UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
Common Stock, $.01 Par Value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K
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 March 15, 2002, the number of shares of common stock of Triad Hospitals,
Inc. outstanding was 72,365,176. As of March 15, 2002 the aggregate market value
of the common stock held by non-affiliates was approximately $2,245,755,666. For
purposes of the foregoing calculation only, the Registrant's directors,
executive officers, and the Triad Hospitals, Inc. Retirement Savings Plan have
been deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2002 Annual Meeting of
Stockholders of Triad Hospitals, Inc. are incorporated by reference into Part
III hereof.
Part I
Item 1. Business
General
Triad Hospitals, Inc. is one of the largest publicly owned hospital
companies in the United States and provides health care services through
hospitals and ambulatory surgery centers that it owns and operates in small
cities and selected urban markets primarily in the southern, midwestern and
western United States. Triad's hospital facilities include 46 general acute care
hospitals and 14 ambulatory surgery centers located in the states of Alabama,
Arizona, Arkansas, California, Indiana, Kansas, Louisiana, Mississippi,
Missouri, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, Texas and West
Virginia. One hospital included among these facilities is operated through a
50/50 joint venture that is not consolidated for financial reporting purposes.
Triad is also a minority investor in three joint ventures that own seven general
acute care hospitals in Georgia and Nevada. Through its wholly-owned subsidiary,
Quorum Health Resources, LLC ("QHR"), Triad also provides management and
consulting services to independent general acute care hospitals located
throughout the United States. The terms "we", "our", "the Company", "us", and
"Triad" refer to the business of Triad Hospitals, Inc. and its subsidiaries as a
consolidated entity, except where it is clear from the context that such terms
mean only Triad Hospitals, Inc.
Triad's general acute care hospitals typically provide a full range of
services commonly available in hospitals, such as internal medicine, general
surgery, cardiology, oncology, neurosurgery, orthopedics, obstetrics, diagnostic
and emergency services. These hospitals also generally provide outpatient and
ancillary health care services such as outpatient surgery, laboratory,
radiology, respiratory therapy, cardiology and physical therapy. Outpatient
services also are provided by ambulatory surgery centers operated by Triad. In
addition, some of Triad's general acute care hospitals have a limited number of
licensed psychiatric beds and provide psychiatric skilled nursing services.
In addition to providing capital resources and general management, Triad
makes available a variety of management services to its health care facilities.
These services include ethics and compliance programs, national supply and
equipment purchasing and leasing contracts, accounting, financial and clinical
systems, governmental reimbursement assistance, information systems, legal
support, personnel management, internal audit, access to regional managed care
networks, resource management, and strategic and business planning.
Our Formation
Triad was incorporated under the laws of the State of Delaware in 1999. On
May 11, 1999, Triad became an independent, publicly traded company owning and
operating the healthcare service business which had comprised the Pacific Group
of HCA, Inc. ("HCA"). On that date, Triad was spun-off from HCA through the
distribution of all outstanding shares of Triad common stock to the stockholders
of HCA. Information regarding HCA in this Annual Report is derived from reports
and other information filed by HCA with the Securities and Exchange Commission
(the "Commission").
On April 27, 2001, Triad completed its merger of Quorum Health Group, Inc.
("Quorum") with and into Triad for approximately $2.4 billion in cash, stock and
assumption of debt. Each former Quorum shareholder became entitled to receive
$3.50 in cash and 0.4107 shares of Triad common stock for each outstanding share
of Quorum stock, plus cash in lieu of fractional shares of Triad common stock.
See "NOTE 3 - ACQUISITIONS" in the consolidated financial statements for a more
detailed description of the transaction.
The common stock of Triad is listed on the New York Stock Exchange (Symbol:
TRI). Information about the distribution and certain indemnification and other
arrangements entered into by Triad and HCA in connection with the distribution
is included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in the consolidated financial statements.
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Principal Executive Offices
Our principal executive offices are located at 13455 Noel Road, 20th Floor,
Dallas, Texas 75240, and our phone number is (972) 789-2700. Our corporate
Website address is http://www.triadhospitals.com. Information contained on our
Website is not part of this Annual Report.
Triad's Markets
Most of Triad's owned facilities are located in two distinct types of
markets primarily in the southern, midwestern and western United States. Over
three-quarters of Triad's owned hospitals are located in small cities, generally
with populations of less than 150,000 residents and located more than 60 miles
from a major urban center. Triad's hospitals are usually either the only
hospital or one of two or three hospitals in the community. The remainder of
Triad's owned hospitals are located in selected larger urban areas. Triad owns
and operates hospitals in 16 states. Approximately half of Triad's facilities
are located in the states of Alabama, Indiana, and Texas.
Through QHR its separate contract management services and consulting
subsidiary, Triad also provides management services to independent hospitals and
hospital systems located throughout the United States.
Small City Markets
Triad believes that the small cities of the southern, midwestern and
western United States are attractive to health care service providers as a
result of favorable demographic, economic and competitive conditions. Thirty-six
of the 46 general acute care hospitals that Triad operated as of December 31,
2001 were located in these small city markets. Of these, 19 hospitals were
located in communities where they were the sole hospital and 17 hospitals were
located in communities where they were one of only two or three hospitals. Triad
believes that small city markets can support specialty services which generally
produce higher revenues than other health care services. In addition, in small
city markets, managed care penetration is generally lower than in urban areas,
and Triad believes that it is in a better position to negotiate more favorable
managed care contracts in these markets.
While Triad's hospitals located in these small cities are more likely to
face direct competition than facilities located in smaller rural markets, that
competition often is limited to a single competitor in the relevant market.
Triad believes that the smaller populations and relative strength of the one or
two acute care hospitals in these markets also limit the entry of alternate
non-hospital providers, such as outpatient surgery centers or rehabilitation or
diagnostic imaging centers, as well as managed care plans.
Selected Larger Urban Markets
Ten of the 46 general acute care hospitals that Triad operated as of
December 31, 2001 are located in selected larger urban markets of the southern,
midwestern and western United States.
In addition to the direct competition Triad faces from other health care
providers in its markets, there are higher levels of managed care penetration in
the larger urban markets (a higher relative proportion of the market population
enrolled in managed care programs such as HMOs and PPOs).
Business Strategy
Triad's primary objective is to provide quality health care services and
simultaneously generate strong financial performance using the following
strategies:
Unique Operating Strategy
. Operating Strategy Components
. Develop strong relationships with the physicians in our communities.
. Maximize community involvement by empowering local Board of Trustees.
. Build strategic relationships with employees, including our nurses.
. Launch quality initiatives to maximize patient, physician and employee
satisfaction
. Operating Strategy Objectives
. Grow volumes through the operating strategy and by adding specialty
and outpatient services.
. Improve reimbursement rates by leveraging improved market positions.
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. Increase operating margins through volume growth and collaborative
resource management.
. Increase the margins methodically without being the "low cost"
provider.
Capital Investment Strategy
. Invest capital in same-facility expansions, new-facility development and
selected acquisitions.
. Enhance and expand healthcare services and simultaneously generate
appropriate financial returns.
. Focus on small cities and selected larger urban markets compatible with
Triad's operating strategies.
. Form joint ventures with other providers, including not-for-profit
healthcare providers.
Contract Management and Consulting Services Strategy
. Grow core business by adding new contracts with independent hospitals.
. Negotiate new and renewal contract terms that achieve an appropriate
balance of risk and reward.
. Acquire and invest selectively in independent hospitals, if invited.
Operations
Triad's general acute care hospitals typically provide a full range of
services commonly available in hospitals, such as internal medicine, general
surgery, cardiology, oncology, neurosurgery, orthopedics and obstetrics, as well
as diagnostic and emergency services. These hospitals also generally provide
outpatient and ancillary health care services such as outpatient surgery,
laboratory, radiology, respiratory therapy, cardiology and physical therapy.
Outpatient services also are provided by ambulatory surgery centers operated by
Triad. In addition, certain of Triad's general acute care hospitals have a
limited number of licensed psychiatric beds.
Each of Triad's hospitals is governed by a local Board of Trustees, which
is composed entirely of local community leaders and members of the hospital's
medical staff. The Board of Trustees establishes policies concerning the
medical, professional and ethical practices at each hospital, monitors such
practices, and is responsible for ensuring that these practices conform to
established standards. Triad maintains quality assurance programs to support and
monitor quality of care standards and to meet accreditation and regulatory
requirements. Patient care evaluations and other quality of care assessment
activities are monitored on a continuing basis.
Services and Utilization
Hospital revenues depend upon inpatient occupancy levels, the volume of
outpatient procedures and the charges or negotiated payment rates for such
services. Charges and reimbursement rates for inpatient routine services vary
significantly depending on the type of service, such as medical/surgical,
intensive care or psychiatric, the payer and the geographic location of the
hospital.
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Triad believes that important factors relating to the overall utilization
of a hospital include the quality and market position of the hospital and the
number, quality and specialties of physicians providing patient care within the
facility. Generally, Triad believes that the ability of a hospital to meet the
health care needs of its community is determined by its breadth of services,
level of technology, emphasis on quality of care and convenience for patients
and physicians. Other factors which impact utilization include the growth in
local population, local economic conditions, market penetration of managed care
programs and the availability of reimbursement programs such as Medicare and
Medicaid. Utilization across the industry also is being affected by improved
treatment protocols as a result of advances in medical technology and
pharmacology.
The following table sets forth certain statistics for hospitals owned by
Triad for each of the past five years. The comparability of the statistics has
been affected by the acquisition of Quorum on April 27, 2001. Medical/surgical
hospital 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.
Years ended December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
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Number of hospitals at end of period (a) ... 46 28 29 39 39
Number of licensed beds at end of period (b) 7,557 3,520 3,722 5,902 5,859
Weighted average licensed beds (c) ......... 6,379 3,633 4,745 5,905 5,860
Admissions (d) ............................. 233,888 128,645 145,889 169,590 172,926
Adjusted admissions (e) .................... 396,256 220,590 241,547 276,771 275,125
Average length of stay (days) (f) .......... 4.8 4.4 4.5 4.9 4.9
Average daily census (g) ................... 3,060 1,532 1,818 2,263 2,326
Occupancy rate (h) ......................... 54% 49% 55% 44% 44%
(a) This table does not include any operating statistics for non-consolidating
joint ventures and facilities leased to others.
(b) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(c) Represents the average number of licensed beds weighted based on periods
owned.
(d) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(e) Adjusted admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "adjusts" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(f) Represents the average number of days admitted patients stay in Triad's
hospitals.
(g) Represents the average number of patients in Triad's hospital beds each
day.
(h) Represents the percentage of hospital licensed beds occupied by patients.
Both average daily census and occupancy rate provide measures of the
utilization of inpatient rooms.
Triad's hospitals have historically experienced shifts from inpatient to
outpatient care as well as decreases in average lengths of inpatient stay,
primarily as a result of improvements in technology and clinical practices and
hospital payment changes by Medicare, insurance carriers and self-insured
employers. Some of these indicators increased during 2001 due to the acquisition
of Quorum, but Triad believes that these shifts will continue in the future.
These hospital payment changes generally encourage the utilization of
outpatient, rather than inpatient,
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services whenever possible, and shortened lengths of stay for inpatient care.
Triad has responded to the outpatient trend by enhancing its hospitals'
outpatient service capabilities, including:
(1) dedicating resources to its freestanding ambulatory surgery centers at
or near certain of its hospital facilities,
(2) reconfiguring certain hospitals to more effectively accommodate
outpatient treatment by, among other things, providing more convenient
registration procedures and separate entrances, and
(3) restructuring existing surgical capacity to allow a greater number and
range of procedures to be performed on an outpatient basis.
Triad expects the growth in outpatient services to continue in the future.
Triad's facilities will continue to emphasize those outpatient services that can
be provided on a quality, cost-effective basis and that Triad believes will
experience increased demand.
Sources of Revenue
Triad receives payment for patient services from the federal government
primarily under the Medicare program, state governments under their respective
Medicaid programs, and HMOs, PPOs and other private insurers as well as directly
from patients. The approximate percentages of patient revenues of Triad's
facilities from such sources during the periods specified below were as follows:
Years Ended December 31,
---------------------------------
2001 2000 1999
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Medicare .......................... 31.9% 29.6% 31.9%
Medicaid .......................... 4.4 6.4 6.9
Managed care plans ................ 28.9 31.0 32.7
Other sources ..................... 34.8 33.0 28.5
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Total ............................. 100.0% 100.0% 100.0%
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Medicare is a federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and persons
with end-stage renal disease. Medicaid is a federal-state program administered
by the states which provides hospital benefits to qualifying individuals who are
unable to afford care. All of Triad's hospitals are certified as providers of
Medicare and Medicaid services. Amounts received under the Medicare and Medicaid
programs are generally significantly less than the hospital's customary charges
for the services provided. See "Reimbursement."
To attract additional volume, most of Triad's hospitals offer discounts
from established charges to certain large group purchasers of health care
services, including private insurance companies, employers, HMOs, PPOs and other
managed care plans. These discount programs limit Triad's ability to increase
charges in response to increasing costs. See "Competition."
Patients are generally not responsible for any difference between customary
hospital charges and amounts reimbursed for such services under Medicare,
Medicaid, some private insurance plans, and HMOs or PPOs, but are responsible
for services not covered by such plans, exclusions, deductibles or co-insurance
features of their coverage. The amount of such exclusions, deductibles and
co-insurance has generally been increasing each year. Collection of amounts due
from individuals is typically more difficult than from governmental or business
payers. For more information on the reimbursement programs on which Triad's
revenues are dependent, see "Reimbursement."
Hospital Management Services
QHR is a leading provider of management and consulting services to acute
care hospitals, providing management services to approximately 200 hospitals as
of December 31, 2001. QHR provides management services to independent hospitals
and hospital systems under management contracts and provides selected
consulting, educational and related services. In addition, QHR provides
turnaround management consulting services to distressed independent hospitals.
QHR assists hospitals in improving their financial performance and the scope of
their services. Most of the hospitals for which QHR performs management,
consulting or support services are
5
independent not-for-profit hospitals. These hospitals are generally located in
non-urban areas. Sixty-five percent (65%) of these hospitals have less than 100
beds. Upon entering into a management contract, QHR first assesses the
operations of the hospital, including the hospital's financial management, the
economic and population-related factors affecting the hospital's market,
physician relationships and staffing requirements. Then, based on its
assessment, QHR develops and recommends a management plan to the hospital's
governing board.
To implement the management plan adopted for each hospital, QHR provides
the hospital with personnel to serve as the hospital's chief executive officer
and, typically, a chief financial officer. Although these people are QHR
employees, they operate under the direction and control of the hospital's
governing body, and the balance of the hospital staff remain employees of the
hospital under the control and supervision of the hospital. QHR's hospital-based
team is supported by its regional and corporate management staff. QHR currently
has 22 regional offices located throughout the United States. QHR's regional
office staff is experienced in providing management services to hospitals of all
sizes in diverse markets throughout the United States. Each regional office is
responsible for the management services provided within its geographic area.
QHR's hospital management contracts generally have a term of three to five
years. QHR's management contract fees are based on amounts agreed upon by QHR
and the hospital's governing body, and generally are not related to the
hospital's revenues or other variables. Under QHR's hospital management
contracts, QHR is not responsible for hospital licensure, certificates of need,
liability coverage, capital expenditures or for other functions which are
normally the responsibility of a hospital's governing body.
QHR offers consulting and related educational and management services to
hospitals that are not part of its contract management program. QHR's consulting
services are directed at many of the operational needs of hospitals, including
accounts receivable management, health information management, human resources,
facility design and various operational services. QHR also provides consulting
services to large, sophisticated medical institutions that need hospital
management advice for specific issues.
Competition
The hospital industry is highly competitive. Triad competes with other
hospitals and health care providers for patients. The competition among
hospitals and other health care providers for patients has intensified in recent
years. In some cases, competing hospitals are more established than Triad's
hospitals. Certain of these competing facilities, particularly in urban markets,
offer services, including extensive medical research and medical education
programs, which are not offered by Triad's facilities. In addition, in certain
of the markets where Triad operates, there are large teaching hospitals which
provide highly specialized facilities, equipment and services which may not be
available at Triad's hospitals. Although some of Triad's hospitals are located
in geographic areas where they are currently the sole provider of general, acute
care hospital services in their communities, these hospitals also face
competition from other hospitals, including larger tertiary care centers.
Despite the fact that these competing hospitals may be as far as 30 to 50 miles
away, patients in these markets increasingly may migrate to these competing
facilities as a result of local physician referrals, managed care incentives or
personal choice.
In addition, some of the hospitals that compete with Triad are owned by
tax-supported governmental agencies or not-for-profit entities supported by
endowments and charitable contributions. These hospitals can make capital
expenditures without paying sales taxes, and are generally exempt from property
and income taxes. Triad also faces competition from other specialized care
providers, including outpatient surgery, orthopedic, oncology and diagnostic
centers.
State certificate of need laws, which place limitations on a hospital's
ability to expand hospital services and add new equipment, also may have the
effect of restricting competition. Five states in which Triad operates, Alabama,
Mississippi, Ohio, South Carolina and West Virginia, have certificate of need
laws ("CON laws"). The application process for approval of covered services,
facilities, changes in operations and capital expenditures in these states is,
therefore, highly competitive. In those states which have no CON laws or which
set relatively high thresholds before expenditures become reviewable by state
authorities, competition in the form of new services, facilities and capital
spending is more prevalent.
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The number and quality of the physicians on a hospital's staff are
important factors in a hospital's competitive advantage. Physicians decide
whether a patient is admitted to the hospital and the procedures to be
performed. Triad believes that physicians refer patients to a hospital primarily
on the basis of the quality of services it renders to patients and physicians,
the quality of other physicians on the medical staff, the location of the
hospital and the quality of the hospital's facilities, equipment and employees.
Admitting physicians may be on the medical staff of other hospitals in addition
to those of Triad's hospitals.
One element of Triad's business strategy is expansion through the
acquisition of acute care hospitals in select markets. The competition to
acquire hospitals is significant. Triad intends to acquire, on a selective
basis, hospitals that are similar to those currently owned and operated.
However, suitable acquisitions may not be accomplished on favorable terms.
Another major factor in the competitive position of a hospital is
management's ability to negotiate service contracts with purchasers of group
health care services, such as HMOs and PPOs, which attempt to direct and control
the use of hospital services through managed care programs and to obtain
discounts from hospitals' established charges. Employers and traditional health
insurers are also increasingly interested in containing costs through
negotiations with hospitals for managed care programs and discounts from
established charges. Generally, hospitals compete for service contracts with
group health care service purchasers on the basis of price, market reputation,
geographic location, quality and range of services, quality of the medical staff
and convenience. The importance of obtaining contracts with managed care
organizations varies from market to market depending on the market strength of
such organizations.
QHR also faces competitive challenges in the area of management services.
In seeking management services, hospitals have a variety of alternatives.
Hospitals managed by hospital management companies represent less than 10% of
the total acute care hospitals in the United States. Most hospitals have their
own management staff. Some hospitals choose to obtain management services from
large, tertiary care facilities that create referral networks with smaller
surrounding hospitals.
Triad, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payers. As both private and government payers
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, federal and state efforts to reform the health care system may
further impact reimbursement rates. Changes in medical technology, existing and
future legislation, regulations and interpretations and competitive contracting
for provider services by private and government payers may require changes in
Triad's facilities, equipment, personnel, rates and/or services in the future.
The hospital industry and Triad's hospitals continue to have significant
unused capacity. Inpatient utilization, average lengths of stay and average
occupancy rates have historically been negatively affected by payer-required
pre-admission authorization, utilization review and payer pressure to maximize
outpatient and alternative health care delivery services for less acutely ill
patients. Admissions constraints, payer pressures and increased competition are
expected to continue. Triad endeavors to meet these challenges by expanding many
of its facilities to include outpatient centers, offering discounts to private
payer groups, upgrading facilities and equipment and offering new programs and
services.
Employees and Medical Staff
At December 31, 2001, Triad had approximately 33,000 employees, including
approximately 9,000 part-time employees, as well as approximately 600 employees
providing hospital management and consulting services. Employees at two
hospitals are currently represented by labor unions. Triad considers its
employee relations to be good. While Triad's non-union hospitals experience
union organizational activity from time to time, Triad does not expect such
efforts to materially affect its future operations. Triad's hospitals, like most
hospitals, have experienced labor costs rising faster than the general inflation
rate, primarily in nursing. There can be no assurance as to future availability
and cost of qualified medical personnel.
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Triad's hospitals are staffed by licensed physicians who have been admitted
to the medical staff of individual hospitals. Physicians generally are not
employees of Triad's hospitals although there are varying levels of employed
physicians in certain markets. Some physicians provide services in Triad's
hospitals under contracts, which generally describe a term of service, provide
and establish the duties and obligations of such physicians, require the
maintenance of certain performance criteria and fix compensation for such
services. Any licensed physician may apply to be admitted to the medical staff
of any of Triad's hospitals, but admission to the staff must be approved by the
hospital's medical staff and the appropriate governing board of the hospital in
accordance with established credentialing criteria. Members of the medical
staffs of Triad's hospitals located in areas where there are other hospitals
often also serve on the medical staffs of other hospitals and may terminate
their affiliation with a hospital at any time.
Triad's Ethics and Compliance Program
It is Triad's policy that its business be conducted with integrity and in
compliance with the law. Triad has developed a corporate-wide ethics and
compliance program, which focuses on all areas of policy and regulatory
compliance, including physician recruitment, reimbursement and cost reporting
practices and laboratory operations.
This ethics and compliance program is intended to assure that high
standards of conduct are maintained in the operation of Triad's business and to
help assure that policies and procedures are implemented so that employees act
in full compliance with all applicable laws, regulations and company policies.
Under the ethics and compliance program, Triad provides initial and periodic
legal compliance and ethics training to every employee, reviews various areas of
Triad's operations, and develops and implements policies and procedures designed
to foster compliance with the law. Triad regularly monitors its ongoing
compliance efforts. The program also includes a mechanism for employees to
report, without fear of retaliation, any suspected legal or ethical violations
to their supervisors or designated compliance officers in Triad's hospitals, as
well as a national "hotline" to which employees can report, on an anonymous
basis if preferred, any suspected violations. Triad has also established a
separate committee of the Board of Directors to monitor the compliance program.
On November 1, 2001, Triad entered into a five-year corporate integrity
agreement with the Office of the Inspector General and agreed to maintain its
compliance program in accordance with the corporate integrity agreement. This
obligation could result in greater scrutiny by regulatory authorities.
Violations of the integrity agreement could subject Triad's hospitals to
substantial monetary penalties. Complying with the corporate integrity agreement
may impose expensive and burdensome requirements on certain operations which
could have a material adverse impact on Triad. The compliance measures and
reporting and auditing requirements for Triad's hospitals contained in the
integrity agreement include:
. Continuing the duties and activities of corporate compliance
officers and committees and maintaining a written code of conduct
and written policies and procedures;
. Providing general training on the compliance policy and the
agreement and specific training for the appropriate personnel on
billing, coding and cost report issues;
. Having an independent third party conduct periodic audits of
inpatient DRG coding and laboratory billing;
. Continuing a confidential disclosure program and compliance
hotline and implementing enhanced screening to ensure ineligible
employees and contractors are not hired;
. Reporting material deficiencies resulting in an overpayment by a
federal healthcare program and probable violations of certain
laws, rules and regulations; and
. Submitting annual reports to the Inspector General describing the
operations of the corporate compliance program for the past year.
Reimbursement
Medicare. Under the Medicare program, acute care hospitals generally
receive reimbursement under a prospective payment system ("PPS") for inpatient
hospital services. Psychiatric, specially designated children's hospitals and
certain designated cancer research hospitals, as well as psychiatric units that
are distinct parts of a
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hospital and meet the Centers for Medicare and Medicaid Services ("CMS")
criteria for exemption, are currently exempt from PPS and are reimbursed on a
cost-based system, subject to certain cost limits known as TEFRA limits.
Under PPS, fixed payment amounts per inpatient discharge are established
based on the patient's assigned diagnosis related group ("DRG"). DRGs classify
treatments for illnesses according to the estimated intensity of hospital
resources necessary to furnish care for each principal diagnosis. DRG rates have
been established for each hospital participating in the Medicare program, are
based upon a statistically normal distribution of severity and are adjusted for
area wage differentials but do not consider a specific hospital's costs. DRG
rates are updated and re-calibrated annually and have been affected by several
recent Federal enactments. The index used to adjust the DRG rates, known as the
"market basket index," gives consideration to the inflation experienced by
hospitals (and entities outside of the health care industry) in purchasing goods
and services. Although for several years the percentage increases to the DRG
rates have been lower than the percentage increases in the costs of goods and
services purchased by hospitals, the Benefits Improvement Protection Act of 2000
("BIPA") has updated the rates hospitals receive so that hospitals generally
received the market basket index minus 1.1% for discharges occurring on or after
October 1, 2000 and before March 31, 2001 or the market basket index plus 1.1%
for discharges occurring on or after April 1, 2001 and before October 1, 2001.
Triad received approximately $16.0 million of additional reimbursement from BIPA
in 2001 and anticipates the receipt of approximately $17.0 million of additional
reimbursement in 2002. For Federal fiscal years 2002 and 2003, hospitals
generally will receive the market basket index minus 0.55%. For Federal fiscal
year 2004, hospitals generally will receive the full market basket. Future
legislation may decrease the rate of increase for DRG payments, which could make
it more difficult to grow revenue and to maintain or improve operating margins.
Until August 1, 2000, outpatient services provided at general, acute care
hospitals typically were reimbursed by Medicare based on a fee schedule. The
Balanced Budget Act of 1997 ("BBA") contains provisions that affect outpatient
hospital services, including a requirement that CMS adopt a PPS system for
outpatient hospital services, which became effective August 1, 2000. Based on
provisions of BIPA, the fee schedule is to be updated by the market basket minus
0.8% and 1.0% in Federal fiscal years 2001 and 2002, respectively, and market
basket for Federal fiscal years 2003 and beyond. Similarly, effective January 1,
1999, therapy services rendered by hospitals to outpatients and inpatients not
reimbursed under Medicare are reimbursed according to the Medicare Physician fee
schedule.
Payments for Medicare skilled nursing facility services and home health
services historically have been paid based on costs, subject to certain
adjustments and limits. Although BBA mandates a PPS system for skilled nursing
facility services, home health services and inpatient rehabilitation hospital
services, BIPA has made adjustments to the PPS payments for these health care
service providers. Specifically, for skilled nursing facilities, BBA set the
annual inflation update at the market basket index minus 1.0% in 2001 and 2002.
However, BIPA adjusts the update to the full market basket index in 2001 and the
market basket index minus 0.5% in 2002 and 2003. In addition to the creation of
a PPS system for skilled nursing, the BBA also institutes consolidated billing
for skilled nursing facility services, under which payments for most
non-physician services for beneficiaries no longer eligible for skilled nursing
facility care will be made to the facility, regardless of whether the item or
service was furnished by the facility, by others under arrangement, or under any
other contracting or consulting arrangement. Consolidated billing is being
implemented on a transition basis. As of December 31, 2001, 24 of Triad's
hospitals operated skilled nursing facilities.
In addition to establishing a PPS system for home health services, BBA
requires a 15% payment reduction in payment limits to home health agencies.
However, BIPA delayed the implementation of this reduction until 2002. As of
December 31, 2001, less than 1% of Triad's revenues were derived from home
health services.
Payments to PPS-exempt hospitals and units, such as inpatient psychiatric
hospital services are based upon reasonable costs, subject to a cost per
discharge target. These limits are updated annually by a market basket index.
Significantly, BIPA increases payments to PPS-exempt hospitals. In particular,
total payments for rehabilitation hospitals in 2002 are to equal the amounts of
payments that would have been made if the rehabilitation PPS system had not been
enacted, and rehabilitation facilities are able to make a one-time election
before the start of the PPS to be paid based on a fully phased-in PPS rate. In
addition, BIPA increases the incentive payments paid for inpatient
9
psychiatric services from 2% to 3%, raises the national cap on long term care
hospital reimbursement by 2% and increases the individual long-term care
hospital target amounts by 35%.
Currently, physicians are paid by Medicare according to the physician fee
schedule. However, physicians working in rural health clinics, such as those
maintained by Triad, are reimbursed for their professional and administrative
services through the rural health clinic subject to per visit limits unless the
rural health clinic is based at a rural hospital with less than 50 beds. There
are 20 rural health clinics affiliated with Triad's hospitals.
Medicare has special payment provisions for "sole community hospitals." A
sole community hospital is generally the only hospital in at least a 35-mile
radius. Eight of Triad's facilities qualify as sole community hospitals under
Medicare regulations. Special payment provisions related to sole community
hospitals include a higher reimbursement rate, which is based on a blend of
hospital-specific costs and a national reimbursement rate, and a 90% payment
"floor" for capital costs which guarantees the sole community hospital capital
reimbursement equal to 90% of capital cost. In addition, the TRICARE program has
special payment provisions for hospitals recognized as sole community hospitals
for Medicare purposes.
On November 19, 1999, Congress passed the Balanced Budget Refinement Act of
1999 (the "Refinement Act") to reduce certain of the perceived adverse effects
of the BBA on various health care providers. Among other things, the Refinement
Act did reduce certain outpatient PPS reimbursement reductions proposed by CMS
as a part of its implementation of a PPS for outpatient hospital services by
attempting to limit certain losses sustained through the implementation of such
system during the first three years of implementation. The Refinement Act also
provided certain reimbursement increases for certain skilled nursing facilities,
in part by allowing such facilities the option of choosing to be reimbursed at
the new Federal PPS rate for certain cost reporting periods beginning after
December 15, 1999, as opposed to the three-year phase-in described above. Triad
received approximately $3.0 million and $1.0 million in additional reimbursement
as a result of the Refinement Act in 2001 and 2000, respectively.
Medicaid. Most state Medicaid payments are made under a PPS, or under
programs which negotiate payment levels with individual hospitals. Medicaid
reimbursement is often less than a hospital's cost of services. Medicaid is
currently funded jointly by the state and the Federal governments. The Federal
government and many states are currently considering significant reductions in
the level of Medicaid funding while at the same time expanding Medicaid
benefits, which could adversely affect future levels of Medicaid reimbursement
received by our hospitals.
Annual Cost Reports. All hospitals participating in the Medicare program,
whether paid on a reasonable cost basis or under PPS, are required to meet
certain financial reporting requirements. Federal regulations require submission
of annual cost reports covering medical costs and expenses associated with the
services provided by each hospital to Medicare beneficiaries. Review of
previously submitted annual cost reports and the cost report preparation process
are areas included in the ongoing government investigations of HCA. See
"Governmental Investigations - Governmental Investigation of HCA and Related
Litigation." The investigations, actions and claims affecting HCA relate to HCA
and its subsidiaries, including subsidiaries that prior to the spin-off from HCA
owned facilities now owned by Triad. It is too early to predict the outcome of
these investigations, but if Triad, or any Triad facility is found to be in
violation of Federal or state laws relating to Medicare, Medicaid or similar
program, Triad could be subject to substantial monetary fines, civil and
criminal penalties and exclusion from participation in the Medicare and Medicaid
programs. Any such sanctions could have a material adverse effect on Triad's
financial position and results of operations. HCA has agreed to indemnify Triad
in respect of losses arising from such government investigations for the period
prior to the spin-off. See "Governmental Investigations - Governmental
Investigation of HCA and Related Litigation" for more information regarding such
arrangement.
Annual cost reports required under the Medicare and Medicaid programs are
subject to routine audits, which may result in adjustments to the amounts
ultimately determined to be due to Triad under these reimbursement programs.
These audits often require several years to reach the final determination of
amounts earned under the programs. Providers also have rights of appeal, and it
is common to contest issues raised in audits of prior years' reports. The due
dates for cost reports for cost reporting periods ending after August 31, 2000
have been delayed due to CMS not issuing the final payment schedules for
outpatient PPS. Triad has not filed cost reports for these periods, although the
estimated impact of filing these cost reports has been reflected in the
financial statements. The delay in filing these cost reports will extend the
time period of final determination of amounts earned. Pursuant to
10
the terms of the spin-off distribution agreement, Triad will be responsible for
the Medicare, Medicaid and Blue Cross cost reports, and associated receivables
and payables, for Triad's facilities for all periods ending after the spin-off.
HCA has agreed to indemnify Triad for any payments which it is required to make
with respect to the Medicare, Medicaid and Blue Cross cost reports for Triad
facilities operated by HCA prior to the spin-off relating to periods ending on
or prior to the spin-off and Triad agreed to indemnify HCA for and pay to HCA
any payments received by Triad relating to such cost reports.
Managed Care. Pressures to control the cost of health care have
historically resulted in increases in admissions attributable to managed care
payers, although admissions for managed care payers declined in 2001 due, in
part, to the Quorum acquisition. Triad expects that volumes related to managed
care payers will increase in the future. Triad generally receives lower payments
from managed care payers than from traditional commercial/indemnity insurers;
however, as part of its business strategy, Triad intends to take steps to
improve its managed care position. The percentage of Triad's revenues
attributable to managed care payers were 28.9%, 31.0% and 32.7% for the years
ended December 31, 2001, 2000 and 1999, respectively. See "Business Strategy"
for a more detailed discussion of such strategy.
Commercial Insurance. Triad hospitals provide services to some individuals
covered by private health care insurance. Private insurance carriers make direct
payments to such hospitals or, in some cases, reimburse their policy holders,
based upon the particular hospital's established charges and the particular
coverage provided in the insurance policy.
Commercial insurers are continuing efforts to limit the payments for
hospital services by adopting discounted payment mechanisms, including
prospective payment or DRG based payment systems, for more inpatient and
outpatient services. To the extent that such efforts are successful and reduce
the insurers' reimbursement to hospitals and the costs of providing services to
their beneficiaries, such reduced levels of reimbursement may have a negative
impact on the operating results of the hospitals of Triad.
Government Regulation and Other Factors
Licensure, Certification and Accreditation. Health care facilities are
subject to Federal, state and local regulations relating to the adequacy of
medical care, equipment, personnel, operating policies and procedures, fire
prevention, rate-setting and compliance with building codes and environmental
protection laws. Facilities are subject to periodic inspection by governmental
and other authorities to assure continued compliance with the various standards
necessary for licensing and accreditation. All of Triad's health care facilities
are properly licensed under appropriate state laws.
