<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
/X/
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED MAY 31, 1995.
OR
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER I-7293
------------------------
TENET HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C>
NEVADA 95-2557091
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
2700 COLORADO AVENUE 90404
SANTA MONICA, CALIFORNIA (Zip Code)
(Address of principal executive
officer)
</TABLE>
AREA CODE (310) 998-8000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- -------------------------------------------------------------------------------- -----------------------------
<S> <C>
Common Stock New York Stock Exchange
Pacific Stock Exchange
8 5/8% Senior Notes due 2003 New York Stock Exchange
9 5/8% Senior Notes due 2002 New York Stock Exchange
10 1/8% Senior Subordinated Notes due 2005 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
</TABLE>
------------------------
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 (Section229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. / /
As of November 30, 1995, there were 201,436,819 shares of Common Stock
outstanding. The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, based on the closing price of these shares on
the New York Stock Exchange was $3,600,683,140. For the purpose of the foregoing
calculation only, all directors and executive officers of the Registrant have
been deemed affiliates.
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended May 31, 1995, have been incorporated by reference into Parts I, II
and IV of this Report. Portions of the definitive Proxy Statement for this
Registrant's 1995 Annual Meeting of the Shareholders have been incorporated by
reference into Part III of this Report.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The following has been added as the last paragraph of Item 3:
Although, based upon information currently available to it, management
believes that the amount of damages in excess of the reserves for unusual
litigation costs that may be awarded in the above unresolved matters cannot
reasonably be estimated, management does not believe it is likely that any
damages awarded in such legal proceedings will have a material adverse effect on
the Company's results of operations, liquidity or capital resources.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data and other
operating information for Tenet for each of the fiscal years in the five-year
period ended May 31, 1995. The selected financial information for each of the
five annual periods has been derived from the Consolidated Financial Statements,
which have been audited by KPMG Peat Marwick LLP, independent auditors for
Tenet, and from the underlying accounting records. The report of KPMG Peat
Marwick LLP covering the Consolidated Financial Statements refers to a change in
the method of accounting for income taxes in 1994.
All information contained in the following tables should be read in
conjunction with "Management's Discussion and Analysis" and with the
Consolidated Financial Statements and related notes included herein. Certain
amounts derived from the consolidated statements of operations have been
reclassified to conform with the presentation below.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------------------------
1995 1994(2) 1993(1) 1992 1991
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (3)
Net operating revenues...................................................... $ 3,318.4 $ 2,943.2 $ 3,178.2 $ 2,934.3 $ 2,604.6
Operating expenses:
Salaries and benefits..................................................... 1,366.8 1,293.4 1,464.8 1,328.1 1,157.7
Supplies.................................................................. 431.5 339.4 349.2 318.9 252.8
Provision for doubtful accounts........................................... 137.5 107.0 114.6 123.1 133.7
Other operating expenses 759.2 666.5 689.1 616.5 596.2
Depreciation 164.4 142.7 141.8 122.4 108.9
Amortization 30.6 18.1 18.6 18.4 16.2
Restructuring charges (4)................................................. 36.9 77.0 51.6 17.9 --
--------- --------- --------- --------- ---------
Operating income............................................................ 391.5 299.1 348.5 389.0 339.1
Interest, net of capitalized portion........................................ (138.1) (70.0) (75.3) (89.4) (123.9)
Investment earnings......................................................... 27.5 27.7 21.1 28.7 29.1
Equity in earnings of unconsolidated affiliates............................. 28.4 23.8 12.5 6.7 5.3
Minority interest expense................................................... (9.4) (8.2) (10.0) (6.8) (4.4)
Net gain/(loss) on disposals of facilities, long-term investments and
subsidiary's common stock.................................................. 29.5 87.5 121.8 31.0 (0.1)
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes....................... 329.4 359.9 418.6 359.2 245.1
Taxes on income............................................................. (135.0) (144.0) (155.0) (141.0) (100.0)
--------- --------- --------- --------- ---------
Income from continuing operations........................................... $ 194.4 $ 215.9 $ 263.6 $ 218.2 $ 145.1
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common share from continuing operations, fully diluted......... $ 1.06 $ 1.23 $ 1.49 $ 1.19 $ 0.87
Cash dividends per common share............................................. -- $ 0.12 $ 0.48 $ 0.46 $ 0.40
BALANCE SHEET DATA:
Working capital (deficit)................................................... $ 267.1 $ (196.3) $ 155.9 $ 223.9 $ 346.0
Total assets................................................................ 7,918.4 3,697.0 4,173.4 4,236.4 4,060.2
Long-term debt, excluding current portion 3,273.4 223.1 892.4 1,066.2 1,140.4
Shareholders' equity........................................................ 1,986.1 1,319.9 1,752.1 1,674.0 1,762.3
<FN>
- ------------------------------
(1) Results of operations for periods prior to April 1993 include, on a
consolidated basis, the results of Westminster, the ownership of which was
reduced from approximately 90% to approximately 42% in April 1993 through a
public offering of Westminster common stock.
(2) Results of operations for the periods presented include the results,
through the respective dates of sale, of 29 inpatient rehabilitation
hospitals and 45 related satellite outpatient clinics sold in fiscal 1994,
23 long-term care facilities sold to Hillhaven in fiscal 1994 and TRC, in
which Tenet sold an approximately 75% interest in August 1994.
(3) Results of operations for all periods presented exclude Tenet's psychiatric
division, which was discontinued as of November 30, 1993, but include other
divested businesses through the date of their divestiture that were not
classified as discontinued operations.
(4) The restructuring charge for 1995 primarily consists of severance payments
and outplacement services for involuntarily terminated former NME employees
and other related costs in connection with the relocation of substantially
all of the Company's hospital support activities located in Southern
California and Florida to Dallas, Texas in connection with the Merger. The
restructuring charge for 1994 relates to a plan initiated by Tenet in April
1994 to significantly decrease overhead costs by reducing corporate and
division staffing levels and selling the corporate headquarters building.
In fiscal 1992 and fiscal 1993, the restructuring charges related to the
combination of Tenet's rehabilitation hospital division into its general
hospital division, a corporate overhead reduction program begun in April
1993, and severance costs incurred in connection with a change in senior
executive management.
</TABLE>
1
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE MERGER
On March 1, 1995, in a transaction accounted for as a purchase, the Company
acquired AMH for $1.5 billion in cash and 33.2 million shares of the Company's
common stock valued at $488 million. In connection with the Merger, the Company
also repaid $1.8 billion of AMH and Tenet debt. The Merger and debt retirements
were financed by the Credit Agreement and the public issuance of $1.2 billion in
new debt securities.
Prior to the Merger, the Company operated 33 domestic general hospitals with
6,620 licensed beds in six states, seven skilled nursing facilities, six
rehabilitation hospitals and four psychiatric hospitals located on or near
general hospital campuses. Through its international hospital division, the
Company operated 13 general hospitals in Australia, Malaysia, Singapore and
Spain with a total of 1,693 licensed beds. With the Merger, the Company acquired
37 domestic general hospitals with 8,831 beds, bringing its domestic general
hospital complement to 70 hospitals with 15,451 licensed beds in thirteen
states. The acquisition also included a psychiatric hospital, ancillary
facilities at or nearby many of AMH's hospitals, including outpatient surgery
centers, rehabilitation units, long-term-care facilities, home healthcare
programs, and ambulatory, occupational and rural healthcare clinics.
Management believes that the transaction has strengthened the Company in its
existing markets and enhanced its ability to deliver quality, cost-effective
healthcare services in new markets. The consolidation of the two companies is
expected to result in certain cost savings, currently estimated to amount to
approximately $60.0 million beginning in the fiscal year ending May 31, 1996.
The $60.0 million estimate is before any severance or other costs of
implementing certain efficiencies. These savings are expected to be realized
through the elimination of duplicate corporate overhead expenses, reduced
supplies expense through the incorporation of the acquired facilities into the
Company's existing group purchasing program, and improved collection of the
acquired AMH facilities' accounts receivable.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's liquidity has been derived principally from the
cash proceeds of operating activities, disposals of assets and investments, and
realization of tax benefits associated with losses on sales of facilities.
Fiscal 1995 is the only year since the Company began reporting cash flows in
1987 in which cash was not provided by operating activities. During 1995, due
principally to the effects of discontinued operations and restructuring charges,
cash flows from operating activities was a negative $7.0 million. Management
believes that future cash flows from operations will be positive. This
liquidity, along with the availability of credit under the Credit Agreement, is
believed to be adequate to meet debt service requirements and to finance planned
capital expenditures, acquisitions and other known operating needs over the
short-term (1 to 18 months), and the long-term (18 months to 3 years), including
resolution of the unusual legal proceedings referred to herein. The only
significant remaining obligations related to discontinued operations are the
unresolved legal proceedings discussed below.
The Company's strategy includes the pursuit of growth through joint
ventures, including the development of integrated healthcare systems in certain
strategic markets, hospital acquisitions and physician practice acquisitions.
All or portions of this growth may be financed through available credit under
the Credit Agreement or, depending on capital market conditions, the sale of
additional debt or equity securities or other bank borrowings. The Company's
unused borrowing capacity under the Credit Agreement was $326.0 million as of
May 31, 1995.
During 1995 net cash used in operating activities was $7.0 million, after
expenditures of $427.5 million related to restructuring charges and the
discontinued psychiatric hospital business. Cash provided by operating
activities during 1994 was $147.0 million and in 1993 it was $398.0 million.
Management believes that patient volumes, cash flows and operating results
at the Company's principal healthcare businesses, particularly those owned and
operated by the Company prior to the Merger, have been adversely affected by the
legal proceedings and investigations related primarily to the Company's
2
<PAGE>
former psychiatric business. See Note 8B to the Consolidated Financial
Statements. The most significant of these matters were resolved last year. The
Company has recorded reserves for the remaining legal proceedings not yet
settled as of May 31, 1995, and an estimate of the legal fees related to these
matters to be incurred subsequently, totaling approximately $75.7 million, of
which $59.6 million is expected to be paid within one year. These reserves
represent management's estimates of the net costs of the disposition of these
matters. There can be no assurance, however, that the ultimate liability will
not exceed such estimates. Although, based upon information currently available
to it, management believes that the amount of damages in excess of the reserves
for unusual litigation costs that may be awarded in any of these matters cannot
reasonably be estimated, management does not believe it is likely that any
damages awarded in such legal proceedings will have a material adverse effect on
the Company's results of operations, liquidity or capital resources.
Proceeds from the sales of facilities, investments and other assets were
$172.0 million during 1995, compared with $569.0 million during 1994 and $69.8
million in 1993. In June 1995, the Company sold two hospitals and related
businesses in Singapore for $243.3 million. In addition, the buyer assumed
approximately $78.3 million in debt. See Note 18 to the Consolidated Financial
Statements. The net proceeds were used to pay off secured bank loans under the
Company's Credit Agreement. During fiscal 1996, the Company has received $91.8
million from the redemption of its Hillhaven Series C Preferred Stock and Series
D Preferred Stock, $12.0 million from the sale of its holdings in Malaysia, and
expects to receive an aggregate of approximately $82.0 million from the sale of
its holdings in Australia and Thailand. In addition, the Company is continuing
to evaluate other opportunities to monetize other investments and certain other
assets.
