<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
AUGUST 31, 1999.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ....... TO ........
COMMISSION FILE NUMBER 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 SEPTEMBER 30, 1999 THERE WERE 311,380,377 SHARES OF $0.075 PAR VALUE
COMMON STOCK OUTSTANDING.
===============================================================================
<PAGE>
TENET HEALTHCARE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
---------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets - As of May 31, 1999
and August 31, 1999................................................. 2
Condensed Consolidated Statements of Income - For the Three Months ended
August 31, 1998 and 1999............................................ 4
Condensed Consolidated Statements of Comprehensive Income - For the
Three Months ended August 31, 1998 and 1999......................... 5
Condensed Consolidated Statements of Cash Flows - For the Three Months
ended August 31, 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, AUGUST 31,
1999 1999
------------- -----------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 29 $ 24
Short-term investments in debt securities................................ 130 119
Accounts receivable, less allowance for doubtful accounts ($287 at
May 31 and $317 at August 31)........................................ 2,318 2,424
Inventories of supplies, at cost......................................... 221 226
Deferred income taxes.................................................... 196 134
Assets held for sale, at the lower of carrying value or fair value less
estimated costs to sell.............................................. 655 632
Other current assets..................................................... 413 392
---------- ----------
Total current assets............................................ 3,962 3,951
---------- ----------
Investments and other assets.................................................. 569 540
Property and equipment, at cost............................................... 7,703 7,780
Less accumulated depreciation and amortization........................... 1,864 1,962
---------- ----------
Net property and equipment............................................... 5,839 5,818
---------- ----------
Intangible assets, at cost less accumulated amortization
($409 at May 31 and $428 at August 31)................................... 3,401 3,384
---------- ----------
$ 13,771 $ 13,693
========== ==========
</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, AUGUST 31,
1999 1999
----------- -----------
(IN MILLIONS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.................................... $ 45 $ 44
Accounts payable..................................................... 713 600
Employee compensation and benefits................................... 390 341
Accrued interest payable............................................. 163 73
Other current liabilities............................................ 711 709
--------- ---------
Total current liabilities................................... 2,022 1,767
--------- ---------
Long-term debt, net of current portion.................................... 6,391 6,525
Other long-term liabilities and minority interests........................ 1,048 1,048
Deferred income taxes..................................................... 440 401
Shareholders' equity:
Common stock, $0.075 par value; authorized 700,000,000
shares; 314,778,323 shares issued at May 31 and
315,125,251 shares issued at August 31........................... 24 24
Other shareholders' equity........................................... 3,916 3,998
Less common stock in treasury, at cost, 3,754,708 shares ............ (70) (70)
--------- ---------
Total shareholders' equity.................................. 3,870 3,952
--------- ---------
$ 13,771 $ 13,693
========= =========
</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 ENDED AUGUST 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- ---------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Net operating revenues.......................................................... $ 2,553 $ 2,873
--------- ---------
Operating expenses:
Salaries and benefits...................................................... 1,018 1,161
Supplies................................................................... 350 407
Provision for doubtful accounts............................................ 159 223
Other operating expenses................................................... 561 625
Depreciation............................................................... 96 102
Amortization............................................................... 31 32
--------- ---------
Operating income................................................................ 338 323
--------- ---------
Interest expense, net of capitalized portion.................................... (119) (124)
Investment earnings............................................................. 7 5
Minority interests in income of consolidated subsidiaries....................... (4) (5)
Gain on sale of facilities ..................................................... -- 10
--------- ---------
Income before income taxes and cumulative effect of accounting change........... 222 209
Taxes on income................................................................. (85) (81)
--------- ---------
Income before cumulative effect of accounting change............................ 137 128
Cumulative effect of accounting change, net of taxes ........................... -- (19)
