<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
NOVEMBER 30, 1998.
OR
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ....... TO ....... .
COMMISSION FILE NUMBER 1-7293
- --------------------------------------------------------------------------------
TENET HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
NEVADA 95-2557091
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3820 STATE STREET
SANTA BARBARA, CA 93105
(Address of principal executive offices)
(805) 563-7000
(Registrant's telephone number, including area code)
-------------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO
--- ---
AS OF DECEMBER 31, 1998 THERE WERE 310,141,816 SHARES OF $0.075 PAR VALUE
COMMON STOCK OUTSTANDING.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TENET HEALTHCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - May 31, 1998
and November 30, 1998................................................ 2
Condensed Consolidated Statements of Income -
Three Months and Six Months Ended November
30, 1997 and 1998.................................................... 4
Condensed Consolidated Statements of Comprehensive
Income - Six Months Ended November 30, 1997
and 1998............................................................. 5
Condensed Consolidated Statements of Cash Flows - Six Months
Ended November 30, 1997 and 1998..................................... 6
Notes to Condensed Consolidated Financial
Statements........................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ................... 19
Item 6. Exhibits and Reports on Form 8-K....................................... 20
Signature.............................................................. 20
</TABLE>
- ------------
Note: Item 3 of Part I and Items 2, 3, and 5 of Part II are omitted because
they are not applicable.
1
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1998 1998
----------- -----------
<S> <C> <C>
(DOLLAR AMOUNTS IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 23 $ 32
Short-term investments in debt securities ........................ 132 139
Accounts receivable, less allowance for doubtful accounts
($191 at May 31 and $203 at November 30) ..................... 1,742 2,044
Inventories of supplies, at cost ................................. 214 237
Deferred income taxes ............................................ 275 233
Other current assets ............................................. 504 398
----------- -----------
Total current assets ........................... 2,890 3,083
----------- -----------
Investments and other assets ......................................... 515 567
Property and equipment, at cost ...................................... 7,779 8,373
Less accumulated depreciation and amortization ................... 1,765 1,951
Net property and equipment ....................................... 6,014 6,422
----------- -----------
Intangible assets, at cost less accumulated amortization
($327 at May 31 and $381 at November 30) ......................... 3,414 3,557
----------- -----------
$12,833 $13,629
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
2
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1998 1998
----------- -----------
<S> <C> <C>
(DOLLAR AMOUNTS IN MILLIONS)
LIABILITIES AND SHAREHOLDERS' EQUITY'
Current liabilities:
Current portion of long-term debt ................................ $ 10 $ 10
Accounts payable ................................................. 657 554
Accrued employee compensation and benefits ....................... 355 344
Accrued interest payable ......................................... 106 163
Reserves related to discontinued operations, merger, facility
consolidation and impairment charges ......................... 189 138
Other current liabilities ........................................ 450 611
----------- -----------
Total current liabilities .................................... 1,767 1,820
----------- -----------
Long-term debt, net of current portion .............................. 5,829 6,309
Other long-term liabilities and minority interests .................. 1,256 1,201
Deferred income taxes ............................................... 423 435
Shareholders' equity:
Common stock, $0.075 par value; authorized 700,000,000 shares;
313,044,417 shares issued at May 31 and 313,816,696
shares issued at November 30 ................................. 23 24
Other shareholders' equity ....................................... 3,605 3,910
Less common stock in treasury, at cost, 3,754,891 shares at
May 31 and November 30 ....................................... (70) (70)
----------- -----------
Total shareholders' equity .............................. 3,558 3,864
----------- -----------
$ 12,833 $ 13,629
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
3
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
--------------------- ---------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AND SHARE AMOUNTS)
Net operating revenues . . . . . . . . . . . . . . $ 2,429 $ 2,563 $ 4,760 $ 5,116
--------- --------- --------- ---------
Operating expenses:
Salaries and benefits. . . . . . . . . . . . . . 1,007 1,039 1,973 2,057
Supplies . . . . . . . . . . . . . . . . . . . . 330 351 651 701
Provision for doubtful accounts. . . . . . . . . 136 184 284 343
Other operating expenses . . . . . . . . . . . . 512 538 998 1,099
Depreciation . . . . . . . . . . . . . . . . . . 87 102 168 198
Amortization . . . . . . . . . . . . . . . . . . 27 32 51 63
--------- --------- --------- ---------
Operating income . . . . . . . . . . . . . . . . . 330 317 635 655
--------- --------- --------- ---------
Interest expense, net of capitalized
portion. . . . . . . . . . . . . . . . . . . . . . (118) (119) (230) (238)
Investment earnings. . . . . . . . . . . . . . . . 6 6 12 13
Minority interests in income of
consolidated subsidiaries. . . . . . . . . . . . (7) (1) (13) (5)
Gain from change in value of indexed
debt . . . . . . . . . . . . . . . . . . . . . . 18 - 18 -
--------- --------- --------- ---------
Income before income taxes . . . . . . . . . . . . 229 203 422 425
Taxes on income. . . . . . . . . . . . . . . . . . (91) (78) (168) (163)
Net income . . . . . . . . . . . . . . . . . . . . $ 138 $ 125 $ 254 $ 262
