<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
AUGUST 31, 1996.
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
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TENET HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
NEVADA 95-2557091
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3820 STATE STREET
SANTA BARBARA, CA 93105
(Address of principal executive offices)
(805) 563-7000
(Registrant's telephone number, including area code)
-----------------
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
--- ---
AS OF SEPTEMBER 30, 1996 THERE WERE 217,052,014 SHARES OF $0.075 PAR VALUE
COMMON STOCK OUTSTANDING.
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<PAGE>
TENET HEALTHCARE CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - May 31, 1996
and August 31, 1996 . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Income - Three Months
Ended August 31, 1995 and 1996 . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows - Three Months
Ended August 31, 1995 and 1996 . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 14
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
- ----------
Note: Items 2, 3, 4 and 5 of Part II are omitted because they are not
applicable.
1
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1996 1996
-------- --------
(IN MILLIONS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 89.2 $ 104.1
Short-term investments, at cost which approximates market . . . . . 111.8 105.2
Accounts and notes receivable, less allowance for doubtful accounts
($156.0 at May 31 and $154.8 at August 31) . . . . . . . . . . 838.4 884.8
Inventories of supplies, at cost . . . . . . . . . . . . . . . . . . 127.6 131.9
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 278.9 269.9
Prepaid expenses and other current assets . . . . . . . . . . . . . 98.9 80.3
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . 1,544.8 1,576.2
-------- --------
Investments and other assets . . . . . . . . . . . . . . . . . . . . . . 517.7 521.4
Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . 4,597.7 4,701.8
Less accumulated depreciation and amortization . . . . . . . . . . . 948.9 1,012.8
-------- --------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . 3,648.8 3,689.0
-------- --------
Intangible assets, at cost less accumulated amortization
($123.0 at May 31 and $136.8 at August 31) . . . . . . . . . . . . . 2,621.1 2,638.9
-------- --------
$8,332.4 $8,425.5
-------- --------
-------- --------
</TABLE>
2
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1996 1996
-------- --------
(IN MILLIONS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . $ 60.0 $ 40.4
Short-term borrowings and notes . . . . . . . . . . . . . . . . . . 2.0 18.1
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 380.4 320.5
Accrued employee compensation and benefits . . . . . . . . . . . . 120.4 137.8
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . 68.1 83.4
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 32.8 49.3
Other current liabilities . . . . . . . . . . . . . . . . . . . . . 470.8 373.2
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . 1,134.5 1,022.7
-------- --------
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . 3,191.1 3,183.4
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 394.0 429.9
Other long-term liabilities and minority interests . . . . . . . . . . . 976.5 1,025.7
Shareholders' equity:
Common stock, $0.075 par value; authorized 450,000,000 shares;
218,713,406 shares issued at May 31, 1996 and 219,232,999
shares issued at August 31, 1996 . . . . . . . . . . . . . . . 16.4 16.4
Other shareholders' equity 2,660.3 2,786.1
Less common stock in treasury, at cost, 2,790,967 shares at May
31, 1996 and 2,676,091 shares at August 31, 1996 . . . . . . . (40.4) (38.7)
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . 2,636.3 2,763.8
-------- --------
$8,332.4 $8,425.5
-------- --------
-------- --------
See accompanying Notes to Condensed Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
</TABLE>
3
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED AUGUST 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------- --------
(IN MILLIONS, EXCEPT PER SHARE AND
SHARE AMOUNTS)
<S> <C> <C>
Net operating revenues . . . . . . . . . . . . . . . . . . . . . . . $ 1,283.9 $ 1,438.6
------------ -----------
Operating expenses:
Salaries and benefits . . . . . . . . . . . . . . . . . . . . . 502.2 568.7
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . 178.7 191.0
Provision for doubtful accounts . . . . . . . . . . . . . . . . 67.3 74.5
Other operating expenses . . . . . . . . . . . . . . . . . . . 281.6 321.7
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 61.4 63.2
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . 18.8 20.9
------------ -----------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 173.9 198.6
------------ -----------
