of $(1.5) million and $0.2 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 amortized 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.
30
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
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 understands 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. This employee agreed to a settlement of charges in September 1999.
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 Spin-off 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 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.
31
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
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 and the Company's systems, including
Columbia/HCA's 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 Columbia/HCA's, as
well as 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).
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 most 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 for the Year 2000
readiness of a majority of its information technology systems. The Company is
responsible for the Year 2000 readiness of its non-information technology
systems. The Company is responsible for contingency planning in respect of Year
2000-related risks in both areas. Any failure by Columbia/HCA or the Company 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 and the Company are utilizing both internal and external
resources to manage and implement its Year 2000 program. With the assistance of
external resources, Columbia/HCA and the Company have undertaken development of
contingency plans in the event that their 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. Columbia/HCA has developed a contingency
planning methodology and the Company 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 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. 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 for the Company's facilities.
32
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
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 currently anticipates
completion, in all material respects, of the IT infrastructure portion of its
program in the fourth quarter of 1999 (revised from an expected completion date
of September 30, 1999 due to certain delays in implementation at a number of the
facilities being remediated).
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, Columbia/HCA and the Company have 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 and the Company have implemented a program to contact vendors,
analyze information provided, and to remedy, replace or otherwise address
devices or equipment that pose a material Year 2000 impact. Columbia/HCA and the
Company currently anticipate completion, in all material respects, of the non-IT
infrastructure portion of the program in the fourth quarter of 1999 (revised
from an expected completion date of September 30, 1999 due to certain delays in
implementation at a number of the facilities being remediated).
Columbia/HCA and the Company are prioritizing its non-IT infrastructure
efforts by focusing on equipment and medical devices that will have a direct
impact on patient care. Columbia/HCA and the Company are 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 and the Company are 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 and the Company are 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 and the Company 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 were not ready to test with Columbia/HCA systems.
These tests will continue through the end of the year. Failure of these third
party systems could have a material adverse affect on the Company's cash flow
and results of operations.
Columbia/HCA and the Company have 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 and the Company have 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 and the Company are
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.
With the assistance of external resources, Columbia/HCA and the Company
have 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 along with the Company will implement contingency plans
throughout 1999.
33
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
While Columbia/HCA and the Company are developing contingency plans to
address possible failure scenarios, the Company recognizes that there are "worst
case" scenarios which may develop and are largely outside its or Columbia/HCA's
control. The Company recognizes the risks associated with extended
infrastructure (power, water, telecommunications) failure, the interruption of
insurance and government program 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 and the Company are addressing these
and other failure scenarios in its contingency planning effort and are 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 and the Company'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.
34
<PAGE>
Part II: Other Information
Item 5: Other Information
(a) Quarterly Pro Forma Operating Results Summary
The following is a summary of pro forma results from continuing operations
for each period presented (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 year:
(1) To reflect the following completed divestiture and planned divestitures in
1999:
(a) elimination of results of operations of seven acute care hospitals
which were sold during the nine months ended September 30, 1999 (the
proceeds of two sales were retained by Columbia/HCA);
(b) elimination of results of operation of four acute care hospitals for
which the Company's management believes dispositions over the next
twelve months are probable and the sale of one psychiatric hospital
which was sold subsequent to September 30, 1999;
(e) elimination of results of operations of one acute care hospital which
the Company swapped for another facility on June 1, 1999; and
(f) inclusion of results of operations of one acute care hospital which
the Company received in a swap of another facility on June 1, 1999.
(2) To reflect the long term lease payment of $16.0 million per year and
elimination of operations of two acute care hospitals and three ambulatory
surgery centers in the Kansas City, Missouri area which commenced in
January 1999.
(3) To adjust to the estimated, incremental general and administrative costs of
an annual amount of $22.4 million 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. 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 1999 as if the weighted average shares were
outstanding for 1998.