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted earnings per share . . . . . . . $ 0.44 $ 0.40 $ 0.82 $ 0.84
Weighted average shares and share
equivalents outstanding - diluted
(in thousands) . . . . . . . . . . . . . . . . . 310,920 313,935 310,294 313,799
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
4
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
(IN MILLIONS)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 254 $ 262
Other comprehensive income (loss):
Foreign currency translation adjustments. . . . . . . . . . . - 12
Unrealized net holding gains (losses) arising during period
on securities held as available for sale . . . . . . . . . (115) 28
-------- --------
Other comprehensive income (loss) before income taxes . . . . (115) 40
Income tax benefit (expense) related to items of other
comprehensive income . . . . . . . . . . . . . . . . . . . 44 (15)
-------- --------
Other comprehensive income (loss) . . . . . . . . . . . . . . (71) 25
-------- --------
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . $ 183 $ 287
-------- --------
-------- --------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
5
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
(IN MILLIONS)
NET CASH PROVIDED BY OPERATING ACTIVITIES. . . . . . . . . . . . . . . . . $ 12 $ 297
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . (215) (241)
Purchases of new businesses, net of cash acquired. . . . . . . . . . . . (381) (446)
Proceeds from sales of facilities and other assets . . . . . . . . . . . 57 4
Other items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23) (64)
------- -------
Net cash used in investing activities . . . . . . . . . . . . . . . . (562) (747)
------- -------
Cash flows from financing activities:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . 1,386 2,118
Payments of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . (889) (1,667)
Other items, primarily issuances of common stock . . . . . . . . . . . . 32 8
------- -------
Net cash provided by financing activities . . . . . . . . . . . . . . 529 459
------- -------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . (21) 9
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 35 23
------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 14 $ 32
------- -------
------- -------
Supplemental disclosures:
Interest paid, net of amounts capitalized. . . . . . . . . . . . . . . . $ 201 $ 177
Income taxes paid (net of refunds received). . . . . . . . . . . . . . . 12 (30)
Fair value of common stock issued for purchase of new business . . . . . 9 -
Fair value of common stock tendered for note receivable. . . . . . . . . 16 -
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
6
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The financial information furnished herein is unaudited; however, in the
opinion of management, the information reflects all adjustments that are
necessary to fairly state the financial position of Tenet Healthcare
Corporation (together with its subsidiaries, "Tenet" or the "Company"), the
results of its operations and its cash flows for the interim periods
indicated. All the adjustments are of a normal recurring nature.
The Company presumes that users of this interim financial information
have read or have access to the Company's audited financial statements
and Management's Discussion and Analysis of Financial Condition and
Results of Operations for the preceding fiscal year, and that the
adequacy of additional disclosure needed for a fair presentation may be
determined in that context. Accordingly, footnotes and other disclosure
that would substantially duplicate the disclosure contained in the
Company's most recent annual report to security holders have been
omitted. Patient volumes and net operating revenues of the
Company's hospitals are subject to seasonal variations caused by a
number of factors, including but not necessarily limited to, seasonal
cycles of illness, climate and weather conditions, vacation patterns of
both hospital patients and admitting physicians and other factors
relating to the timing of elective hospital procedures. Quarterly
operating results are not necessarily representative of operations for a
full year for various reasons, including levels of occupancy, interest
rates, acquisitions, disposals, revenue allowance and discount
fluctuations, the timing of price changes, unusual or non-recurring
items and fluctuations in quarterly tax rates. These same considerations
apply to all year-to-year comparisons.
2. During the six months ended November 30, 1998, Tenet acquired nine general
hospitals, approximately 150 physician practices and certain other related
businesses in transactions accounted for as purchases. The Company also
sold one general hospital, closed another and combined the operations of
two. The results of operations of the acquired businesses, which are not
material, have been included in the Company's consolidated statements of
income and cash flows from the dates of acquisition. The operations of the
sold and closed businesses were also not material.
In December 1998, the Company acquired a 99-bed hospital ( 49 acute-care
beds and 50 skilled-nursing beds) in Southern California in a transaction
accounted for as a purchase.
3. There have been no material changes to the description of professional and
general liability insurance set forth in Note 9A or significant legal
proceedings set forth in Note 9B of Notes to Consolidated Financial
Statements of Tenet for its fiscal year ended May 31, 1998.
4. During the six-months ended November 30, 1998, the Company made cash
payments of approximately $20 million against the Company's reserves for
discontinued operations and other non-recurring charges and further reduced
those reserves by approximately $45 million for asset write-offs and other
non-cash transactions as facilities were closed, sold or converted to
alternate uses. The reserve balances are included in the Company's balance
sheets at May 31, 1998 and November 30, 1998 as reserves related to
discontinued operations, merger, facility consolidation and impairment
charges and as other long-term liabilities.
