<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
AUGUST 31, 1998.
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 1-7293
- ------------------------------------------------------------------------------
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 NOVEMBER 30, 1998 THERE WERE 310,061,805 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, 1998
and August 31, 1998................................................2
Condensed Consolidated Statements of Income - Three Months Ended
August 31, 1997 and 1998...........................................4
Condensed Consolidated Statements of Comprehensive Income - Three
Months Ended August 31, 1997 and 1998..............................5
Condensed Consolidated Statements of Cash Flows - Three months
Ended August 31, 1997 and 1998.....................................6
Notes to Condensed Consolidated Financial Statements.................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................18
Item 6. Exhibits and Reports on Form 8-K...................................18
Signature..........................................................18
- ------------------
Note: Item 3 of Part I and 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,
1998 1998
--------- ----------
(DOLLAR AMOUNTS IN MILLIONS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................ $ 23 $ 21
Short-term investments in debt securities ............ 132 135
Accounts receivable, less allowance for doubtful
accounts ($191 at May 31 and $182 at August 31) .... 1,742 1,885
Inventories of supplies, at cost ..................... 214 218
Deferred income taxes ................................ 275 277
Other current assets ................................. 504 450
------- -------
Total current assets ............................ 2,890 2,986
------- -------
Investments and other assets ............................ 515 517
Property and equipment, at cost ......................... 7,779 7,960
Less accumulated depreciation and amortization ....... 1,765 1,857
------- -------
Net property and equipment ........................... 6,014 6,103
------- -------
Intangible assets, at cost less accumulated amortization
($327 at May 31 and $355 at August 31) ............... 3,414 3,412
------- -------
$12,833 $13,018
------- -------
------- -------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
2
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1998 1998
---------- -------------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................ $ 10 $ 11
Accounts payable ......................................................... 657 525
Accrued employee compensation and benefits ............................... 355 313
Accrued interest payable ................................................. 106 80
Reserves related to discontinued operations, merger, facility
consolidation and impairment charges ................................ 189 152
Other current liabilities ................................................ 450 567
-------- --------
Total current liabilities ...................................... 1,767 1,648
-------- --------
Long-term debt, net of current portion ......................................... 5,829 6,025
Other long-term liabilities and minority interests ............................. 1,256 1,226
Deferred income taxes .......................................................... 423 426
Shareholders' equity:
Common stock, $0.075 par value; authorized 700,000,000 shares; 313,044,417
shares issued at May 31 and 313,343,721 shares issued at August 31 .. 23 24
Other shareholders' equity ............................................... 3,605 3,739
Less common stock in treasury, at cost, 3,754,891 shares at
May 31 and August 31 ................................................ (70) (70)
-------- --------
Total shareholders' equity ..................................... 3,558 3,693
-------- --------
$ 12,833 $ 13,018
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements
and Management's Discussion and Analysis of Financial
Condition and Results of Operations.
3
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED AUGUST 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
(IN MILLIONS, EXCEPT PER SHARE
AND SHARE AMOUNTS)
<S> <C> <C>
Net operating revenues ............................................. $ 2,331 $ 2,553
--------- ---------
Operating expenses:
Salaries and benefits ........................................ 966 1,018
Supplies ..................................................... 21 350
Provision for doubtful accounts .............................. 148 159
Other operating expenses ..................................... 486 561
Depreciation ................................................. 81 96
Amortization ................................................. 24 31
--------- ---------
Operating income ................................................... 305 338
--------- ---------
Interest expense, net of capitalized portion ....................... (112) (119)
Investment earnings ................................................ 6 7
Minority interests in income of consolidated subsidiaries .......... (6) (4)
--------- ---------
Income before income taxes ......................................... 193 222
Taxes on income .................................................... (77) (85)
--------- ---------
Net income ......................................................... $ 116 $ 137
--------- ---------
--------- ---------
Earnings per share ................................................. $ 0.38 $ 0.44
Weighted average shares outstanding (in thousands) ................ 304,275 309,403
</TABLE>
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 COMPREHENSIVE INCOME