All of the hospitals affiliated with Triad are certified under the Medicare
and Medicaid programs and all are accredited by the Joint Commission on
Accreditation of Healthcare Organizations, the effect of which is to permit the
facilities to participate in the Medicare and Medicaid programs. Should any
facility lose its accreditation by this Joint Commission, or otherwise lose its
certification under the Medicare and/or Medicaid program, the facility would be
unable to receive reimbursement from the Medicare and Medicaid programs. The
facilities of Triad are in substantial compliance with current applicable
federal, state, local and independent review body regulations and standards. The
requirements for licensure, certification and accreditation are subject to
change and, in order to remain qualified, it may be necessary for Triad to
effect changes in its facilities, equipment, personnel and services.
Certificates of Need. The construction of new facilities, the acquisition
of existing facilities, and the addition of new beds or services may be subject
to review by state regulatory agencies under a CON program. Triad operates in
five states (Alabama, Mississippi, Ohio, South Carolina, and West Virginia) that
require CON approval to expand certain acute care hospital services. Such laws
generally require state agency determination of public need and approval prior
to the addition of beds or services or certain other capital expenditures.
Failure to obtain necessary state approval can result in the inability to expand
facilities, add services, complete an acquisition or change ownership. Further,
violation of such laws may result in the imposition of civil sanctions or the
revocation of a facility's license.
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State Rate Review. The state of Arizona adopted legislation mandating rate
or budget review for hospitals. In the aggregate, state rate or budget review
and indigent tax provisions have not materially adversely affected the results
of operations of Triad. Triad is not able to predict whether any additional
state rate or budget review or indigent tax provisions will be adopted and,
accordingly, is not able to assess the effect thereof on its results of
operations or financial condition.
Utilization Review. Federal law contains numerous provisions designed to
ensure that services rendered by hospitals to Medicare and Medicaid patients
meet professionally recognized standards, are medically necessary and that
claims for reimbursement are properly filed. These provisions include a
requirement that a sampling of admissions of Medicare and Medicaid patients must
be reviewed by peer review organizations, which review the appropriateness of
Medicare and Medicaid patient admissions and discharges, the quality of care
provided, the validity of DRG classifications and the appropriateness of cases
of extraordinary length of stay or cost. Peer review organizations may deny
payment for services provided, may assess fines and also have the authority to
recommend to the Department of Health and Human Services ("HHS") that a provider
which is in substantial noncompliance with the standards of the peer review
organization be excluded from participation in the Medicare program. Utilization
review is also a requirement of most non-governmental managed care
organizations.
The Federal False Claims Act and Similar State Laws. A trend affecting the
health care industry today is the increased use of the Federal False Claims Act,
and, in particular, actions being brought by individuals on the government's
behalf under the False Claims Act's qui tam, or whistleblower, provisions.
Whistleblower provisions allow private individuals to bring actions on behalf of
the government alleging that the defendant has defrauded the Federal government.
When a defendant is determined by a court of law to be liable under the
False Claims Act, the defendant must pay three times the actual damages
sustained by the government, plus mandatory civil penalties of between $5,000 to
$10,000 for each separate false claim. Settlements entered into prior to
litigation usually involve a less severe damages methodology. There are many
potential bases for liability under the False Claims Act. Liability often arises
when an entity knowingly submits a false claim for reimbursement to the Federal
government. In addition, a number of states have adopted their own false claims
provisions as well as their own whistleblower provisions whereby a private party
may file a civil lawsuit on behalf of the state in state court. From time to
time, companies in the health care industry, including Triad, may be subject to
actions under the False Claims Act. For a more complete discussion of litigation
brought against Triad under the False Claims Act, see "Governmental
Investigations."
Federal and State Fraud and Abuse. Participation in the Medicare program is
heavily regulated by Federal statute and regulation. If a hospital fails
substantially to comply with the numerous conditions of participation in the
Medicare program or performs certain prohibited acts, such hospital's
participation in the Medicare program may be terminated or civil or criminal
penalties may be imposed upon it under certain provisions of the Social Security
Act. For example, the Social Security Act prohibits providers and others from
soliciting, receiving, offering or paying, directly or indirectly, any
remuneration intended to induce referrals of patients to receive goods or
services covered by a Federal health care program (the "Anti-Kickback Statute").
In addition to felony criminal penalties (fines up to $25,000 and imprisonment),
the Social Security Act establishes civil monetary penalties and the sanction of
excluding violators from participation in the Federal health care programs.
The Anti-Kickback Statute has been interpreted broadly by Federal
regulators and certain courts to prohibit the intentional payment of anything of
value if even one purpose of the payment is to influence the referral of
Medicare or Medicaid business. Therefore, many commonplace commercial
arrangements between hospitals and physicians could be considered by the
government to violate the Anti-Kickback Statute.
As authorized by Congress, the Office of the Inspector General has
published final safe harbor regulations that outline categories of activities
that are deemed protected from prosecution under the Anti-Kickback Statute.
Currently, there are safe harbors for various activities, including, but not
limited to: investment interest, space rental, equipment rental, practitioner
recruitment, personal services and management contracts, sale of practice,
discounts, employees, investments in group practices, and ambulatory surgery
centers. The fact that conduct or a business arrangement does not fall within a
safe harbor does not automatically render the conduct or business arrangement
12
unlawful under the Anti-Kickback Statute. The conduct and business arrangements,
however, do risk increased scrutiny by government enforcement authorities.
Triad has a variety of financial relationships with physicians who refer
patients to Triad's hospitals. Triad also has contracts with physicians
providing for a variety of financial arrangements, including employment
contracts, leases, and professional service agreements. Triad also provides
financial incentives, including loans and minimum revenue guarantees, to recruit
physicians into the communities served by Triad's hospitals. Several of Triad's
freestanding surgery centers have physician investors and physicians own
interests in certain of Triad's hospitals. Some of the arrangements with
physicians do not expressly meet requirements for safe harbor protection. It
cannot be assured that regulatory authorities that enforce the Anti-Kickback
Statute will not determine that any of these arrangements violate the
Anti-Kickback Statute or other Federal or state laws.
The Social Security Act also imposes criminal and civil penalties for
submitting false claims to Medicare and Medicaid. False claims include, but are
not limited to, billing for services not rendered, billing for services without
prescribed documentation, misrepresenting actual services rendered in order to
obtain higher reimbursement and cost report fraud. Like the Anti-Kickback
Statute, these provisions are very broad. Further, the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA") created civil penalties for
conduct including improper coding and billing for unnecessary goods and
services. HIPAA also broadened the scope of the fraud and abuse laws by adding
several criminal provisions for health care fraud offenses that apply to all
health benefit programs.
The Social Security Act also includes a provision commonly known as the
"Stark Law." This law prohibits physicians from referring Medicare and Medicaid
patients to entities with which they or any of their immediate family members
have a financial relationship if these entities provide certain designated
health services that are reimbursable by Medicare, including inpatient and
outpatient hospital services. Sanctions for violating the Stark Law include
civil money penalties up to $15,000 per prohibited service provided, assessments
equal to twice the dollar value of each such service provided and exclusion from
the Federal health care programs. There are a number of exceptions to the
self-referral prohibition, including an exception for a physician's ownership
interest in an entire hospital as opposed to an ownership interest in a hospital
department. There are also exceptions for many of the customary financial
arrangements between physicians and providers, including employment contracts,
leases and recruitment agreements.
On January 4, 2001, CMS issued final regulations subject to comment
intended to clarify parts of the Stark Law and some of the exceptions to it.
These regulations are considered Phase I, of a two-phase process, with the
remaining regulations to be published at an unknown future date. Phase I of the
regulations became effective January 4, 2002, except in the case of the
provisions relating to home health agencies, which became effective April 5,
2001.
Many of the states in which Triad operates also have adopted laws that
prohibit payments to physicians in exchange for referrals similar to the
Anti-Kickback Statute and the Stark Law, some of which apply regardless of the
source of payment for care. These statutes typically provide criminal and civil
penalties as well as loss of licensure. Little precedent exists for the
interpretation or enforcement of these state laws.
Corporate Practice of Medicine. Some of the states in which Triad operates
have laws that prohibit corporations and other entities from employing
physicians or that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers. In addition, some
states restrict certain business relationships between physicians and
pharmacies. Possible sanctions for violation of these restrictions include loss
of a physician's license and civil and criminal penalties. These statutes vary
from state to state, are often vague and have seldom been interpreted by the
courts or regulatory agencies. Although Triad exercises care to structure its
arrangements with health care providers to comply with the relevant state law,
and believes such arrangements comply with applicable laws in all material
respects, there can be no assurance that governmental officials charged with
responsibility for enforcing these laws will not assert that Triad, or certain
transactions in which it is involved, is in violation of such laws, or that such
laws ultimately will be interpreted by the courts in a manner consistent with
the interpretations of Triad.
13
Health Care Reform. Health care, as one of the largest industries in the
United States, continues to attract much legislative interest and public
attention. In recent years, an increasing number of legislative proposals have
been introduced or proposed in Congress and in some state legislatures that
would effect major changes in the health care system, either nationally or at
the state level. Proposals that have been considered include cost controls on
hospitals, insurance market reforms to increase the availability of group health
insurance to small businesses, patients' bills of rights and requirements that
all businesses offer health insurance coverage to their employees. The costs of
certain proposals would be funded in significant part by reductions in payments
by governmental programs, including Medicare and Medicaid, to health care
providers such as hospitals. There can be no assurance that future health care
legislation or other changes in the administration or interpretation of
governmental health care programs will not have a material adverse effect on the
business, financial condition or results of operations of Triad.
Administrative Simplification. The Administrative Simplification Provisions
of HIPAA require the use of uniform electronic data transmission standards for
health care claims and payment transactions submitted or received
electronically. On August 17, 2000, CMS published final regulations establishing
electronic data transmission standards that all health care providers must use
when submitting or receiving certain health care transactions electronically.
Compliance with these regulations is required by October 2002 subject to certain
recently enacted exceptions, but Triad cannot yet predict the impact that these
final regulations will have.
HIPAA also requires CMS to adopt standards to protect the security and
privacy of health-related information. Regulations were proposed on August 12,
1998, but have not yet been finalized. However, as proposed, these regulations
would require health care providers to implement organizational and technical
practices to protect the security of electronically maintained or transmitted
health-related information. In addition, CMS released final regulations
containing privacy standards in December 2000 and which require compliance by
February 2003. As currently drafted, the privacy regulations will extensively
regulate the use and disclosure of individually identifiable health-related
information. The security regulations, as proposed, and the privacy regulations,
when they become effective, could impose significant costs on Triad's facilities
in order to comply with these standards. Violations of the Administrative
Simplification provisions of HIPAA could result in civil penalties of up to
$25,000 per type of violation in each calendar year and criminal penalties of up
to $250,000 per violation.
In addition, Triad's facilities will continue to remain subject to any
state laws that are more restrictive than the regulations issued under HIPAA,
which vary by state and could impose additional penalties.
Conversion Legislation. Many states have enacted or are considering
enacting laws affecting the conversion or sale of not-for-profit hospitals.
These laws, in general, include provisions relating to attorney general
approval, advance notification and community involvement. In addition, state
attorneys general in states without specific conversion legislation may exercise
authority over these transactions based upon existing law. In many states there
has been an increased interest in the oversight of not-for-profit conversions.
The adoption of conversion legislation and the increased review of
not-for-profit hospital conversions may increase the cost and difficulty or
prevent the completion of transactions with not-for-profit organizations in
certain states in the future.
Revenue Ruling 98-15. During March 1998, the IRS issued guidance regarding
the tax consequences of joint ventures between for-profit and not-for-profit
hospitals. Triad has not determined the impact of the tax ruling on the
development of future ventures. The tax ruling could limit joint venture
development with not-for-profit hospitals, and could influence the exercise of
"put agreements"--agreements that require the purchase of the partner's interest
in the joint venture--by Triad's existing joint venture partner.
Environmental Matters. Triad is subject to various Federal, state and local
statutes and ordinances regulating the discharge of materials into the
environment. Triad does not expect that it will be required to expend any
material amounts in order to comply with these laws and regulations or that
compliance will materially affect its capital expenditures, earnings or
competitive position.
Insurance. As is typical in the health care industry, Triad is subject to
claims and legal actions by patients in the ordinary course of business. To
cover these claims, Triad maintains professional malpractice liability insurance
and general liability insurance in amounts which it believes to be sufficient
for its operations, although it is possible that some claims may exceed the
scope of the coverage in effect. At various times in the past, the cost of
malpractice
14
and other liability insurance has risen significantly. Therefore, there can be
no assurance that such insurance will continue to be available at reasonable
prices which will allow Triad to maintain adequate levels of coverage.
Substantially all losses in periods prior to the spin-off are insured through a
wholly-owned insurance subsidiary of HCA and excess loss policies maintained by
HCA. HCA has agreed to indemnify Triad in respect of claims covered by such
insurance policies arising prior to the spin-off. After the spin-off, Triad
obtained insurance coverage on a claims incurred basis from HCA's wholly-owned
insurance subsidiary with excess coverage obtained from other carriers which is
subject to certain deductibles which Triad considers to be reasonable. For the
facilities acquired in the Quorum transaction, Triad obtained tail coverage,
subject to certain deductibles, to cover claims incurred prior to July 31, 2001.
These facilities were converted to Triad's existing coverage on August 1, 2001.
Triad has a reserve for general and professional liability risks of $36.0
million at December 31, 2001. Any losses incurred in excess of amounts
maintained under such insurance will be funded from working capital. There can
be no assurance that the cash flow of Triad will be adequate to provide for
professional and general liability claims in the future. See "NOTE 2 -
ACCOUNTING POLICIES - General and Professional Liability Risks" in the
consolidated financial statements for a more detailed discussion of such
arrangements.
Governmental Investigations
False Claims Act Litigation. At a meeting in September 1998, Quorum learned
from the government that the government would likely join in a lawsuit filed
against Quorum under the False Claims Act. The suit was filed in January 1993 by
a former employee of a hospital managed by a Quorum subsidiary. These lawsuits,
commonly known as qui tam actions, are filed "under seal." That means that the
claims are kept secret until the government decides whether to join the case.
The person who files the lawsuit is called a "relator." The government joined
the case against Quorum in October 1998. The relator's lawsuit named Quorum,
QHR, HCA and all hospitals that Quorum or HCA owned, operated or managed from
1984 through 1997, as defendants. The unsealed complaint, prepared by the
relator, alleged that Quorum knowingly prepared and caused to be filed cost
reports which claimed payments from Medicare and other government payment
programs greater than the amounts due.
On February 24, 1999, the government filed its own complaint in the case.
The new complaint alleged that Quorum, on behalf of hospitals it managed between
1985 and 1995 and hospitals it owned from 1990 to the date of the complaint,
violated the False Claims Act by knowingly submitting or causing to be submitted
false Medicare cost reports, resulting in the submission of false claims to
Federal health care programs.
The government asserted that the false claims in cost reports were, in
part, reflected in "reserve analyses" created by Quorum. The complaint also
alleged that these cost report filings were prepared as the result of company
policy. This qui tam action sought three times the amount of damages caused to
the United States by Quorum's submission of any alleged false claims to the
government, civil penalties of not less than $5,000 nor more than $10,000 for
each claim, and the relator's attorneys' fees and costs. On April 23, 2001, a
settlement agreement was signed and a stipulation of dismissal was filed with
the court dismissing all claims against Quorum, QHR and the other Quorum
subsidiaries named in the lawsuit. The settlement provided for a payment of
$82.5 million in compensation to the government, plus interest accruing on $77.5
million at 7.25% per annum from October 2, 2000 (the date on which an
understanding with the government to settle this lawsuit was reached) to the
payment date. The settlement was paid in April 2001. The settlement agreement
also provides, on certain conditions, for a release of all hospitals currently
or formerly managed by QHR electing to participate in the settlement.
In connection with the settlement, Quorum entered into a corporate
integrity agreement with the Office of the Inspector General containing, among
other things, an affirmative obligation to report certain violations of
applicable laws and regulations. On August 10, 2001, the Office of Inspector
General agreed to suspend Quorum's obligations under this corporate integrity
agreement until November 1, 2001, in exchange for Triad's agreement to negotiate
a corporate integrity agreement that would also include the hospitals owned by
Triad at the time of its merger with Quorum, as well as hospitals Triad might
subsequently acquire. (In the distribution agreement with HCA at the time of its
spin-off, Triad agreed to participate in the negotiation of a corporate
integrity agreement with the Office of Inspector General.) These negotiations of
a "combined" corporate integrity agreement were concluded and the agreement
became effective on November 1, 2001. See "Triad's Ethics and Compliance
Program".
15
Other Qui Tam Actions and Related Investigations. In May 1998, Quorum was
informed that it was a defendant in another qui tam action involving home health
services provided by two of its owned hospitals and alleging that Quorum had
violated Medicare laws. This action was filed under seal in June 1996 by a
former employee, whom Quorum fired in April 1996. The United States Attorney's
Office allowed Quorum an opportunity to review the results of the government's
investigations and discuss the allegations made in the action prior to the
government making a decision to intervene as a plaintiff. Quorum cooperated
fully with the United States Attorney's Office and provided additional
information and made employees available for interviews.
On October 26, 2000, Quorum completed settlement of a qui tam lawsuit which
primarily involved allegedly improper allocation of costs at Flowers Hospital,
Dothan, Alabama, to its home health agency (CV-96-P1638-S, N.D. Alabama). Quorum
paid to the government on October 26, 2000 approximately $18 million in
connection with this settlement. In addition to the settlement agreement, Quorum
entered into a five year corporate integrity agreement covering Flowers Hospital
with the Office of the Inspector General which was terminated upon the effective
date of the Quorum corporate integrity agreement entered into in connection with
the False Claims Act litigation discussed above. The government always reserves
the right to investigate and pursue other allegations made by a relator under a
complaint. However, under the settlement agreement, the relator is prohibited
from pursuing these additional allegations.
As a result of its ongoing discussions with the government, prior to the
merger Quorum learned that there are two additional unrelated qui tam complaints
against it alleging violations of the False Claims Act for claims allegedly
submitted to the government involving one owned and two managed hospitals.
Quorum accrued $3.5 million on these items prior to the merger. Both matters
remain under seal. With respect to the matter involving the two managed
hospitals, the government has requested that Quorum conduct a self audit with
respect to one Medicare cost report for one managed hospital and three other
specific issues and that matter remains under seal. The government could
undertake additional investigative efforts. The government has stated that it
intends to investigate certain other allegations. With respect to the complaint
involving the owned hospital, Triad reached an agreement to settle this matter
through the payment to the government of $427,500 (plus interest to the date of
actual payment), and payment of certain attorneys' fees to the relators under
the complaint. Payment was made on January 15, 2002, and the case has been
dismissed with prejudice. As Quorum's successor, Triad was also a defendant in
another qui tam complaint, in which the government declined to intervene. After
receipt of service, Triad filed motions to dismiss such litigation against
Quorum and QHR and on October 9, 2001, the relators filed notices of voluntary
dismissal, to which the government indicated its consent. The court dismissed
such litigation on October 17, 2001.
From time to time, Triad may be the subject of additional investigations or
a party to additional litigation which alleges violations of law. Triad may not
know about such investigations, or about qui tam actions filed against Triad
unless and to the extent such are unsealed.
Governmental Investigation of HCA and Related Litigation. In connection
with the spin-off, Triad entered into a distribution agreement with HCA. The
terms of the distribution agreement provide that HCA will indemnify Triad for
any losses (other than consequential damages) which it may incur as a result of
proceedings described below. HCA has also agreed to indemnify Triad for any
losses (other than consequential damages) which it may incur as a result of
proceedings which may be commenced by government authorities or by private
parties in the future that arise from acts, practices or omissions engaged in
prior to the date of the spin-off and that relate to the proceedings described
below.
HCA is currently the subject of several Federal investigations into certain
of its business practices, as well as governmental investigations by various
states. HCA is cooperating in these investigations and understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, HCA expects additional
subpoenas and other investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. HCA is the subject of a formal order of
investigation by the SEC. HCA understands that the SEC's investigation includes
the anti-fraud, insider trading, periodic reporting and internal accounting
control provisions of the Federal securities laws.
16
HCA is a defendant in several qui tam actions on behalf of the United
States of America, which have been unsealed and served on HCA. The actions
allege, in general, that HCA and certain subsidiaries and/or affiliated
partnerships violated the False Claims Act, 31 U.S.C. ss. 3729 et seq., by
submitting improper claims to the government for reimbursement. The lawsuits
seek three times the amount of damages caused to the United States by the
submission of any Medicare or Medicaid false claims presented by the defendants
to the Federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. HCA
has disclosed that of the original 30 qui tam actions, the Department of Justice
remains active in and has elected to intervene in 8 actions. HCA has also
disclosed that it is aware of additional qui tam actions that remain under seal
and believes that there may be other sealed qui tam cases of which it is
unaware.
The investigations, actions and claims affecting HCA relate to HCA and its
subsidiaries, including subsidiaries that, prior to the spin-off, owned
facilities now owned by Triad. On May 5, 2000, Triad was advised that one of the
qui tam cases which had been unsealed listed three of Triad's hospitals as
defendants. This qui tam action alleges various violations arising out of the
relationship between Curative Health Services and the other defendants,
including allegations of false claims relating to contracts with Curative Health
Services for the management of certain wound care centers and excessive and
unreasonable management fees paid to Curative Health Services and submitted for
reimbursement. Two of the three Triad hospitals named as defendants terminated
their relationship with Curative Health Services prior to the spin-off and the
third hospital terminated its contract thereafter.
In July 1999, Olsten Corporation and its subsidiary, Kimberly Home Health
(neither of which is affiliated with HCA), announced that they would pay $61
million to settle allegations that both companies defrauded the Medicare
program. Kimberly pled guilty to three separate felony charges (conspiracy, mail
fraud and violating the Medicare Anti-Kickback statute) filed by the U.S.
Attorneys in the Middle and Southern Districts of Florida and the Northern
District of Georgia. While HCA was not specifically named in these guilty pleas,
the guilty pleas refer to the involvement of a "Company A" or a "company not
named as a defendant." HCA has disclosed that it believes these references refer
to HCA or its subsidiaries.
HCA is a defendant in a number of other suits, which allege, in general,
improper and fraudulent billing, overcharging, coding and physician referrals,
as well as other violations of law. Certain of the suits have been conditionally
certified as class actions. Since April 1997, numerous securities class action
and derivative lawsuits have been filed in the United States District Court for
the Middle District of Tennessee against HCA and a number of its current and
former directors, officers and/or employees. Several derivative actions have
been filed in state court by certain purported stockholders of HCA against
certain of its current and former officers and directors alleging breach of
fiduciary duty, and failure to take reasonable steps to ensure that HCA did not
engage in illegal practices thereby exposing it to significant damages.
On December 14, 2000, HCA announced that it had entered into a settlement
agreement with the Civil Division of the Department of Justice resolving certain
civil claims actions against HCA relating to diagnosis related group coding,
outpatient laboratory billing and home health issues. HCA paid $745 million in
compensation to the government, with interest accruing at a fixed rate of 6.5%
per annum (beginning May 18, 2000), and HCA's existing letter of credit
agreement with the government was reduced from $1 billion to $250 million. HCA
also entered into a corporate integrity agreement with the Health and Human
Services Office of the Inspector General. Civil issues relating to cost
reporting and physician relations are not covered by the settlement agreement.
On December 14, 2000, HCA also announced that it had signed an agreement
with the Criminal Division of the Department of Justice and various U.S.
Attorney's offices to resolve pending Federal criminal actions against HCA. HCA
received a full release from criminal liability for conduct arising from or
relating to certain specified billing and reimbursement for services provided
pursuant to Federal health care benefit programs. In addition, the government
agreed not to prosecute HCA for other possible criminal offenses which are or
have been under investigation by the Department of Justice arising from or
relating to billing and reimbursement for services provided pursuant to Federal
health care benefit programs. As part of the criminal agreement, HCA paid the
government $95 million and two non-operating subsidiaries of HCA entered certain
pleas in respect of the criminal actions.
17
The agreements announced on December 14, 2000 relate only to conduct that
was the subject of the Federal investigations resolved in the agreements, and
HCA has stated publicly that it continues to discuss civil claims relating to
cost reporting and physician relations with the government. These agreements
with the government do not resolve various qui tam actions filed by private
parties against HCA, or any pending state actions. In addition to other claims
not covered by these agreements, the government also reserved its rights under
these agreements to pursue any claims it may have for:
. any civil, criminal or administrative liability under the Internal
Revenue Code;
. any other criminal liability;
. any administrative liability, including mandatory exclusion from
Federal health care programs;
. any liability to the United States (or its agencies) for any conduct
other than the conduct covered in the government's investigation;
. any express or implied warranty claims or other claims for defective
or deficient products or services, including quality of goods and
services, provided by HCA;
. any claims for personal injury or property damage or for other similar
consequential damages arising from the conduct subject to the
investigation; and
. any civil or administrative claims of the United States against
individuals.
In addition, 14 of Triad's current and former hospitals received notices in
early 2001 from CMS that it was re-opening for examination cost reports for
Medicare and Medicaid reimbursement filed by these hospitals for periods between
1993 and 1998, which pre-dates Triad's spin-off from HCA. Furthermore, two of
Triad's hospitals formerly owned by Quorum have received such notices. HCA or
its predecessors owned these hospitals during the period covered by the notices.
HCA is obligated to indemnify Triad for liabilities arising out of cost reports
filed during these periods.
On March 28, 2002, HCA announced that it had reached an understanding with
CMS to resolve all Medicaid cost report appeal issues between HCA and CMS on
more than 2,600 cost reports for reporting periods from 1993 through July 31,
2001. The understanding, which is subject to approval of the Department of
Justice and execution of a mutually satisfactory definitive written agreement,
would require HCA to pay CMS the sum of $250 million. The understanding does not
include resolution of outstanding civil issues with the Department of Justice
and relators under HCA's various qui tam cases with respect to cost reports and
physician relations.
HCA has agreed that, in the event that any hospital owned by Triad at the
time of the spin-off is permanently excluded from participation in the Medicare
and Medicaid programs as a result of the proceedings described above, then HCA
will make a cash payment to Triad, in an amount (if positive) equal to five
times the excluded hospital's 1998 income from continuing operations before
depreciation and amortization, interest expense, management fees, impairment of
long-lived assets, minority interests and income taxes, as set forth on a
schedule to the distribution agreement, less the net proceeds of the sale or
other disposition of the excluded hospital.
HCA will not indemnify Triad under the distribution agreement for losses
relating to any acts, practices or omissions engaged in by Triad after the
spin-off, whether or not Triad is indemnified for similar acts, practices and
omissions occurring prior to the spin-off. HCA also will not indemnify Triad
under the distribution agreement for similar qui tam litigation, governmental
investigations and other actions to which Quorum was subject, some of which are
described above. If indemnified matters were asserted successfully against Triad
or any of its facilities, and HCA failed to meet its indemnification
obligations, then this event could have a material adverse effect on Triad's
business, financial condition, and results of operations or prospects.
Triad is unable to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. The extent to which Triad may or
may not continue to be affected by the ongoing investigations of HCA and the
initiation of additional investigations, if any, cannot be predicted. These
matters could have a material adverse effect on Triad's business, financial
condition, and results of operations or prospects.
18
Item 2. Properties
The following table lists the hospitals owned, except as otherwise
indicated, by Triad as of December 31, 2001.
Facility Name City State Licensed Beds
------------- ---- ----- -------------
Flowers Hospital Dothan AL 400
Medical Center Enterprise Enterprise AL 131
Gadsden Regional Medical Center Gadsden AL 346
Crestwood Medical Center Huntsville AL 120
Jacksonville Hospital Jacksonville AL 89
Bates Medical Center Bentonville AR 63
Medical Center of South Arkansas (1) El Dorado AR 166
Medical Park Hospital Hope AR 91
Northwest Medical Center Springdale AR 222
El Dorado Hospital Tucson AZ 166
Northwest Medical Center Tucson AZ 193
San Leandro Hospital San Leandro CA 122
Bluffton Regional Medical Center Bluffton IN 96
Dupont Hospital (2) Fort Wayne IN 86
Lutheran Hospital of Indiana Fort Wayne IN 404
St. Joseph Hospital Fort Wayne IN 191
Kosciusko Community Hospital Warsaw IN 72
Overland Park Regional Medical Center (3) Overland Park KS --
Women & Children's Hospital Lake Charles LA 80
Wesley Medical Center Hattiesburg MS 211
River Region Health System (4) Vicksburg MS 385
Independence Regional Health Center (3) Independence MO --
Carlsbad Medical Center Carlsbad NM 127
Lea Regional Medical Center Hobbs NM 250
Barberton Citizens Hospital (5) Barberton OH 327
Doctors Hospital of Stark County (5) Massillon OH 166
Claremore Regional Hospital Claremore OK 89
SouthCrest Hospital Tulsa OK 116
Willamette Valley Medical Center McMinnville OR 80
Carolinas Hospital System - Florence Florence SC 372
Carolinas Hospital System - Lake City (6) Lake City SC 48
Mary Black Memorial Hospital (7) Spartanburg SC 209
Abilene Regional Medical Center Abilene TX 187
Alice Regional Medical Center Alice TX 138
Brownwood Regional Medical Center Brownwood TX 218
College Station Medical Center College Station TX 119
Navarro Regional Hospital Corsicana TX 162
Denton Community Hospital Denton TX 122
Longview Regional Medical Center Longview TX 164
Woodland Heights Medical Center Lufkin TX 146
Pampa Regional Medical Center Pampa TX 115
San Angelo Community Medical Center San Angelo TX 162
Medical Center at Terrell (8) Terrell TX 130
DeTar Healthcare System Victoria TX 359
Gulf Coast Medical Center Wharton TX 161
Greenbrier Valley Medical Center Lewisburg WV 122
(1) Triad holds a 50% equity interest in a non-consolidated joint venture
which owns and operates this facility.
(2) Owned by a limited liability company which owns an 81.3% interest and
is the manager.
19
(3) Triad continues to own the assets related to this hospital, but has
transferred the exclusive rights to use and control the hospital's
operations to a separate, independent entity pursuant to a long-term
lease agreement effective as of January 1, 1999. There are 726
licensed beds at the leased facilities.
(4) Owned by a limited liability company which owns a 64.5% interest and
is the manager.
(5) Owned by a limited liability company which owns a 95% interest and is
the manager.
(6) Carolinas Hospital System - Lake City is held pursuant to operating
leases with initial terms of ten years and two renewal options of five
years each.
(7) Owned by a limited liability company which owns an 89.4% interest and
is the manager.
(8) Triad currently leases this hospital pursuant to a long-term lease
which provides the exclusive right to use and control the hospital
operations.
In addition to the hospitals listed in the table above, as of December 31,
2001, Triad operated 14 ambulatory surgery centers, including three surgery
centers that are operated by an unaffiliated third party pursuant to a long-term
lease. Medical office buildings also are operated in conjunction with its
hospitals. These office buildings are primarily occupied by physicians who
practice at Triad's hospitals.
The following table lists the hospitals owned by joint venture entities in
which Triad is the minority owner and our percentage ownership interest as of
December 31, 2001. Information on licensed beds was provided by the majority
owner and manager of each joint venture. HCA is the majority owner of Macon
Healthcare LLC. Universal Health Systems is the majority owner of Summerlin
Hospital Medical Center LLC and Valley Health System LLC.
Joint Venture Facility Name City State Licensed Beds
------------- ------------- ---- ----- -------------
Macon Healthcare LLC Coliseum Medical Center (38%) Macon GA 250
Macon Healthcare LLC Coliseum Psychiatric Center (38%) Macon GA 60
Macon Healthcare LLC Macon Northside Hospital (38%) Macon GA 103
Macon Healthcare LLC Middle Georgia Hospital (38%) Macon GA 119
Summerlin Hospital Medical Center LLC Summerlin Hospital Medical Center (26%) Las Vegas NV 166
Valley Health System LLC Desert Springs Hospital (28%) Las Vegas NV 233
Valley Health System LLC Valley Hospital Medical Center (28%) Las Vegas NV 417
Triad's headquarters are located in approximately 63,000 square feet of
space in one office building in Dallas, Texas. Triad sub-leases this space from
HCA. See "NOTE 13-AGREEMENTS WITH HCA" in the consolidated financial statements
for a more detailed description of such arrangement.
QHR leases its headquarters in Brentwood, Tennessee and regional offices
located throughout the United States.
Triad's hospitals and other facilities are suitable for their respective
uses and are, in general, adequate for Triad's present needs.
Item 3. Legal Proceedings
On October 20, 2000, a purported class action, Samuel Brand v. Colleen
Conway Welch, et al., Case No.: OCC-3066, was filed against Triad and members of
the board of directors of Quorum in the Circuit Court of Davidson County,
Tennessee, on behalf of all public stockholders of Quorum. The complaint
alleged, among other things, that Quorum's directors breached their fiduciary
duties to Quorum and its stockholders in agreeing to the merger at an unfair
price.
In April 2001, the parties negotiated a settlement that would result in the
dismissal of the action. The settlement was subject to a number of conditions,
including Court approval. Court approval was obtained, and on October 22, 2001
the court dismissed the action pursuant to the terms of the agreed upon
settlement and Triad paid the settlement. The settlement did not have a material
effect on Triad's financial position or results of operations.
In October and November 1998, some of Quorum's stockholders filed lawsuits
against Quorum in the U.S. District Court for the Middle District of Tennessee.
In January 1999, the court consolidated these cases into a single
20
lawsuit (M.D. Tenn. No. 3-98-1004). The plaintiffs filed an amended complaint in
March 1999. The plaintiffs seek to represent a class of plaintiffs who purchased
Quorum's common stock from October 25, 1995 through October 21, 1998, except for
Quorum's insiders and their immediate families. The amended complaint names
Quorum, several of Quorum's former officers, and one of Quorum's former outside
directors, as defendants.