7
<PAGE>
5. The following is a reconciliation of the numerators and the denominators of
the Company's basic and diluted earnings per share computations for the
three months and six months ended November 30, 1997 and 1998. Income is
expressed in millions and weighted average shares are expressed in
thousands:
<TABLE>
<CAPTION>
1997 1998
---------------------------------------- -----------------------------------------
WEIGHTED WEIGHTED
INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE
THREE MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------- ----------- -------------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item $ 138 $ 125
Basic earnings per share:
Income available to common
shareholders . . . . . . . $ 138 305,499 $ 0.44 $ 125 309,803 $ 0.40
--------- ---------
--------- ---------
Effect of dilutive stock options and
warrants. . . . . . . . . . . - 5,421 - 4,132
----------- -------------- ----------- --------------
Dilutive earnings per share
Income available to common
shareholders . . . . . . . $ 138 310,920 $ 0.44 $ 125 313,935 $ 0.40
----------- -------------- --------- ----------- -------------- ---------
----------- -------------- --------- ----------- -------------- ---------
</TABLE>
Outstanding options to purchase 47,100 and 7,797,209 shares of common stock were
not included in the computation of earnings per share for the three-month
periods ended November 30, 1997 and 1998, respectively, because the options'
excercise prices were greater than the average market price of the common stock.
<TABLE>
<CAPTION>
1997 1998
---------------------------------------- -----------------------------------------
WEIGHTED WEIGHTED
INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE
SIX MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------- ----------- -------------- --------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary item $ 254 $ 262
Basic earnings per share:
Income available to common
shareholders . . . . . . . $ 254 304,884 $0.82 $ 262 309,602 $ 0.84
--------- ---------
--------- ---------
Effect of dilutive stock options and
warrants. . . . . . . . . . . - 5,410 - 4,197
----------- -------------- ----------- --------------
Dilutive earnings per share
Income available to common
shareholders. . . . . . . . . $ 254 310,294 $0.82 $ 262 313,799 $ 0.84
----------- -------------- --------- ----------- -------------- ---------
----------- -------------- --------- ----------- -------------- ---------
</TABLE>
Outstanding options to purchase 47,100 and 7,800,784 shares of common stock were
not included in the computation of earnings per share for the six-month periods
ended November 30, 1997 and 1998, respectively, because the options' excercise
prices were greater than the average market price of the common stock.
8
<PAGE>
6. The following table sets forth the tax effects allocated to each component
of other comprehensive income for the six months ended November 30, 1997
and 1998:
<TABLE>
<CAPTION>
1997 1998
--------------------------------- ---------------------------------
BEFORE- TAX NET-OF- BEFORE- TAX NET-OF-
TAX (EXPENSE) TAX TAX (EXPENSE) TAX
AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT
-------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Foreign currency translation
adjustment $ - $ - $ - $ 12 $ (5) $ 7
Unrealized holding gains (losses)
on securities (115) 44 (71) 28 (10) 18
-------- ---------- -------- -------- ---------- --------
Other comprehensive income (loss) $ (115) $ 44 $ (71) $ 40 $ (15) $ 25
-------- ---------- -------- -------- ---------- --------
-------- ---------- -------- -------- ---------- --------
</TABLE>
The following table sets forth the accumulated other comprehensive income
balances, by component, as of November 30, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------------------------------------------- --------------------------------------------
UNREALIZED ACCUMULATED UNREALIZED ACCUMULATED
FOREIGN GAINS OTHER FOREIGN GAINS OTHER
CURRENCY (LOSSES) ON COMPREHENSIVE CURRENCY (LOSSES) ON COMPREHENSIVE
ITEMS SECURITIES INCOME (LOSS) ITEMS SECURITIES INCOME
-------- ----------- ------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Beginning balance $ - $ 28 $ 28 - $ 50 $ 50
Current-period change - (71) (71) 7 18 25
-------- ----------- ------------- -------- ----------- -------------
Ending balance $ - $ (43) $ (43) $ 7 $ 68 $ 75
-------- ----------- ------------- -------- ----------- -------------
-------- ----------- ------------- -------- ----------- -------------
</TABLE>
7. On December 7, 1998, the Company's Board of Directors adopted a new
stockholder rights plan to replace a similar plan upon its expiration on
December 22, 1998. The rights generally will be exercisable ten business
days after a person or group acquires beneficial ownership of, or commences
a tender offer or exchange offer that would result in such person or group
beneficially owning, 15 percent or more of Tenet's common stock.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The healthcare industry continues to undergo tremendous change, driven
primarily by (1) cost-containment pressures by government payors, managed care
providers and others, and (2) technological advances that require increased
capital expenditures. In addition to the above, the Company has also experienced
a significant shift in net patient revenues away from traditional Medicare and
indemnity payors to managed care. To address these changes, Tenet has
implemented various cost-control programs and overhead-reduction plans and
continues to create and enhance its integrated healthcare delivery systems.
Income before income taxes was $229 million in the quarter ended
November 30, 1997 and $203 million in the quarter ended November 30, 1998.
For the six-month periods ended November 30, 1997 and 1998, income before
income taxes was $422 million and $425 million, respectively. The 1997
figures include a gain from changes in indexed debt recorded in the November
1997 quarter. The gain amounted to $11 million after tax, or $0.03 per share.
