<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1998.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: I-7293
------------------------
TENET HEALTHCARE CORPORATION
(Exact name of Registrant as specified in its charter)
NEVADA 95-2557091
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3820 STATE STREET
SANTA BARBARA, CALIFORNIA 93105
(Address of principal executive (Zip Code)
offices)
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 6/8% Senior Notes due 2002................................... New York Stock Exchange
7 7/8% Senior Note 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
</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, 1998, there were 309,356,363 share of Common Stock
outstanding. The aggregate market value of the share 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 $9,255,609,225. 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, 1998 have been incorporated by reference in Parts I, II and
IV of this Report. Portions of the definitive Proxy Statement for the
Registrant's 1998 Annual Meeting of Shareholders have been incorporated by
reference into Part III of this Report.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical financial data and other
operating information for Tenet for each of the fiscal years in the five-year
period ended May 31, 1998. The selected financial information for each of the
five annual periods has been derived from the Consolidated Financial Statements,
which have been audited by KPMG LLP, independent auditors for Tenet, and from
the underlying accounting records. The report of KPMG LLP covering the
Consolidated Financial Statements refers to a change in the method of accounting
for income taxes in fiscal 1994.
All information contained in the following tables should be read in
conjunction with "Management's Discussion and Analysis" and with the
Consolidated Financial Statements and related notes included herein. Certain
amounts derived from the consolidated statements of operations have been
reclassified to conform with the presentation below.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------------------------------------
1994 1995 1996 1997
(RESTATED) (RESTATED) (RESTATED) (RESTATED) 1998
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net operating revenues.................................... $ 4,218 $ 5,161 $ 7,706 $ 8,691 $ 9,895
Operating expenses:
Salaries and benefits................................... 1,868 2,170 3,139 3,595 4,052
Supplies................................................ 498 668 1,056 1,197 1,375
Provision for doubtful accounts......................... 193 260 436 498 588
Other operating expenses................................ 952 1,189 1,658 1,878 2,071
Depreciation............................................ 199 232 319 335 347
Amortization............................................ 25 44 100 108 113
Merger, facility consolidation, impairment and other
charges............................................... 110 37 86 619 221
----------- ----------- ----------- ----------- -----------
Operating income.......................................... 373 561 912 461 1,128
Interest expense, net of capitalized portion.............. (157) (251) (425) (417) (464)
Investment earnings....................................... 31 32 27 26 22
Equity in earnings of unconsolidated affiliates........... 27 43 25 1 --
Minority interests in income of consolidated
subsidiaries............................................ (12) (10) (30) (27) (22)
Net gains (losses) on disposals of facilities and
long-term investments................................... 42 31 346 (18) (17)
----------- ----------- ----------- ----------- -----------
Income from continuing operations before income taxes..... 304 406 855 26 647
Taxes on income........................................... (141) (128) (373) (89) (269)
----------- ----------- ----------- ----------- -----------
Income (loss) from continuing operations.................. $ 163 $ 278 $ 482 $ (63) $ 378
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic earnings (loss) per common share from continuing
operations.............................................. $ 0.74 $ 1.17 $ 1.71 $ (0.21) $ 1.23
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted earnings (loss) per common share from continuing
operations.............................................. $ 0.73 $ 1.12 $ 1.65 $ (0.21) $ 1.22
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Cash dividends per common share........................... $ 0.12 -- -- -- --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
AS OF MAY 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................................... $ (190) $ 273 $ 499 $ 621 $ 1,182
Total assets................................................. 5,543 9,787 10,768 11,606 12,774
Long-term debt, excluding current portion.................... 1,290 4,287 4,421 5,022 5,829
Shareholders' equity (1994-1997 restated).................... 1,642 2,385 3,267 3,224 3,558
Book value per common share.................................. $ 7.31 $ 9.15 $ 11.09 $ 10.65 $ 11.50
</TABLE>
In September 1998, the Company filed with the Commission a registration
statement for a debt exchange offer. The staff of the Commission reviewed and
commented on that registration statement, and in response to the staff's
comments regarding the classification of certain expenses incurred in connection
with the OrNda Merger and the classification of certain facility consolidation
and impairment charges, the Company has restated its consolidated financial
statements for the years ended May 31, 1994 through 1997 to correctly present
the effects of conforming accounting changes. The Company has allocated $121
million of expenses originally included in fiscal 1997's merger, facility
consolidation and impairment charges (a) to other operating expense line items
within fiscal 1997 or (b) to earlier periods as follows: $10 million to other
operating expenses in fiscal 1994; $11 million to other operating expenses in
fiscal 1995; $12 million to other operating expenses, $5 million to provision
for doubtful accounts, and $9 million to salaries and benefits in fiscal 1996;
$49 million to other operating expenses, $4 million to provision for doubtful
accounts, and $21 million to salaries and benefits in fiscal 1997. The Company
also restated the effect of a $19 million reduction of an income tax valuation
allowance related to OrNda from fiscal year 1997 to fiscal year 1995.
The Selected Financial Data above has been restated to reflect these
changes, all of which relate to the financial statements of OrNda for periods
prior to the January 1997 merger. The Company also has reclassified certain May
31, 1997 and 1998 balance sheet items previously included in reserves related to
discontinued operations, merger, facility consolidation and impairment charges
and other long-term liabilities to other assets, property and equipment and
costs in excess of net assets acquired. The effects of these changes on
previously reported consolidated statements of operations are shown below
(dollars in millions, except for per share amounts):
<TABLE>
<CAPTION>
1994 1995
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Other operating expenses.................................... $ 942 $ 952 $ 1,178 $ 1,189
Operating income............................................ 383 373 572 561
Income from continuing operations before income taxes....... 314 304 417 406
Taxes on income............................................. (145) (141) (151) (128)
----------- ----------- ----------- -----------
Income from continuing operations........................... $ 169 $ 163 $ 266 $ 278
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings per common share from continuing
operations................................................ $ 0.77 $ 0.74 $ 1.12 $ 1.17
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings per common share from continuing
operations................................................ $ 0.75 $ 0.73 $ 1.07 $ 1.12
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
1996 1997
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Salaries and benefits....................................... $ 3,130 $ 3,139 $ 3,574 $ 3,595
Provision for doubtful accounts............................. 431 436 494 498
Other operating expenses.................................... 1,646 1,658 1,829 1,878
Merger, facility consolidation and impairment charges....... 86 86 740 619
Operating income............................................ 938 912 414 461
Income (loss) from continuing operations before income
taxes..................................................... 881 855 (21) 26
Taxes on income............................................. (383) (373) (52) (89)
----------- ----------- ----------- -----------
Income (loss) from continuing operations.................... $ 498 $ 482 $ (73) $ (63)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings (loss) per common share from continuing
operations................................................ $ 1.77 $ 1.71 $ (0.24) $ (0.21)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted earnings (loss) per common share from continuing
operations................................................ $ 1.70 $ 1.65 $ (0.24) $ (0.21)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The healthcare industry continues to undergo tremendous change, driven
primarily by (1) cost-containment pressures by government payors, managed care
providers and others, and (2) technological advances that require increased
capital expenditures. To address these changes, Tenet has implemented various
cost-control programs and overhead-reduction plans, and continues to create
strong integrated healthcare delivery systems.
As more fully discussed in Item 6., Selected Financial Data and in Note 1 of
Notes to Consolidated Financial Statements herein, the Company has restated its
consolidated statements of operations for the years ended May 31, 1994 through
1997 to correctly present the effects of conforming accounting changes in
connection with the OrNda Merger. All relevant information discussed herein for
fiscal 1996 and 1997 reflects that restatement.
The Company reported income from continuing operations before income taxes
of $855 million in 1996, $26 million in 1997 and $647 million in 1998. The most
significant transactions affecting the results of continuing operations in the
last three years have been: (1) a series of acquisitions and divestitures (See
Note 3 of Notes to Consolidated Financial Statements herein), and (2) merger,
facility consolidation and impairment charges (See Note 4 of Notes to
Consolidated Financial Statements herein).
Fiscal 1996 also includes gains from sales of the Company's interests in its
hospitals and related healthcare businesses in Singapore, Australia, Malaysia
and Thailand, its interest in Westminster Health Care Holdings, PLC
("Westminster"), the sale of the Company's investment in preferred stock of The
Hillhaven Corporation ("Hillhaven"), and the exchange of its interest in the
common stock of Hillhaven for common stock of Ventas, Inc., formerly known as
Vencor, Inc. ("Ventas"). Fiscal 1997 includes a noncash charge relating to
increases in the index value of certain of the Company's long-term debt. Fiscal
4
<PAGE>
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>
1997
1996 (RESTATED) 1998
--------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Gain (loss) on sales of facilities and long-term investments,
net............................................................. $ 346 $ (18) $ (17)
Merger, facility consolidation and impairment charges............. (86) (619) (221)
--------- ----- ---------
Net pretax impact (after tax, diluted per share: $0.43 in 1996,
($1.44) in 1997 and $0.51 in 1998).............................. $ 260 $ (637) $ (238)
--------- ----- ---------
--------- ----- ---------
</TABLE>
Excluding the items in the table above, income from continuing operations
before income taxes would have been $595 million in 1996, $663 million in 1997
and $885 million in 1998.
