<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
/X/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
FEBRUARY 28, 1999.
OR
/ /
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ....... TO ....... .
COMMISSION FILE NUMBER 1-7293
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TENET HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
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NEVADA 95-2557091
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3820 STATE STREET
SANTA BARBARA, CA 93105
(Address of principal executive offices)
(805) 563-7000
(Registrant's telephone number, including area code)
-----------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO
--- ---
AS OF MARCH 31, 1999 THERE WERE 310,537,022 SHARES OF $0.075 PAR VALUE
COMMON STOCK OUTSTANDING.
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<PAGE>
TENET HEALTHCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
------------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - May 31, 1998
and February 28, 1999............................................................ 2
Condensed Consolidated Statements of Income - Three Months and Nine Months ended
February 28, 1998 and 1999....................................................... 4
Condensed Consolidated Statements of Comprehensive Income - Nine Months ended
February 28, 1998 and 1999....................................................... 5
Condensed Consolidated Statements of Cash Flows - Nine Months ended February 28,
1998 and 1999.................................................................... 6
Notes to Condensed Consolidated Financial Statements................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................ 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 20
Item 6. Exhibits and Reports on Form 8-K..................................................... 20
Signature............................................................................ 21
- -----------------
</TABLE>
Note: Item 3 of Part I and Items 2, 3, 4 and 5 of Part II are omitted because
they are not applicable.
1
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1998 1999
------------ ------------
(DOLLAR AMOUNTS IN MILLIONS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 23 $ 61
Short-term investments in debt securities................................ 132 130
Accounts receivable, less allowance for doubtful accounts ($191 at
May 31 and $244 at February 28)...................................... 1,742 2,303
Inventories of supplies, at cost......................................... 214 244
Deferred income taxes.................................................... 275 166
Other current assets..................................................... 504 418
------------ ------------
Total current assets............................................ 2,890 3,322
------------ ------------
Investments and other assets.................................................. 498 524
Property and equipment, at cost............................................... 7,748 8,450
Less accumulated depreciation and amortization........................... 1,761 2,033
------------ ------------
Net property and equipment............................................... 5,987 6,417
------------ ------------
Intangible assets, at cost less accumulated amortization
($327 at May 31 and $420 at February 28)................................. 3,399 3,607
------------ ------------
$ 12,774 $ 13,870
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Managements Discussion and Analysis of Financial Condition and
Results of Operations.
2
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, FEBRUARY 28,
1998 1999
------------ ------------
(DOLLAR AMOUNTS IN MILLIONS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current portion of long-term debt.................................... $ 10 $ 35
Accounts payable..................................................... 657 642
Accrued employee compensation and benefits........................... 355 377
Accrued interest payable............................................. 106 80
Other current liabilities............................................ 580 696
------------ ------------
Total current liabilities................................... 1,708 1,830
------------ ------------
Long-term debt, net of current portion.................................... 5,829 6,496
Other long-term liabilities and minority interests........................ 1,256 1,134
Deferred income taxes..................................................... 423 437
Shareholders' equity:
Common stock, $0.075 par value; authorized 700,000,000 shares; 313,044,417
shares issued at May 31 and 314,279,558 shares
issued at February 28............................................ 23 24
Other shareholders' equity........................................... 3,605 4,019
Less common stock in treasury, at cost, 3,754,891 shares at May 31
and 3,754,555 at February 28 .................................... (70) (70)
------------ ------------
Total shareholders' equity.................................. 3,558 3,973
------------ ------------
$ 12,774 $ 13,870
------------ ------------
------------ ------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Managements Discussion and Analysis of Financial Condition and
Results of Operations.