--------- ---------
Net income ..................................................................... $ 137 $ 109
========= =========
Basic earnings (loss) per share:
Income before cumulative effect of accounting change ...................... $ 0.44 $ 0.41
Cumulative effect of accounting change .................................... -- (0.06)
Net income ................................................................ 0.44 0.35
Diluted earnings (loss) per share:
Income before cumulative effect of accounting change ...................... $ 0.44 $ 0.41
Cumulative effect of accounting change .................................... -- (0.06)
Net income ................................................................ 0.44 0.35
Weighted average shares and dilutive securities outstanding (in thousands):
Basic...................................................................... 309,403 311,152
Diluted.................................................................... 313,665 313,224
</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
THREE MONTHS ENDED AUGUST 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
---------- ---------
(IN MILLIONS)
<S> <C> <C>
Net income ............................................................ $ 137 $ 109
Other comprehensive income (loss):
Foreign currency translation adjustments.......................... 7 2
Unrealized net holding losses arising during period on
securities held as available for sale......................... (71) (55)
-------- ---------
Other comprehensive loss before income taxes...................... (64) (53)
Income tax benefit related to items of other comprehensive
income........................................................ 25 20
-------- ---------
Other comprehensive loss.......................................... (39) (33)
-------- ---------
Comprehensive income................................................... $ 98 $ 76
======== =========
</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
THREE MONTHS ENDED AUGUST 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Net cash provided by operating activities.......................... $ 41 $ 12
-------- --------
Cash flows from investing activities:
Proceeds from sales of facilities and other assets............ -- 34
Purchases of property and equipment........................... (107) (138)
Purchases of businesses, net of cash acquired. ............... (84) (24)
Other items................................................... (27) (20)
-------- --------
Net cash used in investing activities..................... (218) (148)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings...................................... 589 476
Payments of borrowings........................................ (416) (346)
Other items, primarily stock option exercises................. 2 1
-------- --------
Net cash provided by financing activities................. 175 131
-------- --------
Net decrease in cash and cash equivalents.......................... (2) (5)
Cash and cash equivalents at beginning of period................... 23 29
-------- --------
Cash and cash equivalents at end of period......................... $ 21 $ 24
======== ========
Supplemental disclosures:
Interest paid, net of amounts capitalized..................... $ 142 $ 211
Income taxes paid, net of refunds received.................... (48) 4
</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 disclosures that would
substantially duplicate the disclosures 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. On June 1, 1999, the Company changed its method of accounting for start-up
costs to expense such costs as incurred in accordance with Statement of
Position 98-5, published by the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants. The adoption of the
Statement resulted in the write-off of previously capitalized start-up
costs as of May 31, 1999 in the amount of $19 million, net of tax benefit,
which amount is shown in the accompanying consolidated statement of income
as a cumulative effect of an accounting change in the three months ended
August 31, 1999.
3. In June 1999, the Company sold three skilled nursing facilities and
other assets for cash in the amount of $34 million. In September 1999,
the Company sold four general hospitals in three separate transactions
for cash in the aggregate amount of $177 million. The Company has also
reached a definitive agreement to sell ten general hospitals to IASIS
Healthcare Corporation, a Nashville-based hospital management company.
This latter sale is expected to close before November 30, 1999. These
transactions are part of the Company's plan to sell or close certain
non-strategic hospitals in order to streamline its organization by
concentrating on markets where it already has a strong presence and for
which the Company recorded $277 million of asset impairment and related
charges in the fourth quarter of fiscal 1999. The results of operations
of the businesses sold or to be sold or closed are not material.
7
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
4. In the most recent quarter the Company successfully defended two cases
involving five plaintiffs in Texas. These cases arose from the previously
reported litigation involving the Company's discontinued psychiatric
business. The Company believes that these victories as well as previous
defense verdicts support its strategy to continue to vigorously defend
against this type of litigation. Except for the foregoing, 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, 1999.