The following is a summary of continuing operations for the past three
fiscal years:
<TABLE>
<CAPTION>
1996 1997
(RESTATED) (RESTATED) 1998 1996 1997 1998
----------- ----------- --------- --------- --------- ---------
(PERCENTAGE OF NET
(DOLLARS IN MILLIONS) OPERATING REVENUES)
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals....................... $ 7,183 $ 7,932 $ 8,997 93.2% 91.3% 90.9%
Other domestic operations(1)..................... 472 759 898 6.1% 8.7% 9.1%
International operations......................... 51 -- -- 0.7% -- --
----------- ----------- --------- --------- --------- ---------
$ 7,706 $ 8,691 $ 9,895 100.0% 100.0% 100.0%
----------- ----------- --------- --------- --------- ---------
Operating expenses:
Salaries and benefits............................ (3,139) (3,595) (4,052) 40.7% 41.4% 41.0%
Supplies......................................... (1,056) (1,197) (1,375) 13.7% 13.8% 13.9%
Provision for doubtful accounts.................. (436) (498) (588) 5.7% 5.7% 5.9%
Other operating expenses......................... (1,658) (1,878) (2,071) 21.5% 21.6% 20.9%
Depreciation..................................... (319) (335) (347) 4.2% 3.9% 3.5%
Amortization..................................... (100) (108) (113) 1.3% 1.2% 1.2%
----------- ----------- --------- --------- --------- ---------
Operating income before merger, facility
consolidation and impairment charges............. 998 1,080 1,349 12.9% 12.4% 13.6%
Merger, facility consolidation and impairment
charges.......................................... (86) (619) (221) 1.1% 7.1% 2.2%
----------- ----------- --------- --------- --------- ---------
Operating income................................... $ 912 $ 461 $ 1,128 11.8% 5.3% 11.4%
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Net operating revenues of other domestic 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) healthcare joint ventures operated by the Company; and (iv)
subsidiaries of the Company offering managed care and indemnity products.
5
<PAGE>
The table below sets forth certain selected historical operating statistics
for the Company's domestic general hospitals:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
1996 1997 1998 1997 TO 1998
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Number of hospitals (at end of period)...................... 122 128 122 (6)*
Licensed beds (at end of period)............................ 25,699 27,959 27,867 (0.3)%
Net inpatient revenues (in millions)........................ $ 4,744 $ 5,227 $ 5,843 11.8%
Net outpatient revenues (in millions)....................... $ 2,283 $ 2,515 $ 2,978 18.4%
Admissions.................................................. 714,058 786,887 872,433 10.9%
Equivalent admissions(1).................................... 1,017,514 1,124,397 1,268,264 12.8%
Average length of stay (days)............................... 5.3 5.2 5.2 --
Patient days................................................ 3,771,928 4,099,709 4,547,312 10.9%
Equivalent patient days(1).................................. 5,432,612 5,817,251 6,557,525 12.7%
Net inpatient revenues per patient day...................... $ 1,258 $ 1,275 $ 1,285 0.8%
Net inpatient revenues per admission........................ $ 6,643 $ 6,643 $ 6,697 0.8%
Utilization of licensed beds................................ 41.6% 42.5% 44.0% 1.5%*
Outpatient visits........................................... 8,174,002 9,997,266 10,402,957 4.1%
</TABLE>
- ------------------------
* The change is the difference between the 1997 and 1998 amounts shown.
(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.
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals, on a same-facility basis:
<TABLE>
<CAPTION>
INCREASE
1997 1998 (DECREASE)
--------- --------- ----------
<S> <C> <C> <C>
Average licensed beds........................ 24,500 24,465 (0.1)%
Patient days................................. 3,927,037 4,000,874 1.9%
Net inpatient revenue per patient day........ $ 1,277 $ 1,290 1.0%
Admissions................................... 752,336 771,443 2.5%
Net inpatient revenue per admission.......... $ 6,667 $ 6,689 0.3%
Outpatient visits............................ 9,582,056 9,129,446 (4.7)%
Average length of stay (days)................ 5.2 5.2 --
</TABLE>
The Company continues to experience increases in inpatient acuity and
intensity of services as less intensive services shift from an inpatient to an
outpatient basis or to alternative healthcare delivery services because of
technological and pharmaceutical improvements and continued pressures by payors
to reduce admissions and lengths of stay. In spite of the historical shifts from
inpatient to outpatient services, the Company experienced a 4.7% decline in the
number of same-facility outpatient visits during 1998 compared to 1997. This
decline was due to (1) fewer home health care visits, primarily due to the
effect of new Medicare reimbursement rules which restrict the number and types
of visits for which Medicare will pay, and (2) the Company's subsequent efforts
to respond to them. In response to these changes, the Company is consolidating
certain home health care agencies and closing others and has begun to focus on
increasing the numbers of higher intensity home visits.
The Medicare program accounted for approximately 40% of the net patient
revenues of the Company's domestic general hospitals in 1996 and 1997. The
percentage in 1998 was approximately 38%. Changes in Medicare payments mandated
by the Balanced Budget Act of 1997 (the "1997 Act"), which became effective
October 1, 1997, as well as certain proposed changes to various states' Medicaid
6
<PAGE>
programs, have and will continue to significantly reduce payments as the changes
are phased in over the next five years. The 1997 Act also contains various
provisions that allow providers such as Tenet to contract directly with the
federal government for the provision of medical care to Medicare beneficiaries
on a fully capitated basis. Under capitation, the Company receives a certain
amount for each person enrolled in its plans and assumes the risks and rewards
of meeting the healthcare needs of those enrolled persons. The Company may
purchase insurance to cover a portion of the cost of meeting the healthcare
needs of those covered. The Company cannot predict at this time what the
ultimate effect of capitated arrangements with the federal government, if any,
will be.
Pressures to control healthcare costs have resulted in an increase in the
number of patients choosing managed care plans for their healthcare coverage.
The percentage of net patient revenues of the Company's domestic general
hospitals attributable to managed care increased from approximately 27.6% in
1996 to approximately 29.5% in 1997 and 33.7% in 1998. 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 also is assuming a
greater share of risk by entering into capitated arrangements with managed care
payors and employers. The Company estimates that approximately 5.0% of its
revenues were derived from capitated arrangements in the year ended May 31,
1998.
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 healthcare delivery systems.
Further consolidations or implementation of additional cost-control programs may
be necessary in the future to offset the reduced payments under the 1997 Act.
Net operating revenues from the Company's other domestic operations were
$472 million in 1996, $759 million in 1997 and $898 million in 1998. These
increases primarily relate to the growth of its physician practices, most of
which were acquired as part of hospital acquisitions. The Company does not
expect to acquire any significant additional physician practices unless they are
included in a hospital acquisition.
Salaries and benefits expense as a percentage of net operating revenues has
remained substantially the same at 40.7% in 1996, 41.4% in 1997 and 41.0% in
1998. The increase in 1997 includes $18 million of costs to terminate or convert
OrNda's employee benefit programs.
Supplies expense as a percentage of net operating revenues was 13.7% in
1996, 13.8% in 1997 and 13.9% in 1998. These increases relate primarily to
greater patient acuity. The Company expects to continue 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 1996 and 1997 and 5.9% in 1998. The increase in 1998 is
attributable to a shift in revenues from Medicare and Medicaid to managed care
and to recent acquisitions and payment delays by various payors.
Other operating expenses as a percentage of net operating revenues were
21.5% in 1996, 21.6% in 1997 and 20.9% in 1998; 1996 and 1997 include $12
million and $17 million, respectively, to conform accounting methodologies used
to estimate professional liability and other self-insurance reserves in
connection with the OrNda Merger and, in 1997, $32 million for the estimated
costs to settle a government investigation of an OrNda facility and other OrNda
litigation. The improvement in the current year is also due to continued
emphasis on cost-control and overhead reduction plans.
Depreciation and amortization expense was $419 million in 1996, $443 million
in 1997 and $460 million in 1998. The increases in 1997 and 1998 are primarily
due to the effects of facility additions offset by
7
<PAGE>
the effect of the May 1997 write-down for impairment of the carrying values of
long-lived assets of certain general hospitals and medical office buildings and
the write-off of goodwill and other long-lived assets related to the Company's
physician practices. Goodwill amortization is approximately $90 million annually
or $0.27 per share.
Merger, facility consolidation and impairment charges of $86 million, $619
million and $221 million were recorded in fiscal 1996, 1997 and 1998,
respectively. Fiscal 1996 and 1997 include impairment losses of $86 million and
$413 million, respectively, in which certain facilities owned by the Company in
1996 and certain facilities acquired in the OrNda Merger were written down to
their estimated fair values. The 1997 charge included losses 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 other regional
offices, reorganization of operations, information systems consolidation,
primarily related to 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 $221 million of facility consolidation and impairment charges recorded
in fiscal 1998 consisted of asset impairment losses related primarily to (1) the
planned closure or sale of three additional general hospitals, two specialty
hospitals and twenty-nine home health agencies, (2) the write-down of the
carrying values of certain long-lived assets of one additional general hospital
and sixteen home health agencies to be held and used to their fair values (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
for the planned closures and sales in 1997.
The Company began its process of determining if its facilities were 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 were negative or trending
significantly downward on this basis were selected for further impairment
analysis. Their future cash flows (undiscounted and without interest charges)
were estimated over the expected useful life of the facility and considered
patient volumes, changes in payor mix, revenue and expense growth rates and
reductions in Medicare payments due to the Balanced Budget Act of 1997, which
assumptions varied by hospital, home health agency and physician practice. These
factors caused significant declines in cash flows 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 charges for
these businesses in 1997 and 1998. The effect of the impairment charges on
future operating results will be minor reductions in depreciation and
amortization expense. In addition to recording these impairment losses, the
Company determined in 1996, 1997 and 1998 to sell, close or convert to alternate
uses a number of facilities, physician practices and other healthcare
businesses, as described above. (See also Note 4 of Notes to Consolidated
Financial Statements.)
The $221 million in charges recorded in fiscal 1998, included approximately
$140 million for non-cash write-downs or write-offs of assets and $81 million
for accruals requiring future cash disbursements estimated to be approximately
$78 million in the year ended May 31, 1999 and $3 million thereafter.
The $619 million in charges recorded in fiscal 1997, included approximately
$387 million for non-cash write-downs or write-offs 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. The
non-cash write-down or write-offs include $322 million of impairment charges and
$55 million of write-offs of assets in connection with the closure of corporate
and regional offices of OrNda and its information systems
8
<PAGE>
consolidations. Costs remaining in the accrued liability at May 31, 1998 for the
1997 charges include $35 million for estimated costs to sell or close remaining
facilities and $22 million of accruals for unfavorable lease commitments. At May
31, 1998 the Company also had $19 million of costs remaining in the accrued
liability relating to the OrNda Merger which consisted of accruals for the
closure of the corporate and regional offices, severance costs and information
system consolidations costs. Cash payments are expected to be $32 million in
fiscal 1999 and $30 million thereafter primarily for unfavorable lease
commitments.