The Company's cash and cash equivalents at May 31, 1995 were $155.0 million,
a decrease of $158.2 million over May 31, 1994. The decrease includes the
effects of expenditures amounting to $379.8 million during fiscal 1995 relating
to the resolution of unusual legal proceedings and government investigations
related to the discontinued psychiatric business. Working capital at May 31,
1995 was $267.1 million, compared with a working capital deficit of $196.3
million at May 31, 1994 and working capital of $155.9 million at May 31, 1993.
The principal reason for the decline in working capital in 1994 was the fiscal
1994 increase in the current portion of long-term debt to $544.5 million due to
notes maturing in April 1995 and a $392.6 million increase in current reserves
for discontinued operations and restructuring charges.
Cash payments for property and equipment were $263.6 million in 1995,
compared with $184.8 million in 1994 and $319 million in 1993. Capital
expenditures for the Company, before any significant acquisitions of facilities,
are expected to be approximately $400 million per year for each of the next
three years. The estimated cost to complete major approved construction projects
is approximately $157.5 million, all of which is related to expansion,
improvement and equipping domestic hospital facilities, and a significant
portion of which is expected to be spent over the next three years. In August
1995, the Company acquired Mercy+Baptist and in September 1995 the Company
acquired Providence. The aggregate cash consideration for these transactions was
$302.9 million (including the purchase or assumption of working capital). The
Company intends to continue to invest in existing and new facilities.
The Credit Agreement and debt securities have affirmative, negative and
financial covenants with which the Company must comply. These covenants include,
among other requirements, limitations on borrowings and guarantees, liens,
investments, and assets sales, a prohibition on the payment of dividends and
covenants regarding maintenance of specified levels of net worth, debt ratios
and fixed-charge ratios.
RESULTS OF OPERATIONS
Income from continuing operations before income taxes was $329.4 million in
1995, compared with $359.9 million and $418.6 million in 1994 and 1993,
respectively. The most significant transactions affecting the results of
continuing operations were (i) the Merger; (ii) the financing of the Merger,
which will add more than $250 million annually in interest expense; and (iii) a
series of divestitures during fiscal 1993, 1994 and 1995, including the sale of
all but six of the Company's rehabilitation hospitals and related outpatient
clinics in January and March of 1994, the sales of majority interests in two
non-hospital subsidiaries, and the
3
<PAGE>
sale to Hillhaven of all but seven of the Company's long-term care facilities,
all of which had been leased to Hillhaven. Other unusual pretax items relating
to restructuring charges and gains or losses on asset sales are shown below:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Gain (loss) on sales of facilities and long-term investments.................... $ (2.5) $ 87.5 $ 92.8
Gains on sales of subsidiaries' common stock.................................... 32.0 -- 29.0
Restructuring charges........................................................... (36.9) (77.0) (51.6)
--------- --------- ---------
Net unusual pretax items (after tax--$0.03 fully diluted per share in 1995,
$0.04 in 1994 and $0.30 in 1993)............................................... $ (7.4) $ 10.5 $ 70.2
--------- --------- ---------
--------- --------- ---------
</TABLE>
Excluding the unusual items as shown in the table above, income from
continuing operations before income taxes would have been $348.4 million in
1993, $349.4 million in 1994 and $336.8 million in 1995.
The following is a summary of continuing operations for the past three
fiscal years:
<TABLE>
<CAPTION>
1995 1994 1993 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS) (PERCENTAGE OF NET
OPERATING REVENUES)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net operating revenues:
Domestic general hospitals...................... $ 2,776.8 $ 2,133.3 $ 2,112.9 83.7% 72.5% 66.5%
Other domestic operations (1)................... 310.6 275.3 271.9 9.3 9.3 8.5
International operations........................ 214.4 175.4 162.4 6.5 6.0 5.1
Divested operations (2)......................... 16.6 359.2 631.0 0.5 12.2 19.9
--------- --------- --------- --------- --------- ---------
Net operating revenues............................ 3,318.4 2,943.2 3,178.2 100.0 100.0 100.0
--------- --------- --------- --------- --------- ---------
Operating expenses:
Salaries and benefits........................... (1,366.8) (1,293.4) (1,464.8) 41.2 43.9 46.1
Supplies........................................ (431.5) (339.4) (349.2) 13.0 11.5 11.0
Provision for doubtful accounts................. (137.5) (107.0) (114.6) 4.1 3.6 3.6
Other operating expenses........................ (759.2) (666.5) (689.1) 22.9 22.7 21.7
Depreciation.................................... (164.4) (142.7) (141.8) 5.0 4.9 4.4
Amortization.................................... (30.6) (18.1) (18.6) 0.9 0.6 0.6
Restructuring charges........................... (36.9) (77.0) (51.6) 1.1 2.6 1.6
--------- --------- --------- --------- --------- ---------
Operating income.................................. $ 391.5 $ 299.1 $ 348.5 11.8% 10.2% 11.0%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<FN>
- ------------------------
(1) Net operating revenues of other domestic operations consist primarily of
revenues from (i) the Company's rehabilitation hospitals, long-term-care
facilities and psychiatric hospitals that are located on or near the same
campuses as the Company's general hospitals; (ii) healthcare joint ventures
operated by the Company; (iii) subsidiaries of the Company offering health
maintenance organizations, preferred provider organizations and indemnity
products; and (iv) revenues earned by the Company in consideration of the
guarantees of certain indebtedness and leases of Hillhaven and other third
parties.
(2) Net operating revenues of divested operations consist of revenues from (i)
TRC prior to the August 1994 sale of the Company's approximately 75% equity
interest; (ii) 29 rehabilitation hospitals and 45 related satellite
outpatient clinics prior to their sales in January and March of 1994; (iii)
85 long-term care facilities prior to their sales to Hillhaven in fiscal
1993 and 1994; and (iv) Westminster prior to the April 1993 public offering
of common stock that reduced the Company's equity interest in Westminster
from approximately 90% to approximately 42%.
</TABLE>
Net operating revenues were $3.3 billion in 1995, compared with $2.9 billion
in 1994 and $3.2 billion in 1993. The current year includes revenues
attributable to facilities acquired in the Merger for the three months ended May
31, 1995. The prior two years include revenues of $359.2 million and $631.0
million, respectively, from the sold rehabilitation hospitals and the other
divestitures mentioned above through the date of divestiture.
Operating income increased 30.9% to $391.5 million in 1995 from $299.1
million in 1994 and $348.5 million in 1993. The operating income margin
increased to 11.8% from 10.2% in 1994 and 11.0% in 1993. The increase in the
operating margin is primarily due to effective cost-control programs in the
hospitals and the sale of the rehabilitation hospitals that, as a whole, had
lower margins than the general hospitals.
4
<PAGE>
Net operating revenues from the Company's domestic general hospital
operations increased 33% to $2.8 billion in 1995, compared with $2.1 billion in
both 1994 and 1993. Excluding net operating revenues from the facilities
acquired in the Merger, net operating revenues for the Company's domestic
general hospitals would have remained relatively flat as less intensive services
continue to shift from an inpatient to an outpatient basis or to alternative
healthcare delivery services because of technological improvements and continued
pressures by payors to reduce admissions and lengths of stay.
The Company continues to experience an increase in Medicare revenues as a
percentage of total patient revenues. The Medicare program accounted for
approximately 39% of the net patient revenues of the domestic general hospitals
in 1995 and 36% and 34% in 1994 and 1993, respectively. Historically, rates paid
under Medicare's prospective payment system for inpatient services have
increased, but such increases have been less than cost increases. Payments for
Medicare outpatient services are presently cost reimbursed, but there are
pending certain proposed regulations that would convert reimbursement to a
prospective payment system. Medicaid programs in certain states in which the
Company operates also are undergoing changes that will result in reduced
payments to hospitals. The Company is addressing the reduced Medicaid payments
by implementing various cost-control programs, such as using flexible staffing
programs, reducing overhead and enhancing the Company's group purchasing and
equipment maintenance programs, focusing on reducing operating costs, and
forming integrated health delivery systems to increase revenues. Pressures to
control healthcare costs have resulted in an increase in the percentage of
managed care payors. The Company anticipates that its managed care business will
increase in the future.
The patient volumes and net operating revenues of the Company's domestic
general hospitals are subject to seasonal variations caused by a number of
factors, including but not necessarily limited to, seasonal cycles of illness,
climate and weather conditions, vacation patterns of both hospital patients and
admitting physicians, and other factors relating to the timing of elective
hospital procedures.
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
1994 TO
1995 1994 1993 1995
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Domestic general hospital operating data:
Number of hospitals (at end of period).............. 70 35 35 35
Licensed beds (at end of period).................... 15,622 6,873 6,818 127.3%
Net inpatient revenues (in millions)................ $ 1,937.9 $ 1,568.4 $ 1,529.5 23.6%
Net outpatient revenues (in millions)............... $ 786.3 $ 557.2 $ 534.7 41.1%
Admissions.......................................... 267,868 207,868 210,669 28.9%
Equivalent admissions............................... 358,664 271,004 274,216 32.3%
Average length of stay.............................. 5.6 5.6 5.6 --
Patient days........................................ 1,507,865 1,154,030 1,187,181 30.7%
Equivalent patient days............................. 1,997,508 1,493,314 1,537,913 33.8%
Net inpatient revenues per patient day.............. $ 1,285 $ 1,359 $ 1,288 (5.4%)
Utilization of licensed beds........................ 46.4% 46.8% 47.8% (0.4%)*
Outpatient visits................................... 2,293,586 1,472,258 1,473,294 55.8%
<FN>
- ------------------------
* The % change is the difference between the 1995 and 1994 percentages shown.
</TABLE>
5
<PAGE>
The general hospital industry in the United States and the Company's general
hospitals continue to have significant unused capacity, and thus there is
substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative healthcare delivery services for
less acutely ill patients. Increased competition, admission constraints and
payor pressures are expected to continue. Another factor impacting operating
results is the slow recovery of the California economy from a recent recession.
At May 31, 1995, 26% of the Company's domestic general hospital beds were in
California.
Allowances and discounts are expected to continue to rise because of
increasing cost controls by government and group health payors and because the
percentage of business from managed care programs (and related discounts)
continues to grow. The Company has been implementing various cost-control
programs focused on reducing operating costs. The Company's general hospitals
have been improving operating margins in a very competitive environment, due in
large part to enhanced cost controls and efficiencies being achieved throughout
the Company.
Net operating revenues from the Company's other domestic operations
increased 12.8% to $310.6 million in 1995, compared with $275.3 million in 1994
and $271.9 million in 1993. This increase primarily reflects continued growth of
National Health Plans, the Company's HMO and insurance subsidiary, to
approximately 57,000 HMO members at May 31, 1995, compared with approximately
40,000 members at May 31, 1994.
Net operating revenues from the Company's international operations increased
22.2% to $214.4 million in 1995, compared with $175.4 million in 1994 and $162.4
million in 1993. This increase is principally attributable to a 17.4% increase
in net operating revenues of AME and a 13.8% increase in the net operating
revenues of the Company's two hospitals in Singapore. In addition, Centro Medico
Teknon in Barcelona, Spain was opened in February 1994 and became a wholly owned
subsidiary in June 1994 when the Company acquired its partner's 50% interest.
On June 28, 1995, the Company sold the two hospitals it owned and operated
in Singapore and on October 3, 1995 the Company sold its 30% interest in a
hospital in Malaysia. In addition, the Company has announced agreements to sell
its holdings in Thailand and Australia. See "Business -- International
Operations." Net operating revenues and operating profits from the facilities
sold and to be sold were $203.4 million and $37.0 million, respectively, in the
year ended May 31, 1995.