3
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
----------------------- -----------------------
1998 1999 1998 1999
--------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net operating revenues............................... $ 2,564 $ 2,822 $ 7,324 $ 7,938
--------- --------- --------- ---------
Operating expenses:
Salaries and benefits........................... 1,040 1,160 3,013 3,217
Supplies........................................ 365 403 1,016 1,104
Provision for doubtful accounts................. 163 190 447 533
Other operating expenses........................ 518 611 1,516 1,710
Depreciation.................................... 89 109 257 307
Amortization.................................... 32 33 83 96
--------- --------- --------- ---------
Operating income..................................... 357 316 992 971
--------- --------- --------- ---------
Interest expense, net of capitalized portion......... (114) (122) (344) (360)
Investment earnings.................................. 5 8 17 21
Minority interests in income of consolidated
subsidiaries.................................... (6) - (19) (5)
Gain from change in value of indexed debt............ - - 18 -
--------- --------- --------- ---------
Income before income taxes........................... 242 202 664 627
Taxes on income...................................... (94) (78) (262) (241)
--------- --------- --------- ---------
Net income........................................... $ 148 $ 124 $ 402 $ 386
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic earnings per share............................... $ 0.48 $ 0.40 $ 1.32 $ 1.25
Diluted earnings per share............................. $ 0.47 $ 0.40 $ 1.29 $ 1.23
Weighted average shares and dilutive securities
outstanding (in thousands):
Basic............................................. 306,607 310,272 305,449 309,823
Diluted........................................... 312,816 312,945 311,258 313,512
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Managements Discussion and Analysis of Financial Condition and
Results of Operations.
4
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Net income ........................................................... $ 402 $ 386
Other comprehensive income (loss):
Foreign currency translation adjustments......................... - 2
Unrealized net holding losses arising during period on securities
held as available for sale....................................... (47) (3)
----------- -----------
Other comprehensive loss before income taxes..................... (47) (1)
Income tax benefit related to items of other comprehensive income 18 -
----------- -----------
Other comprehensive loss......................................... (29) (1)
----------- -----------
Comprehensive income.................................................. $ 373 $ 385
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Managements Discussion and Analysis of Financial Condition and
Results of Operations.
5
<PAGE>
TENET HEALTHCARE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED FEBRUARY 28, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Net cash provided by operating activities................................. $ 137 $ 315
----------- -----------
Cash flows from investing activities:
Proceeds from sales of facilities and other assets................... 162 19
Collection of notes receivable....................................... 25 7
Purchases of property and equipment.................................. (371) (401)
Purchases of new businesses, net of cash acquired. .................. (679) (470)
Other items.......................................................... (77) (108)
----------- -----------
Net cash used in investing activities............................ (940) (953)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings............................................. 1,916 4,660
Payments of borrowings............................................... (1,189) (3,998)
Other items, primarily stock option exercises........................ 58 14
----------- -----------
Net cash provided by financing activities........................ 785 676
----------- -----------
Net increase (decrease) in cash and cash equivalents...................... (18) 38
Cash and cash equivalents at beginning of period.......................... 35 23
----------- -----------
Cash and cash equivalents at end of period................................ $ 17 $ 61
----------- -----------
----------- -----------
Supplemental disclosures:
Interest paid, net of amounts capitalized............................ $ 338 $ 378
Income taxes paid, net of refunds received........................... 11 (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
Managements 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 nine months ended February 28, 1999, Tenet acquired ten general
hospitals and related 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. In March, 1999, the
Company acquired an 80% interest in two hospitals in Massachussetts in a
transaction accounted for as a purchase and sold a 69-bed general hospital
in California. The operations of the sold and closed businesses were also
not material.