5. The table below provides a reconciliation between net income and net cash
provided by operating activities for the three months ended August 31, 1998
and 1999:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
(In millions)
<S> <C> <C>
Net income .............................................................. $ 137 $ 109
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ...................................... 128 134
Provision for doubtful accounts .................................... 159 223
Deferred income taxes .............................................. 14 46
Other items ........................................................ 11 15
Increases (decreases) in cash from changes in operating assets and
liabilities, net of effects from purchases of businesses:
Accounts receivable .............................................. (313) (329)
Inventories and other current assets ............................. (38) (24)
Accounts payable, accrued expenses and other current liabilities . (52) (129)
Other long-term liabilities ...................................... 3 (15)
Net expenditures for discontinued operations, merger, impairment
and other unusual charges ..................................... (8) (18)
---------- ----------
Net cash provided by operating activities .......................... $ 41 $ 12
========== ==========
</TABLE>
8
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
6. The following table presents a reconciliation of beginning and ending
liability balances in connection with merger, impairment and restructuring
charges recorded in fiscal 1997,1998 and 1999 by type of cost for the
three-month period ended August 31, 1999 (in millions):
<TABLE>
<CAPTION>
BALANCES AT CASH OTHER BALANCES AT
RESERVES RELATED TO: MAY 31, 1999 (1) PAYMENTS ITEMS (2) AUGUST 31,1999 (1)
- -------------------------------------------- --------------- -------------- ----------- ------------------
<S> <C> <C> <C> <C>
Estimated costs to sell or close hospitals and
other facilities......................... $ 30 $ (3) $ -- $ 27
Severance costs in connection with the
implementation of hospital cost control
programs, general overhead reduction
plans and closure of home health
agencies............................... 19 (4) -- 15
Lease cancelation and other exit costs...... 46 (2) -- 44
Accruals for unfavorable lease commitments
at six medical offices buildings....... 20 (1) -- 19
1997 merger................................. 8 (1) -- 7
Termination of physician contracts.......... 6 -- -- 6
--------------- ------------- ---------- -----------------
Total.................................. $ 129 $ (11) $ -- $ 118
=============== ============== =========== ==================
</TABLE>
(1) The above liability balances are included in other current liabilities and
other long-term liabilities in the accompanying consolidated balance
sheets.
(2) Other items primarily include write-offs or write-downs of long-lived
assets, including property and equipment, goodwill and other assets.
Cash payments to be applied against these accruals are expected to approximate
$100 million in the remainder of fiscal 2000 and $18 million thereafter. There
were no merger, impairment or restructuring charges in the three months ended
August 31, 1999.
9
<PAGE>
TENET HEALTHCARE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONT.)
7. The following is a reconciliation of the numerators and the denominators of
the Company's basic and diluted earnings per share computations before the
cumulative effect of an accounting change for the three months ended August
31, 1998 and 1999. Income is expressed in millions and weighted average
shares are expressed in thousands:
<TABLE>
<CAPTION>
1998 1999
-------------------------------------- --------------------------------------
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>
Basic earnings per share:
Income available to common
shareholders................ $ 137 309,403 $ 0.44 $ 128 311,152 $ 0.41
========== =========
Effect of dilutive stock
options and warrants........ -- 4,262 -- 2,072
----------- ------------- ------------ -------------
Diluted earnings per share:
Income available to common
shareholders................ $ 137 313,665 $ 0.44 $ 128 313,224 $ 0.41
=========== ============= ========== ============ ============= =========
</TABLE>
Outstanding options to purchase 7,804,359 and 23,121,496 shares of common
stock were not included in the computation of earnings per share for the
three-month periods ended August 31, 1998 and 1999, respectively, because
the options' exercise prices were greater than the average market price of
the common stock during the quarter.
8. The following table sets forth the tax effects allocated to each component
of other comprehensive income for the three months ended August 31, 1998
and 1999:
<TABLE>
<CAPTION>
1998 1999
--------------------------------------- --------------------------------------
BEFORE- TAX NET-OF- BEFORE- TAX NET-OF-
TAX (EXPENSE) TAX TAX (EXPENSE) TAX
AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT
----------- ---------- ---------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Foreign currency translation
adjustment $ 7 $ (2) $ 5 $ 2 $ (1) $ 1
Unrealized holding gains (losses)
on securities (71) 27 (44) (55) 21 (34)
----------- ---------- ---------- ---------- ---------- ----------
Other comprehensive income (loss) $ (64) $ 25 $ (39) $ (53) $ 20 $ (33)
=========== ========== ========== ========== ========== ==========
</TABLE>
The following table sets forth the accumulated other comprehensive income
balances, by component, as of August 31, 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 $ -- $ 50 $ 50 $ -- $ 77 $ 77
Current-period change 5 (44) (39) 1 (34) (33)
----------- ---------- -------------- ---------- ----------- --------------
Ending balance $ 5 $ 6 $ 11 $ 1 $ 43 $ 44
=========== ========== ============== ========== =========== ==============
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The health care industry continues to undergo tremendous change, driven
primarily by (1) cost-containment pressures by government payors, managed care
providers and others, (2) technological advances that require increased capital
expenditures, and (3) 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
health care delivery systems.
Income before income taxes and cumulative effect of accounting change was
$222 million in the quarter ended August 31, 1998 and $209 million in the
quarter ended August 31, 1999.