Operating expenses, which include salaries and benefits, supplies, provision
for doubtful accounts, depreciation and amortization, restructuring charges and
other operating expenses, were $2.9 billion in 1995, $2.6 billion in 1994 and
$2.8 billion in 1993. Operating expenses for the current year include three
months of operating expenses from the facilities acquired in the Merger.
Prior-year periods include the operating expenses of the divested operations, as
discussed above, and to that extent, the current year and prior-year periods are
not comparable.
Salaries and benefits expense as a percentage of net operating revenues was
41.2% in 1995, 43.9% in 1994 and 46.1% in 1993. The improvement in 1995 is
primarily attributable to the Merger, and in 1994 to the divested operations and
a reduction in corporate and divisional staffing levels.
Supplies expense as a percentage of net operating revenues was 13.0% in
1995, 11.5% in 1994 and 11.0% in 1993. Most of this change in 1995 is due to the
facilities acquired in the Merger. The prior-year change was largely due to the
sales of the rehabilitation hospitals, which were less supplies-intensive than
are general hospitals.
The provision for doubtful accounts as a percentage of net operating
revenues was 4.1% in 1995 and 3.6% in both 1994 and 1993. The increase is
primarily attributable to the facilities acquired in the Merger. Excluding the
net operating revenues and operating expenses of the AMH facilities, the
provision for doubtful accounts as a percentage of net operating revenues would
have been 3.7% in 1995. The Company has been able to control the provision for
doubtful accounts through continued improvement of follow-up collection systems,
through investment in an electronic claims processing network and through the
continued consolidation of hospital business office functions.
6
<PAGE>
Other operating expenses as a percentage of net operating revenues were
22.9% in 1995, 22.7% in 1994 and 21.7% in 1993.
Depreciation and amortization expense as a percentage of net operating
revenues were 5.9% in 1995, 5.5% in 1994 and 5.0% in 1993. The increase in 1995
is primarily due to the Merger. Goodwill amortization is expected to be at least
$62.5 million annually, based on the amount of goodwill related to the Merger
recorded as of May 31, 1995.
In connection with the March 1, 1995 merger of the Company and AMH, the
Company has relocated substantially all of its hospital support activities
located in Southern California and Florida to the former corporate headquarters
of AMH located in Dallas, Texas. Severance payments and outplacement services
for involuntary terminations of approximately 890 former NME employees and other
related costs in connection with this move are estimated to be $36.9 million
($0.12 per share on an after-tax, fully diluted basis) and have been classified
as restructuring charges in the accompanying consolidated statements of
operations for the year ended May 31, 1995.
During the fourth quarter of fiscal 1994, the Company initiated a plan to
significantly decrease overhead costs through a reduction in corporate and
division staffing levels and to review the resulting office space needs of all
corporate operations. The Company decided to sell its corporate headquarters
building and to lease substantially less office space in that building or at an
alternative site. Costs of the write-down of the building, employee severance
benefits for approximately 110 employees and other expenses directly related to
the overhead reduction plan were estimated to be approximately $77.0 million.
In 1993 the Company recorded a charge of $52.0 million for costs associated
with the combination of the Company's rehabilitation hospital division into its
general hospital division, a corporate overhead reduction program that began in
April 1993, and severance costs incurred in connection with a change in senior
executive management.
During the year ended May 31, 1995, actual costs incurred and charged
against the restructuring reserves were approximately $22.7 million. The
balances of the reserves are included in other current liabilities or other
long-term liabilities in the Company's consolidated balance sheets at May 31,
1995 and 1994.
Interest expense, net of capitalized interest, was $138.1 million in 1995,
compared with $70.0 million in 1994 and $75.3 million in 1993. All of the
increase between 1994 and 1995 was due to the acquisition of AMH and the $3.5
billion of new notes and bank loans used to finance the acquisition and retire
debt in connection with the Merger.
Investment earnings were $27.5 million in 1995, $27.7 million in 1994 and
$21.1 million in 1993, and were derived primarily from notes receivable and
investments in short-term debt securities.
Equity in earnings of unconsolidated affiliates was $28.4 million in 1995,
$23.8 million in 1994 and $12.5 million in 1993. The increases are due to an
increase in the Company's ownership of Hillhaven from approximately 14% to
approximately 33% during fiscal 1994. By the end of fiscal 1995, the Company's
ownership had been reduced to approximately 26% as a result of the issuance by
Hillhaven of additional stock in connection with acquisitions. See Note 14 to
the Consolidated Financial Statements.
Minority interest in income of consolidated subsidiaries represents outside
shareholders' interests in consolidated, but not wholly owned, subsidiaries of
the Company, and, at May 31, 1995, consists primarily of the approximately 48%
minority shareholders' interest in AME. Minority interest expense was $9.4
million in 1995, $8.2 million in 1994 and $10.0 million in 1993.
Taxes on income as a percentage of pretax income from continuing operations
were 41% in 1995, 40% in 1994 and 37% in 1993. The Company expects the effective
tax rate to increase further in 1996, primarily due to the additional
amortization of goodwill resulting from the Merger. Such amortization expense is
a noncash charge but provides no income tax benefits.
7
<PAGE>
The Company believes that inflation does not have a significant impact on
its earnings, except when Medicare and Medicaid rate increases are inadequate in
relation to rising costs and when other payors also implement programs to
control their healthcare costs.
BUSINESS OUTLOOK
Because of intense national, state and private industry efforts to reform
the healthcare delivery and payment systems in this country, the healthcare
industry as a whole faces increased uncertainty. While the Company is unable to
predict which, if any, proposals for healthcare reform will be adopted, it
continues to monitor their progress and analyze their potential impacts in order
to formulate its future business strategies.
The challenge facing the Company and the healthcare industry is to continue
to provide quality patient care in an environment of rising costs, strong
competition for patients, and a general reduction of reimbursement by both
private and government payors.
8
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
Financial Statements:
Report of Independent Auditors........................................................................... 11
Consolidated Balance Sheets as of May 31, 1995 and 1994.................................................. 12
Consolidated Statements of Operations for the years ended May 31, 1995, 1994 and 1993.................... 13
Consolidated Statements of Changes in Shareholders' Equity for the years ended May 31, 1995, 1994 and
1993.................................................................................................... 14
Consolidated Statements of Cash Flows for the years ended May 31, 1995, 1994 and 1993.................... 15
Notes to Consolidated Financial Statements............................................................... 17
</TABLE>
9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Tenet Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Tenet
Healthcare Corporation and subsidiaries as of May 31, 1995 and 1994, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended May 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tenet
Healthcare Corporation and subsidiaries as of May 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended May 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective June 1, 1993.
KPMG PEAT MARWICK LLP
Los Angeles, California
July 25, 1995
10
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MAY 31,
--------------------
1995 1994
--------- ---------
(DOLLAR AMOUNTS ARE
EXPRESSED IN
MILLIONS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 155 $ 313
Short-term investments in debt securities................................................. 139 60
Accounts and notes receivable, less allowance for doubtful accounts
($184 in 1995 and $77 in 1994)........................................................... 565 385
Inventories of supplies, at cost.......................................................... 116 55
Deferred income taxes..................................................................... 410 372
Assets held for sale...................................................................... 184 204
Prepaid expenses and other current assets................................................. 55 55
--------- ---------
Total current assets.................................................................... 1,624 1,444
--------- ---------
Investments and other assets................................................................ 362 382
Property, plant and equipment, net.......................................................... 3,319 1,764
Costs in excess of net assets acquired, less accumulated amortization
($21 in 1995 and $11 in 1994).............................................................. 2,511 61
Other intangible assets, at cost, less accumulated amortization
($37 in 1995 and $43 in 1994).............................................................. 102 46
--------- ---------
$ 7,918 $ 3,697
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................................... $ 252 $ 545
Short-term borrowings and notes........................................................... 35 67
Accounts payable.......................................................................... 359 176
Employee compensation and benefits........................................................ 162 93
Reserves related to discontinued operations............................................... 77 465
Income taxes payable...................................................................... 2 58
Other current liabilities................................................................. 469 236
--------- ---------
Total current liabilities............................................................... 1,356 1,640
--------- ---------
Long-term debt, net of current portion...................................................... 3,273 223
Other long-term liabilities and minority interests.......................................... 1,002 389
Deferred income taxes....................................................................... 301 125
Commitments and contingencies
Shareholders' equity:
Common stock, $0.075 par value; authorized 450,000,000 shares; 218,713,406 shares issued
at May 31, 1995, and 185,587,666 shares at May 31, 1994.................................. 16 14
Additional paid-in capital................................................................ 1,502 1,013
Retained earnings......................................................................... 740 575
Less common stock in treasury, at cost, 18,775,274 shares at May 31, 1995, and 19,507,161
at May 31, 1994.......................................................................... (272) (282)
--------- ---------
Total shareholders' equity.............................................................. 1,986 1,320
--------- ---------
$ 7,918 $ 3,697
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
11
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLAR AMOUNTS, EXCEPT PER
SHARE AMOUNTS, ARE EXPRESSED IN
MILLIONS)
<S> <C> <C> <C>
Net operating revenues................................................... $ 3,318 $ 2,943 $ 3,178
Operating expenses:
Salaries and benefits.................................................. (1,367) (1,293) (1,465)
Supplies............................................................... (432) (339) (349)
Provision for doubtful accounts........................................ (137) (107) (115)
Other operating expenses............................................... (759) (667) (689)
Depreciation........................................................... (164) (143) (141)
Amortization........................................................... (31) (18) (19)
Restructuring charges.................................................. (37) (77) (52)
--------- --------- ---------
Operating income......................................................... 391 299 348
--------- --------- ---------
Interest expense, net of capitalized portion............................. (138) (70) (75)
Investment earnings...................................................... 27 28 21
Equity in earnings of unconsolidated affiliates.......................... 28 23 13
Minority interests in income of consolidated subsidiaries................ (9) (8) (10)
Net gain (loss) on disposals of facilities and long-term investments..... (2) 88 93
Gains on sales of subsidiaries' common stock............................. 32 0 29
--------- --------- ---------
Income from continuing operations before income taxes.................... 329 360 419
Taxes on income.......................................................... (135) (144) (155)
--------- --------- ---------
Income from continuing operations........................................ 194 216 264
Discontinued operations.................................................. (9) (701) (104)
Extraordinary charge from early extinguishment of debt................... (20) 0 0
Cumulative effect of a change in accounting principle.................... 0 60 0
--------- --------- ---------
Net income (loss)........................................................ $ 165 $ (425) $ 160
--------- --------- ---------
--------- --------- ---------
PER-SHARE DATA
Earnings (loss) per share:
Primary:
Continuing operations................................................ $ 1.10 $ 1.29 $ 1.59
Discontinued operations.............................................. (0.06) (4.19) (0.63)
Extraordinary charge................................................. (0.11) 0.00 0.00
Cumulative effect of a change in accounting principle................ 0.00 0.36 0.00
--------- --------- ---------
$ 0.93 $ (2.54) $ 0.96
--------- --------- ---------
--------- --------- ---------