Interest expense, net of capitalized interest, was $425 million in 1996,
$417 million in 1997 and $464 million in 1998. The reduction in 1997 compared to
1996 is primarily due to the refinancing of debt at lower interest rates in
connection with the OrNda Merger. The increase in 1998 is primarily due to
increased borrowings for acquisitions.
Investment earnings were $27 million in 1996, $26 million in 1997, and $22
million in 1998 and were derived primarily from notes receivable and investments
in debt securities.
Equity in earnings of unconsolidated affiliates declined from $25 million in
1996 to approximately $1 million in 1997 and approximately $5 million in 1998.
The principal reasons for the decline from 1996 include the purchase of a
majority interest in a hospital and the sale of the Company's investment in
Westminster. In 1998, because the amounts had become immaterial, the Company
began classifying its equity in earnings of unconsolidated affiliates as a part
of net operating revenues in its Consolidated Statement of Operations.
Minority interests in income of consolidated subsidiaries decreased in 1997
and 1998 primarily due to reduced operating results at consolidated but not
wholly owned facilities. Minority interest expense was $30 million in 1996, $27
million in 1997 and $22 million in 1998.
The $17 million net losses from the disposals of facilities and other
long-term investments in the current year is comprised of $35 million in losses
on the disposals of the Company's investments in the common stock of Vencor,
Inc. (received as a dividend from 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 1996 includes the benefit of the realization
of certain prior-year operating losses of OrNda, nondeductible amortization of
certain goodwill and gains from prior years' sales of international operations.
The goodwill amortization is a noncash charge that provides no income tax
benefits. The tax provision in 1997 includes 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 tax rate in 1998 before
the effect of nonrecurring items was 39%. The Company expects its tax rate in
1999 also to be approximately 39%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the year ended May 31, 1998 was derived
principally from the proceeds from the sale of public debt, borrowings under the
Company's bank credit agreements and net cash proceeds from operating
activities. Net cash provided by operating activities for the years ended May
31, 1996, 1997 and 1998 was $446 million, $512 million and $788 million,
respectively, before net expenditures for discontinued operations, merger,
facility consolidation and impairment charges of $97 million in 1996, $108
million in 1997 and $385 million in 1998. The expenditures in 1998 include the
settlement of significant litigation related to the Company's discontinued
psychiatric business.
In January 1997, in connection with the OrNda Merger, the Company entered
into a new five-year, $2.8 billion unsecured revolving credit agreement (the
"1997 Credit Agreement") with Morgan Guaranty Trust Company of New York, Bank of
America NT&SA, The Bank of New York and the Bank of Nova
9
<PAGE>
Scotia and a syndicate of other lenders. Borrowings under the 1997 Credit
Agreement are unsecured and will mature on January 31, 2002. The Company
generally may repay or prepay loans made under the 1997 Credit Agreement and may
reborrow at any time prior to the maturity date.
Management believes that future cash provided by operating activities, along
with the availability of credit under the 1997 Credit Agreement, should be
adequate to meet debt-service requirements and to finance planned capital
expenditures and other known operating needs for the next three years.
Proceeds from borrowings under the Company's bank credit agreements amounted
to $2.1 billion in 1996, $3.1 billion in 1997 and $2.0 billion in 1998. Loan
repayments under the credit agreements were $1.3 billion in 1996, $1.9 billion
during 1997 and $1.3 billion in 1998. Net proceeds from the sales of facilities,
investments and other assets were $551 million in 1996, compared to $50 million
during 1997 and $170 million during 1998.
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 aggregate
proceeds to the Company were $1.32 billion, after underwriting discounts and
commissions. These proceeds were used to redeem $286 million of the Company's
9 5/8% Senior Notes due 2002 and $897 million of its 10 1/8% Senior Subordinated
Notes due 2005.
In connection with the OrNda Merger and related refinancing, in January
1997, the Company sold $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. The proceeds to the Company were
$1.95 billion, after underwriting discounts and commissions.
Cash payments for property and equipment were $472 million in fiscal 1996,
$406 million in fiscal 1997 and $534 million in fiscal 1998. The Company expects
to spend approximately $400-$500 million annually on capital expenditures,
before any significant acquisitions of facilities and other healthcare
operations and before an estimated $293 million commitment to complete
construction of two new hospitals over the next three years. Such capital
expenditures relate primarily to the development of healthcare service networks
in selected geographic areas, design and construction of new buildings,
expansion and renovation of existing facilities, equipment additions and
replacements, introduction of new medical technologies and various other capital
improvements.
During fiscal 1997 and 1998, the Company spent $787 million and $679
million, respectively, for purchases of new businesses, net of cash acquired.
These include 17 general hospitals and a number of other healthcare-related
businesses. These acquisitions were financed primarily by borrowings under the
Company's credit agreements.
The Company's strategy includes the development of integrated healthcare
systems, including the acquisition of general hospitals and related ancillary
healthcare businesses or joining with others to develop integrated healthcare
delivery networks. All or portions of this growth may be financed through
available credit under the 1997 Credit Agreement or, depending on capital market
conditions, the sale of additional debt or equity securities or other bank
borrowings. The Company's unused borrowing capacity under the 1997 Credit
Agreement was $1.2 billion at May 31, 1998.
The Company's 1997 Credit Agreement and the indentures governing its senior
and senior subordinated notes have, among other requirements, affirmative,
negative and financial covenants with which the Company must comply. These
covenants include, among other requirements, limitations on other borrowings,
liens, investments, the sale of all or substantially all assets and prepayment
of subordinated debt, a prohibition against the Company declaring or paying a
dividend or purchasing its common stock unless its senior long-term unsecured
debt securities are rated BBB- or higher by Standard and Poors' Rating Services
and Baa3 or higher by Moody's Investors Service, Inc., and covenants regarding
maintenance of specified levels of net worth, debt ratios and fixed charge
coverages. Current debt ratings on the
10
<PAGE>
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, including long-term debt and interest
rate swaps as of May 31, 1998. The fair values of long-term debt and interest
rate swaps were determined based on quoted market prices for the same or similar
debt issues.
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. Those foreign currency forward exchange
contracts are not included in the tables below because the Company's exposure
under those instruments is immaterial in the aggregate. The interest rate swaps
and foreign currency contracts are 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 counter parties to perform. Because the other parties are creditworthy
financial institutions, generally commercial banks, the Company does not expect
any losses as a result of counter party defaults.
<TABLE>
<CAPTION>
MATURITY DATE, FISCAL YEAR ENDING MAY 31,
------------------------------------------------------------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
--------- --------- --------- --------- --------- ----------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed-rate long-term debt........... $ 10 $ 33 $ 6 $ 6 $ 464 $ 3,840 $ 4,359 $ 4,415
Average interest rates............ 12.5% 12.7% 12.9% 12.9% 8.6% 8.3% 8.4%
Variable-rate long-term debt........ -- -- -- $ 1,587 -- -- $ 1,587 $ 1,587
Average interest rates............ -- -- -- 6.2% -- -- 6.2% --
Interest rate swaps:
Notional amounts.................. -- $ 18 $ 50 -- -- -- $ 68 $ (4)
Average fixed rate paid........... -- 8.8% 8.6% -- -- -- 8.6% --
Average variable rate received.... -- 5.6% 5.6% -- -- -- 5.6% --
</TABLE>
At May 31, 1998, the Company had the following long-term investments that
are sensitive to changes in market price. They are carried at market value on
the Company's consolidated balance sheet:
<TABLE>
<CAPTION>
DESCRIPTION OF INVESTMENT NUMBER OF SHARES MARKET VALUE
- ------------------------------------------------------------- ----------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Ventas, Inc. common stock.................................... 8,301,067 $ 134
Total Renal Care Holdings, Inc. common stock................. 2,865,000 88
Investment portfolio of debt securities...................... n.a. 77
-----
Total.................................................... $ 299
-----
-----
</TABLE>
At May 31, 1998, the investment portfolio in the table above consisted of
investments in U.S. Treasury Bills, the Federal Home Loan Mortgage Corporation
and the Federal National Mortgage Association, 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
11
<PAGE>
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 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.
BUSINESS OUTLOOK
The general hospital industry in the United States and the Company's general
hospitals continue to have significant unused capacity, and thus there is
substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative healthcare delivery services for
less acutely ill patients. Increased competition, admission constraints and
payor pressure are expected to continue.
The ongoing challenge facing the Company and the healthcare industry as a
whole is to continue to provide quality patient care in an environment of rising
costs, strong competition for patients and a general reduction of reimbursement
rates by both private and government payors. Because of national, state and
private industry efforts to reform healthcare delivery and payment systems, the
healthcare industry as a whole faces increased uncertainty. The Company is
unable to predict whether any new healthcare legislation at the federal and/or
state level will be passed in the future and what action it may take in response
to such legislation, but it continues to monitor all proposed legislation and
analyze its potential impact in order to formulate the Company's future business
strategies.
THE YEAR 2000 ISSUE
Many existing computer systems and programs process transactions using a
two-digit rather than a four-digit code for the year of a transaction. Unless
they have been or are modified, a significant number of those computer systems
and programs may process a transaction with a date of 2000 as the year "00",
which could cause the system or program to fail or create erroneous results
before, on or after January 1, 2000.
The Company has initiated a six-phase program in order to assess the effect
of this problem (the "Year 2000 Issue") on the Company's computer systems and
programs, including the embedded systems that control certain medical and other
equipment, and address the Year 2000 Issues that are discovered. In addition, as
part of the program the Company is contacting its principal suppliers, other
vendors and payors to assess whether their Year 2000 Issues, if any, will affect
the Company.