The amended complaint alleges that defendants violated the Securities
Exchange Act of 1934. The plaintiffs claim that Quorum materially inflated
Quorum's net revenues during the class period by including in those net revenues
amounts received from the settlement of cost reports that had allegedly been
filed in violation of applicable Medicare regulations years earlier and that,
because of that practice, this statement, which first appeared in Quorum's Form
10-K filed in September 1996, was false: "The Company believes that its owned
hospitals are in substantial compliance with current federal, state, local, and
independent review body regulations and standards." In May 1999, Quorum filed a
motion to dismiss the complaint. On November 13, 2000, the judge denied Quorum's
motion to dismiss the complaint against Quorum and James E. Dalton, Jr.,
Quorum's former President/CEO. The judge granted Quorum's motion to dismiss as
to all other defendants. The judge has heard oral argument on Mr. Dalton's
motion to reconsider the judge's denial of Mr. Dalton's motion to dismiss and on
April 19, 2001 granted Mr. Dalton's motion to dismiss. The parties recently
tentatively agreed to submit the class action to non-binding mediation. As
Quorum's successor, Triad intends to vigorously defend the claims and
allegations in this action.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
Part II.
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Triad's common stock commenced trading on the Nasdaq Stock Market National
Market, on May 11, 1999 (symbol "TRIH"). On April 30, 2001, Triad's common stock
commenced trading on the New York Stock Exchange (symbol "TRI"). The table below
set forth, for the calendar quarters indicated, the high and low reported
closing sales prices per share reported on by Nasdaq and New York Stock Exchange
for Triad's common stock for the years ended December 31, 2000 and 2001.
2000 High Low
---- ---- ---
First Quarter .......................... $18.75 $13.44
Second Quarter ......................... 25.00 14.88
Third Quarter .......................... 33.00 21.94
Fourth Quarter ......................... 34.38 25.44
2001
----
First Quarter .......................... $33.81 $24.81
Second Quarter ......................... 31.42 24.49
Third Quarter .......................... 36.70 29.95
Fourth Quarter ......................... 36.50 25.70
At the close of business on March 15, 2002, there were approximately 13,000
holders of record of Triad's common stock.
Triad has not paid any dividends on its shares of common stock and is
restricted from paying dividends by certain bank indebtedness covenants. See
Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources".
Item 6. Selected Financial Data
The following consolidated selected financial data as of and for the years
ended December 31, 2001, 2000, 1999, 1998 and 1997 should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Triad's consolidated financial statements and related notes to
the consolidated financial statements, which are included herein.
21
Years Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(Dollars in millions, except per share amounts)
Summary of Operations:
Revenues ......................................... $ 2,669.5 $ 1,235.5 $ 1,329.1 $ 1,588.7 $ 1,609.3
Income (loss) from operations (a) ................ 6.0 4.4 (95.6) (85.5) (19.0)
Net income (loss) (a) ............................ 2.8 4.4 (95.6) (87.1) (19.8)
Basic earnings (loss) per share:
Income (loss) from operations .................. $ 0.10 $ 0.14 $ (3.12) $ (2.80) $ (0.62)
Net income (loss) .............................. $ 0.04 $ 0.14 $ (3.12) $ (2.85) $ (0.65)
Shares used in computing basic earnings
(loss) per share (in millions) .............. 57.7 31.7 30.6 30.6 30.6
Diluted earnings (loss) per share:
Income (loss) from operations .................. $ 0.10 $ 0.13 $ (3.12) $ (2.80) $ (0.62)
Net income (loss) .............................. $ 0.05 $ 0.13 $ (3.12) $ (2.85) $ (0.65)
Shares used in computing diluted earnings (loss)
per share (in millions) ..................... 61.1 34.1 30.6 30.6 30.6
Financial Position:
Assets ........................................... $ 4,165.3 $ 1,400.5 $ 1,341.1 $ 1,371.3 $ 1,410.5
Long-term debt, including amounts due within
one year ......................................... 1,773.8 590.7 555.4 14.3 15.4
Intercompany balances payable to HCA ............. -- -- -- 613.7 525.0
Working capital .................................. 381.0 191.9 187.6 184.9 150.3
Capital expenditures ............................. 200.6 94.4 132.7 114.9 120.1
Operating Data:
EBITDA (b) ....................................... $ 361.1 $ 174.0 $ 124.5 $ 149.0 $ 187.8
Number of hospitals at end of period (c) ......... 46 28 29 39 39
Number of licensed beds at end of period (d) ..... 7,557 3,520 3,722 5,902 5,859
Weighted average licensed beds (e) ............... 6,379 3,633 4,745 5,905 5,860
Number of available beds at end of period (f) .... 6,776 3,162 3,280 5,199 5,230
Admissions (g) ................................... 233,888 128,645 145,889 169,590 172,926
Adjusted admissions (h) .......................... 396,256 220,590 241,547 276,771 275,125
Average length of stay (days) (i) ................ 4.8 4.4 4.5 4.9 4.9
Average daily census (j) ......................... 3,060 1,532 1,818 2,263 2,326
Occupancy rate (k) ............................... 54% 49% 55% 44% 44%
Selected Ratios:
Ratio of earnings to fixed charges (l) ........... 1.3x 1.3x -- -- --
(a) Includes charges related to impairment of long-lived assets of $23.1
million ($21.1 million after tax benefit), $8.0 million ($4.7 million after
tax benefit), $69.2 million ($55.8 million after tax benefit), $55.1
million ($32.9 million after tax benefit) and $13.7 million ($8.2 million
after tax benefit) for the years ended December 31, 2001, 2000, 1999, 1998
and 1997, respectively.
(b) EBITDA is defined as income (loss) from operations before depreciation and
amortization, interest expense, ESOP expense, management fees, gain on
sales of assets, impairment of long-lived assets, minority interests in
earnings of consolidated entities and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves
as a measure of leverage capacity and debt service ability. EBITDA should
not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from EBITDA should
not be considered in isolation or as an alternative to net income, cash
flows generated by operating, investing or financing activities or other
financial statement data presented in the 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.
(c) This table does not include any operating statistics for non-consolidating
joint ventures and facilities leased to others.
(d) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
22
(e) Represents the average number of licensed beds, weighted based on periods
owned.
(f) Available beds are those beds a facility actually has in use.
(g) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's hospitals and is used by
management and certain investors as a general measure of inpatient volume.
(h) Adjusted admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "adjusts" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(i) Represents the average number of days admitted patients stay in Triad's
hospitals.
(j) Represents the average number of patients in Triad'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.
(l) Triad's earnings were insufficient to cover fixed charges for the years
ended December 31, 1999, 1998 and 1997 by $112.4 million, $115.6 million
and $15.1 million, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
On April 27, 2001, Triad completed the merger of Quorum with and into Triad
with Triad being the surviving corporation. Under the terms of the merger
agreement, Quorum shareholders became entitled to receive $3.50 in cash and
0.4107 shares of Triad common stock for each outstanding share of Quorum stock,
plus cash in lieu of fractional shares of Triad common stock. In addition, each
outstanding option to purchase shares of Quorum common stock, whether or not
vested or exercisable, was converted at the holder's election into either a
fully vested and exercisable option to purchase shares of Triad common stock or
cash and shares of Triad common stock. Triad issued 35,786,380 shares, paid
$305.0 million in cash and issued 1,638,479 options to Quorum option holders in
connection with the merger. The purchase price for the merger was determined
using the average stock price at the time the merger was announced, cash paid,
fair value of options converted and direct costs associated with the merger. The
purchase price was approximately $2.4 billion. The merger was accounted for
under the purchase method of accounting and the results of operations for Quorum
are included in Triad's results of operations beginning May 1, 2001.
On May 2, 2001, Triad sold two of the acute care hospitals acquired in the
merger with Quorum for $38.0 million plus $8.2 million for working capital.
Additionally, one hospital acquired in the merger with Quorum was designated as
held for sale prior to the completion of the merger. The purchase price
allocation of this hospital was equal to the estimated sales price of the
hospital plus the anticipated cash flows for its estimated holding period and
the estimated interest expense on the incremental debt incurred for the purchase
of the hospital. On August 7, 2001, Triad sold this hospital. The results of
operations of this entity are not included in Triad's results of operations.
Subsequent to the merger, Triad recorded charges of approximately $31.8
million associated with coordinating Quorum's accounting policies, practices and
estimation processes with those of Triad. These charges included an $8.3 million
pre-tax reduction to revenue, $18.5 million pre-tax increase in provision for
doubtful accounts and $5.0 million additional income tax provision.
During 2001, Triad acquired the remaining 50% interest in one of its joint
ventures and sold one hospital. During 2000, Triad sold one hospital, ceased
operations of two hospitals and purchased two hospitals. Triad sold its
partnership interest in a rehabilitation hospital on March 31, 2000. During 1999
after the spin-off, Triad sold ten hospitals and two ambulatory surgery centers
and opened one new hospital that was accounted for using the equity method.
The above described events significantly affect the comparability of the
results of operations for the years ended December 31, 2001, 2000, and 1999.
23
Forward-Looking Statements
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains disclosures which are "forward-looking
statements." Forward-looking statements include all statements that do not
relate solely to historical or current facts, and can be identified by the use
of words such as "may," "believe," "will," "expect," "project," "estimate,"
"anticipate," "plan" or "continue." These forward-looking statements are based
on the current plans and expectations of Triad and are subject to a number of
uncertainties and risks that could significantly affect current plans and
expectations and the future financial condition and results of Triad. These
factors include, but are not limited to,
.. the highly competitive nature of the health care business,
.. the efforts of insurers, health care providers and others to contain health
care costs,
.. possible changes in the Medicare and Medicaid programs that may limit
reimbursements to health care providers and insurers,
.. changes in federal, state or local regulation affecting the health care
industry,
.. the possible enactment of federal or state health care reform,
.. the ability to attract and retain qualified management and personnel,
including physicians and nurses,
.. the departure of key executive officers from Triad,
.. claims and legal actions relating to professional liabilities and other
matters,
.. fluctuations in the market value of Triad common stock,
.. changes in accounting practices,
.. changes in general economic conditions,
.. future divestitures which may result in additional charges,
.. the ability to enter into managed care provider arrangements on acceptable
terms,
.. the availability and terms of capital to fund the expansion of Triad's
business,
.. changes in business strategy on development plans,
.. the ability to obtain adequate levels of general and professional liability
insurance,
.. potential adverse impact of known and unknown government investigations,
.. timeliness of reimbursement payments received under government programs,
and
.. other risk factors described herein.
As a consequence, current plans, anticipated actions and future financial
condition and results may differ from those expressed in any forward-looking
statements made by or on behalf of Triad. 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."
Critical Accounting Policies and Estimates
Triad's discussion and analysis of its financial condition and results of
operations are based upon Triad's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires Triad to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. On an on-going basis, Triad evaluates its estimates, including
those related to third-party payer discounts, bad debts, property and equipment,
intangible assets, income taxes, general and professional liability risks and
contingencies and litigation. Triad bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. Triad believes the following critical accounting
policies affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
24
Revenue Recognition
Triad's health care facilities have entered into agreements with
third-party payers, including government programs and managed care health plans,
under which the facilities are paid based upon several methodologies including
established charges, the cost of providing services, predetermined rates per
diagnosis, fixed per diem rates or discounts from established charges. Revenues
are recorded at estimated net amounts due from patients, third-party payers and
others for health care services provided. Settlements under reimbursement
agreements with third-party payers are estimated and recorded in the period the
related services are rendered and are adjusted in future periods as adjustments
become known or as the service years are no longer subject to audit, review or
investigation. Laws and regulations governing the Medicare and Medicaid programs
are extremely complex, subject to interpretation and are routinely modified for
provider reimbursement. All hospitals participating in the Medicare and Medicaid
programs are required to meet certain financial reporting requirements. Federal
regulations require submission of annual cost reports covering medical costs and
expenses associated with the services provided by each hospital to program
beneficiaries. Annual cost reports required under the Medicare and Medicaid
programs are subject to routine audits, which may result in adjustments to the
amounts ultimately determined to be due to Triad under these reimbursement
programs. These audits often require several years to reach the final
determination of amounts earned under the programs. As a result, there is at
least a reasonable possibility that recorded estimates will change by a material
amount in the near term.
Bad Debt
Triad maintains allowances for doubtful accounts for estimated losses
resulting from payers' inability to make payments on accounts. Triad estimates
these allowances based on historical net write-offs of uncollectible accounts.
If payers' ability to pay deteriorates, additional allowances may be required.
Property and Equipment and Intangible Assets
Triad evaluates the carrying value of long-lived assets and long-lived
assets to be disposed of, certain identifiable intangibles and goodwill related
to those assets, and recognizes impairment losses when the fair value is less
than the carrying value. The fair value of assets to be held and used is
determined using discounted future cash flows. The fair value of assets held for
sale is determined using estimated selling values. When events, circumstances
and operating results indicate that the carrying values of certain long-lived
assets and the related identifiable intangible assets might be impaired, Triad
prepares projections of the undiscounted future cash flows expected to result
from the use of the assets and their eventual disposition. If the projections
indicate that the recorded amounts are not expected to be recoverable, such
amounts are reduced to estimated fair value. If market conditions become less
favorable than those projected by management, additional impairments may be
required.
Income Taxes
Triad records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While Triad has
considered several items including ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event Triad
were to determine that the realization of its deferred tax asset in the future
is different than its net recorded amount, an adjustment to income would be
necessary.
General and Professional Liability Risks
Triad self-insures portions of its workers compensation, health insurance
and general and professional liability insurance coverage and maintains excess
loss policies. The reserves for these self insured portions are based on
actuarially determined estimates. Any factors changing the underlying data used
in determining these estimates would result in revisions to the reserves which
could result in an adjustment to income.
25
Contingencies
Triad is subject to claims and suits arising from governmental
investigations and other matters in the ordinary course of business. In certain
of these actions the claimants may seek punitive damages against Triad, which
are usually not covered by insurance. Triad is required to assess the likelihood
of any adverse judgments or outcomes to these matters as well as potential
ranges of probable losses. A determination of the amount of reserves required,
if any, for these contingencies is made after careful analysis of each
individual issue. The required reserves may change in the future due to new
developments in each matter or changes in approach, such as a change in
settlement strategy in dealing with these matters, which would result in an
adjustment to income.
Results of Operations
Revenue/Volume Trends
As discussed previously, Triad completed the merger with Quorum on April
27, 2001. The effective date of the transaction for accounting purposes was May
1, 2001. Triad also acquired the remaining 50% interest in one of its joint
ventures effective January 1, 2001 and two hospitals in the fourth quarter of
2000. The merger and acquisitions collectively contributed revenue of $1,390.5
million for the year ended December 31, 2001.
Triad's revenues continue to be affected by an increasing proportion of
revenue being derived from fixed payment, higher discount sources, including
Medicare, Medicaid and managed care plans. In addition, insurance companies,
government programs, other than Medicare, and employers purchasing health care
services for their employees are also negotiating discounted amounts that they
will pay health care providers rather than paying standard prices. Triad expects
patient volumes from Medicare and Medicaid to continue to increase due to the
general aging of the population and expansion of state Medicaid programs.
However, under the Balanced Budget Act, Triad's reimbursement from the Medicare
and Medicaid programs has been reduced. Certain of the reductions from the
Balanced Budget Act have been mitigated by the Refinement Act and were further
mitigated by BIPA. Additional reimbursement from BIPA was approximately $16.0
million in the year ended December 31, 2001. Triad anticipates receiving
approximately $17.0 million in additional reimbursement in 2002. The Balanced
Budget Act has accelerated a shift, by certain Medicare beneficiaries, from
traditional Medicare coverage to medical coverage that is provided under managed
care plans. Triad generally receives lower payments per patient under managed
care plans than under traditional indemnity insurance plans. With an increasing
proportion of services being reimbursed based upon fixed payment amounts, where
the payment is based upon the diagnosis, regardless of the cost incurred or
level of service provided, revenues, earnings and cash flows are being
significantly reduced. As part of the Balanced Budget Act, CMS implemented
outpatient PPS on August 1, 2000 which reduced reimbursement in 2000. Patient
revenues related to Medicare and Medicaid patients were 36.3%, 36.0%, and 38.8%
of total patient revenues for the years ended December 31, 2001, 2000 and 1999,
respectively. Patient revenues related to managed care plan patients were 28.9%,
31.0% and 32.7% of total patient revenues for the years ended December 31, 2001,
2000 and 1999, respectively. Patient revenues from capitation arrangements, or
prepaid health service agreements, are less than 1% of patient revenues in each
period presented. See Item I "Business - Reimbursement."
Management of Triad has focused on streamlining its portfolio of facilities
to eliminate those with poor financial performance, weak competitive market
positions or locations in certain urban markets. Triad sold one hospital during
the year ended December 31, 2001, sold one hospital and ceased operations of two
hospitals during the year ended December 31, 2000, and sold ten hospitals during
the year ended December 31, 1999. Revenues for these facilities were $60.5
million, $118.8 million and $249.9 million for the years ended December 31,
2001, 2000 and 1999, respectively.
Triad's revenues also continue to be affected by the trend toward certain
services being performed more frequently on an outpatient basis. Growth in
outpatient services is expected to continue in the health care industry as
procedures performed on an inpatient basis are converted to outpatient
procedures through continuing advances in pharmaceutical and medical
technologies. The redirection of certain procedures to an outpatient basis is
also influenced by pressures from payers to perform certain procedures as
outpatient care rather than inpatient care. Outpatient revenues were 45.6% in
the year ended December 31, 2001 compared to 45.3% in the comparable period in
2000.
26
Reductions in the rate of increase in Medicare and Medicaid reimbursement,
increasing percentages of the patient volume being related to patients
participating in managed care plans and continuing trends toward more services
being performed on an outpatient basis are expected to present ongoing
challenges. The challenges presented by these trends are magnified by Triad's
inability to control these trends and the associated risks. To maintain and
improve its operating margins in future periods, Triad must increase patient
volumes while controlling the costs of providing services. If Triad is not able
to achieve reductions in the cost of providing services through 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 made by the local management teams and
local physicians.
In connection with the spin-off, HCA agreed to indemnify Triad for any
payments which it is required to make in respect of Medicare, Medicaid and Blue
Cross cost reports for former HCA facilities owned by Triad at the time of the
spin-off from HCA relating to periods ending on or prior to the date of the
spin-off, and Triad agreed to indemnify HCA for and pay to HCA any payments
received by it relating to such cost reports relating to periods ending on or
prior to the date of the spin-off. Triad will be responsible for the filing of
these cost reports and any terminating cost reports. Triad has recorded a
receivable from HCA relating to the indemnification of $24.2 million as of
December 31, 2001.
27
Operating Results Summary
Following are comparative summaries of results from operations for the
years ended December 31, 2001, 2000 and 1999. Dollars are in millions, except
per share amounts and ratios.
Years Ended December 31,
--------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage
---------- ---------- ---------- ---------- --------- ----------
Revenues........................................ $ 2,669.5 100.0 $ 1,235.5 100.0 $ 1,329.1 100.0
Salaries and benefits........................... 1,128.5 42.3 511.1 41.4 570.9 42.9
Reimbursable expenses........................... 41.6 1.6 -- -- -- --
Supplies........................................ 411.2 15.4 185.6 15.0 200.1 15.0
Other operating expenses........................ 501.7 18.8 259.8 21.0 301.5 22.7
Provision for doubtful accounts................. 239.9 9.0 103.6 8.4 129.0 9.7
Depreciation and amortization................... 170.1 6.3 83.2 6.7 98.5 7.4
Interest expense allocated from HCA............. -- -- -- -- 22.5 1.7
Interest expense, net........................... 126.0 4.7 57.3 4.6 42.7 3.2
ESOP expense.................................... 9.3 0.4 7.1 0.6 3.7 0.3
Management fees allocated from HCA.............. -- -- -- -- 8.9 0.7
Gain on sale of assets.......................... (23.1) (0.9) (7.9) (0.6) (8.6) (0.6)
Impairment of long-lived assets................. 23.1 0.9 8.0 0.7 69.2 5.2
---------- ----- ---------- ----- --------- -----
2,628.3 98.5 1,207.8 97.8 1,438.4 108.2
---------- ----- ---------- ----- --------- -----
Income (loss) from operations before
minority interests, equity in
earnings and income tax
(provision) benefit......................... 41.2 1.5 27.7 2.2 (109.3) (8.2)
Minority interests in earnings of
consolidated entities....................... (7.2) (0.2) (9.0) (0.7) (8.7) (0.7)
Equity in earnings (loss) of
non-consolidating entities.................. 14.5 0.5 (1.4) (0.1) (3.1) (0.2)
---------- ----- ---------- ----- --------- -----
Income (loss) from operations before income
tax(provision) benefit...................... 48.5 1.8 17.3 1.4 (121.1) (9.1)
Income tax (provision) benefit.................. (42.5) (1.6) (12.9) (1.0) 25.5 1.9
---------- ----- ---------- ----- --------- -----
Income (loss) from operations................... $ 6.0 0.2 $ 4.4 0.4 $ (95.6) (7.2)
========== ===== ========== ===== ========= =====
Income (loss) per common share from operations
Basic........................................... $ 0.10 $ 0.14 $ (3.12)
Diluted ........................................ $ 0.10 $ 0.13 $ (3.12)
EBITDA (a)...................................... $ 361.1 $ 174.0 $ 124.5
Number of hospitals at end of period (b)
Owned and managed........................... 43 24 25
Joint ventures.............................. 1 2 2
Leased to others............................ 2 2 2
---------- ---------- ---------
Total....................................... 46 28 29
Licensed beds at end of period (c).............. 7,557 3,520 3,722
Available beds at end of period (d)............. 6,776 3,162 3,280
Admissions (e)
Owned and managed........................... 233,888 128,645 145,889
Joint ventures.............................. 5,758 11,718 7,774
---------- ---------- ---------
Total ..................................... 239,646 140,363 153,663
Adjusted admissions (f)......................... 396,256 220,590 241,547
Outpatient visits............................... 2,677,338 1,295,841 1,462,250
Inpatient surgeries............................. 86,187 45,637 49,630
Outpatient surgeries............................ 244,928 164,051 172,782
---------- ---------- ---------
Total surgeries................................. 331,115 209,688 222,412
Average length of stay (g)...................... 4.8 4.4 4.5
Outpatient revenue percentage................... 45.6% 45.3% 44.2%
Inpatient revenue per admission................. 5,785 5,069 4,937
Outpatient revenue per outpatient visits........ 424 417 390
Patient revenue per adjusted admission......... 6,283 5,408 5,341
(a) EBITDA is defined as income (loss) from operations before depreciation and
amortization, interest expense, ESOP expense, management fees, gain on
sales of assets, impairment of long-lived assets, minority interests in
earnings of consolidated entities and income taxes. EBITDA is commonly used
as an analytical indicator within the health care industry, and also serves
as a measure of leverage capacity and debt service ability. EBITDA should
not be considered as a measure of financial performance under generally
accepted accounting principles, and the items excluded from EBITDA are
significant components in understanding and assessing financial
performance. EBITDA should not be considered in isolation or as an
alternative to net income, cash flows generated by operating, investing or
financing activities or other financial statement data presented in the
consolidated financial statements as an indicator of financial performance
or liquidity. Because
28
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 for facilities leased
to others and, except for admissions for the managed joint ventures, the
joint ventures.
(c) Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.
(d) Available beds are those beds a facility actually has in use.
(e) Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to Triad's facilities and is used by
management and certain investors as a general measure of inpatient volume.
(f) Adjusted admissions are used by management and certain investors as a
general measure of combined inpatient and outpatient volume. Adjusted
admissions are computed by multiplying admissions (inpatient volume) by the
sum of gross inpatient revenue and gross outpatient revenue and then
dividing the resulting amount by gross inpatient revenue. The adjusted
admissions computation "adjusts" outpatient revenue to the volume measure
(admissions) used to measure inpatient volume resulting in a general
measure of combined inpatient and outpatient volume.
(g) Represents the average number of days an admitted patient stays in Triad's
hospitals.
Years Ended December 31, 2001 and 2000
Income from operations increased to $6.0 million in the year ended December
31, 2001 from $4.4 million in the year ended December 31, 2000. The change was
attributable primarily to $122.9 million of pre-tax income from acquisitions,
excluding the charges associated with coordinating Quorum's accounting policies,
practices, and estimation processes with those of Triad. Pre-tax income from
same facility operations increased $12.9 million, which included $1.1 million of
unfavorable adjustments in the year ended December 31, 2000 at one facility from
write-offs of certain expenditures that were previously capitalized. Same
facility equity in earnings increased $2.9 million due primarily to $1.1 million
of unfavorable adjustments from various changes of estimates and other
adjustments during the year ended December 31, 2000. Another factor contributing
to the increase was decreased losses on facilities that were sold or closed of
$7.5 million. Additionally, Triad recognized a $22.0 million gain on the sale of
one hospital during the year ended December 31, 2001 compared to a $7.9 million
gain on sale during the year ended December 31, 2000. The decreases were offset
by $31.8 million of charges associated with coordinating Quorum's accounting
policies, practices and estimation processes with those of Triad and an increase
in interest expense of $68.7 million primarily related to the additional
indebtedness incurred in the acquisition of Quorum. Triad had impairments of
long-lived assets of $23.1 million in the year ended December 31, 2001 compared
to $8.0 million in the year ended December 31, 2000. Triad incurred $3.8 million
of non-cash stock compensation expense relating to stock option vesting
acceleration that was incurred due to the acquisition of Quorum and $1.4 million
of non-cash stock compensation from options granted to a charitable foundation
established by Triad. Corporate overhead increased $14.2 million in the year
ended December 31, 2001 compared to the year ended December 31, 2000 due
primarily to additional staffing and other costs due to the merger.
Revenues increased to $2,669.5 million in the year ended December 31, 2001
from $1,235.5 million in the year ended December 31, 2000. Same facility
revenues increased $121.1 million or 11.0% in the year ended December 31, 2001
compared to December 31, 2000. For the year ended December 31, 2001 compared to
the year ended December 31, 2000, same facility admissions increased 4.7%,
adjusted admissions increased 4.0%, revenues per adjusted admission increased
5.8%, outpatient visits increased 1.8%, outpatient revenue per visit increased
7.8% and surgeries increased 3.1%. Another factor in the increase in revenues
was $4.9 million in favorable prior year cost report settlements during 2001.
Revenues for the year ended December 31, 2000 included $4.8 million in favorable
prior year cost report settlements and contractual estimate adjustments and $5.2
million in unfavorable changes of estimate for contractual discounts at one
facility. Revenues for facilities acquired were $1,390.5 million in the year
ended December 31, 2001, which included $2.1 million in favorable prior year
cost report settlements. Revenues for facilities acquired were reduced by $8.3
million associated with coordinating Quorum's accounting policies, practices and
estimation processes with those of Triad as discussed previously. The acquired
facilities had admissions of 109,455, adjusted admissions of 184,285, outpatient
visits of 1,456,472 and surgeries of 125,937. The increase in revenues was
partially offset by the facilities that were sold or closed. In the year ended
December 31, 2001 compared to the year ended December 31, 2000, the sold or
closed facilities revenues decreased $58.3 million,
29
which included $3.1 million in favorable prior year cost report settlements and
contractual estimates in 2000. The facilities that were sold or closed had
admissions of 7,164, adjusted admissions of 11,700, outpatient visits of 48,068
and surgeries of 11,602 in the year ended December 31, 2001. The facilities that
were sold or closed had admissions of 14,576, adjusted admissions of 19,856,
outpatient visits of 127,154 and surgeries of 19,541, in the year ended December
31, 2000.
Salaries and benefits (which include contract nursing), as a percentage of
revenues, increased to 42.3% in the year ended December 31, 2001 from 41.4% in
the year ended December 31, 2000. Same facility salaries and benefits increased
0.7% as a percentage of revenue in the year ended December 31, 2001 compared to
the year ended December 31, 2000. This was due primarily to $5.5 million of
non-cash stock option expense in 2001, an increase in the number of full time
equivalent employees primarily at the corporate office and a smaller favorable
adjustment relating to Triad's retirement plan contributions of $1.3 million in
2001 compared to $2.8 million in 2000. This was partially offset by productivity
increases. Salaries and benefits for the acquired facilities, as a percentage of
revenue, were 43.1% in the year ended December 31, 2001. This includes
approximately $3.0 million in duplicate overhead costs and stay-on bonuses at
the former Quorum corporate office and approximately $1.0 million in severance
cost for a reduction in force at QHR. Also included in salaries and benefits for
the acquired facilities are salaries from owned physician practices, which are
higher as a percentage of revenue than traditional hospital operations. Salaries
and benefits for the facilities sold or closed were $27.2 million in the year
ended December 31, 2001 compared to $59.4 million in the year ended December 31,
2000, which included approximately $2.6 million of severance costs associated
with the closure of two facilities.
Reimbursable expenses were 1.6% as a percentage of revenue in the year
ended December 31, 2001. Reimbursable expenses relate primarily to salaries and
benefits of QHR employees that serve as executives at hospitals managed by QHR.
These expenses are also included as a component of revenues.
Supplies increased as a percentage of revenues to 15.4% in the year ended
December 31, 2001 from 15.0% in the year ended December 31, 2000. Same facility
supplies increased 0.3% as a percentage of revenue in the year ended December
31, 2001 compared to the year ended December 31, 2000. This was due primarily to
higher patient acuity and supply cost increases. Additionally, Triad had
unfavorable adjustments of $1.1 million in the year ended December 31, 2000 at
one facility from the write-off of certain expenditures that were previously
capitalized. Supplies for the acquired facilities, as a percentage of revenue,
were 15.5% in the year ended December 31, 2001. Supplies for the facilities sold
or closed were $8.8 million in the year ended December 31, 2001 compared to
$17.7 million in the year ended December 31, 2000.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) decreased as a percentage of revenues to 18.8%
in the year ended December 31, 2001 compared to 21.0% in the year ended December
31, 2000. Same facility other operating expenses decreased 0.2% as a percentage
of revenue in the year ended December 31, 2001 compared to the year ended
December 31, 2000. This decrease was due primarily to the increase in revenues.
This was partially offset by an increase in professional fees at the corporate
office. Other operating expenses for the acquired facilities, as a percentage of
revenue, were 17.3% in the year ended December 31, 2001. Other operating
expenses for the facilities sold or closed were $14.2 million in the year ended
December 31, 2001 compared to $30.9 million in the year ended December 31, 2000.
Provision for doubtful accounts, as a percentage of revenues, increased to
9.0% in the year ended December 31, 2001 compared to 8.4% in the year ended
December 31, 2000. Same facility provision for doubtful accounts increased 1.4%
as a percentage of revenue in the year ended December 31, 2001 compared to the
year ended December 31, 2000. This was due, in part, to an increase in emergency
room visits, primarily in Texas, which typically have a higher incidence of
uninsured accounts. Triad also refined the estimation process of the allowance
for doubtful accounts resulting in a $2.0 million reduction in the provision in
2000. Provision for doubtful accounts for the acquired facilities, as a
percentage of revenue, was 8.7% in the year ended December 31, 2001. As
discussed previously, included in the provision for doubtful accounts were $18.5
million in charges associated with coordinating Quorum's accounting policies,
practices and estimation process with those of Triad. Provision for doubtful
accounts for the facilities sold or closed was $6.8 million in the year ended
December 31, 2001 compared to $13.7 million in the year ended December 31, 2000.
30
Depreciation and amortization, as a percentage of revenues, decreased to
6.3% in the year ended December 31, 2001 compared to 6.7% in the year ended
December 31, 2000. This was due primarily to the increase in revenues.
Interest expense, which was offset by $1.6 million and $4.9 million of
interest income in the year ended December 31, 2001 and 2000, respectively,
increased to $126.0 million in the year ended December 31, 2001 from $57.3
million in the year ended December 31, 2000, due to additional debt outstanding
primarily from indebtedness incurred to finance the Quorum acquisition and a
decrease in interest income.
Gain on sale of assets was $23.1 million during the year ended December 31,
2001, due primarily to the sale of one hospital facility in the fourth quarter
of 2001. Gain on sale of assets was $7.9 million during the year ended December
31, 2000, due primarily to the sale of one hospital facility and Triad's
partnership interest in a rehabilitation hospital.
Impairments on long-lived assets were $23.1 million in the year ended
December 31, 2001 and $8.0 million in the year ended December 31, 2000. The
impairments during 2001 were primarily due to the carrying value of the
long-lived assets related to one hospital being reduced to fair value, based on
estimated future cash flows. The impairments during 2000 were primarily due to
the carrying value of the long-lived assets related to one hospital closed being
reduced to fair value, based on estimated disposal value.
Minority interests decreased to $7.2 million in the year ended December 31,
2001 compared to $9.0 million in the year ended December 31, 2000. This was due
primarily to the operations of one hospital joint venture acquired in the Quorum
acquisition.
Equity in earnings (loss) of affiliates increased to $14.5 million in the
year ended December 31, 2001 from $(1.4) million in the year ended December 31,
2000, primarily due to the Quorum acquisition and $1.1 million of unfavorable
adjustments from various changes of estimates and other adjustments during the
year ended December 31, 2000.
Income tax provision was $42.5 million in the year ended December 31, 2001
compared to $12.9 million in the year ended December 31, 2000. As discussed
previously, included in the income tax provision for the year ended December 31,
2001 was $5.0 million in charges associated with coordinating Quorum's
accounting policies, practices and estimation processes. Triad's effective tax
rate was significantly increased by the effect of nondeductible goodwill
amortization, nondeductible expense for impairments and ESOP expense. Triad's
effective tax rate will be reduced significantly in 2002 primarily due to
changes in accounting for goodwill amortization. See "Recent Accounting
Pronouncements".