THREE MONTHS ENDED AUGUST 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Net income ........................................................... $ 116 $ 137
Other comprehensive income (loss):
Foreign currency translation adjustments ....................... -- 8
Unrealized net holding gains (losses) arising during period
on securities held as available for sale .................. 24 (23)
----- -----
Other comprehensive income (loss) before income taxes .......... 24 (15)
Income tax benefit (expense) related to items of other
comprehensive income ...................................... (9) 6
----- -----
Other comprehensive income (loss) .............................. 15 (9)
----- -----
Comprehensive income ................................................. $ 131 $ 128
----- -----
----- -----
</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
THREE MONTHS ENDED AUGUST 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
---- ----
(IN MILLIONS)
<S> <C> <C>
Net cash provided by operating activities ................... $ 1 $ 41
Cash flows from investing activities:
Purchases of property and equipment ................... (103) (107)
Purchases of new businesses, net of cash acquired ..... (126) (84)
Proceeds from sales of facilities and other assets .... 38 --
Other items ........................................... (24) (27)
----- -----
Net cash used in investing activities ............ (215) (218)
----- -----
Cash flows from financing activities:
Proceeds from borrowings .............................. 712 589
Payments of borrowings ................................ (452) (416)
Other items, primarily stock option exercises ......... 22 2
----- -----
Net cash provided by financing activities ........ 282 175
----- -----
Net increase (decrease) in cash and cash equivalents ........ 68 (2)
Cash and cash equivalents at beginning of period ............ 35 23
----- -----
Cash and cash equivalents at end of period .................. $ 103 $ 21
----- -----
----- -----
Supplemental disclosures:
Interest paid, net of amounts capitalized ............. $ 119 $ 142
Income taxes paid, net of refunds received ............ 7 (48)
Fair value of common stock tendered for note
receivable .......................................... 16 --
</TABLE>
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 (UNAUDITED)
1. The financial information furnished herein is unaudited; however, in
the opinion of management, the information reflects all adjustments
that are necessary to fairly state the financial position of Tenet
Healthcare Corporation (together with its subsidiaries, "Tenet" or the
"Company"), the results of its operations and its cash flows for the
interim periods indicated. All the adjustments 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 that would substantially
duplicate the disclosure contained in the Company's most recent
annual report to security holders have been omitted. Patient
volumes and net operating revenues of the Company's 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. 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 or
non-recurring items and fluctuations in quarterly tax rates. These
same considerations apply to all year-to-year comparisons.
2. During the three months ended August 31, 1998, Tenet acquired one
general hospital, in a transaction accounted for as a purchase, sold
one general hospital, closed another general hospital and combined two.
The results of operations of the acquired business, which are not
material, have been included in the Company's consolidated statements
of income and cash flows from the date of acquisition. The operations
of the sold and closed businesses were also not material.
On September 29, 1998, Tenet was selected as the winning bidder to
acquire the assets of the Philadelphia-area operations of Allegheny
Health, Education and Research Foundation ("AHERF") for $345 million,
subject to certain adjustments. The assets, which are the subject of a
bankruptcy proceeding under Chapter 11 of the Bankruptcy Code, include
eight general hospitals with 2,484 licensed beds and certain other
assets. The acquisition will be accounted for as a purchase. Also
included in the transaction are the assets of the Allegheny University
of Health Sciences (the "University"), which will be contributed to a
non-profit corporation at the closing. The closing of the transaction,
which currently is scheduled to occur on October 21, 1998, is
contingent upon Tenet entering into an agreement with an academic
partner that will manage the University. Tenet currently is endeavoring
to find an academic partner with which it may enter into an agreement
for the management of the University.
3. There have been no material changes to the description of professional
and general liability insurance set forth in Note 9A or significant
legal proceedings set forth in Note 9B of Notes to Consolidated
Financial Statements of Tenet for its fiscal year ended May 31, 1998.
7
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
4. During the three-months ended August 31, 1998, net cash expenditures
charged against the Company's reserves for discontinued operations and
other non-recurring charges were approximately $8 million. The reserve
balances are included in the Company's balance sheets at May 31, 1998
and August 31, 1998 as reserves related to discontinued operations,
merger, facility consolidation and impairment charges and as other
long-term liabilities.
5. The following is a reconciliation of the numerators and the
denominators of the Company's basic and diluted earnings per share
computations for the three months ended August 31, 1997 and 1998.