The Company's financial and general ledger systems already are substantially
Year 2000 compliant. Furthermore, changes to the Company's payroll and patient
accounting systems are underway, testing of those changes is expected to be
substantially completed by the end of fiscal 1999 and implementation of those
changes is expected to be completed during the fall of calendar 1999. The cost
to bring these systems into Year 2000 compliance has not been and is not
expected to be material.
The first phase of the program, conducting an inventory of what systems and
programs may be affected by the Year 2000 Issues, has been substantially
completed. The second phase, assessment of how the Year 2000 Issues may affect
each piece of equipment and system, has begun and is expected to be
substantially completed by the second quarter of fiscal 1999. The third phase
involves planning how to correct any Year 2000 Issues that are discovered and is
expected to be substantially completed by the third quarter of fiscal 1999. The
fourth phase will entail executing the plans developed during the third phase
and correcting the Year 2000 Issues. During the fifth phase the Company will
test the corrections made during the fourth phase to make sure that the Year
2000 Issues have been properly corrected. The sixth phase will involve
implementing the corrections of the Year 2000 Issues across all of the Company's
12
<PAGE>
systems and programs. Different systems and programs will be subject to the
fourth and fifth phases of the program concurrently through the end of fiscal
1999, by which time those phases are expected to be substantially completed. The
sixth phase of the program is expected to run through the fall of calendar 1999,
by which time the program is expected to be substantially completed.
In addition to the six-phase remediation program, the Company is preparing
general contingency plans to address unforeseen Year 2000 Issues. These
contingency plans include preparing the Company's hospitals for any increased
service demands that may occur as a result of problems at non-Year 2000
compliant hospitals owned by others.
Since the Company has not yet completed its assessment of the scope of the
Year 2000 Issues facing most of its systems and programs, it is unable at this
time to estimate the costs to correct any Year 2000 Issues that may be
discovered. Although the costs incurred by the Company to date have not been
material, the Company is unable to estimate at this time whether or not future
costs will be material.
Furthermore, as noted above, the Company is contacting its principal
suppliers, other vendors and payors, including Federal and State governments,
Medicare fiscal intermediaries, insurance companies and managed care companies,
concerning the state of their Year 2000 compliance. The Company is not aware at
this time whether those other systems are or will be Year 2000 compliant and is
unable to estimate at this time the impact on the Company if one or more of
those systems is not Year 2000 compliant. For the foregoing reasons, the Company
is not able to determine at this time whether the Year 2000 Issue will
materially affect its future financial results or financial condition.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report, including, without
limitation, statements containing the words "believes", "anticipates",
"expects", "will", "may", "might", and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
management's current expectations and involve known and unknown risks,
uncertainties and other factors, many of which the Company is unable to predict
or control, that may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, both national and in the regions in
which the Company operates; industry capacity; demographic changes; existing
laws and government regulations and changes in, or the failure to comply with
laws and governmental regulations; legislative proposals for healthcare reform;
the ability to enter into managed care provider arrangements on acceptable
terms; a shift from fee-for-service payment to capitated and other risk-based
payment systems; changes in Medicare and Medicaid reimbursement levels;
liability and other claims asserted against the Company; competition; the loss
of any significant customers; technological and pharmaceutical improvements that
increase the cost of providing, or reduce the demand for, healthcare; changes in
business strategy or development plans; the ability to attract and retain
qualified personnel, including physicians; the significant indebtedness of the
Company; 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.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Tenet Healthcare Corporation and Subsidiaries
<S> <C>
Financial Statements:
Report of Independent Auditors....................................................... 15
Consolidated Balance Sheets as of May 31, 1997 and 1998.............................. 16
Consolidated Statements of Operations for the years May 31, 1996, 1997 and 1998...... 17
Consolidated Statements of Comprehensive Income for the years May 31, 1996, 1997 and
1998............................................................................... 18
Consolidated Statements of Changes in Shareholders' Equity for the years ended May
31, 1996, 1997 and 1998............................................................ 19
Consolidated Statements of Cash Flows for the years ended May 31, 1996, 1997 and
1998............................................................................... 20
Notes to Consolidated Financial Statements........................................... 21
</TABLE>
14
<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, 1997 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, 1998. 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, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended May 31, 1998, in conformity with generally accepted
accounting principles.
As discussed more fully in Note 1 to the consolidated financial statements,
the Company and the staff of the Securities and Exchange Commission have had
discussions with respect to the classification of certain expenses originally
included in merger, facility consolidation and impairment charges related to the
Company's merger with OrNda HealthCorp during the year ended May 31, 1997, as
well as the periods in which such expenses and the reduction of an income tax
valuation allowance should be recognized. As a result of these discussions, the
Company has restated the consolidated financial statements for the years ended
May 31, 1996 and 1997 to reflect these changes.
/s/ KPMG LLP
Los Angeles, California
July 24, 1998
15
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
--------------------
1997 1998
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 35 $ 23
Short-term investments in debt securities................................................. 116 132
Accounts receivable, less allowance for doubtful accounts
($224 in 1997 and $191 in 1998)......................................................... 1,346 1,742
Inventories of supplies, at cost.......................................................... 193 214
Deferred income taxes..................................................................... 294 275
Other current assets...................................................................... 407 504
--------- ---------
Total current assets.................................................................... 2,391 2,890
--------- ---------
Investments and other assets................................................................ 657 498
Property and equipment, net................................................................. 5,459 5,987
Costs in excess of net assets acquired, less accumulated amortization
($176 in 1997 and $270 in 1998)........................................................... 3,025 3,317
Other intangible assets, at cost, less accumulated amortization
($46 in 1997 and $55 in 1998)............................................................. 74 82
--------- ---------
$ 11,606 $ 12,774
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................................... $ 28 $ 10
Accounts payable.......................................................................... 540 657
Employee compensation and benefits........................................................ 309 355
Accrued interest payable.................................................................. 144 106
Reserves related to discontinued operations, merger, facility consolidation and other
charges................................................................................. 272 78
Other current liabilities................................................................. 477 502
--------- ---------
Total current liabilities............................................................... 1,770 1,708
--------- ---------
Long-term debt, net of current portion...................................................... 5,022 5,829
Other long-term liabilities and minority interests.......................................... 1,282 1,256
Deferred income taxes....................................................................... 308 423
Commitments and contingencies
Shareholders' equity:
Common stock, $0.075 par value; authorized 700,000,000 shares at May 31, 1997 and at May
31, 1998; 305,501,379 shares issued at May 31, 1997 and 313,044,417 shares issued at May
31, 1998................................................................................ 23 23
Additional paid-in capital................................................................ 2,311 2,475
Accumulated other comprehensive income.................................................... 110 50
Retained earnings......................................................................... 819 1,080
Less common stock in treasury, at cost, 2,676,091 shares at May 31, 1997 and 3,754,891 at
May 31, 1998............................................................................ (39) (70)
--------- ---------
Total shareholders' equity.............................................................. 3,224 3,558
--------- ---------
$ 11,606 $ 12,774
--------- ---------
--------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------
1996 1997
(RESTATED) (RESTATED) 1998
----------- ----------- ---------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net operating revenues......................................................... $ 7,706 $ 8,691 $ 9,895
----------- ----------- ---------
Operating expenses:
Salaries and benefits........................................................ 3,139 3,595 4,052
Supplies..................................................................... 1,056 1,197 1,375
Provision for doubtful accounts.............................................. 436 498 588
Other operating expenses..................................................... 1,658 1,878 2,071
Depreciation................................................................. 319 335 347
Amortization................................................................. 100 108 113
Merger, facility consolidation and impairment charges........................ 86 619 221
----------- ----------- ---------
Operating income............................................................... 912 461 1,128
----------- ----------- ---------
Interest expense, net of capitalized portion................................... (425) (417) (464)
Investment earnings............................................................ 27 26 22
Equity in earnings of unconsolidated affiliates................................ 25 1 --
Minority interests in income of consolidated subsidiaries...................... (30) (27) (22)
Net gains (losses) on disposals of facilities and long-term investments........ 346 (18) (17)
----------- ----------- ---------
Income (loss) from continuing operations before income taxes................... 855 26 647
Taxes on income................................................................ (373) (89) (269)
----------- ----------- ---------
Income (loss) from continuing operations....................................... 482 (63) 378
Discontinued operations........................................................ (25) (134) --
Extraordinary charges from early extinguishment of debt........................ (23) (47) (117)
----------- ----------- ---------
Net income (loss).............................................................. 434 (244) 261
----------- ----------- ---------
----------- ----------- ---------
Earnings (loss) per common and common equivalent share:
Basic:
Continuing operations...................................................... $ 1.71 $ (0.21) $ 1.23
Discontinued operations.................................................... (0.09) (0.44) --
Extraordinary charges...................................................... (0.08) (0.16) (0.38)
----------- ----------- ---------
$ 1.54 $ (0.81) $ 0.85
----------- ----------- ---------
----------- ----------- ---------
Diluted:
Continuing operations...................................................... $ 1.65 $ (0.21) $ 1.22
Discontinued operations.................................................... (0.08) (0.44) --
Extraordinary charges...................................................... (0.08) (0.16) (0.38)
----------- ----------- ---------
$ 1.49 $ (0.81) $ 0.84
----------- ----------- ---------
----------- ----------- ---------
Weighted shares and dilutive securities outstanding (in thousands):
Basic........................................................................ 281,664 303,947 306,255
Diluted...................................................................... 294,796 303,947 312,113
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------------------
1996 1997
(RESTATED) (RESTATED) 1998
------------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net income (loss)................................................................. $ 434 $ (244) $ 261
Other comprehensive income (loss):
Unrealized gains (losses) on securities held as available for sale:
Unrealized net holding gains (losses) arising during period................... 40 134 (56)