Interest expense, net of capitalized portion . . . . . . . . . . . . (77.1) (71.0)
Investment earnings . . . . . . . . . . . . . . . . . . . . . . . . 7.3 4.8
Equity in earnings of unconsolidated affiliates . . . . . . . . . . 6.9 0.6
Minority interests in income of consolidated subsidiaries . . . . . (5.6) (4.6)
Gains on sales of facilities . . . . . . . . . . . . . . . . . . . . 123.5 -
------------ -----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . 228.9 128.4
Taxes on income . . . . . . . . . . . . . . . . . . . . . . . . . . (110.6) (56.0)
------------ -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 118.3 $ 72.4
------------ -----------
------------ -----------
Earnings per share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.59 $ 0.33
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.56 $ 0.33
Weighted average shares and share equivalents outstanding - primary . 201,890,477 219,640,626
See accompanying Notes to Condensed Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
</TABLE>
4
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN MILLIONS)
<S> <C> <C>
Net cash provided by operating activities, including net expenditures
for discontinued operations and restructuring charges . . . . . . . $ 60.8 $ 39.3
------- -------
Cash flows from investing activities:
Proceeds from sales of facilities and other assets . . . . . . . . 231.3 40.3
Purchases of property and equipment . . . . . . . . . . . . . . . . (95.1) (43.4)
Purchases of new businesses, net of cash acquired . . . . . . . . . (224.3) (79.2)
Collection of note receivable . . . . . . . . . . . . . . . . . . . - 67.1
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8.4) (0.5)
------- -------
Net cash used in investing activities . . . . . . . . . . . . (96.5) (15.7)
------- -------
Cash flows from financing activities:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . 244.2 207.0
Payments of borrowings . . . . . . . . . . . . . . . . . . . . . . (258.3) (222.6)
Proceeds from stock options exercised . . . . . . . . . . . . . . . 1.2 7.8
Sales of common stock under employee stock purchase plan . . . . . - 2.1
Dividends to minority interests . . . . . . . . . . . . . . . . . . - (3.0)
------- -------
Net cash used in financing activities . . . . . . . . . . . . (12.9) (8.7)
------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . (48.6) 14.9
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . 155.0 89.2
------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $ 106.4 $ 104.1
------- -------
------- -------
Supplemental disclosures:
Interest paid, net of amounts capitalized . . . . . . . . . . . . . $ 41.4 $ 54.4
Income taxes paid, net of refunds received . . . . . . . . . . . . - 20.5
See accompanying Notes to Condensed Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations.
</TABLE>
5
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments that are necessary to fairly state the
financial position of Tenet Healthcare Corporation, its cash flows and the
results of its operations for the periods indicated. All the adjustments
affecting net income are of a normal recurring nature.
The Company presumes that users of this interim financial information have
read or have access to the Company's audited financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the preceding fiscal year and that the adequacy of
additional disclosure needed for a fair presentation may be determined in
that context. Accordingly, footnotes and other disclosure which would
substantially duplicate the disclosure contained in the Company's most
recent annual report to security holders have been omitted. 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. Net income also is not necessarily
representative of operations for a full year for various reasons, including
interest rates, acquisitions and disposals of facilities and long-term
assets, revenue allowances and discount fluctuations, the timing of price
changes and fluctuations in quarterly tax rates. These same considerations
apply to all year-to-year comparisons.
2. The Company's net operating revenues consist primarily of net patient
service revenues, which are based on established billing rates less
applicable allowances and discounts. These allowances and discounts,
primarily for patients covered by Medicare, Medicaid and other contractual
programs, amounted to $1.7 billion and $1.4 billion for the three-month
periods ended August 31, 1996 and 1995, respectively.
3. During the three-month period ended August 31, 1996, actual costs incurred
and charged against the Company's reserves for discontinued operations were
approximately $13.5 million. Costs incurred and charged against
restructuring reserves were approximately $3.1 million. These reserves are
included in other current liabilities or other long-term liabilities in the
Company's balance sheets at May 31, 1996 and August 31, 1996.