Results of operations for the quarter ended August 31, 1999 include the
operations of 11 general hospitals acquired after the end of the prior-year
quarter and exclude the operations of two general hospitals sold and 29 home
health agencies that were closed since then. The following is a summary of
consolidated operations for the three months ended August 31, 1998 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
----------------------------------------------------------------------------
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
(DOLLARS IN MILLIONS) (% OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C>
Net operating revenues:
Domestic general hospitals............. $ 2,285 $ 2,667 89.5% 92.8%
Other domestic operations ............. 268 206 10.5% 7.2%
--------------- --------------- --------------- ---------------
Net operating revenues...................... 2,553 2,873 100.0% 100.0%
--------------- --------------- --------------- ---------------
Operating expenses:
Salaries and benefits.................. (1,018) (1,161) 39.9% 40.4%
Supplies............................... (350) (407) 13.7% 14.2%
Provision for doubtful accounts........ (159) (223) 6.2% 7.8%
Other operating expenses............... (561) (625) 22.0% 21.7%
Depreciation........................... (96) (102) 3.8% 3.6%
Amortization........................... (31) (32) 1.2% 1.1%
--------------- --------------- --------------- ---------------
Operating income............................ $ 338 $ 323 13.2% 11.2%
=============== =============== =============== ===============
</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) health care 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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
The table below sets forth certain selected historical operating statistics
for the Company's domestic general hospitals:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
------------------------------------------
INCREASE
1998 1999 (DECREASE)
----------- ----------- --------------
<S> <C> <C> <C>
Number of hospitals (at end of period)............ 121 130 9 *
Licensed beds (at end of period).................. 28,126 30,731 9.3%
Net inpatient revenues (in millions).............. $ 1,474 $ 1,703 15.5%
Net outpatient revenues (in millions)............. $ 786 $ 902 14.8%
Admissions........................................ 219,167 239,378 9.2%
Equivalent admissions............................. 322,799 353,711 9.6%
Average length of stay (days)..................... 5.1 5.1 --
Patient days...................................... 1,113,315 1,223,438 9.9%
Equivalent patient days........................... 1,624,041 1,787,716 10.1%
Net inpatient revenue per patient day............. $ 1,324 $ 1,392 5.1%
Net inpatient revenue per admission............... $ 6,725 $ 7,114 5.8%
Utilization of licensed beds...................... 43.1% 43.3% 0.2%*
Outpatient visits................................. 2,420,628 2,468,827 2.0%
</TABLE>
* The change is the difference between 1998 and 1999 amounts shown.
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals on a same-store basis:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
---------------------------------------
INCREASE
1998 1999 (DECREASE)
----------- ----------- -----------
<S> <C> <C> <C>
Average licensed beds............................. 26,004 25,829 (0.7)%
Patient days...................................... 1,082,018 1,085,066 0.3%
Net inpatient revenue per patient day............. $ 1,331 $ 1,390 4.4%
Admissions........................................ 213,091 214,274 0.6%
Net inpatient revenue per admission............... $ 6,758 $ 7,041 4.2%
Outpatient visits................................. 2,358,479 2,198,254 (6.8)%
Average length of stay (days)..................... 5.1 5.1 --
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
The table below sets forth the sources of net patient revenues for the
Company's domestic general hospitals for the three-month periods ended August
31, 1998 and 1999, expressed as percentages of net patient revenues from all
sources:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
---------------------------------------------
INCREASE
1998 1999 (DECREASE) *
----------- ----------- -------------
<S> <C> <C> <C>
Medicare ............................................................... 35.3% 32.6% (2.7)%
Medicaid ............................................................... 9.0% 8.0% (1.0)%
Managed care ........................................................... 35.8% 37.2% 1.4%
Indemnity and other .................................................... 19.9% 22.2% 2.3%
</TABLE>
* The change is the difference between the 1998 and 1999 amounts shown.
Changes in Medicare payments mandated by the Balanced Budget Act of 1997
(the "BBA"), which became effective October 1, 1997, as well as certain proposed
changes to various states' Medicaid programs, have reduced and will continue to
reduce revenues and earnings significantly as these changes are phased in over
the next two years. The most significant changes were phased in by October 1,
1998.
