<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ X /
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
FEBRUARY 28, 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 I-7293
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TENET HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
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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 MARCH 31, 1998 THERE WERE 308,253,598 SHARES OF $0.075 PAR VALUE
COMMON STOCK OUTSTANDING.
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<PAGE>
TENET HEALTHCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - May 31, 1997
and February 28, 1998....................................... 2
Condensed Consolidated Statements of Operations - Three
Months and Nine Months Ended February 28, 1997 and 1998..... 4
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended February 28, 1997 and 1998............................ 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signature...................................................... 16
</TABLE>
- ----------
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, FEBRUARY 28,
1997 1998
------- ------------
<S> <C> <C>
(DOLLAR AMOUNTS IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents....................... $ 35 $ 17
Short-term investments in debt securities....... 116 132
Accounts receivable, less allowance for
doubtful accounts ($224 at May 31 and $204
at February 28).............................. 1,346 1,725
Inventories of supplies, at cost................ 193 211
Deferred income taxes........................... 294 158
Other current assets............................ 407 478
------- -------
Total current assets.................. 2,391 2,721
------- -------
Investments and other assets......................... 678 642
Property and equipment, at cost...................... 6,922 7,563
Less accumulated depreciation and amortization.. 1,432 1,728
------- -------
Net property and equipment...................... 5,490 5,835
------- -------
Intangible assets, at cost less accumulated
amortization ($226 at May 31 and $316 at
February 28)...................................... 3,146 3,517
------- -------
$11,705 $12,715
------- -------
------- -------
</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, FEBRUARY 28,
1997 1998
------- ------------
<S> <C> <C>
(DOLLAR AMOUNTS IN MILLIONS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............... $ 28 $ 13
Accounts payable................................ 540 536
Accrued employee compensation and benefits...... 309 358
Accrued interest payable........................ 144 109
Reserves related to discontinued operations
and other non-recurring charges.............. 423 147
Other current liabilities....................... 425 477
------- -------
Total current liabilities............. 1,869 1,640
------- -------
Long-term debt, net of current portion............... 5,022 5,755
Deferred income taxes................................ 308 334
Other long-term liabilities and minority interests... 1,282 1,293
Shareholders' equity:
Common stock, $0.075 par value; authorized
450,000,000 shares; 305,501,379 shares
issued at May 31 and 311,511,837 shares
issued at February 28........................ 23 23
Other shareholders' equity...................... 3,240 3,740
Less common stock in treasury, at cost,
2,676,091 shares at May 31 and 3,754,891
shares at February 28........................ (39) (70)
------- -------
Total shareholders' equity............ 3,224 3,693
------- -------
$11,705 $12,715
------- -------
------- -------
</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 OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------- ----------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Net operating revenues $2,237 $2,564 $6,339 $7,324
------ ------ ------ ------
Operating expenses:
Salaries and benefits............... 911 1,040 2,601 3,013
Supplies............................ 316 365 872 1,016
Provision for doubtful accounts..... 128 163 351 447
Other operating expenses............ 470 518 1,337 1,516
Depreciation........................ 82 89 256 257
Amortization........................ 27 32 81 83
Merger-related expenses............. 272 - 272 -
------ ------ ------ ------
Operating income......................... 31 357 569 992
------ ------ ------ ------
Interest expense, net of capitalized
portion............................... (106) (114) (308) (344)
Investment earnings...................... 7 5 21 17
Minority interests in income of
consolidated subsidiaries............. (8) (6) (24) (19)
Gain from change in value of indexed
long-term debt........................ - - - 18
------ ------ ------ ------
Income (loss) before income taxes........ (76) 242 258 664
Taxes on income.......................... 10 (94) (125) (262)
------ ------ ------ ------
Income (loss) before extraordinary item.. (66) 148 133 402
Extraordinary charge from early
extinguishment of debt, less
applicable income taxes of $29........ (47) - (47) -
------ ------ ------ ------
Net income (loss)........................ $ (113) $ 148 $ 86 $ 402
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
(continued)
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 OPERATIONS (CONT.)
THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------- ----------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Earnings (loss) per share:
Basic:
Before extraordinary charge.... $(0.21) $ 0.48 $ 0.45 $ 1.32
Extraordinary charge........... (0.16) - (0.16) -
------ ------ ------ ------
Net............................ $(0.37) $ 0.48 $ 0.29 $ 1.32
------ ------ ------ ------
------ ------ ------ ------
Diluted:
Before extraordinary charge.... $(0.21) $ 0.47 $ 0.44 $ 1.29
Extraordinary charge........... (0.16) - (0.16) -
------ ------ ------ ------
Net............................ $(0.37) $ 0.47 $ 0.28 $ 1.29
------ ------ ------ ------
------ ------ ------ ------
Weighted average shares outstanding -
basic (in thousands).................. 304,443 306,607 296,493 305,449
Weighted average shares and dilutive
securities outstanding - dilutive
(in thousands)........................ 304,443 312,816 302,742 311,258
</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
NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
(IN MILLIONS)
Cash flows from operating activities:
Recurring operations........................... $ 316 $ 444
Net expenditures for discontinued operations
and non-recurring charges................... (61) (307)
------- -------
Net cash provided by operating activities........... 255 137
Cash flows from investing activities:
Proceeds from sales of facilities and
other assets................................ 50 162
Collection of notes receivable................. 70 25
Purchases of property and equipment............ (261) (371)
Purchases of new businesses, net of cash
acquired.................................... (677) (679)
Other items.................................... (15) (77)
------- -------
Net cash used in investing activities..... (833) (940)
------- -------
Cash flows from financing activities:
Proceeds from borrowings....................... 4,436 1,916
Payments of borrowings......................... (3,936) (1,189)
Other items, primarily stock option exercises.. 36 58
------- -------
Net cash provided by financing activities. 536 785
------- -------
Net decrease in cash and cash equivalents........... (42) (18)
Cash and cash equivalents at beginning of period.... 103 35
------- -------
Cash and cash equivalents at end of period.......... $ 61 $ 17
------- -------
------- -------
Supplemental disclosures:
Interest paid, net of amounts capitalized...... $ 264 $ 338
Income taxes paid, net of refunds received..... 116 11
Fair value of common stock issued for
purchase of new business.................... - 9
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 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 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 nine months ended February 28, 1998, Tenet acquired six general
hospitals and several related healthcare businesses. All these transactions
have been accounted for as purchases. The results of operations of the
acquired businesses, which are not material in the aggregate, have been
included in the Company's consolidated statements of operations and cash
flows from the dates of acquisition. Also during the nine months ended
February 28, 1998, the Company sold five general hospitals, two
rehabilitation hospitals and one psychiatric hospital. The operations of
the sold businesses were also not material.
3. There have been no material changes to the description of i) Professional
and General Liability Insurance set forth in Note 8A or ii) Significant
Legal Proceedings set forth in Note 8B of Notes to Consolidated Financial
Statements of Tenet for its fiscal year ended May 31, 1997.
4. During the three-month and nine-month periods ended February 28, 1998, net
cash expenditures charged against the Company's reserves for discontinued
operations and other non-recurring charges were approximately $75 million
and $307 million, respectively. The reserve balances are included in the
Company's balance sheets at May 31, 1997 and February 28, 1998 as reserves
related to discontinued operations and other non-recurring charges or as
other long-term liabilities.
5. The gain from changes in the value of indexed long-term debt resulted from
a decrease in the fair market value of the Company's investment in common
stock of Vencor, Inc., into which certain of the Company's notes are
exchangeable.
7
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONT.)
6. The Company adopted, during the quarter ended February 28, 1998, Statement
of Financial Accounting Standards ("SFAS") No. 128, issued recently by the
Financial Accounting Standards Board ("FASB") and required to be adopted
for financial statements issued for periods ended after December 15, 1997.
This statement establishes new, simplified standards for computing and
presenting earnings per share. It replaces the traditional presentation of
primary earnings per share and fully-diluted earnings per share with
presentations of basic earnings per share and diluted earnings per share,
respectively. For the Company, the differences between earnings per share
calculated under the former standard and the new one are negligible. All
prior periods have been restated for the new standard.