Income is expressed in millions and weighted average shares are
expressed in thousands:
<TABLE>
<CAPTION>
1997 1998
---------------------------------------------- ---------------------------------------
WEIGHTED WEIGHTED
INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------ ----------- -------------- --------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item ... $ 116 $ 137
-------- --------
Basic earnings per share:
Income available to common
shareholders ................... $ 116 304,275 $ 0.38 $ 137 309,403 $ 0.44
-------- ---------
-------- ---------
Effect of dilutive stock options and
warrants ................... -- 5,400 -- 4,262
-------- -------- -------- ---------
Dilutive earnings per share:
Income available to common
shareholders ............... $ 116 309,675 $ 0.38 $ 137 313,665 $ 0.44
-------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- --------- ---------
</TABLE>
6. The following table sets forth the tax effects allocated to each component
of other comprehensive income for the three months ended August 31, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------------------------------------- --------------------------------------
TAX TAX
BEFORE- (EXPENSE) NET-OF- BEFORE- (EXPENSE) NET-OF-
TAX OR TAX TAX OR TAX
AMOUNT BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
----------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Foreign currency translation
adjustment $ - $ - $ - $ 8 $ (3) $ 5
Unrealized holding gains
(losses) on
securities 24 (9) 15 (23) 9 (14)
----------- ---------- ---------- ---------- ---------- ----------
Other comprehensive
income (loss) $24 $(9) $15 $(15) $6 $(9)
----------- ---------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ---------- ----------
</TABLE>
8
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONT.)
The following table sets forth the accumulated other comprehensive income
balances, by component, as of August 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
----------------------------------------- ----------------------------------------
UNREALIZED
GAINS ACCUMULATED UNREALIZED ACCUMULATED
FOREIGN (LOSSES) OTHER FOREIGN GAINS OTHER
CURRENCY ON COMPREHENSIVE CURRENCY (LOSSES) ON COMPREHENSIVE
ITEMS SECURITIES INCOME ITEMS SECURITIES INCOME
----------- ---------- -------------- ---------- ----------- --------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ - $ 28 $ 28 - $ 50 $ 50
Current-period
change - 15 15 5 (14) (9)
----------- ---------- -------------- ---------- ----------- --------------
Ending balance $ - $ 43 $ 43 $ 5 $ 36 $ 41
----------- ---------- -------------- ---------- ----------- --------------
----------- ---------- -------------- ---------- ----------- --------------
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The healthcare industry continues to undergo tremendous change, driven primarily
by (1) cost-containment pressures by government payors, managed care providers
and others, and (2) technological advances that require increased capital
expenditures. To address these changes, Tenet has implemented various
cost-control programs and overhead-reduction plans and continues to create and
enhance its integrated healthcare delivery systems.
Income before income taxes was $193 million in the quarter ended August 31, 1997
and $222 million in the quarter ended August 31, 1998. The following is a
summary of operations for the three months ended August 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998 1997 1998
--------------- --------------- --------------- ---------------
(DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals............ $2,123 $2,285 91.1% 89.5%
Other domestic operations ............ 208 268 8.9% 10.5%
--------------- --------------- ------------------ ------------------
Net operating revenues...................... 2,331 2,553 100.0% 100.0%
--------------- --------------- ------------------ ------------------
Operating expenses:
Salaries and benefits................. (966) (1,018) 41.4% 39.9%
Supplies.............................. (321) (350) 13.8% 13.7%
Provision for doubtful accounts....... (148) (159) 6.3% 6.2%
Other operating expenses.............. (486) (561) 20.9% 22.0%
Depreciation.......................... (81) (96) 3.5% 3.8%
Amortization.......................... (24) (31) 1.0% 1.2%
--------------- --------------- ------------------ ------------------
Operating income............................ $305 $338 13.1% 13.2%
--------------- --------------- ------------------ ------------------
--------------- --------------- ------------------ ------------------
</TABLE>
Net operating revenues of other domestic operations in the table above consist
primarily of revenues from: (i) physician practices, (ii) rehabilitation
hospitals, long-term care facilities, psychiatric and specialty 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 managed care and indemnity products; and (v) equity in the
earnings of unconsolidated affiliates.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
The table below sets forth certain selected historical operating
statistics for the Company's domestic general hospitals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
-------------------------------------------
INCREASE
1997 1998 (DECREASE)
------------- ------------ ------------