The Company continues to experience increases in inpatient acuity and
intensity of services as less intensive services shift from an inpatient to an
outpatient basis or to alternative health care delivery services because of
technological and pharmaceutical improvements and continued pressures by payors
to reduce admissions and lengths of stay. In spite of the historical shifts from
inpatient to outpatient services, the Company experienced a 6.8% decline on a
same-store basis in the number of outpatient visits during the quarter ended
August 31, 1999 compared to the year-ago quarter. Due to hospital acquisitions
during the last half of the prior fiscal year, total store outpatient visits
increased by 2.0%. The primary reason for the decline in visits on a same-store
basis was the consolidation or closure of the majority of its home health
agencies, in response to the changes in Medicare payments to home health
agencies mandated by the BBA.
Pressures to control health care costs and a shift from traditional
Medicare to Medicare managed care plans after the BBA was enacted have resulted
in an increase in the number of patients whose health care coverage is provided
under managed care plans. The Company generally receives lower payments per
patient from managed care payors than it does from traditional indemnity
insurers. However, one of the most significant trends in the three-month period
ended August 31, 1999 was the improvement in net revenue per admission. On a
total store basis, this statistic increased 5.8% and, on a same-store basis, it
increased by 4.2%, the largest quarterly increases in recent years. While
increases in any quarter will vary, there now appears to be an upward trend that
the Company expects will continue. The pricing environment for managed care and
other non-government payors has improved and the Company expects continuing
benefits as it renegotiates and renews contracts with improved terms and, also,
as it continues to terminate capitated arrangements with managed care payors and
employers. In most of the large markets served by the Company, capitation
arrangements generally have been disappointing to both physicians and hospitals.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
To address all the changes impacting the health care industry, while
continuing to provide quality care to patients, the Company has implemented
strategies to reduce inefficiencies, create synergies, obtain additional
business and control costs. In the past 12 months, such strategies have included
hospital cost-control programs and overhead reduction plans and the formation
and enhancement of integrated health care delivery systems. In certain markets,
for example, the Company has outsourced services such as housekeeping, laundry,
dietary and plant maintenance. In each case it has achieved significant cost
savings and is now applying this strategy to its other hospitals, the benefits
of which are expected to occur in the second half of this fiscal year. Further
consolidations and implementation of additional cost-control programs and other
operating efficiencies may be undertaken in the future.
Net operating revenues from the Company's other domestic operations were
$268 million for the three months ended August 31, 1998, compared to $206
million for the current quarter. The decrease is primarily the result of sales
or closures of six nonacute facilities that occurred after the first quarter of
fiscal 1999 and a decrease in physician practice revenues compared to the prior
year quarter.
The Company has employed or entered into management agreements with
physicians in most of its markets. These agreements generally, however, have not
been profitable for the Company. The Company is in the process of reevaluating
its physician contract strategy and is developing plans to either terminate or
allow a significant number of it existing contracts to expire over the next two
or three years. The Company may incur significant charges as these plans are
executed. Such charges might require significant cash outlays as contract
settlements with physicians and physician groups are executed. The future
benefits of such a strategy could be significant, but would not likely occur
until fiscal 2001 and beyond.
Salaries and benefits expense as a percentage of net operating revenues was
39.9% in the quarter ended August 31, 1998 and 40.4% in the current quarter.
This increase is primarily the result of the acquisition of hospitals following
the end of the year ago quarter, partially offset by continuing cost control
measures and the outsourcing of certain hospital services.
Supplies expense as a percentage of net operating revenues was 13.7% in the
quarter ended August 31, 1998 and 14.2% in the current quarter. The increase
primarily was due to greater patient acuity, higher supplies expenses at
recently acquired facilities and higher prices for new products. The Company
continues to focus on reducing supplies expense by developing and expanding
programs designed to improve the purchasing and utilization of supplies.
The provision for doubtful accounts as a percentage of net operating
revenues was 7.8% in the current quarter. It was 6.2% for the quarter ended
August 31, 1998. 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, (c) delays in payment and denial of claims
by managed care payors, and (d) improved pricing. 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
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
taking a series of actions to mitigate these recent increases in bad debt
expense, including the creation of a 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 business office
operations, including admitting, medical records and coding, and the
recruitment, training and compensation of business office staff. In certain
markets, the Company is setting up dedicated managed care collection units to
focus on problem accounts and payors and the highly complex claim payment terms
in managed care contracts. In addition, the Company has recently resorted to
arbitration and litigation in its efforts to settle long-outstanding past due
accounts with certain managed care companies.