Years Ended December 31, 2000 and 1999
Income from operations increased to $4.4 million in the year ended December
31, 2000 from a loss of $95.6 million in the year ended December 31, 1999. The
increase was partially attributable to impairment charges of $69.2 million in
the year ended December 31, 1999 compared to $8.0 million in the year ended
December 31, 2000. Other factors contributing to the increase were decreased
losses before impairment charges of $36.1 million in the facilities that were
divested in 2000 and 1999 and improvement in the operations of the facilities
that comprised ongoing operations of $23.5 million. Ongoing operations exclude
facilities that were sold or closed in 2000 and 1999. In addition, there were
$8.6 million of favorable prior year cost report settlements and contractual
estimates during the year ended December 31, 2000 and a $3.7 million increase in
equity in earnings, primarily due to one non-consolidating entity which opened
in May 1999. These increases were partially offset during the year ended
December 31, 2000 by $5.2 million of unfavorable contractual adjustments at one
facility, $1.1 million of unfavorable adjustments at one facility from
write-offs of certain expenses that were previously capitalized and other
adjustments and $1.1 million of unfavorable adjustments in equity in earnings at
a non-consolidating entity from various changes of estimates and other
adjustments.
Revenues decreased 7.0% to $1,235.5 million in the year ended December 31,
2000 compared to $1,329.1 million in the year ended December 31, 1999. Revenues
declined primarily as a result of the facilities that were sold or closed in
2000 and 1999. In the year ended December 31, 1999, these facilities had
revenues of $249.9 million
31
compared to $54.1 million in the year ended December 31, 2000. For the year
ended December 31, 2000, revenues at the facilities that were sold or closed
included $3.5 million in favorable prior year cost report settlements and
contractual estimates. The decrease in revenues was partially offset by a 9.5%
increase for the facilities that comprised ongoing operations. Revenues for
ongoing operations included $19.3 million from the acquisition of two facilities
in the fourth quarter of 2000. For the year ended December 31, 2000 compared to
the year ended December 31, 1999, admissions for the ongoing operations
increased 5.7%, adjusted admissions from ongoing operations increased 6.3%, and
revenues per adjusted admission from ongoing operations increased 2.4%,
outpatient visits increased 2.5%, outpatient revenues per visit increased 4.2%
and surgeries increased 8.5%. Another factor was $4.8 million in favorable prior
year cost report settlements and contractual estimates during the year ended
December 31, 2000. The increases were partially offset by an unfavorable $5.2
million change in estimate for contractual discounts at one facility.
Salaries and benefits, as a percentage of revenues, decreased to 41.4% in
the year ended December 31, 2000 from 42.9% in the year ended December 31, 1999.
For the year ended December 31, 2000 and 1999, salaries and benefits for the
facilities sold or closed in 2000 and 1999 were $35.9 million and $133.3
million, respectively. The salaries and benefits for the sold and closed
facilities during the year ended December 31, 2000 included severance costs
associated with the closure of two facilities of $2.6 million. Salaries and
benefits for ongoing operations decreased to 40.2% as a percentage of revenue in
the year ended December 31, 2000 compared to 40.6% in the year ended December
31, 1999. Salaries and benefits decreased $2.8 million due to a favorable
adjustment relating to Triad's retirement plan contributions during the year
ended December 31, 2000 and increases in labor productivity. These decreases
were partially offset by a 1.4% increase in costs per full time equivalent in
the year ended December 31, 2000 compared to the year ended December 31, 1999
and the addition of corporate staff after the spin-off. Salaries and benefits
for ongoing operations included $7.0 million from the acquisition of two
facilities in the fourth quarter of 2000.
Supply costs remained constant as a percentage of revenues in the year
ended December 31, 2000 compared to the year ended December 31, 1999. For the
year ended December 31, 1999, supplies for the facilities sold or closed in 2000
and 1999 were $39.1 million compared to $7.6 million in the year ended December
31, 2000. Supplies for ongoing operations increased 0.2% as a percentage of
revenue in the year ended December 31, 2000 compared to the year ended December
31, 1999. This increase was attributable to higher patient acuity, price
increases and $3.2 million from the acquisition of two facilities in the fourth
quarter of 2000. Additionally, an unfavorable adjustment of $1.1 million was
recorded at one facility from write-offs of certain expenses during the year
ended December 31, 2000 that were previously capitalized.
Other operating expenses (primarily consisting of contract services,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance and non-income taxes) decreased as a percentage of revenues to 21.0%
in the year ended December 31, 2000 compared to 22.7% in the year ended December
31, 1999. For the year ended December 31, 1999, other operating expenses for the
facilities sold or closed in 2000 and 1999 were $72.8 million compared to $16.5
million in the year ended December 31, 2000. Other operating expenses for
ongoing operations decreased 0.6% as a percentage of revenue in the year ended
December 31, 2000 compared to the year ended December 31, 1999. This decrease
was due primarily to the increase in revenues. This was partially offset by $4.3
million from the acquisition of two facilities in the fourth quarter of 2000.
Provision for doubtful accounts, as a percentage of revenues, decreased to
8.4% in the year ended December 31, 2000 compared to 9.7% in the year ended
December 31, 1999. Provision for doubtful accounts for the facilities sold or
closed in 2000 and 1999 were $36.6 million in the year ended December 31, 1999
compared to $4.9 million in the year ended December 31, 2000. Provision for
doubtful accounts for ongoing operations decreased 0.2% as a percentage of
revenue in the year ended December 31, 2000 compared to the year ended December
31, 1999 due to improved collections and refinement of the estimation process
for allowance for doubtful accounts of approximately $2.0 million. Days in
accounts receivable decreased two days in the year ended December 31, 2000
compared to the year ended December 31, 1999. This decrease was offset partially
by $3.0 million from the acquisition of two facilities in the fourth quarter of
2000.
32
Depreciation and amortization decreased as a percentage of revenues to 6.7%
in the year ended December 31, 2000 from 7.4% in the year ended December 31,
1999, primarily due to $19.9 million in 1999 depreciation for the facilities
sold or closed in 2000 and 1999.
Interest expense allocated from HCA, which was represented by interest
incurred on the net intercompany balance with HCA, was $22.5 million in the year
ended December 31, 1999. The intercompany balances were eliminated at the
spin-off.
Interest expense, which is offset by $4.9 million and $2.5 million of
interest income in the year ended December 31, 2000 and 1999, respectively,
increased to $57.3 million in the year ended December 31, 2000 from $42.7
million in the year ended December 31, 1999 due to the assumption of additional
debt from HCA in the spin-off.
Management fees allocated from HCA were $8.9 million during the year ended
December 31, 1999. No management fees were allocated during the year ended
December 30, 2000 due to the spin-off from HCA.
Gain on sale of assets was $7.9 million during the year ended December 31,
2000 primarily due to the sale of one hospital facility and Triad's partnership
interest in a rehabilitation hospital during 2000. Gain on sale of assets was
$8.6 million during the year ended December 31, 1999 due primarily to the sale
of ten facilities during the period.
Impairments on long-lived assets were $8.0 million and $69.2 million during
the years ended December 31, 2000 and 1999, respectively. The impairments during
2000 were due primarily to the carrying value of the long-lived assets related
to one hospital closed being reduced to fair value, based on estimated disposal
value. The impairments during 1999 were due to reductions of the book value of
certain facilities that Triad divested during 1999 to fair value, based on
estimates of selling values.
Minority interests, which are primarily related to one joint venture in
Arizona that includes 9 ambulatory surgery centers, as a percentage of revenues
remained relatively unchanged in the year ended December 31, 2000 compared to
the year ended December 31, 1999.
Equity in earnings (loss) of affiliates was $(1.4) million for the year
ended December 31, 2000 compared to $(3.1) million for the year ended December
31, 1999. This was due to reduction in losses of $3.7 million for one
non-consolidating entity which opened in May 1999. This reduction in losses was
offset by $1.1 million of unfavorable adjustments for various changes of
estimates and other adjustments at one non-consolidating entity during the year
ended December 31, 2000.
Income tax provision was $12.9 million for the year ended December 31, 2000
compared to income tax benefit of $25.5 million for the year ended December 31,
1999. Triad's effective tax rate is impacted by the effect of nondeductible
goodwill amortization expense, nondeductible expense for impairments and ESOP
expense.
Liquidity and Capital Resources
Cash provided by operating activities was $318.3 million in the year ended
December 31, 2001 compared to $71.6 million in the year ended December 31, 2000.
The increase was due to the acquisition of Quorum and improved same facility
operations in 2001 compared to 2000. In addition accounts payable and other
current liabilities decreased in 2000 from payments made to HCA for capital
expenditures funded by HCA in 1999.
Cash used in investing activities increased to $1,453.1 million in the year
ended December 31, 2001 from $171.4 million in the year ended December 31, 2000.
This was due to $1,386.6 million, net of cash acquired, paid during the year
ended December 31, 2001 for the merger with Quorum and acquisition of SouthCrest
Hospital, (discussed elsewhere) compared to $118.8 million paid for acquisitions
during the year ended December 31, 2000. This was offset by a $37.0 million loan
repayment from the co-venturer in SouthCrest Hospital during the year ended
December 31, 2000. Also, Triad received $127.8 million in proceeds on the sale
of five hospitals, one of which was closed during 2000, in the year ended
December 31, 2001 compared to $20.7 million in proceeds on the sale of one
33
hospital and its partnership interest in a rehabilitation hospital during the
year ended December 31, 2000. Triad may expend up to $350 million (approximately
$250 million for expansion) in capital expenditures in 2002.
Cash provided by financing activities was $1,144.4 million in the year
ended December 31, 2001 compared to $35.6 million in the year ended December 31,
2000. This increase was due to the financing activity as part of the Quorum
merger.
As part of the merger with Quorum, Triad refinanced its Tranche A term
loan, Tranche B term loan, Delay Draw term loan, and Quorum's indebtedness with
new indebtedness totaling $1.8 billion. This indebtedness consisted of a Tranche
A term loan of $250 million bearing interest at LIBOR plus 3.0% (4.93% at
December 31, 2001) with principal amounts due beginning 2001 through 2007, a
Tranche B term loan of $550 million bearing interest at LIBOR plus 3.0% (4.93%
at December 31, 2001) with principal amounts due beginning 2001 through 2008, an
Asset Sale term loan of $150 million which was paid in full as of December 31,
2001 and $600 million of senior notes bearing interest at 8.75% with principal
amounts due in 2009. Triad also obtained a $250 million revolving credit line,
of which $46.0 million was outstanding at December 31, 2001, that bears interest
at LIBOR plus 3.0% (4.75% at December 31, 2001) or at prime plus 2.0% (6.75% at
December 31, 2001). The amount outstanding under the revolving credit line was
reduced to $35.0 million on January 3, 2002 at a rate of 4.88%. The revolving
credit line reduces to $225 million in 2004, $200 million in 2005 and matures in
2007. As of December 31, 2001, Triad had $26.9 million in letters of credit
outstanding which reduce the amount available under the revolving credit line.
The LIBOR spread on the revolving credit line and the Tranche A term loan are
subject to reduction depending upon the total leverage of Triad.
Triad has repaid the entire Asset Sale term loan at December 31, 2001 from
the proceeds received on the facility sales described below and from cash on
hand.
Subsequent to December 31, 2001, Triad entered into an interest rate swap
agreement. The interest rate swap is designated as a cash flow hedge, which
effectively converts a notional amount of $100 million of floating rate
borrowings to fixed rate borrowings. The term of the interest rate swap expires
in January 2004. Triad will pay a rate of 3.22% and receive LIBOR, which in the
initial period is 1.83%. Triad is exposed to credit losses in the event of
nonperformance by the counterparty. The counterparty is a creditworthy financial
institution and it is anticipated that the counterparty will be able to fully
satisfy the obligation under the contract.
Triad's term loans and revolving lines of credit are collateralized by a
pledge of substantially all of its assets other than real estate associated with
the Quorum facilities. The debt agreements require that Triad comply with
various financial ratios and tests and have restrictions, including but not
limited to, new indebtedness, asset sales and use of proceeds therefrom, capital
expenditures and dividends. Triad currently is in compliance with all debt
agreement restrictions. If an event of default occurs with respect to the debt
agreements, then the balances of the term loans and revolving line of credit
could become due and payable.
In connection with the debt financing, Triad incurred $45.8 million in debt
issue costs, which are being amortized over the period the indebtedness is
outstanding.
The following tables show the total future contractual obligations and
other commercial commitments of Triad as of December 31, 2001 (in millions):
Payment Period
Contractual Obligations 2002 2003 2004 2005 2006 Thereafter Total
----------------------- ----- ------ ------ ------ -------- ---------- --------
Long-term debt........................ $30.9 $ 73.2 $ 93.6 $ 93.7 $ 98.9 $1,390.7 $1,781.0
Operating leases ..................... 37.2 31.5 27.4 21.6 16.2 43.6 177.5
----- ------ ------ ------ ------ -------- --------
Total contractual obligations......... $68.1 $104.7 $121.0 $115.3 $115.1 $1,434.3 $1,958.5
===== ====== ====== ====== ====== ======== ========
Other Commercial Commitments
----------------------------
Standby letters of credit............. $ -- $ -- $ -- $ -- $ -- $ 26.9 $ 26.9
===== ====== ====== ====== ====== ======== ========
34
At December 31, 2001, Triad had working capital of $381.0 million.
Management expects that operating cash flows and its revolving credit line will
provide sufficient liquidity for fiscal 2002. Significant changes in
reimbursement from government programs and managed care health plans could
affect liquidity in the future.
On November 1, 2001, Triad sold its hospital in Phoenix, Arizona for $55.3
million, including working capital. The proceeds from the sale were used to
reduce the Asset Sale term loan. A gain of $22.0 million was recognized during
the year ended December 31, 2001. This facility had revenues of $58.3 million
and $64.8 million in the years ended December 31, 2001 and 2000, respectively.
This facility had pre-tax income (loss) of $0.3 million and $(1.2) million in
the years ended December 31, 2001 and 2000, respectively.
On August 7, 2001, Triad sold its hospital in Baton Rouge, Louisiana
acquired in the Quorum transaction and designated as held for sale, for $19.0
million plus assumed liabilities of $2.3 million. The purchaser is affiliated
with one former member of Triad's board of directors. The sales price was the
amount of the purchase price allocated to the hospital and, therefore, no gain
or loss on the sale was recorded.
Triad closed its acute care hospital in San Diego, California on November
30, 2000. On June 29, 2001, Triad sold the remaining assets of this facility for
a net sales price of $6.6 million and recognized a minimal gain on the sale.
On May 2, 2001, Triad sold two hospitals in Minot, North Dakota acquired in
the Quorum transaction for $38.0 million plus $8.2 million in working capital.
The sales price was the amount of the purchase price allocated to the hospitals
and, therefore, no gain or loss on the sale was recorded.
On February 5, 2001, Triad acquired the remaining 50% interest in the
entity that owns SouthCrest Hospital and other related healthcare facilities in
Tulsa, Oklahoma which opened in May 1999 from its not-for-profit partner,
Hillcrest Healthcare System ("Hillcrest"), for $44.6 million, the amount of
Hillcrest's investment in the entity. The acquisition consolidated 100%
ownership and control of the hospital in Triad effective January 1, 2001. Triad
has an option to acquire an adjacent 26-acre parcel of land from Hillcrest for
future expansion and a right of first refusal on certain other real estate.
SouthCrest Hospital will continue to participate in Hillcrest's joint
contracting network that includes other Hillcrest hospitals in Tulsa. Under
certain conditions and for a limited time, Hillcrest will have an option to
repurchase a 49% interest in SouthCrest Hospital at the then fair market value,
subject to minimum valuations and minimum returns on investment to Triad; if
Hillcrest were to exercise the option, Triad would retain governance of the
facility and continue consolidating it for financial reporting. The purchase was
funded with borrowings under Triad's then existing delay draw loan which was
refinanced as part of the Quorum acquisition.
Triad has commenced development of a new hospital in Las Cruces, New
Mexico. The projected cost of this development is approximately $67 million and
is expected to be completed by the third quarter of 2002. As of December 31,
2001, approximately $22 million had been spent for this project.
On February 17, 2002, Triad opened a replacement hospital that was
initiated by Quorum in Vicksburg, Mississippi. The total project cost of this
facility is approximately $108 million. As of December 31, 2001, approximately
$28 million of expenditures remain to be made on the project.
Triad commenced development of a replacement hospital in Bentonville,
Arkansas, which is expected to be completed in the third quarter of 2003. The
anticipated cost of the replacement facility is approximately $63 million. As of
December 31, 2001, approximately $1.0 million of expenditures have been spent
for this project.
Triad has various other hospital expansion projects in progress. Triad has
spent approximately $73 million and anticipates expending approximately $118
million related to these projects.
Triad expects that the above referenced projects will be funded with either
operating cash flows or existing credit facilities.
35
Recent Accounting Pronouncements
Triad adopted Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") on
January 1, 2001. SFAS 133 requires that all derivative financial instruments
that qualify for hedge accounting be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in fair value of derivative financial instruments are either recognized
periodically in income or shareholders' equity (as a component of comprehensive
income), depending on whether the derivative is being used to hedge changes in
fair value or cash flows. Triad did not use derivatives during 2001, therefore
the adoption of SFAS 133 did not have an effect on the results of operations or
the financial position of Triad in 2001. Triad's policy is to not hold or issue
derivatives for trading purposes and to avoid derivatives with leverage
features. As discussed previously, Triad entered into an interest rate swap
subsequent to December 31, 2001.
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141")
and Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"), which are required to be adopted in fiscal
years beginning after December 15, 2001. SFAS 141 supersedes Accounting
Principles Board Opinion No. 16 "Business Combination" and Statement of
Financial Accounting Standards No. 28 "Accounting for Preacquisition
Contingencies of Purchased Enterprises" and eliminates pooling of interests
accounting for business combinations for transactions entered into after July 1,
2001. The adoption of SFAS 141 will not have a significant impact on the results
of operations or the financial condition of Triad. SFAS 142 supersedes
Accounting Principles Board Opinion No. 17 "Intangible Assets" which changes the
accounting for goodwill. The adoption of SFAS 142 will eliminate the periodic
amortization of goodwill and institute an annual review of the fair value of
goodwill. The elimination of goodwill amortization would have increased income
from operations by $29.7 million and $6.3 million for the years ended December
31, 2001 and 2000, respectively. Impairment of goodwill would be recorded if the
fair value of the goodwill is less than the book value. The review of goodwill
will be at the reporting unit level, which is defined as an operating segment or
one level below an operating segment. Triad has determined that the reporting
unit for its owned operations segment will be at one level below the segment.
SFAS 142 requires the completion of the initial step of a transitional
impairment test within six months of adoption. Any impairment loss resulting
from the transitional impairment test will be recorded as a cumulative effect of
a change in accounting principle. Subsequent impairment losses would be
reflected in operating income. Triad has not determined the impact on the
results of operations or financial position for the change in impairment
testing.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which is required to be adopted in
fiscal years beginning after December 15, 2001 with early application
encouraged. SFAS 144 supercedes Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121") and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30 "Reporting the Results
of Operations-Reporting the Effects and Transactions" for the disposal of a
segment of a business. SFAS 144 establishes a single accounting model, based on
the framework established in SFAS 121, for long-lived assets to be disposed of
by sale and resolves implementation issues related to SFAS 121 by removing
goodwill from its scope. The adoption of SFAS 144 would impact the results of
operations and the financial position of Triad if a component of Triad's
business is designated as held for sale after adoption of SFAS 144. Components
designated as held for sale would be reported separately as discontinued
operations with prior periods restated. Currently, Triad has not designated any
components as held for sale under SFAS 144, but could do so in the future.
Contingencies
Merger Litigation
On October 20, 2000, a purported class action, Samuel Brand v. Colleen
Conway Welch, et al., Case No.: OCC-3066, was filed against Triad and members of
the board of directors of Quorum in the Circuit Court of Davidson County,
Tennessee, on behalf of all public stockholders of Quorum. The complaint
alleged, among other
36
things, that Quorum's directors breached their fiduciary duties to Quorum and
its stockholders in agreeing to the merger at an unfair price.
In April 2001, the parties negotiated a settlement that would result in the
dismissal of the action. The settlement was subject to a number of conditions,
including Court approval. Court approval was obtained, and on October 22, 2001
the court dismissed the action pursuant to the terms of the agreed upon
settlement and Triad paid the settlement. The settlement did not have a material
effect on Triad's results of operations or financial position.
False Claims Act Litigation
At a meeting in September 1998, Quorum learned from the government that the
government would likely join in a lawsuit filed against Quorum under the False
Claims Act. The suit was filed in January 1993 by a former employee of a
hospital managed by a Quorum subsidiary. These lawsuits, commonly known as qui
tam actions, are filed "under seal." That means that the claims are kept secret
until the government decides whether to join the case. The person who files the
lawsuit is called a "relator." The government joined the case against Quorum in
October 1998. The relator's lawsuit named Quorum, QHR, HCA and all hospitals
that Quorum or HCA owned, operated or managed from 1984 through 1997, as
defendants. The unsealed complaint, prepared by the relator, alleged that Quorum
knowingly prepared and caused to be filed cost reports which claimed payments
from Medicare and other government payment programs greater than the amounts
due.
On February 24, 1999, the government filed its own complaint in the case.
The new complaint alleged that Quorum, on behalf of hospitals it managed between
1985 and 1995 and hospitals it owned from 1990 to the date of the complaint,
violated the False Claims Act by knowingly submitting or causing to be submitted
false Medicare cost reports, resulting in the submission of false claims to
Federal health care programs.
The government asserted that the false claims in cost reports were
reflected, in part, in "reserve analyses" created by Quorum. The complaint also
alleged that these cost report filings were prepared as a result of company
policy. This qui tam action sought three times the amount of damages caused to
the United States by Quorum's submission of any alleged false claims to the
government, civil penalties of not less than $5,000 nor more than $10,000 for
each claim, and the relator's attorneys' fees and costs. On April 23, 2001, a
settlement agreement was signed and a stipulation of dismissal was filed with
the court dismissing all claims against Quorum, QHR and the other Quorum
subsidiaries named in the lawsuit. The settlement provided for a payment of
$82.5 million in compensation to the government, plus interest accruing on $77.5
million at 7.25% per annum from October 2, 2000 (the date on which an
understanding with the government to settle this lawsuit was reached) to the
payment date. The settlement was paid in April 2001. The settlement agreement
also provides, on certain conditions, for a release of all hospitals currently
or formerly managed by QHR electing to participate in the settlement. In
connection with the settlement, Quorum entered into a corporate integrity
agreement with the Office of the Inspector General containing, among other
things, an affirmative obligation to report certain violations of applicable
laws and regulations. On August 10, 2001, the Office of Inspector General agreed
to suspend Quorum's obligations under this corporate integrity agreement until
November 1, 2001, in exchange for Triad's agreement to negotiate a corporate
integrity agreement that would also include the hospitals owned by Triad at the
time of its merger with Quorum, as well as hospitals Triad might subsequently
acquire. (In the distribution agreement with HCA at the time of its spin-off,
Triad agreed to participate in the negotiation of a corporate integrity
agreement with the Office of Inspector General.) The negotiations of a
"combined" corporate integrity agreement were concluded and the agreement became
effective on November 1, 2001. See Part I - Item I. Business - "Triad's Ethics
and Compliance Program."
Violations of the integrity agreement could subject Triad's hospitals to
substantial monetary penalties. Complying with the corporate integrity agreement
may impose expensive and burdensome requirements on certain operations which
could have a material adverse impact on Triad.
Other Qui Tam Actions and Related Investigations
In May 1998, Quorum was informed that it was a defendant in another qui tam
action involving home health services provided by two of its owned hospitals and
alleging that Quorum had violated Medicare laws. This action
37
was filed under seal in June 1996 by a former employee whom Quorum fired in
April 1996. The United States Attorney's Office allowed Quorum an opportunity to
review the results of the government's investigations and discuss the
allegations made in the action prior to the government making a decision to
intervene as a plaintiff. Quorum cooperated fully with the United States
Attorney's Office and provided additional information and made employees
available for interviews.
On October 26, 2000, Quorum completed settlement of this qui tam lawsuit
which primarily involved allegedly improper allocation of costs at Flowers
Hospital, Dothan, Alabama, to its home health agency. Quorum paid to the
government on October 26, 2000 approximately $18 million in connection with this
settlement. In addition to the settlement agreement, Quorum entered into a
five-year corporate integrity agreement covering Flowers Hospital with the
Office of the Inspector General, which was terminated upon the effective date of
the Quorum corporate integrity agreement entered into in connection with the
False Claims Act litigation discussed above. The government always reserves the
right to investigate and pursue other allegations made by a relator under a
complaint. However, under the settlement agreement, the relator is prohibited
from pursuing these additional allegations.
As a result of its ongoing discussions with the government, prior to the
merger Quorum learned that there are two additional unrelated qui tam complaints
against it alleging violations of the False Claims Act for claims allegedly
submitted to the government involving one owned and two managed hospitals.
Quorum accrued $3.5 million on these items prior to the merger. Both matters
remain under seal. With respect to the matter involving the two managed
hospitals, the government has requested that Quorum conduct a self audit with
respect to one Medicare cost report for one managed hospital and three other
specific issues and that matter remains under seal. The government could
undertake additional investigative efforts. The government has stated that it
intends to investigate certain other allegations. With respect to the complaint
involving the owned hospital, Triad reached an agreement to settle this matter
through the payment to the government of $427,500 (plus interest to the date of
actual payment), and payment of certain attorneys' fees to the relators under
the complaint. Payment was made on January 15, 2002, and the case has been
dismissed with prejudice. As Quorum's successor, Triad was also a defendant in
another qui tam complaint, in which the government has declined to intervene.
After receipt of service, Triad filed motions to dismiss such litigation against
Quorum and QHR and on October 9, 2001, the relators filed notices of voluntary
dismissal, to which the government indicated its consent. The court dismissed
such litigation on October 17, 2001.
Stockholder Class Action Regarding the Securities Exchange Act of 1934
In October and November 1998, some of Quorum's stockholders filed lawsuits
against Quorum in the U.S. District Court for the Middle District of Tennessee.
In January 1999, the court consolidated these cases into a single lawsuit (M.D.
Tenn. No. 3-98-1004). The plaintiffs filed an amended complaint in March 1999.
The plaintiffs seek to represent a class of plaintiffs who purchased Quorum's
common stock from October 25, 1995 through October 21, 1998, except for Quorum's
insiders and their immediate families. The amended complaint names Quorum,
several of Quorum's former officers, and one of Quorum's former outside
directors, as defendants.
The amended complaint alleges that defendants violated the Securities
Exchange Act of 1934. The plaintiffs claim that Quorum materially inflated
Quorum's net revenues during the class period by including in those net revenues
amounts received from the settlement of cost reports that had allegedly been
filed in violation of applicable Medicare regulations years earlier and that,
because of that practice, this statement, which first appeared in Quorum's Form
10-K filed in September 1996, was false: "The Company believes that its owned
hospitals are in substantial compliance with current federal, state, local, and
independent review body regulations and standards." In May 1999, Quorum filed a
motion to dismiss the complaint. On November 13, 2000, the judge denied Quorum's
motion to dismiss the complaint against Quorum and James E. Dalton, Jr.,
Quorum's former President/CEO. The judge granted Quorum's motion to dismiss as
to all other defendants. The judge heard oral argument on Mr. Dalton's motion to
reconsider the judge's denial of Mr. Dalton's motion to dismiss and on April 19,
2001 granted Mr. Dalton's motion to dismiss. The parties recently tentatively
agreed to submit the class action to non-binding mediation. As Quorum's
successor, Triad intends to vigorously defend the claims and allegations in this
action.
At this time Triad cannot predict the final effect or outcome of any of the
ongoing investigations or the class or qui tam actions. If Quorum's hospitals
are found to have violated Federal or state laws relating to Medicare,
38
Medicaid or other government programs, then Triad may be required to pay
substantial fines and civil and criminal penalties and also may be excluded from
participation in the Medicare and Medicaid programs and other government
programs. Similarly, the amount of damages sought in the qui tam actions or in
the future may be substantial. Triad could be subject to substantial costs
resulting from defending, or from an adverse outcome in any current or future
investigations, administrative proceedings or litigation. In an effort to
resolve one or more of these matters, Triad may choose to negotiate a
settlement. Amounts paid to settle any of these matters may be material.
Agreements entered into as a part of any settlement could also materially
adversely affect Triad. Any current or future investigations or actions could
have a material adverse effect on Triad's results or operations or financial
position.
From time to time Triad may be the subject of additional investigations or
a party to additional litigation which alleges violations of law. Triad may not
know about those investigations, or about qui tam actions filed against it
unless and to the extent such are unsealed. If any of those matters were
successfully asserted against Triad, there could be a material adverse effect on
Triad's business, financial position, and results of operations or prospects.
Income Taxes
The IRS is in the process of conducting an examination of the federal
income tax returns of Triad for the calendar years ended December 31, 1999 and
2000, and the federal income tax returns of Quorum for the fiscal years ended
June 30, 1999 and 2000. The IRS has not proposed any adjustments.
During the year ended December 31, 2001, Triad (as successor-in-interest to
Quorum) accepted IRS proposed settlements for the fiscal years ended June 30,
1993 through 1998. The most significant items included in the settlements were
adjustments to taxable income for certain tax deductions and losses disallowed
in the preceding IRS audit cycle for the fiscal years ended June 30, 1990
through 1992, tax accounting methods adopted for computing bad debt expense, the
valuation of purchased hospital property and equipment and related depreciable
lives, and income recognition related to cost report settlements. The
settlements did not have a material effect on Triad's results of operations or
financial position.
The IRS has proposed adjustments with respect to partnership returns of
income for certain joint ventures where Quorum owns a majority interest for the
fiscal years ended June 30, 1997 and 1998. The most significant adjustments
involve the tax accounting methods adopted for computing bad debt expense, the
valuation of purchased hospital property and equipment and related depreciable
lives, income recognition related to cost reports and the loss calculation on a
taxable liquidation of a subsidiary. Triad has filed protests on behalf of the
joint ventures with the Appeals Division of the IRS contesting substantially all
of the proposed adjustments. In the opinion of management, the ultimate outcome
of the IRS examinations will not have a material effect on Triad's results of
operations or financial position.
HCA Litigation and Investigations
In connection with the spin-off, Triad entered into a distribution
agreement with HCA. The terms of the distribution agreement provide that HCA
will indemnify Triad for any losses (other than consequential damages) which it
may incur as a result of proceedings described below. HCA has also agreed to
indemnify Triad for any losses (other than consequential damages) which it may
incur as a result of proceedings which may be commenced by government
authorities or by private parties in the future that arise from acts, practices
or omissions engaged in prior to the date of the spin-off and that relate to the
proceedings described below.
HCA is currently the subject of several Federal investigations into certain
of its business practices, as well as governmental investigations by various
states. HCA is cooperating in these investigations and understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, HCA expects additional
subpoenas and other investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. HCA is the subject of a formal order of
investigation by the SEC. HCA understands that the SEC's investigation includes
the anti-fraud, insider trading, periodic reporting and internal accounting
control provisions of the Federal securities laws.
39
HCA is a defendant in several qui tam actions on behalf of the United
States of America, which have been unsealed and served on HCA. The actions
allege, in general, that HCA and certain subsidiaries and/or affiliated
partnerships violated the False Claims Act, 31 U.S.C. ss. 3729 et seq., by
submitting improper claims to the government for reimbursement. The lawsuits
seek three times the amount of damages caused to the United States by the
submission of any Medicare or Medicaid false claims presented by the defendants
to the Federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. HCA
has disclosed that of the original 30 qui tam actions, the Department of Justice
remains active in and has elected to intervene in 8 actions. HCA has also
disclosed that it is aware of additional qui tam actions that remain under seal
and believes that there may be other sealed qui tam cases of which it is
unaware.
The investigations, actions and claims affecting HCA relate to HCA and its
subsidiaries, including subsidiaries that, prior to the spin-off, owned
facilities now owned by Triad. On May 5, 2000, Triad was advised that one of the
qui tam cases which had been unsealed listed three of Triad's hospitals as
defendants. This qui tam action alleges various violations arising out of the
relationship between Curative Health Services and the other defendants,
including allegations of false claims relating to contracts with Curative Health
Services for the management of certain wound care centers and excessive and
unreasonable management fees paid to Curative Health Services and submitted for
reimbursement. Two of the three Triad hospitals named as defendants terminated
their relationship with Curative Health Services prior to the spin-off and the
third hospital terminated its contract thereafter.
In July 1999, Olsten Corporation and its subsidiary, Kimberly Home Health
(neither of which is affiliated with HCA), announced that they would pay $61
million to settle allegations that both companies defrauded the Medicare
program. Kimberly pled guilty to three separate felony charges (conspiracy, mail
fraud and violating the Medicare Anti-Kickback statute) filed by the U.S.
Attorneys in the Middle and Southern Districts of Florida and the Northern
District of Georgia. While HCA was not specifically named in these guilty pleas,
the guilty pleas refer to the involvement of a "Company A" or a "company not
named as a defendant." HCA has disclosed that it believes these references refer
to HCA or its subsidiaries.
HCA is a defendant in a number of other suits, which allege, in general,
improper and fraudulent billing, overcharging, coding and physician referrals,
as well as other violations of law. Certain of the suits have been conditionally
certified as class actions. Since April 1997, numerous securities class action
and derivative lawsuits have been filed in the United States District Court for
the Middle District of Tennessee against HCA and a number of its current and
former directors, officers and/or employees. Several derivative actions have
been filed in state court by certain purported stockholders of HCA against
certain of its current and former officers and directors alleging breach of
fiduciary duty, and failure to take reasonable steps to ensure that HCA did not
engage in illegal practices thereby exposing it to significant damages.
On December 14, 2000, HCA announced that it had entered into a settlement
agreement with the Civil Division of the Department of Justice to recommend an
agreement to settle, subject to certain conditions, the civil claims actions
against HCA relating to diagnosis related group coding, outpatient laboratory
billing and home health issues. HCA paid $745 million in compensation to the
government, with interest accruing at a fixed rate of 6.5% per annum (beginning
May 18, 2000), and HCA's existing letter of credit agreement with the government
was reduced from $1 billion to $250 million. HCA also entered into a corporate
integrity agreement with the Health and Human Services Office of the Inspector
General. Civil issues relating to cost reporting and physician relations are not
covered by the settlement agreement.
On December 14, 2000, HCA also announced that it had signed an agreement
with the Criminal Division of the Department of Justice and various U.S.
