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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 1999.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
.
COMMISSION FILE NUMBER: I-7293
------------------------
TENET HEALTHCARE CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 95-2557091
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3820 STATE STREET 93105
SANTA BARBARA, CALIFORNIA (Zip Code)
(Address of principal
executive offices)
</TABLE>
AREA CODE (805) 563-7000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
<S> <C>
Common Stock................................................... New York Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights................................ New York Stock Exchange
Pacific Stock Exchange
9 5/8% Senior Notes due 2002................................... New York Stock Exchange
7 7/8% Senior Notes due 2003................................... New York Stock Exchange
8 5/8% Senior Notes due 2003................................... New York Stock Exchange
6% Exchangeable Subordinated Notes due 2005.................... New York Stock Exchange
8% Senior Notes due 2005....................................... New York Stock Exchange
10 1/8% Senior Subordinated Notes due 2005..................... New York Stock Exchange
8 5/8% Senior Subordinated Notes due 2007...................... New York Stock Exchange
7 5/8% Series B Senior Notes due 2008.......................... New York Stock Exchange
8 1/8% Series B Senior Subordinated Notes due 2008............. New York Stock Exchange
</TABLE>
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. /X/
As of July 31, 1999, there were 311,341,137 shares of Common Stock
outstanding. The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, based on the closing price of these shares on
the New York Stock Exchange, was $5,579,900,260. For the purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended May 31, 1999, have been incorporated by reference into Parts I, II
and IV of this Report. Portions of the definitive Proxy Statement for the
Registrant's 1999 Annual Meeting of Shareholders have been incorporated by
reference into Part III of this Report.
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<PAGE>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT--1999
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
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<CAPTION>
PAGE
-----
<S> <C> <C>
PART I
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 23
Item 3. Legal Proceedings............................................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders........................................... 24
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 24
Item 6. Selected Financial Data....................................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 24
Item 8. Financial Statements and Supplementary Data................................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 24
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 25
Item 11. Executive Compensation........................................................................ 25
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 25
Item 13. Certain Relationships and Related Transactions................................................ 25
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............................. 26
</TABLE>
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Note: The responses to Items 5 through 8, Item 12 and portions of Items 1, 3,
10, 11 and 14 are included in the Registrant's Annual Report to
Shareholders for the year ended May 31, 1999, or the definitive Proxy
Statement for the Registrant's 1999 Annual Meeting of Shareholders. The
required information is incorporated into this Report by reference to
those documents and is not repeated herein.
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Tenet Healthcare Corporation (together with its subsidiaries, "Tenet", the
"Registrant" or the "Company") is the second-largest investor-owned health care
services company in the United States. At May 31, 1999, Tenet's subsidiaries and
affiliates (collectively "subsidiaries") owned or operated 130 general hospitals
with 30,791 licensed beds and related health care facilities serving urban and
rural communities in 18 states, and held investments in other health care
companies. The related health care facilities included a small number of
rehabilitation hospitals, specialty hospitals, long-term care facilities and
psychiatric facilities and many medical office buildings located on the same
campus as, or nearby, its general hospitals, various ancillary health care
businesses, including outpatient surgery centers, home health care agencies,
occupational and rural health care clinics, health maintenance organizations, a
preferred provider organization, a managed care insurance company and physician
practices. Tenet intends to continue its strategic acquisitions of and
partnerships or affiliations with additional general hospitals and related
health care businesses in order to expand and enhance its integrated health care
delivery systems.
Tenet has grown substantially over the past several years through corporate
acquisitions and acquisitions of individual facilities. On March 1, 1995, Tenet
acquired the parent company of American Medical International, Inc., now known
as Tenet HealthSystem Medical, Inc. ("TH Medical"), in a transaction accounted
for as a purchase. At the time it was acquired, TH Medical owned 35 general
hospitals as well as related health care businesses. On January 30, 1997, Tenet
acquired OrNda HealthCorp ("OrNda"), now known as Tenet HealthSystem HealthCorp
("TH HealthCorp"), in a transaction accounted for as a pooling-of-interests (the
"Merger"). Accordingly, the consolidated financial statements incorporated
herein by reference and all statistical data shown herein prior to the Merger
were restated in fiscal 1997 to include the accounts and results of operations
of OrNda for all periods presented (subsequent periods were not restated). At
the time it was acquired, OrNda owned 50 general hospitals as well as related
health care operations.
As discussed in more detail under Health Care on page 2 below, Tenet's
subsidiaries acquired twelve general hospitals during fiscal 1999. In addition,
Tenet closed one general hospital, sold two general hospitals and combined the
operations of one general hospital with those of a nearby general hospital
during fiscal 1999.
Tenet's revolving credit agreement allows Tenet to borrow, repay and
reborrow up to $2.8 billion prior to its January 31, 2002, maturity date. The
Company had approximately $632 million available under its revolving credit
agreement at May 31, 1999.
Under segment reporting criteria, Tenet believes that "health care services"
is its only material business segment. See the discussion of Tenet's revenues
and operations in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in Tenet's 1999 Annual Report to
Shareholders.
1
<PAGE>
OPERATIONS
A. HEALTH CARE
All of Tenet's operations are conducted through its subsidiaries. Tenet's
general hospital and other health care operations are conducted primarily
through the following three subsidiaries and their subsidiaries: (i) Tenet
HealthSystem Hospitals, Inc., (ii) TH Medical, Inc., and (iii) TH HealthCorp. At
May 31, 1999, Tenet's subsidiaries operated 130 general hospitals with 30,791
licensed beds serving urban and rural communities in 18 states. Of those general
hospitals, 104 are owned by Tenet's subsidiaries and 26 are owned by third
parties and leased by Tenet subsidiaries (including one Tenet owned facility
that is on land leased from a third party). A Tenet subsidiary also owns one
general hospital and ancillary health care operations in Barcelona, Spain.
During fiscal 1999, Tenet's subsidiaries acquired the following 12 general
hospitals: (i) eight Philadelphia-area hospitals (City Avenue Hospital, Elkins
Park Hospital, Graduate Hospital, Hahnemann University Hospital, Medical College
of Pennsylvania Hospital, Parkview Hospital, Saint Christopher's Hospital for
Children and Warminster Hospital) with a total of 2,484 beds, acquired from the
Allegheny Health, Education and Research Foundation ("AHERF"); (ii) the 409-bed
Queen of Angels-Hollywood Presbyterian Medical Center in Los Angeles,
California; (iii) the 99-bed Rancho Springs Medical Center in Murrieta,
California; and (iv) an 80 percent interest in the two-hospital 414-bed
MetroWest Medical Center in Framingham and Natick, Massachusetts. As part of the
AHERF transaction, Tenet also acquired physician practices and other related
health care facilities, and obtained the right to reorganize MCP Hahnemann
University of the Health Sciences (formerly Allegheny University of the Health
Sciences), a nonprofit institution that is managed by Philadelphia's Drexel
University under a management agreement with Tenet.
In addition, during fiscal 1999, Tenet sold two general hospitals, closed
one general hospital, combined the operations of the Sharpstown General Hospital
with those of nearby Twelve Oaks Hospital in Houston, Texas, to form the Bayou
City Medical Center and closed 29 home health agencies. During fiscal 1999,
construction continued on a new hospital in Weston, Florida, under a joint
venture with the Cleveland Clinic. Construction also continued on Worcester
Medical Center, a new medical complex that will replace Tenet's Saint Vincent
Hospital in Worcester, Massachusetts.
Each of Tenet's general hospitals offers acute care services, operating and
recovery rooms, radiology services, respiratory therapy services, pharmacies and
clinical laboratories, and most offer intensive-care, critical-care and/or
coronary care units, and physical therapy, orthopedic, oncology and outpatient
services. A number of the hospitals also offer tertiary care services such as
open-heart surgery, neonatal intensive care and neuroscience. Five of the
Company's hospitals--Memorial Medical Center, USC University Hospital, Saint
Louis University Hospital, Hahnemann University Hospital and Sierra Medical
Center--offer quaternary care in such areas as heart, lung, liver and kidney
transplants. USC University Hospital and Sierra Medical Center also offer
gamma-knife brain surgery and Memorial Medical Center offers bone marrow
transplants. Except for one small hospital that has not sought to be accredited,
each of the Company's facilities that is eligible for accreditation is fully
accredited by the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"), the Commission on Accreditation of Rehabilitation Facilities ("CARF")
(in the case of rehabilitation hospitals) or another appropriate accreditation
agency. With such accreditation, the Company's hospitals are eligible to
2
<PAGE>
participate in the Medicare and Medicaid programs. The one hospital that is not
accredited participates in the Medicare program through a special waiver that
must be renewed each year.
Various factors, such as technological developments permitting more
procedures to be performed on an outpatient basis, pharmaceutical advances and
pressures to contain health care costs, have led to a shift from inpatient care
to ambulatory or outpatient care. Tenet has responded to this trend by enhancing
its hospitals' outpatient service capabilities, including (i) establishing
freestanding outpatient surgery centers at or near certain of its hospital
facilities, (ii) reconfiguring certain hospitals to more effectively accommodate
outpatient treatment, by, among other things, providing more convenient,
dedicated outpatient facilities and (iii) restructuring existing surgical and
diagnostic capacity to allow a greater number and range of procedures to be
performed on an outpatient basis. Tenet's facilities will continue to emphasize
those outpatient services that can be provided on a quality, cost-effective
basis and that the Company believes will meet the needs of the communities the
facilities serve. The patient volumes and net operating revenues at both the
Company's general hospitals and its outpatient surgery centers 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 patients and physicians and other factors
relating to the timing of elective procedures.
In addition, inpatient care is continuing to move from acute care to
sub-acute care, where a less-intensive level of care is provided. Tenet has been
proactive in the development of a variety of sub-acute inpatient services to
utilize a portion of its unused capacity. By offering cost-effective ancillary
services in appropriate circumstances, Tenet is able to provide a continuum of
care where the demand for such services exists. For example, in certain
hospitals the Company has developed transitional care, rehabilitation and
long-term care sub-acute units. Such units utilize less intensive staffing
levels to provide the range of services sought by payors with a lower cost
structure.
The largest concentrations of the Company's hospital beds are in California
(26.4 percent), Texas (14.7 percent) and Florida (14.4 percent). While having
concentrations of hospital beds within geographic areas helps the Company to
reduce management and marketing expenses and more efficiently utilize resources,
such concentrations also increase the risk that any adverse economic, regulatory
or other developments that may occur within such areas may adversely affect the
Company's business, results of operations or financial condition.
Tenet believes that its general hospitals are well-positioned to compete
effectively in the rapidly evolving health care environment. Tenet continually
analyzes whether each of its hospitals fits within its strategic plans and has
and will continue to analyze ways in which such assets may best be used to
maximize shareholder value. To that end, the Company occasionally may close,
sell or convert to alternate uses certain of the Company's facilities and
services in order to eliminate non-strategic assets, duplicate services and
excess capacity or because of changing market conditions.
3
<PAGE>
The following table lists, by state, the general hospitals owned or (if
indicated below) leased by Tenet's subsidiaries and operated domestically as of
May 31, 1999:
<TABLE>
<CAPTION>
LICENSED
GEOGRAPHIC AREA/STATE FACILITY LOCATION BEDS STATUS
- ------------------------------ ------------------------------------- --------------------- ------------- ---------
<S> <C> <C> <C> <C>
Alabama....................... Brookwood Medical Center Birmingham 586 Owned
Lloyd Noland Hospital Fairfield 319 Owned
Arizona....................... Community Hospital Medical Center Phoenix 43 Owned
Mesa General Hospital Medical Center Mesa 143 Leased
St. Luke's Medical Center Phoenix 280 Leased
Tempe St. Luke's Hospital Tempe 106 Leased
Tucson General Hospital Tucson 106 Owned
Arkansas...................... Central Arkansas Hospital Searcy 193 Owned
Regional Medical Center of NEA (1) Jonesboro 104 Owned
National Park Medical Center Hot Springs 166 Owned
St. Mary's Regional Medical Center Russellville 170 Owned
California (Southern)......... Alvarado Hospital Medical Center San Diego 231 Owned
Brotman Medical Center Culver City 432 Owned
Centinela Hospital Medical Center Inglewood 400 Owned
Century City Hospital Los Angeles 190 Leased
Chapman Medical Center Orange 126 Leased
Coastal Communities Hospital Santa Ana 177 Owned
Community Hospital of Huntington Park Huntington Park 81 Leased
Desert Hospital Palm Springs 388 Leased
Encino-Tarzana Regional Medical
Center (2) Encino 151 Leased
Encino-Tarzana Regional Medical
Center (2) Tarzana 236 Leased
Fountain Valley Regional Hospital and
Medical Ctr Fountain Valley 395 Owned
Garden Grove Hospital and Medical
Center Garden Grove 167 Owned
Garfield Medical Center Monterey Park 210 Owned
Greater El Monte Community Hospital South El Monte 115 Owned
Irvine Medical Center Irvine 176 Leased
John F. Kennedy Memorial Hospital Indio 130 Owned
Lakewood Regional Medical Center Lakewood 161 Owned
Los Alamitos Medical Center Los Alamitos 173 Owned
Midway Hospital Medical Center Los Angeles 225 Owned
Mission Hospital of Huntington Park Huntington Park 109 Owned
Monterey Park Hospital Monterey Park 101 Owned
Placentia Linda Hospital Placentia 114 Owned
Queen of Angeles-Hollywood
Presbyterian Med Ctr Los Angeles 409 Owned
Rancho Springs Medical Center Murrieta 99 Owned
San Dimas Community Hospital San Dimas 93 Owned
Santa Ana Hospital Medical Center Santa Ana 90 Leased
Saint Luke Medical Center Pasadena 165 Owned
Suburban Medical Center Paramount 182 Leased
USC University Hospital (3) Los Angeles 285 Owned
Western Medical Center--Anaheim Anaheim 193 Owned
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
LICENSED
GEOGRAPHIC AREA/STATE FACILITY LOCATION BEDS STATUS
- ------------------------------ ------------------------------------- --------------------- ------------- ---------
<S> <C> <C> <C> <C>
Western Medical Center Santa Ana 296 Owned
Whittier Hospital Medical Center Whittier 181 Owned
California (Northern)......... Community Hospital of Los Gatos Los Gatos 148 Leased
Doctors Hospital of Manteca Manteca 73 Owned
Doctors Medical Center of Modesto Modesto 459 Owned
Doctors Medical Center-San Pablo San Pablo 233 Leased
Doctors Medical Center--Pinole Pinole 136 Leased
Redding Medical Center Redding 188 Owned
San Ramon Regional Medical Center San Ramon 123 Owned
Sierra Vista Regional Medical Center San Luis Obispo 201 Owned
Twin Cities Community Hospital Templeton 84 Owned
Florida (Southern)............ Coral Gables Hospital Coral Gables 273 Owned
Delray Medical Center Delray Beach 301 Owned
Florida Medical Center Ft. Lauderdale 459 Owned
Hialeah Hospital Hialeah 378 Owned
Hollywood Medical Center Hollywood 324 Owned
North Ridge Medical Center Ft. Lauderdale 391 Owned
North Shore Medical Center Miami 357 Owned
Palm Beach Gardens Community Hospital Palm Beach Gardens 204 Leased
Palmetto General Hospital Hialeah 360 Owned
Parkway Regional Medical Center North Miami 382 Owned
West Boca Medical Center Boca Raton 185 Owned
Florida (Tampa/ St.
Petersburg)................. Memorial Hospital of Tampa Tampa 174 Owned
Palms of Pasadena Hospital St. Petersburg 307 Owned
Seven Rivers Community Hospital Crystal River 128 Owned
Town & Country Hospital Tampa 201 Owned
Georgia....................... Atlanta Medical Center Atlanta 460 Owned
North Fulton Regional Hospital Roswell 167 Leased
Spalding Regional Hospital Griffin 160 Owned
Sylvan Grove Hospital Jackson 25 Leased
Indiana....................... Culver Union Hospital Crawfordsville 120 Owned
Winona Memorial Hospital Indianapolis 277 Owned
Louisiana..................... Doctors Hospital of Jefferson Metairie 138 Leased
Kenner Regional Medical Center Kenner 237 Owned
Meadowcrest Hospital Gretna 203 Owned
Memorial Medical Center, Mid-City New Orleans 272 Owned
Memorial Medical Center, Uptown New Orleans 526 Owned
Minden Medical Center Minden 121 Owned
Northshore Regional Medical Center Slidell 174 Leased
St. Charles General Hospital New Orleans 163 Owned
Massachusetts................. MetroWest Medical Center-- Leonard
Morse Natick 185 Owned
MetroWest Medical Center--Union
Hospital Framingham 229 Owned
Saint Vincent Hospital Worcester 362 Owned
Mississippi................... Gulf Coast Medical Center Biloxi 189 Owned
Missouri...................... Columbia Regional Hospital Columbia 289 Owned
Forest Park Hospital Central St. Louis 516 Owned
Des Peres Hospital Des Peres 167 Owned
Compton Heights Hospital St. Louis 336 Owned
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
LICENSED
GEOGRAPHIC AREA/STATE FACILITY LOCATION BEDS STATUS
- ------------------------------ ------------------------------------- --------------------- ------------- ---------
<S> <C> <C> <C> <C>
Lucy Lee Hospital Poplar Bluff 201 Leased
SouthPointe Hospital St. Louis 408 Owned
Saint Louis University Hospital St. Louis 356 Owned
Twin Rivers Regional Medical Center Kennett 116 Owned
Nebraska...................... Saint Joseph Hospital (4) Omaha 388 Owned
Nevada........................ Lake Mead Hospital Medical Center North Las Vegas 198 Owned
North Carolina................ Central Carolina Hospital Sanford 137 Owned
Frye Regional Medical Center Hickory 355 Leased
Pennsylvania.................. City Avenue Hospital Philadelphia 228 Owned
Elkins Park Hospital Elkins Park 280 Owned
Graduate Hospital Philadelphia 330 Owned
Hahnemann University Hospital Philadelphia 618 Owned
Medical College of Pennsylvania
Hospital Philadelphia 465 Owned
Parkview Hospital Philadelphia 200 Owned
Saint Christopher's Hospital for
Children Philadelphia 183 Owned
Warminster Hospital Warminster 180 Owned
South Carolina................ East Cooper Regional Medical Center Mount Pleasant 100 Owned
Hilton Head Medical Center and
Clinics (5) Hilton Head 79 Owned
Piedmont Medical Center Rock Hill 268 Owned
Tennessee..................... John W. Harton Regional Medical
Center Tullahoma 137 Owned
Medical Center of Manchester Manchester 49 Leased
Saint Francis Hospital Memphis 651 Owned
University Medical Center Lebanon 257 Owned
Texas (Dallas)................ Doctors Hospital Dallas 228 Owned
Garland Community Hospital Garland 113 Owned
Lake Pointe Medical Center Rowlett 97 Owned
RHD Memorial Medical Center Dallas 150 Leased
Trinity Medical Center Carrollton 149 Leased
Texas (Houston)............... Cypress Fairbanks Medical Center Houston 140 Owned
Houston Northwest Medical Center Houston 498 Owned
Park Plaza Hospital Houston 468 Owned
Bayou City Medical Center Houston 526 Owned
Texas (Other)................. Brownsville Medical Center Brownsville 219 Owned
Mid-Jefferson Hospital Nederland 138 Owned
Nacogdoches Medical Center Nacogdoches 150 Owned
Odessa Regional Hospital (6) Odessa 100 Owned
Park Place Medical Center Port Arthur 244 Owned
Providence Memorial Hospital El Paso 501 Owned
Sierra Medical Center El Paso 365 Owned
Southwest General Hospital San Antonio 286 Owned
Trinity Valley Medical Center Palestine 153 Owned
</TABLE>
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(1) Owned by a limited liability company in which a Tenet subsidiary owns 95
percent interest and is the managing member.
(2) Leased by a partnership in which Tenet's subsidiaries own a 75 percent
interest.
(3) Facility owned by Tenet; on land leased from a third party.
6
<PAGE>
(4) Owned by a limited liability company in which a Tenet subsidiary owns a 74
percent interest and is the managing member.
(5) Owned by a partnership in which Tenet's subsidiaries own a 90 percent
interest.
(6) Owned by a partnership in which Tenet's subsidiaries own a 78.125 percent
interest.
The following table shows certain information about the general hospitals
owned or leased domestically by Tenet's subsidiaries (including OrNda, both
before and after it was acquired by Tenet) for the fiscal years ended May 31:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Total number of facilities.................................... 128 122 130
Total number of licensed beds................................. 27,959 27,867 30,791
Average occupancy during the period........................... 42.5% 44.0% 45.4%
</TABLE>
Note: The above tables do not include Tenet's general hospital in Barcelona,
Spain, or Tenet's rehabilitation hospitals, long-term care facilities,
psychiatric facilities, outpatient surgery centers or other ancillary
facilities.
B. BUSINESS STRATEGY
The Company's strategic objective is to provide quality health care services
responsive to the needs of each community or region within the current managed
care environment. Tenet believes that competition among health care providers
occurs primarily at the local level. Accordingly, the Company tailors its local
strategies to address the specific competitive characteristics of the geographic
areas in which it operates, including the number of facilities operated by Tenet
subsidiaries, the nature and structure of physician practices and physician
groups, the extent of managed care penetration, the number and size of
competitors and the demographic characteristics of the area. Key elements of the
Company's strategy are:
- to develop integrated health care delivery systems by coordinating the
operations and services of the Company's facilities with other hospitals
and ancillary care providers and through alliances with physicians and
physician groups;
- to reduce costs through enhanced operating efficiencies while maintaining
the quality of care provided;
- to develop or maintain its strong relationships with physicians and
generally to foster a physician-friendly culture;
- to enter into discounted fee-for-service arrangements and managed care
contracts with third-party payors; and
- to acquire or enter into strategic partnerships with hospitals, groups of
hospitals, other health care businesses, ancillary health care providers,
physician practices and physician practice assets where appropriate to
expand and enhance quality integrated health care delivery systems
responsive to the current managed care environment.
7
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Tenet's general hospitals serve as the hubs of its integrated health care
delivery systems. Those systems are designed to provide a full spectrum of care
throughout a community or region. For a further discussion of how Tenet's
business strategy enhances its competitive position, see Competition on page 9
below. Tenet intends to continue its strategic acquisitions of and partnerships
with additional general hospitals and related health care businesses in order to
expand and enhance its integrated health care delivery networks.
Several factors have impacted the environment for acquisitions of general
hospitals and have caused Tenet's pace for acquisitions to slow. First, many
states have enacted and other states are considering enacting legislation that
subjects conversions of not-for-profit hospitals to for-profit status and
acquisitions of not-for-profit hospitals by for-profit companies to public
hearings and/or state approval. These reviews and hearings have lengthened the
process of acquiring not-for-profit hospitals. Second, not-for-profit boards
have become more deliberative in the process of selling their hospitals and
increasingly are engaging investment bankers or other third parties to assist
with the sale process. Third, start-up companies and financially strong
not-for-profit bidders--alone or in consortiums--are continuing to compete with
Tenet for acquisitions.
PROPERTIES
Tenet's principal executive offices are located at 3820 State Street, Santa
Barbara, CA 93105. That building is leased by a Tenet subsidiary under a
five-year lease that expires in 2001, with one five-year renewal option. The
telephone number of Tenet's Santa Barbara headquarters is (805) 563-7000.
Hospital support services for Tenet's subsidiaries are located in space leased
by a subsidiary in an operations center in Dallas, Texas. On May 14, 1998, the
Company signed a ten-year lease for a new operations center in Dallas, Texas,
that will replace its present leased office space. Construction is expected to
be completed by December 1999. At May 31, 1999, Tenet and its subsidiaries also
were leasing space for regional offices in Alabama, Arizona, Arkansas,
California, Florida, Georgia, Louisiana, Pennsylvania and Texas. In addition,
Tenet's subsidiaries operated domestically 158 medical office buildings, most of
which are adjacent to Tenet's general hospitals.
The number of licensed beds and locations of the Company's general hospitals
are described on pages 4 through 7 above. As of May 31, 1999, Tenet had
approximately $71 million of outstanding loans secured by property and equipment
and approximately $56 million of capitalized lease obligations. The Company
believes that all of these properties, as well as the administrative and medical
office buildings described above, are suitable for their intended purposes.
MEDICAL STAFF AND EMPLOYEES
Tenet's hospitals are staffed by licensed physicians who have been admitted
to the medical staff of individual hospitals. Members of the medical staffs of
Tenet's hospitals also often serve on the medical staffs of hospitals not owned
by the Company and may terminate their affiliation with the Tenet hospital or
shift some or all of their admissions to competing hospitals at any time.
Although Tenet purchases physician practices and, where permitted by law,
employs physicians, most of the physicians who practice at the Company's
hospitals are not employees of the Company. In states where corporations are not
permitted to purchase physician practices or employ physicians, Tenet manages
physician practices. Nurses, therapists, lab technicians, facility maintenance
staff and the administrative staff of hospitals, however, normally are employees
of the Company, as are the staff of the physician practices.
8
<PAGE>
Tenet's operations are dependent on the efforts, ability and experience of
its officers, employees and physicians. Tenet's continued growth depends on (i)
its ability to attract and retain skilled employees, (2) the ability of its
officers to manage growth successfully and (iii) Tenet's ability to attract and
retain physicians and other health care professionals at its hospitals. In
addition, the success of Tenet is, in part, dependent upon the quality, number
and specialties of physicians on its hospitals' medical staffs, most of whom
have no long-term contractual relationship with Tenet and may terminate their
association with Tenet's hospitals at any time. Although Tenet currently
believes it will continue to successfully attract and retain key officers,
qualified physicians and other health care professionals, the loss of some or
all of its key officers or an inability to attract or retain sufficient numbers
of qualified physicians and other health care professionals could have a
material adverse impact on future results of operations.
The number of Tenet's employees (of which approximately 30 percent were
part-time employees) at May 31, 1999, was approximately as follows:
<TABLE>
<S> <C>
General hospitals and related health care facilities(1)...................... 124,500
Dallas Operations Center and regional and support offices.................... 1,300
Corporate headquarters....................................................... 150
---------
Total........................................................................ 125,950
---------
---------
</TABLE>
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(1) Includes employees whose employment relates to the operations of the
Company's general hospitals, rehabilitation hospitals, psychiatric
facilities, specialty hospitals, outpatient surgery centers, managed
services organizations, physician practices, debt collection subsidiary and
other health care operations.
Tenet is subject to the federal minimum wage and hour laws and maintains
various employee benefit plans. Labor relations at Tenet's facilities have been
satisfactory. A small percentage of Tenet's employees are represented by labor
unions. Although the Company as a whole currently is not experiencing a shortage
of nursing personnel at most of its facilities, there is a shortage of nurses in
certain geographic areas, such as South Florida and Southern California, and in
certain specialties, affecting hospitals throughout the country, which has
resulted in increased costs to the Company for nursing personnel. The
availability of nursing personnel fluctuates from year to year and the Company
cannot predict the degree to which it will be affected by the future
availability and cost of nursing personnel.
COMPETITION
Tenet's general hospitals and other health care businesses operate in
competitive environments. A facility's competitive position within the
geographic area in which it operates is affected by a number of competitive
factors. Those factors include the scope, breadth and quality of services a
hospital offers to its patients and their physicians; the number, quality and
specialties of the physicians; nurses and other health care professionals
employed by the hospital or on its staff; its reputation; its managed care
contracting relationships; the extent to which it is part of an integrated
network; the number of competitive facilities and other health care
alternatives; the physical condition of its buildings and improvements; the
quality, age and state of the art of its medical equipment; its location; its
parking or proximity to public transportation; the length of time it has been a
part of the community; and its charges for services. Tax-exempt competitors may
have certain financial advantages, such as endowments, charitable contributions,
tax-exempt financing and exemption from sales, property and income taxes, not
available to Tenet facilities.
9
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One factor of ever-increasing importance in the competitive position of
Tenet's facilities is the ability of those facilities to obtain managed care
contracts. The importance of obtaining managed care contracts has increased over
the years and is expected to continue to increase as employers, private and
government payors and others turn to the use of managed care in an attempt to
control rising health care costs. The revenues and operating results of most of
the Company's hospitals' are significantly affected by the hospitals' ability to
negotiate favorable contracts with managed care payors. Under such contracts,
health care providers agree to provide services on a discounted-fee or capitated
basis in exchange for the payors agreeing to send some or all of their
members/enrollees to those providers. With capitated contracts, a health care
provider such as Tenet receives specific fixed periodic payments from a health
maintenance organization, preferred provider organization or employer based on
the number of members of such organization being serviced by the provider. In
return, the provider agrees to provide health care services to such members
regardless of the actual costs incurred and services provided. The profitability
of such contracts depends upon the provider's ability to negotiate payments per
patient that, in the aggregate, are adequate to cover the cost of meeting the
health care needs of the covered persons. In some cases, a provider may contract
with an insurance carrier to cover some or all of the costs of providing the
necessary health care.
A health care provider's ability to compete for managed care contracts is
affected by many factors, including the competitive factors referred to above.
Among the most important of those factors is whether the hospital is part of an
integrated health care delivery network and, if so, the scope, breadth and
quality of services offered by such network and by competing networks. A
hospital that is part of a network that offers a broad range of services in a
wide geographic area is more likely to obtain managed care contracts than a
hospital that is not. Tenet evaluates changing circumstances in each geographic
area on an ongoing basis and positions itself to compete in the managed care
market by forming its own, or joining with others to form, integrated health
care delivery networks.
Tenet's networks in Southern California, South Florida, the greater New
Orleans area, St. Louis and Philadelphia are models of how Tenet has developed
regional networks of its own hospitals and related health care facilities and
ancillary services to serve the full spectrum of health care needs of those
communities. In addition to competing for managed care contracts, Tenet's
hospitals and networks compete for traditional fee-for-service patients and
contracts with traditional health care insurers and employers. Tenet's future
success will depend, in part, on the ability of its hospitals to continue to
attract and retain staff physicians, enter into managed care contracts and
organize and structure integrated health care delivery networks, including those
with other health care providers and physician practice groups, while continuing
to provide quality, cost-effective care.
The health care industry, including Tenet, has been characterized in recent
years by increased competition for patients and staff physicians, significant
excess capacity at general hospitals, a shift from inpatient to outpatient
treatment settings and increased consolidation. New competitive strategies of
hospitals and other health care providers place increasing emphasis on the use
of alternative health care delivery systems (such as home health care services,
outpatient surgery and emergency and diagnostic centers) that eliminate or
reduce lengths of hospital stays. The principal factors contributing to these
trends are advances in medical technology and pharmaceuticals, cost-containment
efforts by managed care payors, employers and traditional health care insurers,
changes in regulations and reimbursement policies, increases in the number and
type of competing health care providers and changes in physician practice
patterns.
10
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The Company's hospitals, and the health care industry as a whole, also face
the challenge of continuing to provide quality patient care while dealing with
strong competition for patients and with pressure on reimbursement rates not
only by private payors, but also by government payors. National and state
efforts to reform the health care system in the United States have adversely
impacted and may further impact reimbursement rates. Changes in medical
technology, existing and future legislation, regulations and interpretations and
competitive contracting for provider services by payors may require changes in
the Company's facilities, equipment, personnel, procedures, rates and/or
services in the future.
Inpatient admissions, average lengths of stay and average occupancy at
general hospitals throughout the industry, including the Company's general
hospitals, continue to be adversely affected by payor-required preadmission
authorization and utilization review and payor pressure to maximize outpatient
and alternative health care delivery services for less acutely ill patients.
Increased competition, admissions constraints and payor pressures are expected
to continue. Inpatient acuity and intensity of services continue to increase as
less intensive services shift from an inpatient to an outpatient basis or to
alternative health care delivery services because of various factors such as
technological improvements, pharmaceutical advances and payor pressures to limit
or reduce payments. Those pressures imposed by government and private payors and
the increasing percentage of business negotiated with purchasers of group health
care services are expected to continue to adversely affect the per-patient
revenues received by the Company.
To meet these challenges, the Company (i) has expanded or converted many of
its general hospitals' facilities to include distinct outpatient centers, (ii)
offers discounts to private payor groups, (iii) enters into capitation contracts
in some service areas, (iv) upgrades facilities and equipment, and (v) offers
new programs and services. The Company also has been reducing its costs. For
example, the Company has implemented a case management system designed to
maximize efficiency by identifying cost-per-procedure variables among physicians
performing the same procedures, standardizing supplies used and negotiating
volume discounts for purchases. In addition, the Company has developed a
computerized outcomes management system that contains clinical and demographic
information from the Company's hospitals and physicians and allows users to
identify "best practices" for treating specific diagnostic-related groups.
Nevertheless, the Company cannot provide assurance that these measures will be
successful, or that if they are successful, they will serve to compensate for
the reduced inpatient admissions, average lengths of stay and average occupancy,
and the consequent reductions in per-patient revenue, resulting from the payor
pressures referred to above.
In fiscal 1999, the Company instituted further initiatives to cut costs not
directly related to patient care, including reducing corporate overhead by
cutting staffing above the hospital level, eliminating nonessential programs and
finding more efficient ways to continue to deliver essential services. We have
also begun to outsource so-called hotel services at the hospitals, such as
laundry, dietary, housekeeping and maintenance services, to gain substantial
cost savings.
As noted above, the Company also is responding to the challenges facing its
hospitals by forming integrated health care delivery systems. Components of
these systems include: (i) encouraging physicians practicing at its hospitals to
form independent physician associations ("IPAs"), joining with those IPAs,
physicians and physician group practices to form physician
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hospital organizations ("PHOs") to contract with managed care and other payors
as well as directly with employers and (iii) forming management services
organizations ("MSOs") to provide management and administrative services to
physicians, physician group practices and IPAs, and to enter into managed care
contracts both on behalf of those groups and, in certain circumstances, on
behalf of PHOs.
In large part, a hospital's revenues, whether from managed care payors,
traditional health insurance payors or directly from patients, depends on the
quality and scope of practices of physicians on staff. Physicians refer patients
to hospitals on the basis of the quality of services provided by the hospital to
patients and their physicians, the hospital's location, the quality of the
medical staff affiliated with the hospital and the quality, age and state of the
art of the hospital's facilities, equipment and employees. The Company attracts
physicians to its hospitals by equipping its hospitals with technologically
advanced equipment, sponsoring training programs to educate physicians on
advanced medical procedures and otherwise creating an environment within which
physicians prefer to practice. The Company also attracts physicians to its
hospitals by using local governing boards, consisting primarily of physicians
and community members, to develop short-and long-term plans for the hospital and
review and approve, as appropriate, actions of the medical staff, including
staff appointments, credentialing, peer review and quality assurance. While
physicians may terminate their association with a hospital at any time, Tenet
believes that by striving to maintain and improve the level of care at its
hospitals and by maintaining ethical and professional standards, it will attract
and retain qualified physicians with a variety of specialties.
There has been significant consolidation in the hospital industry over the
past decade due, in large part, to continuing pressures on payments from
government and private payors and increasing shifts away from the provision of
traditional in-patient services. Those economic trends have caused many
hospitals to close and many to consolidate either through acquisitions or
affiliations. Tenet's management believes that these cost-containment pressures
will continue and will lead to further consolidation in the hospital industry.
MEDICARE, MEDICAID AND OTHER REVENUES
Tenet receives payments for patient care from private insurance carriers,
federal Medicare programs for elderly patients and patients with disabilities,
health maintenance organizations ("HMOs"), preferred provider organizations
("PPOs"), state Medicaid programs for indigent and cash grant patients, the
TriCare Program (formerly known as the Civilian Health and Medical Program of
the Uniformed Services program, or CHAMPUS) ("Tri Care"), employers and patients
directly. The approximate percentages of Tenet's net patient revenue by payment
sources for Tenet's domestic general hospitals owned or operated by its
subsidiaries are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Medicare............................................................. 40.2% 38.0% 34.2%
Medicaid............................................................. 8.6 8.4 9.1
Managed Care......................................................... 29.5 33.7 37.6
Private and Other.................................................... 21.7 19.9 19.1
</TABLE>
12
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Payments from government programs, such as Medicare and Medicaid, account
for a significant portion of Tenet's operating revenues. Recent legislative
changes, including the Balanced Budget Act of 1997 (the "BBA"), have resulted in
limitations on and, in some cases, significant reductions in levels of payments
to health care providers under government programs. The BBA is being phased in
gradually beginning October 1, 1997. The most significant changes were phased in
by October 31, 1998. The BBA changes the method of paying health care providers
under the Medicare and Medicaid programs, which has resulted and is expected to
continue to result in significant reductions in payments to health care
providers for their inpatient, outpatient, home health, capital and skilled
nursing facilities costs.
In addition, private payors, including managed care payors, increasingly are
demanding discounted fee structures or the assumption by health care providers
of all or a portion of the financial risk through capitation arrangements.
Inpatient utilization, average lengths of stay and occupancy rates continue to
be negatively affected by payor-required preadmission authorization and
utilization review and by payor pressure to maximize outpatient and alternative
health care delivery services for less acutely ill patients. Efforts to impose
reduced allowances, greater discounts and more stringent cost controls by
government and other payors also are expected to continue. Although Tenet is
unable to predict the effect these changes will have on its operations, as the
number of patients covered by managed care payors increases, significant limits
on the scope of services reimbursed and on reimbursement rates and fees could
have a material adverse effect on its business, financial condition and/or
results of operations.
DESCRIPTION OF GOVERNMENT PROGRAMS
Medicare payments for general hospital inpatient services are based on a
prospective payment system ("PPS"), referred to herein as the "DRG-PPS." Under
the DRG-PPS, a general hospital receives for each Medicare patient discharged
from the hospital a fixed amount based on the Medicare patient's assigned
diagnostic related group ("DRG"). DRG payments are adjusted for area wage
differentials but otherwise do not consider a specific hospital's operating
costs. As discussed below, DRG payments exclude the reimbursement of (a) capital
costs, including depreciation, interest relating to capital expenditures,
property taxes and lease expenses, and (b) outpatient services. Payments for
those items are made in advance based on estimates and later are increased or
decreased, as the case may be based on the final audit of the cost report by
program auditors. Payments from state Medicaid programs are based on reasonable
costs with certain limits or are at fixed rates. Substantially all Medicare and
Medicaid payments are below the retail rates charged by Tenet's facilities.
Payments from other sources usually are based on the hospital's established
charges, a percentage discount from such charges or all-inclusive per diem
rates.
Historically, DRG rates were increased each year to take into account the
increased cost of goods and services purchased by hospitals and non-hospitals
(the "Market Basket"). With the exception of federal fiscal year 1997 (which
ended September 30, 1997), in which the increase in DRG Rates was equal to the
2.5% Market Basket, the percentage increases to the DRG rates for the past
several years have been lower than the Market Basket and, as a result, payments
received by general hospitals under the DRG-PPS has not kept up with the cost of
goods and services. Moreover, the BBA froze DRG rates at their 1997 levels
through federal fiscal year 1998 (which ended September 30, 1998). The BBA also
limits the rate of increase in DRG rates thereafter to the annual Market Basket
for such year minus (a) 1.9 percent from October 1, 1998 through September 30,
1999, (b) 1.8 percent from October 1, 1999 through September 30, 2000,
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<PAGE>
and (c) 1.1 percent from October 1, 2000 through September 30, 2003. Payments to
be received by general hospitals under the DRG-PPS continue to be below the
increases in the cost of goods and services purchased by hospitals. The update
for the federal fiscal year beginning October 1, 1999, has been set at 1.1
percent (2.9 percent Market Basket minus 1.8 percent).
Medicare pays general hospitals' capital costs separately from DRG payments.
Beginning in 1992, a PPS for Medicare reimbursement of general hospitals'
inpatient capital costs ("PPS-CC") generally became effective with respect to
the Company's general hospitals. Pursuant to the BBA, the PPS-CC rates paid to
Tenet's general hospitals for their inpatient capital costs were reduced by
approximately 15 percent in federal fiscal year 1998 from their prior-year
levels.
Medicare historically has limited payment for outpatient services provided
at general hospitals, physical rehabilitation hospitals and psychiatric
facilities to the lower of customary charges or 94.2 percent of actual cost. In
addition, Congress has established additional limits on the payment of operating
costs for the following outpatient services: (a) clinical laboratory services,
which have been paid based on a fee schedule, and (b) ambulatory surgery
procedures and certain imaging and other diagnostic procedures, which have been
paid based on a blend of the hospital's specific cost and the rate paid by
Medicare to non-hospital providers for such services. The BBA corrects a flaw in
the existing payment formula for ambulatory surgery services referred to as the
"formula driven overpayment." That flaw resulted in general hospitals receiving
payments that were higher than those anticipated by the Health Care Financing
Administration ("HCFA") but were still below the actual cost of providing the
services. The correction of the formula-driven overpayment has resulted in
payments to general hospitals for outpatient services performed by them being
reduced even further below the cost of providing those services. Under the BBA,
the payment method for most outpatient services provided at general hospitals
was to be converted from the cost-based system to a PPS effective January 1,
1999, and phased-in over a three-year period. HCFA has requested, and Congress
has approved, postponing the implementation of the outpatient PPS systems. The
stated reason for the delay is HCFA's need to focus its resources on correcting
its computer systems to handle its Year 2000 Issues (discussed below). The
implementation date has not been established, but is expected to be July 2000.
Hospitals and hospital units currently exempt from the DRG-PPS, such as
qualified physical rehabilitation hospitals and psychiatric facilities ("Exempt
Hospitals/Units"), traditionally have been paid by Medicare on a cost-based
system under which target rates for each facility were used in applying various
limitations and calculating incentive payments. Tenet's Exempt Hospitals/Units
received no increase to their target rates for cost reporting periods beginning
from October 1, 1997 through September 30, 1998. Increases in target rates for
future periods will vary between a Market Basket increase and no increase at
all, depending upon the extent to which the Exempt Hospitals/Units' actual costs
are below their target rates. An additional change under the BBA is that the
Company's Exempt Hospitals/Units will lose certain incentive payments they have
been receiving for keeping their costs lower than their pre-established target
limits.
Home health services historically have been exempt from the DRG-PPS and have
been paid by Medicare at cost, subject to certain limits. The BBA requires that
HCFA develop a PPS for home health services, which is to be phased in over a
four-year period for cost-reporting periods beginning on or after October 1,
1999. In the interim, payment rates in effect under the current system have been
reduced. In addition, a new limit based on a per beneficiary cost limit has been
established. The BBA also provides that rates in effect on September 30, 1999 be
reduced by
14
<PAGE>
15 percent, even if HCFA does not begin to implement the PPS by October 1, 1999.
The development and implementation of these provisions may be delayed. When
implemented, the Company expects that its hospitals will receive significantly
lower payment for home health services.
Hospitals that treat a disproportionately large number of low-income
patients (Medicaid and Medicare patients eligible to receive supplemental Social
Security income) currently receive additional payment from the federal
government in the form of Disproportionate Share Payments. The BBA provides that
such payments will be reduced by 1 percent for each federal fiscal year from
1998 through 2002.
A general hospital historically has been paid its full DRG payment for
patients discharged from an acute-care setting. Under the BBA, however, if a
patient is discharged from a general hospital prior to being in the general
hospital for the mean length of stay for the patient's DRG and receives home
health services or rehabilitation, psychiatric or skilled nursing services in
either a freestanding hospital or hospital unit, the general hospital will
receive only a prorated payment for that DRG depending on the length of time the
patient was in the hospital. This new provision became effective for discharges
after October 1, 1998, and applies only to ten, high-volume DRG's selected by
the Secretary of HHS.
Under current law, if a hospital is unable to collect a Medicare
beneficiary's deductible or co-payment (a "Bad Debt"), the hospital may be paid
by the federal government for the Bad Debt provided certain conditions are met.
The BBA provides that the amount of a Bad Debt for which the Company otherwise
would be paid will be reduced: 25 percent beginning October 1, 1997, 40 percent
beginning October 1, 1998, and 45 percent beginning October 1, 1999.
As discussed above, the BBA significantly changes the manner in which the
Company will be paid for services provided to Medicare beneficiaries. While none
of the changes individually is expected to have a significant impact on the
amount of payment received by the Company, the changes taken as a whole are
expected to significantly reduce the amount of payment received by the Company
from the federal government.
The purpose of the BBA is to balance the federal budget by federal fiscal
year 2002. If the federal budget is not balanced by federal fiscal year 2002 and
the federal deficit is not reduced thereafter, payment rates could be further
reduced to ensure the solvency of the Social Security system. The Company is
unable to predict at this time if there will be any further reductions in
payment rates in future years and, if there are further reductions, how
significant those reductions will be.
As part of the DRG-PPS, Congress has established additional payments to
hospitals that treat patients who are costlier to treat than the average
patient. These additional payments are referred to as "Outlier Payments."
Congress has mandated that HCFA limit Outlier Payments to equal between 5% and
6% of total DRG payments. In order to bring expected Outlier Payments within the
mandated limit, HCFA has raised the threshold cost used to determine the
patients for which a hospital receives Outlier Payments, effective October 1,
1999. The increase in the outlier standard will significantly reduce the number
of patients with respect to which Tenet hospitals will qualify for future
Outlier Payments. This change is expected to result in a significant reduction
in Outlier Payments to the Company in fiscal year 2000.
The Medicare, Medicaid and TriCare programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization
15
<PAGE>
review and new governmental funding restrictions, all of which may materially
increase or decrease program payments as well as affect the cost of providing
services and the timing of payments to facilities. The final determination of
amounts earned under the programs often requires many years, because of audits
by the program representatives, providers' rights of appeal and the application
of numerous technical reimbursement provisions. Management believes that
adequate provision has been made for such adjustments. Until final adjustment,
however, significant issues remain unresolved and previously determined
allowances could be more or less than ultimately required.
