SELECTED SUPPLEMENTAL FINANCIAL INFORMATION
On January 30, 1997, Tenet Healthcare Corporation ("Tenet" or the
"Company") acquired OrNda HealthCorp ("OrNda"), a provider of healthcare
services operating general acute care hospitals, surgery centers, outpatient
and specialty clinics, a psychiatric hospital and a managed healthcare
Medicaid plan, when a subsidiary of the Company was merged into OrNda (the
"Merger"), leaving OrNda and all of its subsidiaries as wholly-owned
subsidiaries of the Company. In connection with the Merger, the Company
issued 81,439,910 shares of its common stock in a tax-free exchange for all
of OrNda's outstanding common stock. The Merger has been accounted for as a
pooling-of-interests and, accordingly, the supplemental consolidated
financial statements and all statistical data shown herein prior to the
combination have been restated to include the accounts and results of
operations of OrNda for all periods presented.
The following tables set forth selected supplemental consolidated financial
information for Tenet and its subsidiaries (collectively, "Tenet" or the
"Company") for each of the fiscal years in the five-year period ended May 31,
1996, giving retroactive effect to the acquisition of OrNda as if it had been in
effect for all periods presented. The information for each of the five fiscal
years has been derived from the consolidated financial statements of Tenet and
OrNda, which have been audited by KPMG Peat Marwick LLP, independent auditors
for Tenet, and by Ernst & Young LLP, independent auditors for OrNda,
respectively, and from the underlying accounting records of Tenet and OrNda. The
report of KPMG Peat Marwick LLP covering the consolidated financial statements
of Tenet refers to a change in the method of accounting for income taxes in
1994.
Tenet reports its financial information on the basis of a May 31 fiscal
year. OrNda reported its financial information on the basis of an August 31
fiscal year. The statement of operations data in the following table reflects
the combination of the operating results of Tenet for the years ended May 31,
1992 through 1996 with the operating results of OrNda for the years ended August
31, 1992 through 1996, respectively.
All information in the following tables should be read in conjunction with
"Management's Discussion and Analysis of Supplemental Financial Condition and
Results of Operations" and with the supplemental consolidated financial
statements and related notes included herein. Certain amounts derived from the
consolidated statements of operations have been reclassified to conform with the
presentation below.
YEAR ENDED MAY 31,
--------------------------------------------------------
1992 1993 (2) 1994 1995 (3) 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA(1)(4)
Net operating revenues . . . . . . . . . . . $3,742.8 $4,140.0 $4,217.6 $5,161.1 $7,705.7
1
Operating expenses:
Salaries and benefits . . . . . . . . . . . 1,721.8 1,907.8 1,867.6 2,169.9 3,129.7
Supplies. . . . . . . . . . . . . . . . . . 420.4 461.7 498.3 667.7 1,055.8
Provision for doubtful accounts . . . . . . 175.5 178.5 193.2 259.7 431.5
Other operating expenses. . . . . . . . . . 795.5 899.4 942.1 1,178.4 1,646.1
Depreciation. . . . . . . . . . . . . . . . 158.0 185.1 199.1 232.3 318.8
Amortization. . . . . . . . . . . . . . . . 22.8 23.0 25.2 43.8 99.7
Restructuring charges (5) . . . . . . . . . 30.9 51.6 79.5 36.9 -
Impairment losses (6) . . . . . . . . . . . - - - - 85.9
Merger-related expenses (7) . . . . . . . . - - 30.0 - -
--------- --------- --------- --------- ---------
Operating income . . . . . . . . . . . . . . 417.9 432.9 382.6 572.4 938.2
Interest expense, net of capitalized
portion . . . . . . . . . . . . . . . . . . (129.6) (144.0) (156.7) (251.3) (424.7)
Investment earnings. . . . . . . . . . . . . 31.9 24.5 30.6 32.1 26.7
Equity in earnings of unconsolidated
affiliates. . . . . . . . . . . . . . . . . (1.5) 12.7 27.4 42.4 24.5
Minority interest expense. . . . . . . . . . (14.4) (14.6) (12.2) (9.6) (29.8)
Net gain on disposals of facilities and
long-term investments (8) . . . . . . . . . (13.9) 121.8 42.2 30.5 346.2