Less: elimination of unrealized gains upon acquisition of controlling equity
interest in unconsolidated affiliate........................................ (47) -- --
Less: reclassification adjustment for gains included in net income............ -- -- (40)
----- ----- ---------
Other comprehensive income (loss), before income taxes.......................... (7) 134 (96)
Income tax benefit (expense) related to items of other comprehensive income..... (17) (52) 36
----- ----- ---------
Other comprehensive income (loss)............................................... (24) 82 (60)
----- ----- ---------
Comprehensive income (loss)..................................................... $ 410 $ (162) $ 201
----- ----- ---------
----- ----- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
18
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
COMMON STOCK STOCK ACCUMULATED
-------------------- -------------- ADDITIONAL OTHER RETAINED
OUTSTANDING ISSUED ISSUED PAID-IN COMPREHENSIVE EARNINGS TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (RESTATED) STOCK
----------- ------ ------ ------ ---------- ------------- -------- --------
(DOLLAR IN MILLIONS, SHARE AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, MAY 31, 1995........ 260,523 $21 1,330 $ 20 $1,912 $ 52 $ 652 $(272)
Net income.................... 434
Other comprehensive loss...... (24)
Performance investment plan
options exercised........... 13,499 39 196
Paid-in-kind dividends........ 33
Issuance of common stock...... 15,588 1 191
Conversion of convertible
preferred stock............. 1,831 (1,356) (20) 20
Redemption of preferred
stock....................... -- (7 )
Stock options exercised....... 3,120 9 36
----------- ------ ------ ------ ---------- ----- -------- --------
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)
----------- ------ ------ ------ ---------- ----- -------- --------
----------- ------ ------ ------ ---------- ----- -------- --------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-----------------------------------
1996 1997
(RESTATED) (RESTATED) 1998
----------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ 434 $ (244) $ 261
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................. 419 443 460
Provision for doubtful accounts............................................... 431 494 588
Deferred income taxes......................................................... 247 (200) 131
Net loss (gain) on disposals of facilities and long-term investments.......... (346) 18 17
Additions to reserves for discontinued operations, merger, facility
consolidation and impairment charges........................................ 127 955 221
Extraordinary charges from early extinguishment of debt....................... 23 47 117
Other items................................................................... 35 26 21
Increases (decreases) in cash from changes in operating assets and liabilities,
net of effects from purchases of new businesses:
Accounts receivable........................................................... (709) (791) (988)
Inventories and other current assets.......................................... (91) (7) (100)
Accounts payable, accrued expenses and other current liabilities.............. (98) (145) 143
Other long-term liabilities and minority interests............................ (26) (84) (83)
Net expenditures for discontinued operations, merger, facility consolidation and
impairment charges............................................................ (97) (108) (385)
----------- ----------- ---------
Net cash provided by operating activities................................... 349 404 403
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................... (472) (406) (534)
Purchases of new businesses, net of cash acquired............................. (841) (787) (679)
Proceeds from sales of facilities, long-term investments and other assets..... 551 50 170
Other items................................................................... (38) 18 (40)
----------- ----------- ---------
Net cash used in investing activities....................................... (800) (1,125) (1,083)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings...................................................... 3,278 5,117 3,349
Loan payments................................................................. (3,307) (4,512) (2,762)
Proceeds from exercises of performance investment plan options................ 203 -- --
Proceeds from exercises of stock options...................................... 37 59 80
Proceeds from sales of common stock........................................... 192 12 17
Other items................................................................... (5) (23) (16)
----------- ----------- ---------
Net cash provided by financing activities................................... 398 653 668
----------- ----------- ---------
Net decrease in cash and cash equivalents....................................... (53) (68) (12)
Cash and cash equivalents at beginning of year.................................. 160 107 35
Pooling adjustment related to the OrNda Merger.................................. -- (4) --
----------- ----------- ---------
Cash and cash equivalents at end of year........................................ $ 107 $ 35 $ 23
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURES
The Company paid interest (net of amounts capitalized) of $386 million, $346
million and $489 million for the years ended May 31, 1996, 1997 and 1998,
respectively. Income taxes paid net of refunds received, during the same years
amounted to $57 million, $147 million and $11 million, respectively. 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.
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 healthcare 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.
On January 30, 1997, the Company acquired OrNda HealthCorp (together with
its subsidiaries, "OrNda"), a provider of healthcare services operating general
hospitals, surgery centers, outpatient and specialty clinics, a psychiatric
hospital and a managed healthcare Medicaid plan, when a subsidiary of the
Company was merged into OrNda (the "OrNda Merger"), leaving OrNda and all of its
subsidiaries as direct and indirect wholly owned subsidiaries of the Company.
The OrNda Merger was accounted for as a pooling-of-interests and, accordingly,
the consolidated financial statements and all statistical data shown herein
prior to the OrNda Merger were restated in fiscal 1997 to include the accounts
and results of operations of OrNda for all periods presented.
Prior to the OrNda Merger, OrNda's fiscal year ended August 31. In recording
the pooling-of-interests combination, OrNda's consolidated financial statements
for the year ended August 31, 1996 have been combined with Tenet's consolidated
financial statements for the year ended May 31, 1996. OrNda's consolidated
financial statements for the 12 months ended May 31, 1997 have been combined
with Tenet's consolidated financial statements for the same period and an
adjustment has been made to shareholders' equity as of May 31, 1997, to
eliminate the effect of including OrNda's results of operations for the three
months ended August 31, 1996 in both years ended May 31, 1997 and 1996. OrNda's
unaudited results of operations for the three months ended August 31, 1996
included net operating revenues of $552 million and net income of $23 million.
In September 1998, the Company filed with the Commission a registration
statement for a debt exchange offer. The staff of the Commission reviewed and
commented on that registration statement, and in response to the staff's
comments regarding the classification of certain expenses incurred in connection
with the OrNda Merger and the classification of certain facility consolidation
and impairment charges, the Company has restated its consolidated financial
statements for the years ended May 31, 1994 through 1997 to correctly present
the effects of conforming accounting changes. The Company has allocated $121
million of expenses originally included in fiscal 1997's merger, facility
consolidation and impairment charges (a) to other operating expense line items
within fiscal 1997 or (b) to earlier periods as follows: $10 million to other
operating expenses in fiscal 1994; $11 million to other operating expenses in
fiscal 1995; $12 million to other operating expenses, $5 million to provision
for doubtful accounts, and $9 million to salaries and benefits in fiscal 1996;
$49 million to other operating expenses, $4 million to provision for doubtful
accounts, and $21 million to salaries and benefits in fiscal 1997. The Company
also restated the effect of a $19 million reduction of an income tax valuation
allowance related to OrNda from fiscal year 1997 to fiscal year 1995.
The accompanying consolidated financial statements have been restated to
reflect the above changes, all of which relate to the accounts and results of
operations of OrNda prior to the OrNda Merger. The
21
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
effects of these changes on previously reported consolidated statements of
operations for 1996 and 1997 are as follows (dollars in millions, except for per
share amounts):
<TABLE>
<CAPTION>
1996 1997
------------------------ ------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Salaries and benefits....................................... $ 3,130 $ 3,139 $ 3,574 $ 3,595
Provision for doubtful accounts............................. 431 436 494 498
Other operating expenses.................................... 1,646 1,658 1,829 1,878
Merger, facility consolidation and impairment charges....... 86 86 740 619
Operating income............................................ 938 912 414 461
Income (loss) from continuing operations before income
taxes..................................................... 881 855 (21) 26
Taxes on income............................................. (383) (373) (52) (89)
----------- ----------- ----------- -----------
Income (loss) from continuing operations.................... $ 498 $ 482 $ (73) $ (63)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Basic earnings (loss) per common share from continuing
operations................................................ $ 1.77 $ 1.71 $ (0.24) $ (0.21)
Diluted earnings (loss) per common share from continuing
operations................................................ $ 1.70 $ 1.65 $ (0.24) $ (0.21)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The Company also has reclassified certain May 31, 1997 and 1998 balance
sheet items previously included in reserves related to discontinued operations,
merger, facility consolidation and impairment charges and other long-term
liabilities to other assets, property and equipment and costs in excess of net
assets acquired.
2. SIGNIFICANT ACCOUNTING POLICIES
A. THE COMPANY
Tenet is an investor-owned healthcare services company that owns or
operates, through its subsidiaries and affiliates (collectively,
"subsidiaries"), general hospitals and related healthcare facilities serving
urban and rural communities in 18 states and holds investments in other
healthcare companies. At May 31, 1998, the Company's subsidiaries operated 122
domestic general hospitals, with a total of 27,867 licensed beds. The Company's
subsidiaries also owned or operated various ancillary healthcare businesses, as
well as 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. The Company's largest
concentrations of general hospital beds are in California with 28.1%, Texas with
16.2% and Florida with 15.7%. The concentrations 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 is also subject to increased
levels of managed care penetration and changes in payor patterns that may impact
the level and timing of payments for services rendered.
22
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
C. COMPREHENSIVE INCOME
The Company has adopted, for its fiscal year ended May 31, 1998, Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), issued in June 1997 by the Financial Accounting Standards Board.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
Comprehensive income includes net income and other comprehensive income.
Comprehensive income is defined as the change in net assets of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. It includes all changes in equity during a period except
those from investments by owners and distributions to owners. All prior-period
financial statements have been restated to reflect the adoption of this
accounting standard.
D. NET OPERATING REVENUES
Net operating revenues consist primarily of net patient service revenues,
which are based on the hospitals' 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.
Management believes that adequate provision has been made for adjustments that
may result from final determination of amounts earned under these programs. Such
adjustments have not been material during the years presented herein. These
contractual allowances and discounts are deducted from accounts receivable in
the accompanying consolidated balance sheets. Approximately 45% of consolidated
net operating revenues were from participation of the Company's hospitals in
Medicare and Medicaid programs in each of 1996 and 1997. It was approximately
42% in 1998.
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.
E. 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.
23
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. 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, 1997 and 1998, 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 other comprehensive
income. Realized gains or losses are included in net income on the specific
identification method.
G. LONG-LIVED ASSETS
Property and Equipment: 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 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 useful life. The Company capitalizes interest costs related to
construction projects. Capitalized interest was $12 million in each of 1996 and
1997, and $16 million in 1998.
Intangible Assets: 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.