The following is a summary of operations for the three months ended
November 30, 1997 and 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
----------------------------------------------------------
1997 1998 1997 1998
------- ------- ------ ------
(DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals ............ $ 2,198 $ 2,340 90.5% 91.3%
Other domestic operations ............. 231 223 9.5% 8.7%
------- ------- ------ ------
Net operating revenues .................... 2,429 2,563 100.0% 100.0%
------- ------- ------ ------
Operating expenses:
Salaries and benefits ................. (1,007) (1,039) 41.5% 40.5%
Supplies .............................. (330) (351) 13.6% 13.7%
Provision for doubtful accounts ....... (136) (184) 5.6% 7.2%
Other operating expenses .............. (512) (538) 21.0% 21.0%
Depreciation .......................... (87) (102) 3.6% 4.0%
Amortization .......................... (27) (32) 1.1% 1.2%
------- ------- ------ ------
Operating income .......................... $ 330 $ 317 13.6% 12.4%
------- ------- ------ ------
------- ------- ------ ------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED NOVEMBER 30,
-----------------------------------------------------
1997 1998 1997 1998
------- ------- ------ ------
(DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals ......... $ 4,321 $ 4,653 90.8% 91.0%
Other domestic operations .......... 439 463 9.2% 9.0%
------- ------- ------ ------
Net operating revenues ................. 4,760 5,116 100.0% 100.0%
------- ------- ------ ------
Operating expenses:
Salaries and benefits .............. (1,973) (2,057) 41.5% 40.2%
Supplies ........................... (651) (701) 13.7% 13.7%
Provision for doubtful accounts .... (284) (343) 6.0% 6.7%
Other operating expenses ........... (998) (1,099) 20.9% 21.5%
Depreciation ....................... (168) (198) 3.5% 3.9%
Amortization ....................... (51) (63) 1.1% 1.2%
------- ------- ------ ------
Operating income ....................... $ 635 $ 655 13.3% 12.8%
------- ------- ------ ------
------- ------- ------ ------
</TABLE>
Net operating revenues of other domestic operations in the table above consist
primarily of revenues from: (i) physician practices, (ii) rehabilitation
hospitals, long-term care facilities, psychiatric and specialty hospitals that
are located on or near the same campuses as the Company's general hospitals;
(iii) healthcare joint ventures operated by the Company; (iv) subsidiaries of
the Company offering managed care and indemnity products; and (v) equity in the
earnings of unconsolidated affiliates.
The table below sets forth certain selected historical operating statistics
for the Company's domestic general hospitals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------------------ ----------------------------------------
INCREASE INCREASE
1997 1998 (DECREASE) 1997 1998 (DECREASE)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Number of hospitals (at end of period)... 129 128 (1) * 129 128 (1) *
Licensed beds (at end of period)......... 28,715 30,410 5.9% 28,715 30,410 5.9%
Net inpatient revenues (in millions)..... $ 1,402 $ 1,538 9.7% $ 2,752 $ 3,012 9.4%
Net outpatient revenues (in millions).... $ 748 $ 755 0.9% $ 1,474 $ 1,541 4.5%
Admissions............................... 213,270 221,499 3.9% 418,842 440,666 5.2%
Equivalent admissions.................... 327,578 322,035 (1.7)% 617,411 644,834 4.4%
Average length of stay (days)............ 5.2 5.1 (0.1) * 5.1 5.1 -
Patient days............................. 1,099,812 1,136,595 3.3% 2,154,251 2,249,910 4.4%
Equivalent patient days.................. 1,661,469 1,638,011 (1.4)% 3,148,109 3,262,052 3.6%
Net inpatient revenue per patient day.... $ 1,275 $ 1,353 6.1% $ 1,277 $ 1,339 4.9%
Net inpatient revenue per admission...... $ 6,574 $ 6,944 5.6% $ 6,570 $ 6,835 4.0%
Utilization of licensed beds............. 42.5% 43.8% 1.3% * 41.6% 43.5% 1.9% *
Outpatient visits........................ 2,642,893 2,326,712 (12.0)% 5,294,737 4,747,340 (10.3)%
</TABLE>
* The change is the difference between 1997 and 1998 amounts shown.
11
<PAGE>
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals on a same-store basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------------------ ----------------------------------------
INCREASE INCREASE
1997 1998 (DECREASE) 1997 1998 (DECREASE)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average licensed beds.................... 25,893 25,682 (0.8)% 26,019 25,779 (0.9)%
Patient days............................. 1,051,539 1,054,024 0.2% 2,055,933 2,075,431 0.9%
Net inpatient revenue per patient day.... $ 1,265 $ $1,308 3.4% $ $1,283 $ 1,317 2.7%
Admissions............................... 204,590 207,347 1.3% 401,334 411,221 2.5%
Net inpatient revenue per admission...... $ 6,504 $ $6,649 2.2% $ $6,570 $ 6,646 1.2%
Outpatient visits........................ 2,510,131 2,180,856 (13.1)% 5,038,038 4,401,859 (12.6)%
Average length of stay (days)............ 5.1 5.1 - 5.1 5.0 (0.1) *
</TABLE>
* The change is the difference between 1997 and 1998 amounts shown.