<S> <C> <C> <C>
Number of hospitals (at end of period)........................... 130 121 (9)*
Licensed beds (at end of period)................................. 28,691 28,126 (2.0)%
Net inpatient revenues (in millions)............................. $ 1,350 $ 1,474 9.2%
Net outpatient revenues (in millions)............................ $ 726 $ 786 8.3%
Admissions....................................................... 205,572 219,167 6.6%
Equivalent admissions............................................ 289,833 322,799 11.4%
Average length of stay (days).................................... 5.1 5.1 -
Patient days..................................................... 1,054,439 1,113,315 5.6%
Equivalent patient days.......................................... 1,486,640 1,624,041 9.2%
Net inpatient revenue per patient day............................ $ 1,280 $ 1,324 3.4%
Net inpatient revenue per admission.............................. $ 6,567 $ 6,725 2.4%
Utilization of licensed beds..................................... 41.4% 43.1% 1.7%*
Outpatient visits................................................ 2,651,844 2,420,628 (8.7)%
</TABLE>
* The change is the difference between 1997 and 1998 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
1997 1998 (DECREASE)
----------- ----------- ------------
<S> <C> <C> <C>
Average licensed beds ..................... 26,143 25,878 (1.0)%
Patient days .............................. 1,004,394 1,021,407 1.7%
Net inpatient revenue per patient day ..... $ 1,300 $ 1,326 2.0%
Admissions ................................ 196,744 203,874 3.6%
Net inpatient revenue per admission ....... $ 6,639 $ 6,643 0.1%
Outpatient visits ......................... 2,527,907 2,221,003 (12.1)%
Average length of stay (days) ............. 5.1 5.0 (0.1)*
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
The Company continues to experience increases in inpatient acuity and
intensity of services as less intensive services shift from an inpatient to
an outpatient basis or to alternative healthcare delivery services because of
technological and pharmaceutical improvements and continued pressures by
payors to reduce admissions and lengths of stay. In spite of the historical
shifts from inpatient to outpatient services, the Company experienced an 8.7%
decline in the number of outpatient visits during the quarter ended August
31, 1998 compared to the year-ago quarter. This decline was due to fewer home
health care visits, primarily due to the effect of new Medicare reimbursement
rules which restrict the number and types of visits for which Medicare will
pay, and the Company's subsequent actions in response to the new rules. The
Company has consolidated certain home health agencies and has closed others
and has begun to increase the number of higher intensity home visits.
Excluding home health care visits for both periods, outpatient visits
increased approximately 9.0% over the year-ago quarter.
The Medicare program accounted for approximately 38.3% of the net
patient revenues of the Company's domestic general hospitals for the quarter
ended August 31, 1997 and 35.3% for the current quarter. Changes in Medicare
payments mandated by the Balanced Budget Act of 1997 (the "1997 Act"), which
became effective October 1, 1997, as well as certain proposed changes to
various states' Medicaid programs, have reduced and will continue to reduce
payments significantly as these changes are phased in over the next several
years.
Pressures to control healthcare costs have resulted in an increase in
the number of patients whose healthcare coverage is provided under managed
care plans. The percentage of net patient revenues of the Company's domestic
general hospitals attributable to managed care increased from approximately
32.3% for the three months ended August 31, 1997 to approximately 35.8% for
the current quarter. The Company anticipates that its managed care business
will continue to increase in the future. The Company generally receives lower
payments per patient from managed care payors than it does from traditional
indemnity insurers. In certain instances, the Company also is assuming a
greater share of risk by entering into capitated arrangements with managed
care payors and employers. Under capitation, the Company receives a certain
amount for each person enrolled in a plan and assumes the risks and rewards
of meeting the healthcare needs of those persons so enrolled. The Company
purchases insurance to cover a portion of the cost of meeting the healthcare
needs of those covered. The Company estimates that approximately 5.4% of its
revenues were derived from capitated arrangements in the quarter ended August
31, 1998, up from 4.6% in the year-ago quarter.
To address the effect of reduced payments for services, while
continuing to provide quality care to patients, the Company has implemented
strategies to reduce inefficiencies, create synergies, obtain additional
business and control costs. Such strategies include hospital cost-control
programs and overhead reduction plans and the formation and enhancement of
integrated healthcare delivery systems. Further consolidations or
implementation of additional cost-control programs may be undertaken in the
future to offset the reduced payments under the 1997 Act.
