<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
NOVEMBER 30, 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
- --------------------------------------------------------------------------------
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 DECEMBER 31, 1996 THERE WERE 220,051,491 SHARES OF $0.075 PAR VALUE
COMMON STOCK OUTSTANDING.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TENET HEALTHCARE CORPORATION
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - May 31, 1996
and November 30, 1996. . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Income - Three
Months and Six Months Ended November 30, 1995
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended November 30, 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. . . . . . . . . . . . . . . . . . . . . . 15
Item 4. Submissions of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 15
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . 16
- ---------------
Note: Items 2, 3 and 5 of Part II are omitted because they are not applicable.
2
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 31, NOVEMBER 30,
1996 1996
--------- -----------
(DOLLARS IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . $ 89.2 $ 56.8
Short-term investments, at cost which approximates
market. . . . . . . . . . . . . . . . . . . . . . 111.8 103.1
Accounts and notes receivable, less allowance for
doubtful accounts ($156.0 at May 31 and
$182.2 at November 30). . . . . . . . . . . . . . 838.4 1,006.3
Inventories of supplies, at cost . . . . . . . . . . 127.6 134.7
Deferred income taxes. . . . . . . . . . . . . . . . 278.9 253.6
Prepaid expenses and other current assets. . . . . . 98.9 81.3
--------- --------
Total current assets. . . . . . . . . . . . . 1,544.8 1,635.8
--------- --------
Investments and other assets . . . . . . . . . . . . . 517.7 505.9
Property and equipment, at cost. . . . . . . . . . . . 4,597.7 4,789.9
Less accumulated depreciation and amortization . . . 948.9 1,051.8
--------- --------
Net property and equipment . . . . . . . . . . . . . 3,648.8 3,738.1
--------- --------
Intangible assets, at cost less accumulated
amortization ($123.0 at May 31 and $160.5
at November 30) . . . . . . . . . . . . . . . . . 2,621.1 2,692.7
--------- --------
$8,332.4 $8,572.5
--------- --------
--------- --------
3
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 31, NOVEMBER 30,
1996 1996
--------- -----------
(DOLLARS IN MILLIONS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . $ 60.0 $ 41.6
Short-term borrowings and notes . . . . . . . . . . 2.0 2.8
Accounts payable. . . . . . . . . . . . . . . . . . 380.4 266.7
Accrued employee compensation and benefits. . . . . 120.4 136.2
Accrued interest payable. . . . . . . . . . . . . . 68.1 71.0
Income taxes payable. . . . . . . . . . . . . . . . 32.8 16.0
Other current liabilities . . . . . . . . . . . . . 470.8 410.6
--------- --------
Total current liabilities . . . . . . . . . . 1,134.5 944.9
--------- --------
Long-term debt, net of current portion . . . . . . . . 3,191.1 3,332.5
Deferred income taxes. . . . . . . . . . . . . . . . . 394.0 424.5
Other long-term liabilities and minority interests . . 976.5 1,024.4
Shareholders' equity:
Common stock, $0.075 par value; authorized
450,000,000 shares; 218,713,406 shares
issued at May 31, 1996 and 219,981,043
shares issued at November 30, 1996. . . . . . 16.4 16.5
Other shareholders' equity. . . . . . . . . . . . . 2,660.3 2,868.4
Less common stock in treasury, at cost,
2,790,967 shares at May 31, 1996 and
2,676,091 shares at November 30, 1996 . . . . (40.4) (38.7)
--------- --------
Total shareholders' equity. . . . . . . . . 2,636.3 2,846.2
--------- --------
$ 8,332.4 $ 8,572.5
--------- --------
--------- --------
See accompanying Notes to Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations
4
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------------------- -------------------------
1995 1996 1995 1996
---------- ----------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Net operating revenues . . . . . . . . . . . . . . . . $ 1,370.9 $ 1,476.1 $ 2,654.8 $ 2,914.7