Changes in Medicare payments mandated by the Balanced Budget Act of 1997
(the "1997 Act"), which became effective October 1, 1997, as well as certain
proposed changes to various states' Medicaid programs, have reduced and will
continue to reduce revenues and earnings significantly as these changes are
phased in over the next two years. The most significant changes have been
phased in by October 1, 1998. The Medicare program accounted for
approximately 37.8% of the net patient revenues of the Company's domestic
general hospitals for the quarter ended November 30, 1997 and 33.8% for the
current quarter. For the six-month periods ended November 30, 1997 and 1998,
the percentages were 38.0% and 34.5%.
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 12.0% decline in the
number of outpatient visits during the quarter ended November 30, 1998 compared
to the year-ago quarter and a 10.3% decline for the corresponding six-month
periods. In response to the changes in Medicare payments to home health agencies
mandated by the 1997 Act, the Company has consolidated certain home health
agencies, closed others and begun to increase the number of higher intensity
home visits, which resulted in fewer total home health care visits. Excluding
home health care visits for both periods, outpatient visits increased
approximately 5.6% over the year-ago quarter. For the six- month periods, the
increase was approximately 7.3%.
Pressures to control healthcare costs and a shift from traditional Medicare
after the 1997 Act was enacted have resulted in an increase in the number of
patients whose healthcare coverage is provided under managed care plans. The
percentage of net patient revenues of the Company's domestic general hospitals
attributable to managed care increased from approximately 32.8% for the three
months ended November 30, 1997 to approximately 37.0% for the current quarter.
For the corresponding six-month periods managed care increased from 32.5% to
36.4%. The Company anticipates that its managed care business will continue to
12
<PAGE>
increase in the future. The Company generally receives lower payments per
patient from managed care payors than it does from traditional indemnity
insurers. In certain instances, the Company also is assuming a greater share of
risk by entering into capitated arrangements with managed care payors and
employers. Under capitation, the Company receives a certain amount for each
person enrolled in a plan and assumes the risks and rewards of meeting the
healthcare needs of those persons so enrolled. The Company purchases insurance
to cover a portion of the cost of meeting the healthcare needs of those covered.
Approximately 5.6% of the Company's revenues were derived from capitated
arrangements in the quarter ended November 30, 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 and enhancement of integrated
healthcare delivery systems. Further consolidations or implementation of
additional cost-control programs may be undertaken in the future to offset
the reduced payments under the 1997 Act and the shift from traditional
Medicare to managed care. The Company may incur severance and other special
charges as these cost-control programs are implemented.
Net operating revenues from the Company's other domestic operations were
$231 million for the three months ended November 30, 1997, compared to $223
million for the current quarter. For the six-month periods ended November 30,
1997 and 1998, net operating revenues from other domestic operations were $439
million and $463 million, respectively. The increase for the six months relates
primarily to growth in the first quarter of fiscal 1999 of its physician
practices, essentially all of which were acquired as part of hospital
acquisitions, offset in the second quarter by the effects of November 1997 sales
of one specialty and two rehabilitation hospitals.
Salaries and benefits expense as a percentage of net operating revenues was
41.5% in the quarter ended November 30, 1997 and 40.5% in the current quarter.
Salaries and benefits expense as a percentage of net operating revenues for the
prior and current six-month periods were 41.5% and 40.2%. This decrease is
primarily the result of continuing cost control measures and the outsourcing of
certain hospital services.
Supplies expense as a percentage of net operating revenues was 13.6% in the
quarter ended November 30, 1997 and 13.7% in the current quarter. Supplies
expense as a percentage of net operating revenues for both the prior and current
six-month periods was 13.7%. The slight overall increase in the quarter
primarily was due to higher supplies expenses at recently acquired facilities.
The Company continues to focus on reducing supplies expense through
incorporating acquired facilities into the Company's existing group-purchasing
program and by developing and expanding various programs designed to improve the
purchasing and utilization of supplies.
The provision for doubtful accounts as a percentage of net operating
revenues was 5.6% in the quarter ended November 30, 1997, and 7.2% in the
current quarter. The provision for doubtful accounts as a percentage of net
operating revenues for the prior and current six-month periods was 6.0% and
6.7%, respectively. Management believes the rise in bad debts is attributable to
a number of factors, including (a) the continuing shift of business from
traditional Medicare, which has no associated bad debts, to managed
13
<PAGE>
care, (b) a rise in the volume of care provided to uninsured patients in certain
of the Company's hospitals, and (c) conversions of patient accounting systems at
hospitals acquired over the past two years. Although management is unable to
quantify the effect of each factor, management believes that, to the extent that
the Company continues to experience a fundamental shift in its payor mix, this
expense is likely to remain at higher levels than in past years. The Company is
taking a series of actions to mitigate these recent increases in bad debt
expense. Since a hospital's emergency room is a major source of uncompensated
care, the Company is developing a best practices model for processing emergency
room patients. The Company is strengthening its medical eligibility programs, as
well as its business office and related operations, including admitting, medical
records and coding, and the recruitment, training and compensation of business
office staff. In certain markets, the Company is placing employees on-site at
managed care claims processing centers to expedite payment. In certain
circumstances, the Company also is obtaining advance payments from managed care
payors who have claims processing or system problems.