The following is a reconciliation of the numerators and the denominators of
the Company's basic and diluted earnings (loss) per share computations for
income before extraordinary item for the three months and nine months ended
February 28, 1997 and 1998. Income or loss is expressed in millions and
weighted average shares are expressed in thousands:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------------------------------ ------------------------------------
WEIGHTED WEIGHTED
INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE
1997 (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------------------------------------- ----------- -------------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before extraordinary item.... $(66) $133
----- ----
Basic earnings (loss) per share:
Income (loss) available to common
shareholders........................... $(66) 304,443 $(0.21) $133 296,493 $0.45
------- -----
------- -----
Effective of dilutive securities:
Stock options and warrants............... - - - 6,249
----- ------- ---- -------
Dilutive earnings(loss) per share:
Income (loss) available to common
shareholders........................... $(66) 304,443 $(0.21) $133 302,742 $0.44
----- ------- ------- ---- ------- -----
----- ------- ------- ---- ------- -----
<CAPTION>
1998
-------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item........... $148 $402
---- ----
Basic earnings per share:
Income available to common shareholders.. $148 306,607 $0.48 $402 305,449 $1.32
----- -----
----- -----
Effective of dilutive securities:
Stock options and warrants............... - 6,209 - 5,809
---- ------- ---- -------
Dilutive earnings per share:
Income available to common shareholders.. $148 312,816 $0.47 $402 311,258 $1.29
---- ------- ----- ---- ------- -----
---- ------- ----- ---- ------- -----
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Income before income taxes was $242 million in the quarter ended
February 28, 1998. In the quarter ended February 28, 1997, the Company
reported a pre-tax loss of $76 million. For the nine-month periods ended
February 28, 1997 and 1998, income before income taxes was $258 million and
$664 million, respectively. The quarter and nine month periods ended February
28, 1997 include non-recurring merger-related expenses of $272 million. The
following is a summary of operations for the three months and nine months
ended February 28, 1997 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28,
---------------------------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(DOLLARS IN (% OF NET OPERATING
MILLIONS) REVENUES)
Net operating revenues:
Domestic general hospitals........... $2,064 $2,331 92.3% 90.9%
Other domestic operations............ 173 233 7.7% 9.1%
------ ------ ------ ------
Net operating revenues.................... 2,237 2,564 100.0% 100.0%
------ ------ ------ ------
Operating expenses:
Salaries and benefits................ (911) (1,040) 40.7 40.6%
Supplies............................. (316) (365) 14.1% 14.2%
Provision for doubtful accounts...... (128) (163) 5.7% 6.4%
Other operating expenses............. (470) (518) 21.0% 20.2%
Depreciation......................... (82) (89) 3.7% 3.5%
Amortization......................... (27) (32) 1.2% 1.2%
------ ------ ------ ------
Operating income before merger
related expenses....................... $ 303 $ 357 13.6% 13.9%
------ ------ ------ ------
------ ------ ------ ------
<CAPTION>
NINE MONTHS ENDED FEBRUARY 28,
---------------------------------
1997 1998 1997 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(DOLLARS IN (% OF NET OPERATING
MILLIONS) REVENUES)
Net operating revenues:
Domestic general hospitals........... $5,797 $6,652 91.4% 90.8%
Other domestic operations............ 542 672 8.6% 9.2%
------ ------ ------ ------
Net operating revenues.................... 6,339 7,324 100.0% 100.0%
------ ------ ------ ------
Operating expenses:
Salaries and benefits................ (2,601) (3,013) 41.0% 41.1%
Supplies............................. (872) (1,016) 13.8% 13.9%
Provision for doubtful accounts...... (351) (447) 5.5% 6.1%
Other operating expenses............. (1,337) (1,516) 21.1% 20.7%
Depreciation......................... (256) (257) 4.0% 3.5%
Amortization......................... (81) (83) 1.3% 1.1%
------ ------ ------ ------
Operating income before merger-
related expenses........................ $ 841 $ 992 13.3% 13.5%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
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 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 managed care and indemnity products; (v) revenues earned by
the Company in consideration of the guarantees of certain indebtedness and
leases of third parties; and (vi) equity in the earnings of unconsolidated
affiliates.