4. During the quarter ended August 31, 1996, the Company acquired Hialeah
Hospital, a 378-bed acute care hospital in Hialeah, Florida for $67.1
million in cash. The Company also acquired several physician practices
during the quarter. All of these transactions were accounted for as
purchases. The results of operations of the acquired businesses have been
included in the Company's Consolidated Statements of Income from the dates
of acquisition. On October 4, 1996, the Company acquired the Lloyd Noland
Hospital, a 319-bed acute care hospital in Birmingham, Alabama.
6
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. As a result of the redemption and/or conversion of all of the Company's
convertible subordinated floating-rate debentures during the year ended May
31, 1996, there are no potentially dilutive securities except for employee
stock options. Consequently, primary and fully-diluted earnings per share
for the quarter ended August 31, 1996 are the same. Fully-diluted earnings
per share for the quarter ended August 31, 1995 include the effects of the
convertible subordinated floating-rate debentures which were outstanding
during the period.
6. On August 30, 1996 the Company announced that it would redeem all of its
then outstanding 11% Senior Notes due 2000 for $1,031.40 per $1,000
principal amount, on October 15, 1996, and pay accrued interest of $55.00
per original principal amount through the redemption date.
7. There have been no material changes to the description of i) Professional
and General Liability Insurance set forth in Note 7A or ii) Significant
Legal Proceedings set forth in Note 7B. Although, based upon information
currently available to it, management believes that the amount of damages,
if any, in excess of the reserves for unusual litigation costs that may be
awarded in any of the unresolved legal proceedings cannot reasonably be
estimated, management does not believe it is likely that any such damages
will have a material adverse effect on the Company's results of operations,
liquidity or capital resources.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the quarter ended August 31, 1996 was derived
principally from the cash proceeds of operating activities and borrowings under
the Company's unsecured revolving bank credit agreement. Net cash provided by
operating activities for the quarter was $39.3 million after expenditures of
$16.6 million for discontinued operations and restructuring charges. Net cash
provided by operating activities in the year ago quarter was $60.8 million after
expenditures of $16.3 million for discontinued operations and restructuring
charges. The above liquidity, along with the availability of credit under the
Company's unsecured revolving credit agreement, should be adequate to meet debt
service requirements and to finance planned capital expenditures, acquisitions
and other known operating needs, over the short-term (up to 18 months) and the
long-term (18 months to three years).
The Company's cash and cash equivalents at August 31, 1996 were $104.1
million, an increase of $14.9 million over May 31, 1996. Working capital at
August 31, 1996 was $553.5 million, compared to $410.3 million at May 31, 1996.
Cash proceeds from the sale of property and equipment in the quarter ended
August 31, 1996 were $40.3 million, primarily from the sale of the Company's
former corporate headquarters building in Santa Monica, California.
Cash payments for property and equipment were $43.4 million in the quarter
ended August 31, 1996, compared to $95.1 million in the quarter ended August 31,
1995. Capital expenditures for the Company, before any significant acquisitions
of facilities and other healthcare operations, are expected to be approximately
$300.0 million to $400.0 annually. Such capital expenditures relate primarily to
the development of healthcare services networks in selected geographic areas,
design and construction of new buildings, expansion and renovation of existing
facilities, equipment additions and replacements, introduction of new medical
technologies and various other capital improvements.
The Company's strategy includes the pursuit of growth through joint
ventures, including the development of integrated healthcare systems in certain
strategic geographic areas, hospital acquisitions and physician practice
acquisitions. All or portions of this growth may be financed through available
credit under the existing credit facility or, depending on capital market
conditions, sale of additional debt or equity securities or other bank
borrowings. The Company's unused borrowing capacity under its unsecured
revolving credit agreement was $566.0 million as of August 31, 1996.
