. the announced divestitures of hospitals in certain markets; . the disposition of ten acute care hospitals and two surgery centers; and . the transfer pursuant to a long-term lease to an unaffiliated third party of two acute care hospitals and three ambulatory surgery centers.
As discussed previously, 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. During the year ended December 31, 1999, Triad and Columbia/HCA sold ten hospitals, which had net revenues of $189.7 million and $330.3 million and losses before impairment charges, gain on sale of assets, and income tax benefit of $50.0 million and $45.6 million for the years ended December 31, 1999 and 1998, respectively. Of the two remaining facilities, one was closed on February 11, 2000 and the sale of the remaining facility is expected to be completed by December 31, 2000. Net revenues for these two facilities were $49.9 million and $50.0 million and losses before impairment charges, gain on sale, and income tax benefit of $7.8 million and $13.0 million for the years ended December 31, 1999 and 1998, respectively.
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 distribution, Columbia/HCA agreed to indemnify Triad for any payments which it is required to make in respect of Medicare, Medicaid and Blue Cross cost reports relating to periods ending on or prior to the date of the distribution, and Triad agreed to indemnify Columbia/HCA for and pay to Columbia/HCA any payments received by it relating to such cost reports relating to periods ending on or prior to the date of the distribution. Triad will be responsible for the filing of these cost reports and any terminating cost reports. Triad has recorded a receivable from Columbia/HCA relating to the indemnification of $28.0 million as of December 31, 1999.
sold during 1999, $3.0 million of favorable cost report settlements in 1998 and $6.5 million reduction in equity in earnings of non-consolidating entities due to the start up of operations of a hospital that opened in May 1999.
Interest expense allocated from Columbia/HCA which was represented by interest incurred on the net intercompany balance with Columbia/HCA, decreased to $22.5 million in the year ended December 31, 1999
compared to $66.2 million in the year ended December 31, 1998 due to the distribution which eliminated the intercompany balances.
Impairments on long-lived assets were $69.2 million during the year ended December 31, 1999 compared to $55.1 million during the year ended December 31, 1998 due to management's reassessment of certain facilities that would not be part of the core markets that Triad would go forward with after the distribution. Management determined that the potential sales prices of these facilities would not cover the book value of the facilities and a write down would be necessary.
Salaries and benefits, as a percentage of revenues, increased to 44.1% in the year ended December 31, 1998 from 41.4% in the year ended December 31, 1997. The increase was due to a 4.4% increase in salaries and benefits per adjusted admission and Triad's inability to adjust staffing levels to mitigate the declining revenue per adjusted admission. Man-hours per adjusted admission increased 1.1% in 1998 compared to 1997.
Supply costs increased as a percentage of revenues to 15.2% in the year ended December 31, 1998 from 14.5% in the year ended December 31, 1997 due to the 1.9% decline in net revenue per adjusted admission, while the cost of supplies per adjusted admission increased 3.2%.
During the year ended December 31, 1998, Triad, as part of its strategic business plan, decided to divest certain of its facilities. The divestitures were expected to be completed in 1999 through sales, leases, joint ventures or closures. The carrying value for these facilities expected to be sold was reduced to fair value, based upon estimated selling values, resulting in a pre- tax impairment charge of $55.1 million.
Management fees allocated by Columbia/HCA were $29.3 million in the year ended December 31, 1998 and $25.4 million in the year ended December 31, 1997. These amounts represent allocations, using revenues as the allocation basis, of the corporate general and administrative expenses of Columbia/HCA. Management estimates that if they managed comparable general and administrative functions for Triad as a separate, independent entity, the costs incurred would be approximately $22.4 million, based upon their 1999 projections.
The following is a summary of core operating (pro forma) results from continuing operations for the years ended December 31, 1999, 1998 and 1997 (dollars are in millions, except per share amounts and ratios). The core operating (pro forma) results from continuing operations reflect the following adjustments at the beginning of each period:
(a) elimination of the year ended December 31, 1999, 1998 and 1997 results of operations of nine acute care hospitals and one psychiatric hospital which were sold during the year ended December 31, 1999, the proceeds of two sales were retained by Columbia/HCA;
(d) elimination of the year ended December 31, 1999, 1998 and 1997 results of operations of one acute care hospital which was swapped for another facility on June 1, 1999; and
(e) inclusion of the first five months of 1999 and the years ended December 31, 1998 and 1997 results of operations of one acute care hospital which was received in a swap of another facility on June 1, 1999.