HEALTH CARE REFORM, REGULATION AND LICENSING
CERTAIN BACKGROUND INFORMATION
Health care, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. Changes in
the Medicare, Medicaid and other programs, hospital cost-containment initiatives
by public and private payors, proposals to limit payments and health care
spending and industry-wide competitive factors are highly significant to the
health care industry. In addition, the health care industry is governed by a
framework of federal and state laws, rules and regulations that are extremely
complex and for which the industry has the benefit of little or no regulatory or
judicial interpretation. Although the Company believes it is in compliance in
all material respects with such laws, rules and regulations, if a determination
is made that the Company was in material violation of such laws, rules or
regulations, its operations and financial results could be materially adversely
affected.
As discussed under Medicare, Medicaid and Other Revenues on pages 12 through
16 above, the BBA has the effect of reducing payments to hospitals and other
health care providers under the Medicare program. The reductions in payments and
other changes mandated by the BBA, discussed above, have had, and are expected
to continue to have, a significant impact on the Company's revenues under the
Medicare program. In addition, there continue to be federal and state proposals
that would, and actions that do, impose more limitations on payments to
providers such as Tenet and proposals to increase copayments and deductibles
from patients.
Tenet's facilities also are affected by controls imposed by government and
private payors designed to reduce admissions and lengths of stay. For all
providers, such controls, including what is commonly referred to as "utilization
review," have resulted in fewer of certain treatments and procedures being
performed. Utilization review entails the review of the admission and course of
treatment of a patient by a third party. Utilization review by third-party peer
review organizations ("PROs") is required in connection with the provision of
care paid for by Medicare and Medicaid. Utilization review by third parties also
is a requirement of many managed care arrangements.
Many states have enacted or are considering enacting measures that are
designed to reduce their Medicaid expenditures and to make certain changes to
private health care insurance. Various states have applied, or are considering
applying, for a federal waiver from current Medicaid regulations to allow them
to serve some of their Medicaid participants through managed care providers.
Texas was denied a waiver under Section 1115 of the BBA but is in the process of
implementing regional managed care programs under a more limited waiver. Texas
also has applied for federal funds for children's health programs under the BBA.
Louisiana is considering wider use of managed care for its Medicaid population.
California has created a voluntary health insurance purchasing cooperative that
seeks to make health care coverage more
16
<PAGE>
affordable for businesses with five to 50 employees and, effective January 1,
1995, changed the payment system for participants in its Medicaid program in
certain counties from fee-for-service arrangements to managed care plans.
Florida also has legislation, and other states are considering adopting
legislation, imposing a tax on net revenues of hospitals to help finance or
expand the provision of health care to uninsured and underinsured persons. A
number of other states are considering the enactment of managed care initiatives
designed to provide universal low-cost coverage. These proposals also may
attempt to include coverage for some people who currently are uninsured.
CERTIFICATE OF NEED REQUIREMENTS
Some states require state approval for construction and expansion of health
care facilities, including findings of need for additional or expanded health
care facilities or services. Certificates of Need, which are issued by
governmental agencies with jurisdiction over health care facilities, are at
times required for capital expenditures exceeding a prescribed amount, changes
in bed capacity or services and certain other matters. Following a number of
years of decline, the number of states requiring Certificates of Need is once
again on the rise as state legislators once again are looking at the Certificate
of Need process as a way to contain rising health care costs. At May 31, 1999,
Tenet operated hospitals in 12 states that require state approval under
Certificate of Need Programs. Tenet is unable to predict whether it will be able
to obtain any Certificates of Need in any jurisdiction where such Certificates
of Need are required.
ANTIKICKBACK AND SELF-REFERRAL REGULATIONS
The health care industry is subject to extensive federal, state and local
regulation relating to licensure, conduct of operations, ownership of
facilities, addition of facilities and services and prices for services. In
particular, Medicare and Medicaid antikickback and antifraud and abuse
amendments codified under Section 1128B(b) of the Social Security Act (the
"Antikickback Amendments") prohibit certain business practices and relationships
that might affect the provision and cost of health care services payable under
the Medicare, Medicaid and other government programs, including the payment or
receipt of remuneration for the referral of patients whose care will be paid for
by such programs. Sanctions for violating the Antikickback Amendments include
criminal penalties and civil sanctions, including fines and possible exclusion
from government programs such as the Medicare and Medicaid programs.
The "Health Insurance Portability and Accountability Act of 1996," which
became effective January 1, 1997, amends, among other things, Title XI (42
U.S.C. 1301 ET SEQ.) to broaden the scope of current fraud and abuse laws to
include all health plans, whether or not they are reimbursed as a federal
program.
Section 1877 of the Social Security Act (commonly referred to as the "Stark"
laws) restricts referrals by physicians of Medicare, Medicaid and other
government-program patients to providers of a broad range of designated health
services with which they have ownership or certain other financial arrangements.
Section 1877 was amended effective January 1, 1995, to significantly broaden the
original scope of prohibited referrals. Many states have adopted or are
considering similar legislative proposals, some of which extend beyond the
Medicaid program to prohibit the payment or receipt of remuneration for the
referral of patients and physician self-referrals regardless of the source of
the payment for the care. Tenet's participation in and development of joint
ventures and other financial relationships with physicians could be adversely
affected by these amendments and similar state enactments.
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<PAGE>
The federal government has issued regulations that describe some of the
conduct and business relationships that are permissible under the Antikickback
Amendments ("Safe Harbors"). The fact that certain conduct or a given business
arrangement does not fall within a Safe Harbor does not render the conduct or
business arrangement per se illegal under the Antikickback Amendments. Such
conduct and business arrangements, however, do risk increased scrutiny by
government enforcement authorities. Tenet may be less willing than some of its
competitors to enter into conduct or business arrangements that do not clearly
satisfy the Safe Harbors. Passing up certain of those opportunities of which its
competitors are willing to take advantage may put Tenet at a competitive
disadvantage. Tenet has a voluntary regulatory compliance program and
systematically reviews all of its operations to ensure that they comply with the
Antikickback Amendments, the Social Security Act and similar state statutes.
Both federal and state government agencies are continuing heightened and
coordinated civil and criminal enforcement efforts. As part of an announced work
plan, the government has begun to scrutinize, among other things, the terms of
acquisitions of physician practices by companies that own hospitals. The Company
has received a subpoena from the Department of Health and Human Services ("HHS")
requesting information concerning the purchase of certain physician practices,
primarily by a company subsequently acquired by Tenet. The Company is
cooperating with the investigation and does not believe it will have a material
adverse affect on the Company's business, financial condition or results of
operations. The Company believes that the health care industry will continue to
be subject to increased government scrutiny and investigations such as this.
Another trend impacting the health care industry today is the increased use
of the False Claims Act by individuals. Such QUI TAM or "whistleblower" actions
allow private individuals to bring actions on behalf of the government alleging
that the defendant has defrauded the federal government. If the government
intervenes in the action and prevails, the party filing the initial complaint
may share in a portion of any settlement or judgment. If the government does not
intervene in the action, the QUI TAM plaintiff may pursue the action
independently. Although from time to time companies in the health care industry
in general and the Company in particular may be subject to QUI TAM actions, the
Company is unable to predict the impact of such actions on its business,
financial condition or results of operations.
Tenet is unable to predict the future course of federal, state and local
regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on Tenet's business, financial condition and results of
operations.
ENVIRONMENTAL REGULATIONS
The Company's health care operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations, as well as the Company's
purchases and sales of facilities, also are subject to compliance with various
other environmental laws, rules and regulations. Such compliance does not, and
the Company anticipates that such compliance will not, materially affect the
Company's business, financial condition and results of operations.
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HEALTH CARE FACILITY LICENSING REQUIREMENTS
Tenet's health care facilities are subject to extensive federal, state and
local legislation and regulation. In order to maintain their operating licenses,
health care facilities must comply with strict standards concerning medical
care, equipment and hygiene. Various licenses and permits also are required in
order to dispense narcotics, operate pharmacies, handle radioactive materials
and operate certain equipment. Tenet's health care facilities hold all required
governmental approvals, licenses and permits. Except for one small hospital that
has not sought to be accredited, each of Tenet's facilities that is eligible for
accreditation is fully accredited by the JCAHO, CARF (in the case of
rehabilitation hospitals) or another appropriate accreditation agency. With such
accreditation, the Company's hospitals are eligible to participate in
government-sponsored provider programs such as the Medicare and Medicaid
programs. The one hospital that is not accredited participates in the Medicare
program through a special waiver that must be renewed each year.
UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE
Tenet's health care facilities are subject to and comply with various forms
of utilization review. In addition, under the Medicare PPS, each state must have
a PRO to carry out a federally mandated system of review of Medicare patient
admissions, treatments and discharges in general hospitals. Medical and surgical
services and practices are extensively supervised by committees of staff doctors
at each health care facility, are overseen by each health care facility's local
governing board, the members of which primarily are physicians and community
members, and are reviewed by Tenet's quality assurance personnel. The local
governing boards also help maintain standards for quality care, develop
long-range plans, establish, review and enforce practices and procedures and
approve the credentials and disciplining of medical staff members.
COMPLIANCE PROGRAM
The Company maintains a multifaceted corporate compliance and ethics program
that meets or exceeds all applicable federal guidelines and industry standards.
The program is designed to raise awareness of various regulatory issues among
employees and to stress the importance of complying with all governmental laws
and regulations. As part of the program, the Company provides annual ethics and
compliance training to every employee and encourages all employees to report any
violations to a toll-free telephone hotline.
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MANAGEMENT
On May 31, 1999, Michael H. Focht, Sr., who had served as President and
Chief Operating Officer since 1993, retired after 20 years of service to the
Company. Mr. Focht was instrumental in the Company's growth and development over
the past five years. Mr. Focht plans to continue to serve on Tenet's Board of
Directors. With the announcement of Mr. Focht's retirement, the Company created
a new Office of the President, shared by Trevor Fetter, Chief Corporate Officer,
and Thomas B. Mackey, Chief Operating Officer.
The executive officers of the Company who are not also Directors as of
August 27, 1999 are:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ------------------------------------------------ --------------------------------------------------------- ---
<S> <C> <C>
Trevor Fetter................................... Chief Corporate Officer and Chief Financial Officer 39
Thomas B. Mackey................................ Chief Operating Officer 51
Raymond L. Mathiasen............................ Executive Vice President and Chief Accounting Officer 56
Barry P. Schochet............................... Vice Chairman 48
Christi R. Sulzbach............................. Executive Vice President and General Counsel 44
</TABLE>
Mr. Fetter was elected to the position of Chief Corporate Officer, Office of
the President, on January 13, 1999. Mr. Fetter joined Tenet as an Executive Vice
President in October 1995. In March 1996, he was elected to the additional
position of Chief Financial Officer, a position he still holds. Prior to joining
Tenet, Mr. Fetter served as Executive Vice President and Chief Financial Officer
of Metro-Goldwyn-Mayer, Inc. ("MGM") from 1990 to October 1995, and as Senior
Vice President of MGM from 1988 to 1990. From 1982 to 1988, Mr. Fetter worked in
the investment banking division of Merrill Lynch Capital Markets. Mr. Fetter
hold a bachelor's degree in economics from Stanford University and an MBA from
Harvard Business School.
Mr. Mackey was elected Chief Operating Officer, Office of the President, on
January 13, 1999. Mr. Mackey has 25 years experience in health care. He joined
Tenet in 1985 and has since held a variety of senior regional and divisional
management positions, most recently serving as Executive Vice President, Western
Division from March 1995 to January 1999. Before joining Tenet, Mr. Mackey was
vice president, operations, for Greatwest Hospitals in California. He began his
health care career at the University of California, San Diego University
Hospital. Mr. Mackey holds a bachelor's degree in industrial engineering from
Northeastern University and a master's degree in business administration from
Cornell University.
Mr. Mathiasen was elected Executive Vice President on March 22, 1999. Since
March 1996, Mr. Mathiasen has been Chief Accounting Officer of the Company. From
February 1994 to March 1996, Mr. Mathiasen served as Senior Vice President and
Chief Financial Officer of the Company and from September 1993 to February 1994,
Mr. Mathiasen served as Senior Vice President and acting Chief Financial
Officer. Mr. Mathiasen was elected to the position of Senior Vice President in
1990 and Chief Operating Financial Officer in 1991. Prior to joining Tenet as a
Vice President in 1985, he was a partner with Arthur Young & Company (now known
as Ernst & Young).
20
<PAGE>
Mr. Schochet was elected Vice Chairman of Tenet on January 25, 1999. Mr.
Schochet joined Tenet in 1979 and has held a variety of executive positions
since that time, most recently serving as Executive Vice President of Operations
from March 1995 to January 1999. Mr. Schochet graduated from the University of
Maine with a bachelor's degree in zoology and received a master's degree in
hospital administration from George Washington Unversity in Washington D.C. He
is a diplomate of the American College of Healthcare Executives and is past
president of the board of governors of the Federation of American Health Systems
and a member of its board of directors.
Ms. Sulzbach was elected Executive Vice President and General Counsel on
February 22, 1999. Prior to that appointment, Ms. Sulzbach served as Associate
General Counsel in charge of compliance and litigation and as Senior Vice
President, Public Affairs. She joined Tenet in 1983 and has held a variety of
positions in the law department since that time. Ms. Sulzbach earned a juris
doctorate degree from Loyola University in Los Angeles in 1979. She serves on
the boards of directors of the National Health Foundation in Los Angeles and the
Federal Bar Association. She also serves on the Strategic Planning Committee for
the American Hospital Association.
PROFESSIONAL AND GENERAL LIABILITY INSURANCE
The Company insures substantially all of its professional and comprehensive
general liability risks in excess of self-insured retentions through a
majority-owned insurance subsidiary. These self-insured retentions currently are
$1 million per occurrence and varied in prior years by hospital and by policy
period from $500 thousand to $3 million per occurrence. A significant portion of
these risks is, in turn, reinsured with major independent insurance companies.
Prior to fiscal 1995, the Company insured its professional and comprehensive
general liability risks related to its psychiatric and rehabilitation hospitals
through a wholly owned insurance subsidiary, which reinsured risks in excess of
$500 thousand per occurrence with major independent insurance companies. The
Company has reached the policy limits provided by this insurance subsidiary
related to the psychiatric hospitals in most of its coverage years. In addition,
damages, if any, arising from fraud and conspiracy claims in psychiatric
malpractice cases (described under Legal Proceedings below) may not be insured.
If actual payments of claims materially exceed projected payments of claims,
Tenet's financial condition could be materially adversely affected.
THE YEAR 2000 ISSUE
The Company is continuing its six-phase Year 2000 Compliance program. The
first phase of the program, conducting an inventory of systems and programs that
may be affected by the Year 2000 issue, the second phase, assessment of how the
Year 2000 issues may affect each piece of equipment and system, and the third
phase, planning corrections of any problems discovered, have been completed for
both the Company's information technology systems ("IT Systems") and non-IT
Systems such as bio-medical equipment ("Non-IT Items"), except for the 12
general hospitals and related operations that were acquired in fiscal year 1999,
with respect to which the first three phases have been substantially completed.
Phases four through six (executing the plans developed, testing the corrections
and implementing the corrections across all of the Company's systems and
programs) are well under way and will run concurrently through the fall of
calendar 1999 for both IT-Systems and Non-IT Items.
21
<PAGE>
The costs the Company has incurred to date in connection with its Year 2000
compliance program amount to approximately $51 million. This amount and the
estimated total cost do not include internal salaries and other internal costs
of the year 2000 compliance program. The Company estimates that its total cost
for addressing all Year 2000 issues will be approximately $100 million,
substantially all of which will be accounted for as capital expenditures. The
Company cautions that its estimate is based on the information available to the
Company at this time. As the Company continues to evaluate the full scope of its
Year 2000 issues, its estimate of the costs it may incur may change. 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 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 or take out of service, 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 phases 4-6 of its Year 2000 compliance
program.
The Company is continuing to develop contingency plans to address any Year
2000 issues that do arise. Since any piece of equipment that is not Year 2000
compliant will be made compliant, replaced or taken out of service, the Company
does not expect the Year 2000 Issues to have an adverse impact on patient care.
Furthermore, the Company has developed or is developing a back-up plan for each
piece of critical equipment in case it unexpectedly fails. Many contingency
plans already are in place since contingency plans 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.
Examples include (i) making certain that each hospital's back-up power generator
is operational if there is a power failure, (ii) if the Company does not receive
assurance that delivery of key medical supplies will not be interrupted by Year
2000 issues, the Company will identify reliable alternative sources for those
supplies or will make appropriate alternative arrangements, and (iii) if regular
payments from a principal payor might be adversely affected by Year 2000 issues,
the Company will endeavor to negotiate an alternative payment system.
The Securities and Exchange Commission'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, since any piece of equipment that is not Year 2000 compliant will
be made compliant, replaced or taken out of service, the Company does not expect
the Year 2000 issues to have an adverse impact on patient care. 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 replace or take out of service some of its existing equipment and 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.
22
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K, including, without
limitation, statements containing the words "believes", "anticipates",
"expects", "will", "may", "might", "estimate", "should" 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 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 health care 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, health care; changes
in business strategy or development plans; the ability to attract and retain
qualified personnel, including physicians; the significant indebtedness of the
Company; the availability and suitable acquisition opportunities and the length
of time it takes to accomplish acquisitions; the availability and terms of
capital to fund the expansion of the Company's business, including the
acquisition of additional facilities; and the impact of the Year 2000 Issues.
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.
ITEM 2. PROPERTIES.
The response to this item is included in Item 1.
ITEM 3. LEGAL PROCEEDINGS.
The Company has been involved in significant legal proceedings of an unusual
nature related principally to its subsidiaries' discontinued psychiatric
business and, although it has settled the most significant of these matters,
continues to defend a greater-than-normal level of civil litigation relating to
certain of its subsidiaries' former psychiatric operations. In prior fiscal
years the Company resolved these matters primarily through settlement. Based on
its experience in these cases, however, and on recent lawsuits generated by
continued advertisements by certain lawyers seeking former patients in order to
file claims against the Company and certain of its subsidiaries, the Company now
believes that the vigorous defense and trial of these cases, and any additional
lawsuits that may be filed, ultimately will be the most cost-effective means of
resolving these issues.
In prior years, the Company recorded provisions to estimate the cost of the
ultimate disposition of all of these proceedings and to estimate the legal fees
that it expected to incur. The remaining reserves are for unusual litigation
costs and fees that relate to matters that had not been settled as of May 31,
1999 and primarily represent management's estimate of the legal fees
23
<PAGE>
and other related costs to be incurred subsequent to May 31, 1999. There can be
no assurance that the ultimate liability will not exceed such estimates.
Although, based upon information currently available to it, management believes
that the amount of damages, if any, in excess of its reserves for unusual
litigation costs that may be awarded in any 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. All of the costs associated with
these legal proceedings are classified in discontinued operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The response to this item is included on page 45 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1999. The required information
hereby is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The response to this item is included on page 7 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1999. The required information
hereby is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The response to this item is included on pages 8 through 18 of the
Registrant's Annual Report to Shareholders for the year ended May 31, 1999. The
required information hereby is incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The response to this item is included on pages 15 and 16 of the Registrant's
Annual Report to Shareholders for the year ended May 31, 1999. The required
information hereby is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included on pages 19 through 45 of the
Registrant's Annual Report to Shareholders for the year ended May 31, 1999. The
required information hereby is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
24
<PAGE>
PART III
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE
COMPENSATION.
Information concerning the Directors of the Registrant, including executive
officers of the Registrant who also are Directors, and other information
required by Items 10 and 11, is included on pages 2 through 13 of the definitive
Proxy Statement for Registrant's 1999 Annual Meeting of Shareholders and hereby
is incorporated by reference. Similar information regarding executive officers
of the Registrant who, except as noted therein, are not Directors is set forth
on pages 20 and 21 above. Information regarding compensation of executive
officers and Directors of the Registrant is included on pages 14 through 19 and
pages 27 through 31 of the definitive Proxy Statement for the Registrant's 1999
Annual Meeting of Shareholders and hereby is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this item is included on pages 7 and 31 of the definitive
Proxy Statement for the Registrant's 1999 Annual Meeting of Shareholders. The
required information hereby is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements to be included in Part II, Item 8, are
incorporated by reference to the Registrant's 1999 Annual Report to
Shareholders. (See Exhibit (13))
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts and Reserves (included on
page 32).
All other schedules and Condensed Financial Statements of Registrant are
omitted because they are not applicable or not required or because the required
information is included in the consolidated financial statements or notes
thereto.
3. EXHIBITS.
(3) Articles of Incorporation and Bylaws
(a) Restated Articles of Incorporation of Registrant, as amended October
13, 1987 and June 22, 1995 (Incorporated by reference to Exhibit
3(a) to Registrant's Annual Report on Form 10-K, dated August 25,
1995, for the fiscal year ended May 31, 1995)
(b) Restated Bylaws of Registrant, as amended March 10, 1999
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Indenture, dated as of March 1, 1995, between Tenet and The Bank of
New York, as Trustee, relating to 9 5/8% Senior Notes due 2002
(Incorporated by reference to Exhibit 4(a) to Registrant's Quarterly
Report on Form 10-Q, dated April 14, 1995, for the fiscal quarter
ended February 28, 1995)
(b) First Supplemental Indenture, dated as of October 30, 1995, between
Tenet and The Bank of New York, as Trustee, relating to 9 5/8%
Senior Notes due 2002 (Incorporated by reference to Exhibit 4(c) to
Registrant's Annual Report on Form 10-K, dated August 27, 1997, for
the fiscal year ended May 31, 1997)
(c) Second Supplemental Indenture, dated as of August 21, 1997, between
Tenet and The Bank of New York, as Trustee, relating to 9 5/8%
Senior Notes due 2002 (Incorporated by reference to Exhibit 4(d) to
Registrant's Annual Report on Form 10-K, dated August 27, 1997, for
the fiscal year ended May 31, 1997)
(d) Indenture, dated as of March 1, 1995, between Tenet and The Bank of
New York, as Trustee, relating to 10 1/8% Senior Subordinated Notes
due 2005 (Incorporated by reference to Exhibit 4(b) to Registrant's
Quarterly Report on Form 10-Q, dated April 14, 1995, for the fiscal
quarter ended February 28, 1995)
(e) First Supplemental Indenture, dated as of October 27, 1995, between
Tenet and The Bank of New York, as Trustee, relating to 10 1/8%
Senior Subordinated Notes due 2005 (Incorporated by reference to
Exhibit 4(f) to Registrant's Annual Report on Form 10-K, dated
August 27, 1997, for the fiscal year ended May 31, 1997)
26
<PAGE>
(f) Second Supplemental Indenture, dated as of August 21, 1997, between
Tenet and The Bank of New York, as Trustee, relating to 10 1/8%
Senior Subordinated Notes due 2005 (Incorporated by reference to
Exhibit 4(g) to Registrant's Annual Report on Form 10-K, dated
August 27, 1997, for the fiscal year ended May 31, 1997)
(g) Indenture, dated as of October 16, 1995, between Tenet and The Bank
of New York, as Trustee, relating to 8 5/8% Senior Notes due 2003
(Incorporated by reference to Exhibit 4(d) to Registrant's Annual
Report on Form 10-K, dated August 26, 1996, for the fiscal year
ended May 31, 1996)
(h) First Supplemental Indenture, dated as of October 30, 1995, between
Tenet and The Bank of New York, as Trustee, relating to 8 5/8%
Senior Notes due 2003 (Incorporated by reference to Exhibit 4(i) to
Registrant's Annual Report on Form 10-K, dated August 27, 1997, for
the fiscal year ended May 31, 1997)
(i) Second Supplemental Indenture, dated as of August 21, 1997, between
Tenet and The Bank of New York, as Trustee, relating to 8 5/8%
Senior Notes due 2003 (Incorporated by reference to Exhibit 4(j) to
Registrant's Annual Report on Form 10-K, dated August 27, 1997, for
the fiscal year ended May 31, 1997)
(j) Indenture, dated as of January 10, 1996, between Tenet and The Bank
of New York, as Trustee, relating to 6% Exchangeable Subordinated
Notes due 2005 (Incorporated by reference to Exhibit 4(a) to
Registrant's Quarterly Report on Form 10-Q, dated January 15, 1996,
for the fiscal quarter ended November 30, 1995)
(k) Escrow Agreement, dated as of January 10, 1996, among Tenet, NME
Properties, Inc., NME Property Holding Co., Inc. and The Bank of New
York, as Escrow Agent (Incorporated by reference to Exhibit 4(b) to
Registrant's Quarterly Report on Form 10-Q, dated as of January 15,
1996, for the fiscal quarter ended November 30, 1995)
(l) Indenture, dated January 15, 1997, between Tenet and The Bank of New
York, as Trustee, relating to 7 7/8% Senior Notes due 2003
(Incorporated by reference to Exhibit 4(m) to Registrant's Annual
Report on Form 10-K, dated August 27, 1997, for the fiscal year
ended May 31, 1997)
(m) Indenture, dated January 15, 1997, between Tenet and The Bank of New
York, as Trustee, relating to 8% Senior Notes due 2005 (Incorporated
by reference to Exhibit 4(n) to Registrant's Annual Report on Form
10-K, dated August 27, 1997, for the fiscal year ended May 31, 1997)
(n) Indenture, dated January 15, 1997, between Tenet and The Bank of New
York, as Trustee, relating to 8 5/8% Senior Subordinated Notes due
2007 (Incorporated by reference to Exhibit 4(o) to Registrant's
Annual Report on Form 10-K, dated August 27, 1997, for the fiscal
year ended May 31, 1997)
(o) Indenture, dated May 21, 1998, between Tenet and The Bank of New
York, as Trustee, relating to 7 5/8% Senior Notes due 2008
(Incorporated by reference to Exhibit 4(o) to Registrant's Annual
Report on Form 10-K, dated August 28, 1998, for the fiscal year
ended May 31, 1998)
27
<PAGE>
(p) Indenture, dated May 21, 1998, between Tenet and The Bank of New
York, as Trustee, relating to 8 1/8% Senior Subordinated Notes due
2008 (Incorporated by reference to Exhibit 4(p) to Registrant's
Annual Report on Form 10-K, dated August 28, 1998, for the fiscal
year ended May 31, 1998)
(q) Shareholder Rights Plan, adopted December 7, 1998 (incorporated by
reference from the Company's Form 8-K filed with the Securities and
Exchange Commission on December 11, 1998)
(10) Material Contracts
(a) $91,350,000 Amended and Restated Letter of Credit and Reimbursement
Agreement, dated as of February 28, 1995, among the Company, as
Account Party, and Bank of America National Trust and Savings
Association, The Bank of New York, Bankers Trust Company and Morgan
Guaranty Trust Company of New York, as Banks, and The Bank of New
York, as Issuing Bank (Incorporated by reference to Exhibit 10(b) to
Registrant's Quarterly Report on Form 10-Q, dated April 14, 1995,
for the fiscal quarter ended February 28, 1995)
(b) Amendment to Reimbursement Agreement, dated as of March 1, 1996,
among the Company, as Account Party, Bank of America National Trust
and Savings Association, The Bank of New York, Bankers Trust Company
and Morgan Guaranty Trust Company of New York, as Banks, and The
Bank of New York, as the Issuing Bank (Incorporated by reference to
Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q, dated
as of April 12, 1996, for the fiscal quarter ended February 29,
1996)
(c) Amendment No. 2 to Reimbursement Agreement, dated January 30, 1997,
among the Company, as Account Party, Bank of America National Trust
and Savings Corporation, The Bank of New York and Morgan Guaranty
Trust Company of New York, as Banks, and The Bank of New York, as
Issuing Bank (Incorporated by reference to Exhibit 10(c) to
Registrant's Annual Report on Form 10-K, dated August 27, 1997, for
the fiscal year ended May 31, 1997)
(d) Agreement, dated August 22, 1995, among the Company, The Hillhaven
Corporation and Vencor, Inc. (Incorporated by reference to Exhibit
10(n) to Registrant's Annual Report on Form 10-K, dated August 25,
1995, for the fiscal year ended May 31, 1995)
(e) $2,800,000,000 Credit Agreement, dated as of January 30, 1997, among
the Company, as Borrower, the Lenders, Managing Agents and Co-Agents
party thereto, the Swingline Bank party thereto, The Bank of New
York and the Bank of Nova Scotia, as Documentation Agents, Bank of
America National Trust and Savings Association, as Syndication
Agent, and Morgan Guaranty Trust Company of New York, as
Administrative Agent (Incorporated by reference to Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q, dated as of April 14,
1997, for the fiscal quarter ended February 28, 1997)
(f) Amendment, dated as of July 25, 1997, to the Credit Agreement, dated
as of January 30, 1997, among the Company, the Lenders, Managing
Agents and Co-Agents party thereto, the Swingline Bank party
thereto, The Bank of New York
28
<PAGE>
and The Bank of Nova Scotia, as Documentation Agents, Bank of
America National Trust and Savings Association, as Syndication
Agent, and Morgan Guaranty Trust Company of New York, as
Administrative Agent (Incorporated by reference to Exhibit 10(f) to
Registrant's Annual Report on Form 10-K, dated August 27, 1997, for
the fiscal year ended May 31, 1997)
(g) Amendment No. 2 to Credit Agreement, dated as of March 16, 1999
(Incorporated by reference to Exhibit 99.1 to Registrant's Quarterly
Report on Form 10-Q, dated as of April 14, 1999, for the fiscal
quarter ended February 28, 1999)
(h) Letter from the Registrant to Jeffrey C. Barbakow, dated May 26, 1993
(i) Letter from the Registrant to Jeffrey C. Barbakow, dated June 1,
1993
(j) Memorandum from the Registrant to Jeffrey C. Barbakow, dated June
14, 1993
(k) Memorandum of Understanding, dated May 21, 1996, from Jeffrey C.
Barbakow to the Company (Incorporated by reference to Exhibit 10(t)
to Registrant's Annual Report on Form 10-K, dated as of August 26,
1996, for the fiscal year ended May 31, 1996)
(l) Deferred Compensation Agreement, dated May 31, 1997, between Jeffrey
C. Barbakow and the Company (Incorporated by reference to Exhibit
10(l) to Registrant's Annual Report on Form 10-K, dated August 28,
1998, for the fiscal year ended May 31, 1998)
(m) Memorandum of Understanding, dated May 21, 1996, from Michael H.
Focht, Sr. to the Company (Incorporated by reference to Exhibit
10(u) to Registrant's Annual Report on Form 10-K, dated as of August
26, 1996, for the fiscal year ended May 31, 1996)
(n) Consulting and Non-Compete Agreement between Michael H. Focht, Sr.
and the Company, dated as of January 12, 1999.
(o) Letter from the Company to Trevor Fetter, dated January 13, 1999
(p) Letter from the Company to Thomas B. Mackey, dated January 13, 1999
(q) Letter from the Company to Barry P. Schochet, dated February 23, 1999
(r) Executive Officers Relocation Protection Agreement (Incorporated by
reference to Exhibit 10(v) to Registrant's Annual Report on Form
10-K, dated as of August 26, 1996, for the fiscal year ended May 31,
1996)
(s) Executive Officers Severance Protection Plan (Incorporated by
reference to Exhibit 10(w) to Registrant's Annual Report on Form
10-K, dated as of August 26, 1996, for the fiscal year ended May 31,
1996)
(t) Board of Directors Retirement Plan, effective January 1, 1985, as
amended August 18, 1993, April 25, 1994 and July 30, 1997
(Incorporated by reference to Exhibit 10(p) to Registrant's Annual
Report on Form 10-K, dated August 28, 1998, for the fiscal year
ended May 31, 1998)
(u) Supplemental Executive Retirement Plan, dated as of November 1, 1984,
as amended May 21, 1986, April 25, 1994, July 25, 1994 and January
28, 1997
29
<PAGE>
(Incorporated by reference to Exhibit 10(q) to Registrant's Annual
Report on Form 10-K, dated August 28, 1998, for the fiscal year
ended May 31, 1998).
(v) 1994 NME Supplemental Executive Retirement Plan Trust Agreement,
dated as of May 25, 1994, as amended July 25, 1994, between the
Registrant, and United States Trust Company of New York
(Incorporated by reference to Exhibit 10(uu) to Registrant's Annual
Report on Form 10-K, dated August 25, 1994, for the fiscal year
ended May 31, 1994)
(w) Agreement, dated October 30, 1996, between Tenet and United States
Trust Company of New York, as Trustee, regarding the First Amendment
to the 1994 Tenet Supplemental Executive Retirement Plan Trust
(Incorporated by reference to Exhibit 10(b) to Registration
Statement on Form S-3 (Registration No. 333-26621) dated May 7,
1997, filed with the Commission on May 7, 1997)
(x) 1994 Annual Incentive Plan
(y) 1997 Annual Incentive Plan (Incorporated by reference to Exhibit B to
the Definitive Proxy Statement, dated as of August 26, 1997, for the
Registrant's 1997 Annual Meeting of Shareholders)
(z) Deferred Compensation Plan, effective March 23, 1983 (Incorporated by
reference to Exhibit 10(gg) to Registrant's Annual Report on Form
10-K, dated August 26, 1996, for the fiscal year ended May 31, 1996)
(aa) First Amendment to Deferred Compensation Plan, dated as of August
15, 1994
(bb) 1994 NME Deferred Compensation Plan Trust Agreement, dated as of May
25, 1994, as amended July 25, 1994, between the Registrant and
United States Trust Company of New York
(cc) Agreement, dated October 30, 1996, between Tenet and United States
Trust Company of New York, as Trustee, Regarding the First Amendment
to the 1994 Tenet Deferred Compensation Plan Trust (Incorporated by
reference to Exhibit 10(d) to Registration Statement on Form S-3
(Registration No. 333-26621) dated May 7, 1997, filed with the
Commission on May 7, 1997)
(dd) First Amended and Restated 1994 Directors Stock Option Plan
(Incorporated by reference to Exhibit A to the Definitive Proxy
Statement, dated as of August 26, 1997, for the Registrant's 1997
Annual Meeting of Shareholders)
(ee) 1991 Stock Incentive Plan (Incorporated by reference to Exhibit
10(kk) to Registrant's Annual Report on Form 10-K, dated as of
August 26, 1996, for the fiscal year ended May 31, 1996)
(ff) Amended and Restated 1995 Stock Incentive Plan (Incorporated by
reference to Annex D to the Proxy Statement/Prospectus, dated as of
December 18, 1997, for the Registrant's Special Meeting of
Shareholders held on January 28, 1997)
(gg) First Amended and Restated 1995 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit C to the definitive Proxy
Statement, dated as of August 26, 1997, for the Registrant's 1997
Annual Meeting of Shareholders)
30
<PAGE>
(hh) Second Amended and Restated 1995 Employee Stock Purchase Plan
(Incorporated by reference to Registrant's Registration Statement on
Form S-8, dated December 10, 1997)
(13) 1999 Annual Report to Shareholders of Registrant
(21) Subsidiaries of the Registrant
(23) Consent of Experts
(a) Accountants' Consent and Report on Consolidated Schedule (KPMG LLP)
(27.1) Financial Data Schedule for fiscal year 1999 (included only in the EDGAR
filing)
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
31
<PAGE>
SIGNATURES
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, on August 26, 1999.
<TABLE>
<S> <C><C> <C>
TENET HEALTHCARE CORPORATION
By: /s/ TREVOR By: /s/ RAYMOND
FETTER L.
--- MATHIASEN
Trevor ---
Fetter Raymond
CHIEF L.
CORPORATE Mathiasen
OFFICER EXECUTIVE
AND VICE
CHIEF PRESIDENT
FINANCIAL AND
OFFICER CHIEF
(PRINCIPAL ACCOUNTING
FINANCIAL OFFICER
OFFICER) (PRINCIPAL
ACCOUNTING
OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on August 26, 1999, by the following persons on
behalf of the registrant and in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<S> <C>
Chairman, Chief Executive
/s/ JEFFREY C. BARBAKOW Officer and Director
- ------------------------------ (Principal Executive
Jeffrey C. Barbakow Officer)
/s/ LAWRENCE BIONDI, S.J
- ------------------------------ Director
Lawrence Biondi, S.J.
/s/ BERNICE BRATTER
- ------------------------------ Director
Bernice Bratter
/s/ SANFORD CLOUD, JR.
- ------------------------------ Director
Sanford Cloud, Jr.
/s/ MAURICE J. DEWALD
- ------------------------------ Director
Maurice J. DeWald
/s/ MICHAEL H. FOCHT, SR.
- ------------------------------ Director
Michael H. Focht, Sr.
/s/ RAYMOND A. HAY
- ------------------------------ Director
Raymond A. Hay
/s/ LESTER B. KORN
- ------------------------------ Director
Lester B. Korn
/s/ FLOYD D. LOOP, M.D.
- ------------------------------ Director
Floyd D. Loop, M.D.
/s/ RICHARD S. SCHWEIKER
- ------------------------------ Director
Richard S. Schweiker
</TABLE>
32
<PAGE>
RESTATED BY-LAWS OF
TENET HEALTHCARE CORPORATION
A NEVADA CORPORATION
AS AMENDED MARCH 10, 1999
ARTICLE I
SHAREHOLDERS' MEETINGS
SECTION 1.1 PLACE OF MEETINGS.
All meetings of the shareholders shall be held at the principal office
of the Corporation in the State of California, or at any other place within
or without the State of Nevada as may be designated for that purpose from
time to time by the Board of Directors.
SECTION 1.2 ANNUAL MEETINGS.
The Annual meeting of the shareholders shall be held not later than 210
days after the close of the fiscal year, on the date and at the time set by
the Board of Directors, at which time the shareholders shall elect by
plurality vote an annual Class of the Board of Directors, consider reports of
the affairs of the Corporation, and transact such other business as may
properly be brought before the meeting.
SECTION 1.3 SPECIAL MEETINGS.
Special meetings of the shareholders, for any purpose or purposes
whatsoever, may be called at any time by the Chief Executive Officer or by
the Board of Directors.
SECTION 1.4 NOTICE OF MEETINGS.
1.4.1. Notice of each meeting of shareholders, whether annual or
special, shall be given at least 10 and not more than 60 days prior to the
day thereof by the Secretary or any Assistant Secretary causing to be
delivered to each shareholder of record entitled to vote at such meeting a
written notice stating the time and place of the meeting and the purpose or
purposes for which the meeting is called. Such notice shall be signed by the
Chief Executive Officer, the President, the Secretary or any Assistant
Secretary and shall be mailed postage prepaid to each shareholder at his
address as it appears on the stock books of the Corporation. If any
shareholder has failed to supply an address, notice shall be deemed to have
been given if mailed to the address of the principal office of the
Corporation, or published at least once in a newspaper having general
circulation in the county in which the principal office is located.
1.4.2. It shall not be necessary to give any notice of the
adjournment of or the business to be transacted at an adjourned meeting other
than by announcement at the meeting
<PAGE>
at which such adjournment is taken; provided that when a meeting is adjourned
for 30 days or more, notice of the adjourned meeting shall be given as in the
case of an original meeting.
SECTION 1.5 CONSENT BY SHAREHOLDERS.
Any action which may be taken at a regular meeting of the shareholders,
except election of directors, may be taken without a meeting, if authorized
by a writing signed by holders of the number of shares required under the law
to give their approval for such purpose.
SECTION 1.6 QUORUM.
1.6.1. The presence in person or by proxy of the persons
entitled to vote a majority of the voting shares at any meeting constitutes a
quorum for the transaction of business. Shares shall not be counted in
determining the number of shares represented or required for a quorum or in
any vote at a meeting, if voting of them at the meeting has been enjoined or
for any reason they cannot be lawfully voted at the meeting.
1.6.2. The shareholders present at a duly called or held meeting
at which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
1.6.3. In the absence of a quorum, a majority of the shares
present in person or by proxy and entitled to vote may adjourn any meeting
from time to time, but not for a period of more than 30 days at any one time,
until a quorum shall attend.
SECTION 1.7 VOTING RIGHTS.
1.7.1. Every shareholder of record of the Corporation shall be
entitled at each meeting of the shareholders to one vote for each share of
stock standing in his name on the books of the Corporation. Except as
otherwise provided by law, or by the Articles of Incorporation or any
amendment thereto, or by the By-Laws, if a quorum is present, the majority of
votes cast in person or by proxy shall be binding upon all shareholders of
the Corporation.
1.7.2. The Board of Directors shall designate a day not more
than 60 days prior to any meeting of the shareholders as the day as of which
shareholders entitled to notice of and to vote at such meetings shall be
determined.
SECTION 1.8 PROXIES.
Every shareholder entitled to vote or to execute consents may do so
either in person or by written proxy executed in accordance with the
provisions of Section 78.355 of the Nevada Revised Statutes and filed with
the Secretary of the Corporation.
SECTION 1.9 MANNER OF CONDUCTING MEETINGS.
To the extent not in conflict with the provisions of the law relating
thereto, the Articles of Incorporation, or express provisions of these
By-Laws, meetings shall be conducted pursuant
<PAGE>
-3-
to such rules as may be adopted by the chairman presiding at, or a majority
of the shares represented at, the meeting.
SECTION 1.10. NATURE OF BUSINESS AT MEETINGS OF SHAREHOLDERS.
1.10.1 No business may be transacted at an annual meeting of
shareholders, or at any special meeting of shareholders, other than business
that is either (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or the Chief Executive Officer, (b) otherwise
properly brought before the meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or the Chief Executive
Officer or (c) otherwise properly brought before the meeting by any
shareholder of the Corporation (i) who is a shareholder of record on the date
of the giving of the notice provided for in this Section 1.10 and on the
record date for the determination of shareholders entitled to vote at such
meeting and (ii) who complies with the notice procedures set forth in this
Section 1.10.
1.10.2 In addition to any other applicable requirements, for
business to be properly brought by a shareholder before an annual meeting, or
at any special meeting, of shareholders, such shareholder must have given
timely notice thereof in proper written form to the Secretary of the
Corporation.
1.10.3 To be timely, a shareholder's notice to the Secretary
must be delivered to or mailed and received at the principal executive
offices of the Corporation (a) in the case of the annual meeting, not less
than ninety (90) days nor more than one hundred twenty (120) days prior to
the anniversary date of the immediately preceding annual meeting of
shareholders; PROVIDED, HOWEVER, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the shareholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs; and (b) in the case of a special meeting of
shareholders, not later than the close of business on the tenth (10th) day
following the day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs.
1.10.4 To be in proper written form, a shareholder's notice to
the Secretary must set forth as to each matter such shareholder proposes to
bring before the annual meeting, or at any special meeting, of shareholders
(i) a brief description of the business desired to be brought before the
meeting and the reasons for conducting such business at the meeting, (ii) the
name and record address of such shareholder, (iii) the class or series and
number of shares of capital stock of the Corporation which are owned
beneficially or of record by such shareholder, (iv) a description of all
arrangements or understandings between such shareholder and any other person
or persons (including their names) in connection with the proposal of such
business by such shareholder and any material interest of such shareholder in
such business and (v) a representation that such shareholder intends to
appear in person or by proxy at the meeting to bring such business before the
meeting.
<PAGE>
-4-
1.10.5 No business shall be conducted at the annual meeting, or
at any special meeting, of shareholders except business brought before the
meeting in accordance with the procedures set forth in this Section 1.10. If
the chairman of any meeting determines that business was not properly brought
before the meeting in accordance with the foregoing procedures, the chairman
shall declare to the meeting that the business was not properly brought
before the meeting and such business shall not be transacted.
ARTICLE II
DIRECTORS - MANAGEMENT
SECTION 2.1 POWERS.
Subject to the limitation of the Articles of Incorporation, of the
By-Laws, and of the laws of the State of Nevada as to action to be authorized
or approved by the shareholders, all corporate powers shall be exercised by
or under authority of, and the business and affairs of this Corporation shall
be controlled by, a Board of Directors.
SECTION 2.2 NUMBER AND QUALIFICATION.
The authorized number of directors of this Corporation shall be not less
than eight nor more than 15, with the exact number to be established from
time to time by resolution of the Board of Directors of this Corporation.
All directors of this Corporation shall be at least 21 years of age and at
least a majority shall be citizens of the United States.
SECTION 2.3 CLASSIFICATION AND ELECTION.
The Board of Directors shall be classified into three annual Classes,
with four directors in Class 1, four directors in Class 2, and five directors
in Class 3. Each Class of directors shall be elected for terms of three
years. Each term shall continue for the number of years stated and until
their successors are elected and have qualified. Their term of office shall
begin immediately after election. These By-Laws are being adopted subsequent
to the initial classification of directors in 1975. The directors in office
as of the date of adoption hereof shall continue to serve the terms for which
they have been previously elected.
SECTION 2.4. NOMINATION OF DIRECTORS.
2.4.1. Only persons who are nominated in accordance with the
following procedures shall be eligible for election as directors of the
Corporation, except as may be otherwise provided in the Articles of
Incorporation or any amendment thereto with respect to the right of holders
of preferred stock of the Corporation to nominate and elect a specified
number of directors in certain circumstances. Nominations of persons for
election to the Board of Directors may be made at any annual meeting of
shareholders, or at any special meeting of shareholders, (a) by or at the
direction of the Board of Directors (or any duly authorized committee
thereof) or (b) by any shareholder of the Corporation (i) who is a
shareholder of record on the date of the
<PAGE>
-5-
giving of the notice provided for in this Section 2.4 and on the record date
for the determination of shareholders entitled to vote at such meeting and
(ii) who complies with the notice procedures set forth in this Section 2.4.
2.4.2. In addition to any other applicable requirements, for a
nomination to be made by a shareholder, such shareholder must have given
timely notice thereof in proper written form to the Secretary of the
Corporation.
2.4.3. To be timely, a shareholder's notice to the Secretary
must be delivered to or mailed and received at the principal executive
offices of the Corporation (a) in the case of an annual meeting, not less
than ninety (90) days nor more than one hundred twenty (120) days prior to
the anniversary date of the immediately preceding annual meeting of
shareholders; PROVIDED, HOWEVER, that in the event that the annual meeting is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the shareholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs; and (b) in the case of a special meeting of
shareholders called for the purpose of electing directors, not later than the
close of business on the tenth (10th) day following the day on which notice
of the date of the special meeting was mailed or public disclosure of the
date of the special meeting was made, whichever first occurs.