The table below sets forth certain selected historical operating
statistics for the Company's domestic general hospitals.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------------- --------------------------------
INCREASE INCREASE
1997 1998 (DECREASE) 1997 1998 (DECREASE)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Number of hospitals (at end of period).. 127 125 (2) * 127 125 (2) *
Licensed beds (at end of period)........ 27,366 28,433 3.9% 27,366 28,433 3.9%
Net inpatient revenues (in millions).... $ 1,383 $ 1,564 13.1% $ 3,847 $ 4,316 12.2%
Net outpatient revenues (in millions)... $ 630 $ 724 14.9% $ 1,855 $ 2,197 18.4%
Admissions.............................. 212,850 230,955 8.5% 575,918 649,797 12.8%
Equivalent admissions................... 301,703 326,322 8.2% 836,057 943,733 12.9%
Average length of stay (days)........... 5.3 5.3 - 5.2 5.2 -
Patient days............................ 1,119,362 1,230,830 10.0% 2,996,795 3,385,081 13.0%
Equivalent patient days................. 1,571,915 1,728,411 10.0% 4,303,669 4,876,520 13.3%
Net inpatient revenue per patient day... $ 1,236 $ 1,271 2.8% $ 1,284 $ 1,275 (0.7)%
Net inpatient revenue per admission..... $ 6,498 $ 6,772 4.2% $ 6,680 $ 6,642 (0.6)%
Utilization of licensed beds............ 46.6% 48.3% 1.7%* 41.6% 44.1% 2.5%*
Outpatient visits....................... 2,594,877 2,535,187 (2.3)% 7,281,006 7,837,645 7.6%
</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 NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------------- -----------------------------------
INCREASE INCREASE
1997 1998 (DECREASE) 1997 1998 (DECREASE)
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average licensed beds................... 24,745 24,797 0.2% 24,585 24,477 (0.4)%
Patient days............................ 1,061,487 1,087,559 2.5% 2,872,755 2,945,169 2.5%
Net inpatient revenue per patient day... $1,237 $1,277 3.2% $1,279 $1,283 0.3%
Admissions.............................. 200,262 205,146 2.4% 550,750 567,022 3.0%
Net inpatient revenue per admission..... $6,555 $6,769 3.3% $6,670 $6,662 (0.1)%
Outpatient visits....................... 2,471,470 2,293,884 (7.2)% 6,983,144 6,832,682 (2.2)%
Average length of stay (days)........... 5.3 5.3 - 5.2 5.2 -
</TABLE>
10
<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 a 2.3%
decline in the number of outpatient visits during the quarter ended February
28, 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. Excluding home health care visits, outpatient visits increased
approximately 11% over the year-ago quarter. In response to these recent
developments, the Company is consolidating certain home health care agencies
and closing others and has begun to focus on increasing the numbers of higher
intensity home visits.
The Medicare program accounted for approximately 41.0% of the net
patient revenues of the Company's domestic general hospitals for the quarter
ended February 28, 1997 and 37.8% for the current quarter. The percentages
for the nine-month periods ended February 28, 1997 and 1998 were 40.4% and
38.0%, respectively. Changes in Medicare reimbursement 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 and will continue to reduce payments as the changes are
phased in over the next three years. The 1997 Act also contains various
provisions that allow providers such as Tenet to contract directly with the
federal government for the provision of medical care to Medicare
beneficiaries on a fully capitated basis. Under capitation, the Company
receives a certain amount for each person enrolled in its plans and assumes
the risks and rewards of meeting the healthcare needs of those persons so
enrolled. The Company may purchase insurance to cover a portion of the cost
of meeting the healthcare needs of those covered. The Company cannot predict
at this time what the ultimate effect of these capitated services will be.
Pressures to control healthcare costs have resulted in an increase in
the percentage of revenues attributable to managed care payors. The
percentage of net patient revenues of the Company's domestic general
hospitals attributable to managed care increased from approximately 30.4% for
the three months ended February 28, 1997 to approximately 33.7% for the
current quarter. The percentages for the nine-month periods ended February
28, 1997 and 1998 were 28.9% and 32.9%, respectively. The Company anticipates
that its managed care business will continue to increase in the future. The
Company generally receives lower payments from managed care payors than it
does from traditional indemnity insurers. The Company also is assuming a
greater share of risk by entering into capitated arrangements with managed
care payors and employers. The Company estimates that approximately 4.8% of
its revenues were derived from capitated arrangements in the quarter ended
February 28, 1998.