---------- ----------- ---------- ----------
Operating expenses:
Salaries and benefits . . . . . . . . . . . . . . . 544.7 581.4 1,046.9 1,150.1
Supplies. . . . . . . . . . . . . . . . . . . . . . 186.0 204.1 364.7 395.1
Provision for doubtful accounts . . . . . . . . . . 69.7 78.7 137.0 153.2
Other operating expenses. . . . . . . . . . . . . . 296.7 320.2 578.3 641.9
Depreciation. . . . . . . . . . . . . . . . . . . . 61.3 63.8 122.7 127.0
Amortization. . . . . . . . . . . . . . . . . . . . 21.2 21.7 40.0 42.6
---------- ----------- ---------- ----------
Operating income . . . . . . . . . . . . . . . . . . . 191.3 206.2 365.2 404.8
---------- ----------- ---------- ----------
Interest expense, net of capitalized portion . . . . . (81.3) (70.1) (158.4) (141.1)
Investment earnings. . . . . . . . . . . . . . . . . . 5.4 5.5 12.7 10.3
Equity in earnings of unconsolidated affiliates. . . . 7.1 0.7 14.0 1.3
Minority interests . . . . . . . . . . . . . . . . . . (5.0) (5.5) (10.6) (10.1)
Gains on sales of facilities . . . . . . . . . . . . . 171.1 - 294.6 -
Gain on subsidiary's sale of common stock . . . . . 17.3 - 17.3 -
---------- ----------- ---------- ----------
Income before income taxes . . . . . . . . . . . . . . 305.9 136.8 534.8 265.2
Taxes on income. . . . . . . . . . . . . . . . . . . . (123.1) (60.0) (233.7) (116.0)
---------- ----------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 182.8 $ 76.8 $ 301.1 $ 149.2
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Earnings per share:
Primary . . . . . . . . . . . . . . . . . . . . . . $ 0.90 $ 0.35 $ 1.48 $ 0.68
Fully diluted . . . . . . . . . . . . . . . . . . . $ 0.85 $ 0.35 $ 1.41 $ 0.68
Weighted average shares and share equivalents
outstanding - fully diluted (in thousands). . . . . 216,183 220,669 216,175 220,096
</TABLE>
See accompanying Notes to Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
5
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 1995 AND 1996
1995 1996
-------- --------
(IN MILLIONS)
Net cash provided by (used in) operating activities,
including net expenditures for discontinued
operations and restructuring charges. . . . . . . . $ 11.1 $ (14.2)
-------- --------
Cash flows from investing activities:
Proceeds from sales of facilities and
other assets . . . . . . . . . . . . . . . . . . . 402.8 40.3
Purchases of property and equipment . . . . . . . . (160.5) (95.4)
Purchases of new businesses, net of cash
acquired . . . . . . . . . . . . . . . . . . . . . (367.3) (159.7)
Collection of note receivable . . . . . . . . . . . - 67.1
Other items . . . . . . . . . . . . . . . . . . . . (9.9) (0.8)
-------- --------
Net cash used in investing activities. . . . . (134.9) (148.5)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings. . . . . . . . . . . . . . 1,079.2 751.4
Payments of borrowings. . . . . . . . . . . . . . . (1,065.9) (636.2)
Proceeds from stock options exercised . . . . . . . 9.4 14.6
Proceeds from exercises of performance
investment options . . . . . . . . . . . . . . . . 44.9 -
Sales of common stock under employee stock
purchase plan. . . . . . . . . . . . . . . . . . . - 4.8
Dividends to minority interests . . . . . . . . . . - (4.3)
-------- --------
Net cash provided by financing activities. . . 67.6 130.3
-------- --------
Net decrease in cash and cash equivalents. . . . . . . . (56.2) (32.4)
Cash and cash equivalents at beginning of period . . . . 155.0 89.2
-------- --------
Cash and cash equivalents at end of period . . . . . . . $ 98.8 $ 56.8
-------- --------
-------- --------
Supplemental disclosures:
Interest paid . . . . . . . . . . . . . . . . . . . $ 150.4 $ 130.9
Income taxes paid, net of refunds received. . . . . 19.7 97.4
See accompanying Notes to Condensed Consolidated Financial
Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
6
<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. As used herein, the
"Company" means Tenet Healthcare Corporation and its subsidiaries, unless
the context requires otherwise.