The Company's unsecured revolving credit agreement and the indentures
governing the senior notes and the senior subordinated notes have, among other
requirements, affirmative, negative and financial covenants with which the
Company must comply. These covenants include, among other requirements,
limitations on borrowings by, and liens on the assets of, the Company and its
subsidiaries, investments, the sale of all or substantially all assets and
prepayment of subordinated debt, a prohibition against the Company declaring or
paying dividends
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
on or purchasing its common stock unless its senior long-term unsecured debt
securities are rated BBB- or higher by Standard and Poors' Rating Services and
Baa3 or higher by Moody's Investors Service, Inc. and covenants regarding
maintenance of specified levels of net worth, debt ratios and fixed-charge
coverage ratios. The Company is in compliance with its loan covenants.
RESULTS OF OPERATIONS
Income before income taxes was $128.4 million in the quarter ended
August 31, 1996, compared with $228.9 million in the quarter ended August 31,
1995. The prior-year quarter includes $123.5 million in gains on sales of
facilities during the quarter, primarily the sales of the Company's interests
in its hospitals in Singapore. Excluding these gains, pre-tax income for the
quarter ended August 31, 1995 was $105.4 million.
The following is a summary of operations for the quarters ended August 31, 1995
and 1996.
<TABLE>
<CAPTION>
1995 1996 1995 1996
-------- -------- ------ ------
(DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals . . . . . . . . $1,175.2 $1,289.3 91.5% 89.6%
Other domestic operations(1) . . . . . . . 74.8 149.3 5.8% 10.4%
International operations . . . . . . . . . 33.9 0.0 2.7% 0.0%
-------- -------- ------ ------
Net operating revenues . . . . . . . . . . . . . 1,283.9 1,438.6 100.0% 100.0%
-------- -------- ------ ------
Operating expenses:
Salaries and benefits . . . . . . . . . . . (502.2) (568.7) 39.1% 39.5%
Supplies . . . . . . . . . . . . . . . . . (178.7) (191.0) 14.0% 13.3%
Provision for doubtful accounts . . . . . . (67.3) (74.5) 5.2% 5.2%
Other operating expenses . . . . . . . . . (281.6) (321.7) 21.9% 22.4%
Depreciation . . . . . . . . . . . . . . . (61.4) (63.2) 4.8% 4.4%
Amortization . . . . . . . . . . . . . . . (18.8) (20.9) 1.5% 1.4%
-------- -------- ------ ------
Operating income . . . . . . . . . . . . . . . . $173.9 $198.6 13.5% 13.8%
-------- -------- ------ ------
-------- -------- ------ ------
</TABLE>
1 NET OPERATING REVENUES OF OTHER DOMESTIC OPERATIONS CONSIST PRIMARILY OF
REVENUES FROM (I) PHYSICIAN PRACTICES, (II) 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;
(III) HEALTHCARE JOINT VENTURES OPERATED BY THE COMPANY; (IV) SUBSIDIARIES
OF THE COMPANY OFFERING HEALTH MAINTENANCE ORGANIZATIONS, PREFERRED
PROVIDER ORGANIZATIONS AND INDEMNITY PRODUCTS; AND (V) REVENUES EARNED BY
THE COMPANY IN CONSIDERATION OF THE GUARANTEES OF CERTAIN INDEBTEDNESS AND
LEASES OF THIRD PARTIES.
Operating income increased by $24.7 million (or 14.2%) to $198.6 million
for the quarter ended August 31, 1996 from $173.9 million for the quarter ended
August 31, 1995. The operating margin for the current quarter increased to 13.8%
from 13.5% a year ago. The increase in the operating margin is due primarily to
effective cost-control programs in the hospitals and the continuing
implementation of overhead reduction plans.