To address the effect of reduced payments for services, while continuing
to provide quality care to patients, the Company has implemented hospital
cost-control programs and overhead reduction plans and continues to form
integrated healthcare delivery systems in an effort to reduce inefficiencies,
create synergies, obtain additional business and control costs. As a result
of these efforts, all of the reduced payments described earlier are not
expected to have a material adverse effect on the Company's results of
operations.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Net operating revenues from the Company's other domestic operations were $173
million for the three months ended February 28, 1997, compared to $233
million for the current period. For the nine-month periods ended February
28, 1997 and 1998, net operating revenues from other domestic operations were
$542 million and $672 million, respectively. These increases primarily relate
to the growth of its physician practices.
Salaries and benefits expense as a percentage of net operating revenues
was 40.7% in the quarter ended February 28, 1997 and 40.6% in the current
quarter. Salaries and benefits expense as a percentage of net operating
revenues for the prior and current nine-month periods were 41.0% and 41.1%,
respectively. The increases, though slight, relate primarily to the recent
acquisitions of several general hospitals.
Supplies expense as a percentage of net operating revenues was 14.1% in
the quarter ended February 28, 1997 and 14.2% in the current quarter.
Supplies expense as a percentage of net operating revenues for the prior and
current nine-month periods were 13.8% and 13.9%, respectively. These
increases relate primarily to greater patient acuity. The Company expects to
continue 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 5.7% in the quarter ended February 28, 1997, and 6.4% in the
current quarter. The provision for doubtful accounts as a percentage of net
operating revenues for the prior and current nine-month periods were 5.5% and
6.1%, respectively. The increases are partially attributable to a shift in
revenues from Medicare and Medicaid to managed-care. Also, they relate to
recent acquisitions and payment delays by various payors. The Company,
through its collection subsidiary, Syndicated Office Systems, has established
improved follow-up collection systems by consolidating the collection of
accounts receivable in all the Company's facilities.
Other operating expenses as a percentage of net operating revenues was
21.0% for the quarter ended February 28, 1997 and 20.2% for the quarter ended
February 28, 1998. Other operating expenses as a percentage of net operating
revenues for the prior and current nine-month periods were 21.1% and 20.7%,
respectively. The improvement in the current quarter is the result of the
continued emphasis on cost-control and overhead reduction plans.
Depreciation and amortization expense as a percentage of net operating
revenues was 4.9% in the quarter ended February 28, 1997, and 4.7% in the
current quarter. Depreciation and amortization expense as a percentage of
net operating revenues for the prior and current nine-month periods were 5.3%
and 4.6%, respectively. The decrease is primarily due to the effect of the
May 1997 write-down for impairment of the carrying values of long-lived
assets of certain general hospitals and medical office buildings and the
write-off of goodwill and other long-lived assets related to some of the
Company's physician practices, offset somewhat by the effects of facility
additions.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
Interest expense, net of capitalized interest, was $106 million in the
quarter ended February 28, 1997 and $114 million in the current quarter.
Interest expense, net of capitalized interest for the prior and current
nine-month periods was $308 million and $344 million, respectively. The
increase is primarily due to increased borrowings for acquisitions.
The $18 million gain from changes in the value of the Company's indexed
long-term debt instruments (its 6% Subordinated Exchangeable Notes) in the
current year resulted from a reduction in the carrying value of the
exchangeable notes due to a decline in the fair market value of the Company's
investment in the common stock of Vencor, Inc. ("Vencor") at the end of the
Company's second quarter to a price below the $38.55 per share exchange
price. The investment in Vencor stock is treated as available for sale with
changes in value recorded in shareholders' equity. At February 28, 1998,
the market price of Vencor's common stock was $28.6875 per share. At the end
of the fourth quarter of fiscal 1997, the Company had recorded a pre-tax,
non-cash charge to earnings amounting to $18 million because and to the
extent that the fair market value of its investment in Vencor stock exceeded
the carrying value of the exchangeable notes at the end of that accounting
period. The gain recorded in the current year reverses that charge.