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. On October 17, 1996, the Company announced the signing of a definitive
merger agreement with OrNda HealthCorp ("OrNda"). Under the terms of the
agreement, OrNda shareholders will receive 1.35 shares of Tenet
Healthcare Corporation common stock (approximately 85.9 million shares in
the aggregate) for each share of OrNda common stock in a tax-free
exchange. The transaction includes the assumption of approximately $1.4
billion in OrNda debt, and is expected to close in late January 1997.
Upon completion of the acquisition, which will be accounted for as a
pooling of interests, the combined company will operate 125 facilities in
22 states (excluding transactions taking place after November 30, 1996).
OrNda's net operating revenues and net income for its latest fiscal year
ended August 31, 1996 were $2.1 billion and $99.9 million, respectively.
The following unaudited pro forma data summarizes the combined results of
operations of the Company and OrNda restated to reflect the combination
as a pooling of interests.
Six Months ended
Year ended November 30,
---------------------------
May 31, 1996 1995 1996
--------------- -------------- ----------
(in millions, except per share data)
Net operating revenues $ 7,705.7 $ 3,632.4 $ 4,104.7
Net income 498.2 336.9 198.8
Earnings per share $1.70 $1.14 $0.66
7
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. During the three-month and six-month periods ended November 30, 1996,
actual costs incurred and charged against the Company's reserves for
discontinued operations were approximately $9.7 million and $23.2 million,
respectively. Costs incurred and charged against restructuring reserves
were approximately $13.4 million for the three months ended November 30,
1996 and $16.5 million for the six months then ended. These reserves are
included in other current liabilities and other long-term liabilities in
the Company's balance sheets at May 31, 1996 and November 30, 1996.
4. During the quarter ended November 30, 1996, the Company acquired Lloyd
Noland Hospital, a 319-bed acute care hospital in Birmingham, Alabama, for
$47.0 million in cash. The Company also acquired several physician
practices. The results of operations of the acquired businesses have
been included in the Company's consolidated statements of income from the
dates of acquisition. In January 1997, the Company acquired North Shore
Medical Center, a 357-bed acute care hospital in Miami, Florida. All of
these transactions have been or will be accounted for as purchases. In
December 1996, the Company sold its lease of the Kirksville Osteopathic
Medical Center, a 119-bed hospital in Kirksville, Missouri.
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 and six months ended November 30, 1996 are the same.
Fully-diluted earnings per share for the quarter and six months ended
November 30, 1995 include the effects of the convertible subordinated
floating-rate debentures which were outstanding during the period.
6. The plaintiffs' motion to remand the Justin Love vs. National Medical
Enterprises, et al. case (which case is described in Note 7B of the Notes
to Consolidated Financial Statements of the Company for its fiscal year
ended May 31, 1996) from the U.S. District Court in Houston, Texas, to
Texas state court has been denied. There have been no other material
changes to the description of i) Professional and General Liability
Insurance set forth in Note 7A of the Notes to Consolidated Financial
Statements of the Company for its fiscal year ended May 31, 1996 or ii)
Significant Legal Proceedings set forth in Note 7B of the Notes to
Consolidated Financial Statements of the Company for its fiscal year
ended May 31, 1996.
8
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IMPACT OF THE MERGER
On October 16, 1996, Tenet and OrNda entered into a merger agreement,
pursuant to which OrNda will become a wholly owned subsidiary of Tenet in a
transaction to be accounted for as a pooling of interests. Under the terms of
the merger agreement, each share of OrNda common stock outstanding
immediately prior to the effective time of the OrNda merger will be converted
into the right to receive 1.35 shares of Tenet common stock and the
associates Rights issued in accordance with the Rights Agreement. In
connection with the consummation of the OrNda merger, the Company has
registered for issuance approximately 85.9 million shares of its common stock
to OrNda stockholders. The OrNda merger is expected to close in late January
1997.
Tenet's subsidiaries operated 76 general hospitals and OrNda's
subsidiaries operated 49 general hospitals at November 30, 1996. Management
believes that joining together Tenet's general hospitals and related
healthcare operations with OrNda's general hospitals and related healthcare
operations will create a stronger, more geographically diverse company that
will be better able to compete in certain key geographic areas, such as south
Florida and southern California, and to grow through strategic acquisitions
and partnerships. The healthcare industry has undergone, and continues to
undergo, tremendous change, including cost-containment pressures by
government payors, managed care providers and others, as well as
technological advances that require increased capital expenditures. The
combined company will continue to emphasize the creation of strong integrated
healthcare delivery systems. The merger is expected to enable the combined
company to realize certain cost savings. No assurances can be made as to the
amount of cost savings, if any, that actually will be recognized.