Other operating expenses as a percentage of net operating revenues were
22.0% for the quarter ended August 31, 1998 and 21.7% for the quarter ended
August 31, 1999. The decline is due to improved cost controls.
Depreciation and amortization expense as a percentage of net operating
revenues was 5.0% in the quarter ended August 31, 1998, and 4.7% in the current
quarter. The impact of the impairment charges recorded at May 31, 1999 and the
suspension of depreciation and amortization on assets held for sale accounts for
most of the decline.
Interest expense, net of capitalized interest, was $119 million in the
quarter ended August 31, 1998 and $124 million in the current quarter. The
increase is primarily due to increased borrowings for acquisitions and working
capital increases, offset by the effect of interest rate reductions during these
periods.
Taxes on income as a percentage of income before income taxes were 38.3%
for the three months ended August 31, 1998 and 38.8% in the current quarter,
which is in line with the Company's expectations for fiscal 2000.
In April 1999, the Company, as part of the strategic initiatives noted
above to improve operations, announced a plan to sell approximately 20 hospitals
that do not fit the Company's strategic profile. The Company sold four of these
hospitals in September 1999 for $177 million in cash and has reached a
definitive agreement with another buyer to sell ten more. This transaction is
expected to close before November 30, 1999. The cash proceeds from sales of
these 14 hospitals will be used to reduce long-term debt. Discussions are
continuing with various other parties to sell the other six hospitals before May
31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the three months ended August 31, 1999 was
derived primarily from the proceeds of borrowings under its unsecured revolving
bank credit agreement (the "Credit Agreement") and net cash provided by
operating activities. Net cash provided by operating activities for the three
months ended August 31, 1998 was $49 million before net expenditures of $8
million for discontinued operations, merger, impairment and other unusual
charges. Net cash provided by operating activities for the three months ended
August 31, 1999 was $30 million before $18 million in expenditures for such
charges.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
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. The Company expects
to refinance the Credit Agreement on or before its January 31, 2002 maturity
date.
Proceeds from net borrowings under the Credit Agreement were $135 million
during the three months ended August 31, 1999 compared to $173 million in the
prior-year period. Payments of other long-term debt in the August 31, 1999
quarter were $5 million.
Cash payments for property and equipment were $138 million in the three
months ended August 31, 1999, compared to $107 million in the corresponding
prior year three-month period. The Company expects to spend approximately $400 -
$500 million annually on capital expenditures, before any significant
acquisitions of facilities and other health care operations and before an
estimated $178 million in remaining commitments to fund the construction of two
new hospitals over the next two years. Such capital expenditures primarily
relate to the development of integrated health care 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.
The Company's strategy continues to include the prudent development of
integrated health care delivery systems, including the possible acquisition of
general hospitals and related ancillary health care businesses or joining with
others to develop integrated health care delivery networks. In addition, as
previously discussed herein, the Company is reevaluating its employment and
management relationships with physicians. All or portions of these activities
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 $557 million as of September 30, 1999.
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.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
THE YEAR 2000 ISSUE
The Company is continuing its six-phase Year 2000 compliance program. The
first phase of the program, conducting an inventory of systems and programs that
may be affected by the Year 2000 issue, the second phase, assessment of how the
Year 2000 issue may affect each piece of equipment and system and the third
phase, planning corrections of any problems discovered, have been completed for
both its information technology systems ("IT Systems") and for its non-IT
Systems such as bio-medical equipment ("Non-IT Items"). Phases four through six
(executing the plans developed, testing the corrections and implementing the
corrections across all of the Company's systems and programs) are substantially
complete except for the 12 general hospitals and related operations that were
acquired in fiscal year 1999, for which these phases should be substantially
completed by October 31, 1999, and for those hospitals in the process of being
sold, with respect to which remediation is being conducted in accordance with
the terms of each sales agreement.
The Company estimates that its total cost for addressing all Year 2000
issues will be less than $100 million, substantially all of which has been or
will be accounted for as capital expenditures. The Company has incurred costs in
connection with its Year 2000 compliance program of approximately $80 million
through September 30, 1999. This amount and the estimated total cost do not
include internal salaries and other internal costs of the Year 2000 compliance
program. The Company cautions that its estimate is based on the information
available to the Company at this time. As the Company finalizes its evaluation
of its Year 2000 issues, its estimate of the costs it may incur may change.