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes . . . . . . . . . . . . 290.4 433.3 313.9 416.5 881.1
Taxes on income. . . . . . . . . . . . . . . (142.3) (156.1) (145.0) (150.8) (382.9)
--------- --------- --------- --------- ---------
Income from continuing operations. . . . . . $148.1 $277.2 $168.9 $265.7 $498.2
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per common share from
continuing operations, fully diluted. . . . $0.68 $1.24 $0.75 $1.08 $1.70
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cash dividends per common share. . . . . . . $0.46 $0.48 $0.12 - -
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
AS OF MAY 31,
--------------------------------------------------------
1992 1993 (2) 1994 1995 (3) 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
Working capital (deficit). . . . . . . . . . $270.6 $182.1 $(189.5) $272.6 $498.7
Total assets . . . . . . . . . . . . . . . . 5,230.8 5,378.5 5,543.5 9,787.4 10,767.6
Long-term debt, excluding current
portion . . . . . . . . . . . . . . . . . . 1,637.2 1,597.8 1,290.2 4,286.8 4,421.0
Shareholders equity. . . . . . . . . . . . . 1,859.9 1,964.2 1,648.0 2,379.0 3,276.7
2
(1) Results of operations for all periods presented exclude Tenet's former
psychiatric division which was discontinued as of November 30, 1993, but
include, through the dates of their divestitures, other divested businesses
that were not classified as discontinued operations.
(2) Results of operations for periods prior to April 1993 include, on a
consolidated basis, the results of Westminster Health Care Holdings PLC
("Westminster"), the ownership of which was reduced from approximately 90%
to 42% in April 1993 through a public offering of Westminster common stock.
(3) On March 1, 1995, Tenet acquired, in a transaction accounted for as a
purchase, all the outstanding common stock of American Medical Holdings,
Inc. (Together with its subsidiaries,"AMH") for $1.5 billion in cash and
33.2 million shares of Tenet's common stock valued at approximately $488.0
million (the "AMH Merger").
(4) Results of operations for the periods presented include the results,
through the respective dates of sale, of (i) the fiscal 1994 sale of 29
inpatient rehabilitation hospitals and 45 related satellite outpatient
clinics; (ii) the fiscal 1994 sale to The Hillhaven Corporation of 23 long-
term care facilities;(iii) the August 1994 sale of an approximately 75%
interest in Total Renal Care Holdings, Inc. ("TRC"); (iv) the June 1995
sale of two hospitals and related healthcare businesses in Singapore; (v)
the October 1995 sales of its interest in Australian Medical Enterprises
("AME") and its equity interest in a hospital in Malaysia; (vi) the
February 1996 sale of its equity interest in a hospital in Thailand and
(vii) the May 1996 sale of its equity interest in Westminster.
(5) The restructuring charges for fiscal 1992 and fiscal 1993 relate primarily
to the combination of Tenet's rehabilitation hospital division into its
general hospital division, employee severance and relocation expenses
related to relocating OrNda's corporate offices from Dallas, Texas to
Nashville, Tennessee, special executive compensation related to the
employment of OrNda's former Chairman, President and Chief Executive
Officer, a corporate overhead reduction program begun in April 1993 and
severance costs incurred in connection with a change in senior executive
management. The restructuring charges for fiscal 1994 relate primarily to
severance payments and outplacement services for involuntary terminations
of former employees and other related costs in connection with Tenet's
relocation of substantially all of its hospital support activities
previously located in southern California and Florida to new offices in
Dallas, Texas following the AMH merger.
(6) The impairment losses for fiscal 1996 relate to three rehabilitation
hospitals, four general hospitals and a parcel of undeveloped land.
(7) Merger-related expenses for fiscal 1994 relate to the April 1994 merger of
American Healthcare Management, Inc. ("American Healthcare") with OrNda.