2.4.4. To be in proper written form, a shareholder's notice to
the Secretary must set forth (a) as to each person whom the shareholder
proposes to nominate for election as a director (i) the name, age, business
address and residence address of the person, (ii) the principal occupation or
employment of the person, (iii) the class or series and number of shares of
capital stock of the Corporation which are owned beneficially or of record by
the person and (iv) any other information relating to the person that would
be required to be disclosed in a proxy statement or other filings required to
be made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations promulgated thereunder;
and (b) as to the shareholder giving the notice (i) the name and record
address of such shareholder, (ii) the class or series and number of shares of
capital stock of the Corporation which are owned beneficially or of record by
such shareholder, (iii) a description of all arrangements or understandings
between such shareholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the nomination(s) are to be
made by such shareholder, (iv) a representation that such shareholder intends
to appear in person or by proxy at the meeting to nominate the persons named
in its notice and (v) any other information relating to such shareholder that
would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election
of directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder. Such notice must be accompanied by a
written consent of each proposed nominee to being named as a nominee and to
serve as a director if elected.
2.4.5. No person shall be eligible for election as a director of
the Corporation by the shareholders unless nominated in accordance with the
procedures set forth in this Section 2.4. If the chairman of the meeting
determines that a nomination was not made in
<PAGE>
-6-
accordance with the foregoing procedures, the chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall
be disregarded.
SECTION 2.5 INCREASE IN THE NUMBER OF DIRECTORS.
The Board of Directors may change the number of directors from time to
time; provided, however, neither the Board of Directors nor the shareholders
may ever increase the number of directorships by more than one during any
twelve-month period, except upon the affirmative vote of two-thirds of the
directors of each Class, or the affirmative vote of the holders of two-thirds
of all outstanding shares voting together and not by class. This provision
may not be amended except by a like vote.
SECTION 2.6 VACANCIES.
2.6.1. Any vacancies in the Board of Directors, except vacancies
first filled by the shareholders, may be filled by the affirmative vote of
two-thirds of the remaining directors of each Class, though less than a
quorum, or by a sole remaining director. Each director so elected shall hold
office for the balance of the term of the resigning director and until his
successor is elected. The power to fill vacancies shall in no event be
delegated to any committee appointed in accordance with these By-Laws.
2.6.2. The shareholders may at any time elect a director to fill
any vacancy not filled by the directors, and may elect the additional
directors at the meeting at which an amendment of the By-Laws is voted
authorizing an increase in the number of directors.
2.6.3. A vacancy or vacancies shall be deemed to exist in case
of the death, resignation, or removal of any director, or if the directors or
shareholders shall increase the authorized number of directors but shall fail
at a meeting at which such increase is authorized or at an adjournment
thereof to elect the additional director so provided for, or in case the
shareholders fail at any time to elect the full number of authorized
directors.
2.6.4. If the Board of Directors accepts the resignation of a
director tendered to take effect at a future time, the Board or the
shareholders shall have power to immediately elect a successor who shall take
office when the resignation shall become effective.
2.6.5. No reduction of the number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
SECTION 2.7 REMOVAL OF DIRECTORS.
The entire Board of Directors or any individual director may be removed
from office, with or without cause, by the vote or written consent of
shareholders representing two-thirds of the issued and outstanding capital
stock entitled to vote.
SECTION 2.8 RESIGNATIONS.
<PAGE>
-7-
Any director of the Corporation may resign at any time either by oral
tender of resignation at any meeting of the Board or by giving written notice
thereof to the Secretary, the Chief Executive Officer or the President. Such
resignation shall take effect at the time it specifies, and the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 2.9 PLACE OF MEETINGS.
Meetings of the Board of Directors shall be held at the principal office
of the Corporation in the State of California, or at such other place within
or without the State of Nevada as may be designated for that purpose by the
Board of Directors. Any meeting shall be valid, wherever held, if held by the
written consent of all members of the Board of Directors, given before or
after the meeting and filed with the Secretary of the Corporation.
SECTION 2.10 MEETINGS AFTER ANNUAL SHAREHOLDERS' MEETING.
The first meeting of the Board of Directors held after the annual
shareholders' meeting shall be held at such time and place within or without
the State of Nevada as shall be fixed by announcement of the Chief Executive
Officer or the President given at the annual shareholders' meeting, and no
other notice of such meeting shall be necessary, provided a majority of the
whole Board shall be present. Alternatively, such meeting may be held at
such time and place as shall be fixed pursuant to notice given under other
provisions of these By-Laws.
SECTION 2.11 OTHER REGULAR MEETINGS.
2.11.1. Regular meetings of the Board of Directors shall be held
at such time and place within or without the State of Nevada as may be agreed
upon from time to time by the Board.
2.11.2. No notice need be given of regular meetings, except that
a written notice shall be given to each director of the resolution
establishing specific meeting dates or a regular meeting date, which notice
shall set forth the date of the month, the time, and the place of the
meetings.
SECTION 2.12 SPECIAL MEETINGS.
Special meetings of the Board of Directors shall be held whenever called
by the Chief Executive Officer or the President or by two-thirds of the
directors of each Class. Notice of any such meeting shall be mailed to each
director not later than three days before the day on which the meeting is to
be held, or shall be sent to him by telegraph, or delivered personally or by
telephone, not later than midnight of the day before the day of the meeting.
Any meeting of the Board of Directors shall be a legal meeting without any
notice thereof having been given, if each director consents to the holding
thereof or waives notice by a writing filed with the Secretary, or is present
thereat and their oral consents are entered on the minutes, or they take part
in the deliberations thereat without objection. Except as otherwise provided
in the By-Laws or as may be indicated in the notice thereof, any and all
business may be transacted at any special meeting.
SECTION 2.13 WAIVER OF NOTICE.
<PAGE>
-8-
Anything herein to the contrary notwithstanding, notice of any meeting
of directors shall not be required as to any director who shall waive notice
in writing (including telex, facsimile telephonic transmission, telegram,
cablegram or radiogram) before or after such meeting.
SECTION 2.14 NOTICE OF ADJOURNMENT.
Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place is fixed at the meeting
adjourned.
SECTION 2.15 QUORUM.
A majority of the number of directors as fixed by the Articles of
Incorporation or By-Laws shall be necessary to constitute a quorum for the
transaction of business, and the action of a majority of the directors
present at any meeting at which there is a quorum, when duly assembled, is
valid as a corporate act; provided, that a minority of the directors, in the
absence of a quorum, may adjourn from time to time or fill vacant
directorships in accordance with Section 2.5 but may not transact any
business.
SECTION 2.16 ACTION BY UNANIMOUS WRITTEN CONSENT.
Any action required or permitted to be taken at any meeting of the Board
of Directors may be taken without a meeting, if all members of the Board
shall individually or collectively consent in writing thereto. Such written
consent shall be filed with the minutes of the proceedings of the Board and
shall have the same force and effect as a unanimous vote of such directors.
SECTION 2.17 COMPENSATION.
The directors may be paid their expenses of attendance at each meeting
of the Board of Directors. Additionally, the Board of Directors may from
time to time, in its discretion, pay to directors either or both a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary
for services as a director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
reimbursement and compensation for attending committee meetings.
SECTION 2.18 TRANSACTIONS INVOLVING INTERESTS OF DIRECTORS.
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
directors of the Corporation are in any way interested in, or connected with,
any other party to, such contract or transaction or are themselves parties to
such contract or transaction, provided that such transaction satisfies
Section 78.140 of the Nevada Revised Statutes; and each and every person who
may become a director of the Corporation is hereby relieved, to the extent
permitted by law, from any liability that might otherwise exist from
contracting in good faith with the Corporation for the benefit of himself or
<PAGE>
-9-
any person in which he may be in any way interested or with which he may be
in any way connected. Any director of the Corporation may vote and act upon
any matter, contract or transaction between the Corporation and any other
person without regard to the fact that he is also a stockholder, director or
officer of, or has any interest in, such other person.
SECTION 2.19 EMERITUS POSITIONS.
The Board of Directors may authorize parties to serve in an emeritus
position with respect to the Board of Directors, included by way of example
but not by way of limitation, as an Emeritus Director, as a Chairman Emeritus
of the Board of Directors or as a Vice-Chairman Emeritus of the Board of
Directors. These positions shall be honorary positions and parties elected to
those positions may be asked to attend meetings of the board of directors and
meeting of the shareholders from time to time. A party holding an emeritus
position shall not be an officer or director of the Company, shall have no
vote at a director's meeting, shall receive no fees for service in that
position and shall not be given access to material, non-published information
pertaining, to the Company. A party filling an emeritus position shall be
requested to do so because of his or her experience with and contributions to
the Company.
ARTICLE III
OFFICERS
SECTION 3.1 EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a Chairman, a Vice
Chairman, a Chief Executive Officer, a President, one or more Senior
Executive Vice Presidents, one or more Executive Vice Presidents, one or more
Group Presidents and Chief Executive Officers, one or more Senior Vice
Presidents, one or more Vice Presidents, a Secretary, and a Treasurer. Any
person may hold two or more offices. The executive officers of the
Corporation shall be elected annually by the Board of Directors and shall
hold office for one year or until their respective successors shall be
elected and shall qualify.
SECTION 3.2 APPOINTED OFFICERS: TITLES.
3.2.1. The Chief Executive Officer or the Secretary in the case
of Assistant Secretaries or the Treasurer in the case of Assistant Treasurers
may appoint one or more Assistant Secretaries or one or more Assistant
Treasurers, each of whom shall hold such title at the pleasure of the
appointing officer, have such authority and perform such duties as are
provided in the By-Laws, or as the Chief Executive Officer or the appointing
officer may determine from time to time. Any person appointed under this
Section 3.2.1 to serve in any of the foregoing positions shall be deemed by
reason of such appointment or service in such capacity to be an "officer" of
the corporation.
<PAGE>
-10-
3.2.2. The Chief Executive Officer or a person designated by the
Chief Executive Officer may also appoint a president, one or more executive
vice presidents, one or more senior vice presidents, one or more vice
presidents and one or more assistant vice presidents for each operating group
and division of the Corporation and one or more senior vice presidents, one
or more vice presidents and one or more assistant vice presidents for each
corporate staff function and a corporate controller and one or more assistant
controllers. Each of such persons will hold such title at the pleasure of the
Chief Executive Officer and have authority to act for and shall perform
duties with respect to only the group, division or corporate staff function
for which the person is appointed. Any person appointed under this Section
3.2.2 to serve in any of the foregoing positions shall not be deemed by
reason of such appointment or service in such capacity to be an "officer" of
the Corporation.
SECTION 3.3 REMOVAL AND RESIGNATION.
3.3.1. Any officer may be removed, either with or without cause,
by a majority of the directors at the time in office, at any regular or
special meeting of the Board. Any appointed person may be removed from such
position at any time by the person making such appointment or his successor.
3.3.2. Any officer may resign at any time, by giving written
notice to the Board of Directors, the Chief Executive Officer, the President
or the Secretary of the Corporation. Any such resignation shall take effect
at the date of the receipt of such notice, or at any later time specified
therein; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 3.4 VACANCIES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed
in the By-Laws for regular appointments to such office.
SECTION 3.5 CHAIRMAN AND VICE CHAIRMAN.
The Chairman shall preside at all meetings of the Board of Directors and
shall exercise and perform such other powers and duties as may be from time
to time assigned to him by the Board of Directors. The Vice Chairman shall,
in the absence of the Chairman, preside at all meetings of the Board of
Directors and shall exercise and perform such other powers and duties as may
be from time to time assigned to him by the Board of Directors.
SECTION 3.6 CHIEF EXECUTIVE OFFICER.
The Chief Executive Officer shall, subject to the control of the Board
of Directors, have general supervision, direction, and control of the
business and affairs of the Corporation. He shall preside at all meetings of
the shareholders and, in the absence of the Chairman of the Board and the
Vice Chairman of the Board, at all meetings of the Board of Directors. He
shall be ex officio a member of the Executive Committee and shall have the
general powers and duties
<PAGE>
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of management usually vested in the office of chief executive officer of a
corporation and such other powers and duties as may be prescribed by the
Board of Directors.
SECTION 3.7 PRESIDENT.
In the absence or disability of the Chief Executive Officer, the
President shall perform all of the duties of the Chief Executive Officer and
when so acting shall have all the powers and be subject to all the
restrictions upon the Chief Executive Officer, including the power to sign
all instruments and to take all actions which the Chief Executive Officer is
authorized to perform by the Board of Directors or the By-Laws. The
President shall have the general powers and duties usually vested in the
office of president of a corporation and such other powers and duties as may
be prescribed by the Chief Executive Officer or the Board of Directors.
SECTION 3.8 SENIOR EXECUTIVE VICE PRESIDENT, EXECUTIVE VICE PRESIDENT,
SENIOR VICE PRESIDENT AND VICE PRESIDENT.
In the absence or disability of the Chief Executive Officer and the
President, a Senior Executive Vice President, an Executive Vice President or
a Group President and Chief Executive Officer, in the order of his rank and
seniority shall perform all of the duties of the Chief Executive Officer, and
when so acting shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer, including the power to sign
all instruments and to take all actions which the Chief Executive Officer is
authorized to perform by the Board of Directors or the By-Laws. The Senior
Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents
and Vice Presidents shall have the general powers and duties usually vested
in the office of a vice president of a corporation; the Group Presidents and
Chief Executive Officers shall have the general powers and duties of a
principal executive officer of an operating group of a corporation; and each
of them shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the Board of
Directors, the Executive Committee of the Board of Directors, the Chief
Executive Officer or the By-Laws.
SECTION 3.9 SECRETARY AND ASSISTANT SECRETARIES.
3.9.1. The Secretary shall (1) attend all sessions of the Board
and all meetings of the shareholders; and (2) record and keep, or cause to be
kept, all votes and the minutes of all proceedings in a book to be kept for
that purpose at the principal office of the Corporation, or at such other
place as the Board of Directors may from time to time determine, specifying
therein (i) the time and place of holding, (ii) whether regular or special,
and if special, how authorized, (iii) the notice thereof given, (iv) the
names of those present at directors' meetings, (v) the number of shares
present or represented at shareholders' meetings, and (vi) the proceedings
thereof; and (3) perform like duties for the Executive and other standing
committees, when required. In addition, he shall keep or cause to be kept,
at the principal office of the Corporation in the State of Nevada, those
documents required to be kept thereat by Section 5.2 of the By-Laws and
Section 78.105 of the Nevada Revised Statutes.
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3.9.2. The Secretary shall give, or cause to be given, notice of
meetings of the shareholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or the Chief Executive Officer, under whose supervision he shall
be. He shall keep in safe custody the seal of the Corporation, and, when
authorized by the Board, affix the same to any instrument requiring it, and
when so affixed, it shall be attested by his signature or by the signature of
the Treasurer or an Assistant Secretary. The Secretary is hereby authorized
to issue certificates, to which the corporate seal may be affixed, attesting
to the incumbency of officers of this Corporation or to actions duly taken by
the Board of Directors or the shareholders.
3.9.3. The Assistant Secretaries, in the order of their
seniority, shall in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary, and shall perform such other
duties as the Chief Executive Officer or the Secretary shall prescribe.
SECTION 3.10 TREASURER AND ASSISTANT TREASURERS.
3.10.1. The Treasurer shall deposit all moneys and other
valuables in the name, and to the credit, of the Corporation, with such
depositories as may be ordered by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board of Directors,
shall render to the Chief Executive Officer and directors, whenever they
request it, an account of all his transactions as Treasurer, and of the
financial condition of the Corporation, and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors or
the By-Laws.
3.10.2. The Assistant Treasurers, in the order of their
seniority, shall in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer, and shall perform such other
duties as the Chief Executive Officer or the Treasurer shall prescribe.
SECTION 3.11 ADDITIONAL POWERS, SENIORITY AND SUBSTITUTION OF OFFICERS.
In addition to the foregoing powers and duties specifically prescribed
for the respective officers, the Board of Directors may from time to time by
resolution (i) impose or confer upon any of the officers such additional
duties and powers as the Board of Directors may see fit, (ii) determine the
order of seniority among the officers, and/or (iii) except as otherwise
provided above, provide that in the absence of any officer or officers, any
other officer or officers shall substitute for and assume the duties, powers
and authority of the absent officer or officers. Any such resolution may be
final, subject only to further action by the Board of Directors, or the
resolution may grant such discretion, as the Board of Directors deems
appropriate, to the Chairman, the Vice Chairman, the Chief Executive Officer,
the President (or in his absence the Senior Executive Vice President or the
Executive Vice President serving in his place) to impose or confer additional
duties and powers, to determine the order of seniority among officers, and/or
to provide for substitution of officers as above described.
SECTION 3.12 COMPENSATION.
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The officers of the Corporation shall receive such compensation as shall
be fixed from time to time by the Board of Directors. No officer shall be
prohibited from receiving such salary by reason of the fact that he is also a
director of the Corporation.
SECTION 3.13 TRANSACTION INVOLVING INTEREST OF OFFICER.
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
officers of the Corporation are in any way interested in, or connected with,
any other party to such contract or transaction, or are themselves parties to
such contract or transaction, provided that such transaction complies with
Section 78.140 of the Nevada Revised Statutes; and each and every person who
is or may become an officer of the Corporation is hereby relieved, to the
extent permitted by law, when acting in good faith, from any liability that
might otherwise exist from contracting with the Corporation for the benefit
of himself or any person in which he may be in any way interested or with
which he may be in any way connected.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 4.1 STANDING COMMITTEES.
The Board of Directors shall appoint an Executive Committee, an Audit
Committee and a Compensation and Stock Option Committee, consisting of such
number of its members as it may designate, consistent with the Articles of
Incorporation, the By-Laws and the laws of the State of Nevada.
4.1.1. The Executive Committee shall have and may exercise, when
the Board is not in session, all of the powers of the Board of Directors in
the management of the business and affairs of the Corporation, but the
Executive Committee shall not have the power to fill vacancies on the Board,
or to change the membership of or to fill vacancies in the Executive
Committee or any other Committee of the Board, or to adopt, amend or repeal
the By-Laws, or to declare dividends.
4.1.2. The Audit Committee shall select and engage on behalf of
the Corporation, subject to the consent of the shareholders, and fix the
compensation of, a firm of certified public accountants whose duty it shall
be to audit the books and accounts of the Corporation and its subsidiaries
for the fiscal year in which they are appointed, and who shall report to such
Committee. The Audit Committee shall confer with the auditors and shall
determine, and from time to time shall report to the Board of Directors upon,
the scope of the auditing of the books and accounts of the Corporation and
its subsidiaries. The Audit Committee shall also be responsible for
determining that the business practices and conduct of employees and other
representatives of the Corporation and its subsidiaries comply with the
policies and
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procedures of the Corporation. None of the members of the Audit Committee
shall be officers or employees of the Corporation.
4.1.3. The Compensation and Stock Option Committee shall
establish a general compensation policy for the Corporation and shall have
responsibility for the approval of increases in directors' fees and in
salaries paid to officers and senior employees earning in excess of an annual
salary to be determined by the Committee. The Compensation and Stock Option
Committee shall have all of the powers of administration under all of the
Corporation's employee benefit plans, including any stock option plans,
long-term incentive plans, bonus plans, retirement plans, stock purchase
plans and medical, dental and insurance plans. In connection therewith, the
Compensation and Stock Option Committee shall determine, subject to the
provisions of the Corporation's plans, the directors, officers and employees
of the Corporation eligible to participate in any of the plans, the extent of
such participation and the terms and conditions under which benefits may be
vested, received or exercised. None of the members of the Compensation and
Stock Option Committee shall be officers or employees of the Corporation.
SECTION 4.2 OTHER COMMITTEES.
Subject to the limitations of the Articles of Incorporation, the By-Laws
and the laws of the State of Nevada as to action to be authorized or approved
by the shareholders, or duties not delegable by the Board of Directors, any
or all of the corporate powers may be exercised by or under authority of, and
the business and affairs of this Corporation may be controlled by, such other
committee or committees as may be appointed by the Board of Directors. The
powers to be exercised by any such committee shall be designated by the Board
of Directors.
SECTION 4.3 PROCEDURES.
Subject to the limitations of the Articles of Incorporation, the By-Laws
and the laws of the State of Nevada regarding the conduct of business by the
Board of Directors and its appointed committees, any committee created under
this Article may use any procedures for conducting its business and
exercising its powers, including but not limited to actions by the unanimous
written consent of its members in the manner set forth in Section 2.15. A
majority (but not less than two members) shall constitute a quorum. Notices
of meetings may be in any reasonable manner and may be waived as for meetings
of directors.
ARTICLE V
CORPORATE RECORDS AND REPORTS - INSPECTION
SECTION 5.1 RECORDS.
The Corporation shall maintain adequate and correct accounts, books and
records of its business and properties. All of such books, records and
accounts shall be kept at its principal place of business in the State of
California, as fixed by the Board of Directors from time to time.
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SECTION 5.2 ARTICLES, BY-LAWS AND STOCK LEDGER.
The Corporation shall maintain and keep the following documents at its
principal place of business in the State of Nevada: (i) a certified copy of
the Articles of Incorporation and all amendments thereto; (ii) a certified
copy of the By-Laws and all amendments thereto; and (iii) a statement setting
forth the following: "The Secretary of the Corporation, whose address is
2700 Colorado Avenue, Santa Monica California 90404, is the custodian of the
duplicate stock ledger of the Corporation."
SECTION 5.3 INSPECTION.
Any person who has been a shareholder of record for at least six months
immediately preceding his demand, or any person holding, or thereunto
authorized in writing by the holders of, at least five percent of all of the
Corporation's outstanding shares, upon at least five days' written demand, or
any judgment creditor without prior demand, shall have the right to inspect
in person or by agent or attorney, during usual business hours, the duplicate
stock ledger of the Corporation and to make extracts therefrom; provided,
however, that such inspection may be denied to any shareholder or other
person upon his refusal to furnish to the Corporation an affidavit that such
inspection is not desired for a purpose which is in the interest of a
business or object other than the business of the Corporation and that he has
not at any time sold or offered for sale any list of shareholders of any
corporation or aided or abetted any person in procuring any such record of
shareholders for any such purpose.
SECTION 5.4 CHECKS, DRAFTS, ETC.
All checks, drafts, or other orders for payment of money, notes, or
other evidences of indebtedness, issued in the name of, or payable to, the
Corporation, shall be signed or endorsed by such person or persons, and in
such manner as shall be determined from time to time by resolution of the
Board of Directors.
ARTICLE VI
OTHER AUTHORIZATIONS
SECTION 6.1 EXECUTION OF CONTRACTS.
The Board of Directors, except as the By-Laws otherwise provide, may
authorize any officer or officers or agent or agents to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation. Such authority may be general, or confined to specific
instances. Unless so authorized by the Board of Directors, no officer, agent
or employee shall have any power or authority, except in the ordinary course
of business, to bind the Corporation by any contract or engagement or to
pledge its credit, or to render it liable for any purpose or in any amount.
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SECTION 6.2 REPRESENTATION OF OTHER CORPORATIONS.
All shares of any other corporation, standing in the name of the
Corporation, shall be voted, represented, and all rights incidental thereto
exercised as directed by written consent or resolution of the Board of
Directors expressly referring thereto. In general, such rights shall be
delegated by the Board of Directors under express instructions from time to
time as to each exercise thereof to the Chief Executive Officer, the
President, any Senior Executive Vice President, any Executive Vice
President, any Senior Vice President, any Vice President, the Treasurer or
the Secretary of this Corporation, or any other person expressly appointed by
the Board of Directors. Such authority may be exercised by the designated
officers in person, or by any other person authorized so to do by proxy, or
power of attorney, duly executed by such officers.
SECTION 6.3 DIVIDENDS.
The Board of Directors may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and on
the terms and conditions provided by the laws of the State of Nevada, and the
Articles of Incorporation, subject to any contractual restrictions to which
the Corporation is then subject.
ARTICLE VII
CERTIFICATES FOR AND TRANSFER OF SHARES
SECTION 7.1 CERTIFICATES FOR SHARES.
7.1.1. Certificates for shares shall be of such form and device
as the Board of Directors may designate and shall be numbered and registered
as they are issued. Each shall state the name of the record holder of the
shares represented thereby; its number and date of issuance; the number of
shares for which it is issued; the par value; a statement of the rights,
privileges, preferences and restrictions, if any; a statement as to rights of
redemption or conversion, if any; and a statement of liens or restrictions
upon transfer or voting, if any, or, alternatively, a statement that
certificates specifying such matters may be obtained from the Secretary of
the Corporation.
7.1.2. Every certificate for shares must be signed by the Chief
Executive Officer or the President and the Secretary or an Assistant
Secretary, or must be authenticated by facsimiles of the signatures of the
Chief Executive Officer or the President and the Secretary or an Assistant
Secretary. Before it becomes effective, every certificate for shares
authenticated by a facsimile or a signature must be countersigned by a
transfer agent or transfer clerk, and must be registered by an incorporated
bank or trust company, either domestic or foreign, as registrar of transfers.
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7.1.3. Even though an officer who signed, or whose facsimile
signature has been written, printed, or stamped on a certificate for shares
ceases, by death, resignation, or otherwise, to be an officer of the
Corporation before the certificate is delivered by the Corporation, the
certificate shall be as valid as though signed by a duly elected, qualified
and authorized officer, if it is countersigned by the signature or facsimile
signature of a transfer clerk or transfer agent and registered by an
incorporated bank or trust company, as registrar of transfers.
7.1.4. Even though a person whose facsimile signature as, or on
behalf of, the transfer agent or transfer clerk has been written, printed or
stamped on a certificate for shares ceases, by death, resignation, or
otherwise, to be a person authorized to so sign such certificate before the
certificate is delivered by the Corporation, the certificate shall be deemed
countersigned by the facsimile signature of a transfer agent or transfer
clerk for purposes of meeting the requirements of this section.
SECTION 7.2 TRANSFER ON THE BOOKS.
Upon surrender to the Secretary or transfer agent of the Corporation of
a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 7.3 LOST OR DESTROYED CERTIFICATES.
The Board of Directors may direct, or may authorize the Secretary to
direct, a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost or destroyed, upon the making of an affidavit of that fact by
the person claiming the certificate for shares so lost or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors or Secretary may, in its or his discretion, and as a condition
precedent to the issuance thereof, require the owner of such lost or
destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or give the
Corporation a bond in such sum as it may direct as indemnity against any
claim that may be made against the Corporation with respect to the
certificate alleged to have been lost or destroyed.
SECTION 7.4 TRANSFER AGENTS AND REGISTRARS.
The Board of Directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, who may be the same person, and
may be the Secretary of the Corporation, or an incorporated bank or trust
company, either domestic or foreign, who shall be appointed at such times and
places as the requirements of the Corporation may necessitate and the Board
of Directors may designate.
SECTION 7.5 FIXING RECORD DATE FOR DIVIDENDS, ETC.
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The Board of Directors may fix a time, not exceeding 50 days preceding
the date fixed for the payment of any dividend or distribution, or for the
allotment of rights, or when any change or conversion or exchange of shares
shall go into effect, as a record date for the determination of the
shareholders entitled to receive any such dividend or distribution, or any
such allotment of rights, or to exercise the rights in respect to any such
change, conversion, or exchange of shares, and, in such case, only
shareholders of record on the date so fixed shall be entitled to receive such
dividend, distribution, or allotment of rights, or to exercise such rights,
as the case may be, notwithstanding any transfer of any shares on the books
of the Corporation after any record date fixed as aforesaid.
SECTION 7.6 RECORD OWNERSHIP.
The Corporation shall be entitled to recognize the exclusive right of a
person registered as such on the books of the Corporation as the owner of
shares of the Corporation's stock to receive dividends, and to vote as such
owner, and shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not the
Corporation shall have express or other notice thereof, except as otherwise
provided by law.
ARTICLE VIII
AMENDMENTS TO BY-LAWS
SECTION 8.1 BY SHAREHOLDERS.
New or restated by-laws may be adopted, or these By-Laws may be repealed
or amended, at the annual shareholders' meeting or at any other meeting of
the shareholders called for that purpose, by a vote of shareholders entitled
to exercise a majority of the voting power of the Corporation.
SECTION 8.2 BY DIRECTORS.
Subject to the right of the shareholders to adopt, amend, or repeal
by-laws, as provided in Section 8.1, the Board of Directors may adopt, amend,
or repeal any of these By-Laws by the affirmative vote of two-thirds of the
directors of each Class except as otherwise provided in Section 2.4. This
power may not be delegated to any committee appointed in accordance with
these By-Laws.
SECTION 8.3 RECORD OF AMENDMENTS.
Whenever an amendment or a new By-Law is adopted, it shall be copied in
the book of minutes with the original By-Laws, in the appropriate place. If
any By-Law is repealed, the fact of repeal, with the date of the meeting at
which the repeal was enacted, or written assent was filed, shall be stated in
said book.
ARTICLE IX
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 9.1 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN
THOSE BY OR IN THE RIGHT OF THE CORPORATION.
Subject to Section 9.3 of this Article IX, each person who was or is a
party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding") (other than an action by or in the right of the
Corporation), by reason of the fact that he, or a person of whom he is the
legal representative, is or was a director or officer of the Corporation or
is or was serving at the request of the Corporation as a director, officer,
employee, fiduciary or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged
action or inaction in an official capacity or in any other capacity while
serving as a director, officer, employee, fiduciary or agent shall be
indemnified and held harmless by the Corporation to the fullest extent
permitted by the laws of Nevada, as the same exist or may hereafter be
amended, against all costs, charges, expenses, liabilities and losses
(including attorneys' fees, judgments, fines, employee benefit plan exercise
taxes or penalties and amounts paid or to be paid in settlement) reasonably
incurred or suffered by such person in connection with such proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
SECTION 9.2 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE
RIGHT OF THE CORPORATION.
Subject to Section 9.3 of this Article IX, the Corporation shall
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he, or a person of whom he is the legal representative, is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee, fiduciary or agent of
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is alleged action or inaction in an official
capacity or in any other capacity while serving as a director, officer,
employee, fiduciary or agent, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
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SECTION 9.3 AUTHORIZATION OF INDEMNIFICATION.
Any indemnification under this Article IX (unless ordered by a court or
advanced pursuant to Section 9.6 hereof) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section
9.1 or Section 9.2 of this Article IX, as the case may be. Such
determination shall be made (i) by the Board of Directors by a majority vote
of a quorum consisting of directors who were not parties to such action, suit
or proceeding, or (ii) if a majority vote of a quorum consisting of directors
who were not parties to the act, suit or proceeding so orders, by independent
legal counsel in a written opinion, or (iii) if such a quorum is not
obtainable, by independent legal counsel in a written opinion, or (iv) by the
shareholders. To the extent, however, that a director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding described above, or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith, without the necessity of authorization in the specific case.
SECTION 9.4 GOOD FAITH DEFINED.
For purposes of any determination under Section 9.3 of this Article IX,
a person shall be deemed to have acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, or, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe his conduct was unlawful, if his action is
based on the records or books of account of the Corporation or another
enterprise, or on information supplied to him by the officers of the
Corporation or another enterprise in the course of their duties, or on the
advice of legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the Corporation or another
enterprise by an independent certified public accountant or by an appraiser
or other expert selected with reasonable care by the Corporation or another
enterprise. The term "another enterprise" as used in this Section 9.4 shall
mean any other corporation or any partnership, joint venture, trust, employee
benefit plan or other enterprise of which such person is or was serving at
the request of the Corporation as a director, officer, employee or agent.
The provisions of this Section 9.4 shall not be deemed to be exclusive or to
limit in any way the circumstances in which a person may be deemed to have
met the applicable standard of conduct set forth in Sections 9.1 or 9.2 of
this Article IX, as the case may be.
SECTION 9.5 INDEMNIFICATION BY A COURT.
If a claim under Sections 9.1 or 9.2 is not paid in full by the
Corporation within thirty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense
of prosecuting such claim. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending
any proceeding in advance of its final
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disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has failed to meet a standard
of conduct which makes it permissible under Nevada law for the Corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
Corporation (including the Board, independent legal counsel, or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is permissible in the
circumstances because he has met such standard of conduct, nor an actual
determination by the Corporation (including the Board, independent legal
counsel, or its shareholders) that the claimant has not met such standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has failed to meet such standard of conduct.
SECTION 9.6 EXPENSES PAYABLE IN ADVANCE.
The right to indemnification conferred in this Article IX shall include
the right to be paid by the Corporation the expenses incurred in defending
any such proceeding in advance of its final disposition; provided, however,
that, if the Nevada General Corporation Law required, the payment of such
expenses incurred by a director or officer in his capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation,
service to any employee benefit plan) in advance of the final disposition of
a proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director of officer, to repay all
amounts so advanced if it shall ultimately be determined that such director
or officer is not entitled to be indemnified under this Section 9.6 or
otherwise.
SECTION 9.7 NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Article IX shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Articles of
Incorporation, By-Law, agreement, vote of shareholders or disinterested
directors or otherwise.
SECTION 9.8 INSURANCE.
The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee, fiduciary or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under Nevada law.
SECTION 9.9 CERTAIN DEFINITIONS.
For purposes of this Article IX, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers, so that
any person
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who is or was a director or officer of such constituent corporation, or is or
was a director or officer of such constituent corporation serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, shall stand in the same position under the
provisions of this Article IX with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if
its separate existence had continued. For purposes of this Article IX,
references to "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan; and references to "serving at the
request of the Corporation" shall include any service as a director, officer,
employee or agent of the Corporation which imposes duties on, or involves
services by, such director or officer with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good faith
and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed to
have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in this Article IX.
SECTION 9.10 SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
The indemnification and advancement of expenses provided by or granted
pursuant to, this Article IX shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director,
officer, employee, fiduciary or agent and shall inure to the benefit of his
heirs, executors and administrators.
SECTION 9.11 LIMITATION ON INDEMNIFICATION.
Notwithstanding anything contained in this Article IX to the contrary,
except as provided in Section 9.3, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part
thereof) initiated by such person only if such proceeding (or part thereof)
was authorized or consented to by the Board.
SECTION 9.12 INDEMNIFICATION OF EMPLOYEES AND AGENTS.
The Corporation may, by action of the Board, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
SECTION 9.13 INDEMNIFICATION OF WITNESSES.
To the extent that any director, officer, employee, fiduciary or agent
of the Corporation is by reason of such position, or a position with another
entity at the request of the Corporation, a witness in any action, suit or
proceeding, he shall be indemnified against all costs and expenses actually
and reasonably incurred by him or on his behalf in connection therewith.
SECTION 9.14 INDEMNIFICATION AGREEMENTS.
The Corporation may enter into agreements with any director, officer,
employee, fiduciary or agent of the Corporation providing for indemnification
to the full extent permitted by Nevada law.
<PAGE>
-23-
SECTION 9.15 DEFINITION OF BOARD.
For purposes of this Article IX, the term "Board" shall mean the Board
of Directors of the Corporation or, to the extent permitted by the laws of
Nevada, as the same exist or may hereafter be amended, its Executive
Committee. On vote of the Board, the Corporation may assent to the adoption
of this Article IX by any subsidiary, whether or not wholly owned.
SECTION 9.16 ACTIONS PRIOR TO ADOPTION OF ARTICLE IX.
The rights provided by this Article IX shall be available whether or not
the claim asserted against the director, officer, employee, fiduciary or
agent is based on matters which antedate the adoption of this Article IX.
SECTION 9.17 SEVERABILITY.
If any provision of this Article IX shall for any reason be determined
to be invalid, the remaining provisions hereof shall not be affected thereby
but shall remain in full force and effect.
SECTION 9.18 APPLICABILITY TO FEDERAL ELECTION CAMPAIGN ACT OF 1971, AS
AMENDED.
The rights provided by this Article IX shall be applicable to the
officers (including without limitation the Chairman, Vice Chairman, treasurer
and assistant treasurer) appointed from time to time by the Chief Executive
Officer of the Corporation or his designee to serve in the administration and
management of any separate, segregated fund established for purposes of
collecting and distributing voluntary employee political contributions to
federal election campaigns pursuant to the Federal Election Campaign Act of
1971, as amended.
ARTICLE X
CORPORATE SEAL
The corporate seal shall be circular in form and shall have inscribed
thereon the name of the Corporation, and the date of its incorporation, and
the word "Nevada".
ARTICLE XI
INTERPRETATION
<PAGE>
-24-
Reference in these By-Laws to any provision of the Nevada Revised
Statutes shall be deemed to include all amendments thereto and the effect of
the construction and determination of validity thereof by the Nevada Supreme
Court.
ARTICLE XII
APPLICABILITY OF CONTROL SHARE ACT
The provisions of Nevada Revised Statutes Sections 78.378 to 78.3792,
inclusive, shall not apply to any acquisition of a controlling interest by
OrNda HealthCorp in the Corporation pursuant to the terms of that certain
Stock Option Agreement between the Corporation and OrNda HealthCorp, as the
same may be amended, modified, supplemented or otherwise changed.
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC.
2700 COLORADO AVENUE
SANTA MONICA, CALIFORNIA 90404
May 26, 1993
Mr. Jeffrey C. Barbakow
559 C San Ysidro Road
Santa Barbara, California 93108
Dear Jeff:
The purpose of this letter is to set forth the terms of your compensation
as President and Chief Executive Officer of National Medical Enterprises
("NME") which have been approved by the Compensation and Stock Option
Committee (the "Committee").
1. Your employment as President and Chief Executive Officer of NME will
commence on June 1, 1993.
2. Your initial annual base salary will be $850,000. Your base salary
will be reviewed by the Committee on an annual basis when the base
salaries for other senior executive officers are reviewed.
3. You will be eligible to participate in the annual and long-term cash
incentive plans which are in effect from time to time for the other
senior executive officers of NME. The plans which are currently in
effect are the Annual Incentive Plan ("AIP") and the Long-Term
Incentive Plan ("LTIP").
4. You will be eligible to participate in pension and welfare plans and
to receive other fringe benefits and perquisites on the same terms as
other senior executive officers of NME.
5. You will receive a grant of a non-qualified stock option for
2,000,000 shares of NME common stock on June 1, 1993. The grant will
be made under NME's 1991 Stock Incentive Plan and will be in the form
attached hereto as Exhibit "A." The stock option will have the
following principal terms:
(i) The stock option will be granted when you become an
employee of NME on June 1, 1993.
(ii) The exercise price will be the closing NME market price on
the New York Stock Exchange on June 1, 1993.
(iii) The stock option will have a term of ten years.
<PAGE>
Mr. Jeffrey C. Barbakow
May 26, 1993
Page 2
(iv) The stock option will vest at the rate of one-third (1/3) per
year on June 1, 1994, 1995 and 1996, subject to acceleration as
provided in Exhibit "A."
The Committee does not presently anticipate that it will make any
other stock option grants to you before June 1, 1996.
6. You will devote your full time and attention to the performance of
your duties as President and Chief Executive Officer of NME during
normal working hours.
7. You have not requested and will not have a formal employment
agreement. You will serve at the will of the Board of Directors of
NME. In the event of termination of your employment, the only
severance benefits which you will be entitled to receive are
(i) any additional vesting of your stock option pursuant to the terms
set forth in Exhibit "A," (ii) any other severance benefits which may
be approved by the Committee or Board of Directors of NME in its
discretion, and (iii) any benefits to which you may be entitled under
the terms of NME pension and welfare plans (other than severance plans)
in which you are then participating.
On behalf of the Committee, I want to express our appreciation for the
manner in which you have negotiated the terms of your employment. We are
delighted that you have agreed to serve as President and Chief Executive
Officer of NME.
Sincerely,
PETER DE WETTER
Peter de Wetter
Chairman of Compensation and
Stock Option Committee
rgt
c: Alan R. Ewalt
<PAGE>
EXHIBIT "A"
NATIONAL MEDICAL ENTERPRISES, INC.
1991 STOCK INCENTIVE PLAN
NON-STATUTORY STOCK OPTION CERTIFICATE NO. 1 ___
On June 1, 1993, National Medical Enterprises, Inc. in consideration of
services to be performed for the company or subsidiary thereof, hereby grants
to Jeffrey C. Barbakow, a Non-Statutory Stock Option, to purchase 2,000,000
shares of the $.075 per value Common Stock of the Company at a price equal to
100% of the fair market value of a share of Common Stock on the Date of
Grant, of $_______ per Share.
This Option shall not be exercisable until one year after the Date of
Grant, at which time it shall become exercisable as to one-third of the
Option Shares. On each succeeding anniversary of the Date of Grant, this
Option shall become exercisable as to an additional one-third of the Option
Shares, so that on the third anniversary of the Date of Grant, it shall be
exercisable in full. This Option shall expire on June 1, 2003.
These options are granted under and governed by the terms and conditions
of the National Medical Enterprises, Inc. 1991 Stock Incentive Plan and by
the additional special terms and conditions set forth in Addendum I hereto.
Please refer to the enclosed National Medical Enterprises, Inc. 1991
Stock Incentive Plan and Key Features of the Non-Statutory Stock Options
summary for details of the Plan, both of which are attached and made part of
this document.
National Medical Enterprises, Inc.
By
-------------------------------------------
Alan R. Ewalt
Assistant Secretary
Compensation and Stock Option Committee
<PAGE>
ADDENDUM I TO
NATIONAL MEDICAL ENTERPRISES, INC.
1991 STOCK INCENTIVE PLAN
NON-STATUTORY STOCK OPTION CERTIFICATE NO. 1
--------------------------------------------
1. In the event of involuntary termination of employment without cause or
constructive termination of employment of Jeffrey C. Barbakow ("Employee")
at any time after a Change in Control, the Option will become fully
exercisable for the 2,000,000 shares covered by the Option as of the date
of such termination of employment.
2. In the event of involuntary termination of employment without cause or
constructive termination of employment of Employee without a Change in
Control, the Option shall be exercisable for a pro-rata portion of the
2,000,000 shares covered by the Option based on (i) the number of full
months which have elapsed from June 1, 1993 to the date of termination of
employment divided by (ii) 36 months, but in no event for less than
500,000 shares. The shares which shall be exercisable under this paragraph
shall include any shares which have previously vested pursuant to the
general terms of the Option.
Examples:
---------
A. Termination between 0 and 9 months
----------------------------------
500,000 shares (the minimum) will be vested.
B. Termination after 10 months
---------------------------
555,556 shares will be vested (10/36 x 2,000,000 shares).
C. Termination after 12 months
---------------------------
666,667 shares will be vested (12/36 x 2,000,000 shares).
D. Termination after 18 months
---------------------------
1,000,000 shares will be vested (18/36 x 2,000,000 shares).
E. Termination after 24 months
---------------------------
1,333,333 shares will be vested (24/36 x 2,000,000 shares).
F. Termination after 30 months
---------------------------
1,666,667 shares will be vested (30/36 x 2,000,000 shares).
G. Termination after 36 months
---------------------------
2,000,000 shares will be vested (36/36 x 2,000,000 shares).
3. For purposes of this Addendum, the term "Change in Control" shall have
the meaning ascribed to that term in Section 11(d)(A) of the Plan, except
that the definition of "Person" in Section 11(d)(D) shall include (rather
than exclude) any Person who acquires 20% or more of the general voting
power of NME in a transaction or series of transactions approved prior to
such transaction or series of transactions by NME's Board of Directors.
The term "constructive termination" shall mean voluntary termination of
<PAGE>
employment by Employee following (i) removal of Employee as President or
Chief Executive Officer of NME, (ii) a reduction in the annual base
salary then paid to Employee, or (iii) transfer of Employee's principal
office to a location outside of Los Angeles, Ventura or Santa Barbara
County. The term "Cause" shall mean (i) any conduct on the part of
Employee which constitutes a material breach of any statutory or common
law duty of loyalty to NME which continues for thirty days after written
notice from NME's Board of Directors, provided that notice will not be
required for any deliberate conduct on the part of Employee which
Employee knows constitutes a breach of his duty of loyalty to NME, (ii)
any illegal or publicly immoral act by Employee which materially and
adversely affects the business of NME, or (iii) any willful and continued
failure of Employee, after written notice from NME's Board of Directors,
to devote substantially full time and attention to the performance of his
duties as President and Chief Executive Officer of NME during normal
working hours.
4. In no event may any shares acquired pursuant to exercise, in whole or
in part, of the Option be sold or otherwise disposed of by Employee prior
to December 1, 1993.
5. In the situations described in Section 11(a) and 11(b) of the Plan or
in the event of payment of a special, large and non-recurring dividend,
whether in cash, securities or other property (exceeding fifteen percent
(15%) of the closing market price of NME common stock on the day before
the dividend is declared), an appropriate and proportionate adjustment
will be made by the Compensation and Stock Option Committee in the terms
of the Option (including the number of shares covered by the Option
and/or the exercise price under the Option) in a manner which is
equitable to Employee and is permitted for accounting purposes without
resulting in a new measurement date and a charge to NME's earnings under
Emerging Issues Task Force ("EITF") Issue No. 90-9.
6. Employee shall be entitled to exercise the Option to the same extent and
for the same period in the event of involuntary termination of employment
without cause or constructive termination of employment of Employee (as
those terms are defined in Paragraph 3 herein) as is provided under
Section 13(d)(i) of the Plan upon involuntary termination of employment
other than for cause.
<PAGE>
(LOGO OF NATIONAL MEDICAL ENTERPRISES INCORPORATED APPEARS HERE)
(LETTERHEAD OF NATIONAL MEDICAL ENTERPRISES, INCORPORATED APPEARS HERE)
June 1, 1993
Mr. Jeffrey C. Barbakow
559 C San Ysidro Road
Santa Barbara, California 93108
Dear Jeff:
The purpose of this letter is to set forth additional terms of your
compensation as President and Chief Executive Officer of National Medical
Enterprises ("NME") which have been approved by the Compensation and
Stock Option Committee (the "Committee").