In connection with the consummation of the OrNda merger, the Company
intends to refinance approximately $525.0 million of OrNda's outstanding
public debt through a tender offer to repurchase such securities and to
refinance the existing credit facilities of Tenet and OrNda with the proceeds
of a $1.3 billion public offering of senior notes and senior subordinated
notes together with borrowings under a new credit facility which is expected
to provide for aggregate commitments of up to $2.5 billion. At November 30,
1996, borrowings under the existing credit facilities were $1.1 billion for
Tenet and $792.6 million for OrNda.
It is anticipated that loans under the new credit facility will mature
in 2002 and generally will bear interest, at the option of the Company, at
either (i) a base rate equal to the higher of the rate announced from time to
time by Morgan Guaranty as its prime rate or the daily federal funds rate
plus 0.50% or (ii) an adjusted London interbank offered rate ("LIBOR") for
1-, 2-, 3-, or 6-month periods plus an interest margin ranging from 22.50 to
68.75 basis points. The interest margins will be based on the ratio of the
Company's consolidated total debt to net earnings before interest, taxes,
depreciation and amortization. Facility fees also are expected to be payable
to each lender based on the amount of such lender's commitment to make loans
at rates ranging from 12.50 basis points to 31.25 basis points as determined
by reference to the same ratio.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS
Income before income taxes was $305.9 million in the quarter ended
November 30, 1995, compared with $136.8 million in the current year quarter.
The prior-year quarter includes pre-tax net gains on disposals of assets of
$188.4 million (approximately $.54 per share net of taxes, on a fully diluted
basis). Income before income taxes was $534.8 million in the six months ended
November 30, 1995, compared with $265.2 million for the current six-month
period. The prior-year six-month results include pre-tax net gains on
disposals of assets of $311.9 million (approximately $.82 per share net of
taxes, on a fully diluted basis). Excluding these gains, pre-tax income for
the six months ended November 30, 1995 was $222.9 million.
The following is a summary of operations for the three months and six
months ended November 30, 1995 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30
-----------------------------------------
1995 1996 1995 1996
--------- -------- -------- --------
(DOLLARS IN (% OF NET
MILLIONS) OPERATING REVENUES)
<S> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals.......... $ 1,264.8 $ 1,342.1 92.3% 90.9%
Other domestic operations(1)........ 89.5 134.0 6.5 9.1
International operations............ 16.6 - 1.2 -
-------- -------- ------ ------
Net operating revenues................. 1,370.9 1,476.1 100.0% 100.0%
-------- -------- ------ ------
Operating expenses:
Salaries and benefits............... (544.7) (581.4) 39.7% 39.4%
Supplies............................ (186.0) (204.1) 13.6 13.8
Provision for doubtful accounts..... (69.7) (78.7) 5.1 5.3
Other operating expenses............ (296.7) (320.2) 21.6 21.7
Depreciation........................ (61.3) (63.8) 4.5 4.3
Amortization........................ (21.2) (21.7) 1.5 1.5
------- -------- ------ ------
Operating income....................... $ 191.3 $ 206.2 14.0% 14.0%
-------- -------- ------ ------
-------- -------- ------ ------
</TABLE>
SIX MONTHS ENDED NOVEMBER 30
------------------------------------------
1995 1996 1995 1996
--------- -------- ------- --------
(DOLLARS IN (% OF NET
MILLIONS) OPERATING REVENUES)
Net operating revenues:
Domestic general hospitals $ 2,440.0 $ 2,631.4 91.9% 90.3%
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Other domestic operations(1) . . . 164.3 283.3 6.2 9.7
International operations . . . . . 50.5 - 1.9 -
-------- ------- ------- -------
Net operating revenues . . . . . . . 2,654.8 2,914.7 100.0% 100.0%
-------- ------- ------- -------
Operating expenses:
Salaries and benefits. . . . . . . (1,046.9) (1,150.1) 39.4% 39.5%
Supplies . . . . . . . . . . . . . (364.7) (395.1) 13.7 13.5
Provision for doubtful accounts. . (137.0) (153.2) 5.2 5.3
Other operating expenses . . . . . (578.3) (641.9) 21.8 22.0
Depreciation . . . . . . . . . . . (122.7) (127.0) 4.6 4.3
Amortization . . . . . . . . . . . (40.0) (42.6) 1.5 1.5
-------- ------- ------- -------
Operating income. . . . . . . . . . . $ 365.2 $ 404.8 13.8% 13.9%
-------- ------- ------- -------
-------- ------- ------- -------
(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 $39.6 million (or 10.8%) to $404.8 million
for the six months ended November 30, 1996 from $365.2 million for the prior
year six-month period. The operating margin for the current six-month period
increased to 13.9% from 13.8% a year ago.