(8) The net after-tax effect of the gains from disposals of facilities and
long-term investments was $181.1 million or $0.61 per share, fully diluted,
for the year ended May 31, 1996.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF SUPPLEMENTAL FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On January 30, 1997, the Company acquired OrNda, a provider of healthcare
services operating general acute care hospitals, surgery centers, outpatient and
specialty clinics, a psychiatric hospital and a managed healthcare Medicaid
plan, when a subsidiary of the Company was merged into OrNda, leaving OrNda and
all of its subsidiaries as wholly-owned subsidiaries of the Company. In
connection with the Merger, the Company issued 81,439,910 shares of its common
stock in a tax-free exchange for all of OrNda's outstanding common stock. The
Merger has been accounted for as a pooling-of-interests combination and,
accordingly, the consolidated financial statements and all statistical data
shown herein prior to the combination have been restated to include the accounts
and results of operations of OrNda for all periods presented.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation. The
supplemental financial statements included herein do not extend through the date
of consummation, however, they will become the historical consolidated financial
statements of the corporation after financial statements covering the date of
consummation of the business combination are issued.
The supplemental consolidated financial statements reflect the combination
of the historical consolidated balance sheets of Tenet as of May 31, 1995 and
1996 with the historical consolidated balance sheets of OrNda as of August 31,
1995 and 1996 and the related historical consolidated statements of operations,
changes in shareholders' equity, and cash flows of Tenet for the years ended May
31, 1994, 1995 and 1996 with the historical consolidated statements of
operations, changes in shareholders' equity and cash flows of OrNda for the
years ended August 31, 1994, 1995 and 1996.
IMPACT OF THE ORNDA MERGER
Tenet's subsidiaries operated 77 general hospitals and OrNda's subsidiaries
operated 50 general hospitals at January 30, 1997. Management believes that
joining together Tenet's general hospitals and related healthcare operations
with OrNda's general hospitals and related healthcare operations will create a
stronger more geographically diverse company that will be better able to compete
in certain key geographic areas, such as south Florida and southern California,
and to grow through strategic acquisitions and partnerships. The healthcare
industry has undergone, and continues to undergo, tremendous change, including
cost-containment pressures by government payors, managed care providers and
others, as well as technological advances that require increased capital
expenditures. The combined company will continue to emphasize the creation of
strong integrated healthcare delivery systems. The Merger is expected to enable
the combined company to realize certain cost savings. No assurances can be made
as to the amount of cost
4
savings, if any, that actually will be recognized.
THE AMERICAN MEDICAL HOLDINGS MERGER
On March 1, 1995, in a transaction accounted for as a purchase, the Company
acquired AMH for $1.5 billion in cash and 33.2 million shares of the Company's
common stock valued at $488 million. In connection with the acquisition, the
Company also repaid $1.8 billion of debt. The acquisition and debt retirements
were financed by borrowings under the Company's February 28, 1995 credit
agreement (described below) and the public issuance of $1.2 billion in new debt
securities.
Prior to the AMH Merger, Tenet and OrNda operated 78 domestic general
hospitals with 14,603 licensed beds in 15 states and a small number of skilled
nursing facilities, rehabilitation hospitals and psychiatric hospitals located
on or near general hospital campuses. With the AMH Merger, the Company acquired
37 domestic general hospitals with 8,831 beds, bringing its domestic general
hospital complement at that time to 115 hospitals with 23,436 licensed beds in
thirteen states. The acquisition also included ancillary facilities at or nearby
many of AMH' hospitals, including outpatient surgery centers, rehabilitation
units, long-term-care facilities, a psychiatric hospital, home healthcare
programs and ambulatory, occupational and rural healthcare clinics.
Management believes that the AMH transaction strengthened the Company in
its existing markets and enhanced its ability to deliver quality, cost-effective
healthcare services in new markets. The consolidation of Tenet and AMH has
resulted in certain cost savings, estimated to be at least $60 million in the
fiscal year ended May 31, 1996. These savings are before any severance or other
costs of implementing certain efficiencies and have been realized through (i)
elimination of duplicate corporate overhead expenses, (ii) reduced supplies
expense through the incorporation of the acquired facilities into the Company's
existing group-purchasing program, (iii) achievement of lower information
system costs through consolidation and outsourcing and (iv) improved collection
of the acquired AMH facilities' accounts receivable.