Fully diluted:
Continuing operations................................................ $ 1.06 $ 1.23 $ 1.49
Discontinued operations.............................................. (0.05) (4.10) (0.58)
Extraordinary charge................................................. (0.10) 0.00 0.00
Cumulative effect of a change in accounting principle................ 0.00 0.33 0.00
--------- --------- ---------
$ 0.91 $ (2.54) $ 0.91
--------- --------- ---------
--------- --------- ---------
Weighted average shares and share equivalents outstanding -- primary (in
thousands).............................................................. 176,817 167,024 166,111
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
12
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ADDITIONAL
OUTSTANDING ISSUED PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS ARE EXPRESSED IN MILLIONS,
SHARE AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCES, MAY 31, 1992................................... 166,963 $ 14 $ 994 $ 939 $ (273)
Net income............................................. 160
Cash dividends ($0.48 per share)....................... (80)
Purchases of treasury stock............................ (1,034) (15)
Stock options exercised, net of tax benefits........... 36 1
Restricted share cancellations......................... (67) 11 1
----------- --- ----------- ----------- -----
BALANCES, MAY 31, 1993................................... 165,898 14 1,005 1,019 (286)
Net loss............................................... (425)
Cash dividends ($0.12 per share)....................... (19)
Stock options exercised, net of tax benefits........... 293 (1) 4
Restricted share cancellations......................... (110) 9
----------- --- ----------- ----------- -----
BALANCES, MAY 31, 1994................................... 166,081 14 1,013 575 (282)
Net income............................................. 165
Shares issued in connection with merger................ 33,156 2 486
Stock options exercised, net of tax benefits........... 705 (1) 10
Restricted share cancellations......................... (4) 4
----------- --- ----------- ----------- -----
BALANCES, MAY 31, 1995................................... 199,938 $ 16 $ 1,502 $ 740 $ (272)
----------- --- ----------- ----------- -----
----------- --- ----------- ----------- -----
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLAR AMOUNTS ARE EXPRESSED
IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................................... $ 165 $ (425) $ 160
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization....................................... 195 198 199
Deferred income taxes............................................... 95 (253) (32)
Gains on sales of facilities and long-term investments.............. (30) (88) (122)
Extraordinary charge from loss on early extinguishment of debt...... 20 0 0
Additions to reserves for discontinued operations and restructuring
charges............................................................ 51 1,175 189
Other items......................................................... (6) (22) 33
Increases (decreases) in cash from changes in operating assets and
liabilities, net of effects from purchases of new businesses:
Accounts and notes receivable, net.................................. (47) (65) 65
Inventories, prepaid expenses and other current assets.............. 1 (21) (43)
Accounts payable, accrued expenses and income taxes payable......... (28) (31) 21
Noncurrent accrued expenses and other liabilities................... 4 (2) 24
Net expenditures for discontinued operations and restructuring
charges.............................................................. (427) (319) (96)
--------- --------- ---------
Net cash provided by (used in) operating activities................. (7) 147 398
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................ (264) (185) (319)
Purchases of new businesses, net of cash acquired..................... (1,429) (5) (3)
Proceeds from sales of facilities, investments and other assets....... 172 569 70
Other items........................................................... 8 7 (47)
--------- --------- ---------
Net cash provided by (used in) investing activities................. (1,513) 386 (299)
--------- --------- ---------
</TABLE>
(CONTINUED)
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLAR AMOUNTS ARE EXPRESSED
IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of borrowings................................................ $ (2,091) $ (428) $ (93)
Proceeds from borrowings.............................................. 3,445 91 131
Net payments of short-term bank borrowings under unsecured revolving
credit line.......................................................... 0 0 (10)
Cash dividends paid to shareholders................................... 0 (40) (78)
Purchases of treasury stock........................................... 0 0 (19)
Other items........................................................... 8 16 (3)
--------- --------- ---------
Net cash provided by (used in) financing activities................. 1,362 (361) (72)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents................ (158) 172 27
Cash and cash equivalents at beginning of year...................... 313 141 114
--------- --------- ---------
Cash and cash equivalents at end of year............................ $ 155 $ 313 $ 141
--------- --------- ---------
--------- --------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURES:
The Company paid interest (net of amounts capitalized) of $113 million, $62
million and $87 million for the years ended May 31, 1995, 1994 and 1993,
respectively. Income taxes paid during the same years amounted to $45 million,
$30 million and $125 million, respectively. Notes received in connection with
the sales of facilities were $92 million in the year ended May 31, 1993.
The fair value of the assets acquired in connection with the AMH merger was
approximately $4.6 billion, including goodwill of approximately $2.5 billion.
Liabilities assumed were approximately $2.6 billion.
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Tenet
Healthcare Corporation, previously known as National Medical Enterprises, Inc.
("NME") and its wholly owned and majority-owned subsidiaries (the "Company").
Significant investments in other affiliated companies are accounted for by the
equity method. Significant intercompany accounts and transactions are eliminated
in consolidation. The results of operations of American Medical Holdings, Inc.
and its subsidiaries ("AMH") are included in the accompanying consolidated
financial statements of the Company since the acquisition of AMH on March 1,
1995. (See Note 2.)
The consolidated statements of operations for the years ended May 31, 1994
and 1993 have been reclassified to make them comparable with the financial
presentation for the current period in which the Company's equity in earnings of
unconsolidated affiliates and the minority interests in income of consolidated
subsidiaries are shown as separate line items. These items had been included
previously in net operating revenues and in other operating expenses,
respectively.
B. NET OPERATING REVENUES
The Company owns and operates general hospitals and related healthcare
facilities in the United States and overseas. (See Note 18.) Its net operating
revenues consist primarily of net patient service revenues, which are based on
the hospitals' established billing rates less allowances and discounts
principally for patients covered by Medicare, Medicaid and other contractual
programs. These allowances and discounts were $3.4 billion, $2.7 billion and
$2.6 billion for the years ended May 31, 1995, 1994 and 1993, respectively.
Payments under these programs are based on either predetermined rates or the
costs of services. Settlements for retrospectively determined rates are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined. Management believes that
adequate provision has been made for adjustments that may result from final
determination of amounts earned under these programs. These contractual
allowances and discounts are deducted from accounts receivable in the
accompanying consolidated balance sheets. Approximately 40% of fiscal 1995 and
1994 consolidated net operating revenues is from participation of the Company's
hospitals in Medicare and Medicaid programs. In 1993 it was approximately 37%.
The Company provides care to patients who meet certain financial or economic
criteria without charge or at amounts substantially less than its established
rates. Because the Company does not pursue collection of amounts determined to
qualify as charity care, they are not reported as gross revenue and are not
included in deductions from revenue or in operating and administrative expenses.
C. CASH EQUIVALENTS
The Company treats highly liquid investments with an original maturity of
three months or less as cash equivalents.
D. INVESTMENTS IN DEBT SECURITIES
On June 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under this new standard, investments are classified as
available-for-sale, held-to-maturity or as part of a trading portfolio. Debt
securities expected to be held to maturity as a result of management's intent
and ability to do so are carried at amortized cost. Debt securities for which
the Company does not have the intent or ability to hold to maturity are
classified as available-for-sale. Securities available for sale are carried at
fair value and their unrealized gains and losses, net of tax, are reported as an
adjustment to shareholders' equity. Realized gains or losses are included in net
income on the specific identification method. Gains and losses, both realized
and unrealized, were immaterial for all years presented.
16
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. PROPERTY, PLANT AND EQUIPMENT
The Company uses the straight-line method of depreciation for buildings,
improvements and equipment over their estimated useful lives as follows:
buildings and improvements--generally 25 to 50 years; equipment--3 to 15 years.
F. INTANGIBLE ASSETS
Preopening costs are amortized over one year. Deferred financing costs are
amortized over the lives of the related loans. The straight-line method is used
to amortize most intangible assets. Costs in excess of the fair value of the net
assets of purchased businesses (goodwill) generally are amortized over 40 years.
These latter costs are reviewed for impairment whenever events or changes in
circumstances indicate that they may not be recoverable. If such an event
occurred, the Company would prepare projections of future undiscounted cash
flows from related operations for the remaining amortization period. If such
projections indicated that the costs would not be recoverable, the carrying
value of such costs would be reduced by the estimated excess of such value over
projected discounted net cash flows.
G. LEASES
Capital leases are recorded at the beginning of the lease term as assets and
liabilities at the lower of the present value of the minimum lease payments or
the fair value of the assets, and such assets are amortized over the shorter of
the lease term or their useful life.
H. INTEREST RATE SWAP AGREEMENTS
The differentials to be paid or received under interest rate swap agreements
are accrued as the interest rates change and are recognized over the lives of
the agreements as adjustments to interest expense. (See Note 17.)
I. SALES OF COMMON STOCK OF SUBSIDIARIES
At the time a subsidiary sells existing or newly issued common stock to
unrelated parties at a price in excess of its book value, the Company's policy
is to record a gain reflecting its share of the change in the subsidiary's
shareholders' equity resulting from the sale. (See Note 15.)
J. TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. All balance sheet accounts have been translated at
fiscal year-end exchange rates. Income statement amounts have been translated at
the average exchange rate for the year. Translation gains or losses are recorded
as an adjustment to shareholders' equity, as cumulative translation adjustments,
until such time as the Company disposes of some or all of its foreign-
currency-denominated net assets, at which time any translation gain or loss
would be realized and credited or charged to earnings. Exchange gains and losses
on forward exchange contracts designated as hedges of foreign net investments
are also reported as an adjustment to shareholders' equity. Currency translation
adjustments, the effect of transaction gains and losses and exchange gains and
losses on forward exchange contracts are insignificant for all years presented
herewith. (See Notes 17 and 18.)
2. AMH MERGER
On March 1, 1995, in a transaction accounted for as a purchase, the Company
acquired all the outstanding common stock of AMH for $1.5 billion in cash and
33,156,614 shares of the Company's common stock valued at $488.0 million. AMH,
through its wholly owned subsidiary, American Medical International, Inc. and
its subsidiaries ("AMI"), operates general hospitals and related healthcare
facilities in 13 states.
In connection with the merger, the Company repaid $1.2 billion of AMI debt
and $554.9 million of its own debt, including $222.0 million of loans under its
April 13, 1994 revolving credit agreement, $96.6 million of unsecured
medium-term notes, $93.0 million of 12 1/8% unsecured notes and $143.3 million
of secured
17
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. AMH MERGER (CONTINUED)
loans. The loss on the early extinguishment of this debt was $19.8 million,
which has been recorded as an extraordinary charge for the year ended May 31,
1995, net of income tax benefits of $12.1 million. The Company financed the
merger and debt-refinancing transactions through a new $2.3 billion credit
facility and the public issuance of $1.2 billion in debt securities.
The total purchase price has been allocated to the assets and liabilities of
AMH based on their estimated fair values. At May 31, 1995, the total purchase
price exceeded the fair value of the net assets acquired by approximately $2.5
billion. Deferred financing costs on the new debt were $52.0 million and are
being amortized to interest expense using the interest method over the
respective lives of the new credit facility and public debt securities, which
range from 6 1/2 to 10 years.
The following supplemental pro forma information is unaudited and assumes
that the merger combination occurred as of the beginning of each period
presented. The amounts reflect pro forma adjustments for interest on new and
refinanced debt, depreciation on revalued property, plant and equipment, and the
amortization of goodwill.