The table below sets forth certain selected historical operating
statistics for the Company's domestic general hospitals.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------------------------- ------------------------------------------
INCREASE INCREASE
1995 1996 (DECREASE) 1995 1996 (DECREASE)
--------- --------- ----------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Number of hospitals (at end of
period) 75 76 1 75 76 1
Licensed beds (at end of end of
period. . . . . . . . . . . . . . 16,827 17,344 3.1% 16,827 17,344 3.1%
Net inpatient revenues (in
millions) . . . . . . . . . . . . $ 839.4 $ 884.5 5.4% $ 1,626.7 $ 1,742.7 7.1%
Net outpatient revenues
(in millions) . . . . . . . . . . $ 390.0 $ 425.7 9.2% $ 755.3 $ 836.2 10.7%
Admissions . . . . . . . . . . . 120,363 124,564 3.5% 231,866 246,774 6.4%
Equivalent admissions . . . . . . 166,564 179,602 7.8% 323,251 357,199 10.5%
Average length of stay (days) . . 5.5 5.4 (0.1) * 5.5 5.4 (0.1) *
Patient days . . . . . . . . . . 661,141 677,525 2.5% 1,280,367 1,342,531 4.9%
Equivalent patient days . . . . . 894,989 968,680 8.2% 1,755,944 1,924,258 9.6%
Net inpatient revenue
per patient day. . . . . . . . . $ 1,270 $ 1,305 2.8% $ 1,270 $ 1,298 2.2%
Net inpatient revenue
per admission . . . . . . . . . . $ 6,974 $ 7,101 1.8% $ 7,016 $ 7,062 0.7%
Utilization of licensed beds. . . 43.4% 43.2% (0.2)% * 43.1% 42.8% (0.3)% *
Outpatient visits . . . . . . . . 1,387,899 1,615,945 16.4% 2,666,656 3,156,690 18.4%
</TABLE>
*The change is the difference between 1995 and 1996 amounts shown.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS(continued)
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 SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------------------------- ------------------------------------------
INCREASE INCREASE
1995 1996 (DECREASE) 1995 1996 (DECREASE)
--------- --------- ----------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Number of hospitals . .. . . . . . 69 69 - 69 69 -
Average licensed beds .. . . . . . 15,282 15,268 (0.1)% 15,285 15,269 (0.1)%
Patient days . . . . .. . . . . . 606,616 608,787 0.4% 1,211,416 1,207,608 (0.3)%
Net inpatient revenue per
patient day. . . . . . . . . . . . $ 1,305 $ 1,326 1.6% $ 1,290 $ 1,317 2.1%
Admissions . . . . .. . . . . . . 111,158 111,756 0.5% 220,534 221,961 0.6%
Net inpatient revenue per
admission. . . . . . . . . . . . . $ 7,122 $ 7,221 1.4% $ 7,085 $ 7,167 1.2%
Outpatient visits . . .. . . . . . 1,293,724 1,438,239 11.2% 2,545,430 2,829,764 11.2%
Average length of stay (days). . . 5.5 5.4 (0.1) * 5.5 5.4 (0.1) *
</TABLE>
*The change is the difference between 1995 and 1996 amounts shown.