1. NME will pay you a minimum guaranteed annual bonus under the NME
Annual Incentive Plan (or any successor annual bonus plan) ("AIP") of
$500,000 for the fiscal year ending in 1994, if the average closing price
of NME common stock on the New York Stock Exchange during the months of
April and May in 1994 exceeds $12.00 per share.
2. NME will pay you a minimum guaranteed annual bonus under the AIP of
$500,000 for the fiscal year ending in 1995, if the average closing price
of NME common stock on the New York Stock Exchange during the months of
April and May in 1995 exceeds $13.25 per share.
3. NME will pay you a minimum guaranteed annual bonus under the AIP of
$500,000 for the fiscal year ending in 1996, if the average closing price
of NME common stock on the New York Stock Exchange during the months of
April and May in 1996 exceeds $14.50 per share.
4. The average closing prices of NME common stock set forth in
Paragraphs 1, 2 and 3 above will be subject to appropriate adjustment by
the Committee upon any event which results in an adjustment of the terms
of the Non-Qualified Stock Option granted to you on June 1, 1993.
5. Any guaranteed annual bonuses which you are entitled to received
under Paragraphs 1, 2 and 3 above will be paid to you at the same time
when annual bonuses are or would be paid to senior executive officers
under the AIP (or any successor annual bonus plan) and will be offset
against (and will not be in addition to) any annual bonus which you are
entitled to receive under the AIP and any other annual bonus plan of NME
for NME's fiscal years ending in 1994, 1995 and 1996, respectively.
6. If the average closing market price of NME common stock on the New
York Stock Exchange during the months of April and May in 1996 exceeds
$14.50 per share, NME will pay you the difference between $1,500,000 and
the cumulative annual bonuses paid
<PAGE>
Mr. Jeffrey C. Barbakow
June 2, 1993
Page 2
to you for NME's fiscal years ending in 1994, 1995 and 1996 under the
AIP and any other bonus plan of NME. This payment will be made after
annual bonuses are or would be paid to senior executive officers of NME
for the fiscal year ending in 1996.
7. In the event of involuntary termination without cause or constructive
termination of your employment with NME (as these terms are defined in
the non-qualified stock option for 2,000,000 shares granted to you on
June 1, 1993 ("Option")), payment of the foregoing aggregate guaranteed
bonus amounts will be accelerated to the extent of the lessor of (i) the
product of $1,500,000 multiplied by the fraction of which the numerator
is (A) the cumulative number of shares which are vested pursuant to the
terms of the Option, and the denominator is (B) 2,000,000 shares, or (ii)
$500,000, $1,000,000, $1,500,000 if the average closing price of NME
common stock on the New York Stock Exchange during the sixty days
preceding your termination of employment exceeds $12.00, $13.25 or $14.50
per share, respectively. Payment of any guaranteed bonus amounts under
this Paragraph 7 will be reduced by the cumulative bonuses previously
paid to you.
Sincerely,
PETER DE WETTER
Chairman of Compensation and
Stock Option Committee
c: Alan Ewalt
<PAGE>
NME
National Medical Enterprises
Memorandum
DATE: June 14, 1993
TO: Jeff Barbakow
FROM: Alan R. Ewalt
SUBJECT: Perquisites & Benefits
In addition to benefits available to you through the flexible benefit
program (TGIF), the following is a listing of perquisites and other
benefits for which you are eligible.
1. AUTOMOBILE ALLOWANCE - An allowance of $20,100 per year will be paid
--------------------
to you through the regular semi-monthly payroll. The tax
department has advised that if the limo is provided in lieu of a car
allowance on a temporary basis and consistent with the company's
requirement to provide security to our CEO, it will not be treated as a
taxable benefit. Therefore, I would propose your auto allowance to begin
after the limo is released. Please let me know if you would like it
handled differently.
2. EXECUTIVE MEDICAL PLAN - The benefit provides you and your family
----------------------
reimbursement for healthcare expenses not covered under the basic
medical, dental, and vision plans up to a maximum of $10,000 per year.
Since it is an insured plan, you will not have a tax liability.
The plan encourages executive health and wellness by requiring
regular physical exams as a condition for continued participation.
3. NME CREDIT CARDS - You will receive an American Express and
----------------
MasterCard credit card for paying business and travel expenses. The
billings will come to NME. You should clear the billings by submitting
receipts for expenses on an expense report.
4. ANNUAL INCENTIVE PLAN (AIP) - You will be named to be a participant
---------------------------
in the Annual Incentive Plan with a target award of 70% of your base
salary for attainment of 100% of stated goals for the year. (Goals are
for EPS, quality, and personal performance).
5. LONG-TERM INCENTIVE PLAN (LTIP) - You will be named to participate
-------------------------------
in the LTIP with a target award equal to 37.5% of your total targeted
cash compensation (TCC). TCC is your base salary plus target AIP amount
determined as of the entry date in the cycle. Awards are payable at the
end of the three year cycle for attainment of stated business goals.
6. CLUB MEMBERSHIP - The company will pay for membership in a business
---------------
lunch club such as the Regency Club. This membership will not be
considered taxable. You are eligible for reimbursement for membership in
a country club if you wish - such costs are considered taxable income and
would be imputed to you at year-end.
<PAGE>
Jeff Barbakow
Page 2
June 14, 1993
7. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP) - You will be named to
---------------------------------------------
participate in the SERP which supplements the basic NME 401-k
Retirement Savings Plan. Eligibility for enrollment in the 401-k is after
twelve months of employment. Details of the SERP will be provided under
separate cover. There is no current tax consequence of participation in
the SERP.
8. SERP LIFE INSURANCE - As a participant in the SERP plan, you will be
-------------------
eligible for a life insurance benefit of two times your annual
salary. The benefit is provided through split-dollar insurance and you
will have taxable income based on the economic value of the benefit. I
will provide you an estimate for your tax planning purposes. Although
there is no requirement to do so, the company will pay you a bonus each
year approximately equal to the amount of the imputed income.
9. SERP LIFE ACCIDENTAL DEATH & DISMEMBERMENT (AD&D) - You are covered
-------------------------------------------------
for AD&D in an amount equal to the SERP Life Insurance of two times
annual salary.
10. SERP LONG-TERM DISABILITY (LTD) - As a SERP participant, you will be
-------------------------------
eligible for an executive LTD benefit equal to 60% of your base pay to
maximum of $25,000 per month. The cost of this plan will be imputed to
you at year-end. The amount of the premium is $1,330 for the seven months
of 1993 which at a 38% marginal tax rate, has an after tax cost to you of
$505.40. Because you are paying the premium, the benefit will be
delivered tax free.
11. BUSINESS TRAVEL ACCIDENT - NME Owned Aircraft - Coverage is provided
------------------------
in the amount of $400,000 per person to an aggregate of $7,200,000
insured by The Hartford.
12. DIRECTORS LIFE INSURANCE PLAN - You are eligible, as a board member,
-----------------------------
for the $1,000,000 second-to-die life insurance policy. On November
18, 1991, you indicated you did not wish to participate however, that
program is still available to you.
<PAGE>
EXHIBIT 10(n)
CONSULTING AND NON-COMPETE AGREEMENT
This Consulting and Non-Compete Agreement ("Agreement") is made and
entered into by and between Michael H. Focht, Sr. (hereinafter referred to
as "Mr. Focht") and Tenet Healthcare Corporation (hereinafter referred to
as "Tenet").
WHEREAS, Mr. Focht has served as the President and Chief Operating
Officer of Tenet Healthcare Corporation; and
WHEREAS, Mr. Focht has indicated his plans to resign from employment with
Tenet and retire on or about December 31, 1999; and
WHEREAS, Tenet desires to retain Mr. Focht as a consultant for a period
of time to perform certain consulting services for Tenet in conjunction with
matters with which he has had previous experience with Tenet or which are
within his area of expertise or experience, and Mr. Focht desires to provide
such consulting services to Tenet;
NOW, THEREFORE, the parties hereto agree as follows:
1. This Agreement shall become effective on January 1, 2000 following
Mr. Focht's retirement and resignation from employment with Tenet ("the
Effective Date") and shall continue for the next thirty-six months ("the
Consulting Period"). Notwithstanding any other provision of this Agreement,
Tenet shall have no obligation to renew or continue this Agreement beyond the
Consulting Period and shall have no further obligation to Mr. Focht if this
Agreement or Mr. Focht's services hereunder are terminated by Tenet for cause
as defined below or this Agreement expires by its terms.
2. Mr. Focht agrees that during the Consulting Period, he will provide
consulting services and hold himself available to provide such services to
Tenet and/or its representatives in connection with any matter with which he
previously has had experience at Tenet or which is otherwise within his area
of expertise or experience. Mr. Focht acknowledges and agrees that he shall
make himself available at reasonable time(s) and place(s) for such consulting
services upon reasonable notice from Tenet's Chairman and Chief Executive
Officer or his/her authorized designee.
3. Mr. Focht acknowledges and agrees that he shall not be an employee of
Tenet during the Consulting Period, and that he shall perform all consulting
services under this Agreement as an independent contractor. Mr. Focht shall
have no authority to bind Tenet to any obligation except with prior written
authorization from Tenet's Chairman and Chief Executive Officer or his/her
authorized designee.
4. As compensation for Mr. Focht's holding himself available to provide
consulting services and for providing such services under this Agreement,
Tenet agrees to pay Mr. Focht a monthly gross fee of Forty Three Thousand Six
Hundred Sixty Six Dollars ($43,666). Mr. Focht agrees that he is responsible
to report his own taxes; however, Tenet will, as an accommodation to Mr.
Focht, withhold taxes from its payments to him. Mr. Focht further
acknowledges that Tenet makes no warranties as to any tax consequences of
such payments, and specifically agrees that the determination of any tax
liability or other consequences of the payments set forth above is
-1-
<PAGE>
Mr. Focht's sole and complete responsibility and that he will pay
all state, federal and/or local taxes, if any, assessed against him on such
payments.
5. Tenet further agrees to reimburse Mr. Focht for any and all
reasonable expenses incurred at Tenet's request and with Tenet's consent in
connection with his providing consulting services during the consulting
period, including, but not limited to, such expenses as (i) local automobile
mileage at the rate established by the United States Internal Revenue
Service; (ii) first class airline tickets purchased for domestic travel;
(iii) first class airline tickets purchased for international travel; and
(iv) all authorized reasonable hotel, meal, telephone, fax and other
out-of-pocket expenses incurred in connection with Mr. Focht's approved
travel and consulting services, so long as Mr. Focht provides to Tenet
acceptable documentation of or receipts for such expenses. Tenet further
agrees to provide secretarial support as required to support Mr. Focht's
consulting assignments and during the first twenty-four months of the
consulting period Tenet will provide a full-time executive assistant
acceptable to Mr. Focht to assist Mr. Focht in the transition from his office
as President and Chief Operating Officer. Tenet will pay for the necessary
and reasonable travel and lodging expenses of the executive assistant as
required to provide the support to Mr. Focht. Such travel and lodging shall
be limited to no more than one round trip from Dallas, Texas to Santa Ynez,
California every 45 days and two nights of lodging per trip.
6. Tenet acknowledges that Mr. Focht is retiring from the company with
its consent. Tenet further agrees that, as a retiree, Mr. Focht also may
exercise, for a period of three (3) years after the Effective Date, and in
accordance with the terms of the applicable Tenet benefit plan, any stock
options he may have been granted under the NME 1983 Stock Incentive Plan
prior to the Effective Date. Tenet further agrees that, as a retiree, Mr.
Focht also may exercise any stock options he may have been granted under the
NME 1991 Stock Option Plan, or the Tenet 1995 Stock Incentive Plan, in
accordance with the terms of the applicable Tenet stock option plan. Mr.
Focht acknowledges that the stock options granted June 24, 1998 will not be
permitted to vest and will not be exercisable since Mr. Focht will not be in
compliance with the terms of that grant.
7. Tenet further agrees that the Consulting Period shall be considered
for purposes of determining Mr. Focht's final SERP benefit under the Tenet
Supplemental Executive Retirement Plan and that Mr. Focht will be eligible to
receive the early retirement benefit from that plan as of the end of the
consulting period. The SERP benefit payable as of the end of the consulting
period will be approximately $546,430 per year with the final amount to be
determined when Mr. Focht's actual salary and bonus through December 31, 1999
are known. Tenet agrees to provide such payment if the plan does not.
8. Tenet agrees that during the Consulting Period, Tenet will continue
to provide health insurance benefits either by Tenet's paying the COBRA
premium for health coverage or such benefits to be provided under a
commercially available health insurance policy from a carrier which is
acceptable to Mr. Focht to be purchased by Tenet, unless such policy is
impracticable to obtain due to preexisting conditions (as defined by such
policy) or other limitations, in which event Tenet shall continue to provide
such health insurance benefits under Tenet's existing benefit plan(s). Tenet
further agrees that any health insurance coverage provided to Mr. Focht and
his spouse during the Consulting Period shall be the same as provided to
Tenet's then current President and Chief Operating Officer or substantially
equal to the health insurance coverage previously provided to Mr. Focht.
-2-
<PAGE>
9. Should Mr. Focht become disabled and otherwise be unable to perform
under this agreement, all consulting payments under the agreement shall cease
and the SERP benefits described in Paragraph 7 above shall become immediately
payable. If Mr. Focht dies during the term of this agreement, the consulting
payments under this agreement shall cease and the survivor benefits as
appropriate under the SERP shall begin to be paid at fifty percent (50%) of
the amount shown in Paragraph 7 above.
10. Mr. Focht agrees that either by mutual agreement with the Chairman
and Chief Executive Officer or by instruction from the Board of Directors of
Tenet, Mr. Focht will surrender his positions, titles and responsibilities as
President and Chief Operating Officer, or either of such positions, prior to
December 31, 1999. Following the date of any such surrender and until the
Effective Date, Mr. Focht shall continue to be an employee of Tenet and shall
continue to receive salary, benefits and Annual Incentive Plan awards as in
effect before such surrendering of title, position and responsibilities, and
shall provide such similar services and in a similar manner to Tenet as set
forth in Paragraph 2.
11. Mr. Focht agrees that should he continue to be a member of the Board
of Directors of Tenet during all or any portion of the Consulting Period, he
shall not receive any fees including the normal fees and retainer paid to
non-employee directors. Further, Mr. Focht shall not be entitled to receive
benefits under the Director's Retirement Plan or the 1994 Directors Stock
Option plan.
12. Mr. Focht acknowledges that he has held sensitive executive positions
with Tenet and its subsidiaries and that, by virtue of having held such
positions, he has had access to, and has received or developed confidential
information and trade secrets pertaining to Tenet's operations which are
proprietary to Tenet and which have not been disclosed to the public. Mr.
Focht agrees that he shall keep all such information confidential and that he
shall not disclose any such information to any other person, except as may be
required by law or with the consent of Tenet. Without limiting the
generality of the foregoing, Mr. Focht agrees that he will not respond to or
in any way participate in or contribute to any public discussion, notice or
other publicity concerning or in any way related to the confidential
information concerning Tenet, its operations, officers or directors which is
proprietary to Tenet and which has not been disclosed to the public, or any
other matters concerning his employment with Tenet. Mr. Focht further agrees
that he will not talk to or provide any documents to any non-governmental
third party concerning any allegation of unlawful or fraudulent activity or
conduct, except as may be required by law. Mr. Focht further agrees that he
promptly will notify Tenet's General Counsel, Scott M. Brown, or his
successor, in the event that any request is made of him by anyone for the
disclosure or release of any information or documents referred to herein.
Mr. Focht further agrees that any disclosure by him or any of Tenet's
confidential or proprietary information referred to herein in violation of
this agreement, which disclosure is materially adverse to Tenet, its
subsidiaries or related companies or entities, or its and/or their
operations, officers or directors, shall constitute a material breach of this
Agreement.
13. Mr. Focht agrees that during the Consulting Period he will cooperate
fully with Tenet, upon request, in relation to Tenet's defense, prosecution
or other involvement in any continuing or future claims, lawsuits, charges,
and internal or external investigations which arise out of events or business
matters which occurred during Executive's prior employment by Tenet. Such
continuing duty of cooperation shall include making himself available to
Tenet, upon reasonable notice, for depositions, interviews, and appearance as
a witness, and furnishing information to Tenet and its legal counsel upon
request. Tenet will reimburse Mr. Focht for any expenses, including legal
expenses, incurred by Mr. Focht in satisfying his obligation under this
Paragraph 13.
-3-
<PAGE>
14. Mr. Focht agrees not to accept any employment, provide any services
to any entity or person or engage in any enterprise during the Consulting
Period that would interfere or conflict with his ability to provide the
consulting services or other services required under this Agreement. Mr.
Focht agrees that during the Consulting Term, unless express prior written
permission is granted by Tenet, he shall not, directly or indirectly, for his
own benefit or as agent for another, carry on or participate in the
ownership, management or control of, or be employed by, or serve as a
director of, or consult for, or license or provide know how to, or otherwise
render services to, or allow his name or reputation to be used in or by, any
other present or future business enterprise that competes with Tenet or its
subsidiaries or affiliates in any of the lines of business in which Tenet or
such subsidiaries or affiliates are then engaged anywhere in the world;
PROVIDED that nothing contained herein shall limit the right of Mr. Focht, as
an investor, to hold and make investments in securities of any corporation or
other entity that competes in the lines of business in which Tenet, its
subsidiaries or its affiliates are engaged. Mr. Focht acknowledges that he
considers the restrictions set forth in this Paragraph 14 to be reasonable
and necessary both individually and in the aggregate for the proper
fulfillment of his consulting obligations hereunder. Mr. Focht further
acknowledges and agrees that if he engages in any activity proscribed by this
Paragraph 14, Tenet shall have no further obligation to make any payments to
Mr. Focht under this Agreement. If Tenet should cease to make payments under
this agreement then Mr. Focht would be free to compete.
15. Tenet agrees to indemnify, defend and hold harmless Mr. Focht to the
fullest extent permitted by Tenet's by-laws and articles of incorporation, in
connection with any action brought against Mr. Focht involving his proper
performance of the consulting services required of him under this Agreement.
16. The parties agree that no provision in this Agreement shall be
construed or interpreted in any way to limit, restrict or preclude either
party hereto from cooperating with any internal or external investigation or
of any governmental agency in the proper performance of its investigatory or
other lawful duties.
17. Tenet may terminate this agreement for cause. For purposes of this
Agreement, "cause" shall be defined to include, without limitation, Mr.
Focht's dishonesty, fraud, willful misconduct, willful breach of his duties,
self-dealing, failure or habitual neglect or refusal to perform his duties in
any material respect, violation of law in the performance of his consulting
duties (except traffic violations or similar minor infractions), continued
incapacity to perform his duties and any failure or refusal by Mr. Focht to
comply with any reasonable instructions from Tenet, including instructions to
surrender his position as further set forth in Paragraph 10.
18. The parties agree that any dispute, controversy or claim whatsoever
arising out of or relating to this Agreement or the termination thereof, or
otherwise between Tenet and Mr. Focht shall, in lieu of a jury or other civil
trial, be settled by final and binding arbitration in accordance with the
Employment Dispute Resolution Rules of the American Arbitration Association
before an arbitrator selected by mutual consent who is a member of the
National Academy of Arbitrators. This includes all claims whether arising in
tort or contract and whether arising under statute or common law. The
obligation to arbitrate such claims shall survive the termination of this
Agreement, and the arbitrator shall have jurisdiction to determine the
arbitrability of any claim. The arbitrator shall not have the right to add
to, subtract from or modify any of the terms of this Agreement. Judgment on
any award rendered by the arbitrator may be entered or enforced by any court
having jurisdiction thereof. The arbitrator's fees shall be borne equally by
the parties, and each party shall be
-4-
<PAGE>
responsible for paying its own costs for the arbitration, including without
limitation, attorneys' fees, witness fees, transcripts or other expenses.
However, the arbitrator may award attorneys' fees and costs to the prevailing
party where expressly authorized by statute.
19. This Agreement shall in all respects be interpreted, enforced and
governed under the laws of the State of California without regard to
conflicts of laws principles. The language of all parts of this Agreement
shall in all cases be construed as a whole, according to its fair meaning,
and not strictly for or against any of the parties.
20. Should any provision of this Agreement be declared and/or be
determined by any court to be illegal or invalid, the validity of the
remaining parts, terms or provisions shall not be affected thereby, and said
illegal or invalid part, term or provision shall be deemed not to be a part
of this Agreement. Notwithstanding the foregoing, Mr. Focht acknowledges and
agrees that if Paragraph 14 of this Agreement is found to be illegal, invalid
or in any way unenforceable or if Mr. Focht initiates any proceeding of any
nature or kind or seeks to challenge the validity or enforceability of
Paragraph 14, Tenet shall have no further obligation to make any payments to
Mr. Focht under this Agreement and Mr. Focht shall have no responsibility to
continue to provide services
21. The parties hereby agree that this Agreement contains the entire
agreement between the parties hereto regarding the subject matter hereof, and
fully supersedes any and all prior agreements or understandings between the
parties hereto pertaining to the subject matter hereof.
22. Tenet further agrees that all of its obligations under this Agreement
shall be binding and enforceable against any and all of its successor
companies and entities. Tenet hereby represents that it has the authority to
so bind such successor(s).
IN WITNESS WHEREOF, the parties hereto, having first read the same, have
executed this Consulting and Non-Compete Agreement on the dates hereinafter
set forth and hereby warrant and represent that they have the authority to
enter into this agreement.
DATED ___________________, 199_ __________________________________
Michael H. Focht, Sr.
DATED ___________________, 199_ TENET HEALTHCARE CORPORATION
By:_______________________________
Title:____________________________
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<PAGE>
EXHIBIT 10(o)
January 13, 1999
PERSONAL & CONFIDENTIAL
Trevor Fetter
Corporate Offices
Santa Barbara, California
Dear Trevor:
I am pleased to confirm the offer for you to become Chief Corporate
Officer and Chief Financial Officer for Tenet Healthcare Corporation in the
Office of the President in Santa Barbara. Your new responsibilities will
commence immediately.
1. COMPENSATION AND BENEFITS: You will be entitled to compensation and
benefits as follows:
a. BASE COMPENSATION: Your base salary will be increased to the rate of
$550,000 per year, payable bi-weekly effective January 15, 1999.
b. ANNUAL INCENTIVE PLAN: Your target award percentage in the Tenet
Annual Incentive Plan will be 60% with a maximum award of 90% of target and a
growth award level to be determined.
Jeff has committed a further elevation of your salary and AIP percentage in
late summer or early fall. Your pay would again be revisited at fiscal year
end (May 31, 2000).
c. CAR ALLOWANCE: You will receive a car allowance in the amount of
$20,000 per year paid bi-weekly.
d. BENEFITS: You will continue to be eligible for the employee benefits
for which you are currently eligible.
e. EXECUTIVE MEDICAL: You will participate in Tenet's ExecuPlan which
provides reimbursement for out of pocket health and dental expenses and
premiums at a $7,500 annual level.
f. STOCK OPTIONS: You will receive 260,000 non-qualified stock options
as granted on January 12, 1999, by the Compensation and Stock Option
Committee. This grant coupled with the grant of 140,000 options in December
1998 is to be viewed as a two-year grant so that you would normally not be
considered for further option grants prior to December 2000. The vesting of
the new options will be one-third each year over three years.
<PAGE>
Trevor Fetter
January 13, 1999
Page 2
g. SEVERANCE PROTECTION AGREEMENT: You will participate in the Tenet
Severance Protection Plan at the same level provided to our current Chairman
and President which provides severance equal to two times base salary plus
target bonus, benefits continuation and legal fees reimbursement for a
qualifying termination following a change of control of Tenet. No severance
is due in the event of a termination for "cause" described below or voluntary
termination except as provided under the Plan for "good reason".
Should your employment with Tenet be terminated by the company without
cause within three years from this date, you shall receive severance benefits
of two years' salary and benefits continuation (excluding AIP). If within
three years from this date Mr. Jeffrey Barbakow ceases to be Chairman and
Chief Executive Officer of Tenet ("the triggering event") then you may
voluntarily terminate your employment and receive the above severance
benefits so long as, within 120 days of such triggering event, you notify the
Chief Human Resources Officer of Tenet in writing that you intend to
voluntarily terminate under these provisions. You may not receive benefits
both under this severance arrangement and any other severance program, plan
or arrangement with Tenet. You will be paid under the plan, program or
arrangement for which you are eligible which provides the greatest benefit.
Finally, your employment with the company will be continue to be on an
at-will basis which means that either you or the company may terminate the
employment relationship with or without notice or with or without cause at
any time. The term "cause" as used above shall include, but not be limited
to, dishonesty, fraud, willful misconduct, self dealing or violation of the
company's Standards of Conduct, breach of fiduciary duty (whether or not
involving personal profit), failure, neglect or refusal to perform your
duties in any material respect, violation of law (except traffic violations
or similar minor infractions), violation of the company's Human Resources
Operations or other Policies, or any material breach of this agreement;
provided, however, that a failure to achieve or meet business objectives as
defined by the company shall not be considered "cause" so long as you have
devoted your best and good faith efforts and full attention to the
achievement of those business objectives.
This letter contains the entire agreement between you and Tenet regarding
the terms and conditions of your employment, and fully supersedes any and all
prior agreements that may have existed between you and Tenet regarding the
terms and conditions of your employment.
Trevor, assuming these terms are agreeable, please sign this letter
indicating your acceptance and return to me.
We are enthusiastic about you accepting this new assignment. Please call
me if you have any questions.
Sincerely, ACCEPTED AND AGREED TO:
___________________________________
Alan R. Ewalt Trevor Fetter Date
Senior Vice President Human Resources
c: Jeffrey Barbakow
<PAGE>
EXHIBIT 10(p)
January 13, 1999
PERSONAL & CONFIDENTIAL
(Revised January 13, 1999)
Thomas B. Mackey
Western Division
Carlsbad, California
Dear Tom:
I am pleased to confirm the offer for you to become the Chief Operating
Officer for Tenet Healthcare Corporation in the Office of President in Santa
Barbara. Your new responsibilities will commence immediately.
1. COMPENSATION AND BENEFITS: You will be entitled to compensation and
benefits as follows:
a. BASE COMPENSATION: Your base salary will be increased to the rate of
$550,000 per year, payable bi-weekly effective January 15, 1999.
b. ANNUAL INCENTIVE PLAN: Your target award percentage in the Tenet
Annual Incentive Plan will be 60% with a maximum award of 90% of target and a
growth award level to be determined.
Jeff has committed a further elevation of your salary and AIP percentage in
late summer or early fall. Your pay would again be revisited at fiscal year
end (May 31, 2000).
c. CAR ALLOWANCE: You will receive a car allowance in the amount of
$20,000 per year paid bi-weekly.
d. BENEFITS: You will continue to be eligible for the employee benefits
for which you are currently eligible.
e. EXECUTIVE MEDICAL: You will participate in Tenet's ExecuPlan which
provides reimbursement for out of pocket health and dental expenses and
premiums at a $7,500 annual level.
f. STOCK OPTIONS: You will receive 260,000 non-qualified stock options
as granted on January 12, 1999, by the Compensation and Stock Option
Committee. This grant coupled with the grant of 140,000 options in December
1998 is to be viewed as a two-year grant so that you would normally not be
considered for further option grants prior to December 2000. The vesting of
the new options will be one-third each year over three years.
<PAGE>
Thomas B. Mackey
January 13, 1999
Page 2
g. RELOCATION: Tenet will:
-- pack, move and unpack household goods
-- reimburse the reasonable selling expenses to sell your home
-- provide you a swing loan interest free secured by equity in your home
to be liquidated when your home is sold
-- if your home does not sell promptly, Tenet will buy your home at the
appraised value using our standard appraisal method (average of two
professional appraisals). If the appraisals are more than 5% apart,
a third appraisal will be requested and the purchase price will be
the average of the two closest appraisals.
-- indemnify you for property improvements for which you will not
receive full value totaling approximately $280,000, which will be
grossed up.
-- pay a housing differential based on actual additional housing
expenses you incur for property taxes and mortgage interest but not
to exceed $170,000 per year. The differential will be paid at 100%
for the first four years, 75% in year five, 50% in year six, 25% in
year seven and zero after seven years. The differential will be
paid monthly and is not subject to gross up. The differential
amount assumes you will invest all the equity from your present
home in the new home.
-- extend provisions of the general Relocation Policy #609 including
appropriate temporary or duplicate housing.
h. RELOCATION PROTECTION: If for some reason within the next three years
you do not continue in this position, the company will pay for your
relocation from Santa Barbara to a destination as far away as San Diego and
will guaranty the resale of your home at cost plus documented capital
improvements so long as your original purchase price of the Santa Barbara
home is within plus or minus five percent of the appraised value of the
property at the time of purchase.
i. SEVERANCE PROTECTION AGREEMENT: You will participate in the Tenet
Severance Protection Plan at the same level provided to our current Chairman
and President which provides severance equal to two times base salary plus
target bonus, benefits continuation and legal fees reimbursement for a
qualifying termination following a change of control of Tenet. No severance
is due in the event of a termination for "cause" described below or voluntary
termination except as provided under the Plan for "good reason".
Should your employment with Tenet be terminated by the company without
cause within three years from this date, you shall receive severance benefits
of two years' salary and benefits continuation (excluding AIP). If within
three years from this date Mr. Jeffrey Barbakow ceases to be Chairman and
Chief Executive Officer of Tenet ("the triggering event") then you may
voluntarily terminate your employment and receive the above severance
benefits so long as, within 120 days of such triggering event, you notify the
Chief Human Resources Officer of Tenet in writing that you intend to
voluntarily terminate under these provisions. You may not receive benefits
both under this severance arrangement and any other severance program, plan
or arrangement with Tenet. You will be paid under the plan, program or
arrangement for which you are eligible which provides the greatest benefit.
<PAGE>
Thomas B. Mackey
January 13, 1999
Page 3
Finally, your employment with the company will be continue to be on an
at-will basis which means that either you or the company may terminate the
employment relationship with or without notice or with or without cause at
any time. The term "cause" as used above shall include, but not be limited
to, dishonesty, fraud, willful misconduct, self dealing or violation of the
company's Standards of Conduct, breach of fiduciary duty (whether or not
involving personal profit), failure, neglect or refusal to perform your
duties in any material respect, violation of law (except traffic violations
or similar minor infractions), violation of the company's Human Resources
Operations or other Policies, or any material breach of this agreement;
provided, however, that a failure to achieve or meet business objectives as
defined by the company shall not be considered "cause" so long as you have
devoted your best and good faith efforts and full attention to the
achievement of those business objectives.
This letter contains the entire agreement between you and Tenet regarding
the terms and conditions of your employment, and fully supersedes any and all
prior agreements that may have existed between you and Tenet regarding the
terms and conditions of your employment.
Tom, assuming these terms are agreeable, please sign this letter
indicating your acceptance and return to me.
We are enthusiastic about you accepting this new assignment. Please call
me if you have any questions.
Sincerely, ACCEPTED AND AGREED TO:
__________________________________
Alan R. Ewalt Thomas B. Mackey Date
Senior Vice President Human Resources
c: Jeffrey Barbakow
<PAGE>
EXHIBIT 10(q)
February 23, 1999
PERSONAL & CONFIDENTIAL
Barry Schochet
Dallas Operations Center
Dallas, Texas
Dear Barry:
I am pleased to confirm the offer for you to become Vice Chairman for
Tenet Healthcare Corporation reporting to Jeffrey Barbakow. Your new
responsibilities will commence immediately.
Barry, we are excited about your accepting this important new role. Jeff
advises that you could office in either Santa Barbara or the Dallas
Operations Center. Practically, although you will have an office in Santa
Barbara, given your anticipated travel, you will probably want to retain your
primary office in the Dallas Operations Center. Also you may find it more
suitable to your personal situation to not to have to relocate.
Your compensation and benefit arrangements will continue as at present
with the exception that we will recommend to the Compensation Committee to
make a special grant of stock options in an amount to be determined at their
next meeting. This grant, if made, will be in place of any further grants in
calendar year 1999.
You, Jeff, Tom and Trevor have discussed certain job responsibilities.
This position is a top level executive assignment which will include the
following general areas:
a. Develop or acquire new lines of business which complement the hospital
business.
b. Create strategic initiatives to improve the performance and
growth of operations.
c. Represent the company in industry associations and policy groups. Be
Tenet's lead board member at FAHS.
d. Manage the government relations department and lobbying activities.
e. Advise the Chairman and Office of the President on strategic and
operational plans and other matters as need be.
f. Other duties as agreed with senior management.
You will participate in the Tenet Severance Protection Plan at the same
level provided to our current Chairman and President which provides
severance equal to two times base salary plus target bonus, benefits
continuation and legal fees reimbursement for a qualifying termination
following a change in control of Tenet. No severance is due in the event of
a termination for "cause" described below or voluntary termination except as
provided under the Plan for "good reason".
Absent a change in control, should your employment with Tenet be
terminated by the company without cause within three years from this date,
you shall receive severance benefits of two years' salary and benefits
continuation (excluding AIP). If within three years from this date Mr.
Jeffrey Barbakow ceases to be Chairman and Chief Executive Officer of Tenet
("the triggering event") then you may voluntarily terminate your employment
and receive severance benefits described in this paragraph so long as, within
120 days of such
<PAGE>
Barry Schochet
February 23, 1999
Page 2
triggering event, you notify the Chief Human Resources Officer of Tenet in
writing that you intend to voluntarily terminate under these provisions. You
may not receive benefits both under this severance arrangement and any other
severance program, plan or arrangement with Tenet. You will be paid under the
plan, program or arrangement for which you are eligible which provides the
greatest benefit.
Finally, your employment with the company will be continue to be on an
at-will basis which means that either you or the company may terminate the
employment relationship with or without notice or with or without cause at
any time. The term "cause" as used above shall include, but not be limited
to, dishonesty, fraud, willful misconduct, self dealing or violation of the
company's Standards of Conduct, breach of fiduciary duty (whether or not
involving personal profit), failure, neglect or refusal to perform your
duties in any material respect, violation of law (except traffic violations
or similar minor infractions), violation of the company's Human Resources
Operations or other Policies, or any material breach of this agreement;
provided, however, that a failure to achieve or meet business objectives as
defined by the company shall not be considered "cause" so long as you have
devoted your best and good faith efforts and full attention to the
achievement of those business objectives.
This letter contains the entire agreement between you and Tenet regarding
the terms and conditions of your employment, and fully supersedes any and all
prior agreements that may have existed between you and Tenet regarding the
terms and conditions of your employment.
Barry, assuming these terms are agreeable, please sign this letter
indicating your acceptance and return to me.
We are enthusiastic about you accepting this new assignment. Please call
me if you have any questions.
Sincerely, ACCEPTED AND AGREED TO:
__________________________________
Alan R. Ewalt Barry Schochet Date
SVP, Human Resources
c: Jeffrey Barbakow
<PAGE>
EXHIBIT 10(x)
1994 ANNUAL INCENTIVE PLAN
OF
NATIONAL MEDICAL ENTERPRISES, INC.
1. PURPOSE. The purpose of the Annual Incentive Plan (the "Plan") of
National Medical Enterprises, Inc. and its subsidiaries (the "Company") is to
provide an incentive to enhance shareholder value and promote the
attainment of significant business objectives of the Company by basing a
portion of selected employees' compensation on the performance of such
employee, the Company, and/or the employee's Business Unit (as defined below).
2. DEFINITIONS.
a. "Award Agreement" means the agreement entered into between the
Company and a participant, setting forth the terms and conditions applicable
to an award granted to the participant.
b. "Award Schedule" means the Award Schedule established pursuant to
Article 4.
c. "Business Unit" means any division, group, subsidiary or other unit
within the Company which is designated by the Committee to constitute a
Business Unit.
d. "Code" means the Internal Revenue Code of 1986, and any successor
statute, and the regulations promulgated thereunder, as it or they may be
amended from time to time.
e. "Code Section 162(m) Award" means an Award intended to satisfy the
requirements of Code Section 162(m) and designated as such in the Award
Agreement.
f. "Covered Employee" means a Covered Employee within the meaning of
Code Section 162(m)(3).
g. "Performance Criteria" means one or more of the following criteria
selected by, and as further defined by, the Committee each Year to measure
achievement of Performance Goals for a Year:
1. A. Income, either before or after income taxes, including or
excluding interest, depreciation and amortization, extraordinary items
and other material non-recurring gains or losses, discontinued
operations, the cumulative effect of changes in accounting policies
and the effects of any tax law changes;
B. Return on average equity, which shall be income calculated in
accordance with paragraph g.1.A. above, divided by the average of
stockholders' equity as of the beginning and as of the end of the Year;
C. Primary or fully diluted earnings per share of common stock,
which shall be income calculated in accordance with paragraph g.1.A.
above, divided by the weighted average number of shares and share
equivalents of common stock;
D. Net cash provided by operating activities based upon income
calculated in accordance with paragraph g.1.A. above; or
E. Quality of service and/or patient care, measured by the
extent to which pre-set quality objectives are achieved by the
Company.
2. Any other criteria related to performance, including the
performance of one or more of the Business Units, individual
performance or any other category of performance selected by the
Committee.
B-1
<PAGE>
h. "Performance Goals" are the annual performance objectives with
respect to Performance Criteria established by the Committee for the Company,
a Business Unit or an individual for the purpose of determining whether, and
the extent to which, awards under the Plan will be made for that Year.
i. "Target Award" means the amount payable for meeting 100% of
Performance Goals for the Year.
j. "Year" means the Company's fiscal year.
3. ADMINISTRATION. The Plan shall be administered by the Compensation
and Stock Option Committee (the "Committee") of the Company's Board of
Directors (the "Board").
The Committee's determinations under the Plan need not be uniform ad may
be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan, whether or not such persons are similarly
situated. Without limiting the generality of the foregoing, the Committee
will be entitled, among other things, to make non-uniform and selective
determinations and to establish non-uniform and selective Performance
Criteria, Performance Goals, the weightings thereof, and Target Awards.
Whenever the Plan refers to a determination being made by the Committee, it
shall be deemed to mean a determination by the Committee in its sole
discretion.
It is the intent of the Company that this Plan and Code Section 162(m)
Awards hereunder satisfy, and be interpreted in a manner that satisfy, in the
case of participants who are or may be Covered Employees, the applicable
requirements of Code Section 162(m), including the administration requirement
of Code Section 162(m)(4)(C), so that the Company's tax deduction for
remuneration in respect of such an award for services performed by such
Covered Employees is not disallowed in whole or in part by the operation of
such Code section. If any provision of this Plan would otherwise frustrate or
conflict with the intent expressed in this Article, that provision, to the
extent possible, shall be interpreted and deemed amended so as to avoid such
conflict. To the extent of any remaining irreconcilable conflict with such
intent, such provision shall be deemed void as applicable to Covered
Employees with respect to whom such conflict exists. Nothing herein shall be
interpreted so as to preclude a participant who is or may be a Covered
Employee from receiving an award that is not a Code Section 162(m) Award.
The Committee shall have the discretion, subject to the limitations
described in Article 4 below relating to Code 162(m) Awards, to (a) determine
the Plan participants; (b) determine who will be treated as a Covered
Employee; (c) determine Performance Criteria and Performance Goals each Year
within the time period required by Code Section 162(m); (d) establish an
Award Schedule; (e) establish performance thresholds for payment of any
awards; (f) determine whether and to what extent the Performance Goals have
been met or exceeded; (g) make discretionary awards as may be appropriate in
order to assure the proper motivation and retention of personnel and
attainment of business goals; (h) make adjustments to Performance Criteria,
Performance Goals and thresholds; and (i) determine the total amount of funds
available for distribution as awards each Year. Subject to the provisions of
the Plan, the Committee shall be authorized to interpret the Plan, to make,
amend and rescind such rules as it deems necessary for the proper
administration of the Plan, to make all other determinations necessary or
advisable for the administration of the Plan and to correct any defect or
supply any omission or reconcile an inconsistency in the Plan in the manner
and to the extent the Committee deems desirable to carry the Plan into
effect. Any action taken or determination made by the Committee shall be
conclusive on all parties.
4. CODE SECTION 162(m) AWARDS. A participant who is or may be a Covered
Employee may receive a Code Section 162(m) Award and/or an award that is not
a Code Section 162(m) Award. The Committee will determine who is to be
treated as a Covered Employee, determine who is eligible to be granted Code
Section 162(m) Awards and establish the Target Awards and Award Schedules for
Code Section 162(m) Awards. Such determinations will be made in a timely
manner, as required by Code Section 162(m). Each award shall be evidenced by
an Award Agreement setting forth the Award
B-2
<PAGE>
Schedule and such other terms and conditions applicable to the award, as
determined by the Committee, not inconsistent with the terms of the Plan.
Notwithstanding anything else in this Plan to the contrary, the aggregate
maximum amount payable under the Plan to a Covered Employee with respect to a
Year shall be $1,500,000. In the event of any conflict between an Award
Agreement and the Plan, the terms of the Plan shall govern.
5. ALL AWARDS. Performance Criteria and Performance Goals will be
established by the Committee for each Year, which, in the case of Performance
Criteria and Performance Goals for Covered Persons, will be established
within the time period required by Code Section 162(m). The Committee also
shall determine the extent to which each Performance Criteria shall be
weighted in determining awards. The Committee will establish an Award Schedule
for each award to each participant setting forth the percentage of the Target
Award for such participant payable at specified levels of performance, based
on the Performance Goal for each of the Performance Criteria and the
weighting established for such criteria. The Committee may vary the Performance
Criteria, Performance Goals and weightings from participant to participant,
award to award and Year to Year. Notwithstanding the foregoing, the
Performance Criteria with respect to a Code Section 162(m) Award shall be
limited to the Performance Criteria set forth in Article 2.g.1.
6. ELIGIBLE PERSONS. Any key employee of the Company who the Committee
determines, in its discretion, is responsible for producing profits for the
Company or otherwise has a significant effect on the operations of the Company
shall be eligible to participate in the Plan. Committee members are not
eligible to participate in the Plan. No employee shall have a right (a) to be
selected under the Plan, or (b) having once been selected, to (i) be selected
again or (ii) continue as an employee.
7. AMOUNT AVAILABLE FOR AWARDS. The amount available for awards in any
Year shall be determined by the Committee.
8. DETERMINATION OF AWARDS. The Committee shall select the
participants and determine which participants, if any, are to be treated as
Covered Employees and which awards, if any, are to be Code Section 162(m)
Awards. Except in the case of Code Section 162(m) Awards, the Committee shall
determine the actual award to each participant for each Year, taking into
consideration, as it deems appropriate, the performance for the Year of the
Company and/or a Business Unit, as the case may be, in relation to the
Performance Goals theretofore established by the Committee, and the
performance of the respective participants during the Year. The fact that an
employee is selected as a participant for any Year shall not mean that such
employee necessarily will receive an award for that Year. Except in the case of
Code Section 162(m) Awards, notwithstanding any other provisions of the Plan
to the contrary, the Committee may make discretionary awards as it sees fit
under the Plan.
A Code Section 162(m) Award payable to any Covered Employee may range
from zero (0) to one hundred and fifty (150) percent of the Covered
Employee's Target Award, depending upon whether, or the extent to which, the
Performance Goals with respect to such Code Section 162(m) Award have been
achieved. Actual Code Section 162(m) Awards will be derived from the Award
Schedule based on the level of performance achieved and the participant's
Target Award. All such determinations regarding the achievement of
Performance Goals and the determination of actual Code Section 162(m) Awards
will be made by the Committee; provided, however, that with respect to a Code
Section 162(m) Award, the Committee may, in its sole discretion, decrease,
but not increase, the amount of the Award that otherwise would be payable.
9. DISTRIBUTION OF AWARDS. Awards under the Plan for a particular Year
shall be paid in cash as soon as practicable after the end of that Year. To
the extent that the Company's tax deduction for remuneration in respect of
the payment of an Award to a Covered Employee would be disallowed under Code
Section 162(m) by reason of the fact that such Covered Employee's applicable
employee remuneration, as defined in Code Section 162(m)(4), either exceeds
or, if such Award were paid, would
B-3
<PAGE>
exceed the $1,000,000 limitation in Code Section 162(m)(1), the Committee
may, in its sole discretion, defer the payment of such Award, but only to the
extent that, and for so long as, the Company's tax deduction in respect of
the payment thereof would be so disallowed; provided that the Committee may,
nevertheless, accelerate the payment of previously deferred Awards if it
determines that the amount of the tax deduction that would be disallowed is
not significant. Deferred Awards will be deemed credited with interest at a
rate determined by the Committee from time to time.
10. TERMINATION OF EMPLOYMENT. A participant must be actively employed
by the Company on the date his or her award is determined by the Committee
("the Payment Date") in order to be entitled to payment of any award for that
Year. In the event active employment of a participant shall be terminated
before the Payment Date for any reason other than discharge for cause or
voluntary resignation, such participant may receive such portion of his or
her award for the Year as may be determined by the Committee. A participant
discharged for cause shall not be entitled to receive any award for the Year.
A participant who voluntarily resigns prior to the Payment Date shall not be
entitled to receive any award for the Year unless otherwise determined by the
Committee.
11. MISCELLANEOUS.
a. NONASSIGNABILITY. No award will be assignable or transferable
without the written consent of the Committee in its sole discretion, except
by will or by the laws of descent and distribution.
b. WITHHOLDING TAXES. Whenever payments under the Plan are to be made,
the Company will withhold therefrom an amount sufficient to satisfy any
applicable governmental withholding tax requirements related thereto.
c. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the
Company may at any time amend, suspend or discontinue the Plan, in whole or in
part. The Committee may at any time alter or amend any or all Award
Agreements under the Plan to the extent permitted by law. No such action may,
however, without approval of the stockholders of the Company, be effective
with respect to any Code Section 162(m) Award to any Covered Employee if such
approval is required by Code Section 162(m)(4)(C).
d. OTHER PAYMENTS OR AWARDS. Nothing contained in the Plan will be
deemed in any way to limit or restrict the Company from making any award or
payment to any person under any other plan, arrangement or understanding,
whether now existing or hereafter in effect.
e. PAYMENTS TO OTHER PERSONS. If payments are legally required to be
made to any person other than the person to whom any amount is available under
the Plan, payments will be made accordingly. Any such payment will be a
complete discharge of the liability of the Company.
f. LIMITS OF LIABILITY.