Other operating expenses as a percentage of net operating revenues were
21.0% for both the prior and current quarters ended November 30, 1997 and
1998. For the prior and current six-month periods, the percentages were 20.9%
and 21.5%, respectively. The increase in the six-month period was due
primarily to increases in medical and other professional fees, including new
consolidated laboratory fees. These new fees are offset by reductions in
salaries and benefits, as certain of the Company's general hospitals
consolidated and outsourced laboratory and other services.
Depreciation and amortization expense as a percentage of net operating
revenues was 4.7% in the quarter ended November 30, 1997, and 5.2% in the
current quarter. Depreciation and amortization expense as a percentage of net
operating revenues for the prior and current six-month periods was 4.6% and
5.1%, respectively. The increase is due to hospital acquisitions and capital
expenditures.
Interest expense, net of capitalized interest, was $118 million in the
quarter ended November 30, 1997 and $119 million in the current quarter. For the
prior and current six-month periods, it was $230 million and $238 million,
respectively. The increase is primarily due to increased borrowings for
acquisitions offset by the effect of interest rate reductions during these
periods.
Taxes on income as a percentage of income before income taxes were 39.7%
for the three months ended November 30, 1997 and 38.4% in the current quarter.
The decrease in the tax rate is primarily due to the utilization of certain
operating loss carryforwards, and, to a lesser extent, the reduced impact of
non-deductible goodwill amortization and certain benefits from charitable
contributions. The Company currently expects its tax rate for the year ended May
31, 1999 to be approximately 38.5%.
On November 10, 1998, subsidiaries of the Company purchased eight general
hospitals with 2,484 licensed beds and certain other assets in the Philadelphia,
Pennsylvania area from the Allegheny Health Education and Research Foundation.
The purchase price was approximately $360 million (including the effect of
certain working capital and other adjustments) which the Company borrowed under
its existing bank credit facility. Based on information presently available and
management's assumptions as to future performance, the Company expects this
acquisition to be dilutive to its earnings per share in fiscal 1999 by
approximately $0.15 per share.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the six months ended November 30, 1998 was
derived primarily from borrowings under the Company's unsecured revolving bank
credit agreement (the "Credit Agreement") and net cash provided by operating
activities. Net cash provided by operating activities for the six months ended
November 30, 1997 was $244 million before expenditures of $232 million for
discontinued operations, merger, facility consolidation and impairment charges.
The expenditures in 1997 include the settlement of significant litigation
relating to the Company's discontinued psychiatric business. Net cash provided
by operating activities for the six months ended November 30, 1998 was $317
million before net expenditures of $20 million for discontinued operations,
merger, facility consolidation and impairment charges.
Management believes that future cash provided by recurring operating
activities, the availability of credit under the Credit Agreement, the sale of
assets and, depending on capital market conditions and to the extent permitted
by the restrictive covenants of the Credit Agreement and the indentures
governing the Company's senior and senior subordinated notes, other borrowings
or the sale of equity securities should be adequate to meet known debt service
requirements and to finance planned capital expenditures, acquisitions and other
presently known operating needs over the next three years.
Proceeds from borrowings under the Credit Agreement were $2.1 billion
during the six months ended November 30, 1998 compared to $1.4 billion in the
prior year period. Loan repayments under the Credit Agreement were $1.6 billion
in the current six-month period compared to $889 million in the period ended
November 30, 1997.
Cash payments for property and equipment were $241 million in the six
months ended November 30, 1998, compared to $215 million in the prior six-month
period. The Company expects to spend approximately $500 million to $600 million
annually on capital expenditures, before any significant acquisitions of
facilities and other healthcare operations and before an estimated $256 million
in remaining commitments to fund the construction of two new hospitals over the
next three years. Such capital expenditures primarily relate to the
development of integrated healthcare systems in selected geographic areas,
design and construction of new buildings, expansion and renovation of existing
facilities, equipment additions and replacements, introduction of new medical
technologies and various other capital improvements.
Purchases of new businesses, net of cash acquired, were $446 million in the
six months ended November 30, 1998 and $381 million for the six months ended
November 30, 1997. These acquisitions were financed substantially by borrowings
under the Credit Agreement. The Company does not expect its acquisition activity
to continue at these levels.
The Credit Agreement and the indentures governing the Company's 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
15
<PAGE>
long-term unsecured debt securities are rated BBB- or higher by Standard and
Poors' Rating Services and Baa3 or higher by Moody's Investors Service, Inc.,
and covenants regarding maintenance of specified levels of net worth, debt
ratios and fixed charge coverages. Current debt ratings on the Company's senior
debt securities are BB+ by Standard and Poors and Ba1 by Moody's. The Company
is in compliance with its loan covenants.
The Company's strategy continues to include the prudent development of
integrated healthcare delivery systems, including the acquisition of general
hospitals and related ancillary healthcare businesses or joining with others to
develop integrated healthcare delivery systems. All or portions of this
development may be financed by net cash provided by operating activities, the
availability of credit under the Credit Agreement, the sale of assets and,
depending on capital market conditions and to the extent permitted by the
restrictive covenants of the Credit Agreement and the indentures governing the
Company's senior and senior subordinated notes, other borrowings or the sale of
equity securities. The Company's unused borrowing capacity under the Credit
Agreement was $585 million as of January 8, 1999. The full availability of any
unused borrowing capacity may become limited by covenants in the Credit
Agreement after May 31, 1999.