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. The following table presents a reconciliation of the Company's beginning
and ending liability balances in connection with the reserves for merger,
facility consolidation and other charges recorded in fiscal 1997 and
1998 by type of cost for the nine-month period ended February 28, 1999 (in
millions):
7
<PAGE>
<TABLE>
<CAPTION>
CASH
PAYMENTS,
NET OF BALANCES AT
BALANCES AT SPECIAL FACILITY SALES FEBRUARY 28,
RESERVES RELATED TO: MAY 31, 1998 CHARGES PROCEEDS OTHER ITEMS 1999
------------------------------------- ------------ ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
The OrNda Merger .................. $ 19 - $ (9) - $ 10
Estimated costs to sell or close
facilities and lease accruals in
1997 Plan.......................... 57 - (1) (8) 48
Estimated costs to sell or close
hospitals in 1998 Plan............. 37 - (2) - 35
Severance and other exit costs
related to closure of home health
agencies........................... 20 - (15) 5
Termination of physician contracts. 9 - - - 9
------------ ---------- ------------- ------------- ------------
Total......................... $ 142 $ 0 $ (27) $ (8) $ 107
------------ ---------- ------------- ------------- ------------
------------ ---------- ------------- ------------- ------------
</TABLE>
Cash payments to be applied against these accruals are expected to
approximate $22 million in the remainder of fiscal 1999 and $85
million thereafter.
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 nine months ended February 28, 1998 and 1999. Income is
expressed in millions and weighted average shares are expressed in
thousands:
<TABLE>
<CAPTION>
1998 1999
--------------------------------------- ----------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
THREE MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------- ----------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net income..................... $ 148 $ 124
----------- ------------
Basic earnings per share:
Income available to common
shareholders.............. $ 148 306,607 $ 0.48 $ 124 310,272 $ 0.40
----------- ------------
----------- ------------
Effect of dilutive stock
options and warrants........... - 6,209 - 2,673
----------- ------------ ----------- ------------
Diluted earnings per share:
Income available to common
shareholders.............. $ 148 312,816 $ 0.47 $ 124 312,945 $ 0.40
----------- ------------ ----------- ----------- ------------ ------------
----------- ------------ ----------- ----------- ------------ ------------
</TABLE>
8
<PAGE>
Outstanding options to purchase 45,000 and 18,224,951 shares of common
stock were not included in the computation of earnings per share for the
three-month periods ended February 28, 1998 and 1999, respectively, because
the options' exercise prices were greater than the average market price of
the common stock.
<TABLE>
<CAPTION>
1998 1999
------------------------------------------ ------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
NINE MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------- -------------- ------------ ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net income..................... $ 402 $ 386
-------------- -------------
-------------- -------------
Basic earnings per share:
Income available to common
shareholders.............. $ 402 305,449 $ 1.32 $ 386 309,823 $ 1.25
----------- -----------
----------- -----------
Effect of dilutive stock
options and warrants........ - 5,809 - 3,689
-------------- ------------ ------------- ------------
Diluted earnings per share:
Income available to common
shareholders.............. $ 402 311,258 $ 1.29 $ 386 313,512 $ 1.23
-------------- ------------ ----------- ------------- ------------ -----------
-------------- ------------ ----------- ------------- ------------ -----------
</TABLE>
Outstanding options to purchase 46,400 and 11,275,506 shares of common
stock were not included in the computation of earnings per share for the
nine-month periods ended February 28, 1998 and 1999, respectively, because
the options' excercise prices were greater than the average market price of
the common stock.
6. The following table sets forth the tax effects allocated to each component
of other comprehensive income for the nine months ended February 28, 1998
and 1999:
<TABLE>
<CAPTION>
1998 1999
----------------------------------- -----------------------------------
TAX
BEFORE- TAX NET-OF- BEFORE- (EXPENSE) NET-OF-
TAX (EXPENSE) TAX TAX OR TAX
AMOUNT OR BENEFIT AMOUNT AMOUNT BENEFIT AMOUNT
----------- ----------- ----------- ----------- ------------ ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Foreign currency translation
adjustment $ - $ - $ - $ 2 $ (1) $ 1
Unrealized holding gains (losses)
on securities (47) 18 (29) (3) 1 (2)
----------- ----------- ----------- ----------- ------------ ----------
Other comprehensive income (loss) $ (47) $ 18 $ (29) $ (1) $ - $ (1)
----------- ----------- ----------- ----------- ------------ ----------
----------- ----------- ----------- ----------- ------------ ----------
</TABLE>
9
<PAGE>
The following table sets forth the accumulated other comprehensive income
balances, by component, as of February 28, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------------------------------------------ -------------------------------------------
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
------------ ------------- --------------- ------------ -------------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ - $ 28 $ 28 - $ 50 $ 50
Current-period change - (29) (29) 1 (2) (1)
------------ ------------- --------------- ------------ -------------- ---------------
Ending balance $ - $ (1) $ (1) $ 1 $ 48 $ 49
------------ ------------- --------------- ------------ -------------- ---------------
------------ ------------- --------------- ------------ -------------- ---------------
</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.