1. Any liability of the Company to any participant with respect to
an award shall be based solely upon contractual obligations created by
the Plan and the Award Agreement.
2. Neither the Company, nor any member of its Board of Directors or
of the Committee, nor any other person participating in any determination
of any question under the Plan, or in the interpretation, administration
or application of the Plan, shall have any liability to any party for
any action taken or not taken in good faith under the Plan.
g. RIGHTS OF EMPLOYEES.
1. Status as an employee eligible to receive an award under the Plan
shall not be construed as a commitment that any award will be made under
this Plan to such employee or to other such employees generally.
B-4
<PAGE>
2. Nothing contained in this Plan or in any Award Agreement (or in
any other documents related to this Plan or to any award or Award
Agreement) shall confer upon any employee or participant any right to
continue in the employ or other service of the Company or constitute any
contract or limit in any way the right of the Company to change such
person's compensation or other benefits or to terminate the employment
or other service of such person with or without cause.
h. SECTION HEADINGS. The section headings contained herein are for the
purposes of convenience only, and in the event of any conflict, the text of
the Plan, rather than the section headings, will control.
i. INVALIDITY. If any term or provision contained herein will to any
extent be invalid or unenforceable, such term or provision will be reformed
so that it is valid, and such invalidity or unenforceability will not affect
any other provision or part hereof.
j. APPLICABLE LAW. The Plan, the Award Agreements and all actions taken
hereunder or thereunder shall be governed by, and construed in accordance
with, the laws of the state of California without regard to the conflict of
law principles thereof.
k. EFFECTIVE DATE. The Plan shall be effective as of June 1, 1994.
B-5
<PAGE>
EXHIBIT 10(aa)
FIRST AMENDMENT TO
DEFERRED COMPENSATION PLAN
I, Scott M. Brown, the Secretary of National Medical Enterprises, Inc.
("NME"), hereby certify that on December 1, 1993 and April 13, 1994, the
Compensation and Stock Option Committee of the Board of Directors of NME
approved the following amendments to the Deferred Compensation Plan (the
"Plan"):
1. The second paragraph of Section 5 of the Plan is hereby amended by
deleting such paragraph in its entirety and replacing it with the
following:
"In the event of the death of the Participant, compensation that has
been deferred together with the accumulated interest will be
distributed to the beneficiary named by the Participant or to the
estate of the Participant in 120 approximately equal monthly payments
unless the Committee, in its sole discretion, determines upon written
request of the beneficiary that payment shall be made voer a shorter
period or in a lump sum. Payment shall commence within 30 days after
the death of the Participant, with interest continuing to accrue
pursuant to Section 3(b) hereof until the full amount of deferred
compensation is paid."
2. The following language shall be added as new Paragraph 8 to the Plan:
"8. LUMP SUM DISTRIBUTIONS. At any time either (a) prior to an event
causing distribution in accordance with Paragraph 4 hereto or (b)
after a Participant or his or her beneficiary is receiving
distributions in installments in accordance with Paragraph 5 hereof
and has not received the entire balance of a Participant's deferred
compensation account, a Participant in the Plan or his or her
beneficiary may elect to receive a lump sum payment, in an amount
determined below, sixty (60) days after giving notice to the Committee
of the Participant's or beneficiary's desire to receive such lump sum
benefit. The date of the notice shall be the "Commencement Date."
The lump sum payment shall be equal to (a) the Participant's remaining
deferred compensation account under the Plan or (b) a beneficiary's
share of the Participant's remaining deferred compensation account
under the Plan, whichever is applicable, reduced by a penalty equal to
ten percent (10%) of such account which shall be forfeited to the
Company. However, the penalty shall not apply if the Committee
determines, based on the advice of counsel or a final determination by
the Internal Revenue Service or any court of competent jurisdiction,
that by reason of the foregoing elective provisions of this Paragraph
8 any Participant or beneficiary has recognized or will recognize
gross income for federal income tax purposes under this Plan in
advance of payment to him or her of Plan benefits. The Company shall
notify all Participants or beneficiaries of any such determination.
Wherever any such determination is made, the Company shall refund all
penalties which were imposed hereunder on account of making lump sum
payments at any time during or after the first year to which such
determination applies (I.E., the first year when gross income is
<PAGE>
recognized for federal income tax purposes). Interest shall be paid on
any such refunds based on an interest factor determined under
Paragraph 3(b) hereof. The Committee may also reduce or eliminate the
penalty if it determines that this action will not cause any
Participant or beneficiary to recognize gross income for federal
income tax purposes under this Plan in advance of payment to him or
her of Plan benefits.
Notwithstanding any other provision of this Plan, a penalty shall not
apply if a retired Participant receives a lump sum distribution
pursuant to Paragraph 5 hereof.
Any Participant who receives a lump-sum distribution in accordance
with this Paragraph 8 shall be prohibited from making any deferral of
compensation under this Plan for a period of one-year commencing on
the date on which the lump-sum distribution is made to such
Participant."
IN WITNESS WHEREOF, I have caused this certificate to be executed as
of August 15, 1994.
National Medical Enterprises, Inc.
By: /s/ Scott M. Brown
-------------------------------
Name: Scott M. Brown
Title: Secretary
<PAGE>
EXHIBIT 10(bb)
1994 NME DEFERRED COMPENSATION PLAN TRUST
AS AMENDED JULY 25, 1994
This Trust Agreement (the "Agreement") is made and entered into this 25th
day of May, 1994, by and between National Medical Enterprises, Inc., a Nevada
corporation (the "Company") and United States Trust Company of New York (the
"Trustee") with reference to the following facts:
A. Company has adopted the National Medical Enterprises, Inc. Deferred
Compensation Plan (the "Plan"), a copy of the Plan is attached hereto as
EXHIBIT A.
B. Company has incurred or expects to incur liability under the terms of
such Plan with respect to the individuals participating in such Plan.
C. Company wishes to establish a trust (hereinafter called "Trust") and
to contribute to the Trust assets that shall be held therein, subject to the
claims of Company's creditors in the event of Company's Insolvency, as herein
defined, until paid to Plan participants and for their beneficiaries in such
manner and at such times as specified in this Plan.
D. It is the intention of the parties that this Trust shall constitute
an unfunded arrangement and shall not affect the status of the Plan as an
unfunded plan maintained for the purpose of providing deferred compensation for
a select group of management or highly compensated employees for purposes of
Title I of the Employee Retirement Income Security Act of 1974 ("ERISA").
E. It is the intention of Company to make contributions to the Trust to
provide itself with a source of funds to assist it in the meeting of its
liabilities under the Plan.
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
Section 1. ESTABLISHMENT OF TRUST.
(a) Company hereby deposits with Trustee in trust Five Hundred Thousand
shares of the $.075 par value per share common stock of Company, which shall
become the principal of the Trust to be held, administered and disposed of by
Trustee as provided in this Agreement.
(b) The Trust shall become irrevocable upon approval by the Board of
Directors. Company shall provide a certified copy of the resolution of the
Board of Directors stipulating that the trust has been approved by them.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used exclusively
for the uses and purposes of participants in the Plan and general creditors
as herein set forth. Plan participants and their beneficiaries shall have no
preferred
claim on, or any beneficial ownership interest in, any assets of the Trust.
Any rights created under the Plan and this Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against
Company. Any assets held by the Trust will be subject to the claims of
Company's general creditors under federal and state law in the event of
Insolvency, as defined in Section 3(a) herein.
(e) Upon a Change of Control, as defined in Section 13(d) herein, and on
the last day of every calendar quarter commencing with the first calendar
quarter beginning after the month in which a Change in Control occurs (a
"Quarter"). Company shall, as soon as possible, but in no event longer than
thirty (30) days following the Change of Control and no longer than ten (10)
days after the end of each Quarter, make an irrevocable contribution to the
Trust in an amount that is sufficient together with all assets held by the
Trust as of such date to pay to each Plan participant or beneficiary, on a
pre-tax basis, the benefits to which Plan participants or their beneficiaries
would be entitled pursuant to the terms of the Plan as of the date on which
the Change of Control occurred, and as of the last day of each Quarter.
Company shall notify the Trustee immediately following verification that a
Change of Control has occurred.
Section 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.
(a) Company shall deliver to Trustee a schedule (the "Payment Schedule")
that indicates the amounts payable in respect of each Plan participant (and
his or her beneficiaries), that provides a formula or other instructions
acceptable to Trustee for determining the amounts so payable, the form in
which such amount is to be paid (as provided for or available under the
Plan), and the time of
commencement for payment of such amounts. Except as otherwise provided
herein, Trustee shall make payments to the Plan participants and their
beneficiaries in accordance with such Payment Schedule. The Trustee shall not
be responsible for determining the accuracy of the amounts to be paid
according to the Payment Schedule. The Trustee shall make provision for the
reporting and withholding of any federal, state or local taxes pursuant to
the terms of the Plan and shall pay amounts withheld to the appropriate
taxing authorities or determine that such amounts have been reported, withheld
and paid by Company.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by Company or such party as it
shall designate under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan.
(c) Company may make payment of benefits directly to Plan participants
or their beneficiaries as they become due under the terms of the Plan.
Company shall notify Trustee of its decision to make payment of benefits
directly prior to the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with
the terms of the Plan, Company shall make the balance of each such payment as
it falls due. Trustee shall notify Company where principal and earnings are
not sufficient.
<PAGE>
Section 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY
WHEN COMPANY IS INSOLVENT.
(a) Trustee shall cease payment of benefits to Plan participants and
their beneficiaries if the Company is Insolvent. Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Company is unable to
pay its debts as they become due, or (ii) Company is subject to a pending
proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject
to claims of general creditors of Company under federal and state law as set
forth below.
(1) The Board of Directors and the Chief Executive Officer of
Company shall have the duty to inform Trustee in writing of Company's
Insolvency. If a person claiming to be a creditor of Company alleges in
writing to Trustee that Company has become Insolvent, Trustee shall determine
whether Company is Insolvent and, pending such determination, Trustee shall
discontinue payment of benefits to Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or
has received notice from Company or a person claiming to be a creditor
alleging that Company is Insolvent, Trustee shall have no duty to inquire
whether Company is Insolvent. Trustee may in all events rely on such evidence
concerning Company's solvency as may be furnished to Trustee and that
provides Trustee with a reasonable basis for making a determination
concerning Company's solvency.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments to Plan participants or their
beneficiaries and shall hold the assets of the Trust for the benefit of
Company's general creditors. Nothing in this Agreement shall in any way
diminish any rights of Plan participants or their beneficiaries to pursue
their rights as general creditors of Company with respect to benefits due
under the Plan or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this
Agreement only after Trustee has determined that Company is not Insolvent (or
is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues
the payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan for the
period of such discontinuance, less the aggregate amount of any payments made
to Plan participants or their beneficiaries by Company in lieu of the
payments provided for hereunder during any such period of discontinuance.
Section 4. PAYMENTS TO COMPANY.
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, Company shall have no right or power to direct Trustee to return
to Company or to divert to others any of the Trust assets before all payment
of benefits have been made to Plan participants and their beneficiaries
pursuant to the terms of the Plan.
Section 5. INVESTMENT AUTHORITY.
It is the intent of Company that the Trustee shall invest the
contributions to the Trust in shares of common stock of Company. Trustee may
invest in securities (including stock or right to acquire stock) or
obligations issued by Company. All rights associated with assets of the
Trust shall be exercised by Trustee, or the person designated by Trustee, and
shall in no event be exercisable by or rest with Plan participants. Company
shall have the right at any time, and from time to time in its sole
discretion, to substitute assets of equal fair market value for any asset
held by the Trust. This right is exercisable by Company in a nonfiduciary
capacity without the approval or consent of any person in a fiduciary
capacity. The Trustee shall hold the stock until such time as the stock must
be liquidated to pay Plan participants or their beneficiaries or until such
time as the Trustee determines it to be clearly imprudent to retain the stock
to preserve the principal balance required to maintain adequate funding for
future payments due to Plan participants or their beneficiaries.
Company represents and warrants that it has filed and will file with the
Securities and Exchange Commission and with all applicable state agencies or
authorities all required registration statements relating to shares of
Company stock and other interests which may be issued under the Plan.
Company acknowledges that it is and shall be responsible for, and that the
Trustee shall
not be responsible for, preparing or filing such registration statements or
for the accuracy of statements contained therein, or for preparing or filing
any other reports, statements or filings required under federal or state
securities laws with respect to the Trusts' investment in Company stock.
Section 6. DISPOSITION OF INCOME.
During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
Section 7. ACCOUNTING BY TRUSTEE.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within sixty (60) days following the close of each
calendar year and within sixty (60) days after the removal or resignation of
Trustee, Trustee shall deliver to Company a written account of its
administration of the Trust during such year or during the period from the
close of the last preceding year to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other transactions
effected by it, including a description of all securities and investments
purchased and sold with the cost or net proceeds of such purchases or sales
(accrued interest paid or receivable being shown separately), and showing all
cash, securities and other property held in the Trust at the end of such year
or as of the date of such removal or resignation, as the case may be.
Section 8. RESPONSIBILITY OF TRUSTEE.
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims provided, however, that
Trustee shall incur no liability to any person for any action taken pursuant
to a direction, request or approval given by Company which is contemplated by,
and in conformity with, the terms of the Plan or this Trust and is given in
writing by Company. In the event of a dispute between Company and a party,
Trustee may apply to a court of competent jurisdiction to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in
connection with this Trust, Company agrees to indemnify Trustee against
Trustee's costs, expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable for
such payments. If Company does not pay such costs, expenses and liabilities
in a reasonably timely manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment
advisors, financial consultants or other professionals to assist it in
performing any of its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on
trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the
Trust, Trustee shall have no power to name a beneficiary of the policy other
than the Trust, to assign the policy (as distinct from conversion of the
policy to a different form) other than to a successor Trustee, or to loan to
any person the proceeds of any borrowing against such policy.
(f) Notwithstanding any powers granted to Trustee pursuant to this
Agreement or to applicable law, Trustee shall not have any power that could
give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure
and Administrative Regulations promulgated pursuant to the Internal Revenue
Code.
(g) Notwithstanding any provision in this Agreement to the contrary, in
the event of a Change of Control, the Trustee is hereby directed to sell any
and all shares of Company stock, or other stock that is received by the
Trustee in exchange for such Company stock as a result of the Change of
Control, which the Trustee holds as a Trust asset, within thirty (30) days of
such Change of Control. The Trustee shall invest any and all proceeds that
it receives as a result of such sales that are not immediately needed in
order to make distributions to Plan participants and their beneficiaries in
United States government securities and/or securities of United States
government agencies with average portfolio maturity of two (2) years.
Additionally, if the Trustee sells any Company stock prior to a Change in
Control the proceeds from any such sale that are not immediately needed in
order to make distributions to Plan participants and their beneficiaries
shall also be invested by the Trustee in United States government securities
and/or securities of United States government agencies with average portfolio
maturity of two (2) years.
Section 9. COMPENSATION AND EXPENSES OF TRUSTEE.
Company shall pay all administrative and Trustee's fees and expenses. If
not so paid, the fees and expenses shall be paid from the Trust. In the
event of a Change of Control or any other matter, which in the Trustee's
reasonable discretion requires the Trustee to perform services in addition to
the Trustee's custodial and investment responsibilities under this Agreement,
the Trustee shall be entitled to an addition fee as provided in this Section
9. The Trustee shall be compensated at its normal hourly rates for all
reasonable additional services and for the reasonable fees and expenses of
its counsel or other experts required to be engaged by the Trustee. Such
amounts shall be paid by Company to the Trustee within thirty (30) days of
billing, provided that if timely payment is not made by the Company, the
Trustee may discharge any such obligation out of the Trust assets, regardless
of whether the Trust is fully funded. In the event of the termination of the
Trust or the removal or resignation of the Trustee, the Trustee shall be
entitled to withhold out of the Trust assets all amounts due to the Trustee
pursuant to this Section 9. This Section 9 shall supersede any conflicting
provision of this Agreement or the Plan.
Section 10. RESIGNATION AND REMOVAL OF TRUSTEE.
(a) Trustee may resign at any time by written notice to Company, which
shall be effective ninety (90) days after receipt of such notice unless
Company and Trustee agree otherwise.
(b) Subject to Section 10(c), Trustee may be removed by Company on
ninety (90) days notice or upon shorter notice accepted by Trustee.
(c) Upon a Change of Control, as defined herein, Trustee may not be
removed by Company for ten (10) years.
(d) If Trustee resigns or is removed within ten (10) years of a Change of
Control, as defined herein, Trustee shall select a successor Trustee in
accordance with the provisions of Section 11(b) hereof prior to the effective
date of Trustee's resignation or removal.
(e) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor Trustee. The transfer shall be completed within ninety (90) days
after receipt of notice of resignation, removal or transfer, unless Company
extends the time limit.
(f) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 11 hereof, by the effective date of resignation or
removal under paragraphs (a) or (b) of this section. If no such appointment
has been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
Section 11. APPOINTMENT OF SUCCESSOR.
(a) If Trustee resigns or is removed in accordance with Section 10(a) or
(b) hereof, Company may appoint any third party, such as a bank trust
department or other party that may be granted corporate trustee powers under
state law, as a successor to replace Trustee upon resignation or removal.
The appointment shall be effective when accepted in writing by the new
Trustee, who shall have all of the rights and powers of the former Trustee,
including ownership rights in the Trust assets. The former Trustee shall
execute any instrument necessary or reasonably requested by Company or the
successor Trustee to evidence the transfer.
(b) If Trustee resigns or is removed pursuant to the provisions of
Section 10(e) hereof and selects a successor Trustee, Trustee may appoint any
third party such as a bank trust department or other party that may be
granted corporate trustee powers under state law. The appointment of a
successor Trustee shall be effective when accepted in writing by the new
Trustee. The new Trustee shall have all the rights and powers of the former
Trustee, including ownership rights in Trust assets. The former Trustee
shall execute any instrument necessary or reasonably requested by the
successor Trustee to evidence the transfer.
(c) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 7 and 8 hereof. The successor Trustee shall not be responsible for
and Company shall indemnify and defend the successor Trustee from any claim
or liability resulting from any action or inaction of any prior Trustee or
from any other past event, or any condition existing at the time it becomes
successor Trustee.
Section 12. AMENDMENT OR TERMINATION.
(a) This Agreement may be amended by a written instrument executed by
Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan or shall make the Trust revocable after
it has become irrevocable in accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits
pursuant to the terms of the Plan unless sooner revoked in accordance with
Section 1(b) hereof. Upon termination of the Trust any assets remaining in
the Trust shall be returned to Company.
(c) Upon written approval of all participants or beneficiaries entitled
to payment of benefits pursuant to the terms of the Plan, Company may
terminate this Trust prior to the time all benefit payments under the Plan
have been made. Company shall provide verification to the Trustee that all
Plan participants or beneficiaries entitled to benefits under the Plan have
in fact approved the termination of the Trust. All assets in the Trust at
termination shall be returned to Company.
(d) Sections 1(e), 4, 5, 8(g), 10(c), 10(d), 12(d) and 13(d) of this
Agreement may not be amended by Company for ten (10) years following a Change
in Control, as defined herein.
Section 13. MISCELLANEOUS.
(a) Any provision of this Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment, levy,
execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and construed in
accordance with the laws of the State of New York, except to the extent
pre-empted by ERISA.
(d) For purposes of this Trust, a Change of Control shall be deemed to
have occurred if after April 1, 1994 (a) any person (as defined in Section
13(c) or 14(d)(2) of the Securities Exchange Act of 1934, as amended),
becomes the beneficial owner directly or indirectly of twenty percent (20%)
or more of the combined voting power of Company's then outstanding securities
or (b) individuals who, as of April 1, 1994, constitute the Board of
Directors of the Company (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board of Directors; provided, however,
that (i) any individual who becomes a director of the Company subsequent to
April 1, 1994, whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be deemed to have been a member of
the Incumbent Board and (ii) no individual who was elected initially (after
April 1, 1994) as a director as a result of an actual or threatened election
contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as amended, or any other actual or
threatened solicitations of proxies or consents by or on behalf of any person
other than the Incumbent Board shall be deemed to have been a member of the
Incumbent Board.
(e) If a Plan participant or beneficiary of a Plan participant is
required to institute a legal proceeding in order to enforce his or her
rights under this Agreement and such Plan participant or beneficiary prevails
in such legal proceeding then the Company shall reimburse such Plan
participant or beneficiary for the reasonable legal fees and expenses
incurred in bringing and prosecuting such legal proceeding.
Section 14. EFFECTIVE DATE.
The effective date of this Agreement shall be the date first written
above.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
"COMPANY"
NATIONAL MEDICAL ENTERPRISES, INC.
By:
-------------------------------
Its:
------------------------------
"TRUSTEE"
UNITED STATES TRUST COMPANY OF NEW YORK
By:
-------------------------------
Its:
------------------------------
<PAGE>
Tenet Healthcare Corporation
TENET
1999 ANNUAL REPORT
<PAGE>
TENET and its subsidiaries own and operate general hospitals and many related
health care services. In communities across the U.S., our 126,000 dedicated
employees treated millions of patients last year. Their work embodied the
core business philosophy reflected in our name: the importance of shared
values among partners providing a full spectrum of quality health care.
<TABLE>
<S> <C>
1 Letter to Shareholders
7 Financial Summary
8 Management's Discussion and Analysis
19 Report of Independent Auditors
20 Consolidated Balance Sheets
21 Consolidated Statements of Operations
22 Consolidated Statements of Comprehensive Income
22 Consolidated Statements of Changes in Shareholders' Equity
23 Consolidated Statements of Cash Flows
24 Notes to Consolidated Financial Statements
45 Supplementary Financial Information
46 Directors and Management
48 Corporate Information
</TABLE>
<PAGE>
[LOGO]
3820 State Street, Santa Barbara, California 93105
805.563.7000
www.tenethealth.com
<PAGE>
LETTER TO SHAREHOLDERS
NO DOUBT ABOUT IT: 1999 was a tough year for U.S. hospitals.
Funding cuts legislated by the Balanced Budget Act of 1997 (BBA)
dramatically reduced Medicare reimbursement to hospitals and health systems
across the country. When Congress passed the BBA, it did so with the intent
of saving $103 billion over the course of five years. In fact, according to
the latest Congressional Budget Office estimates, the actual savings will be
approximately $206 billion - twice what was originally intended.
In this harsh economic climate, however - and despite the overall
decline in earnings Tenet experienced in fiscal 1999 - one fact remains
clear: Our strategy of developing integrated health care delivery systems in
specific regions is working. Tenet hospitals are gaining market share,
growing revenues and holding the line on costs, with the notable exception of
bad debt expense, which I will return to later.
The effectiveness of our strategy is underscored by the substantial
progress we have made in turning around operations in our newest integrated
market - Philadelphia - where we acquired eight hospitals out of bankruptcy
in November 1998. Only two months after taking over this troubled system
- - reportedly the largest nonprofit health care system failure in U.S. history
- - we had stopped the financial hemorrhaging and achieved positive operating
income before depreciation and amortization.
PUTTING FISCAL 1999 INTO PERSPECTIVE
If ever there was a year in which the statistics alone failed to tell
the whole story, it was Tenet's fiscal 1999. That's why I think it's crucial
to put our financial performance for the year in the proper perspective.
Earnings per share from operations before special charges declined 5
percent in fiscal 1999 - to $1.65 per share versus $1.73 in the prior year.
It should be noted, however, that this decline in fiscal 1999 comes after
three years of strong, uninterrupted growth in earnings per share from
operations before special charges, with average gains of more than 17 percent
over the preceding 12 quarters.
A major cause of this recent decline in Tenet's earnings was the impact
of the BBA. Simply stated, our single biggest customer, the federal
government, decided to pay us about $100 million less in fiscal 1999 - with
no corresponding reduction in the level of services we provide. That cost us
20 cents per share.
To help mitigate the adverse financial impact of the BBA, we've launched
initiatives to dramatically cut costs not directly related to patient care.
In fiscal 1999, we reduced our corporate overhead expense by cutting our
staffing above the hospital level, eliminating nonessential programs and
1 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
LETTER TO SHAREHOLDERS (continued)
finding more efficient ways to continue to deliver essential
services. As part of that process, we reexamined how we support our
hospitals and looked for ways to do so more cost-effectively.
Though difficult, we expect these reductions will better position
us in fiscal 2000 and beyond.
At the hospital level, we sought to reduce our costs by taking
full advantage of the inherent strengths of our integrated delivery
systems. For example, by leveraging our size, we are able to
negotiate reduced-rate volume contracts with vendors for supplies
and services, as well as gain access to new managed care contracts
- or achieve better terms in existing contracts. We have also begun
outsourcing so-called hotel services - things like laundry,
dietary, housekeeping and maintenance - to gain substantial cost
savings. This presents a significant opportunity for us companywide
and is one we intend to pursue in fiscal 2000.
To appreciate the underlying strength of our integrated
delivery system strategy, it's important to focus on the
performance of hospitals we've owned for more than a year. For
example, excluding the impact of bad debts, we managed to absorb
all the BBA cuts and still hold same-facility operating margins
before depreciation, amortization and special charges essentially
flat for the year - down only one-tenth of one percent. Labor
expense was excellent, declining to 40 percent of revenues, down
from 40.8 percent in the prior year. Some of this decline is
explained by outsourcing, but we believe it also shows that our
employees are highly productive. We held supply expense at 13.9
percent. Other operating expense for the year increased somewhat -
to 21.8 percent, compared to 20.9 percent in the prior year,
largely as a result of outsourcing.
While our expense control has been excellent in most areas,
the greater-than-expected increase in our bad debt expense in
fiscal 1999 was a source of great frustration. Same-facility bad
debt expense as a percent of revenues rose to 6.8 percent for the
year, compared to 5.9 percent in the prior year, costing us
approximately 18 cents a share on a same-facility basis in fiscal
1999, plus an additional 5 cents per share to finance higher
receivables. Among the many factors influencing this increase are a
shift in our payor mix from Medicare to managed care, "slow-pay"
initiatives by certain managed care companies and an increase in
care provided to uninsured patients at certain hospitals.
To help reduce our bad debt expense, we consolidated
responsibility for patient financial services - all the steps from
admission through the billing and collections process - in a new
department specially created for that purpose. Actions taken so far
by the department include focusing on admitting procedures at our
hospitals to identify best practices; simplifying certain managed
care contracts to reduce disputes over bills; developing special
teams
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 2
<PAGE>
LETTER TO SHAREHOLDERS (continued)
to focus on hospitals with significant bad debt problems, and enhancing our
information systems so that we can better monitor and respond to those
problems. We saw some improvement in bad debt expense toward the end of
fiscal 1999 as a result of these initiatives. On a same-facility basis, our
bad debt expense dropped slightly from the second to third quarter, and again
from the third to the fourth quarter.
STRENGTHENING OUR INTEGRATED DELIVERY SYSTEMS
To better support our integrated delivery systems, we made some major
changes to our operational structure in fiscal 1999, grouping our 130
hospitals into three operating divisions instead of two. This enabled our
most-senior divisional managers to focus their attention on fewer hospitals.
Instead of being responsible for 60 or 70 hospitals, they will oversee 30 to
40 facilities. Similarly, each of our 11 regions or markets will be
responsible for between five and 12 hospitals, instead of as many as 18.
Although integrated delivery systems have been central to our strategy
for four years, there are some hospitals in our portfolio that either are not
part of - or are not essential to - a network. For that reason, we have
identified 20 hospitals as candidates for sale in fiscal 2000 and we are
currently evaluating bids for many of them. The first definitive agreement
was announced in July 1999 and we expect other announcements to follow in the
coming months. Divesting hospitals that do not fit our strategic profile is
part of our continuing effort to strengthen our overall portfolio.
We also strengthened our existing integrated delivery systems through
strategic acquisitions in fiscal 1999.
Further augmenting our strong Southern California network, we acquired
Queen of Angels-Hollywood Presbyterian Medical Center, a 409-bed hospital
located in the densely populated area of Los Angeles, and Rancho Springs
Medical Center, a 99-bed hospital in Murrieta, Calif. Additionally, we
expanded our assets in New England with the acquisition of an 80 percent
interest in MetroWest Medical Center, a two-hospital system in Framingham and
Natick, Mass. The remaining 20 percent interest in the medical center is
owned by a local not-for-profit organization.
Philadelphia - the site of our largest acquisition in fiscal 1999
- - dramatically illustrates our strategy for entering a new market. By
acquiring the eight Allegheny Health, Education and Research Foundation
(AHERF) hospitals out of bankruptcy in November 1998, we gained instant
access to a new market for Tenet and immediately became an important force in
the market.
The AHERF hospitals were losing vast sums of money and near collapse
when we acquired them. We quickly mobilized an extensive array of
3 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
LETTER TO SHAREHOLDERS (continued)
in-house expertise to evaluate the system, diagnose its problems
and develop solutions. On the day we completed the acquisition we
had a management team in place, ready to quickly implement those
solutions. The result was an immediate improvement in profitability.
Today, our Philadelphia operations are performing better than
we initially expected. Operating income before depreciation and
amortization turned positive in January 1999, our second full month
of operation. We are stabilizing and enhancing physician relations
at these facilities and rebuilding the community's confidence in
them. We've also made significant progress in cutting costs - by
reducing the work force through attrition and layoffs,
renegotiating contracts to lower supply costs, buying out expensive
equipment leases and negotiating regional purchasing contracts for
local services, leveraging the network's size to obtain volume
discounts.
Philadelphia has been a crucial test of what we believe is a
unique competency of Tenet - our ability to diagnose and treat
ailing large hospital systems. While fiscal 1999 was certainly a
difficult year for Tenet, we believe the reimbursement and other
pressures affecting us are even tougher on not-for-profit hospitals
and systems, which typically have slimmer margins and
less-effective cost controls. Going forward, we believe this will
lead to the kind of acquisition opportunities we are looking for -
carefully selected acquisitions that offer significant growth
opportunities.
A NEW MANAGEMENT TEAM
Fiscal 1999 brought significant changes within the company's
leadership. After 20 years with the company, Michael H. Focht Sr.
retired as Tenet's President and Chief Operating Officer. While he
is no longer involved in day-to-day operations, Mike remains a
member of Tenet's Board of Directors and is available as a
consultant. Mike and I joined the board of Tenet's predecessor
company on the same day, and he was the one I turned to in 1993 to
help fix what was then a very troubled company. Mike helped turn
our company into an industry leader, growing core revenues from
approximately $2 billion to nearly $11 billion in the space of five
short years. The leadership, integrity and intelligence he
displayed during his career with Tenet will be greatly missed.
Instead of replacing Mike directly, we took this opportunity
to reorganize our senior management structure, emphasizing a
hands-on management approach that is consistent with our strategy
of focusing more intently on improving our existing operations. We
created a new Office of the President consisting of Trevor Fetter,
Chief Corporate Officer and Chief Financial Officer, and Thomas B.
Mackey, Chief Operating Officer. Trevor, whose previous title was
Executive Vice President and Chief Financial Officer, now
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 4
<PAGE>
LETTER TO SHAREHOLDERS (continued)
is also responsible for all of the company's corporate functions, while Tom,
who previously served as Executive Vice President for Operations in the
western half of the country, is responsible for all hospital operations.
We also appointed three highly regarded new members to our Board of
Directors within the last 16 months - Sanford Cloud Jr., President and Chief
Executive of The National Conference for Community and Justice (NCCJ); The
Rev. Lawrence Biondi S.J., President of Saint Louis University, and Floyd D.
Loop M.D., Chairman and Chief Executive Officer of The Cleveland Clinic
Foundation.
Mr. Cloud, the first African-American leader of the NCCJ (known for most
of its 70-year history as The National Conference of Christians and Jews), is
a board member for various corporations and philanthropic organizations, as
well as a lecturer, lawyer, former legislator and corporate executive. His
insight and counsel have been invaluable in helping us meet the diverse needs
of the many communities we serve. Fr. Biondi, a Catholic, Jesuit priest,
brings his expertise as the successful head of a major university with a
renowned medical school, as well as his insight into medical ethics. Dr.
Loop, a noted thoracic and cardiovascular surgeon, adds his background in
health care administration with the prestigious Cleveland Clinic Foundation,
known worldwide for the quality of its clinical care, research and education.
LOOKING AHEAD
We continue to face a number of serious challenges in fiscal 2000, the
most significant of which is an additional $100 million reduction in
government reimbursement. This estimate, based on information currently
available, includes incremental Medicare reimbursement cuts from the BBA, as
well as proposed reductions in both Medicare "outlier" payments and
disproportionate share Medicaid reimbursement to some of our California
hospitals. These outlier payments are intended to reimburse hospitals for
high-acuity patients whose length of stay and cost of treatment is well
beyond the averages established in the diagnostic-related group (DRG)
payment. The California disproportionate share program compensates hospitals
that care for a higher-than-average mix of Medicaid and uninsured patients.
As discussed earlier in this letter, we have developed and are
implementing various strategies to absorb these cuts and grow in spite of
them. Our actual results will depend importantly on the success of each of
these initiatives.
Further, Tenet has many inherent strengths, as well as strategic
advantages, that give me cause for optimism in fiscal 2000 and beyond. Our
portfolio of hospitals is strong - and will be even stronger when our
divestiture program is complete. It includes facilities that are cornerstones
in their communities,
5 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
LETTER TO SHAREHOLDERS (continued)
institutions that are renowned for the quality care they provide
their patients. Two of our hospitals - Saint Louis University
Hospital and Memorial Medical Center in New Orleans - were recently
included in U.S. News & World Report's list of America's Top
Hospitals. Both facilities are key components of our integrated
delivery systems in their markets.
Our integrated market strategy continues to reward us with
significant cost-saving opportunities, market share gains and
better pricing for commercial customers.
We continue to enjoy all the advantages of a large national
provider network. Our hospitals represent 130 individual learning
laboratories in which we can develop and test innovative ideas and
approaches, then pass along the best of them to our other
facilities and integrated systems.
Above all, we are fortunate in the quality and professionalism
of our 126,000 employees, the vast majority of whom work at our
hospitals. Their dedication to providing quality, compassionate
care to our patients remains one of this company's strongest assets.
I thank you for supporting Tenet in fiscal 1999. We are
working very hard to make fiscal 2000 a better year for our
company, our employees and our shareholders.
Sincerely,
/s/ Jeffrey C. Barbakow
Jeffrey C. Barbakow
Chairman and Chief Executive Officer
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 6
<PAGE>
FINANCIAL SUMMARY
SELECTED FINANCIAL DATA CONTINUING OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net operating revenues $ 5,161 $ 7,706 $ 8,691 $ 9,895 $ 10,880
Operating expenses:
Salaries and benefits 2,170 3,139 3,595 4,052 4,412
Supplies 668 1,056 1,197 1,375 1,525
Provision for doubtful accounts 260 436 498 588 743
Other operating expenses 1,189 1,658 1,878 2,071 2,342
Depreciation 232 319 335 347 421
Amortization 44 100 108 113 135
Merger, impairment and other unusual charges 37 86 619 221 363
--------------------------------------------------------
Operating income 561 912 461 1,128 939
Interest expense, net of capitalized portion (251) (425) (417) (464) (485)
Investment earnings 32 27 27 22 27
Equity in earnings of unconsolidated subsidiaries 43 25 -- -- --
Minority interests in income of consolidated subsidiaries (10) (30) (27) (22) (7)
Net gains (losses) on disposals of facilities and long-term investments 31 346 (18) (17) --
Income from continuing operations before income taxes 406 855 26 647 474
Taxes on income (128) (373) (89) (269) (225)
--------------------------------------------------------
Income (loss) from continuing operations $ 278 $ 482 $ (63) $ 378 $ 249
- ----------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share from continuing operations $ 1.17 $ 1.71 $ (0.21) $ 1.23 $ 0.80
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share from continuing operations $ 1.12 $ 1.65 $ (0.21) $ 1.22 $ 0.79
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 31,
1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital $ 273 $ 499 $ 621 $ 1,182 $ 1,940
Total assets 9,787 10,768 11,606 12,774 13,771
Long-term debt, excluding current portion 4,287 4,421 5,022 5,829 6,391
Shareholders' equity 2,385 3,267 3,224 3,558 3,870
Book value per common share 9.15 11.09 10.65 11.50 12.44
</TABLE>
7 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The health care 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 strong integrated health care delivery systems.
The Company reported income from continuing operations before income
taxes of $26 million in 1997, $647 million in 1998 and $474 million in 1999.
The most significant items affecting the results of continuing operations in
the last three years have been: (1) acquisitions and disposals (see Note 3 of
Notes to Consolidated Financial Statements herein), and (2) merger,
impairment and other unusual charges (see Note 4 of Notes to Consolidated
Financial Statements herein). Fiscal 1997 also includes a noncash charge
relating to increases in the index value of certain of the Company's
long-term debt. Fiscal 1998 includes losses on the disposition of shares of
common stock in unconsolidated affiliates and a reversal of the noncash
charge taken in fiscal 1997. The pretax impact of these items is shown below:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1997 1998 1999
<S> <C> <C> <C>
Losses on sales of facilities and long-term investments, net $ (18) $ (17) $ --
Merger, impairment and other unusual charges (619) (221) (363)
-------------------------------------
Net pretax impact (after tax, diluted per share: $(1.44) in 1997,
$(0.51) in 1998 and $(0.86) in 1999) $(637) $(238) $(363)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Excluding the items in the table above, income from continuing
operations before income taxes would have been $663 million in 1997, $885
million in 1998 and $837 million in 1999.
In November 1998, subsidiaries of the Company purchased eight general
hospitals and certain other assets, including several physician practices, in
the Philadelphia, Pennsylvania area that were in bankruptcy proceedings. This
acquisition was dilutive to its earnings per share in fiscal 1999 by
approximately $0.05 per share. The operations of these hospitals have been
improving steadily since the date of acquisition and the Company expects that
they will continue this trend in fiscal 2000.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The following is a summary of operating income for the past three fiscal
years:
<TABLE>
<CAPTION>
1997 1998 1999 1997 1998 1999
(DOLLARS IN MILLIONS) (PERCENTAGE OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals $ 7,932 $ 8,997 $ 9,958 91.3% 90.9% 91.5%
Other operations (1) 759 898 922 8.7% 9.1% 8.5%
----------------------------------------------------------------------
$ 8,691 $ 9,895 $10,880 100.0% 100.0% 100.0%
- -----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and benefits (3,595) (4,052) (4,412) 41.4% 41.0% 40.6%
Supplies (1,197) (1,375) (1,525) 13.8% 13.9% 14.0%
Provision for doubtful accounts (498) (588) (743) 5.7% 5.9% 6.8%
Other operating expenses (1,878) (2,071) (2,342) 21.6% 20.9% 21.5%
Depreciation (335) (347) (421) 3.9% 3.5% 3.9%
Amortization (108) (113) (135) 1.2% 1.2% 1.2%
----------------------------------------------------------------------
Operating income before merger,
impairment and other unusual charges 1,080 1,349 1,302 12.4% 13.6% 12.0%
Merger, impairment and other unusual charges (619) (221) (363) 7.1% 2.2% 3.4%
----------------------------------------------------------------------
Operating income $ 461 $ 1,128 $ 939 5.3% 11.4% 8.6%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net operating revenues of other operations 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) health care
joint ventures operated by the Company; and (iv) subsidiaries of the
Company offering managed care and indemnity products.
The table below sets forth certain selected historical operating statistics
for the Company's domestic general hospitals:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
1997 1998 1999 1998 TO 1999
<S> <C> <C> <C> <C>
Number of hospitals (at end of period) 128 122 130 8 (2)
Licensed beds (at end of period) 27,959 27,867 30,791 10.5%
Net inpatient revenues (in millions) $ 5,227 $ 5,843 $ 6,516 11.5%
Net outpatient revenues (in millions) $ 2,515 $ 2,978 $ 3,185 7.0%
Admissions 786,887 872,433 940,247 7.8%
Equivalent admissions (1) 1,124,397 1,268,264 1,360,024 7.2%
Average length of stay (days) 5.2 5.2 5.2 --
Patient days 4,099,709 4,547,312 4,881,439 7.3%
Equivalent patient days (1) 5,817,251 6,557,525 6,997,079 6.7%
Net inpatient revenues per patient day $ 1,275 $ 1,285 $ 1,335 3.9%
Net inpatient revenues per admission $ 6,643 $ 6,697 $ 6,930 3.5%
Utilization of licensed beds 42.5% 44.0% 45.4% 1.4%(2)
Outpatient visits 9,997,266 10,402,957 9,654,975 (7.2)%
</TABLE>
(1) Equivalent admissions/patient days represents actual admissions/patient
days adjusted to include outpatient and emergency room services by
multiplying actual admissions/patient days by the sum of gross inpatient
revenues and outpatient revenues and dividing the result by gross inpatient
revenues.
(2) The change is the difference between the 1998 and 1999 amounts shown.
9 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<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-facility basis:
<TABLE>
<CAPTION>
INCREASE
1998 1999 (DECREASE)
<S> <C> <C> <C>
Average licensed beds 25,948 25,777 (0.7)%
Patient days 4,393,956 4,418,992 0.6%
Net inpatient revenue per patient day $ 1,294 $ 1,317 1.8%
Admissions 845,202 859,330 1.7%
Net inpatient revenue per admission $ 6,725 $ 6,770 0.7%
Outpatient visits 10,006,646 8,819,694 (11.9)%
Average length of stay (days) 5.2 5.1 (0.1)
</TABLE>
The table below sets forth the sources of net patient revenue for the
Company's domestic general hospitals:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
1997 1998 1999 1998 TO 1999(1)
<S> <C> <C> <C> <C>
Medicare 40.2% 38.0% 34.2% (3.8)%
Medicaid 8.6% 8.4% 9.1% 0.7%
Managed care 29.5% 33.7% 37.6% 3.9%
Indemnity and other 21.7% 19.9% 19.1% (0.8)%
</TABLE>
(1) The change is the difference between the 1998 and 1999 amounts shown.
Changes in Medicare payments mandated by the Balanced Budget Act of 1997
(the "BBA"), which became effective October 1, 1997, as well as certain
proposed changes to various states' Medicaid programs, have reduced and will
continue to reduce revenues and earnings significantly as these changes are
phased in over the next two years. The most significant changes were phased
in by October 1, 1998.
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 health care 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 4.7%
decline in the number of same-facility outpatient visits during 1998 compared
to 1997 and an 11.9% decline during 1999 compared to 1998. In response to the
changes in Medicare payments to home health agencies mandated by the BBA, the
Company has consolidated or closed several home health care agencies, which
resulted in the decline in visits.
Pressures to control health care costs and a shift from traditional
Medicare to Medicare managed care plans after the BBA was enacted have
resulted in an increase in the number of patients whose health care coverage
is provided
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
under managed care plans. 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. The Company has been assuming a greater
share of risk by entering into capitated arrangements with managed care
payors and employers. The Company estimates that approximately 5.5% of its
revenues were derived from capitated arrangements in the year ended May 31,
1999 compared to 5.0% in 1998. However, the Company expects its capitated
business to decline in the future since, in most of the large markets served
by the Company, capitation arrangements generally have been disappointing to
both physicians and hospitals.
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 of integrated health care delivery
systems. In certain markets the Company has outsourced many services such as
housekeeping, laundry, dietary and plant maintenance. In each case it has
gained significant cost savings by doing so and is now rolling out this
strategy to all its hospitals. Further consolidations or implementation of
additional cost-control programs may be implemented in the future to offset
the reduced payments under the BBA and the continuing shift from traditional
Medicare to managed care.
Net operating revenues from the Company's other operations were $759
million in 1997, $898 million in 1998 and $922 million in 1999. The increases
are primarily the result of new physician practices acquired as part of
hospital acquisitions. The Company has employed or entered into full-risk
management agreements with physicians in most of its markets. A large
percentage of these physician practices were acquired as part of large
hospital acquisitions or through the formation of integrated health care
delivery systems. However, the physician practice business has not been
profitable.
The Company is in the processs of reevaluating its physician strategy in
every one of its markets and is developing plans to allow a significant
number of its existing contracts to expire. Such plans could result in a
decision to exit the physician practice business during fiscal 2000. The
Company would expect to incur significant charges on the disposal of this
business, including estimated operating losses during the phase-out period,
if it decides to exit the business entirely. Such charges may require
significant cash expenditures as contract settlements with physicians and
physician groups are made. The benefits of such a strategy, which could be
significant, would not be expected to occur until fiscal 2001 and beyond.
Salaries and benefits expense as a percentage of net operating revenues
was 41.4% in 1997, 41.0% in 1998 and 40.6% in 1999. The decreases have
primarily resulted from continuing cost control measures and the outsourcing
of certain hospital services.
Supplies expense as a percentage of net operating revenues was 13.8% in
1997, 13.9% in 1998 and 14.0% in 1999. These increases relate primarily to
greater patient acuity and higher supplies expenses at recently acquired
facilities. The Company continues to focus on reducing supplies expense by
incorporating acquired facilities into the Company's existing
group-purchasing program and by developing and expanding various other
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 1997, 5.9% in 1998 and 6.8% in 1999. Management believes
the rise in bad debts is generally attributable to a number of factors,
including (a) the continuing shift of business from traditional Medicare,
which has no associated bad debts, to managed care, (b) a rise in the volume
of care provided to uninsured patients in certain of the Company's hospitals
and (c) delays in payment and denial of claims by managed care payors.