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED MAY 31,
--------------------
1995 1994
--------- ---------
(IN MILLIONS, EXCEPT
PER-SHARE AMOUNTS)
<S> <C> <C>
Net operating revenues..................................................... $ 5,256.7 $ 5,324.9
Income from continuing operations before extraordinary charge.............. $ 220.1 $ 271.8
Income from continuing operations after extraordinary charge............... $ 200.3 $ 252.0
Fully diluted earnings per share from continuing operations before
extraordinary charge...................................................... $ 1.06 $ 1.30
</TABLE>
The supplemental pro forma information shown above does not purport to
present the results of operations of the Company had the transactions and events
assumed therein occurred on the dates specified, nor are they necessarily
indicative of the results of operations that may be achieved in the future. In
addition, such information does not reflect certain cost savings that management
believes may be realized following the merger.
3. DISCONTINUED OPERATIONS--PSYCHIATRIC HOSPITAL BUSINESS
At November 30, 1993, the Company decided to discontinue its psychiatric
hospital business and adopted a plan to dispose of its psychiatric hospitals and
substance abuse recovery facilities. The consolidated statements of operations
reflect the operating results of the discontinued business separately from
continuing operations. Except for an additional $16 million of estimated
litigation costs recorded in the fourth quarter of fiscal 1995 (less income tax
benefits of $7 million), operating results and gains or losses on disposals of
facilities for the discontinued business for periods subsequent to November 30,
1993, have been charged to a reserve for estimated losses during the phase-out
period.
Net operating revenues for the discontinued operations for fiscal 1994 and
1993 were $476 million and $571 million, respectively. Losses from operations
during the two years were $266 million and $160 million, respectively, before
income tax benefits of $111 million and $56 million. The Company recognized a
charge for estimated losses upon disposal amounting to $414 million, including
$379 million of costs to settle federal and state investigations and other
unusual legal costs related to the psychiatric hospital business in fiscal 1994,
along with $433 million of estimated operating losses during the phase-out
period, less tax benefits of $301 million. At May 31, 1995, substantially all of
the assets of the discontinued operations have been sold.
The reserves related to discontinued operations in the accompanying
consolidated balance sheet include $75.7 million for unusual litigation costs
and legal fees relating to matters that have not been resolved as of May 31,
1995. (See Note 8B.)
18
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable and
interest payable approximate fair value because of the short maturity of these
instruments. The carrying values of investments, both short-term and long-term
(excluding investments accounted for by the equity method), long-term
receivables and long-term debt are not materially different from the estimated
fair values of these instruments. The estimated fair values of interest rate
swap agreements and foreign currency contracts also are not material to the
Company's financial position.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consists of the
following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Land........................................................................... $ 238 $ 173
Buildings and improvements..................................................... 2,593 1,388
Construction in progress....................................................... 97 59
Equipment...................................................................... 1,215 916
--------- ---------
4,143 2,536
Less accumulated depreciation and amortization................................. 824 772
--------- ---------
Net property, plant and equipment.............................................. $ 3,319 $ 1,764
--------- ---------
--------- ---------
</TABLE>
19
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT AND LEASE OBLIGATIONS
A. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Secured loans payable to banks................................................... $ 1,731 $ 13
9 5/8% Senior Notes due 2002, $300 million face value, net of $6.6 million
unamortized discount............................................................ 293 --
10 1/8% Senior Subordinated Notes due 2005, $900 million face value, net of $23.3
million unamortized discount.................................................... 877 --
Convertible floating-rate debentures............................................. 219 219
Unsecured medium-term notes due through 1997..................................... 73 169
13 1/2% Senior Subordinated and 15% Junior Subordinated Notes due 2001 and 2005,
$38.3 million face value, plus $3.7 million unamortized premium................. 42 --
6 1/2% Swiss franc/dollar dual currency debentures due 1997 and 5% Swiss franc
bonds due 1996, $34.8 million face value, net of $0.4 million of unamortized
discount........................................................................ 34 --
Zero-coupon guaranteed bonds due 1997 and 2002, $130.7 million face value, net of
$35.0 million unamortized discount.............................................. 96 --
Notes secured by property, plant and equipment, weighted average interest rate of
approximately 9.6% in 1995 and 9.5% in 1994, payable in installments to 2009.... 104 28
12 1/8% unsecured notes due April 1995........................................... -- 93
Other secured loans payable...................................................... -- 143
Other notes, primarily unsecured, and capital lease obligations.................. 56 103
--------- ---------
3,525 768
Less current portion............................................................. 252 545
--------- ---------
$ 3,273 $ 223
--------- ---------
--------- ---------
</TABLE>
SECURED LOANS PAYABLE--In connection with the merger and refinancing
described in Note 2 above, a syndicate of banks entered into a new credit
facility with the Company consisting of (i) a 6 1/2-year amortizing term loan in
the aggregate principal amount of $1.8 billion and (ii) a 6 1/2-year $500.0
million revolving credit facility, including a letter-of-credit option not to
exceed $100.0 million. The Company's unused borrowing capacity under the new
credit facility was $326.0 million as of May 31, 1995.
Borrowings under the new credit facility are secured by a first-priority
lien on the capital stock of substantially all of the Company's first-tier
subsidiaries, all intercompany indebtedness owed to the Company and its
investment in Westminster Health Care Holdings PLC ("Westminster"). The lenders
have priority as to such collateral over the Company's other indebtedness,
including the new senior notes and senior subordinated notes described below.
The Company's obligations under the new credit facility rank PARI PASSU with the
senior notes and constitute senior debt with respect to the new senior
subordinated notes and any other subordinated debt of the Company.
Loans under the new credit facility bear interest at a base rate equal to
the prime rate announced by Morgan Guaranty Trust Company of New York or, if
higher, the federal funds rate plus 0.50%, plus an interest margin ranging from
zero to 50 basis points, or, at the option of the Company, a London interbank
offered rate ("LIBOR") for one-, two-, three- or six-month periods plus an
interest margin of from 50 to 150 basis points. The Company has agreed to pay to
the lenders a commitment fee on the unused loan
20
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
commitment at rates ranging from 18.75 basis points to 50 basis points annually.
The interest margins and loan commitment rates are based on the ratio of the
Company's consolidated net earnings before interest, taxes, depreciation and
amortization ("EBITDA") to interest expense and the ratio of the Company's
consolidated debt to EBITDA. The weighted average interest rate on loans under
the new credit facility from March 1, 1995 through May 31, 1995 was 7.6%.
The Company must make mandatory quarterly payments on the term loan in each
fiscal year in the following annual amounts (in millions), with the first
installment due on August 31, 1995: 1996 - $180; 1997 - $180; 1998 - $225; 1999
- -$315; 2000 - $360; 2001 - $405; and on August 31, 2002 - $135. Prepayments are
required from the proceeds of certain events, including the sale of certain
assets and a portion of the net after-tax proceeds of a sale, if any, of the
Company's investments in Hillhaven, Westminster or the Company's international
subsidiaries, and additional offerings of certain debt or equity securities. The
installment schedule above does not reflect the application to the August 31,
2002 installment of $115.0 million from the proceeds of the June 28, 1995 sale
of certain international subsidiary assets. (See Note 18.)
In April 1994 the Company entered into a $464.7 million revolving credit and
letter-of-credit agreement with several banks, pledging all of the capital stock
of a wholly owned subsidiary of the Company as security for any indebtedness
under the agreement. The agreement provided for revolving loans of up to $222.0
million, all of which were outstanding at May 31, 1994, and for letters of
credit of $242.7 million to support certain of the Company's obligations
relating to commercial paper and remarketable bond programs. All outstanding
revolving loans under this agreement matured on April 12, 1995 and were repaid
with the proceeds of the new credit facility described above. The weighted
average interest rate on these loans was 6.0% during fiscal 1995 and 5.1% during
fiscal 1994.
Also at May 31, 1994, the Company had $143.3 million of secured loans
outstanding that were used for project financings and were secured by liens on
real property or leasehold interests. These loans also matured and were repaid
on April 12, 1995 with the proceeds of the new credit facility. The weighted
average interest rate on these loans was 5.8% during fiscal 1995, 5.1% during
fiscal 1994 and 4.6% during fiscal 1993.
SENIOR NOTES AND SENIOR SUBORDINATED NOTES--Also in connection with the
merger and refinancing, the Company sold, on March 1, 1995, $300.0 million of
9 5/8% Senior Notes due September 1, 2002 and $900.0 million of 10 1/8% Senior
Subordinated Notes due March 1, 2005. The proceeds to the Company were $1.17
billion, after underwriting discounts and commissions. The senior notes are not
redeemable by the Company prior to maturity. The senior subordinated notes are
redeemable at the option of the Company, in whole or from time to time in part,
at any time after March 1, 2000, at redemption prices ranging from 105.063% in
2000 to 100% in 2003 and thereafter.
The senior notes are general unsecured obligations of the Company ranking
senior to all subordinated indebtedness of the Company, including the senior
subordinated notes, and PARI PASSU in right of payment with all other
indebtedness of the Company, including borrowings under the new credit facility
described above. The senior subordinated notes also are general unsecured
obligations of the Company subordinated in right of payment to all existing and
future senior debt, including the senior notes and borrowings under the new
credit facility.
CONVERTIBLE FLOATING-RATE DEBENTURES--The floating-rate debentures consist
of two components: $208 million of secured loans payable to banks and $11
million (5% of the $219 million debenture face amount) of generally
nontransferable performance investment options purchased by key employees of the
Company. Because the proceeds from the exercise of the investment options are
used by the Company to redeem debt underlying the debentures, these loans,
together with the outstanding balance of the investment options, are classified
as convertible floating-rate debentures. The debentures are subject to mandatory
redemption in April 1996 and after the occurrence of certain events. Of the $208
million secured loan
21
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
component, $180 million is classified as current portion of long-term debt and
is included as current in the schedule of term loan maturities shown on the
previous page; the balance will be refinanced with existing, long-term financing
commitments and is therefore classified as long-term. All of the $11 million
performance investment option component is classified as current. The weighted
average interest rate for the debentures was 6.4% during 1995, 4.8% during 1994
and 3.6% in 1993.
The performance investment options permit the holder to purchase debentures
at 95% of their $105,264 face value. The debentures are convertible into
preferred stock, which, in turn, is convertible into common stock. At May 31,
1995 the investment options were convertible into 13,824,627 shares of common
stock at an exercise price equivalent to $15.83 per share. The Company may
repurchase the investment options without a premium with the consent of the
holder or by paying a redemption premium sufficient to provide the holder a 6%
annual return. Under certain conditions, the investment options are subject to
mandatory redemption at a redemption price including a 6% annual return.
When investment options are exercised, the Company reduces taxable income by
any excess of the fair market value of the stock obtained at the date of
exercise over the principal amount of the debentures redeemed. The resulting tax
benefit increases additional paid-in capital.
UNSECURED MEDIUM-TERM NOTES--These notes had both fixed and floating rates
of interest. The floating-rate notes were repaid during fiscal 1994; $96.6
million of the fixed-rate notes were repaid during fiscal 1995 in connection
with the AMH merger and refinancing. (See Note 2.) The weighted average interest
rates on the notes were 8.3% during 1995, 8.1% during 1994 and 7.3% in 1993.
LOAN COVENANTS--The new credit facility and the indentures governing the
senior notes and the senior subordinated notes have, among other requirements,
limitations on borrowings, liens, investments, capital expenditures, operating
leases and asset sales, a prohibition on the payment of any dividends, and
covenants regarding maintenance of specified levels of net worth, debt ratios
and fixed-charge ratios. Because of the dividend restriction, all of the
Company's retained earnings is restricted. The Company is in compliance with its
loan covenants. There are no compensating balance requirements for any credit
line or borrowing.