Attorney's offices to resolve pending Federal criminal actions against HCA. HCA
received a full release from criminal liability for conduct arising from or
relating to billing and reimbursement for services provided pursuant to Federal
health care benefit programs. In addition, the government agreed not to
prosecute HCA for other possible criminal offenses which are or have been under
investigation by the Department of Justice arising from or relating to billing
and reimbursement for services provided pursuant to Federal health care benefit
programs. As part of the criminal agreement, HCA paid the government $95 million
and two non-operating subsidiaries of HCA entered certain pleas in respect of
the criminal actions.
40
The agreements announced on December 14, 2000 relate only to conduct that
was the subject of the Federal investigations resolved in the agreements, and
HCA has stated publicly that it continues to discuss civil claims relating to
cost reporting and physician relations with the government. These agreements
with the government do not resolve various qui tam actions filed by private
parties against HCA, or any pending state actions. In addition to other claims
not covered by these agreements, the government also reserved its rights under
these agreements to pursue any claims it may have for:
. any civil, criminal or administrative liability under the Internal
Revenue Code;
. any other criminal liability;
. any administrative liability, including mandatory exclusion from
Federal health care programs;
. any liability to the United States (or its agencies) for any conduct
other than the conduct covered in the government's investigation;
. any express or implied warranty claims or other claims for defective
or deficient products or services, including quality of goods and
services, provided by HCA;
. any claims for personal injury or property damage or for other similar
consequential damages arising from the conduct subject to the
investigation; and
. any civil or administrative claims of the United States against
individuals.
In addition, 14 of Triad's current and former hospitals received notices in
early 2001 from CMS that it was re-opening for examination cost reports for
Medicare and Medicaid reimbursement filed by these hospitals for periods between
1993 and 1998, which pre-dates Triad's spin-off from HCA. Furthermore, two of
Triad's hospitals formerly owned by Quorum have received such notices. HCA or
its predecessors owned these hospitals during the period covered by the notices.
HCA is obligated to indemnify Triad for liabilities arising out of cost reports
filed during these periods.
On March 28, 2002, HCA announced that it had reached an understanding with
CMS to resolve all Medicaid cost report appeal issues between HCA and CMS on
more than 2,600 cost reports for reporting periods from 1993 through July 31,
2001. The understanding, which is subject to approval of the Department of
Justice and execution of a mutually satisfactory definitive written agreement,
would require HCA to pay CMS the sum of $250 million. The understanding does not
include resolution of outstanding civil issues with the Department of Justice
and relators under HCA's various qui tam cases with respect to cost reports and
physician relations.
HCA has agreed that, in the event that any hospital owned by Triad at the
time of the spin-off is permanently excluded from participation in the Medicare
and Medicaid programs as a result of the proceedings described above, then HCA
will make a cash payment to Triad, in an amount (if positive) equal to five
times the excluded hospital's 1998 income from continuing operations before
depreciation and amortization, interest expense, management fees, impairment of
long-lived assets, minority interests and income taxes, as set forth on a
schedule to the distribution agreement, less the net proceeds of the sale or
other disposition of the excluded hospital.
HCA will not indemnify Triad under the distribution agreement for losses
relating to any acts, practices or omissions engaged in by Triad after the
spin-off, whether or not Triad is indemnified for similar acts, practices and
omissions occurring prior to the spin-off. HCA also will not indemnify Triad
under the distribution agreement for similar qui tam litigation, governmental
investigations and other actions to which Quorum was subject, some of which are
described above. If indemnified matters were asserted successfully against Triad
or any of its facilities, and HCA failed to meet its indemnification
obligations, then this event could have a material adverse effect on Triad's
business, financial condition, and results of operations or prospects.
Triad is unable to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. The extent to which Triad may or
may not continue to be affected by the ongoing investigations of HCA and the
initiation of additional investigations, if any, cannot be predicted. These
matters could have a material adverse effect on Triad's business, financial
condition, and results of operations or prospects.
General Liability Claims
Triad is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of, or
interference with, physicians' staff privileges. In certain of these actions the
claimants may seek punitive damages against Triad, which are usually not covered
by insurance. It is management's opinion that the ultimate resolution of these
pending claims and legal proceedings will not have a material adverse effect on
Triad's results of operations or financial position.
41
Effects of Inflation and Changing Prices
Various federal, state and local laws have been enacted that, in certain
cases, limit Triad's ability to increase prices. Revenues for acute care
hospital services rendered to Medicare patients are established under the
federal government's prospective payment system. Medicare revenues approximated
31.9% in 2001, 29.6% in 2000 and 31.9% in 1999.
Management believes that hospital industry operating margins have been, and
may continue to be, under significant pressure because of deterioration in
pricing flexibility and payer mix, and growth in operating expenses in excess of
the increase in prospective payments under the Medicare program. Although
Medicare prospective payments increased in 2001, management expects that the
average rate of increase in Medicare prospective payments will decline slightly
in 2002 and 2003, not withstanding the enactment of the Refinement Act and BIPA.
In addition, as a result of increasing regulatory and competitive pressures,
Triad's ability to maintain operating margins through price increases to
non-Medicare patients is limited.
Health Care Reform
In recent years, an increasing number of legislative proposals have been
introduced in or proposed by Congress and some state legislatures that would
significantly affect health care systems in Triad's markets. The cost of certain
proposals would be funded, in significant part, by a reduction in payments by
government programs, including Medicare and Medicaid, to health care providers
(similar to the reductions incurred as part of the Balanced Budget Act as
previously discussed). While Triad is unable to predict whether any proposals
for health care reform will be adopted, there can be no assurance that proposals
adverse to the business of Triad will not be adopted.
In December 2000, CMS acting under HIPAA released final regulations, which
would require compliance by April 2003 relating to adoption of standards to
protect the security and privacy of health-related information. These
regulations would require healthcare providers to implement organizational and
technical practices to protect the security of electronically maintained or
transmitted health-related information. The effective dates of these regulations
were originally postponed by the Bush Administration, but now have been
reestablished. The privacy regulations will extensively regulate the use and
disclosure of individually identifiable health-related information. The security
regulations and the privacy regulations could impose significant costs on Triad
in order to comply with these standards. Violations of the regulations could
result in civil penalties of up to $25,000 per type of violation in each
calendar year and criminal penalties of up to $250,000 per violation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Triad is exposed to market risk related to changes in interest rates. To
mitigate the impact of fluctuations in interest rates, subsequent to December
31, 2001, Triad entered into an interest rate swap. Interest rate swaps are
contracts which allow the parties to exchange fixed and floating rate interest
rate payments periodically over the life of the agreements. Floating rate
payments are based on LIBOR and fixed rate payments are dependent upon market
levels at the time the interest rate swap was consummated. The interest rate
swap that was entered into is a cash flow hedge, which effectively converts a
notional amount of $100 million of floating rate borrowings to fixed rate
borrowings. The term of the interest rate swap expires in January 2004. Triad's
policy is to not hold or issue derivatives for trading purposes and to avoid
derivatives with leverage features. Triad is exposed to credit losses in the
event of nonperformance by the counterparty. The counterparty is a creditworthy
financial institution and it is anticipated that the counterparty will be able
to fully satisfy their obligation under the contract. Triad will pay a rate of
3.22% and receive LIBOR, which in the initial period is 1.83%.
With respect to Triad's interest-bearing liabilities, approximately $849.1
million of long-term debt at December 31, 2001 is subject to variable rates of
interest, while the remaining balance in long-term debt of $924.7 million at
December 31, 2001 is subject to fixed rates of interest. The estimated fair
value of Triad's total long-term debt was $1,841.5 million at December 31, 2001.
The estimates of fair value are based upon the quoted market prices for the same
or similar issues of long-term debt with the same maturities, when available, or
discounted cash flows. Based on a hypothetical 1% increase in interest rates,
the potential annualized losses in future pretax earnings would be approximately
$7.4 million. The impact of such a change in interest rates on the carrying
value of long-term debt would not be significant. The estimated
42
changes to interest expense and the fair value of long-term debt are determined
considering the impact of hypothetical interest rates on Triad's borrowing cost
and long-term debt balances. These analyses do not consider the effects, if any,
of the potential changes in Triad's credit ratings or the overall level of
economic activity. Further, in the event of a change of significant magnitude,
management would expect to take actions intended to further mitigate its
exposure to such change.
Item 8. Financial Statements and Supplementary Data
Information with respect to this Item is contained in Triad's consolidated
financial statements indicated in the Index on Page F-1 of this Annual Report on
Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Previously reported in Triad's current reports on Form 8-K filed November
28, 2000.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is set forth under the headings
"Election of Directors" and "Named Executive Officers Who Are Not Directors" in
the definitive proxy materials of Triad to be filed in connection with its 2002
Annual Meeting of Stockholders. The information required by this Item to be
contained in such definitive proxy materials is incorporated herein by
reference.
Item 11. Executive Compensation
The information required by this Item is set forth under the heading
"Executive Compensation" in the definitive proxy materials of Triad to be filed
in connection with its 2002 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is set forth under the heading "Stock
Ownership of Certain Beneficial Owners and Management" in the definitive proxy
materials of Triad to be filed in connection with its 2002 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is set forth under the heading
"Certain Transactions" in the definitive proxy materials of Triad to be filed in
connection with its 2002 Annual Meeting of Stockholders, which information is
incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of the report:
1. Financial Statements - The accompanying index to financial statements
on page F-1 of this Annual Report on Form 10-K is provided in response
to this item.
2. List of Financial Statement Schedules - All schedules are omitted
because the required information is not present, not present in
material amounts or presented within the financial statements.
43
3. List of Exhibits
(a) Exhibits
Exhibit
No. Description
------- -----------
2.1 Distribution Agreement dated May 11, 1999 by and among Columbia/HCA,
Triad Hospitals, Inc. and LifePoint Hospitals, Inc., incorporated by
reference from Exhibit 2.1 to Triad Hospitals' Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1999.
2.2 Agreement and Plan of Merger, dated as of October 18, 2000, by and
between Quorum Health Group, Inc. and Triad Hospitals, Inc. (the
"Merger Agreement"), incorporated by reference from Triad Hospitals'
Current Report on Form 8-K dated October 18, 2000.
3.1 Certificate of Incorporation of Triad, as amended as of April 27,
2001, incorporated by reference from Exhibit 3.1 to Triad Hospitals'
Post Effective Amendment No. 1 on Form S-8 to the Registration
Statement Form S-4.
3.2 Bylaws of Triad Hospitals as amended February 18, 2000 incorporated by
reference from Triad Hospitals' Annual Report on Form 10-K for the
year ended December 31, 2000.
3.3 Certificate of Incorporation of Triad Holdings, incorporated by
reference from Triad Hospitals' Annual Report on Form 10-K for the
year ended December 31, 1999.
3.4 Bylaws of Triad Holdings, incorporated by reference from Triad
Hospitals' Annual Report on Form 10-K for the year ended December 31,
1999.
4.1 Indenture (including form of 11% Senior Subordinated Notes due 2009)
dated as of May 11, 1999 , between Healthtrust and Citibank N.A. as
Trustee, incorporated by reference from Exhibit 4.2(a) to Triad
Hospitals' Quarterly Report on Form 10-Q, for the quarter ended March
31, 1999.
4.2 Form of 11% Senior Subordinated Notes due 2009 (filed as part of
Exhibit 4.1).
4.3 Registration Rights Agreement dated as of May 11, 1999 between
Healthtrust and the Initial Purchasers named therein, incorporated by
reference from Exhibit 4.4 (a) to Triad Hospitals' Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1999.
4.4 Triad Assumption Agreement dated May 11, 1999 between Healthtrust and
Triad Hospitals, incorporated by reference from Exhibit 4.4(b) to
Triad Hospitals' Quarterly Report on Form 10-Q, for the quarter ended
March 31, 1999.
4.5 Holdings Assumption Agreement dated May 11, 1999 between Triad
Hospitals, Inc. and Triad Holdings, incorporated by reference from
Exhibit 4.4(c) to Triad Hospitals' Quarterly Report on Form 10-Q, for
the quarter ended March 31, 1999.
4.6 Guarantor Assumption Agreements dated May 11, 1999 between Triad
Holdings and the Guarantors signatory thereto, incorporated by
reference from Exhibit 4.4 (d) to Triad Hospitals' Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1999.
4.7 Indenture (including form of 8 3/4% Senior Notes due 2009) dated as of
April 27, 2001, among Triad, the guarantors named therein and Citibank
N.A. as Trustee, incorporated herein by reference from Exhibit 4.1 to
Triad's Quarterly Report on Form 10-Q, for the quarter ended March 31,
2001.
4.8 Registration Rights Agreement dated as of April 27, 2001 among Triad,
the guarantors named therein and the Initial Purchasers named therein,
incorporated herein by reference from Exhibit 4.2 to Triad's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
10.1 Tax Sharing and Indemnification Agreement, dated May 11, 1999, by and
among Columbia/HCA, LifePoint Hospitals and Triad Hospitals,
incorporated by reference from Exhibit 10.1 to Triad Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March 31, 1999.
10.2 Benefits and Employment Matters Agreement, dated May 11, 1999 by and
among Columbia/HCA, LifePoint Hospitals and Triad Hospitals,
incorporated by reference from Exhibit 10.2 to Triad Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March 31, 1999.
44
10.3 Insurance Allocation and Administration Agreement, dated May 11, 1999,
by and among Columbia/HCA, LifePoint Hospitals and Triad Hospitals,
incorporated by reference from Exhibit 10.3 to Triad Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March 31, 1999.
10.4 Transitional Services Agreement dated May 11, 1999 by and between
Columbia/HCA and Triad Hospitals, incorporated by reference from
Exhibit 10.4 to Triad Hospitals' Quarterly Report on Form 10-Q, for
the quarter ended March 31, 1999.
10.5 Computer and Data Processing Services Agreement dated May 11, 1999 by
and between Columbia Information Systems, Inc. and Triad Hospitals,
incorporated by reference from Exhibit 10.5 to Triad Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March 31, 1999.
10.6 Agreement to Share Telecommunications Services dated May 11, 1999 by
and between Columbia Information Systems, Inc. and Triad Hospitals,
incorporated by reference from Exhibit 10.6 to Triad Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March 31, 1999.
10.7 Year 2000 Professional Services Agreement dated May 11, 1999 by and
between CHCA Management Services, L.P. and Triad Hospitals,
incorporated by reference from Exhibit 10.7 to Triad Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March 31, 1999.
10.8 Sub-Lease Agreement dated May 11, 1999 by and between Med-Point LLC
and Triad Hospitals, incorporated by reference from Exhibit 10.8 to
Triad Hospitals' Quarterly Report on Form 10-Q, for the quarter ended
March 31, 1999.
10.9 Sub-Lease Agreement dated May 11, 1999 by and between Healthtrust and
Triad Hospitals, incorporated by reference from Exhibit 10.9 to Triad
Hospitals' Quarterly Report on Form 10-Q, for the quarter ended March
31, 1999.
10.10 Triad Hospitals, Inc. 1999 Long-Term Incentive Plan, as amended on May
29, 2001, incorporated by reference from Exhibit 10.4 to Triad
Hospitals' Quarterly Report on Form 10-Q, for the quarter ended June
30, 2001.
10.11 Triad Hospitals, Inc. Executive Stock Purchase Plan, incorporated by
reference from Exhibit 10.11 to Triad Hospitals' Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1999.
10.12 Triad Hospitals, Inc. Management Stock Purchase Plan, incorporated by
reference from Exhibit 10.12 to Triad Hospitals' Quarterly Report on
Form 10-Q, for the quarter ended March 31, 1999.
10.13 Triad Hospitals, Inc. Outside Directors Stock and Incentive
Compensation Plan, as amended, incorporated by reference from Exhibit
B to Triad Hospitals' definitive Proxy Statement on Schedule 14A of
Triad's annual meeting held on May 29, 2001.
10.14 Credit Agreement, dated as of May 11, 1999 among Healthtrust, Inc. -
The Hospital Company and certain subsidiaries from time to time party
thereto, as Borrower, the several lenders from time to time thereto,
Citicorp USA, Inc. and The Chase Manhattan Bank as syndication agents,
Credit Lyonnais New York Branch and Societe Generale as co-agents,
Bank of America National Trust and Savings Association as
administrative agent and NationsBanc Montgomery Securities, LLC as
lead arranger and sole book manager, incorporated by reference from
Exhibit 10.14 to Triad Hospitals' Quarterly Report on Form 10-Q, for
the quarter ended March 31, 1999.
10.15 Assumption Agreement dated as of May 11, 1999 by and between Bank of
America National Trust and Savings Association and Triad Hospitals,
incorporated by reference from Exhibit 10.15 to Triad Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March 31, 1999.
10.16 Assumption Agreement dated as of May 11, 1999 by and between Bank of
America National Trust and Savings Association and Triad Holdings,
incorporated by reference from Exhibit 10.16 to Triad Hospitals'
Quarterly Report on Form 10-Q, for the quarter ended March 31, 1999.
10.17 Amendment No. 1 dated as of September 28, 2000, to the Credit
Agreement, dated as of May 11, 1999 among Healthtrust, Inc. - The
Hospital Company and certain subsidiaries from time to time party
thereto, as Borrower, the several lenders from time to time thereto,
Citicorp USA, Inc.
45
and The Chase Manhattan Bank as syndication agents, Credit Lyonnais
New York Branch and Societe Generale as co-agents, Bank of America
National Trust and Savings Association as administrative agent and
Nations Banc Montgomery Securities, LLC as lead arranger and sale back
manager, incorporated by reference from Exhibit 10.1 to Triad
Hospitals' Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000.
10.18 Credit Agreement dated as of April 27, 2001 among Triad, the Lenders
party thereto, Merrill Lynch & Co. and Banc of America Securities LLC
as co-lead arrangers, Merrill Lynch & Co. as syndication agent and
Bank of America, N.A. as administrative agent, incorporated herein by
reference from Exhibit 10.1 on Form 10-Q for the quarter ended March
31, 2001.
10.19 Amendment No. 1 dated as of July 10, 2001 to the Credit Agreement
dated as of April 27, 2001 among Triad, the Lenders party thereto,
Merrill Lynch & Co. as syndication agent and Bank of America, N.A. as
administrative agent, incorporated herein by reference from Exhibit
10.2 on Form 10-Q for the quarter ended June 30, 2001.
10.20 Amendment No. 2 dated as of August 8, 2001 to the Credit Agreement
dated as of April 27, 2001 among Triad, the Lenders party thereto,
Merrill Lynch & Co. as syndication agent and Bank of America , N.A. as
administrative agent, incorporated herein by reference from Exhibit
10.3 on Form 10-Q for the quarter ended June 30, 2001.
10.21 Amendment No. 3 dated as of February 7, 2002 to the Credit Agreement
dated as of April 27, 2001 among Triad, the Lenders party thereto,
Merrill Lynch & Co. as syndication agent and Bank of America, N.A.
10.22 Quorum Health Group, Inc. 1997 Stock Option Plan, incorporated herein
by reference from Exhibit B to Quorum's definitive Proxy Statement on
Schedule 14A for Quorum's annual meeting held on November 10, 1997.
12.1 Statement of Computation of Ratio of Earnings to Fixed Charges.
16.1 Statement re: Change in Certifying Accountant, incorporated by
reference from Exhibit 16.1 to Triad Hospitals' Report on Form 8-K
dated November 23, 1999.
16.2 Statement re: Change in Certifying Accountant, incorporated by
reference from Exhibit 16.1 to Triad Hospitals' Report on Form 8-K
dated November 30, 2000.
21.1 List of the Subsidiaries of Triad Hospitals.
23.1 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K filed during the quarter ended December 31, 2001:
On October 1, 2001, Triad issued a press release to announce the
appointment of Dan Moen as Executive Vice President of Hospital
Management.
On October 29, 2001, Triad reported that they had issued a press
release of its third quarter earnings.
On November 15, 2001, Triad issued a press release to announce that
they plan to give financial guidance regarding its future performance.
On December 10, 2001, Triad provided updated financial guidance for
years 2001, 2002, and beyond.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
By: /s/ JAMES D. SHELTON
--------------------------------------------
James D. Shelton
Chairman, President and Chief Executive Officer
Dated: March 29, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES D. SHELTON Chairman of the Board, President and March 29, 2002
--------------------------------- Chief Executive Officer; Director (Principal Executive
James D. Shelton Officer)
/s/ MICHAEL J. PARSONS Executive Vice President and March 29, 2002
--------------------------------- Chief Operating Officer; Director
Michael J. Parsons
/s/ BURKE W. WHITMAN Executive Vice President and Chief March 29, 2002
--------------------------------- Financial Officer (Principal Accounting Officer)
Burke W. Whitman
/s/ THOMAS F. FRIST, III Director March 29, 2002
---------------------------------
Thomas F. Frist, III
/s/ DALE V. KESLER Director March 29, 2002
---------------------------------
Dale V. Kesler
/s/ THOMAS G. LOEFFLER, Esq. Director March 29, 2002
---------------------------------
Thomas G. Loeffler, Esq.
/s/ UWE E. REINHARDT, Ph.D Director March 29, 2002
---------------------------------
Uwe E. Reinhardt, Ph.D
/s/ MARVIN RUNYON Director March 29, 2002
---------------------------------
Marvin Runyon
/s/ GALE SAYERS Director March 29, 2002
---------------------------------
Gale Sayers
/s/ DONALD B. HALVERSTADT, M.D. Director March 29, 2002
---------------------------------
Donald B. Halverstadt, M.D.
/s/ BARBARA A. DURAND, Ed.D. Director March 29, 2002
---------------------------------
Barbara A. Durand, Ed.D.
/s/ NANCY ANN DEPARLE Director March 29, 2002
---------------------------------
Nancy Ann DeParle
/s/ JAMES E. DALTON, JR. Director March 29, 2002
---------------------------------
James E. Dalton, Jr.
47
INDEX TO FINANCIAL STATEMENTS
TRIAD HOSPITALS, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors................................................................. F-2
Consolidated Statements of Operations--for the years ended December 31, 2001, 2000 and 1999.... F-3
Consolidated Balance Sheets--December 31, 2001 and 2000........................................ F-4
Consolidated Statements of Equity--for the years ended December 31, 2001, 2000 and 1999........ F-5
Consolidated Statements of Cash Flows--for the years ended December 31, 2001, 2000
and 1999.................................................................................... F-6
Notes to Consolidated Financial Statements..................................................... F-7
F-1
Report of Independent Auditors
To the Board of Directors and Stockholders
Triad Hospitals, Inc.
We have audited the accompanying consolidated balance sheets of Triad
Hospitals, Inc. (see Note 1) as of December 31, 2001 and 2000 and the related
consolidated statements of operations, equity and cash flows for each of the
three years in the period ended December 31, 2001. These consolidated financial
statements are the responsibility of management of Triad Hospitals, Inc. (the
"Company"). Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Triad
Hospitals, Inc. at December 31, 2001 and 2000 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG, LLP
----------------------
Dallas, Texas
February 15, 2002
F-2
TRIAD HOSPITALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31 2001, 2000 AND 1999
(Dollars in millions, except per share amounts)
2001 2000 1999
----------- ----------- ----------
Revenues .................................................................. $ 2,669.5 $ 1,235.5 $ 1,329.1
Salaries and benefits ..................................................... 1,128.5 511.1 570.9
Reimbursable expenses ..................................................... 41.6 -- --
Supplies .................................................................. 411.2 185.6 200.1
Other operating expenses .................................................. 501.7 259.8 301.5
Provision for doubtful accounts ........................................... 239.9 103.6 129.0
Depreciation .............................................................. 134.4 76.1 89.8
Amortization .............................................................. 35.7 7.1 8.7
Interest expense allocated from HCA ....................................... -- -- 22.5
Interest expense, net of capitalized interest of $4.6 and $1.7 for the
years ended December 31, 2001 and 2000, respectively ................... 127.6 62.2 45.2
Interest income ........................................................... (1.6) (4.9) (2.5)
ESOP expense .............................................................. 9.3 7.1 3.7
Management fees allocated from HCA ........................................ -- -- 8.9
Gain on sales of assets ................................................... (23.1) (7.9) (8.6)
Impairments of long-lived assets .......................................... 23.1 8.0 69.2
----------- ----------- ----------
2,628.3 1,207.8 1,438.4
----------- ----------- ----------
Income (loss) from operations before minority interests, equity in
earnings (loss) and income taxes ....................................... 41.2 27.7 (109.3)
Minority interests in earnings of consolidated entities ................... (7.2) (9.0) (8.7)
Equity in earnings (loss) of affiliates ................................... 14.5 (1.4) (3.1)
----------- ----------- ----------
Income (loss) from operations before income taxes ......................... 48.5 17.3 (121.1)
Income tax (provision) benefit ............................................ (42.5) (12.9) 25.5
----------- ----------- ----------
Income (loss) from operations ............................................. 6.0 4.4 (95.6)
Extraordinary loss on retirement of debt, net of income tax benefit of
$2.0 in 2001 ........................................................... (3.2) -- --
----------- ----------- ----------
Net income (loss) ......................................................... $ 2.8 $ 4.4 $ (95.6)
=========== =========== ==========
Income (loss) per common share:
Basic:
Operations ........................................................... $ 0.10 $ 0.14 $ (3.12)
Extraordinary loss on retirement of debt ............................. (0.06) -- --
----------- ----------- ----------
Net ............................................................. $ 0.04 $ 0.14 $ (3.12)
=========== =========== ==========
Diluted:
Operations ........................................................... $ 0.10 $ 0.13 $ (3.12)
Extraordinary loss on retirement of debt ............................. (0.05) -- --
----------- ----------- ----------
Net ............................................................. $ 0.05 $ 0.13 $ (3.12)
=========== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
TRIAD HOSPITALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(Dollars in millions)
2001 2000
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 16.3 $ 6.7
Restricted cash .................................................................. 5.7 --
Accounts receivable, less allowances for doubtful accounts of $192.4 and $122.9 at
December 31, 2001 and 2000, respectively ....................................... 446.6 171.1
Inventories ...................................................................... 82.2 34.7
Deferred income taxes ............................................................ 103.1 40.5
Prepaid expenses ................................................................. 23.2 9.2
Other ............................................................................ 70.2 66.0
---------- ----------
747.3 328.2
Property and equipment, at cost:
Land ............................................................................. 126.4 71.9
Buildings and improvements ....................................................... 1,173.4 540.7
Equipment ........................................................................ 998.1 662.2
Construction in progress (estimated cost to complete and equip after December 31,
2001--$251.0 million) .......................................................... 175.8 51.1
---------- ----------
2,473.7 1,325.9
Accumulated depreciation ......................................................... (656.7) (572.9)
---------- ----------
1,817.0 753.0
Intangible assets, net of accumulated amortization of $92.6 and $61.1 at December 31,
2001 and 2000, respectively ...................................................... 1,295.8 227.8
Investment in and advances to affiliates .............................................. 189.4 79.4
Other ................................................................................. 115.8 12.1
---------- ----------
Total assets .......................................................................... $ 4,165.3 $ 1,400.5
========== ==========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable ................................................................. $ 122.4 $ 67.4
Accrued salaries ................................................................. 80.0 31.8
Current portion of long-term debt ................................................ 30.9 9.0
Other current liabilities ........................................................ 133.0 28.1
---------- ----------
366.3 136.3
Long-term debt ........................................................................ 1,742.9 581.7
Other liabilities ..................................................................... 68.4 9.6
Deferred taxes ........................................................................ 132.1 49.2
Minority interests in equity of consolidated entities ................................. 124.1 50.0
Commitments and contingencies ......................................................... -- --
Stockholders' equity:
Common stock .01 par value: 120,000,000 shares authorized, 72,202,736 and
34,783,816 shares issued and outstanding at December 31, 2001 and 2000,
respectively ................................................................... 0.7 0.4
Additional paid-in capital ....................................................... 1,810.2 659.3
Unearned ESOP compensation and stockholder notes receivable ...................... (32.9) (36.7)
Accumulated deficit .............................................................. (46.5) (49.3)
---------- ----------
Total stockholders' equity ....................................................... 1,731.5 573.7
---------- ----------
Total liabilities and stockholders' equity ............................................ $ 4,165.3 $ 1,400.5
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
TRIAD HOSPITALS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in millions)
Unearned
Common ESOP
Stock Additional Compensation and Equity Total
----- Paid-in Stockholders' Accumulated Investments Stockholders'
Shares Amount Capital Notes Receivable Deficit by HCA Equity
---------- ------ ---------- ---------------- ---------- ----------- -------------
Balance January 1, 1999 ...................... -- $ -- $ -- $ -- $ -- $ 500.7 $ 500.7
Elimination of intercompany balances
and other equity transactions ............ -- -- -- -- -- 800.1 800.1
Assumption of long-term debt
(net of discount) ....................... -- -- -- -- -- (649.0) (649.0)
Spin-off of Triad shares to HCA
shareholders ............................. 29,898,688 0.3 609.6 -- 41.9 (651.8) --
Issuance of common stock for
Executive Stock Purchase Plan loans ...... 970,000 -- 9.1 (9.1) -- -- --
Issuance of common stock under employee
plans ................................... 74,594 -- -- -- -- -- --
Issuance of common shares for ESOP
note receivable ......................... 3,000,000 -- 34.5 (34.5) -- -- --
ESOP compensation earned -- -- 0.2 3.5 -- -- 3.7
Net loss ................................... -- -- -- -- (95.6) -- (95.6)
---------- ----- --------- ------- ------- ------- ---------
Balance December 31, 1999 .................... 33,943,282 0.3 653.4 (40.1) (53.7) -- 559.9
Issuance of common stock under employee
plans ................................... 219,609 -- 2.8 -- -- -- 2.8
Stock options exercised ................... 620,925 0.1 7.0 -- -- -- 7.1
Income tax benefit from stock options
exercised ............................... -- -- (1.1) -- -- -- (1.1)
ESOP compensation earned .................. -- -- 3.7 3.4 -- -- 7.1
Stock compensation expense ................ -- -- 0.9 -- -- -- 0.9
Spin-off transactions with HCA ............ -- -- (7.4) -- -- -- (7.4)
Net income ................................ -- -- -- -- 4.4 -- 4.4
---------- ----- --------- ------- ------- ------- ---------
Balance December 31, 2000 .................... 34,783,816 0.4 659.3 (36.7) (49.3) -- 573.7
Issuance of common stock under employee
plans ................................... 244,252 -- 5.4 -- -- -- 5.4
Stock options exercised ................... 1,388,288 -- 21.6 -- -- -- 21.6
Income tax benefit from stock options
exercised ............................... -- -- 11.9 -- -- -- 11.9
Issuance of common stock for Quorum
acquisition ............................. 35,786,380 0.3 1,069.2 -- -- -- 1,069.5
Fair value of converted options ........... -- -- 31.4 -- -- -- 31.4
ESOP compensation earned .................. -- -- 5.8 3.4 -- -- 9.2
Stock compensation expense ................ -- -- 5.6 -- -- -- 5.6
Repayment of Executive Stock Purchase
Plan loan .............................. -- -- -- 0.4 -- -- 0.4
Net income ................................... -- -- -- -- 2.8 -- 2.8
---------- ----- --------- ------- ------- ------- ---------
Balance December 31, 2001 .................... 72,202,736 $ 0.7 $ 1,810.2 $ (32.9) $ (46.5) $ -- $1,731.5
========== ===== ========= ======= ======= ======= ==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
TRIAD HOSPITALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Dollars in millions)
2001 2000 1999
---------- -------- --------
Cash flows from operating activities:
Net income (loss) ......................................................... $ 2.8 $ 4.4 $ (95.6)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Provision for doubtful accounts ......................................... 239.9 103.6 129.0
Depreciation and amortization ........................................... 170.1 83.2 98.5
ESOP expense ............................................................ 9.3 7.1 3.7
Minority interests ...................................................... 7.2 9.0 8.7
Equity in (earnings) loss of affiliates ................................. (14.5) 1.4 3.1
Gain on sales of assets ................................................. (23.1) (7.9) (8.6)
Deferred income tax provision (benefit) ................................. 39.6 11.8 (27.3)
Impairment of long-lived assets ......................................... 23.1 8.0 69.2
Non-cash interest expense ............................................... 10.3 1.0 3.3
Non-cash stock option compensation ...................................... 5.6 0.9 --
Extraordinary loss on retirement of debt, net of tax ................... 3.2 -- --
Increase (decrease) in cash from operating assets and liabilities (net of
acquisitions):
Accounts receivable .................................................. (193.2) (116.9) (94.1)
Inventories and other assets ......................................... 13.3 (22.0) 14.4
Accounts payable and other current liabilities ....................... 25.0 (19.9) 56.3
Other ................................................................ (0.3) 7.9 (5.4)
---------- -------- --------
Net cash provided by operating activities .......................... 318.3 71.6 155.2
---------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ....................................... (200.6) (94.4) (132.7)
Investment in and advances to affiliates .................................. 17.7 22.7 (54.7)
Proceeds received on sale of assets ....................................... 127.8 20.7 117.8
Acquisitions, net of cash acquired of $(8.3) million and $(0.4)
million in the years ended December 31, 2001 and 2000, respectively ...... (1,386.6) (118.8) --
Restricted cash ........................................................... (5.7) -- --
Other ..................................................................... (5.7) (1.6) 11.9
---------- -------- --------
Net cash used in investing activities .................................. (1,453.1) (171.4) (57.7)
---------- -------- --------
Cash flows from financing activities:
Payments of long-term debt ................................................ (581.6) (17.5) (114.2)
Proceeds from long-term debt .............................................. 1,752.7 51.0 --
Payment of debt issue costs ............................................... (45.8) (1.5) --
Proceeds from issuance of common stock .................................... 27.0 9.9 --
Distributions to minority partners ........................................ (7.9) (6.3) (18.6)
Increase in intercompany balances with HCA, net ........................... -- -- 106.2
---------- -------- --------
Net cash provided by (used in) financing activities ..................... 1,144.4 35.6 (26.6)
---------- -------- --------
Change in cash and cash equivalents .......................................... 9.6 (64.2) 70.9
Cash and cash equivalents at beginning of period ............................. 6.7 70.9 --
---------- -------- --------
Cash and cash equivalents at end of period ................................... $ 16.3 $ 6.7 $ 70.9
========== ======== ========
Cash paid for:
Interest ..................................................................... $ 112.9 $ 60.5 $ 59.2
Income taxes, net of refunds ................................................. $ 5.0 $ 2.6 $ --
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SPIN-OFF OF TRIAD HOSPITALS, INC.