Although management is unable to quantify
11 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
the effect of each factor, management believes that, to the extent that the
Company continues to experience a fundamental shift in its payor mix, this
expense is likely to remain at higher levels than in past years. The Company
is taking a series of actions to mitigate these recent increases in bad debt
expense. In March 1999, the Company created a new, corporate-level department
combining all patient billing and account collection activities in order to
improve collection of receivables, accelerate payments from managed care
payors, standardize and improve billing systems and develop best practices in
the patient admissions and registration process. The Company is strengthening
its medical eligibility programs, as well as its business office and related
operations, including admitting, medical records and coding, and the
recruitment, training and compensation of business office staff. In certain
markets, the Company is also setting up dedicated managed care collection
units to focus on problem accounts, problem payors and the highly complex
reimbursement terms in managed care contracts.
Other operating expenses as a percentage of net operating revenues were
21.6% in 1997, 20.9% in 1998 and 21.5% in 1999. The expenses in 1997 include
unusual operating expenses of $17 million to conform accounting methodologies
used to estimate professional liability and other self-insurance reserves in
connection with the January 30, 1997 acquisition of OrNda HealthCorp (the
"OrNda Merger") and $32 million for the estimated costs to settle a
government investigation of an OrNda facility and other OrNda litigation. The
increase in 1999 is primarily due to the outsourcing of certain hospital
services mentioned earlier.
Depreciation and amortization expense was $443 million in 1997, $460
million in 1998 and $556 million in 1999. The increases are primarily due to
the effects of facility acquisitions and increased capital expenditures
partially offset by the effect of disposals, write-downs 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 the Company's physician practices. Goodwill amortization is
approximately $105 million annually or $0.29 per share.
Merger, impairment and other unusual charges of $619 million, $221
million and $363 million were recorded in fiscal 1997, 1998 and 1999,
respectively.
The charges recorded in fiscal 1999 consisted of (1) $277 million of
impairment losses for the Company's plan to sell 20 general hospitals and
close one general and one specialty hospital, (2) $48 million of
restructuring charges related to the implementation of hospital cost-control
programs and general overhead reduction plans, and (3) $38 million for the
impairment of carrying values of property, equipment and goodwill at
facilities and physician practices to be held and used.
The charges recorded in fiscal 1998 consisted of asset impairment losses
related primarily to (1) the planned closure or sale of three general
hospitals, two specialty hospitals and 29 home health agencies, (2) the
write-down of the carrying values of certain long-lived assets of one
additional general hospital and 16 home health agencies to be held and used
to their fair values and (3) the write-off of goodwill and other assets and
additional costs to terminate contracts related to physician practices and an
increase to the charges incurred in 1997 for the planned closures and sales.
The fiscal 1997 charges include impairment losses of $413 million,
related to the planned closure, sale or conversion to alternate uses of
certain of the Company's facilities and services in order to eliminate
duplication of services and excess capacity following the OrNda Merger and
the write-off of goodwill and other assets related to the Company's physician
practices. In fiscal 1997, the Company recorded other charges in connection
with the OrNda Merger of $188 million, which included: investment banking and
other professional fees, other transaction costs, severance payments for
substantially all of OrNda's corporate and regional employees, closure of
OrNda's corporate office and regional offices, reorganization of operations
and information systems consolidation, primarily related to
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
the buy-out of vendor contracts and the write-down of computer equipment and
capitalized software. The Company also recorded $18 million to restructure
its physician practices in fiscal 1997.
The Company begins its process of determining if its facilities are
impaired (other than those related to the elimination of duplicate facilities
or excess capacity) by reviewing all of the facilities' three-year historical
and one-year projected cash flows. Facilities whose cash flows are negative
or trending significantly downward on this basis are selected for further
impairment analysis. Their future cash flows (undiscounted and without
interest charges) are estimated over the expected useful life of the facility
and consider patient volumes, changes in payor mix, revenue and expense
growth rates and reductions in Medicare payments due to the BBA, which vary
by facility. In 1997, 1998 and 1999, these factors caused significant
declines in cash flows at certain facilities such that estimated future cash
flows were inadequate to recover the carrying values of the long-lived
assets. Marked deterioration of operating results relative to past trends for
certain of the Company's physician practices also led to impairment and
restructuring charges related to these businesses in all three years.
Impairment charges have resulted in minor reductions in depreciation and
amortization expense.
In addition to striving to continuously improve its portfolio of general
hospitals through acquisitions, the Company also divests, from time to time,
hospitals that are not essential to its strategic objectives. In April 1999,
the Company announced a plan to sell approximately 20 non-strategic
hospitals. For the most part, these facilities are not part of an integrated
delivery system. The size and performance of these facilities varies, but on
average they are smaller, with lower margins. The hospitals in the
divestiture plan also include certain rural facilities. These divestitures
will allow the Company to streamline its organization by concentrating on
markets where it already has a strong presence. The anticipated proceeds from
these sales will be used to reduce debt. The Company expects to close these
sales by the end of the third quarter of fiscal 2000.
The charges recorded in fiscal 1999 included approximately $298 million
for noncash write-downs of assets and $65 million for accruals requiring
future cash disbursements, most of which are expected to occur in fiscal
2000. The charges recorded in fiscal 1998 included approximately $140 million
for noncash write-downs of assets and $81 million for accruals requiring
future cash disbursements. The charges recorded in fiscal 1997 included
approximately $387 million for noncash write-downs of assets and $232 million
for cash disbursements of $68 million in fiscal 1997 and accruals requiring
future cash disbursements estimated to be approximately $164 million.
Costs remaining in the accrued liability at May 31, 1999 for the 1998
charges include $7 million for the estimated costs to sell or close
hospitals, $4 million in home heath agency severance costs and $6 million in
estimated costs to terminate physician contracts, all of which are expected
to be spent in fiscal 2000.
Costs remaining in the accrued liability at May 31, 1999 for the 1997
charges include $19 million for estimated costs to sell or close facilities,
$20 million of accruals for unfavorable lease commitments and $8 million of
costs relating to the OrNda Merger. Cash payments are expected to be $41
million in fiscal 2000 and $6 million thereafter, primarily for unfavorable
lease commitments.
Interest expense, net of capitalized interest, was $417 million in 1997,
$464 million in 1998 and $485 million in 1999. The increases are primarily
due to increased borrowings for acquisitions and increases in working capital
offset by the effect of interest rate reductions.
Investment earnings were $27 million in 1997, $22 million in 1998 and
$27 million in 1999 and were derived primarily from notes receivable and
investments in debt securities.
Minority interests in income of consolidated but not wholly owned
subsidiaries were $27 million in 1997, $22 million in 1998 and $7 million in
1999. The decline in 1999 was primarily due to the purchase of the minority
13 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
interests in two hospitals and one insurance subsidiary in fiscal 1999.
The $17 million of net losses from the disposals of facilities and other
long-term investments in 1998 is comprised of $35 million in losses on the
disposals of the Company's investments in the common stock of Vencor, Inc.
("Vencor") (received as a dividend from Ventas, Inc. ("Ventas")) and Total
Renal Care Holdings, Inc. ("TRC"), and an $18 million gain from changes in
the index value of the Company's 6% Subordinated Exchangeable Notes.
The Company's tax provision in 1997 includes the effect of certain
nondeductible merger costs and impairment charges that provide no tax
benefits. The tax provision in 1998 includes a benefit for the charitable
contribution of TRC common stock, offset by nondeductible amortization of
goodwill. The Company's 1999 tax provision includes certain nondeductible
impairment charges related to certain facilities held for sale that provide
no tax benefits. The Company's tax rate in 1999 before the effect of
impairment and other unusual charges was 38.3%. The Company expects this tax
rate to increase slightly in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the year ended May 31, 1999 was derived
principally from the proceeds from borrowings under its unsecured revolving
bank agreement ("Credit Agreement") and net cash proceeds from operating
activities. Net cash provided by operating activities for the years ended May
31, 1997, 1998 and 1999 was $512 million, $788 million and $657 million,
respectively, before net expenditures for discontinued operations, merger,
impairment and other unusual charges of $108 million in 1997, $385 million in
1998 and $75 million in 1999. The expenditures in 1998 include the settlement
of significant litigation related to the Company's discontinued psychiatric
business.
Management believes that future cash provided by recurring operating
activities, the availability of credit under the Credit Agreement, the sale
of assets and, depending on capital market conditions and to the extent
permitted by the restrictive covenants of the Credit Agreement and the
indentures governing the Company's Senior and Senior Subordinated notes,
other borrowings or the sale of equity securities should be adequate to meet
known debt-service requirements and to finance planned capital expenditures,
acquisitions and other presently known operating needs for the next three
years. The Company expects to refinance the Credit Agreement on or before its
January 31, 2002 maturity date.
Proceeds from borrowings under the Credit Agreements amounted to $3.1
billion in 1997, $2.0 billion in 1998 and $5.6 billion in 1999. Loan
repayments under the Credit Agreement were $1.9 billion during 1997, $1.3
billion in 1998 and $5.1 billion in 1999.
In May 1998, the Company sold $1.355 billion of Senior and Senior
Subordinated notes due 2008. The aggregate proceeds to the Company were $1.32
billion, after underwriting discounts and commissions, and were used to
redeem certain of the Company's Senior and Senior Subordinated notes.
During fiscal 1997, 1998 and 1999, the Company received net proceeds
from the sales of assets of $50 million, $170 million and $72 million,
respectively. As discussed earlier, the Company has announced a plan to sell
20 hospitals in fiscal 2000, the proceeds of which will be used to repay
borrowings under the Credit Agreement. The Company expects that it may divest
other hospitals in the future if it determines they are not essential to its
strategic objectives.
Cash payments for property and equipment were $406 million in fiscal
1997, $534 million in fiscal 1998 and $592 million in fiscal 1999. The
Company expects to spend approximately $400-$500 million annually on capital
expenditures, before any significant acquisitions of facilities and other
health care operations and before an estimated $216 million commitment to
complete construction of two new hospitals over the next two years. Such
capital expenditures relate primarily to the development of health care
service networks in selected geographic areas, design
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
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, including those related
to its year 2000 compliance program.
During fiscal 1997, 1998 and 1999, the Company spent $787 million, $679
million and $646 million, respectively, for purchases of new businesses, net
of cash acquired. These acquisitions were financed primarily by borrowings.
The Company does not expect its acquisition activity to continue at these
levels in fiscal 2000.
The Company's strategy includes the prudent development of integrated
health care systems, including the possible acquisition of general hospitals
and related health care businesses or joining with others to develop
integrated health care delivery networks. In addition, as previously
discussed herein, the Company is reevaluating its physician strategy. These
strategies may be financed by net cash provided by recurring operating
activities, the availability of credit under the Credit Agreement, sales of
assets and, to the extent permitted by the restrictive covenants of the
Credit Agreement and the indentures governing the Company's Senior and Senior
Subordinated notes, and depending on capital market conditions, the sale of
additional debt or equity securities or other bank borrowings. The Company's
unused borrowing capacity under the Credit Agreement was $632 million at May
31, 1999.
The Company's 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.
MARKET RISK ASSOCIATED WITH FINANCIAL INSTRUMENTS
The table below presents information about certain of the Company's
market-sensitive financial instruments as of May 31, 1999. The fair values
were determined based on quoted market prices for the same or similar
instruments.
<TABLE>
<CAPTION>
MATURITY DATE, FISCAL YEAR ENDING MAY 31,
(DOLLARS IN MILLIONS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-rate long-term debt $ 45 $ 11 $ 8 $464 $505 $3,330 $4,363 $4,252
Average interest rates 13.2% 13.2% 13.2% 8.6% 9.1% 8.4% 8.6% --
Variable-rate long-term debt -- -- $2,168 -- -- -- $2,168 $2,168
Average interest rates -- -- 5.9% -- -- -- 5.9% --
Interest rate swaps:
Notional amounts for agreements
under which the Company
pays fixed rates $ 18 $ 50 -- -- -- -- $ 68 $ 2
Average pay rate 8.8% 8.3% -- -- -- -- 8.4% --
Average received rate 5.2% 5.2% -- -- -- -- 5.2% --
Euro denominated foreign currency
forward exchange contracts $ 22 -- -- -- -- -- $ 22 $ 18
</TABLE>
15 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Company utilizes, to a limited extent, interest rate swaps and
foreign currency forward exchange contracts to manage certain of its interest
rate and currency exchange rate risk exposures. The interest rate swaps and
foreign currency contracts were entered into for periods consistent with
related underlying exposures and do not constitute positions independent of
those exposures. The Company does not hold or issue derivative instruments
for trading purposes and is not a party to any instruments with leverage or
prepayment features. In entering into these contracts, the Company has
assumed the risk, which it considers slight, that might arise from the
possible failure of the counterparties to perform. Because the other parties
are creditworthy financial institutions, generally commercial banks, the
Company does not expect any losses as a result of counterparty defaults.
At May 31, 1999, the Company's principal long-term investments sensitive
to changes in market price are shown in the following table. They are carried
at market value on the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) NUMBER OF SHARES MARKET VALUE
<S> <C> <C>
Ion Beam Applications, S.A. common stock 511,045 $166
iVillage, Inc. common stock 962,679 46
Total Renal Care Holdings, Inc. common stock 2,865,000 44
Ventas, Inc. common stock 8,301,067 45
Investment portfolio of debt securities n.a. 77
------------------------------
$378
- ------------------------------------------------------------------------------------------------
</TABLE>
At May 31, 1999, the investment portfolio of debt securities consisted
of investments in U.S. Treasury Bills, and Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association Notes, with an
average maturity of 180 days. The Company's market risk associated with its
short-term investments in debt securities is substantially mitigated by the
frequent turnover of the portfolio.
Included in the Company's fixed-rate long-term debt are 6% Exchangeable
Subordinated Notes due 2005 with an aggregate principal balance of $320
million. These notes are exchangeable at the option of the holder for 25.9403
shares of Ventas, Inc. common stock plus $239.36 in cash per $1,000 principal
amount of the notes, subject to the Company's right to also pay an amount in
cash equal to the market price of the Ventas shares in lieu of delivery of
such shares. To the extent that the fair market value of the Company's
investment in Ventas common stock and the related portfolio of debt
securities exceeds the carrying value of the notes, the Company must adjust
the carrying value of the notes to such fair market value through a charge or
credit to earnings. Corresponding adjustments to the carrying values of the
investments are credited or charged directly to other comprehensive income.
THE YEAR 2000 ISSUE
The Company is continuing its six-phase Year 2000 compliance program.
The first phase of the program, conducting an inventory of systems and
programs that may be affected by the Year 2000 issue, the second phase,
assessment of how the Year 2000 issues may affect each piece of equipment and
system, and the third phase, planning corrections of any problems discovered,
have been completed for both the Company's information technology systems
("IT Systems") and its non-IT Systems such as bio-medical equipment ("Non-IT
Items"), except for the 12 general hospitals and related operations that were
acquired in fiscal year 1999, with respect to which the first three phases
have been substantially completed. Phases four through six (executing the
plans developed, testing the corrections
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
and implementing the corrections across all of the Company's systems and
programs) are well under way and will run concurrently through the fall of
calendar 1999 for both IT-Systems and Non-IT Items.
The costs the Company has incurred to date in connection with its Year
2000 compliance program amount to approximately $51 million. This amount and
the estimated total cost do not include internal salaries and other internal
costs of the year 2000 compliance program. The Company estimates that its
total cost for addressing all Year 2000 issues will be approximately $100
million, substantially all of which will be accounted for as capital
expenditures. The Company cautions that its estimate is based on the
information available to the Company at this time. As the Company continues
to evaluate the full scope of its Year 2000 issues, its estimate of the costs
it may incur may change. 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
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 or take out of service, 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 phases 4-6 of its Year 2000 compliance program.
The Company is continuing to develop contingency plans to address any
Year 2000 issues that do arise. Since any piece of equipment that is not Year
2000 compliant will be made compliant, replaced or taken out of service, the
Company does not expect the Year 2000 issues to have an adverse impact on
patient care. Furthermore, the Company has developed or is developing a
back-up plan for each piece of critical equipment in case it unexpectedly
fails. Many contingency plans already are in place since contingency plans
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. Examples include (i) making certain that each
hospital's back-up power generator is operational if there is a power
failure, (ii) if the Company does not receive assurance that delivery of key
medical supplies will not be interrupted by Year 2000 issues, the Company
will identify reliable alternative sources for those supplies or will make
appropriate alternative arrangements, and (iii) if regular payments from a
principal payor might be adversely affected by Year 2000 issues, the Company
will endeavor to negotiate an alternative payment system.
The Securities and Exchange Commission'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, since any piece of equipment that is not
Year 2000 compliant will be made compliant, replaced or taken out of service,
the Company does not expect the Year 2000 issues to have an adverse impact on
patient care. 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 replace or take out of service some
of its existing equipment and 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.
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
17 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
alternative health care delivery services for less acutely ill patients.
Increased competition, admission constraints and payor pressure are expected
to continue.
The ongoing challenge facing the Company and the health care 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 health care delivery
and payment systems, the health care industry as a whole faces increased
uncertainty. The Company is unable to predict whether any new health care
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 its future business strategies.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report, including, without
limitation, statements containing the words believes, anticipates, expects,
will, may, might, should, estimates, 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 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 health care 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, health care; changes in business
strategy or development plans; the ability to attract and retain qualified
personnel, including physicians; the significant indebtedness of the Company;
the availability and terms of capital to fund the expansion of the Company's
business, including the acquisition of additional facilities; and the impact
of the Year 2000 Issues. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company 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.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Tenet Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Tenet
Healthcare Corporation and subsidiaries as of May 31, 1998 and 1999, and the
related consolidated statements of operations, comprehensive income, changes
in shareholders' equity and cash flows for each of the years in the
three-year period ended May 31, 1999. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tenet
Healthcare Corporation and subsidiaries as of May 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended May 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Jeffrey C. Barbakow
Los Angeles, California
July 27, 1999
19 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
(DOLLARS IN MILLIONS) 1998 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23 $ 29
Short-term investments in debt securities 132 130
Accounts receivable, less allowance for doubtful accounts ($191 in 1998 and $287 in 1999) 1,742 2,318
Inventories of supplies, at cost 214 221
Deferred income taxes 275 196
Assets held for sale, at the lower of carrying value or fair value less estimated costs to sell 33 655
Other current assets 471 413
-------------------
Total current assets 2,890 3,962
-------------------
Investments and other assets 498 569
Property and equipment, net 5,987 5,839
Costs in excess of net assets acquired, less accumulated amortization ($270 in 1998 and $339 in 1999) 3,317 3,283
Other intangible assets, at cost, less accumulated amortization ($55 in 1998 and $70 in 1999) 82 118
-------------------
$12,774 $13,771
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS` EQUITY
Current liabilities:
Current portion of long-term debt $ 10 $ 45
Accounts payable 657 713
Employee compensation and benefits 355 390
Accrued interest payable 106 163
Other current liabilities 580 711
-------------------
Total current liabilities 1,708 2,022
-------------------
Long-term debt, net of current portion 5,829 6,391
Other long-term liabilities and minority interests 1,256 1,048
Deferred income taxes 423 440
Commitments and contingencies
Shareholders' equity:
Common stock, $0.075 par value; authorized 700,000,000 shares; 313,044,417 shares issued at
May 31, 1998 and 314,778,323 shares issued at May 31, 1999 23 24
Additional paid-in capital 2,475 2,510
Accumulated other comprehensive income 50 77
Retained earnings 1,080 1,329
Less common stock in treasury, at cost, 3,754,891 shares at May 31, 1998 and 3,754,708 at May 31, 1999 (70) (70)
-------------------
Total shareholders' equity 3,558 3,870
-------------------
$12,774 $13,771
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 20
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1998 1999
<S> <C> <C> <C>
Net operating revenues $ 8,691 $ 9,895 $ 10,880
-------------------------------------------
Operating expenses:
Salaries and benefits 3,595 4,052 4,412
Supplies 1,197 1,375 1,525
Provision for doubtful accounts 498 588 743
Other operating expenses 1,878 2,071 2,342
Depreciation 335 347 421
Amortization 108 113 135
Merger, impairment and other unusual charges 619 221 363
-------------------------------------------
Operating income 461 1,128 939
-------------------------------------------
Interest expense, net of capitalized portion (417) (464) (485)
Investment earnings 27 22 27
Minority interests in income of consolidated subsidiaries (27) (22) (7)
Net losses on disposals of facilities and long-term investments (18) (17) --
-------------------------------------------
Income from continuing operations before income taxes 26 647 474
Taxes on income (89) (269) (225)
-------------------------------------------
Income (loss) from continuing operations (63) 378 249
Discontinued operations (134) -- --
Extraordinary charges from early extinguishment of debt (47) (117) --
-------------------------------------------
Net income (loss) $ (244) $ 261 $ 249
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common and common equivalent share:
Basic:
Continuing operations $ (0.21) $ 1.23 $ 0.80
Discontinued operations (0.44) -- --
Extraordinary charges (0.16) (0.38) --
-------------------------------------------
$ (0.81) $ 0.85 $ 0.80
- ---------------------------------------------------------------------------------------------------------------------
Diluted:
Continuing operations $ (0.21) $ 1.22 $ 0.79
Discontinued operations (0.44) -- --
Extraordinary charges (0.16) (0.38) --
-------------------------------------------
$ (0.81) $ 0.84 $ 0.79
- ---------------------------------------------------------------------------------------------------------------------
Weighted shares and dilutive securities outstanding (in thousands):
Basic 303,947 306,255 310,050
Diluted 303,947 312,113 313,386
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
(DOLLARS IN MILLIONS) 1997 1998 1999
<S> <C> <C> <C>
Net income (loss) $(244) $ 261 $ 249
Other comprehensive income (loss):
Unrealized gains (losses) on securities held as available for sale:
Unrealized net holding gains (losses) arising during period 134 (56) 51
Less: reclassification adjustment for realized gains included in net income -- (40) --
Foreign currency translation adjustments -- -- (5)
-------------------------------
Other comprehensive income (loss), before income taxes 134 (96) 46
Income tax benefit (expense) related to items of other comprehensive income (52) 36 (19)
-------------------------------
Other comprehensive income (loss) 82 (60) 27
-------------------------------
Comprehensive income (loss) $(162) $ 201 $ 276
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
OUTSTANDING ISSUED PAID-IN COMPREHENSIVE RETAINED TREASURY
(DOLLARS IN MILLIONS, SHARE AMOUNTS IN THOUSANDS) SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK
<S> <C> <C> <C> <C> <C> <C>
Balances, May 31, 1996 294,561 $ 22 $ 2,171 $ 28 $ 1,086 $ (40)
Net loss (244)
Other comprehensive income 82
Issuance of common stock 1,171 22 1
Stock options exercised 7,093 1 118
Pooling adjustment related to the OrNda Merger (23)
--------------------------------------------------------------------
Balances, May 31, 1997 302,825 23 2,311 110 819 (39)
Net income 261
Other comprehensive loss (60)
Issuance of common stock 997 26
Stock options exercised 5,468 138 (31)
--------------------------------------------------------------------
Balances, May 31, 1998 309,290 23 2,475 50 1,080 (70)
Net income 249
Other comprehensive income 27
Issuance of common stock 1,044 1 22
Stock options exercised 690 13
--------------------------------------------------------------------
Balances, May 31, 1999 311,024 $ 24 $ 2,510 $ 77 $ 1,329 $ (70)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 22
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
(DOLLARS IN MILLIONS) 1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (244) $ 261 $ 249
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 443 460 556
Provision for doubtful accounts 494 588 743
Additions to reserves for discontinued operations, merger,
impairment and other unusual charges 955 221 363
Deferred income taxes (200) 131 101
Extraordinary charges from early extinguishment of debt 47 117 --
Other items 44 38 17
Increases (decreases) in cash from changes in operating assets and liabilities,
net of effects from purchases of new businesses:
Accounts receivable (791) (988) (1,347)
Inventories and other current assets (7) (100) (114)
Accounts payable, accrued expenses and other current liabilities (145) 143 197
Other long-term liabilities and minority interests (84) (83) (108)
Net expenditures for discontinued operations, merger,
impairment and other unusual charges (108) (385) (75)
-----------------------------------
Net cash provided by operating activities 404 403 582
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (406) (534) (592)
Purchases of new businesses, net of cash acquired (787) (679) (646)
Proceeds from sales of facilities, long-term investments and other assets 50 170 72
Other items 18 (40) 19
-----------------------------------
Net cash used in investing activities (1,125) (1,083) (1,147)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 5,117 3,349 5,634
Loan payments (4,512) (2,762) (5,085)
Proceeds from exercises of stock options 59 80 13
Proceeds from sales of common stock 12 17 23
Other items (23) (16) (14)
-----------------------------------
Net cash provided by financing activities 653 668 571
-----------------------------------
Net increase (decrease) in cash and cash equivalents (68) (12) 6
Cash and cash equivalents at beginning of year 107 35 23
Pooling adjustment related to the OrNda Merger (4) --
-----------------------------------
Cash and cash equivalents at end of year $ 35 $ 23 $ 29
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- -------------------------------------------------------------------------------
The accounting and reporting policies of Tenet Healthcare Corporation
(together with its subsidiaries, "Tenet" or the "Company") conform to
generally accepted accounting principles and prevailing practices for
investor-owned entities within the health care industry. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management of the Company to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
A. THE COMPANY
Tenet is an investor-owned health care services company that owns or
operates, through its subsidiaries and affiliates (collectively,
"subsidiaries"), general hospitals and related health care facilities and
holds investments in other companies, including health care companies. The
Company's provision of health care through its domestic general hospitals,
physician practices and related health care facilities comprises a single
reportable operating segment under Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." At May 31, 1999, the Company's subsidiaries operated 130
domestic general hospitals serving urban and rural communities in 18 states,
with a total of 30,791 licensed beds. The Company's subsidiaries also owned
or operated physician practices, a small number of rehabilitation hospitals,
specialty hospitals, long-term-care facilities and psychiatric facilities
located on the same campus as, or nearby, the Company's general hospitals and
various other ancillary health care businesses.
At May 31, 1999, the Company's largest concentration of hospital beds
was in California with 26.4%, Texas with 14.7% and Florida with 14.4%. The
concentration of hospital beds in these three states increases the risk that
any adverse economic, regulatory or other developments that may occur in such
states may adversely affect the Company's results of operations or financial
condition.
The Company is subject to changes in government legislation that could
impact Medicare and Medicaid payment levels and to increased levels of
managed care penetration and changes in payor patterns that may impact the
level and timing of payments for services rendered.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Tenet and
its wholly owned and majority-owned subsidiaries. Significant investments in
other affiliated companies generally are accounted for using the equity
method. Intercompany accounts and transactions are eliminated in
consolidation. The results of operations of acquired businesses in purchase
transactions are included from their respective acquisition dates.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
C. NET OPERATING REVENUES
Net operating revenues consist primarily of net patient service
revenues, which are based on established billing rates less allowances and
discounts, principally for patients covered by Medicare, Medicaid and other
contractual programs. Payments under these programs are based on either
predetermined rates or the costs of services. Settlements for retrospectively
determined rates are estimated in the period the related services are
rendered and are adjusted in future periods as final settlements are
determined. Such adjustments have not been material during the years
presented herein. These estimates of governmental contractual allowances
(Medicare and Medicaid) are based on historically developed models adjusted
for currently effective reimbursement or contract rates, the results of which
are adjusted as final settlements of filed cost reports are reached, and are
determined on a hospital-by-hospital year-by-year basis. Estimates of
commercial contractual allowances are based primarily on the terms of
contractual arrangements with commercial payors. Contractual allowances and
discounts are deducted from accounts receivable in the accompanying
consolidated balance sheets. Management believes that adequate provision has
been made for adjustments that may result from final determination of amounts
earned under these programs. There are no known material claims, disputes or
unsettled matters with third-party payors not adequately provided for in the
consolidated financial statements. Approximately 45% of consolidated net
operating revenues were from participation of the Company's hospitals in
Medicare and Medicaid programs in 1997. It was approximately 42% in 1998 and
41% in 1999.
The Company provides care to patients who meet certain financial or
economic criteria without charge or at amounts substantially less than its
established rates. Because the Company does not pursue collection of amounts
determined to qualify as charity care, they are not reported in net operating
revenues or in operating and administrative expenses.
D. CASH EQUIVALENTS
The Company treats highly liquid investments with an original maturity
of three months or less as cash equivalents. The carrying amounts reported in
the consolidated balance sheets for cash and cash equivalents approximate
fair value.
E. INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investments in debt and equity securities are classified as
available-for-sale, held-to-maturity or as part of a trading portfolio. At
May 31, 1998 and 1999, the Company had no significant investments in
securities classified as either held-to-maturity or trading. Securities
classified as available-for-sale are carried at fair value if unrestricted
and their unrealized gains and losses, net of tax, are reported as
accumulated other comprehensive income. Realized gains or losses are included
in net income on the specific identification method.
F. LONG-LIVED ASSETS
The Company uses the straight-line method of depreciation for buildings,
building improvements and equipment over their estimated useful lives as
follows: buildings and improvements, 25 to 40 years; equipment, three to 15
years. Capital leases are recorded at the beginning of the lease term as
assets and liabilities at the lower of the present value
25 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
of the minimum lease payments or the fair value of the assets, and such
assets, including improvements, are amortized over the shorter of the lease
term or their estimated useful life. The Company capitalizes interest costs
related to construction projects. Capitalized interest was $12 million in
1997, $16 million in 1998 and $20 million in 1999.
Costs in excess of the fair value of the net assets of purchased
businesses (goodwill) generally are amortized over 20 to 40 years. The
straight-line method is used to amortize most intangible assets. Deferred
financing costs are amortized over the lives of the related loans using the
interest method.
Impairment of long-lived assets, including goodwill related to such
assets, is recognized whenever events or changes in circumstances indicate
that the carrying amount of the asset, or related groups of assets, may not
be fully recoverable from estimated future cash flows. The Company also
assesses the recoverability of goodwill at the enterprise level in a similar
manner. Measurement of the amount of impairment may be based on appraisal,
market values of similar assets or estimates of future discounted cash flows
resulting from use and ultimate disposition of the asset.
The Company begins its process of determining if its facilities are
impaired at each fiscal year-end by reviewing all of the facilities'
three-year historical and one-year projected cash flows. Facilities whose
cash flows are negative or trending significantly downward on this basis are
selected for further impairment analysis. Their future cash flows
(undiscounted and without interest charges) are estimated over the expected
useful life of the facility and consider patient volumes, changes in payor
mix, revenue and expense growth rates and reductions in Medicare payments due
to the Balanced Budget Act of 1997 (the "BBA") and other regulatory actions,
which assumptions vary by hospital, home health agency and physician
practice. The sum of those expected future cash flows is compared to the
carrying value of the assets. If the sum of the expected future cash flows is
less than the carrying amount of the assets, the Company recognizes an
impairment loss.
G. INDEXED DEBT INSTRUMENTS
Changes in liability resulting from increases or decreases in the index
value of the Company's 6% Exchangeable Subordinated Notes are accounted for
as adjustments of the carrying amount of the notes with corresponding charges
(or credits) to earnings.
H. INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. This approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
NOTE 3 - ACQUISITIONS AND DISPOSALS OF FACILITIES
- -------------------------------------------------------------------------------
On January 30, 1997, the Company acquired OrNda HealthCorp ("OrNda") by
issuing 81,439,910 shares of its common stock in a tax-free exchange for all
of OrNda's outstanding common stock in a transaction accounted for as a
pooling-of-interests.
Tenet's subsidiaries acquired 11 other general hospitals in fiscal 1997,
six general hospitals in fiscal 1998 and 12 general hospitals in fiscal 1999.
During the past three years, the Company also acquired a number of physician
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
practices, home health agencies and other health care operations. All of
these transactions have been accounted for as purchases. The results of
operations of the acquired businesses have been included in the Company's
consolidated statements of operations, comprehensive income, changes in
shareholders' equity and cash flows from the dates of acquisition. During the
year ended May 31, 1998, the Company sold or closed 10 general hospitals,
exchanged its ownership interest in one hospital for a minority interest in a
joint venture, combined the operations of two other general hospitals and
sold certain ancillary health care operations. During the year ended May 31,
1999, the Company sold two general hospitals, closed one and combined the
operations of two general hospitals and closed 29 home-health agencies. The
results of operations of the sold or closed businesses were not significant.
NOTE 4 - MERGER, IMPAIRMENT AND OTHER UNUSUAL CHARGES
- -------------------------------------------------------------------------------
1999
In the fourth quarter of the year ended May 31, 1999, the Company
recorded impairment and restructuring charges of $363 million relating to (in
millions):
<TABLE>
<S> <C>
The Company's 1999 Plan to sell 20 general hospitals and close one general and one specialty hospital by February 28, 2000 $277
Impairment of the carrying values of property, equipment and goodwill at 20 physician practices and other ancillary
health care businesses to be held and used 38
Implementation of hospital cost control programs and general overhead reduction plans 48
-----
$363
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The charges in the 1999 Plan above primarily consist of $264 million in
impairment charges to value property and equipment and other assets at the
lower of carrying value or estimated fair values for those facilities
included in the Company's plan that are to be closed or expected to be sold
at losses, including $10 million for estimated costs to sell, and $13 million
in other costs of closure, primarily lease cancellations. The Company expects
to dispose of other facilities at gains that will be recorded in the periods
of sale. The $38 million impairment charge includes $19 million for the
write-off of goodwill, $10 million for the write-down of property and
equipment to estimated fair values and $9 million for the write-down of other
assets. The principal elements of the $48 million restructuring charge for
the implementation of hospital cost control programs and general overhead
reduction plans are $18 million in lease cancellation costs, $15 million in
severance costs related to the termination of 233 employees in facilities and
120 employees in corporate overhead departments and $15 million in other exit
costs.
The Company decided to sell or close the above facilities because, for
the most part, they are in non-strategic markets and are not essential to the
Company's strategic objectives. The hospitals in the 1999 Plan also include
certain rural facilities. The execution of the plan will allow the Company to
concentrate on markets where it already has a strong presence.
The aggregate carrying amount of assets held for sale following the
above charges was $631 million and is included in assets held for sale in the
accompanying consolidated balance sheet at May 31, 1999. The results of
operations of the assets held for sale and the effect of suspending future
depreciation and amortization on these assets are not significant.
27 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1998
In the fourth quarter of the year ended May 31, 1998, the Company recorded
impairment charges of $221 million relating to (in millions):
<TABLE>
<S> <C>
The Company's 1998 Plan to close or sell:
Three general hospitals by May 31, 1999 $ 77
Two specialty hospitals by May 31, 1999 24
Twenty-nine home health agencies by August 31, 1998 38
Write-off of goodwill and other assets and additional costs to terminate contracts related to 33 of the Company's
physician practices by May 31, 1999 41
Impairment of the carrying value of goodwill at an additional general hospital 20
Impairment of the carrying values of property, equipment, goodwill and other assets at 16 home health agencies
to be held and used 7
A net increase in the estimate for losses from the 1997 Plan described below 14
-----
$ 221
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The charges in the 1998 Plan above primarily consisted of $42 million in
impairment charges to value property and equipment and other assets and $40
million to value goodwill at estimated fair values, which included, in the
case of facilities to be sold, $1 million for costs to sell. For the
hospitals to be closed, the charges also include $36 million of lease
commitments, demolition and other costs of closure. For the home health
agencies to be closed, the charges above also include (a) $14 million in
severance costs related to the termination of 489 employees at the agencies
and in the corporate overhead departments involved with these exit
activities, and (b) $6 million in other exit costs. The Company decided to
terminate the physician contracts because they were generating and were
projected to continue to generate operating losses. The $41 million charge
includes $32 million for the write-off of goodwill and other assets and $9
million for the estimated costs to cancel the employment or management
service agreements with the physicians. The $14 million increase in the
estimate for losses from the 1997 Plan was primarily to record $33 million of
additional impairment charges at five hospitals from the 1997 Plan based on
revised estimates of fair value and costs to sell or close, less $19 million
of favorable adjustments at two other hospitals while they were held for
disposal and whose fair market values increased during the year ended May 31,
1998. The aggregate carrying amount of assets held for disposal following the
above charges was $38 million. The results of operations of the assets held
for disposal and the effect of suspending future depreciation on impaired
assets are not significant.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1997
In the third and fourth quarters of the year ended May 31, 1997, the
Company recorded merger, restructuring and impairment charges totaling $619
million, relating to (in millions):
<TABLE>
<S> <C>
The OrNda Merger, including the following:
Closure of OrNda's corporate and regional offices; consolidation of operations $ 90
Severance for 230 identified employees 56
Investment banking, professional fees and other transaction costs 27
Information systems consolidations, primarily related to the buy-out of vendor contracts,
and the write-down of computer equipment and capitalized software 15
The Company's 1997 Plan to close seven general hospitals and to sell eight
general hospitals and one other health care business in order to eliminate
the duplication of services and excess capacity following the OrNda Merger 219
Impairment of the carrying values of long-lived assets to their estimated fair
values and other related costs at four general hospitals and three
medical office buildings and unfavorable lease commitments at six
medical office buildings acquired from OrNda 134
Write-off of goodwill and other long-lived assets related to some of the
Company's physician practices which are deemed not to be fully recoverable
based on the trends of operating results 60
A restructuring of physician practices, including severance for physicians,
write-offs of computer equipment and software, physician contract
terminations and the costs to reorganize regional management service
organizations 18
-----
$ 619
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The $219 million charge for the Company's 1997 Plan consists of $129
million of impairment losses to value property, equipment and other assets at
estimated fair values, $34 million of impairment losses to write-down
goodwill and $56 million of estimated costs to sell or close facilities
subject to the 1997 Plan (including demolition costs). The other impairment
charges of $134 million above consist of $65 million in write-downs of
property and equipment, $44 million in write-downs of goodwill to estimated
fair values and $25 million for the unfavorable lease commitments.
Three of the hospitals to be closed under the 1997 Plan were converted
to alternate uses. The aggregate carrying amount of assets held for disposal
following the above charges was $130 million. The results of operations of
assets held for disposal and the effect of suspending future depreciation on
impaired assets were not significant. At May 31, 1998 management reclassified
two of these facilities from assets to be disposed of to assets to be held
and used, adjusted the fair values while they were held for disposal based on
the Company's revised expectation of future positive cash flows from
operations and eliminated the portion of the reserve set aside in fiscal 1997
for estimated costs to sell. All sold facilities were sold for amounts that
approximated the estimated sales proceeds.
In the third and fourth quarters of the year ended May 31, 1997 the
Company also recorded unusual operating expenses related to OrNda, which
expenses are reflected in the related expense line item in the consolidated
statement of operations for the following:
<TABLE>
<S> <C>
Costs to terminate or convert OrNda's employee benefit programs $ 18
Costs to conform accounting methodologies used to estimate allowances for doubtful accounts 5
Costs to conform accounting methodologies for estimating allowance for self-insurance reserves 19
Estimated costs to settle a government investigation of an OrNda facility and other OrNda litigation 32
------
$ 74
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
29 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below presents a reconciliation of beginning and ending
liability balances in connection with merger and impairment charges recorded
in fiscal 1997, 1998 and 1999, as of May 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
TRANSACTIONS IN FISCAL 1998 TRANSACTIONS IN FISCAL 1999
BALANCES AT BALANCES AT BALANCES AT
MAY 31, CASH OTHER MAY 31, CASH OTHER MAY 31,
DESCRIPTION OF CHARGES 1997(2) CHARGES PAYMENTS ITEMS(1) 1998(2) CHARGES PAYMENTS ITEMS(1) 1999(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The OrNda Merger:
Closure of corporate and
regional offices $ 39 $-- $ (15) $ (12) $ 12 $-- $ (4) $-- $ 8
Severance costs 21 -- (16) -- 5 -- (5) -- --
Transaction costs 3 -- (2) -- 1 -- (1) -- --
Information systems consolidation 11 -- (10) -- 1 -- (1) -- --
Estimated costs to close or sell
facilities in 1997 Plan 56 14 (35) -- 35 -- (2) (14) 19
Accruals for unfavorable lease
commitments at six medical
office buildings 25 -- (3) -- 22 -- (2) -- 20
Restructuring of physician practices 18 -- (13) (5) -- -- -- -- --
Impairment losses to value
property, equipment and goodwill
at estimated fair values 141 -- (141) -- -- -- -- --
Estimated costs to close or sell
facilities in 1998 Plan 37 -- -- 37 -- (8) (22) 7
Severance costs in connection with
the closure of 29 home health
agencies 14 -- -- 14 -- (10) -- 4
Other home health agency exit costs 6 -- -- 6 -- (6) -- --
Physician contract termination costs 9 -- -- 9 -- (3) -- 6
Impairment losses to value
property, equipment and goodwill
at estimated fair values 292 -- (292) --
Estimated costs to sell
facilities in 1999 Plan 10 -- (6) 4
Severance costs in connection with
the implementation of hospital
cost-control programs and
general overhead reduction plans 15 -- -- 15
Lease cancellation and other exit costs 46 -- -- 46
--------------------------------------------------------------------------------------
Total $ 173 $ 221 $ (94) $(158) $ 142 $ 363 $(42) $(334) $ 129
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Other items primarily include write-offs or write-downs of long-lived
assets, including property and equipment, goodwill and other assets.
(2) The above liability balances are included in other current liabilities and
other long-term liabilities in the accompanying consolidated balance
sheets.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - OTHER CURRENT ASSETS
- -------------------------------------------------------------------------------
Other current assets consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1998 1999
<S> <C> <C>
Other receivables $ 361 $ 278
Prepaid expenses and other current items 110 135
---------------------
$ 471 $ 413
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 6 - PROPERTY AND EQUIPMENT
- -------------------------------------------------------------------------------
Property and equipment is stated at cost less any impairment write-downs
related to assets held and used and consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1998 1999
<S> <C> <C>
Land $ 524 $ 527
Buildings and improvements 4,511 4,348
Construction in progress 409 388
Equipment 2,304 2,440
---------------------
7,748 7,703
Less accumulated depreciation and amortization (1,761) (1,864)
---------------------
Net property and equipment $ 5,987 $ 5,839
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
31 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - LONG-TERM DEBT AND LEASE OBLIGATIONS
- -------------------------------------------------------------------------------
A. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1998 1999
<S> <C> <C>
Loans payable to banks--Unsecured $ 1,587 $ 2,168
8 5/8% Senior Notes due 2003, $500 million face value, net of $8 million unamortized discount 491 492
7 7/8% Senior Notes due 2003, $400 million face value, net of $5 million unamortized discount 394 395
8% Senior Notes due 2005, $900 million face value, net of $18 million unamortized discount 879 882
7 5/8% Senior Notes due 2008, $350 million face value, net of $6 million unamortized discount 343 344
8 5/8% Senior Subordinated Notes due 2007, $700 million face value, net of $14 million unamortized discount 685 686
8 1/8% Senior Subordinated Notes due 2008, $1,005 million face value, net of $25 million unamortized discount 979
980
6% Exchangeable Subordinated Notes due 2005, $320 million face value, net of $7 million unamortized discount 312
313
Zero-coupon guaranteed bonds due 2002 30 33
Notes and capital lease obligations, secured by property and equipment payable in installments to 2016 121 125
Other notes, primarily unsecured 18 18
-----------------
5,839 6,436
-----------------
Less current portion (10) (45)
-----------------
$ 5,829 $ 6,391
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
LOANS PAYABLE TO BANKS -- In January 1997, in connection with the OrNda
Merger, the Company entered into a revolving credit agreement (the "Credit
Agreement") with a syndicate of banks that allows the Company to borrow,
repay and reborrow up to $2.8 billion prior to the agreement's January 31,
2002 maturity date. This agreement replaced the Company's previous unsecured
revolving credit agreement with a syndicate of banks. As a result of this
refinancing, as well as the refinancing of OrNda's debt, the Company recorded
an extraordinary charge from early extinguishment of debt in the amount of
$47 million, net of taxes of $29 million.
Loans under the Credit Agreement are unsecured and generally bear
interest at a base rate equal to the prime rate or, if higher, the federal
funds rate plus 0.50%, or, at the option of the Company, an adjusted London
interbank offered rate ("LIBOR") for one-, two-, three-, or six-month periods
plus an interest margin of from 22.50 to 68.75 basis points. The Company has
agreed to pay the lenders an annual facility fee on the total loan commitment
at rates ranging from 12.50 to 31.25 basis points. The interest margins and
facility fee rates are based on the ratio of the Company's consolidated total
debt to net earnings before interest, taxes, depreciation, amortization and
certain other similar noncash charges. During the year ended May 31, 1999 the
weighted average interest rate on loans payable to banks under the Credit
Agreement was 5.9%.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SENIOR NOTES AND SENIOR SUBORDINATED NOTES -- In May 1998, the Company
sold $350 million of 7 5/8% Senior Notes due 2008 and $1.005 billion of 8
1/8% Senior Subordinated Notes due 2008. The senior notes are redeemable at
any time at the option of the Company. The senior subordinated notes are not
redeemable by the Company prior to June 1, 2003. The net proceeds from the
sales of these notes were used to redeem $286 million of the Company's 9 5/8%
Senior Notes due 2002 and $897 million of 10 1/8% Senior Subordinated Notes
due 2005. In connection with this redemption, the Company recorded an
extraordinary charge from early extinguishment of debt in the amount of $117
million, net of tax benefits of $72 million.
In connection with the OrNda Merger and related refinancing, the Company
issued, on January 30, 1997, $400 million of 7 7/8% Senior Notes due January
15, 2003, $900 million of 8% Senior Notes due January 15, 2005 and $700
million of 8 5/8% Senior Subordinated Notes due January 15, 2007. These
Senior Notes and the $500 million of 8 5/8% Senior Notes due 2003 are not
redeemable by the Company prior to maturity. Subject to certain limitations
in the Credit Agreement, these Senior Subordinated Notes are redeemable at
the option of the Company, in whole or from time to time in part, at any time
on or after January 15, 2002.