35
<PAGE>
Part II: Other Information
(Continued)
Pro Forma Operating Results Summary for 1999
<TABLE>
<CAPTION>
For the nine
For the quarters ended months ended
----------------------------------------------- ----------------
March 31, June 30, September 30, September 30,
1999 1999 1999 1999
---------- --------- -------------- ----------------
<S> <C> <C> <C> <C>
Revenues........................................ $285.2 $274.0 $269.4 $828.6
Salaries and benefits........................... 114.4 114.0 110.0 338.4
Supplies........................................ 41.1 39.6 41.0 121.7
Other operating expenses........................ 60.9 60.3 57.9 179.1
Provision for doubtful accounts................. 22.4 23.2 22.7 68.3
Depreciation and amortization................... 21.0 20.2 19.1 60.3
Interest expense................................ 17.4 16.8 18.7 52.9
ESOP expense.................................... 1.1 1.1 1.1 3.3
----- ----- ----- -----
278.3 275.2 270.5 824.0
----- ----- ----- -----
Loss from continuing operations before
minority interests, equity in earnings
(losses), and income tax benefit.............. 6.9 (1.2) (1.1) 4.6
Minority interests in earnings of consolidated entities (2.1) (2.5) (2.2) (6.8)
Equity in earnings (loss) of unconsolidated subsidiaries 0.4 (1.9) (0.9) (2.4)
------ ------ ----- -----
Loss from continuing operations before
income taxes.................................. 5.2 (5.6) (4.2) (4.6)
Income tax benefit.............................. (2.6) 1.6 1.0 --
------ ------ ----- -------
Loss from continuing operations................. $ 2.6 $ (4.0) $ (3.2) $ (4.6)
====== ======= ======= =======
Loss per common share from continuing operations $0.08 $(0.13) $(0.10) $(0.15)
Pro forma EBITDA (a) ........................... $46.8 $35.0 $36.9 $118.7
Number of hospitals at end of period (b)
Owned and managed.............................. 24 24 24 24
Joint ventures................................. 1 2 2 2
Leased to others............................... 2 2 2 2
------ ----- ----- ------
Total.......................................... 27 28 28 28
Licensed beds at end of period (c) ............. 3,512 3,522 3,501 3,501
Available beds at end of period (d) ............ 3,082 3,196 3,087 3,087
Admissions (e)
Owned and managed............................. 32,052 28,486 27,921 88,458
Joint ventures................................ 1,530 1,751 1,958 6,996
------ ------ ----- ------
Total......................................... 33,582 30,237 29,879 95,454
Adjusted admissions (f) ........................ 52,814 48,897 48,688 150,483
Patient days (g) ............................... 147,297 128,313 122,497 398,107
Adjusted patient days (h) ...................... 242,714 220,257 213,609 677,250
Outpatient visits............................... 202,460 189,978 208,800 601,238
Emergency room visits........................... 117,590 105,013 95,669 318,273
Average length of stay (i) ..................... 4.6 4.5 4.4 4.5
Average daily census (j) ....................... 1,637 1,410 1,332 1,458
Occupancy rate (k) ............................. 53.1% 44.1% 43.1% 47.2%
Net patient revenue per adjusted patient day.... 1,138 1,204 1,220 1,184
Gross inpatient revenue......................... $362.5 $334.6 $333.4 $1,030.5
Gross outpatient revenue........................ $324.8 $239.8 $247.9 $722.5
Gross outpatient revenue percentage............. 39.3% 41.7% 42.7% 41.2%
Net inpatient revenue........................... $137.5 $126.2 $123.0 $386.7
Net outpatient revenue.......................... $138.7 $138.9 $137.7 $415.3
Net outpatient revenue percentage............... 50.2% 52.4% 52.8% 51.8%
Net inpatient revenue per patient day........... 934 983 1,004 971
Net outpatient revenue per total outpatient visits 433 471 452 452
Operating expenses per adjusted patient day (l). 984 1,077 1,084 1,045
Total salaries and benefits per FTE............. 10,687 10,581 10,501 32,300
</TABLE>
36
<PAGE>
Part II: Other Information
(Continued)
Pro Forma Operating Results Summary for 1998
<TABLE>
<CAPTION>
For the year
For the quarters ended ended
--------------------------------------------------------- ------------
March 31, June 30, September 30, December 31, December 31,
1998 1998 1998 1998 1998
--------- ------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues............................................. $273.2 $267.4 $259.5 $258.6 $1,058.7
Salaries and benefits................................ 112.2 109.8 106.5 112.7 441.2
Supplies............................................. 38.4 36.3 39.2 38.7 152.6
Other operating expenses............................. 62.0 61.4 59.3 62.6 245.3
Provision for doubtful accounts...................... 24.4 23.6 22.1 23.1 93.2
Depreciation and amortization........................ 19.7 19.7 19.9 22.6 81.9
Interest expense..................................... 17.4 17.4 17.4 17.4 69.6
ESOP expense......................................... 1.1 1.1 1.1 1.1 4.4
------- ------- ------- ------- -------
275.2 269.3 265.5 278.2 1,088.2
------- ------- ------- ------- -------
Loss from continuing operations before
minority interests, equity in earnings
(losses), and income tax benefit................. (2.0) (1.9) (6.0) (19.6) (29.5)
Minority interests in earnings of consolidated
entities......................................... (3.5) (2.0) (1.8) (2.5) (9.8)
Equity in earnings (loss) of unconsolidated
subsidiaries..................................... 1.4 1.0 2.0 (1.0) (3.4)
Loss from continuing operations before
income taxes..................................... (4.1) (2.9) (5.8) (23.1) (35.9)