The table below sets forth certain selected historical operating statistics
for the Company's domestic general hospitals.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
------------------------------------------
INCREASE
1995 1996 (DECREASE)
---------- ---------- ----------
<S> <C> <C> <C>
Number of hospitals (at end of period) . . . . . . . 72 75 3
Licensed beds (at end of period) . . . . . . . . . . 16,210 17,031 5.1%
Net inpatient revenues (in millions) . . . . . . . . $ 787.3 $ 858.2 9.0%
Net outpatient revenues (in millions) . . . . . . . . $ 365.3 $ 410.5 12.4%
Admissions . . . . . . . . . . . . . . . . . . . 111,503 122,210 9.6%
Equivalent admissions . . . . . . . . . . . . . . . 156,687 177,597 13.3%
Average length of stay (days) . . . . . . . . . . . 5.6 5.4 (0.2) *
Patient days . . . . . . . . . . . . . . . . . . . 619,226 665,006 7.4%
Equivalent patient days . . . . . . . . . . . . . . 860,955 955,578 11.0%
Net inpatient revenues per patient day . . . . . . . $1,271 $1,291 1.6%
Net inpatient revenues per admission . . . . . . . . $7,061 $7,022 (0.6)%
Utilization of licensed beds . . . . . . . . . . . . 43.4% 42.4% (1.0)%*
Outpatient visits . . . . . . . . . . . . . . . . . 1,278,757 1,540,745 20.5%
</TABLE>
*The change is the difference between 1996 and 1995 amounts shown.
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals on a same-store basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
------------------------------------------
INCREASE
1995 1996 (DECREASE)
---------- ---------- ----------
<S> <C> <C> <C>
Number of hospitals . . . . . . . . . . . . . . . . 69 69 0
Average licensed beds . . . . . . . . . . . . . . . 15,287 15,270 (0.1)%
Patient days . . . . . . . . . . . . . . . . . . . 604,800 598,821 (1.0)%
Net inpatient revenues per patient day . . . . . . . $1,274 $1,308 2.7%
Admissions . . . . . . . . . . . . . . . . . . . 109,376 110,205 0.8%
Net inpatient revenues per admission . . . . . . . . $7,046 $7,107 0.9%
Outpatient visits . . . . . . . . . . . . . . . . . 1,251,706 1,391,525 11.2%
Average length of stay (days) . . . . . . . . . . . 5.5 5.4 (0.1) *
</TABLE>
*The change is the difference between 1996 and 1995 amounts shown.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
There continue to be increases in inpatient acuity and intensity as less
intensive services shift from inpatient to outpatient settings or to alternative
healthcare delivery services because of technological improvements and continued
pressures by payors to reduce admissions and lengths of stay.
The Medicare program accounted for 38.2% of the net patient revenues of the
Company's domestic general hospitals for the three months ended August 31, 1996,
compared with 38.4% for the prior year quarter. 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 presently are cost reimbursed, but there are certain
proposals pending that would convert Medicare reimbursement for outpatient
services to a prospective payment system which, if implemented, may result in
reduced payments. Medicaid programs in certain states in which the Company
operates also are undergoing changes that will result in reduced payments to
hospitals.
The Company has implemented hospital cost-control programs and overhead
reductions and is forming integrated healthcare delivery systems to address the
prospect of reduced payments. Pressures to control healthcare costs have
resulted in an increase in the percentage of revenues attributable to managed
care payors. The Company anticipates that its managed care business will
increase in the future.
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. 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 99.6% to $149.3 million for the three months ended August 31, 1996,
compared to $74.8 million for the prior year period, representing an increase of
$74.5 million. This increase primarily reflects continued growth of physician
practices and National Health Plans, the Company's HMO and insurance subsidiary.
Net operating revenues from the Company's former international operations
were $33.9 million in the quarter ended August 31, 1995. During and subsequent
to that fiscal quarter, the Company sold all of its hospitals and related
healthcare businesses in Singapore and Australia.