H. 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.
I. EARNINGS PER SHARE
The Company adopted, during the quarter ended February 28, 1998, Statement
of Financial Accounting Standards No. 128, "Earnings per Share," issued by the
Financial Accounting Standards Board. This statement establishes new, simplified
standards for computing and presenting earnings per share. It replaces the
traditional presentation of primary earnings per share and fully diluted
earnings per share with presentations of basic earnings per share and diluted
earnings per share, respectively. For the Company, the differences between
earnings per share calculated under the former standard and the new standard are
negligible. All prior periods have been restated for the new standard.
The following is a reconciliation of the numerators and the denominators of
the Company's basic and diluted earnings (loss) per share computations for
income or loss from continuing operations for each of
24
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the five years ended May 31. Income or loss, adjusted for preferred stock
dividends of $2 million in 1994 and 1995, is expressed in millions and weighted
average shares are expressed in thousands:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- ------------- ---------
<S> <C> <C> <C>
1994
Basic earnings per share................... $161 217,047 $ 0.74
Effect of dilutive securities:
Stock options and warrants............... -- 1,878
Convertible notes and debentures......... 8 13,966
----- -------------
Dilutive earnings per share................ $169 232,891 $ 0.73
----- ------------- ---------
----- ------------- ---------
1995
Basic earnings per share................... $276 234,415 $ 1.17
Effect of dilutive securities:
Stock options and warrants............... -- 6,422
Convertible notes and debentures......... 9 13,119
----- -------------
Dilutive earnings per share................ $285 253,956 $ 1.12
----- ------------- ---------
----- ------------- ---------
1996
Basic earnings per share................... $482 281,664 $ 1.71
Effect of dilutive securities:
Stock options and warrants............... -- 6,242
Convertible notes and debentures......... 4 6,890
----- -------------
Dilutive earnings per share................ $486 294,796 $ 1.65
----- ------------- ---------
----- ------------- ---------
1997
Basic loss per share....................... $(63) 303,947 $(0.21)
Effect of dilutive stock options and
warrants................................. -- -- --
----- ------------- ---------
Dilutive loss per share.................... (63) 303,947 $(0.21)
----- ------------- ---------
----- ------------- ---------
1998
Basic earnings per share................... $378 306,255 $ 1.23
Effect of dilutive stock options and
warrants................................. -- 5,858
----- ------------- ---------
Dilutive earnings per share................ $378 312,113 $ 1.22
----- ------------- ---------
----- ------------- ---------
</TABLE>
Outstanding options to purchase 3,393,436 shares of common stock were not
included in the computation of earnings per share for fiscal 1996 because the
options' exercise prices were greater than the average market price of the
common stock.
25
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
J. INCOME TAXES
The Company accounts for income taxes under the asset and liability method
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." 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.
3. ACQUISITIONS AND DISPOSALS OF FACILITIES
On January 30, 1997, the Company acquired 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, including OrNda, acquired seven general hospitals in
fiscal 1996, 11 general hospitals in fiscal 1997 and six general hospitals in
fiscal 1998. During the past three years, the Company also acquired a number of
physician practices, home health agencies and other healthcare operations. All
of these transactions have been accounted for as purchases. The results of
operations of the acquired businesses, which are not material in the aggregate
with respect to any single fiscal year, 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 healthcare operations. The results of operations of the sold
or closed businesses were not significant.
4. MERGER, FACILITY CONSOLIDATION, IMPAIRMENT AND OTHER CHARGES
1998
In the fourth quarter of the year ended May 31, 1998, the Company recorded
facility consolidation and impairment charges of $221 million relating to (in
millions):
<TABLE>
<C> <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 thirty-three 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 sixteen 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
26
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MERGER, FACILITY CONSOLIDATION, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
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 is primarily to record $33 million of additional
impairment charges at 5 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 value increased during the year ended May 31, 1998.
The Company began its process of determining if its facilities were impaired
(other than those related to the elimination of duplicate facilities or excess
capacity) at May 31, 1998 by reviewing all of the facilities' three-year
historical and one-year projected cash flows. Facilities whose cash flows were
negative or trending significantly downward on this basis were selected for
further impairment analysis. Their future cash flows (undiscounted and without
interest charges) were estimated over the expected useful life of the facility
and considered patient volumes, changes in payor mix, revenue and expense growth
rates and reductions in Medicare payments due to the Balanced Budget Act of
1997, which assumptions varied by hospital, home health agency and physician
practice. The sum of those expected future cash flows was compared to the
carrying value of the assets. If the sum of the expected future cash flows was
less than the carrying amount of the assets, the Company recognized an
impairment loss. 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
these assets are not significant.
27
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MERGER, FACILITY CONSOLIDATION, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
1997
In the third and fourth quarters of the year ended May 31, 1997, the Company
recorded merger, facility consolidation and impairment charges totaling $619
million, relating to (in millions):
<TABLE>
<C> <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 above 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 Company began its process of determining if its facilities
were impaired (other than those related to the elimination of duplicate
facilities or excess capacity) at May 31, 1997 by reviewing all of the
facilities' and physician practices three-year historical and one-year projected
cash flows. Facilities whose cash flows were negative or trending significantly
downward on this basis were selected for further impairment analysis. Their
future cash flows (undiscounted and without interest charges) were estimated
over the expected useful life of the facility and considered patient volumes,
changes in payor mix, revenue and expense growth rates and anticipated
reductions in Medicare payments upon enactment of the Balanced Budget Act of
1997, which assumptions varied by hospital and physician practice. The sum of
those expected future cash flows was compared to the carrying value of the
assets. If the sum of the expected future cash flows was less than the carrying
amount of the assets, the Company recognized an impairment loss. The aggregate
carrying amount of assets held for disposal following the above charges was $130
million. The results of operations of the assets held for disposal and the
effect of suspending future depreciation on
28
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MERGER, FACILITY CONSOLIDATION, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
these 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 are reflected in
the related expense line item in the consolidated statement of operations for
the following:
<TABLE>
<C> <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 self-insurance reserves... 19
- Estimated costs to settle a government investigation of an OrNda facility and other
OrNda litigation................................................................. 32
---
$ 74
---
---
</TABLE>
1996
In the year ended May 31, 1996, the Company recorded impairment losses of
$86 million. The assets deemed to be impaired consisted of four general
hospitals, one of which was held for sale, three rehabilitation hospitals, one
of which was held for sale, and a parcel of undeveloped land. The charges
consisted of $80 million in write-downs of property and equipment to estimated
fair values, plus, in the case of facilities to be sold, costs to sell and $6
million in write-offs of pre-opening costs. The aggregate carrying amount of the
assets held for disposal following the impairment charges was $8 million.
One of the four general hospitals was converted to a specialty hospital. The
conversion was begun in fiscal 1997 and completed in fiscal 1998. One general
hospital was sold in fiscal 1997 and another was sold in fiscal 1998. The fourth
hospital remains in operation. All three rehabilitation hospitals were sold in
fiscal 1998. The results of operations of the assets held for disposal were not
significant, nor was the effect of suspending future depreciation on these
assets. All sold facilities were sold for amounts that approximated the
estimated sales proceeds.
In the case of the rehabilitation hospitals, the principal facts and
circumstances leading to the impairment included (i) recent and forecast
reductions in hospital admissions and payment rates caused by payor-driven
shifts in care from traditional rehabilitation services to lower-cost skilled
nursing facilities and (ii) changes in Medicare regulations for reimbursement of
rehabilitative care after hip replacement surgery. The impairment of the general
hospitals was the result of (i) a change in the use of one of the facilities
from acute care to less intense specialty care, (ii) lower patient volumes, and
(iii) adverse changes in payor mix.
29
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. MERGER, FACILITY CONSOLIDATION, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
The table below presents a reconciliation of beginning and ending liability
balances in connection with the $619 million of special charges recorded in
fiscal 1997 and the $221 million of special charges recorded in fiscal 1998, as
of May 31, 1997 and 1998.
<TABLE>
<CAPTION>
TRANSACTIONS IN FISCAL 1997 TRANSACTIONS IN FISCAL 1998
----------------------------------------- -----------------------------------------
BALANCES AT BALANCES AT
SPECIAL CASH OTHER MAY 31, SPECIAL CASH OTHER MAY 31,
DESCRIPTION OF CHARGES CHARGES PAYMENTS ITEMS 1997 CHARGES PAYMENTS ITEMS 1998
- ----------------------------------- ------- -------- ------ ----------- ------- -------- ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The OrNda Merger:
Closure of corporate and regional
offices........................ $ 90 $ (9) $ (42) $ 39 $ -- $ (15) $ (12) $ 12
Severance costs.................. 56 (35) -- 21 -- (16) -- 5
Transaction costs................ 27 (24) -- 3 -- (2) -- 1
Information systems
consolidation.................. 15 -- (4) 11 -- (10) -- 1
Impairment losses to value
property, equipment and goodwill
at estimated fair values......... 332 -- (332) -- -- -- -- --
Estimated costs to close or sell
facilities in 1997 Plan.......... 56 -- -- 56 14 (35) -- 35
Accruals for unfavorable lease
commitments at six medical office
buildings........................ 25 -- -- 25 -- (3) -- 22
Restructuring of physician
practices........................ 18 -- -- 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
Severance costs in connection with
the closure of 29 home health
agencies......................... 14 -- -- 14
Other home health agency exit
costs............................ 6 -- -- 6
Physician contract termination
costs............................ 9 -- -- 9
------- --- ------ ----- ------- -------- ------ -----
Total.............................. $619 $(68) $(378) $173 $221 $ (94) $(158) $142
------- --- ------ ------- -------- ------
------- --- ------ ------- -------- ------
Less amounts included in long-term
liabilities...................... (69) (94)
----- -----
Current portion of reserves related
to merger, facility consolidation
and impairment charges........... 104 48
Plus current portion of reserve for
discontinued operations.......... 168 30
----- -----
Amount shown on consolidated
balance sheet.................... 272 78
----- -----
----- -----
</TABLE>
Other items primarily include write-offs or write-downs of long-lived
assets, including property and equipment, goodwill and other assets.