The senior notes are unsecured obligations of the Company ranking senior
to all subordinated indebtedness of the Company, including the senior
subordinated notes, and equally in right of payment with all other
indebtedness of the Company, including borrowings under the Credit Agreement
described above. The senior subordinated notes also are all unsecured
obligations of the Company and are subordinated in right of payment to all
existing and future senior debt, including the senior notes and borrowings
under the Credit Agreement.
6% EXCHANGEABLE SUBORDINATED NOTES -- The 6% Exchangeable Subordinated
Notes due 2005 are exchangeable at the option of the holder for shares of
common stock of Ventas, Inc., formerly known as Vencor, Inc. ("Ventas"), at
an exchange rate of 25.9403 shares and $239.36 in cash (see Note 14) per
$1,000 principal amount of the notes, subject to the Company's right to also
pay an amount in cash equal to the market price of the shares of Ventas
common stock in lieu of delivery of such shares. Subject to certain
limitations in the Credit Agreement, the notes are now redeemable at the
option of the Company at any time. The notes also are unsecured obligations
of the Company subordinated in right of payment to all existing and future
senior and senior subordinated debt and borrowings under the Credit Agreement.
In May 1998, Ventas, in connection with a plan of reorganization, split
into two public companies: a self-administered, self-managed realty company
(Ventas), and an operating company now known as Vencor, Inc. ("Vencor"),
which leases hospitals and nursing facilities from Ventas. In May 1998, the
Company sold its Vencor common stock and invested the proceeds in a portfolio
of investments in U.S. government and U.S. government-sponsored agency
securities. These investments, which are held in escrow for the benefit of
the holders of the 6% Exchangeable Subordinated Notes, are treated as
available for sale.
To the extent that the fair market value of the Company's investment in
the common stock of Ventas and, from May 1998, the related investment
portfolio, exceeds the carrying value of the notes at the end of any
accounting period, the Company adjusts the carrying value of the notes to the
fair market value of the investments through a charge or credit to earnings.
Corresponding adjustments to the carrying value of the investments are
credited or charged directly to other comprehensive income as unrealized
gains or losses. At May 31, 1997, the market price of
33 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Ventas' common stock was $2.20 per share over the then-existing exchange
price of the stock. The Company accordingly recognized a noncash charge to
earnings in the amount of $18 million. This charge was included with the net
gain (or loss) on disposals of facilities and long-term investments in the
accompanying consolidated statement of operations for the year ended May 31,
1997. At the end of the Company's second quarter in fiscal 1998, the Company
reversed that charge because the market price of Ventas' common stock had
dropped below the exchange price. The combined value of the Ventas common
stock and the investment portfolio remained below the exchange price through
May 31, 1999.
LOAN COVENANTS -- The Credit Agreement and the indentures governing the
Company's outstanding public debt have, among other requirements, limitations
on borrowings by, and liens on the assets of, the Company or 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 stock unless its senior long-term
unsecured debt securities are rated BBB- or higher by Standard and Poors'
Rating Services and Baa3 or higher by Moody's Investors Service, Inc., and
covenants regarding maintenance of specified levels of net worth, debt ratios
and fixed-charge coverage ratios. Because of the dividend restrictions, all
of the Company's retained earnings are restricted. The Company is in
compliance with its loan covenants. There are no compensating balance
requirements for any credit line or borrowing.
B. LONG-TERM DEBT MATURITIES AND LEASE OBLIGATIONS
- -------------------------------------------------------------------------------
Future long-term debt cash maturities and minimum operating lease
payments are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 2000 2001 2002 2003 2004 LATER YEARS
<S> <C> <C> <C> <C> <C> <C>
Long-term debt $ 45 $ 11 $2,176 $ 464 $ 505 $3,330
Long-term leases 174 165 149 133 120 383
</TABLE>
Rental expense under operating leases, including short-term leases, was
$253 million in 1997, $283 million in 1998 and $290 million in 1999.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - INCOME TAXES
- -------------------------------------------------------------------------------
Taxes on income from continuing operations consist of the following
amounts:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1997 1998 1999
<S> <C> <C> <C>
Currently payable:
Federal $ 131 $ 66 $ 97
State 27 28 25
-------------------------------------
158 94 122
Deferred:
Federal (97) 112 83
State (4) 19 18
-------------------------------------
(101) 131 101
Other 32 44 2
-------------------------------------
$ 89 $ 269 $ 225
- ----------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation between the amount of reported income tax expense and
the amount computed by multiplying income before tax by the statutory Federal
income tax rate is shown below:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1997 1998 1999
<S> <C> <C> <C>
Tax provision at statutory federal rate of 35% $ 9 $ 227 $ 166
State income taxes, net of federal income tax benefit 17 27 28
Goodwill amortization 26 26 25
Donation of TRC common stock -- (25) --
Nondeductible merger costs 14 -- --
Nondeductible asset impairment charges 29 12 38
Change in valuation allowances and tax contingency reserves -- 10 (35)
Other items (6) (8) 3
-------------------------------------
$ 89 $ 269 $ 225
- ----------------------------------------------------------------------------------------------------------
</TABLE>
35 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred tax assets and liabilities as of May 31, 1998 and 1999 relate to
the following:
<TABLE>
<CAPTION>
1998 1999
(DOLLARS IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES
<S> <C> <C> <C> <C>
Depreciation and fixed-asset basis differences $ -- $824 $ -- $754
Reserves related to discontinued operations, merger,
impairment and other unusual charges 32 -- 152 --
Receivables-- doubtful accounts and adjustments 50 -- 44 --
Accruals for insurance risks 121 -- 101 --
Intangible assets -- 13 -- 8
Other long-term liabilities 235 -- 64 --
Benefit plans 80 -- 98 --
Other accrued liabilities 150 -- 92 --
Investments and other assets -- 57 -- 75
Federal and state net operating loss carryforwards 87 -- 41 --
Other items -- 9 1 --
--------------------------------------------------
$ 755 $903 $ 593 $837
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Management believes that realization of the deferred tax assets is more
likely than not to occur as temporary differences reverse against future
taxable income.
At May 31, 1999, the Company's carryforwards from prior OrNda tax
returns available to offset future federal net taxable income consisted of 1)
net operating loss carryforwards of approximately $118 million, expiring in
2000 through 2008, and 2) approximately $6 million in alternative minimum
taxes with no expiration.
Allowable federal deductions relating to net operating losses of OrNda
and certain of its subsidiaries are subject to annual limitations. These
limitations are not expected to significantly affect the ability of the
Company to ultimately recognize the benefit of these net operating loss
deductions in future years.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - CLAIMS AND LAWSUITS
- -------------------------------------------------------------------------------
A. PROFESSIONAL AND GENERAL LIABILITY INSURANCE
In its normal course of business, the Company is subject to claims and
lawsuits relating to patient treatment. The Company believes that its
liability for damages resulting from such claims and lawsuits is adequately
covered by insurance or is adequately provided for in its consolidated
financial statements.
The Company insures substantially all of its professional and
comprehensive general liability risks in excess of self-insured retentions
through a majority-owned insurance subsidiary. These self-insured retentions
currently are $1 million per occurrence and in prior years varied by hospital
and by policy period from $500,000 to $3 million per occurrence. A
significant portion of these risks is, in turn, reinsured with major
independent insurance companies. Prior to fiscal 1995, the Company insured
its professional and comprehensive general liability risks related to its
psychiatric and rehabilitation hospitals through a wholly owned insurance
subsidiary, which reinsured risks in excess of $500,000 per occurrence with
major independent insurance companies. The Company has reached the policy
limits provided by this insurance subsidiary related to the psychiatric
hospitals in most of its coverage years. In addition, damages, if any,
arising from fraud and conspiracy claims in psychiatric malpractice cases
(described under Legal Proceedings below) may not be insured.
In addition to the reserves recorded by the above insurance
subsidiaries, the Company maintains an unfunded reserve based on actuarial
estimates for the self-insured portion of its professional liability risks.
Reserves for losses and related expenses are estimated using expected
loss-reporting patterns and have been discounted to their present value.
Adjustments to the reserves are included in results of operations.
B. SIGNIFICANT LEGAL PROCEEDINGS
The Company has been involved in significant legal proceedings of an
unusual nature related principally to its subsidiaries' discontinued
psychiatric business and, although it has settled the most significant of
these matters, continues to defend a greater-than-normal level of civil
litigation relating to certain of its subsidiaries' former psychiatric
operations. In prior fiscal years the Company resolved these matters
primarily through settlement. Based on its experience in these cases,
however, and on recent lawsuits generated by continued advertisements by
certain lawyers seeking former patients in order to file claims against the
Company and certain of its subsidiaries, the Company now believes that the
vigorous defense and trial of these cases, and any additional lawsuits that
may be filed, ultimately will be the most cost-effective means of resolving
these issues.
In prior years, the Company recorded provisions to estimate the cost of
the ultimate disposition of all of these proceedings and to estimate the
legal fees that it expected to incur. The remaining reserves are for unusual
litigation costs and fees that relate to matters that had not been settled as
of May 31, 1999 and primarily represent management's estimate of the legal
fees and other related costs to be incurred subsequent to May 31, 1999. There
can be no assurance that the ultimate liability will not exceed such
estimates. Although, based upon information currently available to it,
management believes that the amount of damages, if any, in excess of its
reserves for unusual litigation costs that may be awarded in any 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. All of the
costs associated with these legal proceedings are classified in discontinued
operations.
37 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
A. PREFERRED STOCK PURCHASE RIGHTS AND PREFERRED STOCK
On December 7, 1998, the Company's Board of Directors adopted a new
stockholder rights plan to replace a similar plan upon its expiration on
December 22, 1998. The rights generally will be exercisable 10 business days
after a person or group acquires beneficial ownership of, or commences a
tender offer or exchange offer that would result in such person or group
beneficially owning, 15% or more of Tenet's common stock, unless such
transaction is approved by a majority of Board members not affiliated with
the acquiring person or group.
When exercisable, each right entitles the holder thereof to purchase
from the Company one one-thousandth of a share of Series B Junior
Participating Preferred Stock ("Preferred Stock") at a price of $120.00,
subject to adjustment. Each share of Preferred Stock will entitle its holder
(other than the acquiring person or group) to purchase shares of the
Company's common stock having a value of $240.00, as adjusted.
Subject to the foregoing, in the event the Company is acquired in a
merger or other business combination transaction in which shares of the
Company's common stock are exchanged for shares of another company or more
than 50% of the Company's assets are sold (in each case without approval of
the Board of Directors), each holder of a right generally will be entitled
upon exercise to purchase, for $120.00 as adjusted, common stock of the
surviving company having a market value equal to $240.00, as adjusted.
The Company may redeem the rights in whole but not in part at any time
prior to their becoming exercisable for $0.01 per right. The rights will
expire on the earlier to occur of (i) the Board ordering their redemption and
(ii) December 22, 2008.
The Series B Preferred Stock is nonredeemable and has a par value of
$0.01 per share. None of the 350,000 authorized shares of Series B Preferred
Stock are issued or outstanding.
B. WARRANTS
At May 31, 1999, there were warrants outstanding to purchase 124,064
shares of common stock at an exercise price of $13.25 per share. These
warrants may be exercised through April 30, 2000.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - STOCK BENEFIT PLANS
The Company has stock-based compensation plans, which are described
below. The Company has elected to continue to apply Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for stock options under
the plans because the exercise prices for all options granted during 1997,
1998 and 1999 were the quoted market prices on the option grant dates and all
option grants were to employees or directors.
At May 31, 1999, there were 9,844,397 shares of common stock available
for future grants of stock options and performance-based incentive awards to
the Company's key employees, advisors and consultants. The exercise price of
each option generally equals the market price of the Company's stock on the
date of grant and options are normally exercisable at the rate of one-third
per year beginning one year from the date of grant. Stock options generally
expire 10 years from the date of grant. No performance-based incentive stock
awards have been made since fiscal 1994.
The Company has a Directors Stock Option Plan that makes available for
issuance to nonemployee directors options to purchase shares of common stock.
At May 31, 1999 there were 192,500 shares available for future grant. Under
this plan each nonemployee director receives a stock option for 7,500 common
shares upon initially being elected to the Board of Directors and on the
fourth Thursday of each January thereafter. Awards have an exercise price
equal to the fair market value of the Company's shares on the date of grant,
vest one year after the date of grant and expire 10 years after the date of
grant.
All awards granted under the foregoing plans will vest under
circumstances defined in the plans or under certain employment arrangements,
including a change in control of the Company without the approval of the
Board of Directors.
The following table summarizes certain information about the Company's
stock options outstanding at May 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER OF OPTIONS CONTRACTUAL LIFE EXERCISE PRICE NUMBER OF OPTIONS EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$4.69 to $9.88 2,531,493 4.4 years $ 9.39 2,531,493 $ 9.39
$11.11 to $15.88 4,872,734 5.4 13.46 4,872,734 13.46
$16.25 to $21.63 5,035,236 7.0 20.51 3,904,402 20.65
$22.44 to $26.38 5,685,735 6.9 24.28 3,655,391 24.18
$29.94 to $35.13 13,262,321 9.0 31.30 1,869,541 33.11
---------- ----------
31,387,519 7.4 23.76 16,833,561 19.02
---------- ----------
</TABLE>
39 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the status of the Company's stock option plans as of May
31, 1997, 1998 and 1999, and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1997 1998 1999
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 26,299,166 $ 14.20 24,850,790 $ 17.25 23,284,572 $ 21.58
Granted 6,436,800 24.07 5,608,259 33.07 9,144,750 28.89
Exercised (7,093,224) 13.85 (6,547,332) 14.89 (690,102) 15.69
Forfeited (791,952) 19.92 (627,145) 22.27 (351,701) 28.07
---------- ---------- ----------
Outstanding at end of year 24,850,790 17.25 23,284,572 21.58 31,387,519 23.76
---------- ---------- ----------
Options exercisable at year-end 14,450,670 14.08 12,169,407 15.63 16,833,561 19.02
---------- ---------- ----------
Weighted average fair value of options
granted during the year 11.62 14.66 13.48
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair values of the option grants in the table above, and for purposes
of the pro forma disclosures below, have been estimated as of the date of each
grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1997 1998 1999
<S> <C> <C> <C>
Expected volatility 40% 33% 35%
Risk-free interest rates 6.5% 5.9% 4.9%
Expected lives, in years 5.8 6.1 7.2
Expected dividend yield 0% 0% 0%
</TABLE>
Had compensation cost for the Company's stock options been determined based
on these fair values for awards granted during the past four years, the
Company's net income (loss) and earnings (loss) per share would have been the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1997 1998 1999
<S> <C> <C> <C>
Net income (loss):
As reported $ (244) $ 261 $ 249
Pro forma (260) 231 199
Basic earnings (loss) per share:
As reported (0.81) 0.85 0.80
Pro forma (0.86) 0.76 0.65
Diluted earnings (loss) per share:
As reported (0.81) 0.84 0.79
Pro forma (0.86) 0.75 0.64
</TABLE>
These pro forma disclosures only account for stock options granted since
June 1, 1995. The pro forma impact is likely to increase in future years as
additional options are granted and amortized ratably over the vesting period.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - EMPLOYEE STOCK PURCHASE PLAN
- -------------------------------------------------------------------------------
The Company has an Employee Stock Purchase Plan under which it is
authorized to issue up to 5 million shares of common stock to eligible
employees of the Company or its designated subsidiaries. Under the terms of
the plan, eligible employees can elect to have between 1% and 10% of their
base earnings withheld each calendar quarter to purchase, on the last day of
the quarter, shares of the Company's common stock at a purchase price equal
to 85% of the lower of the closing price on the first day of the quarter or
its closing price on the last day of the quarter. Under the plan, the Company
sold 727,954 shares to employees in the year ended May 31, 1997 at a weighted
average price of $17.64 per share, 703,832 shares in the year ended May 31,
1998 at a weighted average price of $24.87 per share and 1,043,804 shares in
the year ended May 31, 1999 at a weighted average exercise price of $21.58
per share.
NOTE 13 - EMPLOYEE RETIREMENT PLANS
- -------------------------------------------------------------------------------
Substantially all employees who are employed by the Company or its
subsidiaries, upon qualification, are eligible to participate in a defined
contribution 401(k) plan. Employees who elect to participate generally make
contributions from 1% to 20% of their eligible compensation, and the Company
matches such contributions up to a maximum percentage. Company contributions
to the plans were approximately $32 million for fiscal 1997, $39 million for
fiscal 1998, and $49 million for fiscal 1999.
NOTE 14 - INVESTMENTS
- -------------------------------------------------------------------------------
The Company's principal long-term investments in unconsolidated
affiliates at May 31, 1999 included 511,045 shares of common stock of Ion
Beam Applications, S.A., 962,679 shares of iVillage, Inc., 8,301,067 shares
of Ventas and 2,865,000 shares of Total Renal Care Holdings, Inc. ("TRC").
Also included in the Company's long-term investments at May 31, 1999 is an
investment portfolio of U.S. government securities aggregating $77 million,
which resulted from the investment of the proceeds from the Company's sale of
8,301,067 shares of Vencor common stock that it received as a dividend from
Ventas in May 1998. This sale resulted in a pretax loss to the Company of $30
million in 1998. The portfolio is being held in an escrow account for the
benefit of the holders of the Company's 6% Exchangeable Notes (see Note 7).
The Company classifies all these investments as "available for sale" whereby
the carrying values of the shares and debt instruments are adjusted to market
value at the end of each accounting period through a credit or charge, net of
income taxes, to other comprehensive income. At May 31, 1998 and 1999, the
aggregate market value of these investments was approximately $299 million
and $378 million, respectively.
In March 1998, the Company contributed 2,135,000 shares of its TRC
common stock, with a fair market value of $75 million and an original cost
basis of $4 million, to the newly created Tenet Healthcare Foundation, a
charitable foundation through which Tenet conducts substantially all of the
Company's philanthropic grant making. The effect of the contribution to the
foundation, less the gain on the disposition of the TRC shares, has been
reflected in net losses on disposals of facilities and long-term investments
in the 1998 consolidated statement of operations.
41 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - DISCONTINUED OPERATIONS -- PSYCHIATRIC HOSPITAL BUSINESS
- -------------------------------------------------------------------------------
In fiscal 1997, the Company recorded $215 million (less income tax
benefits of $81 million) to reflect settlements of patient and other
litigation and to record the estimated future costs to settle the remaining
litigation all related to certain of its former psychiatric hospitals and to
increase the reserves of its wholly owned insurance subsidiary for
professional liability claims related to its former psychiatric hospitals by
an additional $42 million.
NOTE 16 - EARNINGS PER SHARE
- -------------------------------------------------------------------------------
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 or loss from continuing operations for each of the three years ended
May 31, 1997 through 1999. Income or loss is expressed in millions and
weighted average shares are expressed in thousands:
<TABLE>
<CAPTION>
EFFECT OF DILUTIVE SECURITIES
BASIC EARNINGS (LOSS) STOCK OPTIONS DILUTIVE EARNINGS (LOSS)
PER SHARE AND WARRANTS PER SHARE
<S> <C> <C> <C>
1997 Income (Numerator) $ (63) -- $ (63)
Weighted average shares (Denominator) 303,947 -- 303,947
Per share amount $ (0.21) $ (0.21)
- -------------------------------------------------------------------------------------------------------------------
1998 Income (Numerator) $ 378 -- $ 378
Weighted average shares (Denominator) 306,255 5,858 312,113
Per share amount $ 1.23 $ 1.22
- -------------------------------------------------------------------------------------------------------------------
1999 Income (Numerator) $ 249 -- $ 249
Weighted average shares (Denominator) 310,050 3,336 313,386
Per share amount $ 0.80 $ 0.79
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Outstanding options to purchase 18,948,056 shares of common stock were
not included in the computation of earnings per share for fiscal 1999 because
the options' exercise prices were greater than the average market price of
the common stock.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------------
The carrying amounts of cash and cash equivalents, accounts receivable,
current portion of long-term debt, accounts payable and accrued interest
payable approximate fair value because of the short maturity of these
instruments. The carrying values of investments, both short-term and
long-term (excluding investments accounted for by the equity method) are
reported at fair value. Long-term receivables are carried at cost and are not
materially different from their estimated fair values. The fair value of
long-term debt is based on quoted market prices and approximates its carrying
value.
NOTE 18 - SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
The Company paid interest (net of amounts capitalized) of $346 million,
$489 million and $417 million for the years ended May 31, 1997, 1998 and
1999, respectively. Income taxes paid, net of refunds received, during the
years ended May 31, 1997 and 1998 amounted to $147 million and $11 million,
respectively. Income tax refunds, net of taxes paid, during the year ended
May 31, 1999 were $7 million. The fair value of common stock issued for
acquisitions of hospitals and other assets was $11 million in 1997 and $9
million in 1998. During 1998, the Company received 1,078,800 shares of common
stock having a fair market value of $31 million as payment for a note and the
exercise of stock options.
NOTE 19 - SUPPLEMENTAL DISCLOSURES FOR OTHER COMPREHENSIVE INCOME
The following table sets forth the tax effects allocated to each
component of other comprehensive income for the years ended May 31, 1997,
1998 and 1999.
<TABLE>
<CAPTION>
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
(DOLLARS IN MILLIONS) AMOUNT OR BENEFIT AMOUNT
<S> <C> <C> <C>
Year ended May 31, 1997
Unrealized gains (losses) on securities held as available for sale $ 134 $ (52) $ 82
- ------------------------------------------------------------------------------------------------------------------------
Year ended May 31, 1998
Unrealized gains (losses) on securities held as available for sale $ (56) $ 36 $ (20)
Less: reclassification adjustment for realized gains included in net income (40) -- (40)
--------------------------------
$ (96) $ 36 $ (60)
- ------------------------------------------------------------------------------------------------------------------------
Year ended May 31, 1999
Foreign currency translation adjustment $ (5) $ 2 $ (3)
Unrealized gains (losses) on securities held as available for sale 51 (21) 30
--------------------------------
$ 46 $ (19) $ 27
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
43 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20 - RECENTLY ISSUED ACCOUNTING STANDARDS
- -------------------------------------------------------------------------------
The Company has adopted Statement of Financial Accounting Standards No.
131 "Disclosures About Segments of an Enterprise and Related Information."
Because the Company's business of providing health care through its domestic
general hospitals, physician practices, and related health care facilities is
a single reportable operating segment under this accounting standard, no new
or additional disclosures are required of the Company. The Company's chief
operating decision maker, as that term is defined in the accounting standard,
regularly reviews financial information about each of the Company's
facilities and subsidiaries for assessing performance and allocating
resources. Operating and resource allocation decisions are not made on a
market, regional or other geographical basis.
In March and in April 1998, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued two
Statements of Position ("SOPs") that are effective for financial statements
for fiscal years beginning after December 15, 1998, which will apply to the
Company beginning June 1, 1999. SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," provides guidance
on the circumstances under which the costs of certain computer software
should be capitalized and/or expensed. SOP 98-5, "Reporting on the Costs of
Start-Up Activities," requires such costs to be expensed as incurred instead
of capitalized and amortized.
As of June 1, 1999, the Company changed its method of accounting for
start-up costs in accordance with SOP 98-5. The change in accounting
principle will result in the write-off of the start-up costs capitalized as
of May 31, 1999 ($19 million, net of tax benefit). The write-off will be
shown as a cumulative effect of a change in accounting principle.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which is effective for financial statements for
fiscal years beginning after June 15, 2000, and which will apply to the
Company beginning June 1, 2001. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities.
The Company does not expect the adoption of these new accounting standards
and statements of position to have a material effect on its future results of
operations.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 44
<PAGE>
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS FISCAL 1999 QUARTERS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $2,331 $2,429 $2,564 $2,571 $2,553 $2,563 $2,822 $2,942
Income (loss) from continuing operations 116 138 148 (24) 137 125 124 (137)
Net income (loss) 116 138 148 (141) 137 125 124 (137)
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share from continuing
operations:
Basic $ 0.38 $ 0.45 $ 0.48 $(0.08) $ 0.44 $ 0.40 $ 0.40 $(0.44)
Diluted $ 0.38 $ 0.44 $ 0.47 $(0.08) $ 0.44 $ 0.40 $ 0.40 $(0.44)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Quarterly operating results are not necessarily representative of
operations for a full year. For example, fiscal 1997 includes expenses of
$151 million recorded in the third quarter and $37 million recorded in the
fourth quarter in connection with the OrNda Merger, and restructuring charges
of $18 million, impairment losses of $413 million and an $18 million loss for
the additional liability related to the Company's indexed debt instruments,
recorded in the fourth quarter, as well as a $47 million extraordinary charge
from early extinguishment of debt in the third quarter and a $134 million
charge to discontinued operations in the fourth quarter. Fiscal 1998 includes
an $18 million gain recorded in the second quarter related to a change in the
index value of the Company's 6% Exchangeable Notes, and a $35 million loss
from disposal of long-term investments, impairment charges of $221 million,
as well as a $117 million extraordinary charge from early extinguishment of
debt in the fourth quarter. Fiscal 1999 includes impairment and restructuring
charges of $363 million recorded in the fourth quarter.
COMMON STOCK INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1998 QUARTERS FISCAL 1999 QUARTERS
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price range:
High 31 1/2 33 1/4 37 1/2 40 15/16 35 3/8 31 1/4 31 15/16 26 3/4
Low 25 1/2 26 7/16 30 3/8 34 3/4 25 3/8 25 5/8 19 16
</TABLE>
At May 31, 1999, there were approximately 16,500 holders of record of
the Company's common stock. The Company's common stock is listed and traded
on the New York and Pacific stock exchanges. The stock prices above are the
high and low sales prices as reported in the NYSE Composite Tape for the last
two fiscal years. The Company's credit facility prohibits the declaration or
payment of dividends 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 Services, Inc.
45 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
DIRECTORS AND MANAGEMENT
BOARD OF DIRECTORS
Jeffrey C. Barbakow 1, 4
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
TENET HEALTHCARE CORPORATION
Lawrence Biondi, S.J. 2, 4, 5
PRESIDENT, ST. LOUIS UNIVERSITY
Bernice B. Bratter 1, 3, 4
PRESIDENT, LOS ANGELES WOMEN'S FOUNDATION
Sanford Cloud Jr. 5, 6, 7
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
NATIONAL CONFERENCE FOR COMMUNITY AND JUSTICE
Maurice J. DeWald 1, 2, 3, 7
CHAIRMAN, VERITY FINANCIAL GROUP, INC.
Michael H. Focht Sr. 1, 5
RETIRED PRESIDENT AND CHIEF OPERATING
OFFICER, TENET HEALTHCARE CORPORATION
Raymond A. Hay 2, 4, 5, 7
CHAIRMAN, ABERDEEN ASSOCIATES
Lester B. Korn 1, 3, 6
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
KORN TUTTLE CAPITAL GROUP
Floyd D. Loop, M.D. 2, 6
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
THE CLEVELAND CLINIC FOUNDATION
Richard S. Schweiker 2, 5
RETIRED PRESIDENT,
AMERICAN COUNCIL OF LIFE INSURANCE
BOARD COMMITTEES
1 Executive Committee
2 Audit Committee
3 Compensation and Stock Option Committee
4 Nominating Committee
5 Ethics and Quality Assurance Committee
6 Pension Committee
7 Shareholder Proposals Committee
PRINCIPAL MANAGEMENT
Jeffrey C. Barbakow
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Trevor Fetter
OFFICE OF THE PRESIDENT, CHIEF CORPORATE
OFFICER AND CHIEF FINANCIAL OFFICER
Thomas B. Mackey
OFFICE OF THE PRESIDENT, CHIEF OPERATING OFFICER
Stephen F. Brown
EXECUTIVE VICE PRESIDENT
AND CHIEF INFORMATION OFFICER
Alan R. Ewalt
EXECUTIVE VICE PRESIDENT, HUMAN RESOURCES
Reynold J. Jennings
EXECUTIVE VICE PRESIDENT, SOUTHEAST DIVISION
Raymond L. Mathiasen
EXECUTIVE VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
David R. Mayeux
EXECUTIVE VICE PRESIDENT,
ACQUISITION & DEVELOPMENT
Barry P. Schochet
VICE CHAIRMAN
W. Randolph Smith
EXECUTIVE VICE PRESIDENT,
CENTRAL-NORTHEAST DIVISION
Neil M. Sorrentino
EXECUTIVE VICE PRESIDENT, WESTERN DIVISION
Christi R. Sulzbach
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND CHIEF COMPLIANCE OFFICER
SENIOR VICE PRESIDENTS
William L. Bradley
CENTRAL STATES AND MASSACHUSETTS REGION
Dennis M. Brown
NORTHERN REGION
David S. Dearman
OPERATIONS FINANCE
Lee Domanico
PENNSYLVANIA REGION
Steven Dominguez
GOVERNMENT PROGRAMS
Michael W. Gallo
PATIENT FINANCIAL SERVICES
Jeffrey S. Heinemann
TENET PHYSICIAN SERVICES
Bruce L. Johnson
AUDIT SERVICES
T. Dennis Jorgensen
ETHICS, BUSINESS CONDUCT AND ADMINISTRATION
Ben F. King
FINANCE, CENTRAL-NORTHEAST DIVISION
Kenneth B. Love Jr.
FINANCE, WESTERN DIVISION
David S. McAdam
CORPORATE COMMUNICATIONS
Martin J. Paris, M.D., M.P.H.
MEDICAL AFFAIRS AND QUALITY IMPROVEMENT
Suzanne T. Porter
STRATEGY & DEVELOPMENT
Timothy L. Pullen
CONTROLLER
David C. Ricker
MATERIEL RESOURCE MANAGEMENT
Paul J. Russell
INVESTOR RELATIONS
Don S. Steigman
FLORIDA REGION
Michael E. Tyson
FINANCE, SOUTHEAST DIVISION
Kenneth K. Westbrook
ORANGE COUNTY MARKET
Barry A. Wolfman
QUAD COUNTIES MARKET
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 46
<PAGE>
VICE PRESIDENTS
Jacinta Titialii Abbott
ASSISTANT GENERAL COUNSEL
Michael P. Appelhans
ASSISTANT GENERAL COUNSEL
Craig C. Armin
GOVERNMENT PROGRAMS
William A. Barrett
ASSISTANT GENERAL COUNSEL
Steven R. Blake
FINANCE, NORTHERN REGION
Monica L. Bowman
OPERATIONS, TENET PHYSICIAN SERVICES
Sanford M. Bragman
RISK MANAGEMENT
Sam I. Brandt, M.D.
MEDICAL INFORMATICS & CLINICAL PROCESSES
Mark H. Bryan
FLORIDA REGION
Gregory H. Burfitt
SOUTHERN STATES REGION
Lourdes Cordero
HUMAN RESOURCES, OPERATIONS
Alan N. Cranford
OPERATIONS, INFORMATION SYSTEMS
Stephen F. Diaz
CORPORATE FINANCIAL PLANNING
Curtis L. Dosch
FINANCE, SOUTHERN STATES REGION
William R. Durham
FINANCE, SOUTHEAST DIVISION
Robert Duzan
FINANCE, WESTERN DIVISION
Donna E. Erb
ASSISTANT GENERAL COUNSEL
Deborah J. Ettinger
BUSINESS DEVELOPMENT, WESTERN DIVISION
Stephen D. Farber
TREASURER
Richard W. Fiske
ACQUISITION & DEVELOPMENT
Lynn S. Hart
GOVERNMENT RELATIONS
Robert S. Hendler, M.D.
MEDICAL EDUCATION & TECHNOLOGY ASSESSMENT
Lawrence G. Hixon
CORPORATE FINANCIAL REPORTING
Michael S. Hongola
FINANCIAL SYSTEMS
Jeffrey Koury
FINANCE, WESTERN DIVISION
Matthew A. Kurs
ST. LOUIS MARKET
Paul Kusserow
CORPORATE STRATEGY & VENTURES
William W. Leyhe
INTEGRATED DELIVERY, WESTERN DIVISION
William Loorz
CONSTRUCTION & DESIGN
John A. Lynn
COMPENSATION
Deborah A. Maicach
PATIENT MANAGEMENT APPLICATIONS
Stephen L. Newman, M.D.
GULF STATES REGION
Paul E. O'Neill
ACQUISITION & DEVELOPMENT
Steven T. Pfeil
BUYPOWER
Douglas E. Rabe
TAX
Rodney Reasoner
FINANCE, CENTRAL STATES & MASSACHUSETTS REGION
Norma Resneder
HUMAN RESOURCES, OPERATIONS
J. Scott Richardson
FINANCE, TEXAS REGION
Gary W. Robinson
ASSISTANT GENERAL COUNSEL
Mario E. Rodriguez
GOVERNMENT PROGRAMS
Leonard H. Rosenfeld
QUALITY MANAGEMENT
C. David Ross
FINANCE, FLORIDA REGION
Richard B. Silver
ASSOCIATE GENERAL COUNSEL AND
CORPORATE SECRETARY
Charles R. Slaton
TEXAS REGION
Gerald L. Stevens
STRATEGIC PROJECTS
Donald W. Thayer
ACQUISITION & DEVELOPMENT
Eric A. Tuckman
ACQUISITION & DEVELOPMENT
Gustavo A. Valdespino
LOS ANGELES COUNTY MARKET
Paul A. Walker
PENNSYLVANIA REGION
Davis L. Watts
BUSINESS OFFICE SERVICES
Steven Weiss
FINANCE, ST. LOUIS MARKET
William R. Wilson
FINANCE, PENNSYLVANIA REGION
SUBSIDIARIES
Jay A. Silverman
CHIEF EXECUTIVE OFFICER, SYNDICATED
OFFICE SYSTEMS
47 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
<PAGE>
COMMON STOCK LISTING
The Company's common stock is listed under the symbol THC on the New York and
Pacific stock exchanges.
Debt securities listed on the New York Stock Exchange are:
9 5/8% Senior Notes due 2002
7 7/8% Senior Notes due 2003
8 5/8% Senior Notes due 2003
6% Exchangeable Subordinated
Notes due 2005
8% Senior Notes due 2005
10 1/8% Senior Subordinated
Notes due 2005
8 5/8% Senior Subordinated
Notes due 2007
7 5/8% Series B Senior Notes
due 2008
8 1/8% Series B Senior Subordinated
Notes due 2008
INVESTOR CONTACTS
TRUSTEE/REGISTRAR
The Bank of New York
101 Barclay Street
New York, NY 10286
(800) 524-4458
COMMON STOCK TRANSFER AGENT AND REGISTRAR
The Bank of New York
(800) 524-4458
[email protected]
Holders of National Medical Enterprises, Inc. (NME) stock certificates who
would like to exchange them for Tenet certificates may do so by contacting
the transfer agent. Former shareholders of American Medical Holdings, Inc.
(AMI) and OrNda HealthCorp who have not yet redeemed their AMI or OrNda stock
for cash and Tenet stock should also contact the transfer agent.
Please send certificates for transfer and address changes to:
Receive and Deliver Dept. - 11W
P.O. Box 11002
Church Street Station
New York, NY 10286
Please address other inquiries for the transfer agent to:
Shareholder Relations Dept. - 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
COMPANY INFORMATION
The Company reports annually to the Securities and Exchange Commission on
Form 10-K. The Company also publishes an annual report to shareholders and
reports quarterly earnings. You may obtain copies of these and other
documents as listed below. Please note that the Company no longer mails
quarterly letters to shareholders; instead it has made available new means
for shareholders to obtain information on a more timely basis:
VIA THE WORLD WIDE WEB
The Company's web site, www.tenethealth.com, offers extensive information
about the Company's operations and financial performance, including a
comprehensive series of investor pages. Current and archived quarterly
earnings reports, annual reports and other documents can be accessed and/or
downloaded.
VIA FACSIMILE
To request that the Company's current quarterly earnings report be delivered
via facsimile, please call (888) 896-9016.
VIA MAIL
To request any financial literature be mailed to you, please call the
Company's literature request hotline at (805) 563-6969 or write to Tenet
Investor Relations.
INVESTOR RELATIONS
For all other shareholder inquiries, please contact:
Paul J. Russell
Senior Vice President,
Investor Relations
P.O. Box 31907
Santa Barbara, CA 93130
Phone: (805) 563-7188
Fax: (805) 563-6877
E-mail: [email protected]
Diana L. Takvam
Senior Director, Investor Relations
P.O. Box 31907
Santa Barbara, CA 93130
Phone: (805) 563-6883
Fax: (805) 563-6877
E-mail: [email protected]
ANNUAL MEETING
The annual meeting of shareholders of Tenet Healthcare Corporation will be
held at 11:00 a.m. on Wednesday, October 6, 1999, at the Westin Galleria
Hotel, 13340 Dallas Parkway, Dallas, Texas.
CORPORATE HEADQUARTERS
Tenet Healthcare Corporation
3820 State Street
Santa Barbara, CA 93105
(805) 563-7000
www.tenethealth.com
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 48
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Tenet HealthSystem Holdings, Inc.
(a) Tenet HealthSystem Medical, Inc.
(b) Tenet Management Services, Inc.
(c) Tenet Health Integrated Services, Inc.
(c) Quality Medical Management, Inc.
(c) Mid-Orange Medical Management, Inc.
(c) Alexa Integrated Medical Management, Inc.
(b) AHS Management Company, Inc.
(b) Alabama Health Connection, Inc.
(b) Alabama Medical Group, Inc.
(c) Alabama Medical Group-Gadsden Family Medicine
(c) Alabama Medical Group-Obstetrics and Gynecology, Inc.
(c) Alabama Medical Group-Primary Care I, Inc.
(c) Alabama Medical Group-Primary Care II, Inc.
(b) American Medical (Central), Inc.
(c) Amisub (Heights), Inc.
(c) Tenet Texas Employment, Inc.
(c) Amisub of Texas, Inc., OWNERSHIP - LIFEMARK HOSPITAL, INC.
(63.68%)
TENET HEALTHSYSTEM MEDICAL, INC. (19.75%)
BROOKWOOD HEALTH SERVICES, INC. (5.10%)
AMI INFORMATION SYSTEMS GROUP, INC. (.42%)
AMERICAN MEDICAL (CENTRAL), INC. (11.05%)
(c) Amisub (Twelve Oaks), Inc.
(c) Lifemark Hospitals, Inc.
(d) Tenet Healthcare, Ltd. - OWNERSHIP - LIFEMARK
HOSPITALS, GP (1%)
AMISUB OF TEXAS, INC., LP (70.1%)
AMISUB (HEIGHTS), INC., LP (10.3%)
AMISUB (TWELVE OAKS), INC., LP (18.6%)
(e) Odessa Hospital, Ltd. - OWNERSHIP-TENET
HEALTHCARE LTD., GP (78.125%);
INDIVIDUAL PHYSICIANS, LP (21.875%)
(d) Texas Healthcare Physician Services, Inc.
(d) 6103 Webb Road Ltd. - OWNERSHIP - LIFEMARK HOSPITALS,
INC.(88%)
PHYSICIANS DEVELOPMENT, INC. + EPP (9%)
DR. ROBERT SHERRILL (3%)
(d) Lifemark Hospitals of Florida, Inc.
(e) Palmetto Medical Plan, Inc.
(e) Pain Management Center of Tampa, Inc.
(e) T&C and USF Ob/Gyn Center, Inc.
(e) Hospital Constructors - OWNERSHIP - LIFEMARK
HOSPITALS OF FLORIDA, INC. (88%)
EASTERN PROFESSIONAL PROPERTIES, INC. (12%)
(d) Lifemark Hospitals of Louisiana, Inc.
(e) Kenner Regional Clinical Services, Inc.
(d) Lifemark Hospitals of Missouri, Inc.
(e) Lifemark RMP Joint Venture - OWNERSHIP - LIFEMARK
HOSPITALS OF MISSOURI, INC. (50%),
RMP, L.L.C. (50%)
(e) Procare Network II, Inc.
(d) Regional Alternative Health Services, Inc.
(e) Mid-Missouri Lithotripter Center - OWNERSHIP -
PHYSICIANS (68.33%)
REGIONAL ALTERNATIVE HEALTH SERVICES,
INC. (31.67%)
(d) Houston Specialty Hospital, Inc.
(d) Memphis Specialty Hospital, Inc.
(d) Tenet Investments-Kenner, Inc.
1
<PAGE>
(d) Tenet HealthSystem RMA, Inc.
(c) Texas Southwest Healthservices, Inc.
(d) Diagnostic and Therapeutic Cardiology Services, L.P. -
OWNERSHIP - PHYSICIANS (7.143%)
TEXAS SOUTHWEST HEALTHSERVICES, INC. (92.857%)
(b) American Medical Finance Company
(b) American Medical Home Care, Inc.
(b) American Purchasing Services, Inc.
(b) AMI Ambulatory Centres, Inc.
(c) Surgical Services, Inc.
(d) Ambulatory Care - Broward Development Corp.
(d) Surgical Services of West Dade, Inc.
(e) Am-Med Associates - OWNERSHIP -
SURGICAL SERVICES OF WEST DADE,
INC. (50%)
PALMED ASSOCIATES (50%)
(b) AMI Arkansas, Inc.
(c) Healthstar Properties Limited Partnership -
OWNERSHIP-AMI ARKANSAS, INC., G.P (1%), LP (49%)
ST. VINCENT TOTALHEALTH CORPORATION, G.P
(1%), L.P. (49%)
(d) Healthstar Ultima, L.L.C.- OWNERSHIP - HEALTHSTAR
PROPERTIES LIMITED PARTNERSHIP
(70 UNITS)
ARKANSAS CHILDREN'S HOSPITAL (1 UNIT)
QUORUM HEALTH RESOURCES, INC. (1 UNIT)
NORTHWEST MEDICAL CENTER (1 UNIT)
REBSAM REGIONAL MEDICAL CENTER (1 UNIT)
(b) AMI Brokerage Services, Inc.
(b) AMI Diagnostic Services, Inc.
(c) UCSD Medical Center Magnetic Resonance Diagnostic
Center - OWNERSHIP -
AMI DIAGNOSTIC SERVICES, INC. (50%)
THE REGENTS OF THE UNIVERSTIY OF
CALIFORNIA (50%)
(b) AMI Information Systems Group, Inc.
(c) American Medical International B.V.
(d) American Medical International N.V.
(b) AMI/HTI Tarzana Encino Joint Venture - OWNERSHIP - TENET
HEALTHSYSTEM MEDICAL, INC. (30%)
AMISUB OF CALIFORNIA, INC. (26%)
NEW H ACUTE, INC. (12%)
AMI INFORMATION SYSTEMS GROUP, INC. (7%)
ENCINO HOSPITAL CORPORATION (25%)
(b) Tenet System Services, Inc.
(b) Amisub (Culver Union Hospital), Inc.
(c) Choice Care Network, Inc.
(b) Tenet Physician Services - Hilton Head, Inc.
(c) Hilton Head Clinics, Inc.
(c) Hilton Head Health Systems, L.P. - OWNERSHIP - TENET
PHYSICIAN SERVICES - HILTON HEAD,
INC. (21%)
AMISUB (HILTON HEAD), INC.(49%)
HILTON HEAD HEALTH FOUNDATION (30%)
(c) Hilton Head Medical Group - Cardiology, L.L.C.
(c) Hilton Head Medical Group - ENT, L.L.C.
(c) Hilton Head Medical Group - Oncology, L.L.C.
(c) Hilton Head Medical Group - Urology - HH, L.L.C.
(c) Hilton Head Medical Group - Urology - Beaufort, L.L.C.
(d) Beaufort Hilton Head Healthcare System, L.L.C. -
OWNERSHIP - HILTON HEAD HEALTH
SYSTEM, L.P. (50%)
BROAD RIVER HEALTHCARE, INC. (50%)
(d) Hilton Head Home Care Services, Inc.
(c) Piedmont Medical Equipment, G.P. - OWNERSHIP - AMISUB OF
SOUTH CAROLINA, INC. (50%)
AMERICA HOME PATIENT, INC. (50%)
(c) Rock Hill Surgery Center, L.P. - OWNERSHIP - AMISUB OF
SOUTH CAROLINA, INC. (72%)
SURGICAL CENTER OF ROCK HILL (28%)
(b) Amisub (Florida Ventures), Inc.
2
<PAGE>
(c) PBG Outpatient Services, Inc.
(c) Brookwood Diagnostic Center of Tampa, Inc.
(c) Clinical Services, Inc.
(c) Ft. Lauderdale Surgery Center, Inc.
(c) Tampa MOB 107, Inc.
(c) Tampa MOB 104, Inc.
(c) Tampa 8313 West Hillsborough, Inc.
(c) Tampa 4802 Gunn Highway, Inc.
(c) Center for Quality Care, Inc.
(c) Tampa 418 W. Platt St., Inc.
(b) Amisub (GTS), Inc.
(b) Amisub (Hilton Head), Inc.
(b) Amisub (Irvine Medical Center), Inc.
(b) Tenet HealthSystem Bartlett, Inc.
(b) Tenet HealthSystem Spalding, Inc.
(c) Tenet Physician Services - FMC, Inc.
(c) Tenet Physician Services - Spalding, Inc.
(c) Spalding Health System, L.L.C. - OWNERSHIP - TENET
HEALTHSYSTEM SPALDING, INC. (50%)
PHYSICIANS (50%)
(c) Tenet EMS/Spalding 911, LLC - OWNERSHIP - TENET
HEALTHSYSTEM SPALDING, INC. (64.1%)
SPALDING COUNTY (35.9%)
(b) Amisub (North Ridge Hospital), Inc.
(c) FL Health Complex, Inc.
(c) North Ridge Carenet, Inc.
(c) North Ridge Partners, Inc.
(d) SFHCA Walk-In Centers, G.P. - OWNERSHIP - NORTHRIDGE
PARTNERS, INC. (50%)
SOUTH FLORIDA HEALTH CARE ASSOCIATES
(50 %)
(b) Amisub of California, Inc.