Operating expenses, which include salaries and benefits, supplies,
provision for doubtful accounts, depreciation and amortization, and other
operating expenses, were $1,240.0 million for the quarter ended August 31, 1996
and $1,110.0 million for the prior year quarter. Operating margins for the
quarters ended August 31, 1996 and 1995 were 13.8% and 13.5%, respectively.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Salaries and benefits expense as a percentage of net operating revenues was
39.5% in the quarter ended August 31, 1996 and 39.1% in the prior year quarter.
The increase is primarily due to acquisitions of physician practices.
Supplies expense as a percentage of net operating revenues was 13.3% in the
quarter ended August 31, 1996 and 14.0% in the prior year quarter. The Company
has reduced supplies expense through fully incorporating acquired facilities
into the Company's group purchasing program.
The provision for doubtful accounts as a percentage of net operating
revenues was 5.2% for the quarter ended August 31, 1996, and the prior year
quarter. The Company, through its collection subsidiary, Syndicated Office
Systems, has been establishing improved follow-up collection systems by
consolidating the collection of accounts receivable in all the Company's
facilities.
Other operating expenses as a percentage of net operating revenues was
22.4% for the quarter ended August 31, 1996 and 21.9% in the prior year quarter.
The increase is primarily attributable to acquisitions since August 31, 1995.
Depreciation and amortization expense as a percentage of net operating
revenues was 5.8% in the quarter ended August 31, 1996, and 6.3% in the prior
year quarter.
Interest expense, net of capitalized interest, was $71.0 million in the
quarter ended August 31, 1996 and $77.1 million in the prior year quarter. The
reduction is due to lower borrowings and interest rates in the current period.
Investment earnings were $4.8 million in the quarter ended August 31, 1996,
compared with $7.3 million in the quarter ended August 31, 1995. Investment
earnings are derived primarily from notes receivable and investments in debt and
equity securities.
Equity in earnings of unconsolidated affiliates was $639 thousand in the
quarter ended August 31, 1996, compared to $6.9 million in the quarter ended
August 31, 1995. The prior year quarter included $6.1 million in earnings from
two unconsolidated affiliates that were sold during fiscal 1996 and two in which
the Company's ownership interest was reduced and thus they are no longer
accounted for on the equity method of accounting. These latter two investments
are now carried in the Company's balance sheet at their fair value.
Minority interests in the income of consolidated subsidiaries was $4.6
million during the quarter ended August 31, 1996, compared to $5.6 million in
the year ago quarter. The decrease is largely due to the sale of the Company's
interests in Australia during fiscal 1996.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Taxes on income as a percentage of income before income taxes were 43.6%
in the August 31, 1996 quarter compared with 48.3% in the prior year quarter.
The difference between the Company's effective income tax rate and the
statutory federal income tax rate is shown below:
<TABLE>
<CAPTION>
August 31,
--------------------------------------------------------
1995 1996
----------------------- ----------------------
Amount Percent Amount Percent
-------- ------- ------ -------
(in millions of dollars and as a percent of pretax income)
<S> <C> <C> <C> <C>
Tax provision at statutory federal rate . . . . . . $80.1 35.0% $44.9 35.0%
State income taxes, net of federal income tax
benefit . . . . . . . . . . . . . . . . . . . . $9.6 4.2% $5.3 4.1%
Gains on sales of foreign subsidiary's assets . . . $16.3 7.1% - -
Other . . . . . . . . . . . . . . . . . . . . . . . $(0.4) (0.2)% $0.1 0.1%
------ ------- ------ -----
Taxes on income and effective tax rates . . . . . . $105.6 46.1% $50.3 39.2%
</TABLE>
Amortization of the goodwill resulting from the AMH merger is a noncash
charge, and provides no income tax benefits.
BUSINESS OUTLOOK
The continuing challenge facing the Company and the healthcare industry
as a whole is to continue to provide quality patient care in an environment
of rising costs, strong competition for patients and a general reduction of
reimbursement rates by both private and public payors. Because of national,
state and private industry efforts to reform healthcare delivery and payment
systems, the healthcare industry faces increased uncertainty. The Company is
unable to predict whether any healthcare legislation at the federal or state
level will be passed in the future, but it continues to monitor all proposed
legislation and analyze its potential impact in order to formulate the
Company's future business strategies.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Material Developments in Previously Reported Legal Proceedings:
There have been no material developments in the legal proceedings
described in the Company's Annual Report on Form 10-K for its fiscal
year ended May 31, 1996.