30
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Other receivables....................................................... $ 314 $ 361
Prepaid expenses and other current items................................ 35 110
Assets held for sale, at fair value, less estimated costs to sell....... 58 33
--------- ---------
$ 407 $ 504
--------- ---------
--------- ---------
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Land.................................................................... $ 443 $ 524
Buildings and improvements.............................................. 4,176 4,511
Construction in progress................................................ 314 409
Equipment............................................................... 1,958 2,304
--------- ---------
6,891 7,748
Less accumulated depreciation and amortization.......................... 1,432 1,761
--------- ---------
Net property and equipment.............................................. $ 5,459 $ 5,987
--------- ---------
--------- ---------
</TABLE>
31
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT AND LEASE OBLIGATIONS
A. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Loans payable to banks--unsecured.............................................................. $ 779 $ 1,587
8 5/8% Senior Notes due 2003, $500 million face value, net of $9 million unamortized
discount................................................................................... 489 491
7 7/8% Senior Notes due 2003, $400 million face value, net of $6 million unamortized
discount................................................................................... 392 394
8% Senior Notes due 2005, $900 million face value, net of $21 million unamortized discount... 877 879
7 5/8% Senior Notes due 2008, $350 million face value, net of $7 million unamortized
discount................................................................................... -- 343
9 5/8% Senior Notes due 2002, $300 million face value, net of $5 million unamortized discount
at May 31, 1997, substantially redeemed in May 1998........................................ 295 14
8 5/8% Senior Subordinated Notes due 2007, $700 million face value, net of $15 million
unamortized discount....................................................................... 684 685
8 1/8% Senior Subordinated Notes due 2008, $1,005 million face value, net of $26 unamortized
discount................................................................................... -- 979
10 1/8% Senior Subordinated Notes due 2005, $900 million face value at May 31, 1997 less $20
million unamortized discount, substantially redeemed in May 1998........................... 880 3
6% Exchangeable Subordinated Notes due 2005, $320 million face value, stated at indexed value
at May 31, 1997 and face value at May 31, 1998, both net of $8 million unamortized
discount................................................................................... 330 312
Zero-coupon guaranteed bonds due 1997 and 2002............................................... 110 30
Notes and capital lease obligations, secured by property and equipment payable in
installments to 2028....................................................................... 188 121
Other notes, primarily unsecured............................................................. 26 1
--------- ---------
5,050 5,839
Less current portion........................................................................... (28) (10)
--------- ---------
$ 5,022 $ 5,829
--------- ---------
--------- ---------
</TABLE>
LOANS PAYABLE TO BANKS--In January 1997, in connection with the OrNda
Merger, the Company entered into a new revolving credit agreement (the "1997
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 $1.55 billion unsecured
revolving credit agreement with a syndicate of banks. As a result of this
refinancing, as well as the refinancing of
32
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
OrNda's then-existing credit facility, its 12 1/4% Senior Subordinated Notes and
its 11 3/8% Senior Subordinated Notes, 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 1997 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 four months ended May 31, 1997, the weighted
average interest rate on loans payable to banks was 6.1%. During the year ended
May 31, 1998 it was 6.2%.
SENIOR NOTES AND SENIOR SUBORDINATED NOTES--On May 21, 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. The proceeds to the
Company were $1.95 billion, after underwriting discounts and commissions. The
senior notes are not redeemable by the Company prior to maturity. Subject to
certain limitations in the 1997 Credit Agreement, the 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 1997 Credit Agreement described above.
The senior subordinated notes also are 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 1997 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 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 1997 Credit Agreement, the
notes are redeemable at the option of the Company at any time on or after
January 15, 1999. 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 1997 Credit Agreement.
33
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT AND LEASE OBLIGATIONS (CONTINUED)
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 are treated as available for sale with changes in value recorded in
other comprehensive income.
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 Ventas' common stock was $40.75 per share, or $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 has remained below the exchange
price through May 31, 1998.
LOAN COVENANTS--The 1997 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>
LATER
1999 2000 2001 2002 2003 YEARS
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt............................. $ 10 $ 33 $ 6 $ 1,593 $ 464 $ 3,840
Long-term leases........................... 171 127 118 102 89 549
</TABLE>
Rental expense under operating leases, including short-term leases, was $239
million in 1996, $253 million in 1997 and $283 million in 1998.
34
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Taxes on income from continuing operations consist of the following amounts:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Currently payable:
Federal............................................................. $ 217 $ 131 $ 66
State............................................................... 44 27 28
Foreign............................................................. 5 -- --
--------- --------- ---------
266 158 94
Deferred:
Federal............................................................. 71 (97) 112
State............................................................... 13 (4) 19
--------- --------- ---------
84 (101) 131
--------- --------- ---------
Other................................................................. 23 32 44
--------- --------- ---------
Total taxes on income from continuing operations...................... $ 373 $ 89 $ 269
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation between the amount of reported income tax expense (benefit)
and the amount computed by multiplying income (loss) before tax by the statutory
Federal income tax rate is shown below:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Tax provision at statutory federal rate of 35%........................ $ 299 $ 9 $ 227
State income taxes, net of federal income tax benefit................. 36 17 27
Goodwill amortization................................................. 27 26 26
Donation of TRC common stock.......................................... -- -- (25)
Gain on sale of foreign operations.................................... 30 -- --
Nondeductible OrNda merger costs...................................... -- 14 --
Nondeductible asset impairment charges................................ -- 29 12
Benefit of prior-year net operating losses............................ (24) -- --
Other................................................................. 5 (6) 2
--------- --------- ---------
Taxes on income from continuing operations............................ $ 373 $ 89 $ 269
--------- --------- ---------
--------- --------- ---------
</TABLE>
35
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities as of May 31, 1997 and 1998 relate to
the following:
<TABLE>
<CAPTION>
1997 1998
------------------------ ------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Depreciation and fixed-asset basis differences............................ -- $ 637 -- $ 824
Reserves related to discontinued operations, merger, facility
consolidation other charges............................................. 103 -- 32 --
Receivables--doubtful accounts and adjustments............................ 112 -- 50 --
Accruals for insurance risks.............................................. 103 -- 121 --
Intangible assets......................................................... 1 -- -- 13
Other long-term liabilities............................................... 98 -- 235 --
Benefit plans............................................................. 91 -- 80 --
Other accrued liabilities................................................. 60 -- 150 --
Investments and other assets.............................................. -- 35 -- 57
Federal and state net operating loss carryforwards........................ 58 -- 87 --
Other items............................................................... 31 -- -- 9
----- ----- ----- -----
$ 657 $ 672 $ 755 $ 903
----- ----- ----- -----
----- ----- ----- -----
</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.
The following schedule summarizes approximate tax attribute carryforwards
from prior tax returns for OrNda which are available to offset future federal
net taxable income:
<TABLE>
<CAPTION>
EXPIRATION
AMOUNT PERIODS
----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Net operating loss.................................................. $ 249 1999-2013
General business credits............................................ 1 1999-2009
Alternative minimum tax............................................. 9 None
</TABLE>
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.
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
36
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CLAIMS AND LAWSUITS (CONTINUED)
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 discontinued psychiatric business. 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 Company has settled the most significant of these
matters. The remaining reserves are for unusual litigation costs that relate to
matters that had not been settled as of May 31, 1998 and an estimate of the
legal fees to be incurred subsequent to May 31, 1998. These reserves represent
management's estimate of the remaining net costs of the ultimate disposition of
these matters. There can be no assurance, however, 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
of the following 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.
The Company continues to defend a greater-than-normal level of civil
litigation relating to certain of its subsidiaries' discontinued psychiatric
operations. The majority of the lawsuits filed contain allegations of medical
malpractice as well as allegations of fraud and conspiracy against the Company
and certain of its subsidiaries and former employees. Also named as defendants
are numerous doctors and other healthcare professionals. The Company believes
that this litigation has arisen primarily from advertisements by certain lawyers
seeking former psychiatric patients in order to file claims against the Company
and certain of its subsidiaries. The advertisements focus, in many instances, on
the settlement of past disputes involving the operations of the subsidiaries'
discontinued psychiatric business. Many of the cases alleging fraud and
conspiracy that have been filed to date against the Company and certain of its
subsidiaries have been resolved.
The number of advertisements has increased and the Company expects that
additional lawsuits with similar allegations will be filed. The Company believes
it has a number of defenses to each of these actions and will defend these and
any additional lawsuits vigorously. Until the lawsuits are resolved, however,
the Company will continue to incur substantial legal expenses.
Two federal securities class actions filed in August 1993 were consolidated
into one action. This consolidated action was on behalf of a purported class of
shareholders who purchased or sold stock of the
37
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CLAIMS AND LAWSUITS (CONTINUED)
Company between January 14, 1993 and August 26, 1993, and alleged violations of
the securities laws by the Company and certain of its executive officers. On
March 2, 1998, the Company signed a definitive settlement agreement, pursuant to
which the Company paid $11,650,000 to settle all claims.
10. SHAREHOLDERS' EQUITY
A. PREFERRED STOCK PURCHASE RIGHTS AND PREFERRED STOCK
In 1988, Tenet distributed Preferred Stock Purchase Rights to holders of
Tenet's common stock and authorized the issuance of additional rights for common
stock issued after that date. The rights expire in December 1998 unless
previously exercised or redeemed and do not entitle the holders thereof to vote
as shareholders or receive dividends. The rights may be replaced by new rights.
The Company may redeem the rights at $0.025 per right at any time up to the
10th business day after a public announcement that a person has acquired 20% or
more of the Company's common stock in a transaction or transactions not approved
by the Board of Directors. The rights are not exercisable until after the date
on which the Company's right to redeem the rights has expired. When exercisable,
each right entitles the holder thereof to purchase from the Company one
two-thousandth of a share of Series A Junior Participating Preferred Stock
("Series A Preferred Stock") at a price of $40.61, subject to adjustment.