10
<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 $242 million in the quarter ended February
28, 1998 and $202 million in the quarter ended February 28, 1999. For the
nine-month periods ended February 28, 1998 and 1999, income before income taxes
was $664 million and $627 million, respectively. The 1998 figures include an $18
million 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 and nine
months ended February 28, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED FEBRUARY 28,
------------------------------------------------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals........... $ 2,331 $ 2,581 90.9% 91.5%
Other domestic operations ........... 233 241 9.1% 8.5%
------------- ------------- ------------- -------------
Net operating revenues.................... 2,564 2,822 100.0% 100.0%
------------- ------------- ------------- -------------
Operating expenses:
Salaries and benefits................ (1,040) (1,160) 40.6% 41.1%
Supplies............................. (365) (403) 14.2% 14.3%
Provision for doubtful accounts...... (163) (190) 6.4% 6.7%
Other operating expenses............. (518) (611) 20.2% 21.6%
Depreciation......................... (89) (109) 3.5% 3.9%
Amortization......................... (32) (33) 1.2% 1.2%
------------- ------------- ------------- -------------
Operating income.......................... $ 357 $ 316 13.9% 11.2%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED FEBRUARY 28,
------------------------------------------------------------------
1998 1999 1998 1999
------------- ------------- ------------- -------------
(DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals........... $ 6,652 $ 7,234 90.8% 91.1%
Other domestic operations ........... 672 704 9.2% 8.9%
------------- ------------- ------------- -------------
Net operating revenues.................... 7,324 7,938 100.0% 100.0%
------------- ------------- ------------- -------------
Operating expenses:
Salaries and benefits................ (3,013) (3,217) 41.1% 40.5%
Supplies............................. (1,016) (1,104) 13.9% 13.9%
Provision for doubtful accounts...... (447) (533) 6.1% 6.7%
Other operating expenses............. (1,516) (1,710) 20.7% 21.6%
Depreciation......................... (257) (307) 3.5% 3.9%
Amortization......................... (83) (96) 1.1% 1.2%
------------- ------------- ------------- -------------
Operating income.......................... $ 992 $ 971 13.5% 12.2%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Net operating revenues of other domestic operations in the table above consist
primarily of revenues from: (i) physician practices, (ii) rehabilitation
hospitals, long-term care facilities, psychiatric and specialty hospitals that
are located on or near the same campuses as the Company's general hospitals;
(iii) healthcare joint ventures operated by the Company; (iv) subsidiaries of
the Company offering managed care and indemnity products; and (v) equity in the
earnings of unconsolidated affiliates.