Items 2, 3, 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(11) (Page 16) Statement Re: Computation of Per Share
Earnings for the three months ended August 31, 1995 and
1996.
(27) Financial Data Schedule (included only in the EDGAR
filing).
14
<PAGE>
PART II. OTHER INFORMATION (CONTINUED)
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: October 11, 1996 /s/ TREVOR FETTER
------------------------------
Trevor Fetter
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
/s/ RAYMOND L. MATHIASEN
------------------------------
Raymond L. Mathiasen
Senior Vice President,
Chief Accounting Officer
(Principal Accounting Officer)
15
<PAGE>
EXHIBIT 11
TENET HEALTHCARE CORPORATION
Statement Re: Computation of Per Share Earnings *
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
------------------------
1995 1996
-------- --------
<S> <C> <C>
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at beginning of period. . . . . . . . . . . . . . . . . 199,938 215,922
Shares issued upon exercise of stock options . . . . . . . . . . . . . . . 54 239
Shares issued in connection with Employee Stock Purchase Plan. . . . . . . - 77
Other items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 8
Dilutive effect of outstanding stock options . . . . . . . . . . . . . . . 1,898 3,395
-------- --------
Weighted average number of shares and share equivalents outstanding. . . . 201,890 219,641
-------- --------
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $118,253 $ 72,401
-------- --------
-------- --------
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.59 $0.33
-------- --------
-------- --------
FOR FULLY DILUTED EARNINGS PER SHARE
Weighted average number of shares used in primary calculation. . . . . . . 201,890 219,641
Additional dilutive effect of stock options. . . . . . . . . . . . . . . . 417 -
Assumed conversion of dilutive convertible debentures. . . . . . . . . . . 13,530 -
-------- --------
Fully diluted weighted average number of shares. . . . . . . . . . . . . . 215,837 219,641
-------- --------
-------- --------
Net income used in primary calculation . . . . . . . . . . . . . . . . . . $118,253 $ 72,401
Adjustments:
Interest expense on convertible debentures . . . . . . . . . . . . . . 3,936 -
Reduced reimbursement of above interest expense by Medicare. . . . . . (1,036) -
Income taxes on interest less Medicare reimbursement . . . . . . . . . (1,113) -
-------- --------
Adjusted income used in fully diluted calculation. . . . . . . . . . . . . $120,040 $ 72,401
-------- --------
-------- --------
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.56 $ 0.33
-------- --------
-------- --------
</TABLE>
- ----------
* All shares in these tables are weighted on the basis of the number of days
the shares were outstanding or assumed to be outstanding during each
period.
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> AUG-31-1996
<CASH> 104,100
<SECURITIES> 105,200
<RECEIVABLES> 1,752,100
<ALLOWANCES> 154,800
<INVENTORY> 131,900
<CURRENT-ASSETS> 1,576,200
<PP&E> 4,701,800
<DEPRECIATION> 1,012,800
<TOTAL-ASSETS> 8,425,500
<CURRENT-LIABILITIES> 1,022,700
<BONDS> 3,183,400
0
0
<COMMON> 16,400
<OTHER-SE> 2,747,400
<TOTAL-LIABILITY-AND-EQUITY> 8,425,500
<SALES> 0
<TOTAL-REVENUES> 1,438,600
<CGS> 0
<TOTAL-COSTS> 1,165,500
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 74,500
<INTEREST-EXPENSE> 71,000
<INCOME-PRETAX> 128,400
<INCOME-TAX> 56,000
<INCOME-CONTINUING> 72,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,400
<EPS-PRIMARY> .33
<EPS-DILUTED> .33
</TABLE>