B. LONG-TERM DEBT MATURITIES AND LEASE OBLIGATIONS
Future long-term debt cash maturities and minimum operating lease payments
are as follows:
<TABLE>
<CAPTION>
LATER
1996 1997 1998 1999 2000 YEARS
--------- --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt......................................... $ 254 $ 238 $ 326 $ 325 $ 395 $ 2,049
Long-term leases....................................... 165 146 140 129 83 333
</TABLE>
Rental expense under operating leases, including short-term leases, was
approximately $111 million in 1995, $98 million in 1994 and $114 million in
1993.
22
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Taxes on income from continuing operations consist of the following amounts:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Currently payable:
Federal................................................................. $ 101 $ 159 $ 148
State................................................................... 18 31 30
Foreign................................................................. 9 6 7
--------- --------- ---------
128 196 185
--------- --------- ---------
Deferred:
Federal................................................................. -- (46) (29)
State................................................................... 2 (6) (3)
--------- --------- ---------
2 (52) (32)
--------- --------- ---------
Other..................................................................... 5 -- 2
--------- --------- ---------
$ 135 $ 144 $ 155
--------- --------- ---------
--------- --------- ---------
</TABLE>
The difference between the Company's effective income tax rate and the
statutory federal income tax rate is shown below:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ------------------------ -------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- ----------- ----------- ------------
(IN MILLIONS OF DOLLARS AND AS A PERCENT OF PRETAX INCOME)
<S> <C> <C> <C> <C> <C> <C>
Tax provision at statutory federal rate............ $ 115 35.0% $ 126 35.0% $ 142 34.0%
State income taxes, net of federal income tax
benefit........................................... 14 4.2% 17 4.6% 18 4.3%
Goodwill amortization.............................. 5 1.5% -- -- -- --
Gain on sale of foreign subsidiary's common
stock............................................. -- -- -- -- (10) (2.4%)
Other.............................................. 1 0.3% 1 0.4% 5 1.1%
----- ----- ----- ----- ----- -----
Taxes on income from continuing operations and
effective tax rates............................... $ 135 41.0% $ 144 40.0% $ 155 37.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Among other
provisions, this standard requires deferred tax balances to be determined using
enacted income tax rates for the years in which the taxes actually are paid or
refunds actually are received instead of when the deferrals were initiated. The
Company has recognized $60 million as income in the fiscal year ended May 31,
1994 for the cumulative effect on prior years of adopting this standard based on
tax rates in effect at June 1, 1993.
23
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities as of May 31, 1995 and 1994 relate to
the following:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Depreciation and fixed-asset basis differences............... $ -- $ 566 $ -- $ 182
Reserves related to discontinued operations and restructuring
charges..................................................... 81 -- 306 --
Receivables--doubtful accounts and adjustments............... 112 -- 69 --
Cash-basis accounting change................................. -- 16 -- 23
Accruals for insurance risks................................. 81 -- 35 --
Intangible assets............................................ -- 2 -- 7
Other long-term liabilities.................................. 121 -- 20 --
Benefit plans................................................ 99 -- 18 --
Other accrued liabilities.................................... 53 -- 10 --
Investments and other assets................................. 17 -- 9 --
Valuation allowance.......................................... -- -- (7) --
Federal and state net operating loss carryforwards........... 137 -- -- --
Other items.................................................. -- 8 -- 1
----- ----- ----- -----
$ 701 $ 592 $ 460 $ 213
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
Management believes that realization of the deferred tax assets at May 31,
1995 will occur as temporary differences, including tax-loss carryforwards,
reverse against future taxable income.
8. CLAIMS AND LAWSUITS
A. PROFESSIONAL AND GENERAL LIABILITY INSURANCE
The Company insures substantially all of its professional and comprehensive
general liability risks in excess of self-insured retentions, which vary by
hospital from $500,000 to $3 million per occurrence, through an insurance
company owned by several healthcare companies and in which the Company has a 77%
equity interest. A significant portion of these risks is, in turn, reinsured
with major independent insurance companies. Through May 31, 1994, the Company
insured its professional and comprehensive general liability risks related to
its psychiatric and physical rehabilitation hospitals through its wholly owned
insurance subsidiary that reinsured risks in excess of $500,000 with major
independent insurance companies. The Company has reached the policy limits
provided by this insurance subsidiary related to the psychiatric hospitals in
certain years. In addition, damages, if any, arising from fraud and conspiracy
claims in psychiatric malpractice cases may not be insured. (See Note 8B.)
In addition to the reserves recorded by the above insurance company, the
Company maintains an unfunded reserve for the self-insured portion of its
professional liability risks, which is based on actuarial estimates. Reserves
for losses and related expenses are estimated using expected loss-reporting
patterns and have been discounted to their present value using a weighted
average discount rate of 9%. Adjustments to the reserves are included in results
of operations.
B. SIGNIFICANT LEGAL PROCEEDINGS--PSYCHIATRIC BUSINESS
The Company has been involved in significant legal proceedings and
investigations of an unusual nature related principally to its psychiatric
business. During the years ended May 31, 1995 and 1994, the Company recorded
provisions to estimate the cost of the ultimate disposition of all these
proceedings and investigations and to estimate the legal fees that it expects to
incur. The Company has settled the most significant of these matters. The
remaining reserves for unusual litigation costs that relate to the matters that
have not been settled as of May 31, 1995 and an estimate of the legal fees to be
incurred subsequent to May 31, 1995
24
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CLAIMS AND LAWSUITS (CONTINUED)
total approximately $75.7 million and represent management's estimate of the net
costs of the ultimate disposition of these matters. There can be no assurance,
however, that the ultimate liability will not exceed such estimates. Although,
based upon information currently available to it, management believes that the
amount of damages in excess of the reserves for unusual litigation costs that
may be awarded in any of the following unresolved legal proceedings cannot
reasonably be estimated, management does not believe it is likely that any
damages awarded in such legal proceedings will have a material adverse effect on
the Company's results of operations, liquidity or capital resources.
All of the costs associated with these legal proceedings and investigations
are classified in discontinued operations. (See Note 3.)
SHAREHOLDER LAWSUITS--In October and November 1991 shareholder derivative
actions and federal class-action suits were filed against the Company and
certain of its officers and directors. Those derivative and federal class-action
suits were subsequently consolidated into one derivative and one federal class
action, respectively. The consolidated derivative action, purportedly brought on
behalf of the Company, alleged breach of fiduciary duty and other causes of
action against the directors and certain officers of the Company. The derivative
action was dismissed by the court in May 1993. Plaintiffs appealed the judgment.
As a result of mediation, the parties in the derivative and class-action
suits described above agreed to a global settlement of all plaintiffs' claims.
The settlement, which will require court approval, involves a total payment of
$63.75 million plus interest by or on behalf of the defendants. Of this amount,
Tenet's directors' and officers' liability insurance ("D&O") carriers have
agreed to pay a total of $32.5 million plus interest on behalf of the individual
defendants. In addition, one of the D&O carriers has reimbursed the Company for
$5.5 million in attorneys' fees expended on the litigation. The parties in the
federal class-action litigation have executed a stipulation of settlement, and
on July 3, 1995 the court issued an order preliminarily approving the
settlement. A hearing regarding approval of the settlement is scheduled to take
place on September 18, 1995. The parties in the derivative litigation have
executed a memorandum of understanding regarding the terms of the settlement. A
stipulation of settlement is expected shortly and also will require court
approval.
Two additional federal class actions filed in August 1993 have been
consolidated into one action. The consolidated action alleges violations of
federal securities laws against the Company and certain of its executive
officers. After unsuccessful mediation, the parties agreed in May 1995 to
proceed with the litigation.
PSYCHIATRIC MALPRACTICE CASES--The Company continues to experience a greater
than normal level of litigation relating to its former psychiatric operations.
The majority of lawsuits filed to date contain allegations of fraud and
conspiracy against the Company and certain of its subsidiaries and former
employees. The Company believes that much of this litigation stems, in whole or
in part, from advertisements by certain lawyers seeking former psychiatric
patients in order to ascertain whether potential claims exist against the
Company. The advertisements focus, in many instances, on the Company's
settlement of past disputes involving the operations of its psychiatric
subsidiaries, including the Company's 1994 resolution of governmental
investigations and a corresponding criminal plea agreement. Among the suits
filed during 1995 are two lawsuits in Texas aggregating approximately 760
individual plaintiffs who are purported to have been patients in certain Texas
psychiatric facilities and a number of lawsuits filed in the District of
Columbia. The Company expects that additional lawsuits with similar allegations
will be filed from time to time. The Company believes it has meritorious
defenses to these actions and will defend this litigation vigorously. The
reserves for unusual litigation costs at May 31, 1995 related to these cases
primarily represent the estimated costs of such defense.
25
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CLAIMS AND LAWSUITS (CONTINUED)
C. LITIGATION RELATING TO THE AMH MERGER
A total of nine purported class actions (the "Class Actions") have been
filed challenging the merger in Delaware and California. The seven Class Actions
filed in Delaware have been consolidated into one class action, and discovery is
continuing in the case. The two California Class Actions have been stayed
pending the resolution of the Delaware case. Named defendants are AMH and its
former directors and, in some of the cases, the Company. The complaints filed in
each of the lawsuits are substantially similar, are brought by purported
stockholders of AMH, and, in general, allege that the directors of AMH breached
their fiduciary duties to the plaintiffs and other members of the purported
class. Plaintiffs allege that the Company has aided and abetted the AMH
directors' alleged breach of their fiduciary duties. Plaintiffs further allege
that the directors of AMH wrongfully failed to hold an open auction and
encourage bona fide bids for AMH and failed to take action to maximize value for
AMH stockholders. Since the merger has been completed, the plaintiffs seek
rescission or rescissory damages, an accounting of all profits realized and to
be realized by the defendants in connection with the merger, and the imposition
of a constructive trust for the benefit of the plaintiffs and other members of
the purported classes pending such an accounting. Plaintiffs also seek monetary
damages of an unspecified amount together with prejudgment interest and
attorneys' and experts' fees. The Company will defend this litigation vigorously
and believes that the complaints are without merit and will not have a material
adverse effect on the Company's results of operations, liquidity or capital
resources.
9. PREFERRED STOCK PURCHASE RIGHTS AND PREFERRED STOCK
A. PREFERRED STOCK PURCHASE RIGHTS
In 1988 the Company distributed Preferred Stock Purchase Rights to holders
of the Company's common stock and authorized the issuance of additional rights
for common stock issued after that date. The rights expire in December 1998
unless previously exercised or redeemed and do not entitle the holders thereof
to vote as shareholders or receive dividends.
The Company may redeem the rights at $.025 per right at any time up to the
10th business day after a public announcement that a person has acquired 20% or
more of the Company's common stock in a transaction or transactions not approved
by the Board of Directors. The rights are not exercisable until after the date
on which the Company's right to redeem the rights has expired. When exercisable,
each right entitles the holder thereof to purchase from the Company one
two-thousandth of a share of Series A Junior Participating Preferred Stock
("Series A Preferred Stock") at a price of $40.61, subject to adjustment.