On May 11, 1999, HCA Inc. ("HCA") completed the spin-off of Triad
Hospitals, Inc. ("Triad") to its shareholders (the "Spin-off") by a pro rata
distribution of 29,898,688 shares of common stock.
On the Spin-off date, Triad became an independent, publicly owned company
encompassing the operations of what had comprised the Pacific Group of HCA. At
the Spin-off, the common shares of Triad were distributed to the record date
holders of HCA at a ratio of one share for every nineteen outstanding HCA
shares. Following the Spin-off, HCA had no ownership in Triad.
Triad has entered into distribution and other related agreements (see NOTE
13) governing the Spin-off transaction and Triad's subsequent relationship with
HCA. These agreements provide certain indemnifications for the parties, and
provide for the allocation of tax and other assets, liabilities and obligations
arising from periods prior to the Spin-off.
As of December 31, 2001, Triad's facilities included 46 general, acute care
hospitals and 14 ambulatory surgery centers located in the states of Alabama,
Arizona, Arkansas, California, Indiana, Kansas, Louisiana, Mississippi,
Missouri, New Mexico, Ohio, Oklahoma, Oregon, South Carolina, Texas and West
Virginia. One hospital included among these facilities is operated through a
50/50 joint venture that is not consolidated for financial reporting purposes.
Triad is also a minority investor in three joint ventures that own seven
general, acute care hospitals in Georgia and Nevada. On April 27, 2001, Triad
completed the merger of Quorum Health Group, Inc. ("Quorum") with and into Triad
(see NOTE 3).
NOTE 2--ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Triad and all
affiliated subsidiaries and entities controlled by Triad through Triad's direct
or indirect ownership of a majority voting interest. All intercompany
transactions have been eliminated. Investments in entities which Triad does not
control, but in which it has a substantial ownership interest and can exercise
significant influence, are accounted for using the equity method.
The accompanying consolidated financial statements present Triad's
financial position, results of operations and cash flows as if Triad had been an
independent, publicly owned company for all periods presented. Certain
allocations of previously unallocated HCA expenses, as well as computations of
separate tax provisions, have been made to facilitate such presentation. The
accompanying financial statements for the periods prior to the Spin-off were
prepared on the push down basis of the historical cost to HCA and represent the
combined results of operations and cash flows of Triad for those periods.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassification
Certain prior year amounts have been reclassified to conform to the current
presentation.
F-7
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--ACCOUNTING POLICIES (continued)
Equity
Equity for the years ended December 31, 2000 and 1999 includes certain
Spin-off related transactions, such as elimination of intercompany balances with
HCA as of the Spin-off, reclassification of HCA's net investment in Triad to
additional paid in capital and certain post Spin-off settlements with HCA.
Revenues
Triad's health care facilities have entered into agreements with
third-party payers, including government programs and managed care health plans,
under which the facilities are paid based upon several methodologies including
established charges, the cost of providing services, predetermined rates per
diagnosis, fixed per diem rates or discounts from established charges.
Revenues are recorded at estimated net amounts due from patients,
third-party payers and others for health care services provided. Settlements
under reimbursement agreements with third-party payers are estimated and
recorded in the period the related services are rendered and are adjusted in
future periods as adjustments become known or as the service years are no longer
subject to audit, review or investigation. Laws and regulations governing the
Medicare and Medicaid programs are extremely complex, subject to interpretation
and are routinely modified for provider reimbursement. All hospitals
participating in the Medicare and Medicaid programs are required to meet certain
financial reporting requirements. Federal regulations require submission of
annual cost reports covering medical costs and expenses associated with the
services provided by each hospital to program beneficiaries. Annual cost reports
required under the Medicare and Medicaid programs are subject to routine audits,
which may result in adjustments to the amounts ultimately determined to be due
to Triad under these reimbursement programs. These audits often require several
years to reach the final determination of amounts earned under the programs. As
a result, there is at least a reasonable possibility that recorded estimates
will change by a material amount in the near term. The net adjustments to
estimated settlements resulted in increases to revenues of $5.5 million and $8.6
million for the years ended December 31, 2001 and 2000, respectively, and
decreases to revenues of $1.7 million for the year ended December 31, 1999.
In association with ongoing federal investigations into certain of HCA's
business practices, applicable governmental agencies ceased the settlement of
cost reports. The settlement of cost reports started to resume during 1999. Due
to the cost reports not being settled, Triad is not receiving all of the updated
information which has historically been the basis used to adjust estimated
settlement amounts. At this time, Triad cannot predict when, or if, the
historical cost report settlement process will be completed. Management believes
that adequate provisions have been made for adjustments that may result from
final determination of amounts earned under these programs. The estimated net
cost report settlements as of December 31, 2001 and 2000 of approximately $34.8
million and $41.1 million, respectively, are included as a reduction to accounts
receivable in the accompanying balance sheet. In connection with the Spin-off,
HCA agreed to indemnify Triad for any payments which it is required to make in
respect of Medicare, Medicaid and Blue Cross cost reports relating to periods
ending on or prior to the Spin-off, and Triad agreed to indemnify HCA for and
pay to HCA any payments received by it relating to such cost reports relating to
periods ending on or prior to the Spin-off. Triad will be responsible for the
filing of these cost reports and any terminating cost reports. Triad has
recorded a net receivable from HCA relating to the indemnification of $24.2
million and $27.7 million as of December 31, 2001 and 2000, respectively (See
NOTE 13).
Triad provides care without charge to patients who are financially unable
to pay for the health care services they receive. Because Triad does not pursue
collection of amounts determined to qualify as charity care, they are not
reported in revenues.
F-8
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
Cash equivalents consist of all investments with an original maturity of
three months or less.
Restricted Cash
Restricted cash consists of cash funded to an escrow account for the
purpose of satisfying deductibles under Triad's general and professional
liability risk policy.
Accounts Receivable
Accounts receivable are recorded at the estimated net realizable amounts
from federal and state agencies (under the Medicare, Medicaid and TRICARE
programs), managed care health plans, commercial insurance companies, employers
and patients. During the years ended December 31, 2001, 2000 and 1999,
approximately 31.9%, 29.6% and 31.9%, respectively, of Triad's revenues related
to patients participating in the Medicare program. Triad recognizes that
revenues and receivables from government agencies are significant to its
operations, but it does not believe that there are significant credit risks
associated with these government agencies. During the years ended December 31,
2001, 2000 and 1999 approximately 28.9%, 31.0% and 32.7%, respectively, of
Triad's revenues related to patients in various managed care plans.
Approximately half of Triad's facilities are located in the states of Alabama,
Indiana, and Texas. Triad does not believe that there are any other significant
concentrations of revenues from any particular payer or geographic area that
would subject it to any significant credit risks in the collection of its
accounts receivable.
Triad maintains allowances for doubtful accounts for estimated losses
resulting from payers' inability to make payments on accounts. Triad estimates
these allowances based on historical net write offs of uncollectible accounts.
If payers' ability to pay deteriorates, additional allowances may be required.
Inventories
Inventories of supplies are stated at the lower of cost (first-in,
first-out) or market.
Long-Lived Assets
(a) Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs
are charged to expense as incurred. Expenditures that increase capacities or
extend useful lives are capitalized.
Depreciation expense, computed using the straight-line method, was $134.4
million, $76.1 million and $89.8 million for the years ended December 31, 2001,
2000, and 1999, respectively. Buildings and improvements are depreciated over
estimated useful lives ranging from 10 to 40 years. Equipment is depreciated
over estimated useful lives ranging from 3 to 10 years.
(b) Intangible Assets
Intangible assets consist primarily of costs in excess of the fair value of
identifiable net assets of acquired entities. These costs of $1,215.2 million
and $227.0 million at December 31, 2001 and 2000, respectively, were amortized
using the straight-line method, generally over periods ranging from 30 to 40
years for hospital acquisitions and periods ranging from 5 to 20 years for
physician practice and clinic acquisitions. During the years ended
F-9
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--ACCOUNTING POLICIES (continued)
December 31, 2001 and 2000, these costs were increased by $1,040.6 million and
$58.4 million primarily from acquisitions (See NOTE 3). Noncompete agreements
are amortized based upon the terms of the respective contracts. Amortization
expense was $35.7 million, $7.1 million and $8.7 million for the years ended
December 31, 2001, 2000 and 1999, respectively.
When events, circumstances and operating results indicate that the carrying
values of certain long-lived assets and the related identifiable intangible
assets might be impaired, Triad prepares projections of the undiscounted future
cash flows expected to result from the use of the assets and their eventual
disposition. If the projections indicate that the recorded amounts are not
expected to be recoverable, such amounts are reduced to estimated fair value. If
market conditions become less favorable than those projected by management,
additional impairments may be required.
Income Taxes
Triad accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax liabilities and assets are determined based
on the difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Income tax (provision) benefit
consists of Triad's current (provision) benefit for federal and state income
taxes and the change in Triad's deferred income tax assets and liabilities.
While Triad has considered several items including ongoing prudent and feasible
tax planning strategies in assessing the need for valuation allowances, in the
event Triad were to determine that the realization of its deferred tax asset in
the future is different than its net recorded amount, an adjustment to income
would be necessary.
For periods prior to the Spin-off, HCA filed consolidated federal and state
income tax returns which included all of its eligible subsidiaries, including
Triad. The provisions for income taxes (benefits) in the consolidated statements
of operations for periods presented prior to the Spin-off were computed on a
separate return basis (i.e., assuming Triad had not been included in a
consolidated income tax return with HCA).
General and Professional Liability Risks
Triad maintains professional malpractice liability insurance and general
liability insurance in amounts which it believes to be sufficient for its
operations, although it is possible that some claims may exceed the scope of the
coverage in effect. Substantially all losses in periods prior to the Spin-off
are insured through a wholly-owned insurance subsidiary of HCA and excess loss
policies maintained by HCA. HCA has agreed to indemnify Triad in respect of
claims covered by such insurance policies arising prior to the Spin-off. After
the Spin-off, Triad obtained insurance coverage on a claims incurred basis from
HCA's wholly owned insurance subsidiary with excess coverage obtained from other
carriers which is subject to certain deductibles which Triad considers to be
reasonable. For the facilities acquired in the Quorum transaction, Triad
obtained tail coverage, subject to certain deductibles, to cover claims incurred
prior to July 31, 2001. These facilities were converted to Triad's existing
coverage on August 1, 2001. The cost of general and professional liability
coverage is based on actuarially determined estimates. Any factors changing the
underlying data used in determining these estimates could result in revisions to
the reserve. The cost for the years ended December 31, 2001, 2000, and 1999 was
approximately $43.6 million, $22.2 million and $23.2 million, respectively.
Reserves for general and professional liability risks are actuarially determined
and discounted using an interest rate of 6%. The reserve was $36.0 million and
$9.5 million at December 31, 2001 and 2000, respectively.
For periods after the Spin-off, Triad instituted its own self-insured
programs for workers compensation and health insurance. Prior to the Spin-off,
Triad participated in self-insured programs for workers' compensation and
F-10
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--ACCOUNTING POLICIES (continued)
health insurance administered by HCA. HCA retained sole responsibility for all
workers' compensation and health claims incurred prior to the Spin-off. The cost
for these programs is based upon claims paid, plus an actuarially determined
amount for claims incurred but not reported. Reserves for workers compensation
were $9.6 million and $3.0 million at December 31, 2001 and 2000, respectively.
Reserves for health claim liability risk were $13.5 million and $4.6 million at
December 31, 2001 and 2000, respectively. The reserve for health claim liability
risk of $4.6 million was funded at December 31, 2000.
Management Fees
Prior to the Spin-off, corporate overhead expenses relating to various HCA
corporate general and administrative expenses were allocated to Triad based on
net revenues. In the opinion of HCA management, this allocation method was
reasonable.
Reimbursable Expenses
Triad's wholly-owned subsidiary, Quorum Health Resources, LLC ("QHR")
recognizes revenue based on a contractually determined rate, plus direct costs
associated with the contract. The direct costs relate primarily to salaries and
benefits of QHR employees who serve as executives at hospitals managed by QHR.
The salaries and benefits of these employees are legal obligations of and are
paid by QHR, and are reimbursed by the managed hospitals. The direct costs are
recorded as revenues and reimbursable expenses in the consolidated statements of
operations.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards 107, "Disclosure About Fair
Value of Financial Instruments," requires certain disclosures regarding the fair
value of financial instruments. Cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities are reflected in the consolidated
financial statements at fair value because of the short-term maturity of these
instruments. The fair value of long-term debt was determined by using quoted
market prices, when available, or discounted cash flows to calculate these fair
values.
Derivative Financial Instruments
Triad adopted Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") on
January 1, 2001. SFAS 133 requires that all derivative financial instruments
that qualify for hedge accounting be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in fair value of derivative financial instruments are either recognized
periodically in income or shareholders' equity (as a component of comprehensive
income), depending on whether the derivative is being used to hedge changes in
fair value or cash flows. Triad did not use derivatives during 2001 and
therefore the adoption of SFAS 133 did not have an effect on the results of
operations or the financial position of Triad in 2001. Triad's policy is to not
hold or issue derivatives for trading purposes and to avoid derivatives with
leverage features. Subsequent to December 31, 2001, Triad entered into an
interest rate swap agreement. The interest rate swap that was entered into is
designated as a cash flow hedge, which effectively converts a notional amount of
$100 million of floating rate borrowings to fixed rate borrowings. The term of
the interest rate swap expires in January 2004. Triad will pay a rate of 3.22%
and receive LIBOR, which in the initial period is 1.83%. Triad is exposed to
credit losses in the event of nonperformance by the counterparty. The
counterparty is a creditworthy financial institution and it is anticipated that
the counterparty will be able to fully satisfy its obligation under the
contract.
F-11
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2--ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141")
and Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"), which are required to be adopted in fiscal
years beginning after December 15, 2001. SFAS 141 supersedes Accounting
Principles Board Opinion No. 16 "Business Combinations" and Statement of
Financial Accounting Standards No. 28 "Accounting for Preacquisition
Contingencies of Purchased Enterprises" and eliminates pooling of interests
accounting for business combinations for transactions entered into after July 1,
2001. The adoption of SFAS 141 will not have a significant impact on the results
of operations or the financial condition of Triad. SFAS 142 supersedes
Accounting Principles Board Opinion No. 17 "Intangible Assets" which changes the
accounting for goodwill. The adoption of SFAS 142 will eliminate the periodic
amortization of goodwill and institute an annual review of the fair value of
goodwill. The elimination of goodwill amortization would have increased income
or decreased loss from operations by $29.7 million, $6.3 million, and $8.0
million in the years ended December 31, 2001, 2000 and 1999, respectively.
Impairment of goodwill would be recorded if the fair value of the goodwill were
less than the book value. The review of goodwill will be at the reporting unit
level, which is defined as an operating segment or one level below an operating
segment. Triad has determined that the reporting units for its owned operations
segment will be at one level below the segment. SFAS 142 requires the completion
of the initial step of a transitional impairment test within six months of
adoption. Any impairment loss resulting from the transitional impairment test
will be recorded as a cumulative effect of a change in accounting principle.
Impairment losses subsequent to June 30, 2002 would be reflected in operating
income. Triad has not determined the impact on the results of operations or
financial position for the change in impairment testing.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which is required to be adopted in
fiscal years beginning after December 15, 2001 with early application
encouraged. SFAS 144 supercedes Statement of Financial Accounting Standards No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121") and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30 "Reporting the Results
of Operations-Reporting the Effects and Transactions" for the disposal of a
segment of a business. SFAS 144 establishes a single accounting model, based on
the framework established in SFAS 121, for long-lived assets to be disposed of
by sale and resolves implementation issues related to SFAS 121 by removing
goodwill from its scope. The adoption of SFAS 144 would impact the results of
operations and the financial position of Triad if a component of Triad's
business is designated as held for sale after the adoption of SFAS 144.
Components designated as held for sale would be reported separately as
discontinued operations with prior periods restated. Currently Triad has not
designated any components as held for sale under SFAS 144, but could do so in
the future.
NOTE 3--ACQUISITIONS
On April 27, 2001, Triad completed the previously announced merger of
Quorum with and into Triad with Triad being the surviving corporation. Triad is
the acquiror for accounting purposes based on several considerations, including,
in particular, that the former Quorum shareholders are not able to replace a
majority of Triad's board of directors until at least the 2003 annual meeting of
shareholders. Under the terms of the merger agreement, Quorum shareholders
became entitled to receive $3.50 in cash and 0.4107 shares of Triad common stock
for each outstanding share of Quorum stock, plus cash in lieu of fractional
shares of Triad common stock. In addition, each outstanding option to purchase
shares of Quorum common stock, whether or not vested or exercisable, was
converted at the holder's election into either a fully vested and exercisable
option to purchase shares of Triad common stock or cash and shares of Triad
common stock. Triad issued 35,786,380 shares, paid $305.0 million in
F-12
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--ACQUISITIONS (continued)
cash and issued 1,638,479 options to Quorum option holders in connection with
the merger. The purchase price for the merger was determined using the average
stock price at the time the merger was announced, cash paid, fair value of
options converted and direct costs associated with the merger. The purchase
price calculation is summarized below (in millions, except for share amounts and
stock price):
Shares issued ................................................ 35,786,380
Average stock price .......................................... $ 29.89
-----------
$ 1,069.7
Cash paid to Quorum shareholders ............................. 305.0
Fair value of converted options .............................. 31.4
Quorum indebtedness paid at closing .......................... 856.5
Direct merger costs and other ................................ 83.0
Quorum government investigation settlement paid .............. 88.7
-----------
$ 2,434.3
===========
The merger was accounted for under the purchase method of accounting and
the results of operations for Quorum are included in Triad's results of
operations beginning May 1, 2001. The purchase price was allocated to assets
acquired and liabilities assumed based on estimated fair values. Triad has
obtained preliminary independent appraisals of acquired property and equipment
and identifiable intangible assets and their remaining useful lives. Triad is
also reviewing and determining the fair value of other assets and liabilities
assumed. Therefore, the allocation of the purchase price is subject to revision
based on the final determination of the appraisals and other fair value
determinations. The preliminary estimated fair values of the assets acquired and
liabilities assumed relating to the acquisition are summarized below (in
millions):
Working capital .................................................. $ 250.0
Property and equipment ........................................... 941.8
Other assets ..................................................... 305.1
Net investment in held for sale assets ........................... 65.8
Long-term debt ................................................... (10.2)
Other non-current liabilities .................................... (84.0)
Minority interests................................................ (73.1)
Goodwill ......................................................... 1,038.9
--------
$2,434.3
========
Goodwill (included in "Intangible assets" on the Consolidated Balance Sheets)
was being amortized on a straight-line basis over 30 years.
On May 2, 2001, Triad sold two acute care hospitals in Minot, North Dakota
acquired in the merger with Quorum for $38.0 million plus $8.2 million for
working capital. Additionally, one hospital acquired in the merger with Quorum
was designated as held for sale prior to the completion of the merger. The
purchase price allocated to these assets is equal to the estimated sales prices
of the hospitals plus the anticipated cash flows for the estimated holding
period and the estimated interest expense on the incremental debt incurred for
the purchase of the hospitals. On August 7, 2001, Triad sold to an affiliate of
a former member of Triad's board of directors its hospital in Baton Rouge,
Louisiana for $19.0 million plus assumption of liabilities of $2.3 million. The
results of operations of this entity are not included in Triad's results of
operations. The pre-tax loss from continuing operations for this hospital and
the associated interest expense excluded was $0.4 million and $0.4 million,
respectively, during the year ended December 31, 2001.
F-13
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3--ACQUISITIONS (continued)
Subsequent to the merger, Triad recorded charges of approximately $31.8
million associated with coordinating Quorum's accounting policies, practices and
estimation processes with those of Triad. These charges included an $8.3 million
pre-tax reduction to revenue, $18.5 million pre-tax increase in provision for
doubtful accounts and $5.0 million additional income tax provision.
On February 5, 2001, Triad acquired the remaining 50% interest in the
entity that owns SouthCrest Hospital and other related healthcare facilities in
Tulsa, Oklahoma from its not-for-profit partner, Hillcrest Healthcare System
("Hillcrest"), for $44.6 million, the amount of Hillcrest's investment in the
entity. The acquisition consolidated 100% ownership and control of the hospital
in Triad effective January 1, 2001. Triad has an option to acquire an adjacent
26-acre parcel of land from Hillcrest for future expansion. SouthCrest Hospital
will continue to participate in Hillcrest's joint contracting network that
includes other Hillcrest hospitals in Tulsa. Under certain conditions and for a
limited time, Hillcrest will have an option to repurchase a 49% interest in
SouthCrest Hospital at the then fair market value, subject to minimum valuations
and minimum returns on investment to Triad; if Hillcrest were to exercise the
option, Triad would retain governance of the facility and continue consolidating
the facility for financial reporting.
The acquisition of SouthCrest Hospital was recorded under the purchase
method of accounting and, therefore, the purchase price has been allocated to
assets acquired and liabilities assumed based on estimated fair values. The
results of operations have been included in Triad's consolidated results of
operations since January 1, 2001. The estimated fair values of the assets
acquired and liabilities assumed relating to the acquisition are summarized
below (in millions):
Working capital .................................................. $ 5.5
Property and equipment ........................................... 86.4
Minority interests ............................................... (0.9)
-----
$91.0
=====
The purchase price consists of the $44.6 million in cash paid plus $46.4
million equity investment Triad had recorded prior to the acquisition.
The following unaudited pro forma data summarizes the results of operations
of the periods indicated as if the acquisitions discussed previously had been
completed as of the beginning of the periods presented. The pro forma results of
operations gives effect to actual operating results prior to the acquisitions,
adjusted to include the pro forma effect of the acquisitions. The pro forma
results do not purport to be indicative of the results that would have actually
been obtained if the acquisitions occurred as of the beginning of the periods
presented or that may be obtained in the future (in millions, except per share
data).
For the years ended December 31,
--------------------------------
2001 2000
--------- ---------
Revenues .................................. $ 3,301.2 $ 3,103.4
Net income (loss) ......................... $ 1.5 $ (28.1)
Net income (loss) per share:
Basic ................................. $ 0.02 $ (0.42)
Diluted ............................... $ 0.02 $ (0.42)
NOTE 4--SALES AND CLOSURES
On November 1, 2001, Triad sold an acute care hospital in Phoenix, Arizona
for $55.3 million, including working capital. A gain of $22.0 million was
recorded in the year ended December 31, 2001. This facility had revenues of
$58.3 million, $64.8 million and $55.0 million for the years ended December 31,
2001, 2000 and 1999,
F-14
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SALES AND CLOSURES (continued)
respectively. This facility had pre-tax income (losses) of $0.3 million, $(1.2)
million and $(4.6) million for the years ended December 31, 2001, 2000 and 1999,
respectively.
Triad closed its acute care hospital in San Diego, California on November
30, 2000. On June 29, 2001, Triad sold the remaining assets of this facility for
a net sales price of $6.6 million and recognized a minimal gain on the sale. For
the years ended December 31, 2000 and 1999, this facility had revenues of $22.1
million and $26.0 million, respectively, and income (losses) before impairment
charges and income taxes of $(8.9) million and $0.1 million, respectively.
As discussed in NOTE 3, Triad sold two acute care hospitals in Minot, North
Dakota and one acute care hospital in Baton Rouge, Louisiana.
On December 14, 2000, Triad sold its hospital in Sherman, Texas, which was
designated as held for sale in 1999, for $16.0 million. A gain on the sale of
$2.0 million was recorded during the year ended December 31, 2000. For the years
ended December 31, 2000 and 1999, this facility had revenues of $27.6 million
and $28.7 million, respectively, and income (losses) before impairment charges
and income taxes of $1.4 million and $(1.6) million, respectively.
On March 31, 2000, Triad sold its limited partnership interest in a
rehabilitation hospital located in Tucson, Arizona for $4.0 million. A gain of
$4.2 million was recognized on the sale.
On February 11, 2000, Triad closed its acute care hospital in Roseburg,
Oregon, which was designated as held for sale. As of December 31, 2001, the
carrying value of this facility was $2.8 million. For the years ended December
31, 2000 and 1999, this facility had revenues of $1.9 million and $21.8 million,
respectively, and losses before impairment charges and income taxes of $4.7
million and $5.6 million, respectively.
Triad sold the assets of its acute care hospital in DeQueen, Arkansas for
approximately $4.0 million plus approximately $0.5 million of assumed
liabilities on November 30, 1999. A loss on the sale of $0.5 million was
recorded during the year ended December 31, 1999. Triad retained the accounts
receivable and certain liabilities with a book value at December 31, 2000 of
$(0.8) million. For the year ended December 31, 1999, this facility had revenues
of $11.5 million and pre-tax losses before loss on sale of assets and impairment
charges of $4.2 million.
Triad sold a majority of the assets of an acute care hospital in Phoenix,
Arizona for $29.2 million on November 30, 1999. Gains (losses) on the sale of
$1.3 million and $(3.8) million were recorded during the years ended December
31, 2000 and 1999, respectively. Triad retained the accounts receivable and
certain liabilities with a book value at December 31, 2001 and 2000 of $2.2
million and $1.8 million, respectively. For the year ended December 31, 1999,
this facility had revenues of $35.4 million and pre-tax losses before loss on
sale of assets and impairment charges of $21.5 million.
On October 31, 1999 Triad sold its stock interest in a psychiatric hospital
in Kansas City, Missouri for $4.3 million. A gain on the sale of $0.6 million
was recorded during the year ended December 31, 1999. For the year ended
December 31, 1999, this facility had revenues of $8.0 million, and no pre-tax
income before gain on sale of assets and impairment charges.
Triad sold its acute care hospitals in Beaumont, Texas and Silsbee, Texas
and its interest in an ambulatory surgery center in Beaumont, Texas on September
30, 1999 for $13.7 million. Triad retained the accounts receivable and certain
liabilities with a net book value of $(0.5) million at December 31, 2000. A loss
on the sale of $2.9 million was recorded during the year ended December 31,
1999. For the year ended December 31, 1999, these
F-15
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4--SALES AND CLOSURES (continued)
facilities had revenues of $36.4 million and pre-tax losses before loss on sale
of assets and impairment charges of $15.1 million.
Triad 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 $1.4 million on the sale was recorded during the year ended December 31,
1999. For the year ended December 31, 1999, these facilities had revenues of
$67.1 million and pre-tax losses before gain on sale of assets and impairment
charges of $3.5 million.
Triad sold its joint venture facility in Amarillo, Texas on September 1,
1999 and received $23.1 million in net proceeds. A gain on the sale of $14.2
million was recorded during the year ended December 31, 1999. For the year ended
December 31, 1999, this facility had revenues of $6.6 million and pre-tax income
before gain on sale of assets and impairment charges of $0.3 million.
NOTE 5--INCOME TAXES
The income tax (provision) benefit for the years ended December 31, 2001,
2000 and 1999 consists of the following (dollars in millions):
2001 2000 1999
------ ------ -----
Current:
Federal ................................ $ (0.2) $ -- $ --
State .................................. (2.7) (1.1) (1.8)
Deferred:
Federal ................................ (38.3) (9.7) 24.8
State .................................. (1.3) (2.1) 2.5
------ ------ -----
$(42.5) $(12.9) $25.5
====== ====== =====
Triad also realized a $2.0 million tax benefit from an extraordinary loss
on retirement of debt in the year ended December 31, 2001. A reconciliation of
the federal statutory rate to the effective income tax rate from operations
follows:
2001 2000 1999
---- ---- -----
Federal statutory rate ................................ 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit . 2.5 4.8 2.8
Coordinating adjustments .............................. 9.3 -- --
Non-deductible goodwill amortization .................. 20.7 13.1 (2.5)
Non-deductible impairment charges ..................... 13.9 11.3 (11.5)
Non-deductible ESOP expense ........................... 4.7 8.1 (0.1)
Other items, net ...................................... 1.5 2.2 (2.6)
---- ---- ----
Effective income tax rate ............................. 87.6% 74.5% 21.1%
==== ==== ====
A summary of the items comprising the deferred tax assets and liabilities
at December 31 follows (dollars in millions):
F-16
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5--INCOME TAXES (continued)
2001 2000
--------------------- ---------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
Depreciation and fixed asset basis differences .......... $ -- $103.2 $ -- $ 51.8
Accounts and other receivables .......................... 43.2 -- 26.2 --
Net operating loss carryforwards ........................ 53.7 -- 7.5 --
Compensation reserves ................................... 24.2 -- 8.0 --
Amortization and intangible asset basis differences ..... -- 38.3 -- --
Other ................................................... -- 7.6 2.4 --
------ ------ ------ ------
121.1 149.1 44.1 51.8
Valuation allowances .................................... (1.0) -- (1.0) --
------ ------ ------ ------
$120.1 $149.1 $ 43.1 $ 51.8
====== ====== ====== ======
As part of the Spin-off, HCA and Triad entered into a tax sharing and
indemnification agreement (See NOTE 13). The tax sharing and indemnification
agreement will not have an impact on the realization of deferred tax assets or
the payment of deferred tax liabilities of Triad except to the extent that the
temporary differences giving rise to such deferred tax assets and liabilities as
of the Spin-off are adjusted as a result of final tax settlements after the
Spin-off. In the event of such adjustments, the tax sharing and indemnification
agreement will provide for certain payments between HCA and Triad as
appropriate.
Deferred income taxes of $103.1 million and $40.5 million at December 31,
2001 and 2000, respectively, are included in current assets. Noncurrent deferred
income tax liabilities totaled $132.1 million and $49.2 million at December 31,
2001 and 2000, respectively. Current and noncurrent deferred taxes totaled $29.0
million and $8.7 million net tax deferred liability at December 31, 2001 and
2000, respectively.
At December 31, 2001, state net operating loss carryforwards (expiring in
years 2002 through 2021) available to offset future taxable income approximated
$255.0 million. Utilization of net operating loss carryforwards in any one year
may be limited and, in certain cases, result in a reduction of deferred tax
assets. Based on available evidence, it is more likely than not that some
portion of the state net operating loss carryforwards will not be realized,
therefore, a valuation allowance of $1.0 million has been reflected as of
December 31, 2001 and 2000.
At December 31, 2001, the federal net operating loss available to offset
future taxable income approximated $134.3 million expiring in 2017 through 2021.
Pursuant to the tax sharing and indemnification agreement, Triad is entitled to
the tax benefit of such losses.
NOTE 6--IMPAIRMENT OF LONG-LIVED ASSETS
Through December 31, 2001, Triad followed the provisions of SFAS 121, which
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.
During the year ended December 31, 2001, Triad recorded impairment losses
of $21.2 million related to one hospital facility in the owned operations
segment where the recorded intangible asset values were not deemed recoverable
based upon operating results, trends and projected future cash flows. The
facility will continue to be used and is now recorded at estimated fair value,
based upon discounted, estimated future cash flows.
During the year ended December 31, 2001, Triad recorded further impairment
losses of $1.9 million on one hospital facility, which was closed in February
2000. The facility's carrying value of $4.7 million was reduced to fair value
based on estimated selling value.
F-17
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6--IMPAIRMENT OF LONG-LIVED ASSETS (continued)
During the year ended December 31, 2000, Triad entered into negotiations to
cancel one of its physician management contracts, which was substantially
completed by December 31, 2000. Accordingly, the carrying value of the
long-lived assets associated with this contract of approximately $1.0 million
was reduced to fair value, based on estimated disposal value, resulting in a
non-cash charge of $0.9 million. For the year ended December 31, 2000 and 1999
this entity contributed revenues of $3.1 million and $3.5 million, respectively,
and losses before impairment charges and income taxes of $2.8 million and $3.9
million, respectively.
During the year ended December 31, 2000, the carrying value of the
long-lived assets related to one facility that was closed on November 30, 2000
of $15.5 million, was reduced to fair value, based on the estimated selling
value, for a non-cash charge of $7.1 million. This facility had revenues of
$22.1 million and $26.0 million, respectively, and income (losses) before
impairment charges and income taxes of $(8.9) million and $0.1 million for the
years ended December 31, 2000 and 1999, respectively. This facility was sold
during the year ended December 31, 2001 (see NOTE 4).
During the year ended December 31, 1999 subsequent to the Spin-off, Triad
sold nine hospitals and one psychiatric hospital (See NOTE 4). Triad decided to
sell two general, acute care hospitals that were identified as not compatible
with Triad's operating plans, based upon management's review of all facilities,
and after 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. During the year ended December 31, 1999, the
carrying values of the long-lived assets related to five of the facilities sold
and the two facilities to be sold, were reduced to fair value, based on
estimated selling values, for a total non-cash charge of $66.1 million. These
facilities had revenues of approximately $131.3 million for the year ended
December 31, 1999. These facilities also contributed losses from operations
before income tax benefit, gain on sale of assets and the asset impairment
charge of approximately $30.7 million for the year ended December 31, 1999.
Triad closed one facility on February 11, 2000 and sold the other of these
facilities on December 14, 2000.
During the year ended December 31, 1999, Triad recorded further impairment
losses of $3.1 million related to one hospital facility where the recorded
intangible 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.