Although the total cost of the Company's Year 2000 compliance program is
presently not expected to have a material adverse effect on its operations,
liquidity or financial condition, many factors, such as the number of pieces of
equipment and systems with Year 2000 issues and the cost of replacing equipment
or systems that cannot be brought into compliance or with respect to which it is
more cost-effective in the long run to replace or take out of service, are not
fully known at this time and could have an aggregate material impact on the
Company's estimate.
The Company is continuing to develop contingency plans to address any Year
2000 issues that may arise. Since any piece of equipment that is not Year 2000
compliant will be made compliant, replaced or taken out of service, the Company
does not expect the Year 2000 issue 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 addressing 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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
The Securities and Exchange Commission's recent guidance for Year 2000
disclosure also calls on companies to describe their most likely worst case Year
2000 scenarios. While one can imagine a scenario in which medical equipment
fails as a result of a Year 2000 problem, which could lead to serious injury or
death, the Company does not believe that such a scenario is likely to occur. As
noted above, since any piece of equipment that is not Year 2000 compliant will
be made compliant, replaced or taken out of service, the Company does not expect
the Year 2000 issues to have an adverse impact on patient care. Furthermore,
there will be a back-up plan for each piece of critical equipment in case it
unexpectedly fails. The most likely worst case scenario is that the Company will
have to replace or take out of service some of its existing equipment and add
additional staff and/or reassign existing staff during the time period leading
up to and immediately following December 31, 1999, in order to address any Year
2000 issues that unexpectedly arise.
BUSINESS OUTLOOK
The general hospital industry in the United States and the Company's
general hospitals continue to have significant unused capacity, and thus there
is substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care 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 ongoing challenge facing the Company and the health care industry as a
whole is to continue to provide quality patient care in an environment of rising
costs, strong competition for patients and a general reduction of payment rates
by government and other payors. Because of national, state and private industry
efforts to reform health care delivery and payment systems, the health care
industry as a whole faces increased uncertainty. The Company is unable to
predict whether any other health care legislation at the federal and/or state
level will be passed in the future and what action it may take in response to
such legislation, but it continues to monitor all proposed legislation and
analyze its potential impact in order to formulate its future business
strategies.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words believes,
anticipates, expects, will, may, might, should, estimates, appears, and words of
similar import, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are based on management's current expectations and involve known and
unknown risks, uncertainties and other factors, many of which the Company is
unable to predict or control, that may cause the actual results, performance or
achievements of the Company or industry results to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions, both nationally and in the regions in
which the Company operates; industry capacity; demographic changes; existing
laws and government regulations and changes in, or the failure to comply with,
laws and governmental regulations; legislative proposals for health
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
care reform; the ability to enter into managed care provider arrangements on
acceptable terms; a shift from fee-for-service payment to capitated and other
risk-based payment systems; changes in Medicare and Medicaid reimbursement
levels; liability and other claims asserted against the Company; competition;
the loss of any significant customers; technological and pharmaceutical
improvements that increase the cost of providing, or reduce the demand for,
health care; changes in business strategy or development plans; the ability to
attract and retain qualified personnel, including physicians; the significant
indebtedness of the Company; the availability and terms of capital to fund the
expansion of the Company's business, including the acquisition of additional
facilities; and the impact of the Year 2000 issues. Given these uncertainties,
prospective investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Material Developments in Previously Reported Legal Proceedings:
In the most recent quarter the Company successfully defended two cases
involving five plaintiffs in Texas. These cases arose from the previously
reported litigation involving the Company's discontinued psychiatric
business. The Company believes that these victories as well as previous
defense verdicts support its strategy to continue to vigorously defend
against this type of litigation.
Items 2, 3,4 and 5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
(10)ii Third Amended and Restated 1995 Employee Stock
Purchase Plan (incorporated by reference to Appendix
A to Proxy Statement dated August 27, 1999, for the
Registrant's 1999 Annual Meeting of Shareholders).
(27.1) Financial Data Schedule for the three months ended
August 31, 1999 (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 August 24,
1999.
20
<PAGE>
PART II. OTHER INFORMATION (CONT.)
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: October 15, 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)
21
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