Net operating revenues from the Company's other domestic operations
were $208 million for the three months ended August 31, 1997, compared to
$268 million for the current quarter. These increases primarily relate to the
growth of its physician practices, most of which were acquired as part of
hospital acquisitions.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Salaries and benefits expense as a percentage of net operating revenues
was 41.4% in the quarter ended August 31, 1997 and 39.9% in the current
quarter. This decrease is primarily the result of continuing cost control
measures and the outsourcing of certain hospital services (described in the
discussion of other operating expenses below).
Supplies expense as a percentage of net operating revenues was 13.8% in
the quarter ended August 31, 1997 and 13.7% in the current quarter. The
Company continues to focus on reducing supplies expense through incorporating
acquired facilities into the Company's existing group-purchasing program and
by developing and expanding various programs designed to improve the
purchasing and utilization of supplies.
The provision for doubtful accounts as a percentage of net operating
revenues was 6.3% in the quarter ended August 31, 1997, and 6.2% in the
current quarter.
Other operating expenses as a percentage of net operating revenues were
20.9% for the quarter ended August 31, 1997 and 22.0% for the current
quarter. Increases in medical and other professional fees, including new
consolidated laboratory fees, account for substantially all of the increase.
These increases are offset by reductions in salaries and benefits, as certain
of the Company's general hospitals consolidate and outsource laboratory and
other services.
Depreciation and amortization expense as a percentage of net operating
revenues was 4.5% in the quarter ended August 31, 1997, and 5.0% in the
current quarter. The change is due to the effects of hospital acquisitions
and capital expenditures.
Interest expense, net of capitalized interest, was $112 million in the
quarter ended August 31, 1997 and $119 million in the current quarter. The
increase is primarily due to increased borrowings for acquisitions.
Taxes on income as a percentage of income before income taxes were
39.9% for the three months ended August 31, 1997 and 38.3% in the current
quarter. The decrease in the tax rate is primarily due to the utilization of
certain operating loss carryforwards, and, to a lesser extent, the reduced
impact of non-deductible goodwill amortization and certain benefits from
charitable contributions. The Company currently expects its tax rate for the
year ending May 31, 1999 to be approximately 38.5%.
On September 29, 1998, Tenet was selected as the winning bidder to
acquire the assets of the Philadelphia-area operations of AHERF for $345
million, subject to certain adjustments. The assets, which are the subject of
a bankruptcy proceeding under Chapter 11 of the Bankruptcy Code, include
eight general hospitals with 2,484 licensed beds and certain other assets.
Also included in the transaction are the assets of the University, which will
be contributed to a non-profit corporation at the closing. The closing of the
transaction, which currently is scheduled to occur on October 21, 1998, is
contingent upon Tenet entering into an agreement with an academic partner
that will manage the University. Tenet currently is endeavoring to find an
academic partner with which it may enter into an agreement for the management
of the University. Based on information presently available to it and
assumptions as to future performance, the Company expects this acquisition to
be dilutive to its earnings per share in fiscal 1999 by approximately $0.15
per share and accretive in fiscal 2000 and 2001, by approximately $0.05 per
share and $0.10 per share, respectively.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the three months ended August 31, 1998 was
derived primarily from borrowings under the Company's unsecured revolving
bank credit agreement (the "1997 Credit Agreement") and net cash provided by
operating activities. Net cash provided by operating activities for the three
months ended August 31, 1997 was $166 million before expenditures of $165
million for discontinued operations, merger, facility consolidation and
impairment charges. The expenditures in 1997 include the settlement of
significant litigation relating to the Company's discontinued psychiatric
business. Net cash provided by operating activities for the three months
ended August 31, 1998 was $49 million before net expenditures of $8 million
for discontinued operations, merger, facility consolidation and impairment
charges. Management believes that future cash provided by recurring operating
activities, along with the availability of credit under the 1997 Credit
Agreement, should be adequate to meet debt service requirements, and to
finance planned capital expenditures, acquisitions and other known operating
needs, over the next three years.
Proceeds from borrowings under the 1997 Credit Agreement were $589
million during the three months ended August 31, 1998 compared to $707 in the
prior year quarter. Loan repayments under the credit agreement were $400
million in the current quarter compared to $343 million in the quarter ended
August 31, 1997.
Cash payments for property and equipment were $103 million in the three
months ended August 31, 1997, compared to $107 million in the current
quarter. The Company expects to spend approximately $400 million to $500
million annually on capital expenditures, before any significant acquisitions
of facilities and other healthcare operations and before an estimated $259
million in commitments to fund the construction of two new hospitals over the
next three years. Such capital expenditures primarily relate to the
development of integrated healthcare systems 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.