The table below sets forth certain selected historical operating statistics
for the Company's domestic general hospitals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------------------- ------------------------------------
INCREASE INCREASE
1998 1999 (DECREASE) 1998 1999 (DECREASE)
----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Number of hospitals (at end of
period)............................. 125 129 4 * 125 129 4 *
Licensed beds (at end of period).... 28,433 30,471 7.2% 28,433 30,471 7.2%
Net inpatient revenues (in millions) $ 1,564 $ 1,725 10.3% $ 4,316 $ 4,737 9.8%
Net outpatient revenues (in
millions)........................... $ 724 $ 807 11.5% $ 2,198 $ 2,348 6.8%
Admissions.......................... 230,955 248,646 7.7% 649,797 689,312 6.1%
Equivalent admissions............... 326,322 351,849 7.8% 943,733 996,683 5.6%
Average length of stay (days)....... 5.3 5.2 (0.1) * 5.2 5.2 -
Patient days........................ 1,230,830 1,304,313 6.0% 3,385,081 3,554,223 5.0%
Equivalent patient days............. 1,728,411 1,832,782 6.0% 4,876,520 5,094,834 4.5%
Net inpatient revenue per patient
day................................. $ 1,271 $ 1,323 4.1% $ 1,275 $ 1,333 4.5%
Net inpatient revenue per admission. $ 6,772 $ 6,938 2.5% $ 6,642 $ 6,872 3.5%
Utilization of licensed beds........ 48.3% 47.6% (0.7)%* 44.1% 44.9% 0.8% *
Outpatient visits................... 2,542,908 2,372,360 (6.7)% 7,837,645 7,119,700 (9.2)%
</TABLE>
* The change is the difference between 1998 and 1999 amounts shown.
12
<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 NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
------------------------------------- ------------------------------------
INCREASE INCREASE
1998 1999 (DECREASE) 1998 1999 (DECREASE)
----------- ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Average licensed beds............... 25,730 25,645 (0.3)% 25,924 25,738 (0.7)%
Patient days........................ 1,192,926 1,160,418 (2.7)% 3,248,859 3,235,849 (0.4)%
Net inpatient revenue per patient $ 1,282 $ 1,295 1.0% $ 1,282 $ 1,309 2.1%
day.................................
Admissions.......................... 224,261 222,867 (0.6)% 625,595 634,088 1.4%
Net inpatient revenue per admission. $ 6,819 $ 6,742 (1.1)% $ 6,659 $ 6,680 0.3%
Outpatient visits................... 2,455,038 2,093,542 (14.7)% 7,493,076 6,495,401 (13.3)%
Average length of stay (days)....... 5.3 5.2 (0.1) * 5.2 5.1 (0.1) *
</TABLE>
* The change is the difference between 1998 and 1999 amounts shown.
In the year-ago period, volumes, as measured by same-store admissions and
outpatient visits, were high in December and January due to a severe flu season
in many of the Company's markets. This phenomena did not repeat itself in those
months in the current year, although same-store admissions improved 5.2% in the
month of February 1999 over February 1998.
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 were 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 February 28, 1998 and 34.5% for the current quarter. For the
nine-month periods ended February 28, 1998 and 1999, the percentages were 38.0%
and 34.5%, respectively.
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 6.7% decline in the
number of outpatient visits during the quarter ended February 28, 1999 (a 14.7%
decline on a same-store basis) compared to the year-ago quarter and a 9.2%
decline for the corresponding nine-month periods (a 13.3% decline on a
same-store basis). 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 9.2% over the year-ago quarter. For the nine- month periods, the
increase was approximately 7.9%.
13
<PAGE>
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 33.7% for the three
months ended February 28, 1998 to approximately 38.4% for the current quarter.
For the corresponding nine-month periods managed care increased from 32.9% to
37.1%. The Company anticipates that its managed care business will continue to
increase in the future. The Company generally receives lower payments per
patient from managed care payors than it does from traditional indemnity
insurers. In certain instances, the Company also is assuming a greater share of
risk by entering into capitated arrangements with managed care payors and
employers. Under capitation, the Company receives a certain amount for each
person enrolled in a plan and assumes the risks and rewards of meeting the
healthcare needs of those persons so enrolled. The Company purchases insurance
to cover a portion of the cost of meeting the healthcare needs of those covered.
Approximately 5.5% of the Company's revenues were derived from capitated
arrangements in the quarter ended February 28, 1999, compared to 4.8% in the
quarter ended February 28, 1998.