Subject to the foregoing, in the event the Company is acquired in a merger
or other business combination transaction in which shares of the Company's
common stock are exchanged for shares of another company or more than 50% of the
Company's assets are sold, each holder of a right generally will be entitled
upon exercise to purchase, for the then-current exercise price of the right,
common stock of the surviving company having a market value equal to two times
the exercise price of the rights. The plan also provides that, in the event of
certain other mergers or business combinations, certain self-dealing
transactions or the acquisition by a person of stock having 30% or more of the
Company's general voting power, each holder of a right generally will be
entitled upon exercise to purchase, for the then-current exercise price of the
right, the number of shares of Series A Preferred Stock having a market value
equal to two times the exercise price of the rights.
B. PREFERRED STOCK
The Series A Junior Participating Preferred Stock for which the Preferred
Stock Purchase Rights may be exchanged is nonredeemable and has a par value of
$0.15 per share. None of the 225,000 authorized shares are outstanding.
The Company has also authorized a Series B Convertible Preferred Stock,
issuable solely upon conversion of the Company's convertible floating-rate
debentures. (See Note 6A.) The par value of the stock is
26
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. PREFERRED STOCK PURCHASE RIGHTS AND PREFERRED STOCK (CONTINUED)
$0.15 per share; its liquidation and redemption value is $105,264 per share;
2,030 shares are reserved for future issuance; and no shares are outstanding.
Because it is likely that this preferred stock would be converted immediately to
common stock, all references in Note 6A are to common stock rather than
preferred stock.
10. STOCK BENEFIT PLANS
Under the Company's 1983 and 1991 stock incentive plans, stock options and
incentive stock awards (restricted shares and restricted units) have been made
to certain officers and other key employees. Stock options generally are granted
at an exercise price equal to the fair market value of the shares on the date of
grant and are exercisable at the rate of one-third per year beginning one year
from the date of grant. In addition, 526,000 options granted to certain senior
officers during fiscal 1994 become exercisable on May 31, 1996. Stock options
generally expire 10 years from the date of grant. Certain 1983-plan stock
options may be canceled in connection with the vesting of restricted units under
circumstances described below.
Restricted units were granted in fiscal 1992, 1993 and 1994. A restricted
unit is a grant that entitles the recipient to a payment of cash at the end of
each vesting period equivalent to the fair market value of a share of the
Company's common stock on the date of vesting subject to a maximum value per
unit, which is equivalent to the fair market value of a share of the Company's
common stock on the date of grant. These restricted units were granted along
with stock options. Restricted units normally vest one-third each year over
three years and earn dividend equivalents during the vesting period.
All awards granted under the 1983 and 1991 plans will vest under
circumstances defined in the plans or under certain employment arrangements,
including, with the consent of the Compensation and Stock Option Committee of
the Board of Directors, upon a change in control of the Company.
Charges to continuing operations associated with restricted shares,
discounted stock options and restricted units were $4 million in fiscal 1995,
$12 million in fiscal 1994, and $11 million in fiscal 1993. The remaining amount
to be charged to future operations is $2 million.
Stock awards may be made only under the 1991 plan. At May 31, 1995, there
were 2,705,236 shares of common stock available under the 1991 plan for future
awards. The table below summarizes the transactions in all stock option plans in
which employees participate, including discounted stock options but excluding
restricted shares and units:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
(SHARES OF COMMON STOCK)
<S> <C> <C>
Outstanding at beginning of year (1983 and 1991 plans)................ 15,426,593 11,682,204
Granted ($9.375 to $17.50 per share in 1995 and 1994)................. 6,241,700 5,719,175
Exercised ($4.405 to $16.813 per share in 1995 and 1994).............. (705,022) (282,482)
Canceled and other adjustments........................................ (1,346,146) (1,692,304)
------------ ------------
Outstanding at end of year ($4.41 to $22.44 per share at May 31,
1995)................................................................ 19,617,125 15,426,593
------------ ------------
------------ ------------
Exercisable at end of year............................................ 8,967,874 6,472,708
------------ ------------
------------ ------------
</TABLE>
In September 1994 a new Directors Stock Option Plan replaced the 1991
Director Restricted Share Plan. The plan makes available options to purchase
500,000 shares of common stock for issuance to nonemployee directors. Under the
plan each nonemployee director will receive a stock option for 5,000 common
shares upon initially being elected to the Board of Directors and on each
January, beginning (for those then serving as nonemployee directors)
retroactively in January 1994 when the plan was approved by the Board of
Directors. Awards will vest one year after the date of grant and will expire 10
years after the date of grant. At May 31, 1995, there were options outstanding
for 298,740 shares of common stock under the directors plan, at exercise prices
of $8.67 to $17.78 per share.
27
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE
Primary earnings per share of common stock are based on after-tax income
applicable to common stock and the weighted average number of shares of common
stock and common stock equivalents outstanding during each period as
appropriate. Fully diluted earnings-per-share calculations are based on the
assumption that all dilutive convertible debentures were converted into shares
of common stock as of the beginning of the year, or as of the issue date if
later, and (i) that those shares are added to the weighted average number of
common shares and share equivalents outstanding used in the calculation of
primary earnings per share, and (ii) that after-tax income is adjusted
accordingly.
12. EMPLOYEE RETIREMENT PLANS
Substantially all domestic employees who were employed by NME prior to the
merger, upon qualification, are eligible to participate in a defined
contribution 401(k) plan, the Tenet Healthcare Retirement Savings Plan.
Employees who elect to participate make mandatory contributions equal to 3% of
their eligible compensation, and such contributions are matched by the Company.
Company contributions from continuing operations to the NME plan for the fiscal
years 1995, 1994 and 1993 were approximately $14 million, $17 million and $18
million, respectively. The Company also has a tax-deferred 401(k) savings plan
for employees of AMI prior to the merger. Expenses relating to this plan were
$2.5 million for the three months ended May 31, 1995.
Substantially all employees who were employed by AMI prior to the merger are
eligible to participate in one of AMI's defined benefit pension plans (the "AMI
Plans"). The benefits are based on years of service and the employee's base
compensation as defined in the AMI Plans. The policy is to fund pension costs
accrued within the limits allowed under federal income tax regulations.
Contributions are intended to provide not only for benefits attributed to
credited service to date, but also for those expected to be earned in the
future.
The following table sets forth the funded status of the AMI Plans and
amounts recognized in the consolidated financial statements as of May 31, 1995:
<TABLE>
<CAPTION>
1995
-------------
(IN MILLIONS)
<S> <C>
Actuarial present value of accumulated benefit obligation:
Vested................................................................................... $ 271
-----
-----
Accumulated.............................................................................. 282
-----
-----
Projected benefit obligation............................................................... 285
Plan assets at fair value, primarily listed stocks and corporate bonds..................... (223)
-----
Projected benefit obligation in excess of plan assets...................................... 62
Unrecognized net loss...................................................................... 13
-----
Pension liability.......................................................................... $ 75
-----
-----
</TABLE>
Net pension cost for the AMI Plans for the three months ended May 31, 1995
was $2 million.
The discount rate used in determining the actuarial present value of the
projected benefit obligation for the AMI Plans approximated 7.0% as of May 31,
1995. The rate of increase in future compensation levels for the AMI Plans was
assumed to be 5.0%.
The Company does not have a plan that provides any postretirement benefits
other than pensions to retired employees.
28
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. OTHER DISPOSALS AND ACQUISITIONS OF FACILITIES
In January 1994 the Company sold 28 inpatient rehabilitation hospitals and
45 related satellite outpatient clinics for approximately $350 million. This
sale resulted in a gain of $66.2 million. The Company retained six
rehabilitation hospitals on or near general hospital campuses and in March 1994
sold its other remaining rehabilitation hospital for approximately $14 million.
For the fiscal year ended May 31, 1994, net operating revenues of the sold
rehabilitation hospitals were $266 million, while pretax income, before general
corporate overhead costs, was $22 million. The Company is contingently liable
for approximately $88 million in obligations, substantially all of which are
lease obligations, relating to the facilities sold in January 1994.
During fiscal 1994 Hillhaven purchased the remaining 23 nursing centers it
previously leased from the Company for $112 million. (See Note 14.) The sales
resulted in a gain of $17 million. In May 1994 the Company entered into a
long-term operating lease of a general hospital in New Orleans. In July 1993 the
Company sold one general hospital, and in June 1994 the Company sold two general
hospitals. Also in June 1994 the Company acquired its partner's 50% interest in
its general hospital in Barcelona, Spain, which opened in February 1994.
In May 1995 the Company announced it had reached an agreement in principle
to purchase Mercy+Baptist Medical Center, a general two-hospital (759 beds)
not-for-profit provider in New Orleans. Also in May 1995 the Company announced
it had reached an agreement in principle to purchase Providence Memorial
Hospital, a 436-bed not-for-profit general hospital in El Paso, Texas. The cash
consideration for these acquisitions will be approximately $350 million.
14. THE HILLHAVEN CORPORATION
The Company owns approximately 8.9 million common shares, or an
approximately 26% voting interest, of Hillhaven. The Company also holds 35,000
shares of Hillhaven's cumulative nonvoting 8 1/4% Series C Preferred Stock, with
an aggregate liquidation preference of $35.0 million, and 65,430 shares of
Hillhaven's cumulative nonvoting 6 1/2% payable-in-kind Series D Preferred
Stock, with an aggregate liquidation preference of $65.4 million.
The Company is contingently liable under various guarantees for $182 million
of Hillhaven's obligations to third parties, including $172 million of lease
obligations and $10 million of long-term debt obligations. During fiscal 1995
and 1994, Hillhaven reduced by approximately $104 million and $420 million,
respectively, its obligations guaranteed by the Company.
On April 24, 1995, Vencor, Inc. and Hillhaven announced that they had
entered into an agreement pursuant to which Vencor would acquire Hillhaven.
Under terms of the agreement, Hillhaven's shareholders would receive $32.25 in
value in Vencor common stock for each share of Hillhaven common stock (subject
to adjustment under certain circumstances depending on the market price of
Vencor stock). The Company expects to receive approximately $90 million in cash
for its Series C Preferred Stock and its Series D Preferred Stock in connection
with this transaction.
15. SALES OF SUBSIDIARIES' COMMON STOCK
On August 11, 1994, the Company completed the sale of a controlling interest
in Total Renal Care, Inc. ("TRC"), an operator of outpatient renal dialysis
centers. As part of the transaction, the Company received a $75.5 million cash
distribution from TRC prior to the sale and retained an approximate 25% minority
interest, which since has been reduced to approximately 23% due to the issuance
of additional shares by TRC in connection with acquisitions. This transaction
resulted in a $32.0 million gain to the Company in fiscal 1995. Net operating
revenues of the subsidiary were $80.5 million in the fiscal year ended May 31,
1994, and operating income was $5.7 million. Net operating revenues and
operating income included in the current year's statement of operations, for the
period from June 1, 1994 through August 11, 1994, were $16.6 million and $2.7
million, respectively.
29
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RESTRUCTURING CHARGES
In connection with the March 1, 1995 merger of the Company and AMH, the
Company has relocated substantially all of its hospital support activities
located in Southern California and Florida to the former corporate headquarters
of AMH located in Dallas, Texas. Severance payments and outplacement services
for involuntary terminations of approximately 890 former NME employees and other
related costs in connection with this move are estimated to be $36.9 million
($0.12 per share on an after-tax, fully diluted basis) and have been classified
as restructuring charges in the accompanying consolidated statements of
operations for the year ended May 31, 1995.