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 38.4% of the net patient revenues of the
Company's domestic general hospitals for the quarter and six months ended
November 30, 1995, compared with 41.7% and 40.0% for the quarter and six months
ended November 30, 1996, 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 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, average
lengths of stay and occupancy rates continue 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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Net operating revenues from the Company's other domestic operations was
$89.5 million for the three months ended November 30, 1995, compared to $134.0
million for the three months ended November 30, 1996, representing an increase
of $44.5 million. Net operating revenues for the six months ended November 30,
1995 were $164.3 million, compared with $283.3 million for the current year six-
month period, representing an increase of $119.0 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 $16.6 million and $50.5 million for the quarter and six
months ended November 30, 1995, respectively. During and subsequent to the
August 31, 1995 fiscal quarter, the Company sold all of its interests in
hospitals and related healthcare businesses in Singapore, Malaysia, Thailand
and Australia.
Operating expenses, which include salaries and benefits, supplies,
provision for doubtful accounts, depreciation and amortization, and other
operating expenses, were $1,179.6 million for the quarter ended November 30,
1995 and $1,269.9 million for the current year quarter. Operating expenses for
the prior and current year six months ended November 30, 1995 and 1996 were
$2,289.6 million and $2,509.9 million, respectively. Operating margins for the
prior and current year quarters ended November 30, 1995 and 1996 were 14.0%.
Operating margins for the prior and current year six-month periods were 13.8%
and 13.9%, respectively.
14
<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
39.7% in the quarter ended November 30, 1995 and 39.4% in the three months ended
November 30, 1996. Salaries and benefits expense as a percentage of net
operating revenues for the prior and current six-month periods were 39.4% and
39.5%, respectively. These improvements resulted from the cost reduction
efforts discussed earlier herein.
Supplies expense as a percentage of net operating revenues was 13.6% in the
quarter ended November 30, 1995 and 13.8% in the three months ended November 30,
1996. Supplies expense as a percentage of net operating revenues for the prior
and current six-month periods were 13.7% and 13.5%, respectively.
The provision for doubtful accounts as a percentage of net operating
revenues was 5.1% for the quarter ended November 30, 1995, and 5.3% in the
three months ended November 30, 1996. The provision for doubtful accounts as
a percentage of net operating revenues for the prior and current six-month
periods were 5.2% and 5.3%, respectively. The increases primarily related to
new acquisitions.
Other operating expenses as a percentage of net operating revenues was
21.6% for the quarter ended November 30, 1995 and 21.7% in the three months
ended November 30, 1996. Other operating expenses as a percentage of net
operating revenues for the prior and current year six-month periods were 21.8%
and 22.0%, respectively.
Depreciation and amortization expense as a percentage of net operating
revenues was 6.0% in the quarter ended November 30, 1995 and 5.8% in the three
months ended November 30, 1996. Depreciation and amortization expense as a
percentage of net operating revenues for the prior and current six-month periods
were 6.1% and 5.8%, respectively.
Interest expense, net of capitalized interest, was $81.3 million in the
quarter ended November 30, 1995 and $70.1 million in the three months ended
November 30, 1996. Interest expense, net of capitalized interest, for the prior
and current six-month periods was $158.4 million and $141.1 million,
respectively. The reduction is due to lower borrowings and interest rates in the
quarter and six months ended November 30, 1996.
Investment earnings were $5.4 million in the quarter ended November 30,
1995 and $5.5 million in the three months ended November 30, 1996. Investment
earnings for the prior and current six-month periods were $12.7 million and
$10.3 million, respectively. Investment earnings are derived primarily from
notes receivable and investments in debt and equity securities.
Equity in earnings of unconsolidated affiliates was $7.1 million in the
quarter ended November 30, 1995 and $0.7 million in the three months ended
November 30, 1996. Equity in earnings of unconsolidated affiliates for the
prior and current year six-month periods was $14.0 million and $1.3 million,
respectively. The prior year quarter and six-month period included $6.2 million
and $12.3 million, respectively, in earnings from two unconsolidated affiliates
that were sold during fiscal 1996 and two that are no longer accounted for on
the equity method of accounting because the Company's ownership interest has
been reduced below 20%. These latter two investments now are carried in the
Company's balance sheet at their fair value.