Purchases of new businesses, net of cash acquired, were $126 million in
the three months ended August 31, 1997 and $84 million for the three months
ended August 31, 1998. These acquisitions were financed substantially by
borrowings under the 1997 Credit Agreement. The Company plans to finance the
acquisition of the eight hospitals and other assets it is purchasing from
AHERF with borrowings under the 1997 Credit Agreement.
The Company's strategy includes the development of integrated
healthcare delivery systems, including the acquisition of general hospitals
and related ancillary healthcare businesses or joining with others to develop
integrated healthcare delivery systems. All or portions of this development
may be financed through available credit under the 1997 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 its unsecured revolving credit agreement was $1.0 billion as of August
31, 1998.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
The 1997 Credit Agreement and the indentures governing its senior and
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 other borrowings,
liens, investments, the sale of all or substantially all assets and
prepayment of subordinated debt, a prohibition against the Company declaring
or paying a dividend 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 coverages. Current debt ratings on the Company's
senior debt securities are BB+ by Standard and Poors and Ba1 by Moody's. The
Company is in compliance with its loan covenants.
BUSINESS OUTLOOK
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 pressure are expected to
continue.
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
payments rates by both private and government payors. Because of national,
state and private industry efforts to reform healthcare delivery and payment
systems, the healthcare industry as a whole faces increased uncertainty. The
Company is unable to predict whether any other healthcare legislation at the
federal and/or state level will be passed in the future and what action it
may take in response to such legislation, but it continues to monitor all
proposed legislation and analyze its potential impact in order to formulate
the Company's future business strategies.
THE YEAR 2000 ISSUE
The Company's Annual Report on Form 10-K for its fiscal year ended May
31, 1998 (the "1998 10-K"), contains a complete description of the Company's
Year 2000 compliance program. The Securities and Exchange Commission (the
"SEC") recently published additional guidance for what companies should
include in their disclosures concerning the Year 2000. In order to comply
with that guidance, the Company is supplementing the description of its Year
2000 compliance program reported earlier in the 1998 10-K.
The Company remains on track with its six-phase program described in
the 1998 10-K. The first phase of the program, conducting an inventory of
systems and programs that may be affected by the Year 2000 issue, has been
substantially completed. The second phase, assessment of how the Year 2000
issues may affect each piece of equipment and system, has begun and is
expected to be substantially completed by the end of the second quarter of
fiscal 1999. Phases three through six, planning corrections of any
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
problems discovered, executing the plans developed, testing the corrections
and implementing the corrections will run concurrently through the fall of
calendar 1999.
Although the Company has not yet completed its assessment of the scope
of the Year 2000 issues facing its systems and programs, the costs the
Company has incurred to date in connection with its Year 2000 compliance
program amount to approximately $17 million. Based on the information
currently available to it, the Company estimates that its total cost,
including costs incurred through August 31, 1998, for addressing all Year
2000 issues will be approximately $73 million. This estimate includes
approximately $15 million of costs associated with capital projects that
would have been undertaken notwithstanding the Year 2000 compliance program
but the timing of which was accelerated by one to three years in light of the
program. The Company cautions you that its estimate is based on the
information available to the Company at this time. As noted above, the
Company has not yet completed its assessment of the scope of its Year 2000
issues and its estimate of the costs it may incur may change as it receives
more complete information. Although the total cost of the Company's Year 2000
compliance program is presently not expected to have a material adverse
effect on its operations, liquidity or financial condition, many factors,
such as the number of pieces of equipment and systems with Year 2000 issues,
the availability and cost of various solutions to any Year 2000 issues and
the cost of replacing equipment or systems that cannot be brought into
compliance or with respect to which it is more cost-effective in the long run
to replace, are not fully known at this time and could have an aggregate
material impact on the Company's estimate. The Company will receive
additional information concerning these and other matters as it completes
each phase of its Year 2000 compliance program.
The Company is continuing to develop contingency plans to address any
Year 2000 issues that do arise. As part of its Year 2000 compliance program,
the Company will evaluate every piece of medical equipment in each of its
hospitals and other facilities. Any piece of equipment that is not Year 2000
compliant will be made compliant, replaced or taken out of service.