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, as well as the shift in patient mix to managed care, are
expected to continue.
The continuing challenge facing the Company and the healthcare industry as
a whole is to continue to provide quality patient care in an environment of
rising costs, strong competition for patients and a general reduction of payment
rates by both private and government payors. Because of national, state and
private industry efforts to reform healthcare delivery and payment systems, the
healthcare industry as a whole faces increased uncertainty. The Company is
unable to predict whether any other healthcare legislation at the federal and/or
state level will be passed in the future and what action it may take in response
to such legislation, but it continues to monitor all proposed legislation and
analyze its potential impact in order to formulate the Company's future business
strategies.
THE YEAR 2000 ISSUE
The Company's Annual Report on Form 10-K for its fiscal year ended May 31,
1998 (the "1998 10-K"), contains a complete description of the Company's Year
2000 compliance program. The Securities and Exchange Commission (the "SEC")
recently published additional guidance for what companies should include in
their disclosures concerning the Year 2000. In order to comply with that
guidance, the Company is supplementing the description of its Year 2000
compliance program reported in the 1998 10-K and in its Quarterly Report on Form
10-Q/A for the quarterly period ended August 31, 1998.
16
<PAGE>
The Company remains on track with its six-phase program described in the
1998 10-K. The first phase of the program, conducting an inventory of systems
and programs that may be affected by the Year 2000 issue, has been substantially
completed for both its information technology systems ("IT Systems") and for its
non-IT Systems such as bio-medical equipment ("Non-IT Items"). The second
phase, assessment of how the Year 2000 issues may affect each piece of equipment
and system, has been substantially completed for the IT Systems and is expected
to be substantially completed for the Non-IT Items by the end of January 1999.
Phases three through six (planning corrections of any problems discovered,
executing the plans developed, testing the corrections and implementing the
corrections) have already commenced and will run concurrently through the fall
of calendar 1999 for both IT-Systems and Non-IT Items.
The costs the Company has incurred to date in connection with its Year 2000
compliance program amount to approximately $18 million. Although the Company has
not yet completed its evaluation of the full scope of the Year 2000 issues
facing its systems and programs, based on the information currently available,
the Company estimates that its total cost for addressing all Year 2000 issues
will be approximately $70 million. This estimate includes approximately $20
million of costs associated with capital projects that would have been
undertaken notwithstanding the Year 2000 compliance program but the timing of
which was accelerated by one to three years in light of the program. The
Company cautions that its estimate is based on the information available to the
Company at this time. As noted above, the Company has not yet completed its
evaluation of the full scope of its Year 2000 issues and its estimate of the
costs it may incur may change as it receives more complete information. Although
the total cost of the Company's Year 2000 compliance program is presently not
expected to have a material adverse effect on its operations, liquidity or
financial condition, many factors, such as the number of pieces of equipment and
systems with Year 2000 issues, the availability and cost of various solutions to
any Year 2000 issues and the cost of replacing equipment or systems that cannot
be brought into compliance or with respect to which it is more cost-effective in
the long run to replace or take out of service, are not fully known at this time
and could have an aggregate material impact on the Company's estimate. The
Company will receive additional information concerning these and other matters
as it completes each phase of its Year 2000 compliance program.
The Company is continuing to develop contingency plans to address any Year
2000 issues that do arise. As part of its Year 2000 compliance program, the
Company is in the process of evaluating every IT System and Non-IT Item in each
of its offices, hospitals and other facilities. Since any piece of equipment
that is not Year 2000 compliant will be made compliant, replaced or taken out of
service, the Company does not expect the Year 2000 Issues to have an adverse
impact on patient care. Furthermore, the Company has developed or is developing
a back-up plan for each piece of critical equipment in case it unexpectedly
fails. Many of those contingency plans already are in place since contingency
plans already are required in order for a hospital to obtain and retain its
license. The Company's contingency plans also include plans to address third
parties' Year 2000 issues that may arise. Examples include (i) making certain
that each hospital's back-up power generator is operational if there is a power
failure, (ii) if the Company does not receive assurance that delivery of key
medical supplies will not be interrupted by Year 2000 issues, the Company will
identify reliable alternative sources for those supplies or will
17
<PAGE>
stockpile those supplies, and (iii) if regular payments from a principal payor
might be adversely affected by Year 2000 issues, the Company will negotiate an
alternative payment system.
The SEC's recent guidance for Year 2000 disclosure also calls on companies
to describe their most likely worst case Year 2000 scenarios. While one can
imagine a scenario in which medical equipment fails as a result of a Year 2000
problem, which could lead to serious injury or death, the Company does not
believe that such a scenario is likely to occur. As noted above, since any
piece of equipment that is not Year 2000 compliant will be made compliant,
replaced or taken out of service, the Company does not expect the Year 2000
issues to have an adverse impact on patient care. Furthermore, there will be a
back-up plan for each piece of critical equipment in case it unexpectedly fails.