Minority interests in the income of consolidated subsidiaries was $5.0
million during the quarter ended November 30, 1995, compared to $5.5 million in
the three months ended November 30, 1996. Minority interests in
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
the income of consolidated subsidiaries for the prior and current year six-month
periods was $10.6 million and $10.1 million, respectively.
Taxes on income as a percentage of income before income taxes were 43.7% in
the six months ended November 30, 1995 and 1996. The difference between the
Company's effective income tax rate and the statutory federal income tax rate
is shown below:
November 30,
-----------------------------------------
1995 1996
-----------------------------------------
Amount Percent Amount Percent
-------- --------- -------- ---------
(in millions of dollars and as a percent of
pretax income)
Tax provision at statutory
federal rate . . . . . . . . $187.2 35.0% $92.8 35.0%
State income taxes, net of
federal income tax benefit . 19.7 3.7 10.9 4.1
Goodwill amortization. . . . . . 10.9 2.0 11.4 4.3
Gains on sales of foreign
subsidiary's assets. . . . . 16.3 3.1 - -
Other. . . . . . . . . . . . . . (0.4) (0.1) 0.9 0.3
--------- --------- ------- ------
Taxes on income and
effective tax rates. . . . . $233.7 43.7% $116.0 43.7%
--------- --------- ------- ------
--------- --------- ------- ------
Amortization of the goodwill resulting from the Company's March 1995
acquisition of American Medical Holdings, Inc. of approximately $32.0 million
($0.15 per share) for the six months ended November 30, 1996 is a noncash
charge, and provides no income tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended November 30, 1996, net cash used in operating
activities was $14.2 million after expenditures of $30.0 million for
discontinued operations and restructuring charges. For the prior year
six-month period net cash provided by operating activities was $11.1 million
after expenditures of $73.4 million for discontinued operations and
restructuring charges. Cash flows from operating activities during the six
months ended November 30, 1996 were adversely affected primarily because of
i) billing delays due to conversions of patient accounting systems at several
hospitals, ii) delays in cash flows at recently acquired facilities where
accounts receivable were not purchased; iii) temporary slowdowns in the
collection of Medicare receivables due to changes in fiscal intermediaries
for recently acquired facilities; and iv) a general slowdown of payments
received from other payors. Management believes that cash flow from operating
activities in the future will return to the Company's historically positive
levels. The above liquidity, along with the availability of credit under the
Company's unsecured revolving bank 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 November 30, 1996 were $56.8
million, a decrease of $32.4 million over May 31, 1996. Working capital at
November 30, 1996 was $690.9 million, compared to $410.3 million at May 31,
1996.
Cash proceeds from the sale of property and equipment in the six months
ended November 30, 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 $95.4 million in the six
months ended November 30, 1996, compared to $160.5 million in the six months
ended November 30, 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 million 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 acquisitions
and partnerships, including the development of integrated healthcare systems in
certain strategic geographic areas, general hospital acquisitions and
partnerships and physician practice acquisitions and partnerships. 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 bank credit agreement
was $633.5 million as of November 30, 1996.
The Company's existing 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 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. The Company must also comply with 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.
In connection with the merger and refinancing described above, Morgan
Guaranty Trust Company of New York, Bank of America NT&SA, the Bank of New
York and the Bank of Nova Scotia and a syndicate of other lenders have
committed to provide the Company with borrowings of aggregate commitments of
up to $2.5 billion under the new credit facility. The new credit facility
will replace the Company's existing credit facility and will rank PARI PASSU
with the new senior notes and will constitute senior debt with respect to new
senior subordinated and other subordinated debt of the Company.
The Company anticipates that the new credit facility will include
covenants similar to those contained in its existing unsecured revolving
credit agreement described above.
BUSINESS OUTLOOK
The 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Material Developments in Previously Reported Legal Proceedings:
The plaintiffs' motion to remand the Justin Love vs. National Medical
Enterprises, et al. case (which case
16
<PAGE>
PART II. OTHER INFORMATION (continued)
is described in the Company's Annual Report on Form 10-K for its
fiscal year ended May 31, 1996) from the U.S. District Court in
Houston, Texas, to Texas state court has been denied. There have been
no other 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 and 5 are not applicable.
Item 4. Submissions of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on September 25,
1996. The shareholders elected all of the Company's nominees for
director and ratified the selection of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ended May 31, 1997.