During the fourth quarter of fiscal 1994, the Company initiated a plan to
significantly decrease overhead costs through a reduction in corporate and
division staffing levels and to review the resulting office space needs of all
corporate operations. The Company decided to sell its corporate headquarters
building and to lease substantially less office space in that building or at an
alternative site. Costs of the write-down of the building, employee severance
benefits for approximately 110 employees and other expenses directly related to
the overhead reduction plan were estimated to be approximately $77.0 million.
In 1993 the Company recorded a charge of $52.0 million for costs associated
with the combination of the Company's rehabilitation hospital division into its
general hospital division, a corporate overhead reduction program that began in
April 1993, and severance costs incurred in connection with a change in senior
executive management.
During the year ended May 31, 1995, actual costs incurred and charged
against the restructuring reserves were approximately $22.7 million. The
balances of the reserves are included in other current liabilities or other
long-term liabilities in the Company's consolidated balance sheets at May 31,
1995 and 1994.
17. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. These derivatives are
nonleveraged and involve little complexity. They are used to manage well-defined
interest rate and foreign currency risks. The notional amounts of derivatives in
the tables below do not represent amounts exchanged by the parties and, thus,
are not a measure of the exposure of the Company through its use of derivatives.
There are no cash or collateral requirements in connection with these
agreements.
INTEREST RATE SWAPS--These derivative financial instruments allow the
Company to make long-term borrowings at floating rates and then swap them into
fixed rates that are lower than those available to the Company if fixed-rate
borrowings were made directly. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional principal amount. Cross-currency interest rate swaps allow
borrowings to be made in foreign currencies, gaining access to additional
sources of financing while limiting foreign exchange risk. The Company's
exposure to credit loss under these agreements is limited to the interest rate
spread in the event of nonperformance by the other parties. Because the other
parties are creditworthy financial institutions, generally commercial banks, the
Company does not expect nonperformance.
30
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
The following table shows the Company's interest rate swaps and their
weighted average interest rates as of the end of the most recent two fiscal
years. Variable interest rates may change significantly, affecting future cash
flows.
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Notional amount for agreements under which the Company receives fixed
rates...................................................................... $ 29.0 $ 29.0
Average receive rate...................................................... 7.0% 7.0%
Average pay rate.......................................................... 5.7% 3.4%
Contract duration......................................................... 2 years 3 years
Notional amount for agreements under which the Company pays fixed rates..... $ 120.0 $ 121.0
Average pay rate.......................................................... 8.5% 8.5%
Average receive rate...................................................... 5.6% 3.4%
Contract duration........................................................... 1-5 years 1-6 years
</TABLE>
The Company's foreign currency positions, by currency, as of May 31, 1995
and 1994 are presented in the following table, expressed in millions of U.S.
dollars:
<TABLE>
<CAPTION>
MAY 31, 1995 MAY 31, 1994
------------------------------------- -------------------------------------
CARRYING EXTENT OF UNHEDGED CARRYING EXTENT OF UNHEDGED
CURRENCY VALUE HEDGE EXPOSURE VALUE HEDGE EXPOSURE
- ------------------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Singapore dollars............................... $ 78.3 -- $ 78.3 $ 108.7 -- $ 108.7
Australian dollars.............................. 66.4 54.4 12.0 64.0 54.8 9.2
Thai baht....................................... 11.1 8.1 3.0 5.0 -- 5.0
Malaysian ringgitt.............................. 3.7 -- 3.7 3.0 -- 3.0
Spanish pesetas................................. 16.1 22.4 (6.3) 9.2 13.7 (4.5)
UK pounds....................................... 70.3 15.9 54.4 62.4 15.0 47.4
Swiss francs.................................... (13.7) (19.2) (5.5) -- -- --
</TABLE>
FORWARD EXCHANGE CONTRACTS--Due to its foreign operations in Australia,
Great Britain, Malaysia, Singapore, Spain, Switzerland and Thailand, the Company
is exposed to the effects of foreign exchange rate fluctuations on the U.S.
dollar. Forward exchange contracts, generally having maturities of less than six
months, are entered into for the sole purpose of hedging the Company's long-term
net investments in its foreign subsidiaries or unconsolidated foreign
affiliates. The Company's forward exchange contracts, as of May 31, 1995 and
1994, are shown in the table below:
<TABLE>
<CAPTION>
1995 1994
--------------------------------- -----------------------------------
FOREIGN U.S. FOREIGN U.S.
CURRENCY CURRENCY MATURITY CURRENCY CURRENCY MATURITY
AMOUNT AMOUNT DATE AMOUNT AMOUNT DATE
--------- ----------- --------- ----------- ----------- ---------
(CURRENCY IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Australian dollars............................ 23.0 $ 16.5 09/20/95 18.0 $ 12.9 08/31/94
Australian dollars............................ 18.0 12.9 07/31/95 23.0 16.5 07/18/94
Spanish pesetas............................... 450.0 3.7 06/09/95 150.0 1.2 10/05/94
Spanish pesetas............................... 1,700.0 13.9 06/22/95 450.0 3.7 06/24/94
Spanish pesetas............................... -- -- -- 100.0 .8 06/30/94
Spanish pesetas............................... -- -- -- 350.0 2.9 06/30/94
Swiss francs.................................. 5.0 4.3 11/15/95 -- -- --
Swiss francs.................................. 23.0 19.7 03/15/96 -- -- --
Thai baht..................................... 200.0 8.1 07/13/95 -- -- --
U.K. pounds................................... 10.0 15.9 06/30/95 10.0 15.9 06/27/94
</TABLE>
31
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
CURRENCY SWAP AGREEMENTS--The Company uses foreign currency swaps to
effectively convert foreign-currency-denominated debt to U.S.-dollar-denominated
debt in order to reduce the impact of interest rate and foreign currency rate
changes on future income. The differential to be paid or received under these
agreements is recognized as an adjustment to interest expense related to the
debt. The related amount payable to or receivable from counterparties is
included in other long-term liabilities or long-term receivables. At May 31,
1995 and 1994, the Company had the following foreign currency swap agreements:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------------ ------------------------------------------------
FOREIGN U.S. FOREIGN U.S.
CURRENCY CURRENCY CURRENCY CURRENCY
NOTIONAL NOTIONAL INTEREST MATURITY NOTIONAL NOTIONAL INTEREST MATURITY
AMOUNT AMOUNT RATE DATE AMOUNT AMOUNT RATE DATE
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
(CURRENCY IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Australian dollars....... 20.5 $ 14.7 10.54% 02/24/99 20.5 $ 14.7 10.54% 02/24/99
Australian dollars....... 14.3 10.3 8.26% 03/04/98 14.3 10.3 4.86% 03/04/98
Spanish pesetas.......... 300.0 2.4 12.00% 10/09/98 300.0 2.4 12.00% 10/09/98
Spanish pesetas.......... 300.0 2.4 11.33% 10/09/98 300.0 2.4 11.33% 10/09/98
</TABLE>
18. SUBSEQUENT EVENTS--SALES OF ASSETS
On June 28, 1995, the Company sold its 505-bed Mount Elizabeth Hospital, its
145-bed East Shore Hospital and related healthcare businesses in Singapore to
the Singapore-based holding company Parkway Holdings Limited for $243.3 million,
which is net of $78.3 million in debt assumed by the buyer. The Company used the
net proceeds from the sale to repay secured bank loans under its domestic term
loan and revolving credit agreement. The transaction resulted in a gain
estimated to be approximately $150 million, which will be included in the
results of operations during the Company's first quarter of fiscal 1996.
The Company also has agreements to sell its holdings in Malaysia, Thailand
and Australia for approximately $94.0 million, which proceeds will be used to
retire long-term debt. These transactions are expected to close no later than
November 30, 1995. The pending sales are subject to foreign government
clearances and a vote of minority shareholders in Australia. Fiscal 1995 net
operating revenues and operating profits from the facilities sold and to be sold
were $203.4 million and $37.0 million, respectively. The net assets of the sold
and to-be-sold facilities amounted to $158.9 million at May 31, 1995 and have
been included in assets held for sale in the accompanying consolidated balance
sheets.
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1995 QUARTERS FISCAL 1994 QUARTERS
-------------------------------------------- ---------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
--------- ----------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER-SHARE DATA)
Net operating revenues..................... $ 663 $ 639 $ 660 $ 1,356 $ 772 $ 758 $ 716
--------- ----- --------- --------- --------- ----- ---------
Income from continuing operations.......... 64 46 49 35 53 61 91
Net income (loss).......................... 64 46 49 6 (41) (226) (164)
--------- ----- --------- --------- --------- ----- ---------
Income per share from continuing
operations:
Primary.................................. $ 0.38 $ 0.27 $ 0.29 $ 0.17 $ 0.32 $ 0.37 $ 0.55
Fully diluted............................ $ 0.36 $ 0.27 $ 0.28 $ 0.17 $ 0.30 $ 0.35 $ 0.51
--------- ----- --------- --------- --------- ----- ---------
<CAPTION>
FOURTH
-----------
<S> <C>
Net operating revenues..................... $ 697
-----
Income from continuing operations.......... 11
Net income (loss).......................... 6
-----
Income per share from continuing
operations:
Primary.................................. $ 0.07
Fully diluted............................ $ 0.07
-----
</TABLE>
Quarterly operating results are not necessarily representative of operations
for a full year for various reasons, including levels of occupancy, interest
rates, acquisitions, disposals, revenue allowance and discount fluctuations, the
timing of price changes, unusual litigation costs, restructuring charges and
fluctuations in quarterly tax rates. Net operating revenues increased
significantly in the fourth quarter of fiscal 1995 due to the acquisition of AMH
on March 1, 1995. Net income in the fourth quarter of 1995 was impacted by a
32
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
restructuring charge of $36.9 million as discussed in Note 16 and an increase in
interest expense attributable to the AMH acquisition. Quarterly results of
operations in fiscal 1994 were affected by the unusual litigation costs
described in Note 8, the discontinuance of the psychiatric hospital business in
the second quarter discussed in Note 3, the sale of inpatient rehabilitation
hospitals and related satellite outpatient clinics in the third quarter
discussed in Note 13 and the $77.0 million restructuring charge taken in the
fourth quarter discussed in Note 16.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 3. Exhibits.
(23) Consent of Experts
(a) Auditors' Consent (KPMG Peat Marwick LLP)
34
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Tenet Healthcare Corporation
(Registrant)
Date: December 18, 1995 /s/ RAYMOND L. MATHIASEN
---------------------------------------------
Raymond L. Mathiasen
Senior Vice President,
Chief Financial Officer
35
<PAGE>
EXHIBIT 23(A)
AUDITORS' CONSENT
The Board of Directors
Tenet Healthcare Corporation:
We consent to the incorporation by reference of our reports dated July 25,
1995 relating to the consolidated balance sheets of Tenet Healthcare Corporation
and subsidiaries as of May 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the years
in the three-year period ended May 31, 1995, and the related schedule, in the
Company's Registration Statements on Form S-3 (Nos. 33-39130, 33-39563,
33-40212, 33-45689, 33-57801, 33-57057, 33-55285 and 33-62591), Registration
Statement on Form S-4 (No. 33-57485) and Registration Statements on Form S-8
(Nos. 33-11478, 2-95774, 2-87611, 2-69472, 2-79401, 33-35688, 33-50180, 33-50182
and 33-57375).
KPMG Peat Marwick LLP
Los Angeles, California
December 15, 1995