(c) Valley Doctors' Hospital
(d) Family Medical Services
(d) L.A. Surgery Center, Ltd. - OWNERSHIP - VALLEY DOCTORS'
HOSPITAL (30.3%) OTHERS (69.7%)
(d) Cypress Specialty Hospital, Inc.
(c) Physician Practice Management Corporation
(c) Park Plaza Retail Pharmacy, Inc.
(c) Tarzana Regional Medical Center MRI Center - OWNERSHIP -
AMISUB OF CALIFORNIA, INC. (7.8%)
NON-TENET ENTITY (92.2%)
(c) AMI (Canada), Ltd.
(b) Amisub of North Carolina, Inc.
(b) Central Carolina Management Services Organization, Inc.
(b) Tenet Central Carolina Physicians for Women, Inc.
(b) Amisub (SMHS), Inc.
(b) Amisub of South Carolina, Inc.
(c) Piedmont Medical Services Company
(c) Tenet Physician Services - Piedmont, Inc.
(c) Piedmont Seven, Inc.
(c) Tenet Piedmont West Urgent Care Center, Inc.
(b) Amisub (Saint Joseph Hospital), Inc.
(c) Creighton Saint Joseph Regional HealthCare System, L.L.C. -
OWNERSHIP -
AMISUB (SAINT JOSEPH HOSPITAL), INC.
(73.82%)
CREIGHTON HEALTHCARE, INC. (26.18%)
(d) Home-based Psychiatric Services, Inc.- OWNERSHIP -
CREIGHTON SAINT JOSEPH REGIONAL HEALTHCARE
SYSTEM, L.L.C. (75%)
JAMES T. WHITE PH.D. (25%)
(c) Saint Joseph Mental Health Plans, Inc.
(c) Saint Joseph Mental Health Physicians, Inc.
3
<PAGE>
(b) Amisub (SFH), Inc.
(c) Tenet HealthSystem SF-SNF, Inc.
(c) Tenet Regional Infusion South, Inc. - OWNERSHIP -
CENTRAL AK HOSPITAL INC. (11%)
AMISUB (CLUVER UNION HOSPITAL), INC. (11%)
NATIONAL MEDICAL HOSPITAL OF TULLAHONA (11%)
LUCY LEE HOSPITAL, INC.(11%)
JONESBORO HEALTH SERVICES, LLC (11%)
AMISUB (SFH), INC. (11%)
S.C. MANAGEMENT INC. (11%)
NATIONAL MEDICAL HOSPITAL OF WILSON COUNTY,
INC. (11%)
WINONA MEMORIAL HOSPITAL, L.P. (11%)
(b) Amisub (Sierra Vista), Inc.
(c) MRI of San Louis Obispo, G.P. - OWNERSHIP - AMISUB (SIERRA
VISTA), INC. (45%) MEDIQ (55%)
(b) Tenet Finance Corp.
(b) Arkansas Healthcare Services, Inc.
(b) Brookwood Center Development Corporation
(c) BWP Associates, Ltd. - OWNERSHIP- BROOKWOOD CENTER
DEVELOPMENT CORPORATION (80%)
W+R, INC. (20%)
(c) Med Plex Land Associates - OWNERSHIP - BROOKWOOD CENTER
DEVELOPMENT CORPORATION (49%)
HOOVER DOCTORS' GROUP II (51%)
(c) Medplex Outpatient Surgery Center, Ltd. - OWNERSHIP -
BROOKWOOD CENTER DEVELOPMENT CORPORATION
(83%) OTHERS (17%)
(c) Hoover Doctors Group, Inc.
(c) Medplex Outpatient Medical Centers, Inc.
(b) Brookwood Development, Inc.
(c) Alabama Health Services, Inc. - OWNERSHIP - BROOKWOOD
DEVELOPMENT, INC. (50%)
EASTERN HEALTH SYSTEM, INC. (50%)
(c) Alabama Health Services (St. Clair), L.L.C. - OWNERSHIP -
BROOKWOOD DEVELOPMENT, INC. (50%)
HEALTH SERVICES EAST, INC. (50%)
(b) Brookwood Health Services, Inc.
(c) Brookwood Medical Center of Tampa, Inc.
(d) Memorial Hospital of Tampa, L.P. - OWNERSHIP -
BROOKWOOD MEDICAL CENTER OF TAMPA,
INC. (76%)
EASTERN PROFESSIONAL PROPERTIES, INC. (24%)
(c) Brookwood - Riverchase Primary Care Center, Inc.
(c) Estes Health Care Centers, Inc.
(b) Central Arkansas Hospital, Inc.
(c) Amisub (Central Arkansas), Inc.
(b) Central Care, Inc.
(b) Columbia Land Development, Inc.
(b) Culver Health Network, Inc.
(b) Cumming Medical Ventures, Inc.
(b) East Cooper Community Hospital, Inc.
(c) Charleston Health Services Organization, Inc.
(b) Eastern Professional Properties, Inc.
(b) Florida Health Network, Inc.
(b) Frye Regional Medical Center, Inc.
(c) Frye Home Infusion, Inc.
(c) Piedmont Health Alliance, Inc. - OWNERSHIP -
FRYE REGIONAL MEDICAL CENTER, INC. (50%);
PHYSICIANS (50%)
(c) Shared Medical Ventures, L.L.C. - OWNERSHIP - FRYE
REGIONAL MEDICAL CENTER, INC. (30%)
GRACE HOSPITAL INC. (30%)
CALDWELL MEMORIAL HOSPITAL INCORPORATED
(30%)
4
<PAGE>
(c) Tenet Claims Processing, Inc.
(c) Ten Broeck/Frye Partnership - OWNERSHIP -
FRYE REGIONAL MEDICAL CENTER, INC. (50%)
UNITED MED CORP. OF NC (50%)
(c) Unifour Infusion Care, L.L.C. - OWNERSHIP -
FRYE REGIONAL MEDICAL CENTER, INC. (33%)
CALDWELL MEMORIAL HOSPITAL, INC. (67%)
(b) Georgia Health Services, Inc.
(b) Heartland Corporation
(c) Prairie Medical Clinic, Inc.
(c) Heartland Physicians, Inc.
(b) Kenner Regional Medical Center, Inc.
(b) Lucy Lee Hospital, Inc.
(c) HMS, L.P. - OWNERSHIP - LUCY LEE
HOSPITAL, INC. (35%);
HOME MEDICAL OF P.B. (65%)
(b) Medical Center of Garden Grove
(c) Orange County Kidney Stone Center, L.P. - OWNERSHIP -
MEDICAL CENTER OF GARDEN GROVE, INC.
(42.5805%)
OCKSC ASSOC. + INC. + 11 OTHERS (57.4195%)
(c) Orange County Kidney Stone Center Assoc., G. P. -
OWNERSHIP -
PHYSICIANS (67.9%)
MEDICAL CENTER OF GARDEN GROVE (32.1%)
(b) Medical Collections, Inc.
(b) Mid-Continent Medical Practices, Inc.
(b) Missouri Health Services, Inc.
(b) National Medical Services III, Inc.
(b) National Medical Services IV, Inc.
(b) National Park Medical Center, Inc.
(c) Garland Managed Care Organization, Inc.
(c) NPMC Healthcenter - Cardiology Care Center, Inc.
(c) NPMC Healthcenter - Family Healthcare Clinic, Inc.
(c) NPMC Healthcenter - Malvern, Inc.
(c) NPMC Healthcenter - Physician Services for Women, Inc.
(c) NPMC Healthcenter - The Heart Clinic, Inc.
(c) NPMC Healthcenter - National Park Surgery Clinic, Inc.
(c) NPMC Healthcenter - Cardiology Services, Inc.
(c) NPMC Healthcenter - Hot Springs Village, Inc.
(c) NPMC Healthcenter - Gastroenterology Center of Hot
Springs, Inc.
(c) NPMC Healthcenter - Physician Services, Inc.
(c) Tenet HealthSystem NPMC Hamilton West, Inc.
(c) Hot Springs Outpatient Surgery, G.P. - OWNERSHIP -
NATIONAL PARK MEDICAL CENTER, INC. (50%)
HOT SPRINGS OUTPATIENT SURGERY (50%)
(b) New H Holdings Corp. - OWNERSHIP - TENET HEALTHSYSTEM
MEDICAL, INC. (99%)
AMISUB OF CALIFORNIA, INC. (.5%)
BROOKWOOD HEALTH SERVICES, INC. (.5%)
(c) New H Acute, Inc.
(d) New H South Bay, Inc.
(b) North Carolina Health Services, Inc.
(b) North Fulton Imaging Ventures, Inc.
(b) North Fulton Medical Center, Inc.
(c) Northwoods Ambulatory Surgery, Inc.
(c) North Fulton Health Care Associates, Inc.
(c) North Fulton Occupational Medicine, Inc.
(c) North Fulton Regional Cancer Center, Inc.
(c) North Fulton 002, Inc.
(c) Tenet Physician Services - North Fulton, Inc.
(c) North Fulton 008, Inc.
(c) North Fulton 009, Inc.
(c) North Fulton 010, Inc.
(b) North Fulton MOB Ventures, Inc.
5
<PAGE>
(c) North Fulton Professional Building I, L.P. - OWNERSHIP -
NORTH FULTON MOB VENTURES, INC. (15.4917%)
NORTH FULTON MEDICAL VENTURES, INC.
(84.5083%)
(b) North Point Medical Ventures, Inc.
(b) Occupational Health Medical Services of Florida, Inc.
(b) Palm Beach Gardens Community Hospital, Inc.
(b) Partners in Service, Inc.(1)
(b) Physicians Development, Inc.
(b) Piedmont Home Health, Inc.
(b) Pinnacle Healthcare Services, Inc.
(b) Professional Healthcare Systems Licensing Corporation
(b) ProMed Pharmicenter, Inc.
(b) Roswell Medical Ventures, Inc.
(c) North Fulton Parking Deck, L.P. - OWNERSHIP -
ROSWELL MEDICAL VENTURES, INC. (89.9361%)
NORTH FULTON PROFESSIONAL BUILDING I, L.P.
(10.1639%)
(b) Saint Joseph Mental Health Physicians, Inc.
(b) San Dimas Community Hospital
(b) SEMO Medical Management Company, Inc.
(b) Sierra Vista Hospital, Inc.
(c) Tenet HealthSystem Sierra Vista Venture I, Inc.
(c) Tenet HealthSystem Sierra Vista Ventures II, Inc.
(b) South Carolina Health Services, Inc.
(b) Southern Medical Holding Corporation
(c) Bio Medical Resources, Inc.
(b) St. Mary's Regional Medical Center, Inc.
(c) Amisub (St Mary's), Inc.
(d) Priority Industrial Physical Therapy Sports
Rehab, G.P. - OWNERSHIP -
AMISUB (ST. MARY'S), INC. (51%)
DANNY LYONS (43%); LARRY ENGLA (6%)
(c) St. Mary's Medical Group, Inc.
(c) Dedicated Health PHO, Inc.
(b) Tenet (Brookwood Development), Inc.
(c) Health Advantage Plans, Inc. - OWNERSHIP -
TENET (BROOKWOOD DEVELOPMENT), INC. (33 1/3%)
TENET HEALTHSYSTEM LLOYD NOLAND PROPERTIES,
INC. (33 1/3%)
EASTSIDE VENTURES, INC. (33 1/3%)
(d) Group Administrators, Inc.
(b) Tennessee Health Services, Inc.
(b) Texas Healthcare Services, Inc.
(b) Texas Professional Properties, Inc.
(b) Tenet Ashley River OB/GYN, Inc.
(b) Tenet Caldwell Family Physicians, Inc.
(b) Tenet Catawba Nurse Midwives, Inc.
(b) Tenet Choices, Inc. - OWNERSHIP - TENET HEALTHSYSTEM MEDICAL,
INC. 5,000 SHARES
RICHARD FREEMAN - 1 SHARE; ROGER FRIEND-
1 SHARE
NOTE: Total issued and outstanding - 5,002 shares.
(b) Tenet DeLaine Adult Medical Care, Inc.
(b) Tenet East Cooper Spine Center, Inc.
(b) Tenet Goodman Family Practice Associates, Inc.
(b) Tenet Health Network, Inc.
(b) Tenet HealthSystem GB, Inc.
- ----------
(1) Mailing address: 900 Market Street, Wilmington, Delaware 19801
6
<PAGE>
(b) Tenet HealthSystem Hilton Head, Inc.
(b) Tenet HealthSystem Lloyd Noland Medical, Inc.
(b) Tenet HealthSystem Lloyd Noland Properties, Inc.
(b) Tenet HealthSystem Nacogdoches ASC, G.P., Inc.
(c) NMC Lessor, L.P.
(c) NMC Surgery Center, L.P.
(b) Tenet HealthSystem Nacogdoches ASC, L.P., Inc.
(b) Tenet HealthSystem North Shore, Inc.
(c) Tenet HealthSystem North Shore (BME), Inc.
(b) Tenet HealthSystem Partners, Inc.
(b) Tenet Healthsystem Philadelphia, Inc.
(c) Philadelphia Health & Education Corporation
(c) Tenet HealthSystem Bucks County, LLC
(c) Tenet HealthSystem City Avenue, LLC
(c) Tenet HealthSystem Elkins Park, LLC
(c) Tenet HealthSystem Graduate, LLC
(c) Tenet HealthSystem Hahnemann, LLC
(c) Tenet HealthSystem MCP, LLC
(c) Tenet HealthSystem Parkview, LLC
(c) Tenet HealthSystem St. Christopher Hospital, LLC
(b) Tenet HealthSystem SGH, Inc.
(b) Tenet HealthSystem SL, Inc.
(c) Tenet HealthSystem DI-SUB, Inc.
(b) Tenet HealthSystem SL-HLC, Inc.
(b) Tenet Hildebran Medical Clinic
(b) Tenet HomeCare Information Systems, Inc.
(b) Tenet Home Care of South Florida, Inc.
(b) Tenet Home Care Tampa/St. Pete, Inc.
(b) Tenet Investments, Inc.
(b) Tenet Riverbend Family Medicine, Inc.
(b) Tenet Physician Services - Fort Mill, Inc.
(b) Tenet Physician Services - Frye Regional, Inc.
(b) Tenet Physician Services - Georgia Baptist, Inc.
(c) Tenet Fayette Medical Group, Inc.
(b) Tenet Physician Services - East Cooper, Inc.
(b) Tenet Physician Services - Piedmont, Inc.
(c) Tenet Physician Services - Walker, L.L.C.
(c) Tenet Physician Services - Delaine, L.L.C.
(c) Tenet Physician Services - Lewisville, L.L.C
(c) Tenet Physician Services - Herlong, L.L.C.
(c) Tenet Physician Services - Village Oaks, L.L.C.
(c) Tenet Physician Services - Rock Hill Psych, L.L.C.
(c) Tenet Physician Services - Piedmont West, L.L.C.
(b) Tenet Physician Services - York, Inc.
(b) Tenet Physician Services of the Southeast, Inc.
(b) Tenet Physician Services of Mississippi, L.L.C.
(b) Tenet Physician Partners, L.L.C.
(b) Brookwood Parking Associates, Ltd. - OWNERSHIP - TENET
HEALTHSYSTEM MEDICAL, INC. (99%)
BROOKWOOD PARKING, INC. (1%)
(b) Northwind Medical Building Associcates, Ltd. - OWNERSHIP -
TENET HEALTHSYSTEM MEDICAL INC. (1.44%)
OTHERS (98.56%)
HUG Services, Inc. (77%)
Assured Investors Life Company
H.F.I.C. Management Company, Inc.
(a) Health Facilities Insurance Corp., Ltd. - Bermuda
International-NME, Inc.
(a) N.M.E. International (Cayman) Limited - Cayman Islands, B.W.I.
7
<PAGE>
(b) B.V. Hospital Management - Netherlands
(b) Pacific Medical Enterprises Sdn. Bhd. - Malaysia
(c) Hyacinth Sdn. Bhd.
(a) Medicalia International, B.V. - Netherlands
(a) NME Spain, S.A.
(a) Tenet UK Properties Limited
NME Headquarters, Inc.
(a) Ortega Development Group
(a) Tenet IL, Inc.
Tenet HealthSystem Hospitals, Inc.
(a) Brookhaven Hospital, Inc.
(b) Brookhaven Pavilion, Inc.
(a) Manteca Medical Management, Inc.
(a) Tenetsub Texas, Inc.
(a) Tenet D.C., Inc.
(a) Tenet Funding, Inc.
(a) Tenet Hospitals Limited - OWNERSHIP - TENET HEALTHSYSTEM
HOSPITALS, INC. G.P. (1%)
TENETSUB TEXAS, INC., L.P. (99%)
(b) Sierra Providence Healthcare Enterprises
(b) Sierra Providence Health Network
(b) Greater El Paso Healthcare Enterprises
(a) National Managed Med, Inc.
(a) National Med, Inc.
(a) National Medical Hospital of Tullahoma, Inc.
(b) Harton Medical Group, Inc.
(a) National Medical Hospital of Wilson County, Inc.
(b) Wilson County Management Services, Inc.
(b) Middle Tennessee Therapy Services, Inc.
(a) National Medical Services, Inc.
(b) Barron, Barron & Roth, Inc.
(a) National Medical Services II, Inc.
(a) National Medical Ventures, Inc.
(b) Litho I - LP - OWNERSHIP - NATIONAL MEDICAL VENTURES, INC.
(63.75%); PHYSICIANS (36.75%)
(b) McHenry Surgery Center Partners, Ltd - LP - OWNERSHIP -
NATIONAL MEDICAL VENTURES, INC. (49.75%)
PHYSICIANS (50.25%)
(b) Redding Surgicenter - LP - OWNERSHIP - NATIONAL MEDICAL
VENTURES, INC.(52.857%) PHYSICIANS (47.143%)
(a) Tenet El Mirador Surgical Center, Inc.
(a) Tenet Hialeah HealthSystem, Inc.
(b) Hialeah Real Properties, Inc.
(b) Tenet Hialeah (H.H.A.) HealthSystem, Inc.
(b) Tenet Hialeah (ASC) HealthSystem, Inc.
(b) Tenet Hialeah Ancillary Services, Inc.
(b) Edgewater Provider Insurance Company, Ltd. (25%)
(a) NM Ventures of North County, Inc.
(b) North County Outpatient Surgery Center, Ltd. - OWNERSHIP -
PHYSICIANS (35.47%)
NM VENTURES OF NORTH COUNTY, INC. (64.53%)
(a) Tenet HealthSystem Hospitals Dallas, Inc.
(a) NME Medical de Mexico, S.A. de C.V.
(a) NMV - Tennessee, Inc.
(a) Physician Network Corporation of Louisiana
(a) Physician Network Corporation of Missouri
(a) Jefferson County Surgery, Inc.
(b) Jefferson City ASC, LLC - OWNERSHIP - JEFFERSON COUNTY SURGERY;
TENET HEALTHSYSTEM DI, INC.
(a) Laughlin Pavilion, Inc.
(a) NMV- II, Inc.
(b) Delray Outpatient Surgery and Care Center, Ltd. - OWNERSHIP -
NMV-II, INC. (10%); OTHERS (90%)
8
<PAGE>
(a) Preferred Medical Systems of California, Inc.
(a) San Ramon ASC, Inc.
(a) San Ramon ASC, LLC
(a) San Ramon ASC, L.P. - OWNERSHIP - THV 1 (100%)
(a) West Coast PT Clinic, Inc.
(a) Tenet HealthSystem CFMC, Inc.
(a) Tenet HealthSystem Desert, Inc.
(a) Tenet HealthSystem DI, Inc.
(a) Tenet HealthSystem DI-SNF, Inc.
(a) Tenet HealthSystem DI-TPS, Inc.
(a) Tenet HealthSystem Memorial Medical Center, Inc.
(a) Tenet HealthSystem Metroplex Hospitals, Inc.
(a) Tenet Healthcare-Florida, Inc.
(c) TCC Partners GP
(a) Tenet Beaumont Healthsystem, Inc.
(b) Baptist/Tenet JV - OWNERSHIP - TENET BEAUMONT HEALTHSYSTEM,
INC. (50%)
BAPTIST HEALTHCARE SYSTEM, L.L.C. (50%)
(a) Tenet Network Management, Inc.
(a) THV I, Inc.
(a) South Bay Practice Administrators, Inc.
(a) Tenet Missouri JV, Inc.
(a) Tenet Birmingham Management, Inc.
(a) Practice Partners, Inc.
(a) MHJ, Inc.
(b) Jonesboro Health Services, L.L.C. - OWNERSHIP - MHJ, INC. (95%)
ST. VINCENT TOTAL HEALTH CORPORATION (5%)
(c) Starcare of Jonesboro, Inc.
(a) Tenet California Medical Ventures I, Inc.
(a) Diagnostic Imaging Services, Inc.
(a) Metro Physicians Management Organization, Inc.
(a) Tenet Regional Infusion North, Inc. - OWNERSHIP -
TENET HEALTHSYSTEM, SL, INC. (50%)
TENET HEALTHSYSTEM DI, INC. (40%)
TENET HEALTHSYSTEM HOSPITALS, INC. (5%)
LIFEMARK HOSPITALS OF MISSOURI, INC.(5%)
(a) Tenet Louisiana Medical Ventures I, Inc.
(a) Northeast Texas Healthcare Enterprises
(a) Mid-Tennessee Health Partners, L.L.C. - OWNERSHIP -
TENET HEALTHSYSTEM HOSPITALS, INC. (50%)
SMITHVILLE HEALTHCARE VENTURES, L.P. (50%)
NME Properties Corp.
(a) Cascade Insurance Company, Ltd.
(a) NME Properties, Inc.
(b) Lake Health Care Facilities, Inc.
(b) NME Properties West, Inc.
(a) NME Property Holding Co., Inc.
(a) Tenet HealthSystem SNF-LA, Inc.
NME Rehabilitation Properties, Inc.
(a) R.H.S.C. Prosthetics, Inc.
(a) Rehabilitation Facility at San Ramon, Inc.
(a) Rehabilitation Facility at San Diego, Inc.
(a) R.H.S.C. Modesto, Inc.
(a) Pinecrest Rehabilitation Hospital, Inc.
(a) R.H.S.C. El Paso, Inc.
(a) Tenet HealthSystem Pinecrest Rehab, Inc.
NME Specialty Hospitals, Inc.
(a) National Medical Specialty Hospital of Redding
(a) NME Management Services, Inc.
(a) NME New Beginnings, Inc.
9
<PAGE>
(b) Addiction Treatment Centers of Maryland, Inc.
(b) Alcoholism Treatment Centers of New Jersey, Inc.
(b) Health Institutes,Inc.
(c) Fenwick Hall, Inc.
(c) Health Insitutes Investments, Inc.
(b) NME New Beginnings-Western, Inc.
(c) Norquest/RCA-W Bitter Lake Partnership
(a) NME Partial Hospital Services Corporation
(a) NME Psychiatric Hospitals, Inc.
(b) The Huron Corporation
(a) NME Rehabilitation Hospitals, Inc.
(a) Psychiatric Management Services Company
NME Psychiatric Properties, Inc.
(a) Alvarado Parkway Institute, Inc.
(a) Baywood Hospital, Inc.
(a) Brawner Hospital, Inc.
(a) Contemporary Psychiatric Hospitals, Inc.
(a) Elmcrest Manor Psychiatric Hospitals, Inc.
(a) Gwinnett Psychiatric Institute, Inc.
(a) Jefferson Hospital, Inc.
(a) Lake Hospital and Clinic, Inc. - OWNERSHIP - NME PSYCHIATRIC
PROPERTIES, INC. (97.875%)
RALPH MOLLYCHECK, M.D. (2.125%)
(a) Lakewood Psychiatric Hospitals, Inc.
(a) Laurel Oaks Residential Treatment Center, Inc.
(a) Leesburg Institute, Inc.
(a) Manatee Palms Residential Treatment Center, Inc.
(a) Manatee Palms Therapeutic Group Home, Inc.
(a) Medfield Residential Treatment Center, Inc.
(a) Modesto Psychiatric Hospitals, Inc.
(a) Modesto Psychiatric Realty, Inc.
(a) Nashua Brookside Hospital, Inc.
(a) North Houston Healthcare Campus, Inc.
(a) Northeast Behavioral Health, Inc.
(a) Northeast Psychiatric Associates - 2, Inc.
(a) Outpatient Recovery Centers, Inc.
(a) P.D. at New Baltimore, Inc.
(a) P.I.A. Alexandria, Inc.
(a) P.I.A. Canoga Park, Inc.
(a) P.I.A. Cape Girardeau, Inc.
(a) P.I.A. Capital City, Inc.
(a) P.I.A. Central Jersey, Inc.
(a) P.I.A. Colorado, Inc.
(a) P.I.A. Connecticut Development Company, Inc.
(a) P.I.A. Cook County, Inc.
(a) P.I.A. Denton, Inc.
(a) P.I.A. Detroit, Inc.
(b) Psychiatric Facility at Michigan Limited Partnership
(a) P.I.A. Educationsl Institute, Inc.
(a) P.I.A. of Fort Worth, Inc.
(a) P.I.A. Green Bay, Inc.
(a) P.I.A. Highland, Inc.
(b) Highland Psychiatric Associates - OWNERSHIP -
P.I.A. HIGHLAND, INC. (50%)
PSYCHIATRIC FACILITY AT ASHEVILLE,
INC. (50%)
(a) P.I.A. Highland Realty, Inc.
(b) Highland Realty Associates - OWNERSHIP -
(LIMITED PARTNERSHIP) -
P.I.A. HIGHLAND REALTY, INC. (49%)
PSYCHIATRIC FACILITY AT ASHEVILLE,
INC. (49%)
10
<PAGE>
(GENERAL PARTNERSHIP) - P.I.A.
HIGHLAND REALTY, INC. (1%)
PSYCHIATRIC FACILITY AT ASHEVILLE,
INC. (1%)
(a) P.I.A. Indianapolis, Inc.
(a) P.I.A. Kansas City, Inc.
(a) P.I.A. Lincoln, Inc.
(a) P.I.A. Long Beach, Inc.
(a) P.I.A. Maryland, Inc.
(a) P.I.A. Michigan City, Inc.
(a) P.I.A. Milwaukee, Inc.
(a) P.I.A. Modesto, Inc.
(a) P.I.A. Naperville, Inc.
(a) P.I.A. New Jersey, Inc.
(a) P.I.A. North Jersey, Inc.
(a) P.I.A. Northern New Mexico, Inc.
(a) P.I.A. Panama City, Inc.
(a) P.I.A. Randolph, Inc.
(a) P.I.A. Rockford, Inc.
(a) P.I.A. of Rocky Mount, Inc.
(a) P.I.A. Salt Lake City, Inc.
(a) P.I.A. San Antonio, Inc.
(a) P.I.A. San Ramon, Inc.
(a) P.I.A. Sarasota Palms, Inc.
(a) P.I.A. Seattle, Inc.
(a) P.I.A. Slidell, Inc.
(a) P.I.A. Solano, Inc.
(a) P.I.A. Specialty Press, Inc.
(a) P.I.A. Stafford, Inc.
(a) P.I.A. Stockton, Inc.
(a) P.I.A. Tacoma, Inc.
(a) P.I.A. Tidewater Reatly, Inc.
(b) I.P.T. Associates
(a) P.I.A. Topeka, Inc.
(a) P.I.A. Visalia, Inc.
(a) P.I.A. Waxahachie, Inc.
(a) P.I.A. Westbank, Inc.
(a) P.I.A.C. Realty Company, Inc.
(a) PIAFCO, Inc.
(a) Pinewood Hospital, Inc.
(a) Potomac Ridge Treatment Center, Inc.
(a) Psychiatric Facility at Amarillo, Inc.
(a) Psychiatric Facility at Asheville, Inc.
(a) Psychiatric Facility at Azusa, Inc.
(a) Psychiatric Facility at Evansville, Inc.
(a) Psychiatric Facility at Lafayette, Inc.
(a) Psychiatric Facility at Lawton, Inc.
(a) Psychiatric Facility at Medfield, Inc.
(a) Psychiatric Facility at Memphis, Inc.
(a) Psychiatric Facility at Palm Springs, Inc.
(a) Psychiatric Facility at Yorba Linda, Inc.
(a) Psychiatric Institute of Alabama, Inc.
(a) Psychiatric Institute of Atlanta, Inc.
(a) Psychiatric Institute of Bedford, Inc.
(a) Psychiatric Institute of Bucks County, Inc.
(a) Psychiatric Institute of Chester County, Inc.
(a) Psychiatric Institute of Columbus, Inc.
(a) Psychiatric Institute of Delray, Inc.
(a) Psychiatric Institute of Northern Kentucky, Inc.
11
<PAGE>
(a) Psychiatric Institute of Northern New Jersey, Inc.
(a) Psychiatric Institute of Orlando, Inc.
(a) Psychiatric Institute of Richmond, Inc.
(a) Psychiatric Institute of San Jose, Inc.
(a) Psychiatric Institute of Sherman, Inc.
(a) Psychiatric Institute of Washington, D.C., Inc.
(a) Residential Treatment Center of Memphis, Inc.
(a) Residential Treatment Center of Mongtomery County, Inc.
(a) The Residential Treatment Center of the Palm Beaches, Inc.
(a) River Wood Center, Inc.
(a) Sandpiper Company, Inc.
(a) Southern Crescent Psychiatric Institute, Inc.
(a) Southwood Psychiatric Centers, Inc.
(a) Springwood Residential Treatment Centers, Inc.
(a) Tidewater Psychiatric Institute, Inc.
(a) The Treatment Center at Bedford, Inc.
(a) Tucson Psychiatric Institute, Inc.
(a) Tulsa County Health Services, Inc.
Northshore Hospital Management Corporation (LA)
Tenet Healthcare Foundation
Tenet HealthSystem HealthCorp
(a) OrNda Hospital Corporation
(b) AHM Acquisition Co., Inc.
(c) OrNda Investments, Inc.
(d) AHM CGH, Inc.
(d) AHM GEMCH, Inc.
(d) AHM Jackson Hospital, Inc.
(d) AHM JV, Inc.
(d) AHM Minden Hospital, Inc.
(d) AHM SMC, Inc.
(d) AHM WCH, Inc.
(d) American Healthcare Management Development Company
(d) CHHP, Inc.
(d) EGH, Inc.
(d) GCH, Inc.
(d) HCW, Inc.
(d) LBPG, Inc.
(d) LCMH, Inc.
(d) Lake Mead Holdings - OWNERSHIP - ORNDA INVESTMENTS,
INC., GP (25%)
DOCTORS GROUP, LP (75%).
(d) Monterey Park Hospital
(d) MPC, Inc.
(d) NLVH, Inc.
(e) Pollamead Partnership - OWNERSHIP - NLVH,
INC., GP (50%)
DOCTORS GROUP, LP (50%)
(e) Pollamead Partnership II - OWNERSHIP -
NLVH, INC., GP (50%)
DOCTORS GROUP, LP (50%)
(d) NLVPG of Nevada, Inc.
(d) OrNda Management Services, Inc.
(d) Tenet HealthSystem Heritage, Inc.PSH, Inc.
(e) Foot and Ankle Specialty Institute of
Tacoma - OWNERSHIP - PSH, INC., GP (50%)
INTEGRATED HEALTHCARE ALLIANCE, LP (50%)
(d) RHCP, Inc.
(d) USDHC, Inc.
(d) WCH Management Services, Inc.
(d) WPH Management Services, Inc.
(d) Tenet HealthSystem WP, Inc.
12
<PAGE>
(b) CFMC LP, Inc.
(b) CGH Realty Holding, Inc.
(b) Coastal Communities Health Systems, Inc.
(c) Coastal Communities Hospital, L.P. - OWNERSHIP -
COASTAL COMMUNITIES HEALTH SYSTEMS,
INC., GP (50%)
DOCTORS GROUP, LP(50%)
(b) Commonwealth Continental Health Care, Inc.
(b) Commonwealth Continental Health Care III, Inc.
(b) Coral Gables Hospital, Inc.
(c) CGH Hospital, Ltd. - OWNERSHIP - CORAL GABLES HOSPITAL,
INC., GP (94.25%)
GREATER MIAMI MEDICAL GROUP,
LTD., LP (5.75%)
(b) Coral Gables Hospital Partners, Inc.
(c) South Florida Physicians Services, Inc.
(b) CVHS Hospital Corporation
(b) Cypress Fairbanks Medical Center, Inc.
(c) New Medical Horizons II, Ltd. - OWNERSHIP - CYPRESS
FAIRBANKS MEDICAL CENTER, INC., GP (99%)
ORNDA HOSPITAL CORPORATION, LP (1%)
(b) Tenet HealthSystem DMC, Inc.
(c) The Davenport Clinic, Inc.
(b) DHPG of Georgia, Inc.
(b) Doctors' Hospital Medical Center, Inc.
(b) FMC Acquisition, Inc.
(c) FMC Hospital, Ltd. - OWNERSHIP - FMC ACQUISITION,
INC., GP (85%)
FLORIDA INSTITUTE OF HEALTH, LTD., LP (15%)
(b) FMC Medical, Inc.
(b) Fountain Valley Health Care, Inc.
(b) Fountain Valley Imaging Center, LP
(b) Fountain Valley Outpatient Surgical Center, LP
(b) Fountain Valley Imaging Corporation
(b) Fountain Valley Pharmacy, Inc.
(b) Fountain Valley Regional Hospital and Medical Center
(b) GCPG, Inc.
(c) Garland Community Hospital, Ltd. - OWNERSHIP - GCPG,
INC., GP (1%)
REPUBLIC HEALTH CORPORATION OF MESQUITE,
LP (99%)
(b) General Hospital of Sequatchie, Inc.
(b) Harbor View Health Systems, Inc.
(c) Harbor View Physician Services, Inc.
(c) Harbor View Health Partners, L.P. - OWNERSHIP - HARBOR
VIEW HEALTH SYSTEMS, INC. GP (50%)
REPUBLIC HEATLH CORPORATION OF SAN
BERNARDINO, LP (50%)
(b) Harbor View Medical Center, Inc.
(b) Health Choice Arizona, Inc.
(b) Health Holding Company, Inc.
(c) Tenet HealthSystem Biltmore, Inc.
(c) OrNda Healthcorp of Phoenix, Inc.
(d) Biltmore Surgery Center, Inc.
(d) CHR Service Corp.
(b) Health Resources Corporation of America - California
(b) Health Resources Corporation of America - Florida
(c) RHC Florida, Inc.
(d) RHC Parkway, Inc.
(e) Republic Health Corporation of North Miami, Inc.
(f) OrNda of South Florida Services Corporation
(g) San Juan Medical Center, Inc.
(b) Houston Northwest Medical Center, Inc.
(c) HNMC, Inc.
(d) C.T. Joint Venture - OWNERSHIP - HNMC, INC., GP (50%)
DOCTORS GROUP, LP (50%)
13
<PAGE>
(d) Houston Northwest Radiotherapy, L.L.C. - OWNERSHIP -
HNMC, INC., MANAGING
MEMBER(6.79%)
DOCTORS GROUP, MEMBER (93.21%)
(d) Houston Rehabilitation Associates - OWNERSHIP - HNMC,
INC., GP (20%)
DOCTORS GROUP, LP (80%)
(d) MRI-North Houston Venture - OWNERSHIP - HNMC,
INC., GP (12%)
DOCTORS GROUP, LP (88%)
(d) HNW GP, Inc.
(d) HNW Holdings, Inc.
(d) HNW Lessor GP, Inc.
(e) Houston Northwest Lessor, Ltd. - OWNERSHIP -
HNW LESSOR GP, INC., GP
HNW HOLDINGS, INC. LP
(d) Houston Northwest Management Services, Inc.
(c) Northwest Houston Providers Alliance, Inc.
(b) Indianapolis Health Systems, Inc.
(c) MMC Cardiology Venture - OWNERSHIP - INDIANAPOLIS
HEALTH SYSTEMS, INC., GP (50%)
REPUBLIC HEALTH CORPORATION OF
INDIANAPOLIS, LP (50%)
(b) La Hacienda Treatment Center, Inc.
(b) Lewisburg Community Hospital, Inc.
(b) Managed Health Alliance
(b) MCF, Inc.
(c) Bone Marrow/Stem Cell Transplant Institute of Florida, Inc.
(d) Bone Marrow/Stem Cell Transplant Institute of
Florida, Ltd. - OWNERSHIP -
BONE MARROW/STEM CELL TRANSPLANT
INSTITUTE OF FLORIDA,
INC., GP (51%)
STEM CELL, INC., LP (49%)
(c) Florida Medical Center, Ltd. - OWNERSHIP - MCF, INC.,
GP (50%)
ORNDA HOSPITAL CORPORATION, LP (50%)
(b) MCS Administrative Services, Inc.
(b) Meridian Regional Hospital, Inc.
(b) Mesa General Hospital Medical Center, Inc.
(b) Midway Hospital Medical Center, Inc.
(c) Midway Surgery Center, Ltd. - OWNERSHIP - MIDWAY HOSPITAL
MEDICAL CENTER (100%)
(c) Westside Hospital, L.L.C. - OWNERSHIP - MIDWAY HOSPITAL
MEDICAL CENTER, INC. - MANAGING
MEMBER
ORNDA HOSPITAL CORPORATION -
PARTICIPATING MEMBER
(b) NAI Community Hospital of Phoenix, Inc.
(b) OrNda Access, Inc.
(b) OrNda Ambulatory Network, Inc.
(c) Central Coast Surgery Center, Ltd.- OWNERSHIP - ORNDA
AMBULATORY NETWORK, INC., GP (69.8%)
DOCTORS GROUP, LP (30.2%)
(c) Magnolia Ambulatory Surgi-Center, L.P. - OWNERSHIP -
ORNDA AMBULATORY NETWORK, INC., GP (71.8%)
DOCTORS GROUP, LP (28.2%)
(c) Metro Ambulatory Surgery Center, L.P. - OWNERSHIP -
ORNDA AMBULATORY NETWORK, INC., GP (75%)
DOCTORS GROUP, LP (25%)
(b) OrNda Health Initiatives, Inc.
(b) OrNda Health Choice, Inc.
(c) Health Choice HMO
(c) Health Choice Partners, Inc.
(b) OrNda Healthcorp of Florida, Inc.
(b) Saint Vincent Healthcare System, Inc.
(c) Saint Vincent Hospital, Inc.
(c) OrNda Metro Surgery, Inc.
(d) Saint Vincent Hospital, L.L.C. - OWNERSHIP - ORNDA
HOSPITAL INVESTMENT CORP. -
MANAGING MEMBER
(c) Clini-Tech Laboratories, Inc.
(c) OHM Health Initiatives, Inc.
14
<PAGE>
(c) Provident Nursing Homes, Inc.
(c) Fallon Clinic, Inc. - OWNERSHIP - ORNDA HEALTHCORP OF
MASSACHUSETTS, INC. (35%)
SAINT VINCENT HOSPITAL, L.L.C. (10%),
INDIVIDUAL PHYSICIANS (55%)
(b) OrNda HomeCare, Inc.
(b) OrNda of South Florida, Inc.
(c) OrNda FMC, Inc.
(c) TriLink Provider Services Organization, Inc.
(b) OrNda of South Florida Holdings, Inc.
(b) OrNda Physicians Services, Inc.
(b) OrNda Receivables Co.
(b) Portland Health Centers, Inc.
(b) PoWay Health Systems, Inc.
(b) Qualicare of Mississippi, Inc.
(c) Gulf Coast Community Health Care Systems, Inc.
(c) Gulf Coast Community Hospital, Inc.
(b) Republic Health Corporation of Arizona
(b) Republic Health Corporation of California
(b) Republic Health Corporation of Central Georgia
(b) Republic Health Corporation of Hayward
(b) Republic Health Corporation of Indianapolis
(c) Indianapolis Physician Services, Inc.
(c) Winona Memorial Hospital, Ltd. - OWNERSHIP -
REPUBLIC HEALTH CORPORATION OF
INDIANAPOLIS, INC., GP (99%)
ORNDA HEALTHCORP, LP (1%)
(b) Republic Health Corporation of Meridian
(b) Republic Health Corporation of Mesquite
(b) Republic Health Corporation of North Miami
(c) North Miami Medical Center, Ltd. - OWNERSHIP -
REPUBLIC HEALTH CORPORATION OF NORTH
MIAMI, GP (60.845%)
DOCTORS GROUP, LP
(b) Republic Health Corporation of Rockwall County
(b) Republic Health Corporation of San Bernardino
(b) Republic Health Corporation of Texas
(b) Republic Health of North Texas
(b) Republic Health Partners, Inc.
(c) Lake Pointe Medical Center, Ltd. - OWNERSHIP -
REPUBLIC HEALTH PARTNERS, INC., GP (1%)
REPUBLIC HEALTH CORPORATION OF ROCKWALL
COUNTY, INC., LP (99%)
(b) RHC Texas, Inc.
(b) RHCMS, Inc.
(b) S.C. Cal, Inc.
(c) Tenet HealthSystem CM, Inc.
(b) S.C. Management, Inc.
(b) S.C. San Antonio, Inc.
(c) Southwest Physician Management Services, Inc.
(b) Sacramento Community Hospital
(b) Santa Ana Hospital Medical Center, Inc.
(b) SHL/O Corp.
(b) South Park Medical Center, Inc.
(b) St. Luke Medical Center
(b) St. Vincent Healthcare System, Inc.
(b) Tenet HealthSystem QA, Inc.
(c) Tenet HealthSystem QA Medical Groups, Inc.
(b) Tenet HealthSystem MCS-AZ, Inc.
(b) Tenet HealthSystem MW, Inc.
(b) Tucson General Hospital, Inc.
(b) UWMC Hospital Corporation
15
<PAGE>
(b) UWMC Anaheim Hospital Corporation
(b) UWMC Bartlett Hospital Corporation
(b) Valley Community Hospital
(b) West Los Angeles Health Systems, Inc.
(c) Brotman Partners, L.P. - OWNERSHIP - WEST LOS ANGELES
HEALTH SYSTEMS, INC. GP (55.75%)
ORNDA INVESTMENTS, INC., LP (44.25%)
(d) Foot and Ankle Specialty Institute of Culver
City - OWNERSHIP -
BROTMAN PARTNERS, L.P., GP (50%)
INTEGRATED HEALTHCARE ALLIANCE,
INC., LP (50%)
(d) Gynecological Specialty Institute of Culver
City - OWNERSHIP -
BROTMAN PARTNERS, L.P., GP (50%)
INTEGRATED HEALTHCARE ALLIANCE,
INC., LP (50%)
(b) Westcenter Rehabilitation Facility, Inc.
(b) Whittier Hospital Medical Center, Inc.
(c) Head & Neck Specialty Institute of Whittier - OWNERSHIP -
WHITTIER HOSPITAL MEDICAL CENTER,
INC. GP (50%)
INTEGRATED HEALTHCARE ALLIANCE, LP (50%)
(a) Horizon Health Group, Inc.
(a) Tenet HealthSystem Metro G.P., Inc.
(b) Metro Phoenix Surgery, Inc. - OWNERSHIP - ORNDA METROSURGURY,
INC. (99%)
TENET HEALTHSYSTEM METRO G.P., INC. (1%)
(a) Tenet HealthSystem Occupational Medicine, Inc.
(a) Tenet HealthSystem Sub, Inc.
Tenet Healthsystem Consulting Ltd.
Tenet HealthSystem Investments, Inc.
(a) Proton Therapy Corporation of America, Inc.
(b) Proton Therapy Center of St. Louis, Inc.
(c) PTCA Investments, Inc.
Syndicated Office Systems
Wilshire Rental Corp.
16
<PAGE>
ACCOUNTANTS' CONSENT AND REPORT ON CONSOLIDATED SCHEDULE
The Board of Directors
Tenet Healthcare Corporation:
Under date of July 27, 1999, we reported on the consolidated balance sheets
of Tenet Healthcare Corporation and subsidiaries as of May 31, 1999 and 1998,
and the related consolidated statements of operations, comprehensive income,
changes in shareholders' equity and cash flows for each of the years in the
three-year period ended May 31, 1999, as contained in the 1999 annual report to
shareholders. These consolidated financial statements and our report thereon are
incorporated by reference in the annual report on Form 10-K for fiscal year
1999. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the index of exhibits to the Annual Report on Form 10-K
for fiscal year 1999. The financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits. In our opinion, such schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
We consent to the incorporation by reference of our report dated July 27,
1999, in the Company's Registration Statements on Form S-3 (Nos. 33-57801,
33-57057, 33-55285, 33-62591, 33-63451, 333-17907, 333-24955, 333-21867,
333-26621 and 333-41907), Registration Statements on Form S-4 (Nos. 33-57485,
333-18185 and 333-64157) and Registration Statements on Form S-8 (Nos. 2-87611,
33-11478, 33-35688, 33-50182, 33-57375, 333-00709, 333-01183, 333-38299 and
333-41903).
/s/ KPMG LLP
Los Angeles, California
August 27, 1999
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 29,000
<SECURITIES> 130,000
<RECEIVABLES> 2,605,000
<ALLOWANCES> 287,000
<INVENTORY> 221,000
<CURRENT-ASSETS> 3,962,000
<PP&E> 7,703,000
<DEPRECIATION> 1,864,000
<TOTAL-ASSETS> 13,771,000
<CURRENT-LIABILITIES> 2,022,000
<BONDS> 6,391,000
0
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<COMMON> 24,000
<OTHER-SE> 3,846,000
<TOTAL-LIABILITY-AND-EQUITY> 13,771,000
<SALES> 0
<TOTAL-REVENUES> 10,880,000
<CGS> 0
<TOTAL-COSTS> 9,578,000
<OTHER-EXPENSES> 363,000
<LOSS-PROVISION> 743,000
<INTEREST-EXPENSE> 485,000
<INCOME-PRETAX> 474,000
<INCOME-TAX> 225,000
<INCOME-CONTINUING> 249,000
<DISCONTINUED> 0
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