Income tax benefit................................... 1.1 0.5 1.8 8.0 11.4
------- ------- ------- ------- -------
Loss from continuing operations...................... $ (3.0) $ (2.4) $ (4.0) $(15.1) $(24.5)
======= ======= ======= ======= =======
Loss per common share from continuing operations..... $(0.10) $(0.08) $(0.13) $(0.48) $(0.80)
Pro forma EBITDA (a)................................. $ 37.6 $37.3 $ 34.4 $ 20.5 $129.8
Number of hospitals at end of period (b)
Owned and managed.................................. 24 24 24 24 24
Joint ventures..................................... 1 1 1 1 1
Leased to others................................... 2 2 2 2 2
------- ------- ------- ------- -------
Total.............................................. 27 27 27 27 27
Licensed beds at end of period (c)................... 3,562 3,545 3,545 3,541 3,541
Available beds at end of period (d).................. 3,129 3,062 3,056 3,052 3,052
Admissions (e)
Owned and managed.................................. 29,527 27,271 26,725 27,976 111,499
Joint ventures..................................... 1,645 1,509 1,409 1,374 5,937
------- ------- ------- ------- -------
Total.............................................. 31,172 28,780 28,134 29,350 117,436
Adjusted admissions (f).............................. 48,640 47,667 47,020 48,143 191,426
Patient days (g)..................................... 143,312 126,639 121,518 126,135 517,604
Adjusted patient days (h)............................ 236,074 221,356 213,799 217,063 888,642
Outpatient visits.................................... 180,303 188,030 195,047 198,822 762,201
Emergency room visits................................ 102,657 101,923 94,873 93,202 392,656
Average length of stay (i)........................... 4.9 4.6 4.5 4.5 4.6
Average daily census (j)............................. 1,592 1,392 1,321 1,371 1,418
Occupancy rate (k)................................... 50.9% 45.4% 43.2% 44.9% 46.5%
Net patient revenue per adjusted patient day......... 1,103 1,159 1,183 1,161 1,150
Gross inpatient revenue.............................. $329.7 $298.1 $291.8 $309.3 $1,228.9
Gross outpatient revenue............................. $213.4 $223.0 $221.6 $222.9 $880.9
Gross outpatient revenue percentage.................. 39.3% 42.8% 43.2% 41.9% 41.8%
Net inpatient revenue................................ $129.1 $111.5 $109.9 $117.0 $467.5
Net outpatient revenue............................... $131.2 $145.2 $143.0 $135.1 $554.5
Net outpatient revenue percentage.................... 50.4% 56.6% 56.5% 53.6% 54.3%
Net inpatient revenue per patient day................ 901 880 904 928 903
Net outpatient revenue per total outpatient
visits........................................... 464 501 493 463 480
Operating expenses per adjusted patient day (l)...... 1,004 1,044 1,062 1,092 1,049
Total salaries and benefits per FTE.................. 10,050 9,992 9,637 10,183 39,854
</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 has
divested or intends to divest 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) the
swap of facilities in June 1999 had occurred at the beginning of each
period, (iv) to exclude non-cash ESOP expense and (v) to include the
Company's management's estimated corporate overhead costs of $22.4
37
<PAGE>
Part II: Other Information
(Continued)
Pro Forma Operating Results Summary (continued)
1998, (iii) the swap of facilities in June 1999 had occurred at the
beginning of 1998, (iv) to exclude non-cash ESOP expense and (v) 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.
(b) This table does not include any operating statistics, except for
admissions, for the joint ventures and facilities leased to others.
(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.
(l) Operating expenses are defined as salaries and benefits, supplies,
provision for doubtful accounts and other operating expenses.
38
<PAGE>
Part II: Other Information
(Continued)
Item 6: Exhibits and Reports on Form 8-K.
(a) List of Exhibits:
Exhibit Number Description
- -------------- -----------
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 10Q 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 September 30, 1999:
None
39
<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: November 4, 1999 By: /s/ Burke W. Whitman
--------------------
Burke W. Whitman
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Triad Hospitals Holdings, Inc.
Date: November 4, 1999 By: /s/ Burke W. Whitman
--------------------
Burke W. Whitman
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
40
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Description
- -------------- -----------
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 10Q for the quarter ended
March 31, 1999.
27 Financial Data Schedule. (Included in electronic format only.)
* Compensatory plan or arrangement.
41
<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>
<CIK> 0001074771
<NAME> TRIAD HOSPITALS INC
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 62
<SECURITIES> 0
<RECEIVABLES> 315
<ALLOWANCES> 153
<INVENTORY> 36
<CURRENT-ASSETS> 370
<PP&E> 1,341
<DEPRECIATION> 601
<TOTAL-ASSETS> 1,438
<CURRENT-LIABILITIES> 162
<BONDS> 592
0
0
<COMMON> 0
<OTHER-SE> 591
<TOTAL-LIABILITY-AND-EQUITY> 1,438
<SALES> 0
<TOTAL-REVENUES> 1,029
<CGS> 0
<TOTAL-COSTS> 590
<OTHER-EXPENSES> 233
<LOSS-PROVISION> 94
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> (59)
<INCOME-TAX> 15
<INCOME-CONTINUING> (44)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44)
<EPS-BASIC> (1.43)
<EPS-DILUTED> (1.43)
</TABLE>