The most likely worst case scenario is that the Company will have to replace or
take out of service some of its existing equipment and add additional staff
and/or reassign existing staff during the time period leading up to and
immediately following December 31, 1999, in order to address any Year 2000
issues that unexpectedly arise.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "estimates," "expects," "will," "may," "might," and words of
similar import, and statements regarding business strategy and plans
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
based on management's current expectations and involve known and unknown
risks, uncertainties and other factors, many of which the Company is unable
to predict or control, that may cause the Company's or the healthcare
industry's actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions, both
nationally, and in the regions in which the Company operates; industry
capacity; demographic changes; existing laws and government regulations and
changes in, or the failure to comply with, laws and governmental regulations;
legislative proposals for healthcare reform; the ability to enter into
managed care provider arrangements on acceptable terms; shifts from
traditional Medicare payment arrangements to Medicare managed care programs,
including capitated Medicare managed care programs; shifts from
fee-for-service payment to capitated and other risk-based payment systems;
changes in Medicare and Medicaid payments levels; liability and other claims
asserted against the Company; competition; the loss of any significant
customers; technological and pharmaceutical improvements that increase the
cost of providing, or reduce the demand for, healthcare; changes in business
strategy or development plans; the ability to attract and retain qualified
personnel, including physicians and nurses; the Company's significant
indebtedness; the availability of suitable acquisition opportunities and the
length of time it takes to accomplish acquisitions; the Company's ability to
integrate new businesses with its existing operations; the availability and
terms of capital to fund the expansion of the Company's business, including
the acquisition of additional facilities; the impact of Year 2000 issues; and
other factors referenced in the Company's 1998 10-K, its other periodic
reports or herein. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements.
Tenet disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Material Developments in Previously Reported Legal Proceedings:
There have been no material developments in the legal proceedings described
in the Company's Annual Report on Form 10-K for its fiscal year ended May
31, 1998.
Items 2, 3 and 5 are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on October 7, 1998. The
shareholders elected all of the Company's nominees for director. The
shareholders approved the shareholder proposal regarding declassification of the
Board of Directors and ratified the selection of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ended May 31, 1999. (KPMG
Peat Marwick LLP subsequently changed its name to KPMG LLP.) The shareholders
did not approve the shareholder proposal regarding Year 2000 disclosures. The
votes were as follows:
<TABLE>
<CAPTION>
1. Election of Directors For Withheld
--- --------
<S> <C> <C>
Sanford Cloud, Jr. 280,777,781 2,196,674
Maurice J. DeWald 280,839,442 2,135,013
Raymond A. Hay 280,785,946 2,188,509
</TABLE>
2. Shareholder proposal regarding Year 2000 disclosures:
<TABLE>
<S> <C>
For: 22,590,574
Against: 231,194,413
Abstaining: 5,063,660
</TABLE>
3. Shareholder proposal regarding declassification of the Company's Board
of Directors:
<TABLE>
<S> <C>
For: 187,596,345
Against: 69,771,022
Abstaining: 1,481,280
</TABLE>
4. Ratification of selection of KPMG Peat Marwick LLP:
<TABLE>
<S> <C>
For: 278,215,579
Against: 4,617,678
Abstaining: 141,196
</TABLE>
19
<PAGE>
PART II. OTHER INFORMATION (CONT.)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(3) Shareholder Rights Plan, adopted December 7, 1998
(incorporated by reference from the Company's Form 8-K filed
with the Securities and Exchange Commission on December 11,
1998).
(27.1) Financial Data Schedule for the six months ended November
30, 1998 (included only in the EDGAR filing).
(b) Reports on Form 8-K
(i) Current Report on Form 8-K, filed with the Securities and
Exchange Commission on November 24, 1998.
(ii) Current Report on Form 8-K, filed with the Securities and
Exchange Commission on December 11, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TENET HEALTHCARE CORPORATION
(Registrant)
Date: January 14, 1999 /s/ TREVOR FETTER
-----------------------------------
Trevor Fetter
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
/s/ RAYMOND L. MATHIASEN
-----------------------------------
Raymond L. Mathiasen
Senior Vice President,
Chief Accounting Officer
(Principal Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AT NOVEMBER 30, 1998 AND
CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED NOVEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-END> NOV-30-1998
<CASH> 32,000
<SECURITIES> 139,000
<RECEIVABLES> 2,247,000
<ALLOWANCES> 203,000
<INVENTORY> 237,000
<CURRENT-ASSETS> 3,083,000
<PP&E> 8,373,000
<DEPRECIATION> 1,951,000
<TOTAL-ASSETS> 13,629,000
<CURRENT-LIABILITIES> 1,820,000
<BONDS> 6,309,000
0
0
<COMMON> 24,000
<OTHER-SE> 3,840,000
<TOTAL-LIABILITY-AND-EQUITY> 13,629,000
<SALES> 0
<TOTAL-REVENUES> 5,116,000
<CGS> 0
<TOTAL-COSTS> 4,118,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 343,000
<INTEREST-EXPENSE> 238,000
<INCOME-PRETAX> 425,000
<INCOME-TAX> 163,000
<INCOME-CONTINUING> 262,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 262,000
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
</TABLE>