(4) To adjust historical retirement plan expenses recorded as a component of salaries and wages and record the estimated annual Triad Hospitals, Inc. Retirement Savings Plan (the "ESOP") expense. Triad's ESOP was established on June 10, 1999 and the ESOP purchased 3.0 million newly issued shares of Triad's common stock. The ESOP shares will be released from a suspense account and allocated to Triad's participating employees over a 10-year period. The non-cash ESOP expense will be recognized as the shares are committed to be released and allocated to the participants and will be based upon the fair value of the shares released.
(7) Core (pro forma) income (loss) per share was computed using the weighted average shares outstanding for the year ended December 31, 1999.
understanding and assessing financial performance. Core (pro forma) 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 combined financial statements as an indicator of financial performance or liquidity. Because core (pro forma) EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, core (pro forma) EBITDA as presented may not be comparable to other similarity titled measures of the companies. (b) This table does not include any operating statistics, except for admissions, for the joint ventures and facilities leased to others. (c) Licensed beds are those beds for which a facility has been granted approval to operate from the applicable state licensing agency. (d) Available beds are those beds a facility actually has in use. (e) Represents the total number of patients admitted to Triad's facilities or in the facility for a period in excess of 23 hours 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 total number of days each patient stays in Triad's hospitals. (h) Adjusted patient days are used by management and certain investors as a general measure of combined inpatient and outpatient volume. Adjusted patient days are computed by multiplying patient days (inpatient volume) by the sum of gross inpatient revenue and gross outpatient revenue and then dividing the resulting amount by gross inpatient revenue. The adjusted patient days computation "adjusts" outpatient revenue to the volume measure (patient days) used to measure inpatient volume resulting in a general measure of combined inpatient and outpatient volume. (i) Represents the average number of days an admitted patient stays in Triad's hospitals. Average length of stay has declined due to the continuing pressures from managed care and other payers to restrict admissions and reduce the number of days that are covered by the payers for certain procedures, and by technological and pharmaceutical improvements. (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. The declining occupancy rate is primarily attributed to the trend toward more services, that were previously performed in an inpatient setting, being performed on an outpatient basis and the decline in average length of stay per admission. (l) Operating expenses are defined as salaries and benefits, supplies, provision for doubtful accounts and other operating expenses.
On a core (pro forma) basis, losses from continuing operations before income taxes decreased to $2.5 million in the year ended December 31, 1999 from $32.7 million in the year ended December 31, 1998. The core (pro forma) decrease was primarily due to the improved operations of the facilities that will remain after the completed and planned divestitures. This was partially offset by $7.1 million reduction in equity in earnings of non-consolidating entities due to the start-up of operations at one hospital which opened in May 1999 and $2.8 million of favorable cost report settlements in the year ended December 31, 1998.
On a core (pro forma) basis, supplies, as a percentage of net revenue, increased to 14.9% compared to 14.5% in the year ended December 31, 1999 and 1998, respectively. Supplies increased 2.4% per adjusted admission due to increase in the purchases of higher cost items due to higher acute care patients and increases in prices.
On a core (pro forma) basis, interest expense and minority interests in earnings of consolidated entities remained relatively unchanged for the year ended December 31, 1998 compared to December 31, 1997.
May 11, 2000, a $65.0 million Tranche A loan bearing interest at LIBOR plus 3.25% with principal amounts due beginning in 1999 through 2004, a $200.0 million Tranche B loan bearing interest at LIBOR plus 4.00% with principal amounts due beginning in 1999 through 2005, and the $325.0 million of senior subordinated notes due in 2009. Triad also assumed various indebtedness of Columbia/HCA related to specific hospitals in an aggregate amount of approximately $8.8 million with interest rates averaging 5.7% maturing over five years. Triad also assumed a $125.0 million revolving line of credit bearing interest at LIBOR plus 3.25% due in 2004. No amounts were outstanding under the revolving credit facility as of December 31, 1999.
Triad sold 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 recognized during the year ended December 31, 1999. For the year ended December 31, 1999 and 1998, these facilities had net revenues of $67.1 million and $95.8 million, respectively, and pre-tax losses before gain on sale of assets and impairment charges of $3.5 million and $8.3 million, respectively.
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.