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, each holder of a right generally will be entitled
upon exercise to purchase, for the then-current exercise price of the right,
common stock of the surviving company having a market value equal to two times
the exercise price of the rights. In the event of certain other mergers or
business combinations, certain self-dealing transactions or the acquisition by a
person of stock having 30% or more of the Company's general voting power (in
each case without the approval of the Board of Directors), each holder of a
right generally will be entitled to purchase upon exercise, for the then-current
exercise price of the right, the number of shares of Series A Preferred Stock
having a market value equal to two times the exercise price of the rights.
The Series A Preferred Stock for which the Preferred Stock Purchase Rights
may be exchanged is nonredeemable and has a par value of $0.15 per share. On
January 27, 1997, in connection with the OrNda Merger, the Board of Directors
approved an increase in the number of preferred shares authorized from 225,000
to 350,000. None of the 350,000 authorized shares are issued or outstanding.
B. WARRANTS
At May 31, 1998, 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.
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 1996, 1997 and 1998 were the
quoted market prices on the option grant dates.
38
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK BENEFIT PLANS (CONTINUED)
At May 31, 1998, there were 18,571,845 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, 1998 there were 267,500 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. In October
1997, the shareholders approved an amendment to the Directors Stock Option Plan
increasing the initial annual grant of options under the plan from 5,000 to
7,500 options.
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, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
REMAINING ----------------------------
NUMBER OF CONTRACTUAL WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OPTIONS LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- ----------------------------------- ---------- --------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4.69 to $ 9.88................... 2,568,961 5.5years $ 9.38 2,568,961 $ 9.38
$10.55 to $15.88................... 5,296,954 6.4 $13.42 5,283,250 $13.42
$16.25 to $20.88................... 3,132,357 7.3 $20.33 2,048,246 $20.16
$21.00 to $26.38................... 6,758,041 7.6 $23.78 2,268,950 $23.73
$31.00 to $35.13................... 5,528,259 9.5 $33.07 -- --
---------- ----------
23,284,572 7.5 $21.58 12,169,407 $15.63
---------- ----------
---------- ----------
</TABLE>
39
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK BENEFIT PLANS (CONTINUED)
A summary of the status of the Company's stock option plans as of May 31,
1996, 1997 and 1998, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------- ------------------------- -------------------------
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........ 25,742,932 $ 14.22 26,299,166 $ 14.20 24,850,790 $ 17.25
Granted................................. 5,782,921 $ 19.23 6,436,800 $ 24.07 5,608,259 $ 33.07
Exercised............................... (3,120,462) $ 11.69 (7,093,224) $ 13.85 (6,547,332) $ 14.89
Forfeited............................... (2,106,225) $ 20.05 (791,952) $ 19.92 (627,145) $ 22.27
------------ ------------ ------------
Outstanding at end of year.............. 26,299,166 $ 14.20 24,850,790 $ 17.25 23,284,572 $ 21.58
------------ ------------ ------------
------------ ------------ ------------
Options exercisable at year-end......... 13,403,495 $ 14.12 14,450,670 $ 14.08 12,169,407 $ 15.63
------------ ------------ ------------
------------ ------------ ------------
Weighted average fair value of options
granted during the past three years... $ 10.12 $ 11.62 $ 14.66
----------- ----------- -----------
----------- ----------- -----------
</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>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Expected volatility................................................ 39% 40% 33%
Risk-free interest rates........................................... 5.7% 6.5% 5.9%
Expected Lives, in years........................................... 6.2 5.8 6.1
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 three years, the
Company's net income (loss) and earnings (loss) per share would have been
reduced (increased) to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net income:
As reported....................................................... $ 434 $ (244) $ 261
Pro forma......................................................... $ 431 $ (260) $ 231
Basic earnings per share:
As reported....................................................... $ 1.54 $ (0.81) $ 0.85
Pro forma......................................................... $ 1.54 $ (0.86) $ 0.76
Diluted earnings per share:
As reported....................................................... $ 1.49 $ (0.81) $ 0.84
Pro forma......................................................... $ 1.48 $ (0.86) $ 0.75
</TABLE>
40
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK BENEFIT PLANS (CONTINUED)
These pro forma disclosures are not likely to be representative of the pro
forma results for future years, because the options vest over three years and
additional awards are generally made each year.
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
and 703,832 shares in the year ended May 31, 1998 at a weighted average price of
$24.87 per share.
13. EMPLOYEE RETIREMENT PLANS
Substantially all domestic 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
mandatory contributions from 1% to 16% 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 each of fiscal
years 1996 and 1997, and $39 million for fiscal 1998.
14. INVESTMENTS
The Company's principal long-term investments in unconsolidated affiliates
include 8,301,067 shares of common stock of Ventas and 2,865,000 shares of TRC.
Also included in the Company's long-term investments at May 31, 1998 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. 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, 1997 and 1998, the aggregate market
value of these investments was approximately $446 million and $299 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 intends to conduct 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 gains (losses) on disposals of facilities and long-term
investments in the 1998 Consolidated Statement of Operations.
15. DISCONTINUED OPERATIONS--PSYCHIATRIC HOSPITAL BUSINESS
In fiscal 1996, the Company recorded $16 million (less income tax benefits
of $6 million) for additional estimated legal costs and $25 million (less tax
benefits of $10 million) to increase the reserves of the Company's wholly owned
insurance subsidiary for professional liability claims, all of which related to
41
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. DISCONTINUED OPERATIONS--PSYCHIATRIC HOSPITAL BUSINESS (CONTINUED)
the former psychiatric hospitals. In fiscal 1997, the Company recorded $215
million (less income tax benefits of $81 million) to reflect the recent
settlements of patient and other litigation and to record the estimated future
costs to settle the remaining litigation related to certain of its former
psychiatric hospitals and to increase the reserves of its wholly owned insurance
subsidiary by an additional $42 million.
16. 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), long-term receivables and
long-term debt are not materially different from the estimated fair values of
these instruments.
17. RECENTLY ISSUED ACCOUNTING STANDARDS
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, 1999, and which will apply to the Company beginning June 1, 2000.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. The Company does not believe that the
new standard will have any significant effect on its future results of
operations.
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
with its fiscal year ended May 31, 2000. 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. The Company does not expect the adoption of either of
these SOPs to have any material effect on its future results of operations.
42
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS
-------------------------------------------- FISCAL 1998 QUARTERS
THIRD ------------------------------------------
FIRST SECOND (RESTATED) FOURTH FIRST SECOND THIRD FOURTH
--------- --------- ----------- --------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues............... $ 1,991 $ 2,112 $ 2,237 $ 2,351 $ 2,331 $ 2,429 $ 2,564 $ 2,571
Income (loss) from continuing
operations......................... $ 96 $ 103 $ (56) $ (206) $ 116 $ 138 $ 148 $ (24)
Net income (loss).................... $ 96 $ 103 $ (103) $ (340) $ 116 $ 138 $ 148 $ (141)
--------- --------- ----------- --------- --------- --------- --------- ---------
--------- --------- ----------- --------- --------- --------- --------- ---------
Earnings (loss) per share from
continuing operations:
Basic.............................. $ 0.32 $ 0.35 $ (0.18) $ (0.67) $ 0.38 $ 0.45 $ 0.48 $ (0.08)
Diluted............................ $ 0.32 $ 0.34 $ (0.18) $ (0.67) $ 0.38 $ 0.44 $ 0.47 $ (0.08)
--------- --------- ----------- --------- --------- --------- --------- ---------
--------- --------- ----------- --------- --------- --------- --------- ---------
</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 losses and other charges of $221
million, as well as a $117 million extraordinary charge from early
extinguishment of debt in the fourth quarter.
COMMON STOCK INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTERS FISCAL 1998 QUARTERS
---------------------------------------- -------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------- ------- ------- ------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price range:
High............................. 22 5/8 23 1/4 28 7/8 29 5/8 31 1/2 33 1/4 37 1/2 40 15/16
Low.............................. 18 1/2 20 3/8 21 3/8 23 1/4 25 1/2 26 7/16 30 3/8 34 3/4
</TABLE>
At May 31, 1998, there were approximately 16,800 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.
43
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 3. Exhibits.
(23) Consent of Experts
(a) Auditors Consent (KPMG LLP)
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) AND RULE 12B-15 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED,
ON APRIL 28, 1999.
TENET HEALTHCARE CORPORATION
By: /s/ Trevor Fetter
- -------------------------------
Name: Trevor Fetter
Title: CHIEF CORPORATE OFFICER AND
CHIEF ACCOUNTING OFFICER
44
<PAGE>
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1996, 1997 AND 1998
(IN MILLIONS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS CHARGED TO:
BALANCE AT ----------------------------
BEGINNING COSTS AND OTHER BALANCE AT
OF PERIOD EXPENSES(1) OTHER ACCOUNTS DEDUCTIONS(2) ITEMS(3) END OF PERIOD
---------- ----------- -------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
1996.................................... $212 $436 -- $(471) $33 $210
1997.................................... $210 $503 -- $(474) ($15) $224
1998.................................... $224 $598 -- $(629) $(2) $191
</TABLE>
- ------------------------
(1) Before considering recoveries on accounts or notes previously written off.
(2) Accounts written off.
(3) Primarily beginning balances for purchased businesses, net of balances for
businesses sold, and, in 1997, also net of the elimination of the effects of
including OrNda's results of operations for the three months ended August
31, 1996 in the years ended May 31, 1996 and 1997.
<PAGE>
EXHIBIT 23(a)
ACCOUNTANTS' CONSENT AND
REPORT ON CONSOLIDATED SCHEDULE
The Board of Directors
Tenet Healthcare Corporation:
Under date of July 24, 1998, we reported on the consolidated balance
sheets of Tenet Healthcare Corporation and subsidiaries as of May 31, 1998
and 1997, 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, 1998, as contained in the
1998 annual report to shareholders. These consolidated financial statements
and our report thereon are incorporated by reference in the annual report on
Form 10-K/A for fiscal year 1998. 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/A for fiscal year 1998. 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 herein.
We consent to the incorporation by reference of our report dated July
24, 1998, 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 and 333-18185) 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 Peat Marwick LLP
Los Angeles, California
April 28, 1999