NOTE 7--INVESTMENTS
In the Quorum acquisition (see NOTE 3), Triad acquired equity interests of
27.5% in Valley Health System LLC, 26.1% in Summerlin Hospital Medical Center
LLC and 38.0% in Macon Healthcare LLC. Universal Health Systems has the
majority interest in Valley Health System LLC and Summerlin Hospital Medical
Center LLC. HCA has the majority interest in Macon Healthcare LLC. Triad also
owns a 50% interest in MCSA, LLC with its partner, SHARE Foundation, a
not-for-profit foundation. Triad uses the equity method of accounting for its
investments in these entities. Summarized financial information of these
entities is as follows (in millions):
F-18
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7--INVESTMENTS (continued)
Balance Sheet December 31,
------------- ---------------
2001 2000
------ ------
Current assets ......................................... $147.2 $142.5
Non-current assets ..................................... 463.5 460.0
------ ------
$610.7 $602.5
====== ======
Current liabilities .................................... $ 50.8 $ 52.5
Non-current liabilities ................................ 3.2 3.7
Members' equity ........................................ 556.7 546.3
------ ------
$610.7 $602.5
====== ======
Income Statement For the years ended December 31,
---------------- --------------------------------
2001 2000 1999
------ ------ ------
Revenues ................................... $666.4 $628.9 $609.9
====== ====== ======
Net income ................................. $ 66.8 $ 74.8 $ 60.3
====== ====== ======
NOTE 8--LONG-TERM DEBT
Components of long-term debt at December 31 (in millions):
Carrying Amount Fair Value
-------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revolving Credit Line ............ $ 46.0 $ -- $ 46.0 $ --
Delay Draw term loan ............. -- 51.0 -- 51.0
Old Tranche A term loan .......... -- 21.5 -- 21.5
New Tranche A term loan .......... 247.5 -- 247.5 --
Old Tranche B term loan .......... -- 194.6 -- 194.6
New Tranche B term loan .......... 548.5 -- 548.5 --
Senior Notes ..................... 600.0 -- 628.5 --
Senior Subordinated Notes ........ 317.8 316.9 356.7 341.3
Other ............................ 14.0 6.7 14.3 6.6
-------- -------- -------- --------
1,773.8 590.7 $1,841.5 $ 615.0
Less current portion ............. (30.9) (9.0) ======== ========
-------- --------
$1,742.9 $ 581.7
======== ========
As part of the merger with Quorum (See NOTE 3), Triad refinanced its
Tranche A term loan, Tranche B term loan, Delay Draw term loan, and Quorum's
indebtedness with new indebtedness totaling $1.8 billion. This indebtedness
consisted of a Tranche A term loan of $250 million presently bearing interest at
LIBOR plus 3.0% (4.93% at December 31, 2001) with principal amounts due
beginning 2001 through 2007, a Tranche B term loan of $550 million presently
bearing interest at LIBOR plus 3.0% (4.93% at December 31, 2001) with principal
amounts due beginning 2001 through 2008, an Asset Sale term loan of $150 million
which has been repaid in full as of December 31, 2001 and $600 million of senior
notes bearing interest at 8.75% with principal amounts due in 2009. Triad also
obtained a $250 million revolving credit line, of which $46 million was
outstanding at December 31, 2001, that presently bears interest at LIBOR plus
3.0% (4.75% at December 31, 2001) or at prime plus 2.0% (6.75% at December 31,
2001). The amount outstanding under the revolving credit line was reduced to
$35.0 million on January 3, 2002 at a rate of 4.88%. The revolving credit line
reduces to $225 million in 2004, $200 million in 2005 and matures in 2007. As of
December 31, 2001, Triad had $26.9 million in letters of credit outstanding
which reduce the amount available under the revolving credit line. The LIBOR
spread on the revolving credit line and the Tranche A term loan are subject to
reduction depending upon the total leverage of Triad.
F-19
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LONG-TERM DEBT (continued)
As discussed above, Triad repaid the entire Asset Sale term loan at
December 31, 2001 from the proceeds received on the facility sales described in
NOTE 3 and NOTE 4 and cash on hand.
Triad also has $325.0 million of senior subordinated notes, net of $7.2
million of unamortized discount, which were issued in May 1999 that bear
interest at 11.0% with principle amounts due in 2009.
Triad's term loans and revolving line of credit are collateralized by a
pledge of substantially all of its assets other than real estate associated with
the Quorum facilities. The debt agreements require that Triad comply with
various financial ratios and tests and have restrictions including, but not
limited to, new indebtedness, asset sales and use of proceeds therefrom, capital
expenditures and dividends. Triad currently is in compliance with all debt
agreement restrictions. If an event of default occurs with respect to the debt
agreements, then the balances of the term loans and revolving line of credit
would become due and payable.
Triad uses varying methods and significant assumptions to estimate fair
values of long-term debt (see NOTE 2).
A debt maturity schedule is as follows (in millions):
2002 ............................................................... $ 30.9
2003 ............................................................... 73.2
2004 ............................................................... 93.6
2005 ............................................................... 93.7
2006 ............................................................... 98.9
Thereafter ......................................................... 1,390.7
--------
1,781.0
Less unamortized debt discount - Senior Subordinated Notes ......... (7.2)
--------
$1,773.8
========
During the year ended December 31, 2001, Triad recorded approximately $45.8
million of debt issue costs in connection with the Quorum acquisition. These
costs are being amortized using the effective interest method over the lives of
the related debt. As a result of the debt financing with the Quorum acquisition,
an extraordinary loss of $2.4 million was incurred during the second quarter of
2001 from the write off of $3.9 million of associated debt issue costs, net of
tax benefit of $1.5 million. During the fourth quarter of 2001, an extraordinary
loss of $0.8 million, net of tax benefit of $0.5 million, was incurred from the
write off of $1.3 million of debt issue costs, associated with the early
retirement of the Asset Sale loan. Accumulated amortization of the debt issue
costs was $8.9 million and $3.0 million as of December 31, 2001 and 2000,
respectively.
Triad's senior subordinated notes and senior notes are guaranteed by all
wholly owned operating subsidiaries of Triad (the "Subsidiary Guarantors").
Triad Hospitals Holdings, Inc. was the primary obligor on the senior
subordinated notes until the merger with Quorum. As part of the merger (see NOTE
3) and related financing transactions, Triad Hospitals Holdings, Inc. was merged
into Triad and all of its existing debt was assumed by Triad. The guarantee
obligations of the Subsidiary Guarantors are full, unconditional and joint and
several. Triad's non-wholly owned operating subsidiaries do not guarantee the
notes (the "Non-Guarantor Subsidiaries").
Condensed unaudited consolidating financial statements for Triad and its
subsidiaries including the financial statements of Triad Hospitals, Inc. (parent
only), the combined Guarantor Subsidiaries and the combined Non-Guarantor
Subsidiary are as follows:
F-20
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the year ended December 31, 2001
Unaudited
(Dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Revenues ...................................... $ -- $2,296.0 $ 380.8 $ (7.3) $2,669.5
Salaries and benefits ......................... 5.6 937.0 185.9 -- 1,128.5
Reimbursable expenses ......................... -- 41.6 -- -- 41.6
Supplies ...................................... -- 356.4 54.8 -- 411.2
Other operating expenses ...................... 0.1 432.1 69.5 -- 501.7
Provision for doubtful accounts ............... -- 213.1 26.8 -- 239.9
Depreciation .................................. -- 117.0 17.4 -- 134.4
Amortization .................................. -- 32.5 3.2 -- 35.7
Interest expense allocated .................... -- -- 5.2 (5.2) --
Interest expense, net ......................... 127.4 (1.5) 0.1 -- 126.0
ESOP expense .................................. 9.3 -- -- -- 9.3
Management fees ............................... -- -- 2.1 (2.1) --
Gain on sale of assets ........................ -- (23.1) -- -- (23.1)
Impairment of long lived assets ............... -- 23.1 -- -- 23.1
-------- -------- -------- -------- --------
Total operating expenses ...................... 142.4 2,128.2 365.0 (7.3) 2,628.3
-------- -------- -------- -------- --------
Income (loss) before minority interests, equity
in earnings and income tax provision ........ (142.4) 167.8 15.8 -- 41.2
Minority interests ............................ -- (7.6) 0.4 -- (7.2)
Equity in earnings of affiliates .............. 190.9 30.7 -- (207.1) 14.5
-------- -------- -------- -------- --------
Income before income tax provision ............ 48.5 190.9 16.2 (207.1) 48.5
Income tax provision .......................... (42.5) -- -- -- (42.5)
-------- -------- -------- -------- --------
Income from operations ........................ 6.0 190.9 16.2 (207.1) 6.0
Extraordinary item, net of tax ................ (3.2) -- -- -- (3.2)
-------- -------- -------- -------- --------
Net income .................................... $ 2.8 $ 190.9 $ 16.2 $ (207.1) $ 2.8
======== ======== ======== ======== ========
F-21
TRIAD HOSPITALS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the year ended December 31, 2000
Unaudited
(Dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Revenues ...................................... $ -- $1,176.6 $ 59.7 $ (0.8) $1,235.5
Salaries and benefits ......................... 0.9 495.3 14.9 -- 511.1
Supplies ...................................... -- 171.9 13.7 -- 185.6
Other operating expenses ...................... -- 251.3 8.5 -- 259.8
Provision for doubtful accounts ............... -- 102.2 1.4 -- 103.6
Depreciation .................................. -- 73.2 2.9 -- 76.1
Amortization .................................. -- 6.6 0.5 -- 7.1
Interest expense allocated .................... -- 0.1 -- (0.1) --
Interest expense, net ......................... 63.1 (5.8) -- -- 57.3
ESOP expense .................................. 7.1 -- -- -- 7.1
Management fees ............................... -- -- 0.7 (0.7) --
Gain on sale of assets ........................ -- (7.9) -- -- (7.9)
Impairment of long lived assets ............... -- 8.0 -- -- 8.0
-------- -------- -------- -------- --------
Total operating expenses ...................... 71.1 1,094.9 42.6 (0.8) 1,207.8
-------- -------- -------- -------- --------
Income (loss) before minority interests, equity
in earnings and income tax provision ........ (71.1) 81.7 17.1 -- 27.7
Minority interests ............................ -- (9.0) -- -- (9.0)
Equity in earnings of affiliates .............. 88.4 15.7 -- (105.5) (1.4)
-------- -------- -------- -------- --------
Income before income tax provision ............ 17.3 88.4 17.1 (105.5) 17.3
Income tax provision .......................... (12.9) -- -- -- (12.9)
-------- -------- -------- -------- --------
Net income .................................... $ 4.4 $ 88.4 $ 17.1 $ (105.5) $ 4.4
======== ======== ======== ======== ========
F-22
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Operations
For the year ended December 31, 1999
Unaudited
(Dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------- ------------ ------------
Revenues ...................................... $ -- $1,278.9 $ 47.9 $ 2.3 $1,329.1
Salaries and benefits ......................... -- 558.4 12.5 -- 570.9
Supplies ...................................... -- 189.5 10.6 -- 200.1
Other operating expenses ...................... -- 293.3 8.2 -- 301.5
Provision for doubtful accounts ............... -- 128.1 0.9 -- 129.0
Depreciation .................................. -- 87.2 2.6 -- 89.8
Amortization .................................. -- 8.0 0.7 -- 8.7
Interest expense allocated .................... -- 23.5 (3.5) 2.5 22.5
Interest expense, net ......................... 44.1 (1.4) -- -- 42.7
ESOP expense .................................. 3.7 -- -- -- 3.7
Management fees ............................... -- 9.4 (0.3) (0.2) 8.9
Gain on sale of assets ........................ -- (8.6) -- -- (8.6)
Impairment of long lived assets ............... -- 66.1 3.1 -- 69.2
-------- -------- -------- -------- --------
Total operating expenses ...................... 47.8 1,353.5 34.8 2.3 1,438.4
-------- -------- -------- -------- --------
Income (loss) before minority interests, equity
in earnings and income tax benefit .......... (47.8) (74.6) 13.1 -- (109.3)
Minority interests ............................ -- (8.7) -- -- (8.7)
Equity in earnings (loss) of affiliates ....... (37.4) 10.0 -- 24.3 (3.1)
-------- -------- -------- -------- --------
Income (loss) before income tax benefit ....... (85.2) (73.3) 13.1 24.3 (121.1)
Income tax benefit ............................ 25.5 -- -- -- 25.5
-------- -------- -------- -------- --------
Net income (loss) ............................. $ (59.7) $ (73.3) $ 13.1 $ 24.3 $ (95.6)
======== ======== ======== ======== ========
F-23
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LONG-TERM DEBT (continued)
Condensed Consolidating Balance Sheets
December 31, 2001
Unaudited
(Dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets
Current assets
Cash and cash equivalents .................... $ -- $ 14.7 $ 1.6 $ -- $ 16.3
Restricted cash .............................. 5.7 -- -- -- 5.7
Accounts receivable, net...................... -- 365.8 80.8 -- 446.6
Other current assets.......................... 104.6 155.9 18.2 -- 278.7
-------- -------- ------ --------- --------
Total current assets............................. 110.3 536.4 100.6 -- 747.3
Net property and equipment, at cost.............. -- 1,526.1 290.9 -- 1,817.0
Intangible assets ............................... -- 1,247.5 48.3 -- 1,295.8
Investments in subsidiaries...................... 3,174.1 471.0 -- (3,455.7) 189.4
Due from affiliates ............................. 313.7 -- -- (313.7) --
Other assets..................................... 39.5 66.4 9.9 -- 115.8
-------- -------- ------ --------- --------
Total assets .................................... $3,637.6 $3,847.4 $449.7 $(3,769.4) $4,165.3
======== ======== ====== ========= ========
Liabilities and Equity
Current liabilities ............................. $ 42.6 $ 279.2 $ 44.5 $ -- $ 366.3
Due to affiliates................................ -- 249.7 64.0 (313.7) --
Long-term debt................................... 1,731.4 4.8 6.7 -- 1,742.9
Deferred taxes and other liabilities ............ 132.1 68.4 -- -- 200.5
Minority interests in equity of consolidated
entities...................................... -- 71.2 52.9 -- 124.1
Equity........................................... 1,731.5 3,174.1 281.6 (3,455.7) 1,731.5
-------- -------- ------ --------- --------
Total liabilities and equity .................... $3,637.6 $3,847.4 $449.7 $(3,769.4) $4,165.3
======== ======== ====== ========= ========
F-24
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LONG-TERM DEBT (continued)
Condensed Consolidating Balance Sheets
December 31, 2000
Unaudited
(Dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals,Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------ ------------
Assets
Current assets
Cash and cash equivalents ............... $ -- $ 6.4 $ 0.3 $ -- $ 6.7
Accounts receivable, net................. -- 162.5 8.6 -- 171.1
Other current assets..................... 41.9 106.9 1.6 -- 150.4
-------- --------- ----- --------- --------
Total current assets....................... 41.9 275.8 10.5 -- 328.2
Net property and equipment, at cost......... -- 738.3 14.7 -- 753.0
Intangible assets........................... -- 215.6 12.2 -- 227.8
Investments in subsidiaries................. 1,326.7 136.2 -- (1,383.5) 79.4
Due from affiliates......................... -- 137.1 23.2 (160.3) --
Other assets................................ 4.7 7.4 -- -- 12.1
-------- -------- ----- --------- --------
Total assets ............................... $1,373.3 $ 1,510.4 $60.6 $(1,543.8) $1,400.5
======== ========= ===== ========= ========
Liabilities and Equity
Current liabilities ........................ $ 13.4 $ 121.3 $ 1.6 $ -- $ 136.3
Due to affiliates........................... 160.3 -- -- (160.3) --
Long-term debt.............................. 576.7 5.0 -- -- 581.7
Deferred taxes and other liabilities........ 49.2 7.4 2.2 -- 58.8
Minority interests in equity of consolidated
entities ................................ -- 50.0 -- -- 50.0
Equity...................................... 573.7 1,326.7 56.8 (1,383.5) 573.7
-------- ------- ---- --------- --------
Total liabilities and equity ............... $1,373.3 $ 1,510.4 $60.6 $(1,543.8) $1,400.5
======== ========= ===== ========= ========
F-25
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2001
Unaudited
(Dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities ....................................... $ (156.0) $ 418.1 $ 56.2 $ -- $ 318.3
Cash flows from investing activities
Purchases of property and equipment............ -- (159.7) (40.9) -- (200.6)
Investment in and advances to affiliates....... 122.1 (72.5) (31.9) -- 17.7
Proceeds received on sale of asset............. -- 127.8 -- -- 127.8
Payments for acquisitions...................... (1,386.6) -- -- -- (1,386.6)
Restricted cash ............................... (5.7) -- -- -- (5.7)
Other.......................................... -- (5.7) -- -- (5.7)
--------- -------- ------ ----- ---------
Net cash used in investing activities.............. (1,270.2) (110.1) (72.8) -- (1,453.1)
Cash flows from financing activities
Payments of long-term debt .................... (577.5) (3.0) (1.1) -- (581.6)
Proceeds from issuance of long-term debt....... 1,752.7 -- -- -- 1,752.7
Payment of debt issue cost..................... (45.8) -- -- -- (45.8)
Proceeds from issuance of common stock......... 27.0 -- -- -- 27.0
Distributions to minority partners ............ -- (7.7) (0.2) -- (7.9)
Net change in due to (from) affiliate.......... 269.8 (289.0) 19.2 -- --
--------- -------- ------ ----- ---------
Net cash provided by (used in) financing
activities ..................................... 1,426.2 (299.7) 17.9 -- 1,144.4
--------- -------- ------ ----- ---------
Change in cash and cash equivalents................ -- 8.3 1.3 -- 9.6
Cash and cash equivalents at beginning of period... -- 6.4 0.3 -- 6.7
--------- -------- ------ ----- ---------
Cash and cash equivalents at end of period ........ $ -- $ 14.7 $ 1.6 $ -- $ 16.3
========= ======== ====== ===== =========
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 2000
Unaudited
(Dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities...................................... $(61.0) $ 117.2 $ 15.4 $ -- $ 71.6
Cashflows from investing activities
Purchases of property and equipment............ -- (90.2) (4.2) -- (94.4)
Investment in and advances to affiliates....... (2.4) 34.9 (9.8) -- 22.7
Proceeds received on sale of assets............ -- 20.7 -- -- 20.7
Payments for acquisitions...................... -- (118.2) (0.6) -- (118.8)
Other.......................................... -- (1.6) -- -- (1.6)
------ -------- ------ ----- -------
Net cash used in investing activities.............. (2.4) (154.4) (14.6) -- (171.4)
Cash flows from financing activities
Payments of long-term debt..................... (15.8) (1.7) -- -- (17.5)
Proceeds from issuance of long-term debt....... 51.0 -- -- -- 51.0
Payment of debt issue costs.................... (1.5) -- -- -- (1.5)
Proceeds from issuance of common stock......... 9.9 -- -- -- 9.9
Distributions to minority partners............. -- (6.3) -- -- (6.3)
Net change in due to (from) affiliate.......... 19.8 (19.2) (0.6) -- --
------ -------- ------ ----- -------
Net cash provided by (used in) financing activities 63.4 (27.2) (0.6) -- 35.6
------ -------- ------ ----- -------
Change in cash and cash equivalents................ -- (64.4) 0.2 -- (64.2)
Cash and cash equivalents at beginning of period... -- 70.8 0.1 -- 70.9
------ -------- ------ ----- -------
Cash and cash equivalents at end of period ........ $ -- $ 6.4 $ 0.3 $ -- $ 6.7
====== ======== ====== ===== =======
F-26
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8--LONG-TERM DEBT (continued)
Condensed Consolidating Statements of Cash Flows
For the year ended December 31, 1999
Unaudited
(Dollars in millions)
Non-
Triad Guarantor Guarantor
Hospitals, Inc. Subsidiaries Subsidiaries Eliminations Consolidated
--------------- ------------ ------------ ------------ ------------
Net cash provided by (used in) operating activities .. $ (34.8) $ 170.5 $ 19.5 $ -- $ 155.2
Cash flows from investing activities
Purchases of property and equipment .............. -- (129.8) (2.9) -- (132.7)
Investment in and advances to affiliates ......... 0.8 (38.9) (16.6) -- (54.7)
Proceeds received on sale of assets .............. -- 117.8 -- -- 117.8
Other ............................................ -- 12.1 (0.2) -- 11.9
------- ------- ------ ------ -------
Net cash provided by (used in) investing activities .. 0.8 (38.8) (19.7) -- (57.7)
Cash flows from financing activities
Payments of long-term debt ....................... (108.0) (6.2) -- -- (114.2)
Distributions to minority partners ............... -- (18.6) -- -- (18.6)
Net change in due to (from) affiliate ............ 142.0 (36.1) 0.3 -- 106.2
------- ------- ------ ------ -------
Net cash provided by (used in) financing activities .. 34.0 (60.9) 0.3 -- (26.6)
------- ------- ------ ------ -------
Change in cash and cash equivalents .................. -- 70.8 0.1 -- 70.9
Cash and cash equivalents at beginning of period ..... -- -- -- -- --
------- ------- ------ ------ -------
Cash and cash equivalents at end of period ........... $ -- $ 70.8 $ 0.1 $ -- $ 70.9
======= ======= ====== ====== =======
NOTE 9--LEASES
Triad leases real estate properties, equipment and vehicles under
cancelable and non-cancelable leases. Rental expense for the years ended
December 31, 2001, 2000 and 1999 was $50.3 million, $31.0 million and $33.6
million, respectively. Future minimum operating and capital lease payments are
as follows at December 31, 2001:
Operating Capital
--------- -------
2002 ............................................. $ 37.2 $ 0.3
2003 ............................................. 31.5 0.2
2004 ............................................. 27.4 0.1
2005 ............................................. 21.6 --
2006 ............................................. 16.2 --
Thereafter ....................................... 43.6 --
-------- ------
Total minimum payments ........................... $ 177.5 0.6
========
Less amounts representing interest ............... (0.1)
------
Present value of minimum lease payments .......... $ 0.5
======
The following summarizes amounts related to equipment leased by Triad under
capital leases at December 31:
2001 2000
------ ------
Equipment ...................................... $ 0.9 $ 1.4
Accumulated amortization ....................... (0.4) (0.6)
------ ------
Net book value ................................. $ 0.5 $ 0.8
====== ======
On January 1, 1999, Triad transferred two acute care hospitals and three
ambulatory surgery centers to an unaffiliated third party pursuant to a
long-term lease. Lease income of $17.8 million, $16.9 million and $16.7 million
was recorded in the years ended December 31, 2001, 2000 and 1999, respectively.
The following summarizes the assets leased at December 31, 2001 and 2000
(dollars in millions):
F-27
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9--LEASES (continued)
2001 2000
------- -------
Land ........................................... $ 7.7 $ 7.7
Buildings ...................................... 51.6 51.6
Equipment ...................................... 69.1 69.1
------- -------
128.4 128.4
Accumulated depreciation ....................... (86.3) (80.3)
------- -------
$ 42.1 $ 48.1
======= =======
The following is a schedule of minimum future lease income on these leases
as of December 31, 2001 (dollars in millions):
2002 ...................................................... $ 18.0
2003 ...................................................... 18.2
2004 ...................................................... 18.5
2005 ...................................................... 18.8
2006 ...................................................... 19.1
Thereafter ................................................ 141.7
--------
Total minimum income ...................................... $ 234.3
========
NOTE 10--STOCK BENEFIT PLANS
Triad's 1999 Long-Term Incentive Plan has 14,000,000 shares of Triad's
common stock 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 Triad. Stock options granted are generally
at an exercise price equal to the fair market value at the date of grant and are
exercisable over a four year period and expire ten years from date of grant. The
plan provides for immediate vesting upon a change in control. On April 28, 2000,
Triad granted 900,056 stock options under this plan with an exercise price of
$17.07, which was the market price of the common stock on the effective date of
grant, contingent on shareholder approval of an amendment to the 1999 Long-Term
Incentive Plan increasing the numbers of shares available. Shareholder approval
was granted on May 23, 2000. Compensation expense of $0.9 million was recognized
in the year ended December 31, 2000 based on the difference between the market
price of the common stock on the date of shareholder approval and the market
price of the common stock on date of grant amortized over the vesting period.
The merger of Triad and Quorum (See NOTE 3) constituted a "change of
control" under the terms of the Triad 1999 Long-Term Incentive Plan, the Triad
Management Stock Purchase Plan ("MSPP"), the Triad Executive Stock Purchase Plan
and all other similar plans. All of the outstanding, unvested stock options
became vested and exercisable at the effective time of the merger; however,
certain executive officers of Triad waived the vesting of certain stock options
in connection with the merger. The waivers ended June 29, 2001. In addition,
restrictions lapsed on shares of Triad restricted common stock issued under the
MSPP, described below, and these shares became fully vested and transferable and
no longer are subject to forfeiture. As a result of the above referenced
vesting, Triad recorded non-cash stock option expense of $4.2 million during the
year ended December 31, 2001.
Triad has an Executive Stock Purchase Plan, for which 1,000,000 shares of
Triad's common stock were reserved for issuance. The Executive Stock Purchase
Plan granted to specified executives of Triad a right to purchase shares of
common stock from Triad. Triad loaned each participant in the plan approximately
100% of the purchase price of Triad's common stock bearing interest at 5.15% per
annum, 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, Triad 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 equal to the purchase price of the shares and the options
expire in 10 years. During the year ended December 31,1999,
F-28
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--STOCK BENEFIT PLANS (continued)
970,000 shares were purchased by participants in the plan and options to
purchase an additional 727,500 shares were issued in connection with such
purchased shares. 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 equity. On September 26, 2001, one participant repaid his $0.4 million loan.
Triad adopted various other plans for which 500,000 shares of Triad's
common stock have been reserved for issuance. During the year ended December 31,
1999, Triad also granted 340,000 options to HCA executives with the exercise
price equal to market price on the date of grant and which were exercisable on
the date of grant. HCA paid Triad $1.5 million in exchange for the issuance of
these options. All of these options expire 10 years after grant. All other
options granted under these plans are exercisable over a four-year period and
expire 10 years from the date of grant.
As anticipated at the time of the Spin-off, Triad entered into a stock
option pledge agreement with a charitable corporation granting 100,000 stock
options on July 11, 2000 subject to approval by the Internal Revenue Service
(the "IRS"). The exercise price of these stock options is equal to the market
price on the grant date. The stock options become immediately exercisable upon
receipt of the IRS approval and expire 10 years from that date. Triad waived the
IRS approval provision on June 27, 2001 and the options are now exercisable.
Non-cash stock option expense of $1.4 million was recorded under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
using the fair value of these options. Since the options are immediately
exercisable, no additional non-cash stock option expense will be recorded.
As part of the merger (see NOTE 3), Triad issued stock options to Quorum
option holders under Quorum's 1997 Stock Option Plan. The fair value of these
options was included in the purchase price for the merger.
Information regarding these options for 2001, 2000 and 1999 is summarized
below:
Stock Option Price Weighted Average
Options Per Share Exercise Price
---------- ---------------- ----------------
Balances, January 1, 1999 .... -- -- --
Granted ................... 4,654,103 $ 0.07 - $18.84 $11.29
Exercised ................. (8,667) $ 0.07 - $12.64 $ 8.30
Cancelled ................. (194,828) $ 0.19 - $18.84 $12.08
---------
Balances, December 31, 1999 .. 4,450,608 $ 0.07 - $18.84 $11.26
Granted ................... 2,102,556 $16.50 - $27.69 $17.48
Exercised ................. (618,456) $ 0.07 - $18.84 $11.52
Cancelled ................. (267,922) $ 0.07 - $27.69 $13.62
---------
Balances, December 31, 2000 .. 5,666,786 $ 0.07 - $27.69 $13.43
Granted ................... 4,948,479 $12.27 - $50.35 $25.90
Exercised ................. (1,388,414) $ 0.19 - $30.47 $15.56
Cancelled ................. (320,301) $ 0.19 - $50.35 $27.90
---------
Balances, December 31, 2001 .. 8,906,550 $ 0.07 - $50.35 $19.49
=========
The weighted-average fair value of stock options granted to Triad employees
during the year ended December 31, 2001, 2000 and 1999, was $17.19, $9.64 and
$4.22 per option, respectively. At December 31, 2001, 2000 and 1999, there were
5,852,800, 1,337,085 and 1,401,650 options exercisable, respectively. There were
4,682,181, 466,506 and 2,118,225 stock options available for grant at December
31, 2001, 2000 and 1999, respectively.
The following table summarizes information regarding the options
outstanding at December 31, 2001:
F-29
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--STOCK BENEFIT PLANS (continued)
Options Outstanding Options Exercisable
------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
at 12/31/01 Life Price at 12/31/01 Price
----------- ----------- --------- ----------- ---------
Range of Exercise Prices
$44.54 ................. 2,695 1 year $ 44.54 2,695 $ 44.54
$50.35 ................. 2,695 2 years 50.35 2,695 50.35
$23.31 ................. 2,695 3 years 23.31 2,695 23.31
$16.69 to $19.14 ....... 262,043 4 years 16.73 262,043 16.73
$15.42 to $29.08 ....... 401,503 5 years 16.10 401,503 16.10
$18.85 to $31.50 ....... 12,721 6 years 25.60 12,721 25.60
$16.34 to $27.84 ....... 186,226 7 years 16.73 186,226 16.73
$0.07 to $18.84 ........ 3,101,720 8 years 11.13 3,101,720 11.13
$16.50 to $27.69 ....... 1,780,502 9 years 17.50 1,780,502 17.50
$24.63 to $35.70 ....... 3,153,750 10 years 29.58 100,000 24.63
--------- --------- --------- ---------
8,906,550 $ 19.49 5,852,800 $ 14.14
========= ========= ========= =========
Triad 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 Triad 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) for the years ended December 31 would have been
changed to the pro forma amounts set forth below (dollars in millions):
2001 2000 1999
--------- -------- ----------
Net income (loss)
As reported ..................... $ 2.8 $ 4.4 $ (95.6)
Pro forma . ..................... $ (15.5) $ 0.8 $ (100.5)
Basic income (loss) per share:
As reported ..................... $ 0.04 $ 0.14 $ (3.12)
Pro forma . ..................... $ (0.27) $ 0.03 $ (3.28)
Diluted income (loss) per share:
As reported ..................... $ 0.05 $ 0.13 $ (3.12)
Pro forma . ..................... $ (0.27) $ 0.02 $ (3.28)
The fair values of stock options granted to Triad's employees used to
compute pro forma net loss disclosures were estimated on the date of grant using
the Black-Scholes option-pricing model based on the following weighted average
assumptions for the years ended December 31:
2001 2000 1999
------- ------- -------
Risk free interest rate .............. 4.63% 5.84% 5.85%
Expected life ........................ 5 years 5 years 5 years
Expected volatility .................. 58.9% 43.5% 31.7%
Expected dividend yield .............. -- -- --
F-30
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10--STOCK BENEFIT PLANS (continued)
Subsequent to December 31, 2001, Triad granted 2,806,500 stock options with
an exercise price equal to the market price on the date of grant. The options
are exercisable over a four-year period and expire ten years from the date of
grant.
Triad has an Employee Stock Purchase Plan ("ESPP") which provides an
opportunity to purchase shares of its common stock at a discount (through
payroll deductions over six month intervals) to substantially all employees.
Shares of common stock issued to employees through the ESPP were 209,553,
147,023 and 65,982 during the years ended December 31, 2001, 2000 and 1999,
respectively.
Triad's MSPP provides certain members of management an opportunity to
purchase restricted shares of common stock at a discount through payroll
deductions over six month intervals. These restrictions lapse three years after
the date of purchase. During the years ended December 31, 2001 and 2000, 34,699
shares at a weighted average price of $21.51 per share and 72,586 shares at a
weighted average price of $10.86 per share, respectively, were issued through
the MSPP. Subsequent to December 31, 2001, 14,599 shares at $23.50 per share
were issued through the MSPP.
NOTE 11--RETIREMENT PLANS
In connection with the Spin-off, Triad established an Employee Stock
Ownership Plan ("ESOP") for substantially all of its employees. The ESOP
purchased from Triad, at fair market value, 3,000,000 shares of Triad's common
stock. The purchase was primarily financed by the ESOP issuing a promissory note
to Triad, which will be repaid annually in equal installments over a 10-year
period beginning December 31, 1999. Triad makes contributions to the ESOP which
the ESOP uses to repay the loan. Triad'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 in unearned ESOP compensation and
stockholders notes receivable in the 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 is
shown as a change in additional paid-in capital. As the shares are committed to
be released, the shares become outstanding for earnings per share calculations.
Triad recognized ESOP expense of $9.3 million, $7.1 million and $3.7 million
during the years ended December 31, 2001, 2000 and 1999, respectively, and the
unearned ESOP compensation was $24.2 million and $27.6 million at December 31,
2001 and 2000, respectively.
The ESOP shares as of December 31, 2001 were as follows:
Shares released ........................................... 600,000
Shares committed to be released ........................... 300,000
Unreleased shares ......................................... 2,100,000
---------
Total ESOP shares ......................................... 3,000,000
=========
Fair value of unreleased shares............................ $61.6 million
Triad has instituted a defined contribution retirement plan which covers
substantially all employees that were not part of the plan assumed in the Quorum
acquisition described below. Benefits are determined primarily as a percentage
of a participant's annual income, less contributions to the ESOP. These benefits
are vested over specific periods of employee service. Triad has also instituted
a contributory benefit plan which is available to employees
F-31
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11--RETIREMENT PLANS (continued)
who meet certain minimum requirements. The plan requires that Triad match 50% of
a participant's contribution up to certain maximum levels. Triad recorded
expense under these plans of $6.9 million, $4.3 million and $11.7 million for
the years ended December 31, 2001, 2000 and 1999, respectively, and recorded
reductions of estimates of prior year retirement plan accruals of $1.5 million,
$5.0 million and $3.4 million for the years ended December 31, 2001, 2000 and
1999, respectively. Amounts approximately equal to retirement plan expense are
funded annually. Triad's contributions to the contributory benefit plan are
funded periodically during the year.
In the Quorum acquisition (see NOTE 3), Triad assumed defined contribution
employee benefit plans covering substantially all employees that were employees
of Quorum. Employees may contribute up to 15% of eligible compensation subject
to IRS limits. The plans permit a discretionary base contribution and a
discretionary match to employee deferrals. Contributions to the plans are
determined annually. Base contributions under the plans vest at the end of each
plan year and matching contributions vest after five years of qualifying
service. Benefit plan expense for the year ended December 31, 2001 totaled $10.2
million. On January 1, 2002, this plan was merged into the Triad defined
contribution plan described above.