Taxes on income as a percentage of income before income taxes were 38.8%
in the current quarter and 39.5% for the nine months ended February 28, 1998.
The Company does not expect its tax rates for the quarter and year ending May
31, 1998 to change significantly.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the nine months ended February 28, 1998 was
derived primarily from borrowings under the Company's unsecured bank credit
agreement and the sale of certain assets. Net cash provided by recurring
operating activities for the nine months ended February 28, 1997 was $316
million before expenditures of $61 million for discontinued operations and
non-recurring charges. Net cash provided by recurring operating activities
for the nine months ended February 28, 1998 was $444 million before
expenditures of $307 million for discontinued operations and non-recurring
charges. Management believes that future cash provided by recurring operating
activities, along with the availability of credit under the Company's
unsecured revolving credit agreement, should be adequate to meet debt service
requirements and to finance planned capital expenditures, acquisitions and
other known operating needs, over the short-term (up to 18 months) and the
long-term (18 months to three years).
Net proceeds from borrowings under the Company's unsecured revolving
bank credit agreement were $870 million during the nine months ended February
28, 1998. Cash proceeds from the sales of facilities, and other assets were
$162 million. The Company's cash and cash equivalents at February 28, 1998
were $17 million, a decrease of $18 million over May 31, 1997. Working
capital at February 28, 1998 was $1.1 billion, compared to $522 million at
May 31, 1997.
Cash payments for property and equipment were $261 million in the nine
months ended February 28, 1997, compared to $371 million in the current
period. The Company expects to spend approximately $400 million to $500
million annually on capital expenditures, before any significant acquisitions
of
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
facilities and other healthcare operations and before an estimated $338
million in commitments to fund the construction of two new hospitals over the
next three years. 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.
Purchases of new businesses, net of cash acquired, were $677 million in
the nine months ended February 28, 1997 and $679 million for the nine months
ended February 28, 1998. These acquisitions were financed substantially by
borrowings under the Company's credit agreement.
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, hospital
acquisitions and partnerships and, to a lesser extent, 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 credit agreement was $1.1 billion as of
February 28, 1998.
The Company's unsecured revolving 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. 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
reimbursement 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,
but it continues to monitor all proposed legislation and analyze its
potential impact in order to formulate the Company's future business
strategies.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
THE YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results
by or at the Year 2000. In connection with this problem ("the Year 2000
Issue"), Tenet has initiated a comprehensive assessment of its computer
systems and applications, including the embedded systems which control
certain medical equipment and other equipment. Most third-party application
vendors have been contacted regarding the compliance status of their
products. The Company's assessment of its own systems and the third-party
applications is expected to be completed by the end of the current fiscal
year. The Company's financial and general ledger systems are substantially
compliant already. Modifications to payroll and patient accounting systems
are underway and are expected to be completed by early 1999. The Company
expects that costs to upgrade these systems will not be material, since most
of the costs are primarily the contractual obligation of the Company's
principal information systems vendor. The Company has not yet completed an
estimate of the costs of bringing its other applications, including embedded
systems, into compliance. Furthermore, the Company presently has no assurance
that the systems of the Federal and State governments, other payors or other
companies with which the Company's systems interface or on which they rely,
will be upgraded on a timely basis. The Company, therefore, is not able to
determine whether the Year 2000 Issue will materially affect future financial
results or future financial conditions. Generally accepted accounting
principles require that the costs of modifying computer software for the Year
2000 Issue be charged to expense as they are incurred.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "expects," and words of similar import, 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 actual results, performance or
achievements of the Company or industry results 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 national 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; a shift from fee-for-service
payment to capitated and other risk-based payment systems; changes in
Medicare and Medicaid reimbursement 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; the significant indebtedness of the Company;
and the availability and terms of capital to fund the expansion of the
Company's business, including the acquisition of additional facilities.
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.
15
<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, 1997.
Items 2, 3, 4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(27.1) Financial Data Schedule for the nine months ended
February 28, 1998 (included only in the EDGAR filing).
(27.2) Restated Financial Data Schedule for the nine months
ended February 28, 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: April 13, 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)
16
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