To address the effect of reduced payments for services, while continuing to
provide quality care to patients, the Company has implemented 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. Implementation of additional cost-control programs and other
operating efficiencies may be undertaken in the future to offset the reduced
payments under the 1997 Act and the shift from traditional Medicare to managed
care. In March 1999, the Company announced a revised management structure
arranging the Company's hospitals in three divisions instead of two. Under this
new organization, each division will oversee 30 to 40 hospitals instead of 60 to
70. The Company expects to incur severance and other special charges as these
programs are implemented in its fourth quarter ending May 31, 1999.
Net operating revenues from the Company's other domestic operations were
$233 million for the three months ended February 28, 1998, compared to $241
million for the current quarter. For the nine-month periods ended February 28,
1998 and 1999, net operating revenues from other domestic operations were $672
million and $704 million, respectively. The increase for the nine 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
40.6% in the quarter ended February 28, 1998 and 41.1% in the current quarter.
This increase was primarily due to (a) lower than anticipated revenue and (b)
seasonal hiring factors. Salaries and benefits expense as a percentage of net
operating revenues for the prior and current nine-month periods were 41.1% and
40.5%. This decrease is primarily the result of continuing cost control measures
and the outsourcing of certain hospital services. (See discussion of other
operating expenses below.)
Supplies expense as a percentage of net operating revenues was 14.2% in the
quarter ended February 28, 1998 and 14.3% in the current quarter. Supplies
expense as a percentage of net operating revenues for both
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the prior and current nine-month periods was 13.9%. 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 6.7% in the current quarter, down from 7.2% in the quarter ended
November 30, 1998. It was 6.4% for the quarter ended February 28, 1998. The
provision for doubtful accounts as a percentage of net operating revenues for
the prior and current nine-month periods was 6.1% and 6.7%, respectively.
Management believes the rise in bad debts is generally attributable to a number
of factors, including (a) the continuing shift of business from traditional
Medicare, which has no associated bad debts, to managed care, (b) a rise in the
volume of care provided to uninsured patients in certain of the Company's
hospitals, and (c) 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. In
March 1999, the Company announced the creation of a new, corporate-level
department combining all patient billing and account collection activities in
order to improve collection of receivables, accelerate payments from managed
care payors, standardize and improve billing systems and develop best practices
in the patient admission and registration process. The Company is also
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 experiencing claims
processing or system problems.
Other operating expenses as a percentage of net operating revenues were
20.2% for the quarter ended February 28, 1998 and 21.6% for the quarter ended
February 28, 1999. For the prior and current nine-month periods, the percentages
were 20.7% and 21.6%, respectively. The increase in the nine-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, dietary, house keeping and other
services.
Depreciation and amortization expense as a percentage of net operating
revenues was 4.7% in the quarter ended February 28, 1998, and 5.1% in the
current quarter. Depreciation and amortization expense as a percentage of net
operating revenues for the prior and current nine-month periods was 4.6% and
5.1%, respectively. The increase is primarily due to hospital acquisitions and
capital expenditures.
Interest expense, net of capitalized interest, was $114 million in the
quarter ended February 28, 1998 and $122 million in the current quarter. For the
prior and current nine-month periods, it was $344 million and $360 million,
respectively. The increase is primarily due to increased borrowings for
acquisitions offset by the effect of interest rate reductions during these
periods.
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Taxes on income as a percentage of income before income taxes were 38.8%
for the three months ended February 28, 1998 and 38.6% in the current quarter.
The decrease in the tax rate is primarily due to the utilization of certain
operating loss carryforwards, reduced exposure to tax contingencies 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 $0.05 per share. Dilution through February 28, 1999 was $.03 per
share.
In April 1999, the Company, as part of the strategic initiatives noted
above to improve operations, announced preliminary plans for a possible sale of
approximately 20 hospitals that may not fit the Company's strategic profile.