NOTE 12--INCOME (LOSS) PER SHARE
Income (loss) per common share is based on the weighted average number of
shares outstanding adjusted for the shares issued to the ESOP. The weighted
average number of shares outstanding for the year ended December 31, 1999
assumes the shares issued at the Spin-off were outstanding at the beginning of
1999. Diluted weighted average shares outstanding is calculated by adjusting
basic weighted average shares outstanding by all potentially dilutive stock
options. Stock options outstanding of 4,385,100 as of December 31, 1999 were not
included for diluted loss per share calculations since the impact was
antidilutive. Weighted average shares for the years ended December 31, 2001,
2000 and 1999 are as follows:
For the years ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Weighted average shares exclusive of unreleased ESOP shares.. 57,508,685 31,593,403 30,484,778
ESOP shares committed to be released ........................ 150,000 150,000 150,000
---------- ---------- ----------
Basic weighted average shares outstanding ................... 57,658,685 31,743,403 30,634,778
Effect of dilutive securities - employee stock options ...... 3,397,009 2,390,007 --
---------- ---------- ----------
Diluted weighted average shares outstanding ................. 61,055,694 34,133,410 30,634,778
========== ========== ==========
NOTE 13--AGREEMENTS WITH HCA
As described below, Triad has entered into several agreements with HCA to
facilitate an orderly change after the Spin-off.
HCA and Triad entered into a distribution agreement providing for certain
arrangements among HCA and Triad subsequent to the date of the Spin-off. The
distribution agreement generally provides that Triad will be financially
responsible for liabilities arising out of or in connection with the assets and
entities that constitute Triad. The distribution agreement provides, however,
that HCA will indemnify Triad for any losses, which it incurs arising from the
pending governmental investigations of certain of HCA's business practices. The
distribution agreement further provides that HCA will indemnify Triad for any
losses which it may incur arising from stockholder actions
F-32
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--AGREEMENTS WITH HCA (continued)
and other legal proceedings related to the governmental investigations which are
currently pending against 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. HCA has also agreed that, in the event that any
hospital owned by Triad 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 HCA will make a cash payment to Triad in an
amount (if positive) equal to five times the excluded hospital's 1998 income
from continuing operations before depreciation and amortization, interest
expense, management fees, impairment of long-lived assets, minority interests
and income taxes less the net proceeds of the sale or other disposition of the
excluded hospital. HCA will not indemnify Triad for losses relating to any acts,
practices and omissions engaged in by Triad after the date of the Spin-off,
whether or not Triad is indemnified for similar acts, practices and omissions
occurring prior to the date of the Spin-off.
HCA has entered into a compliance agreement setting forth certain
agreements to comply with applicable laws and regulations. Triad was obligated
to participate with HCA in these negotiations. On November 1, 2001, Triad
entered into a five-year corporate integrity agreement with the Office of the
Inspector General and agreed to maintain its compliance program in accordance
with the corporate integrity agreement. This obligation could result in greater
scrutiny by regulatory authorities. Violations of the integrity agreement could
subject Triad's hospitals to substantial monetary penalties. Complying with the
corporate integrity agreement may impose expensive and burdensome requirements
on certain operations which could have a material adverse impact on Triad. The
compliance measures and reporting and auditing requirements for Triad's
hospitals contained in the integrity agreement include:
. Continuing the duties and activities of corporate compliance officers
and committees and maintaining a written code of conduct and written
policies and procedures;
. Providing general training on the compliance policy in the agreement
and specific training for the appropriate personnel on billing, coding
and cost report issues;
. Having an independent third party conduct periodic audits of inpatient
DRG coding and laboratory billing;
. Continuing a confidential disclosure program and compliance hotline
and implementing enhanced screening to ensure ineligible employees and
contractors are not hired;
. Reporting material deficiencies resulting in an overpayment by a
federal healthcare program and probable violations of certain laws,
rules and regulations; and
. Submitting annual reports to the Inspector General describing the
operations of the corporate compliance program for the past year.
In connection with the Spin-off, HCA also agreed to indemnify Triad for any
payments which it is required to make in respect to Medicare, Medicaid and Blue
Cross cost reports relating to the cost report periods ending on or prior to the
date of the Spin-off, and Triad agreed to indemnify HCA for and pay to HCA any
payments received by Triad relating to such cost reports. Triad will be
responsible for the filing of these cost reports and any terminating cost
reports.
HCA and Triad entered into a tax sharing and indemnification agreement,
which allocates tax liabilities among HCA and Triad, 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, HCA will be responsible for taxes that are allocable to
periods prior to the Spin-off, and HCA and Triad 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 HCA) for periods after the
Spin-off. The tax sharing and indemnification agreement prohibits Triad from
taking actions that could jeopardize the tax treatment of either the Spin-off or
the internal restructuring of HCA that preceded the Spin-off, and requires Triad
to indemnify HCA for any taxes or other losses that result from any
F-33
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--AGREEMENTS WITH HCA (continued)
such actions.
Prior to the date of the Spin-off, HCA maintained various insurance
policies for the benefit of Triad. In connection with the Spin-off, HCA and
Triad 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. HCA will pay Triad 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). HCA and Triad have
ensured that all of the insurance policies in effect after the Spin-off provided
the same coverage to Triad that were available prior to the Spin-off. Triad
purchased continuous coverage under extensions or renewals of existing, or new,
policies issued by Health Care Indemnity, Inc., a subsidiary of 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 HCA. Triad
continues to purchase a portion of its general and professional liability
insurance from HCA (See NOTE 2).
HCA's wholly owned subsidiary Columbia Information Services, Inc. ("CIS"),
entered into a computer and data processing services agreement with Triad.
Pursuant to this agreement, CIS will provide computer installation, support,
training, maintenance, data processing and other related services to Triad. The
initial term of the agreement is seven years, which will be followed by a
wind-down period of up to one year. CIS charged Triad approximately $22.0
million, $19.0 million, and $19.0 million in the years ended December 31, 2001,
2000 and 1999, respectively, for services provided under this agreement. In the
event the agreement is terminated by Triad, 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 did not warrant that the
software and hardware used by CIS in providing services to Triad would be Year
2000 ready, although Triad did not experience any significant Year 2000 problems
in respect of such software. Pursuant to a Year 2000 professional services
agreement, HCA continued its ongoing program of inspecting medical equipment at
Triad's hospitals to assure Year 2000 compliance. Under such agreement, Triad
remained solely responsible for any lack of Year 2000 compliance. No Year 2000
problems occurred relating to any medical equipment. The Year 2000 professional
services agreement terminated on April 30, 2000.
HCA and Triad 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 Triad
assumed responsibility for its employees from and after the date of the
Spin-off, and that HCA retained the liabilities with respect to former employees
associated with the facilities and operations of Triad who terminated employment
on or prior to the date of the Spin-off. Benefit plans established by Triad
generally recognize past service with HCA.
HCA also entered into an agreement with Triad, pursuant to which Triad
sub-leases from HCA its principal executive offices (at the same price per
square foot as is payable under the existing HCA lease). Triad's sub-lease will
terminate on January 31, 2003.
HCA also entered into a transitional service agreement with Triad pursuant
to which HCA furnished various administrative services to Triad. These services
include support in various aspects of payroll processing and tax reporting for
employees of Triad, real estate design and construction management, legal, human
resources, insurance and accounting matters on an as needed basis. Each
agreement terminated on December 31, 2000.
The agreements provide that Triad's fees to HCA for services provided are
based on HCA's costs incurred in providing such services.
F-34
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13--AGREEMENTS WITH HCA (continued)
Triad is an investor along with HCA in a group purchasing organization
which makes certain national supply and equipment contracts available to their
respective facilities.
HCA entered into agreements with Triad whereby HCA will share
telecommunications services with Triad under HCA's agreements with its
telecommunications services provider and whereby HCA will make certain account
collection services available to Triad.
NOTE 14--SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities:
2001 2000 1999
---- ---- ------
Investing activities:
Swap of Laredo/Victoria facilities
Transfer of Laredo facility................................................ -- -- (38.1)
Recording of Victoria facility............................................. -- -- 33.9
Escrow establishment in connection with the sale of Phoenix Medical Center.... -- -- 4.4
Sale of facilities prior to Spin-off.......................................... -- -- 3.3
NOTE 15--CONTINGENCIES
Merger Litigation
On October 20, 2000, a purported class action, Samuel Brand v. Colleen
Conway Welch, et al., Case No.: OCC-3066, was filed against Triad and members of
the board of directors of Quorum in the Circuit Court of Davidson County,
Tennessee, on behalf of all public stockholders of Quorum. The complaint
alleged, among other things, that Quorum's directors breached their fiduciary
duties to Quorum and its stockholders in agreeing to the merger at an unfair
price.
In April 2001, the parties negotiated a settlement that would result in the
dismissal of the action. The settlement was subject to a number of conditions,
including Court approval. Court approval was obtained, and on October 22, 2001
the court dismissed the action pursuant to the terms of the agreed upon
settlement, and Triad paid the settlement. The settlement did not have a
material effect on Triad's financial position or results of operations.
False Claims Act Litigation
At a meeting in September 1998, Quorum learned from the government that the
government would likely join in a lawsuit filed against Quorum under the False
Claims Act. The suit was filed in January 1993 by a former employee of a
hospital managed by a Quorum subsidiary. These lawsuits, commonly known as qui
tam actions, are filed "under seal." That means that the claims are kept secret
until the government decides whether to join the case. The person who files the
lawsuit is called a "relator." The government joined the case against Quorum in
October 1998. The relator's lawsuit named Quorum, QHR, HCA and all hospitals
that Quorum or HCA owned, operated or managed from 1984 through 1997, as
defendants. The unsealed complaint, prepared by the relator, alleged that Quorum
knowingly prepared and caused to be filed cost reports which claimed payments
from Medicare and other government payment programs greater than the amounts
due.
On February 24, 1999, the government filed its own complaint in the case.
The new complaint alleged that Quorum, on behalf of hospitals it managed between
1985 and 1995 and hospitals it owned from 1990 to the date of the complaint,
violated the False Claims Act by knowingly submitting or causing to be submitted
false Medicare cost reports, resulting in the submission of false claims to
Federal health care programs.
F-35
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15--CONTINGENCIES (continued)
The government asserted that the false claims in cost reports were
reflected, in part, in "reserve analyses" created by Quorum. The complaint also
alleged that these cost report filings were prepared as a result of company
policy. This qui tam action sought three times the amount of damages caused to
the United States by Quorum's submission of any alleged false claims to the
government, civil penalties of not less than $5,000 nor more than $10,000 for
each claim, and the relator's attorneys' fees and costs. On April 23, 2001, a
settlement agreement was signed and a stipulation of dismissal was filed with
the court dismissing all claims against Quorum, QHR and the other Quorum
subsidiaries named in the lawsuit. The settlement provided for a payment of
$82.5 million in compensation to the government, plus interest accruing on $77.5
million at 7.25% per annum from October 2, 2000 (the date on which an
understanding with the government to settle this lawsuit was reached) to the
payment date. The settlement was paid in April 2001. The settlement agreement
also provides, on certain conditions, for a release of all hospitals currently
or formerly managed by QHR electing to participate in the settlement.
In connection with the settlement, Quorum entered into a corporate
integrity agreement with the Office of Inspector General containing, among other
things, an affirmative obligation to report certain violations of applicable
laws and regulations. On August 10, 2001, the Office of Inspector General agreed
to suspend Quorum's obligations under this corporate integrity agreement until
November 1, 2001, in exchange for Triad's agreement to negotiate a corporate
integrity agreement that would also include the hospitals owned by Triad at the
time of its merger with Quorum, as well as hospitals Triad might subsequently
acquire. (In the distribution agreement with HCA at the time of its spin-off,
Triad agreed to participate in the negotiation of a corporate integrity
agreement with the Office of Inspector General.) These negotiations of a
"combined" corporate integrity agreement were concluded and the agreement became
effective on November 1, 2001 (see NOTE 13).
Other Qui Tam Actions and Related Investigations
In May 1998, Quorum was informed that it was a defendant in another qui tam
action involving home health services provided by two of its owned hospitals and
alleging that Quorum had violated Medicare laws. This action was filed under
seal in June 1996 by a former employee whom Quorum fired in April 1996. The
United States Attorney's Office allowed Quorum an opportunity to review the
results of the government's investigations and discuss the allegations made in
the action prior to the government making a decision to intervene as a
plaintiff. Quorum cooperated fully with the United States Attorney's Office and
provided additional information and made employees available for interviews.
On October 26, 2000, Quorum completed settlement of this qui tam lawsuit
which primarily involved allegedly improper allocation of costs at Flowers
Hospital, Dothan, Alabama, to its home health agency. Quorum paid to the
government on October 26, 2000 approximately $18 million in connection with this
settlement. In addition to the settlement agreement, Quorum entered into a
five-year corporate integrity agreement covering Flowers Hospital with the
Office of the Inspector General, which was terminated upon the effective date of
the Quorum corporate integrity agreement entered into in connection with the
False Claims Act litigation discussed above. The government always reserves the
right to investigate and pursue other allegations made by a relator under a
complaint. However, under the settlement agreement, the relator is prohibited
from pursuing these additional allegations.
As a result of its ongoing discussions with the government, prior to the
merger Quorum learned that there are two additional unrelated qui tam complaints
against it alleging violations of the False Claims Act for claims allegedly
submitted to the government involving one owned and two managed hospitals.
Quorum accrued $3.5 million on these items prior to the merger. Both matters
remain under seal. With respect to the matter involving the two managed
hospitals, the government has requested that Quorum conduct a self-audit with
respect to one Medicare cost report for one managed hospital and three other
specific issues and that matter remains under seal. The
F-36
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15--CONTINGENCIES (continued)
government could undertake additional investigative efforts. The government has
stated that it intends to investigate certain other allegations. With respect to
the complaint involving the owned hospital, Triad reached an agreement to settle
this matter through the payment to the government of $427,500 (plus interest to
the date of actual payment), and payment of certain attorneys' fees to the
relators under the complaint. Payment was made on January 15, 2002, and the case
has been dismissed with prejudice. As Quorum's successor, Triad was also a
defendant in another qui tam complaint, in which the government declined to
intervene. After receipt of service, Triad filed motions to dismiss such
litigation against Quorum and QHR and on October 9, 2001, the relators filed
notices of voluntary dismissal, to which the government indicated its consent.
The court dismissed such litigation on October 17, 2001.
Stockholder Class Action Regarding the Securities Exchange Act of 1934
In October and November 1998, some of Quorum's stockholders filed lawsuits
against Quorum in the U.S. District Court for the Middle District of Tennessee.
In January 1999, the court consolidated these cases into a single lawsuit (M.D.
Tenn. No. 3-98-1004). The plaintiffs filed an amended complaint in March 1999.
The plaintiffs seek to represent a class of plaintiffs who purchased Quorum's
common stock from October 25, 1995 through October 21, 1998, except for Quorum's
insiders and their immediate families. The amended complaint names Quorum,
several of Quorum's former officers, and one of Quorum's former outside
directors, as defendants.
The amended complaint alleges that defendants violated the Securities
Exchange Act of 1934. The plaintiffs claim that Quorum materially inflated
Quorum's net revenues during the class period by including in those net revenues
amounts received from the settlement of cost reports that had allegedly been
filed in violation of applicable Medicare regulations years earlier and that,
because of that practice, this statement, which first appeared in Quorum's Form
10-K filed in September 1996, was false: "The Company believes that its owned
hospitals are in substantial compliance with current federal, state, local, and
independent review body regulations and standards." In May 1999, Quorum filed a
motion to dismiss the complaint. On November 13, 2000, the judge denied Quorum's
motion to dismiss the complaint against Quorum and James E. Dalton, Jr.,
Quorum's former President/CEO. The judge granted Quorum's motion to dismiss as
to all other defendants. The judge heard oral argument on Mr. Dalton's motion to
reconsider the judge's denial of Mr. Dalton's motion to dismiss and on April 19,
2001 granted Mr. Dalton's motion to dismiss. The parties recently tentatively
agreed to submit the class action to non-binding mediation. As Quorum's
successor, Triad intends to vigorously defend the claims and allegations in this
action.
At this time Triad cannot predict the final effect or outcome of any of the
ongoing investigations or the class or qui tam actions. If Quorum's hospitals
are found to have violated Federal or state laws relating to Medicare, Medicaid
or other government programs, then Triad may be required to pay substantial
fines and civil and criminal penalties and also may be excluded from
participation in the Medicare and Medicaid programs and other government
programs. Similarly, the amount of damages sought in the qui tam actions are or
in the future may be substantial. Triad could be subject to substantial costs
resulting from defending, or from an adverse outcome in any current or future
investigations, administrative proceedings or litigation. In an effort to
resolve one or more of these matters, Triad may choose to negotiate a
settlement. Amounts paid to settle any of these matters may be
material. Agreements entered into as a part of any settlement could also
materially adversely affect Triad. Any current or future investigations or
actions could have a material adverse effect on Triad's results of operations or
financial position.
From time to time Triad may be the subject of additional investigations or
a party to additional litigation which alleges violations of law. Triad may not
know about those investigations, or about qui tam actions filed against it
unless and to the extent such are unsealed. If any of those matters were
successfully asserted against Triad, there could be a material adverse effect on
Triad's business, financial position, and results of operations or prospects.
F-37
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15--CONTINGENCIES (continued)
Income Taxes
The IRS is in the process of conducting an examination of the federal
income tax returns of Triad for the calendar years ended December 31, 1999 and
2000, and the federal income tax returns of Quorum for the fiscal years ended
June 30, 1999 and 2000. The IRS has not proposed any adjustments.
During the year ended December 31, 2001, Triad (as successor-in-interest to
Quorum) accepted IRS proposed settlements for the fiscal years ended June 30,
1993 through 1998. The most significant items included in the settlements were
adjustments to taxable income for certain tax deductions and losses disallowed
in the preceding IRS audit cycle for the fiscal years ended June 30, 1990
through 1992, tax accounting methods adopted for computing bad debt expense, the
valuation of purchased hospital property and equipment and related depreciable
lives, and income recognition related to cost report settlements. The
settlements did not have a material effect on Triad's results of operations or
financial position.
The IRS has proposed adjustments with respect to partnership returns of
income for certain joint ventures where Quorum owns a majority interest for the
fiscal years ended June 30, 1997 and 1998. The most significant adjustments
involve the tax accounting methods adopted for computing bad debt expense, the
valuation of purchased hospital property and equipment and related depreciable
lives, income recognition related to cost reports and the loss calculation on a
taxable liquidation of a subsidiary. Triad filed protests on behalf of the joint
ventures with the Appeals Division of the IRS contesting substantially all of
the proposed adjustments. In the opinion of management, the ultimate outcome of
the IRS examinations will not have a material effect on Triad's results of
operations or financial position.
HCA Litigation and Investigations
In connection with the Spin-off, Triad entered into a distribution
agreement with HCA. The terms of the distribution agreement provide that HCA
will indemnify Triad for any losses (other than consequential damages) which it
may incur as a result of proceedings described below. HCA has also agreed to
indemnify Triad for any losses (other than consequential damages) which it may
incur as a result of proceedings which may be commenced by government
authorities or by private parties in the future that arise from acts, practices
or omissions engaged in prior to the date of the Spin-off and that relate to the
proceedings described below.
HCA is currently the subject of several Federal investigations into certain
of its business practices, as well as governmental investigations by various
states. HCA is cooperating in these investigations and understands, through
written notice and other means, that it is a target in these investigations.
Given the breadth of the ongoing investigations, HCA expects additional
subpoenas and other investigative and prosecutorial activity to occur in these
and other jurisdictions in the future. HCA is the subject of a formal order of
investigation by the SEC. HCA understands that the SEC's investigation includes
the anti-fraud, insider trading, periodic reporting and internal accounting
control provisions of the Federal securities laws.
HCA is a defendant in several qui tam actions on behalf of the United
States of America, which have been unsealed and served on HCA. The actions
allege, in general, that HCA and certain subsidiaries and/or affiliated
partnerships violated the False Claims Act, 31 U.S.C. ss. 3729 et seq., by
submitting improper claims to the government for reimbursement. The lawsuits
seek three times the amount of damages caused to the United States by the
submission of any Medicare or Medicaid false claims presented by the defendants
to the Federal government, civil penalties of not less than $5,000 nor more than
$10,000 for each such Medicare or Medicaid claim, attorneys' fees and costs. HCA
has disclosed that of the original 30 qui tam actions, the Department of Justice
remains active in and has elected to intervene in 8 actions. HCA has also
disclosed that it is aware of additional qui tam actions that remain under seal
and believes that there may be other sealed qui tam cases of which it is
unaware.
F-38
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15--CONTINGENCIES (continued)
The investigations, actions and claims affecting HCA relate to HCA and its
subsidiaries, including subsidiaries that, prior to the Spin-off, owned
facilities now owned by Triad. On May 5, 2000, Triad was advised that one of the
qui tam cases which had been unsealed listed three of Triad's hospitals as
defendants. This qui tam action alleges various violations arising out of the
relationship between Curative Health Services and the other defendants,
including allegations of false claims relating to contracts with Curative Health
Services for the management of certain wound care centers and excessive and
unreasonable management fees paid to Curative Health Services and submitted for
reimbursement. Two of the three Triad hospitals named as defendants terminated
their relationship with Curative Health Services prior to the Spin-off and the
third hospital terminated its contract thereafter.
In July 1999, Olsten Corporation and its subsidiary, Kimberly Home Health
(neither of which is affiliated with HCA), announced that they would pay $61
million to settle allegations that both companies defrauded the Medicare
program. Kimberly pled guilty to three separate felony charges (conspiracy, mail
fraud and violating the Medicare Anti-Kickback statute) filed by the U.S.
Attorneys in the Middle and Southern Districts of Florida and the Northern
District of Georgia. While HCA was not specifically named in these guilty pleas,
the guilty pleas refer to the involvement of a "Company A" or a "company not
named as a defendant." HCA has disclosed that it believes these references refer
to HCA or its subsidiaries.
HCA is a defendant in a number of other suits, which allege, in general,
improper and fraudulent billing, overcharging, coding and physician referrals,
as well as other violations of law. Certain of the suits have been conditionally
certified as class actions. Since April 1997, numerous securities class action
and derivative lawsuits have been filed in the United States District Court for
the Middle District of Tennessee against HCA and a number of its current and
former directors, officers and/or employees. Several derivative actions have
been filed in state court by certain purported stockholders of HCA against
certain of its current and former officers and directors alleging breach of
fiduciary duty, and failure to take reasonable steps to ensure that HCA did not
engage in illegal practices thereby exposing it to significant damages.
On December 14, 2000, HCA announced that it had entered into a settlement
agreement with the Civil Division of the Department of Justice resolving certain
civil claims actions against HCA relating to diagnosis related group coding,
outpatient laboratory billing and home health issues. HCA paid $745 million in
compensation to the government, with interest accruing at a fixed rate of 6.5%
per annum (beginning May 18, 2000), and HCA's existing letter of credit
agreement with the government was reduced from $1 billion to $250 million. HCA
also entered into a corporate integrity agreement with the Office of the
Inspector General. Civil issues relating to cost reporting and physician
relations are not covered by the settlement agreement.
On December 14, 2000, HCA also announced that it had signed an agreement
with the Criminal Division of the Department of Justice and various U.S.
Attorney's offices to resolve pending Federal criminal actions against HCA. HCA
received a full release from criminal liability for conduct arising from or
relating to billing and reimbursement for services provided pursuant to Federal
health care benefit programs. In addition, the government agreed not to
prosecute HCA for other possible criminal offenses which are or have been under
investigation by the Department of Justice arising from or relating to billing
and reimbursement for services provided pursuant to Federal health care benefit
programs. As part of the criminal agreement, HCA paid the government $95 million
and two non-operating subsidiaries of HCA entered certain pleas in respect of
the criminal actions.
The agreements announced on December 14, 2000 relate only to conduct that
was the subject of the Federal investigations resolved in the agreements, and
HCA has stated publicly that it continues to discuss civil claims relating to
cost reporting and physician relations with the government. These agreements
with the government do not resolve various qui tam actions filed by private
parties against HCA, or any pending state actions. In addition to other claims
not covered by these agreements, the government also reserved its rights under
these agreements to pursue any claims it may have for:
F-39
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15--CONTINGENCIES (continued)
. any civil, criminal or administrative liability under the Internal
Revenue Code;
. any other criminal liability;
. any administrative liability, including mandatory exclusion from
Federal health care programs;
. any liability to the United States (or its agencies) for any conduct
other than the conduct covered in the government's investigation;
. any express or implied warranty claims or other claims for defective
or deficient products or services, including quality of goods and
services, provided by HCA;
. any claims for personal injury or property damage or for other similar
consequential damages arising from the conduct subject to the
investigation; and
. any civil or administrative claims of the United States against
individuals.
In addition, 14 of Triad's current and former hospitals received notices in
early 2001 from the Centers for Medicare and Medicaid Services that it was
re-opening for examination cost reports for Medicare and Medicaid reimbursement
filed by these hospitals for periods between 1993 and 1998, which pre-dates
Triad's Spin-off from HCA. Furthermore, two of Triad's hospitals formerly owned
by Quorum have received such notices. HCA or its predecessors owned these
hospitals during the period covered by the notices. HCA is obligated to
indemnify Triad for liabilities arising out of cost reports filed during these
periods.
On March 28, 2002, HCA announced that it had reached an understanding with
CMS to resolve all Medicaid cost report appeal issues between HCA and CMS on
more than 2,600 cost reports for reporting periods from 1993 through July 31,
2001. The understanding, which is subject to approval of the Department of
Justice and execution of a mutually satisfactory definitive written agreement,
would require HCA to pay CMS the sum of $250 million. The understanding does not
include resolution of outstanding civil issues with the Department of Justice
and relators under HCA's various qui tam cases with respect to cost reports and
physician relations.
HCA has agreed that, in the event that any hospital owned by Triad at the
time of the Spin-off is permanently excluded from participation in the Medicare
and Medicaid programs as a result of the proceedings described above, then HCA
will make a cash payment to Triad, in an amount (if positive) equal to five
times the excluded hospital's 1998 income from continuing operations before
depreciation and amortization, interest expense, management fees, impairment of
long-lived assets, minority interests and income taxes, as set forth on a
schedule to the distribution agreement, less the net proceeds of the sale or
other disposition of the excluded hospital.
HCA will not indemnify Triad under the distribution agreement for losses
relating to any acts, practices or omissions engaged in by Triad after the
Spin-off, whether or not Triad is indemnified for similar acts, practices and
omissions occurring prior to the Spin-off. HCA also will not indemnify Triad
under the distribution agreement for similar qui tam litigation, governmental
investigations and other actions to which Quorum was subject, some of which are
described above. If indemnified matters were asserted successfully against Triad
or any of its facilities, and HCA failed to meet its indemnification
obligations, then this event could have a material adverse effect on Triad's
business, financial condition, and results of operations or prospects.
Triad is unable to predict the effect or outcome of any of the ongoing
investigations or qui tam and other actions, or whether any additional
investigations or litigation will be commenced. The extent to which Triad may or
may not continue to be affected by the ongoing investigations of HCA and the
initiation of additional investigations, if any, cannot be predicted. These
matters could have a material adverse effect on Triad's business, financial
condition, and results of operations or prospects in future periods.
General Liability Claims
Triad is subject to claims and suits arising in the ordinary course of
business, including claims for personal injuries or wrongful restriction of, or
interference with, physicians' staff privileges. In certain of these actions the
claimants may seek punitive damages against Triad, which are usually not covered
by insurance. It is management's opinion that the ultimate resolution of these
pending claims and legal proceedings will not have a material adverse effect on
Triad's results of operations or financial position.
F-40
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16--SEGMENT AND GEOGRAPHIC INFORMATION
Triad operates hospitals and related health care entities. During the years
ended December 31, 2001, 2000, and 1999, approximately 31.9%, 29.6%, and 31.9%,
respectively, of Triad's revenues related to patients participating in the
Medicare program.
In connection with the merger with Quorum (see NOTE 3), Triad reorganized
its segment information into two segments. The segment information for the prior
periods has been restated to conform to the current segment structure. The owned
operations segment includes Triad's acute care hospitals and related healthcare
entities. The management services segment includes the newly acquired management
services business, which provides executive management services to smaller
not-for-profit acute care hospitals.
The distribution of Triad's revenues, EBITDA (which is used by management
for operating performance review, see (a)) and assets are summarized in the
following tables (dollars in millions):
For the years ended December 31,
--------------------------------
Revenues: 2001 2000 1999
-------- -------- --------
Owned operations ........................... $2,546.1 $1,218.2 $1,315.0
Management services ........................ 95.5 -- --
Corporate and other ........................ 27.9 17.3 14.1
-------- -------- --------
$2,669.5 $1,235.5 $1,329.1
======== ======== ========
EBITDA (a): 2001 2000 1999
-------- -------- --------
Owned operations ........................... $374.9 $170.8 $140.7
Management services ........................ 15.3 -- --
Corporate and other ........................ (29.1) 3.2 (16.2)
------ ------ ------
$361.1 $174.0 $124.5
====== ====== ======
December 31,
---------------------
Assets: 2001 2000
-------- --------
Owned operations ..................................... $3,739.7 $1,263.7
Management services .................................. 154.9 --
Corporate and other .................................. 270.7 136.8
-------- --------
$4,165.3 $1,400.5
======== ========
EBITDA for owned operations includes equity in earnings (loss) of
affiliates of $14.5 million, $(1.4) million and $(3.1) million in years ended
December 31, 2001, 2000, and 1999, respectively.
A reconciliation of EBITDA to income from operations before income taxes
follows (in millions):
F-41
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16--SEGMENT AND GEOGRAPHIC INFORMATION (continued)
For the years ended December 31,
--------------------------------
2001 2000 1999
------ ------ -------
Total EBITDA for reportable segments ............... $361.1 $174.0 $ 124.5
Depreciation ....................................... 134.4 76.1 89.8
Amortization ....................................... 35.7 7.1 8.7
Interest expense allocated from HCA ................ -- -- 22.5
Interest expense ................................... 127.6 62.2 45.2
Interest income .................................... (1.6) (4.9) (2.5)
ESOP expense ....................................... 9.3 7.1 3.7
Management fees allocated from HCA ................. -- -- 8.9
Gain on sale of assets ............................. (23.1) (7.9) (8.6)
Impairment of long-lived assets .................... 23.1 8.0 69.2
Minority interests in earnings of consolidated
entities ......................................... 7.2 9.0 8.7
------ ------ -------
Income (loss) from operations before income taxes... $ 48.5 $ 17.3 $(121.1)
====== ====== =======
(a) EBITDA is defined as income (loss) from operations before
depreciation, amortization, interest expense, interest income, ESOP
expense, gain on sale of assets, impairment of long-lived assets,
minority interests in earnings of consolidated entities, and income
taxes. EBITDA is commonly used as an analytical indicator within the
health care industry, and also serves as a measure of leverage
capacity and debt service ability. EBITDA should not be considered as
a measure of financial performance under generally accepted accounting
principles, and the items excluded from EBITDA are significant
components in understanding and assessing financial performance.
EBITDA should not be considered in isolation or as an alternative to
net income (loss), cash flows generated by operating, investing or
financing activities or financial statement data presented in the
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 measure of other
companies.
NOTE 17--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
A summary of other current liabilities as of December 31 follows (in
millions):
2001 2000
------ ------
Due to HCA ................................................... $ 2.1 $ 0.6
Employee benefit plans ....................................... 17.8 0.8
Taxes, other than income ..................................... 19.3 9.2
Accrued interest ............................................. 13.9 5.7
Self insured employee benefit programs ....................... 23.2 3.0
Current portion of professional liability risk ............... 8.7 1.0
Deferred income .............................................. 4.0 --
Other ........................................................ 44.0 7.8
------ ------
$133.0 $ 28.1
====== ======
A summary of activity in Triad's allowances for doubtful accounts follows
(in millions):
F-42
TRIAD HOSPITALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17--OTHER CURRENT LIABILITIES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
(continued)
Additions Accounts
Balances at Charged Written off, Balances at
Beginning of to Net of End of
Period Expense Recoveries Acquisition Sales Period
------------ --------- ------------ ----------- ------- -----------
Allowances for doubtful accounts:
Year ended December 31, 1999... $155.9 $129.0 $(128.2) -- -- $156.7
Year ended December 31, 2000... $156.7 $103.6 $(137.4) -- -- $122.9
Year ended December 31, 2001... $122.9 $239.9 $(234.7) $ 74.6 $(10.3) $192.4
NOTE 18--UNAUDITED QUARTERLY FINANCIAL INFORMATION
The quarterly interim financial information shown below has been prepared
by Triad's management and is unaudited. It should be read in conjunction with
the audited consolidated financial statements appearing herein (dollars in
millions, except per share amounts).
2001
First Second Third Fourth
------- ------- ------- -------
Revenues ............................. $ 365.8 $ 643.2 $ 829.5 $ 831.0
Net income (loss) .................... $ 7.8 $ (21.3)(a) $ 6.5 $ 9.8(b)
Basic net income (loss) per share .... $ 0.24 $ (0.36)(a) $ 0.09 $ 0.14(b)
Diluted net income (loss) per share... $ 0.22 $ (0.36)(a) $ 0.09 $ 0.13(b)
2000
First Second Third Fourth
------- ------- ------- -------
Revenues ............................. $ 311.6 $ 302.5 $ 301.3 $ 320.1
Net income (loss) .................... $ 8.0(c) $ 1.1 $ (1.0) $ (3.7)(d)
Basic net income (loss) per share..... $ 0.26(c) $ 0.03 $ (0.03) $ (0.11)(d)
Diluted net income (loss) per share... $ 0.25(c) $ 0.03 $ (0.03) $ (0.11)(d)
(a) During the second quarter of 2001, Triad recorded a $2.4 million, net of
tax benefit, extraordinary loss on retirement of debt.
(b) During the fourth quarter of 2001, Triad recorded $6.5 million pretax
reduction to expense related to preliminary purchase price allocations,
$23.1 million pretax charges related to impairment of certain long-lived
assets, a $22.0 million pretax gain on sale of assets and a $0.8 million,
net of tax benefit, extraordinary loss on retirement of debt.
(c) During the first quarter of 2000, Triad recorded a $0.9 million pretax
charge related to the impairment of certain long-lived assets and a $4.2
million gain on sale of assets.
(d) During the fourth quarter of 2000, Triad recorded a $7.1 million pretax
charge related to the impairment of certain long-lived assets and a $3.3
million gain on sale of assets.
F-43