The votes were as follows:
1. Election of Directors For Withheld
--- --------
Bernice B. Bratter 188,792,700 2,139,759
Michael H. Focht Sr. 188,575,084 2,357,375
Lester B. Korn 188,781,151 2,151,308
2. Ratification of selection of KPMG Peat Marwick LLP:
For: 190,616,083
Against: 139,924
Abstaining: 176,452
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(11) (Page 19) Statement Re: Computation of Per Share Earnings for the
three months and six months ended November 30, 1995 and 1996.
(27) Financial Data Schedule (included only in the EDGAR filing).
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
17
<PAGE>
PART II. OTHER INFORMATION (continued)
(Registrant)
Date: January 10, 1997 /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)
18
<PAGE>
EXHIBIT 11
TENET HEALTHCARE CORPORATION
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS *
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------------- -----------------------
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at beginning of period. . . . . . . . . . . . 200,053 216,557 199,938 215,922
Shares issued upon exercise of stock options . . . . . . . . . . 251 286 209 518
Shares issued in connection with employee stock
purchase plan. . . . . . . . . . . . . . . . . . . . . . . - 102 - 90
Dilutive effect of outstanding stock options . . . . . . . . . . 2,823 3,555 2,361 3,475
Shares issued upon exercises of performance
investment options . . . . . . . . . . . . . . . . . . . . 718 - 357 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 169 - 91
-------- -------- -------- --------
Weighted average number of shares and share
equivalents outstanding. . . . . . . . . . . . . . . . . . 203,845 220,669 202,865 220,096
-------- -------- -------- --------
-------- -------- -------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 182,863 $ 76,822 $ 301,116 $ 149,223
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.90 $ 0.35 $ 1.48 $ 0.68
-------- -------- -------- --------
-------- -------- -------- --------
FOR FULLY DILUTED EARNINGS PER SHARE
Weighted average number of shares used in primary
calculation. . . . . . . . . . . . . . . . . . . . . . . . 203,845 220,669 202,865 220,096
Additional dilutive effect of stock options. . . . . . . . . . . 197 - 307 -
Assumed conversion of dilutive convertible
debentures . . . . . . . . . . . . . . . . . . . . . . . . 12,141 - 13,003 -
-------- -------- -------- --------
Fully diluted weighted average number of shares. . . . . . . . . 216,183 220,669 216,175 220,096
-------- -------- -------- --------
-------- -------- -------- --------
Income used in primary calculation . . . . . . . . . . . . . . . $ 182,863 $ 76,822 $ 301,116 $ 149,223
Adjustments:
Interest expense on convertible debentures. . . . . . . . . . . 3,716 - 7,652 -
Reduced reimbursement of above interest expense
by Medicare. . . . . . . . . . . . . . . . . . . . . . . . . . (922) - (1,958) -
Income taxes on interest less Medicare
reimbursement. . . . . . . . . . . . . . . . . . . . . . . . . (1,102) - (2,215) -
-------- -------- -------- --------
Adjusted income used in fully diluted calculation. . . . . . . . $ 184,555 $ 76,822 $ 304,595 $ 149,223
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . $ 0.85 $ 0.35 $ 1.41 $ 0.68
-------- -------- -------- --------
-------- -------- -------- --------
</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.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> NOV-30-1996
<CASH> 56,800
<SECURITIES> 103,100
<RECEIVABLES> 1,905,600
<ALLOWANCES> 182,200
<INVENTORY> 134,700
<CURRENT-ASSETS> 1,635,800
<PP&E> 4,789,900
<DEPRECIATION> 1,051,800
<TOTAL-ASSETS> 8,572,500
<CURRENT-LIABILITIES> 944,900
<BONDS> 3,332,500
0
0
<COMMON> 16,500
<OTHER-SE> 2,829,700
<TOTAL-LIABILITY-AND-EQUITY> 8,572,500
<SALES> 0
<TOTAL-REVENUES> 2,914,700
<CGS> 0
<TOTAL-COSTS> 2,356,700
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 153,200
<INTEREST-EXPENSE> 141,100
<INCOME-PRETAX> 265,200
<INCOME-TAX> 116,000
<INCOME-CONTINUING> 149,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149,200
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