Proceeds from any sales will be used to reduce long-term debt. Because the sales
plan is still subject to significant change and a potential buyer or buyers have
not yet been identified, the Company cannot presently estimate the effect of
these transactions on future operations or financial position.
In conjunction with the preparation of the Company's annual business plan
in April and May 1999, the Company will obtain sufficient information to enable
it to complete an ongoing analysis to determine whether the carrying values of
any of the long-lived assets of its hospitals, physician practices and home
health agencies are impaired as of May 31, 1999. Facilities whose cash flows are
negative in fiscal 1999 or trending significantly downward over the last three
years will be selected for further impairment analysis. The Company may
recognize (a) gains or losses on the hospitals being offered for sale in the
planned transaction described above and (b) additional impairment charges in its
fourth quarter ending May 31, 1999, depending on the progress of the sales
transaction, if any, and the impairment analysis of the other hospitals,
physician practices and home health agencies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the nine months ended February 28, 1999 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 nine
months ended February 28, 1998 was $137 million. Cash expenditures in 1998
include the settlement of significant litigation relating to the Company's
discontinued psychiatric business. Net cash provided by operating activities
for the nine months ended February 28, 1999 was $315 million.
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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 $4.7 billion
during the nine months ended February 28, 1999 compared to $1.9 billion in the
prior year period. Loan repayments under the Credit Agreement were $4.0 billion
in the current nine-month period compared to $1.0 billion in the period ended
February 28, 1998.
Cash payments for property and equipment were $401 million in the nine
months ended February 28, 1999, compared to $371 million in the prior nine-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 $240 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 and systems additions and replacements, introduction of new medical
technologies and various other capital improvements.
Purchases of new businesses, net of cash acquired, were $470 million in the
nine months ended February 28, 1999 and $679 million for the nine months ended
February 28, 1998. 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 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
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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 $507 million as of April 9, 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 its future business
strategies.
THE YEAR 2000 ISSUE
The Company is continuing its six-phase Year 2000 compliance program
described in its Annual Report on Form 10-K for its fiscal year ended May 31,
1998 (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, also has been substantially completed for
both the IT Systems and Non-IT Items. 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 $25 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 $100 million, substantially all of which will be accounted
for as capital expenditures. The Company cautions that its estimate is based on
the information available to the Company at this time. As 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.
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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 contingency plans already are in place since contingency plans are
required in order for a hospital to obtain and retain its license. The Company's
contingency plans also include plans to address third parties' Year 2000 issues
that may arise. Examples include (i) making certain that each hospital's back-up
power generator is operational if there is a power failure, (ii) if the Company
does not receive assurance that delivery of key medical supplies will not be
interrupted by Year 2000 issues, the Company will identify reliable alternative
sources for those supplies or will make appropriate alternative arrangements,
and (iii) if regular payments from a principal payor might be adversely affected
by Year 2000 issues, the Company will endeavor to negotiate an alternative
payment system.
The 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
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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.
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PART II. OTHER INFORMATION (CONT.)
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Material Developments in Previously Reported Legal Proceedings:
There have been no material developments in the legal proceedings described
in the Company's Annual Report on Form 10-K for its fiscal year ended May
31, 1998.
Items 2, 3,4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(27.1) Financial Data Schedule for the nine months ended February
28, 1999 (included only in the EDGAR filing).
(99.1) Amendment No. 2 to Credit Agreement, dated as of March 16,
1999.
(99.2) Restated Bylaws of Tenet Healthcare Corporation, amended and
restated as of March 10, 1999.
(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.
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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: April 28, 1999 /s/ TREVOR FETTER
---------------------------------------------------
Trevor Fetter
Office of the President,
Chief Corporate Officer and Chief Financial Officer
(Principal Financial Officer)
/s/ RAYMOND L. MATHIASEN
---------------------------------------------------
Raymond L. Mathiasen
Executive Vice President,
Chief Accounting Officer
(Principal Accounting Officer)
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