Furthermore, the Company has developed or is developing a back-up plan for
each piece of critical equipment in case it unexpectedly fails. Many of those
contingency plans already are in place since contingency plans already are
required in order for a hospital to obtain and retain its license. The
Company's contingency plans also include plans to address third parties' Year
2000 issues that may arise. For example, if there is a power failure, each
hospital has a back-up power generator.
The SEC's recent guidance for Year 2000 disclosure also calls on
companies to describe their most likely worst case Year 2000 scenarios. While
one can imagine a scenario in which medical equipment fails as a result of a
Year 2000 problem, which could lead to serious injury or death, the Company
does not believe that such a scenario is likely to occur. As noted above, any
piece of equipment that is not Year 2000 compliant will be made compliant,
replaced or taken out of service. Furthermore, there will be a back-up plan
for each piece of critical equipment in case it unexpectedly fails. The most
likely worst case scenario is that the Company will have to add additional
staff and/or reassign existing staff during the time period leading up to and
immediately following December 31, 1999, in order to address any Year 2000
issues that unexpectedly arise.
FORWARD-LOOKING STATEMENTS
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," "will," "may," "might," and words of
similar import, and statements regarding business strategy and plans
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
based on management's current expectations and involve known and unknown
risks, uncertainties and other factors, many of which the Company is unable
to predict or control, that may cause the Company's or the healthcare
industry's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions, both
nationally, and in the regions in which the Company operates; industry
capacity; demographic changes; existing laws and government regulations and
changes in, or the failure to comply with, laws and governmental regulations;
legislative proposals for healthcare reform; the ability to enter into
managed care provider arrangements on acceptable terms; shifts from
fee-for-service payment to capitated and other risk-based payment systems;
changes in Medicare and Medicaid payments levels; liability and other claims
asserted against the Company; competition; the loss of any significant
customers; technological and pharmaceutical improvements that increase the
cost of providing, or reduce the demand for, healthcare; changes in business
strategy or development plans; the ability to attract and retain qualified
personnel, including physicians and nurses; the Company's significant
indebtedness; the availability of suitable acquisition opportunities and the
length of time it takes to accomplish acquisitions; the Company's ability to
integrate new businesses with its existing operations; the availability and
terms of capital to fund the expansion of the Company's business, including
the acquisition of additional facilities; the impact of Year 2000 issues; and
other factors referenced in the Company's 1998 10-K or herein. Given these
uncertainties, prospective investors are cautioned not to place undue
reliance on such forward-looking statements. Tenet disclaims any obligation
to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to
reflect future events or developments.
17
<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, 1998.
Items 2, 3, 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(27.1) Amended Financial Data Schedule for the three months
ended August 31, 1998 (included only in the EDGAR filing).
(27.2) Restated Financial Data Schedule for the three months
ended August 31, 1997 (included only in the EDGAR filing).
(b) Reports on Form 8-K
(a) None.
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 16, 1998 /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
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<PAGE>
<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AT AUGUST 31, 1998 AND CONDENSED
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED AUGUST 31, 1998 AND
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<SECURITIES> 135,000
<RECEIVABLES> 2,067,000
<ALLOWANCES> 182,000
<INVENTORY> 218,000
<CURRENT-ASSETS> 2,986,000
<PP&E> 7,960,000
<DEPRECIATION> 1,857,000
<TOTAL-ASSETS> 13,018,000
<CURRENT-LIABILITIES> 1,648,000
<BONDS> 6,025,000
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<COMMON> 24,000
<OTHER-SE> 3,669,000
<TOTAL-LIABILITY-AND-EQUITY> 13,018,000
<SALES> 0
<TOTAL-REVENUES> 2,553,000
<CGS> 0
<TOTAL-COSTS> 2,056,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 159,000
<INTEREST-EXPENSE> 119,000
<INCOME-PRETAX> 222,000
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<PAGE>
<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
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<RECEIVABLES> 1,583,000
<ALLOWANCES> 236,000
<INVENTORY> 199,000
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<PP&E> 7,174,000
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<TOTAL-ASSETS> 11,898,000
<CURRENT-LIABILITIES> 1,636,000
<BONDS> 5,293,000
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<COMMON> 23,000
<OTHER-SE> 3,358,000
<TOTAL-LIABILITY-AND-EQUITY> 11,898,000
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<TOTAL-REVENUES> 2,331,000
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<TOTAL-COSTS> 1,878,000
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<LOSS-PROVISION> 148,000
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