RESULTS OF OPERATIONS
Income from continuing operations before income taxes was $313.9 million in
1994, $416.5 million in 1995 and $881.1 million in 1996. The most significant
transactions affecting the results of continuing operations were (i) the
acquisition of AMH, (ii) the acquisition of American Healthcare, (iii) the
acquisition of Summit Health Ltd ("Summit"), (iv) the financing of the AMH
acquisition, which added more than $250 million annually in interest expense and
(v) a series of other acquisitions and divestitures during fiscal 1994, 1995 and
1996 (see Note 3 to Notes to Supplemental Consolidated Financial Statements
herein).
5
Fiscal 1994 includes the sale of all but six of the Company's
rehabilitation hospitals and related outpatient clinics and the sale to
Hillhaven of all but seven of the Company's long-term-care facilities, all of
which had been leased to Hillhaven. Fiscal 1994 also includes the sale of four
facilities, which resulted in a loss of $45.3 million. Fiscal 1995 includes the
sale of a 75% interest in TRC. Fiscal 1996 includes the sales of the Company's
interests in its hospitals and related healthcare businesses in Singapore,
Australia, Malaysia and Thailand, its interest in Westminster, the sale of the
Company's investment in preferred stock of Hillhaven, and the exchange of its
interest in the common stock of Hillhaven for 8,301,067 shares of common stock
of Vencor. These transactions and other unusual pretax items relating to
impairment losses and restructuring charges are shown below:
1994 1995 1996
---------- ---------- ----------
(IN MILLIONS)
Gain (loss) on sales of facilities and long-term investments. . . . . $ 25.2 $ (1.5) $ 328.9
Gains on sales of subsidiary's common stock . . . . . . . . . . . . . 17.0 32.0 17.3
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . (79.5) (36.9) -
Impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . - - (85.9)
Merger-related expenses . . . . . . . . . . . . . . . . . . . . . . . (30.0) - -
---------- ---------- ----------
Net unusual pretax items (after tax-$(0.18), fully diluted per
share in 1994, ($0.02) in 1995 and $0.43 in 1996) . . . . . . . . . $ (67.3) $ (6.4) $ 260.3
---------- ---------- ----------
---------- ---------- ----------
Income from continuing operations before income taxes, excluding the
unusual items in the table above, was $381.2 million in 1994, $422.9 million in
1995 and $620.8 million in 1996 and fully-diluted earnings per share from
continuing operations was $0.93, $1.10 and $1.27, respectively.
The following is a summary of continuing operations for the past three
fiscal years:
1994 1995 1996 1994 1995 1996
----------- ----------- ----------- ------- ------- -------
(PERCENTAGE OF
(DOLLARS IN MILLIONS) NET OPERATING REVENUES)
Net operating revenues:
Domestic general hospitals . . . . . . $ 3,407.6 $ 4,620.1 $ 7,279.7 80.8% 89.5% 94.5%
Other domestic operations (1). . . . . 275.0 310.0 375.0 6.5% 6.1% 4.8%
International operations . . . . . . . 175.0 214.0 51.0 4.2% 4.1% 0.7%
Divested operations (2). . . . . . . . 360.0 17.0 - 8.5% 0.3% 0.0%
----------- ----------- ----------- ------- ------- -------
4,217.6 5,161.1 7,705.7 100.0% 100.0% 100.0%
----------- ----------- ----------- ------- ------- -------
----------- ----------- ----------- ------- ------- -------
Operating expenses:
Salaries and benefits. . . . . . . . . (1,867.6) (2,169.9) (3,129.7) 44.3% 42.1% 40.6%
Supplies . . . . . . . . . . . . . . . (498.3) (667.7) (1,055.8) 11.8% 12.9% 13.7%
6
Provision for doubtful
accounts . . . . . . . . . . . . . . (193.2) (259.7) (431.5) 4.6% 5.0% 5.6%
Other operating expenses . . . . . . . (942.1) (1,178.4) (1,646.1) 22.3% 22.8% 21.4%
Depreciation . . . . . . . . . . . . . (199.1) (232.3) (318.8) 4.7% 4.5% 4.1%
Amortization . . . . . . . . . . . . . (25.2) (43.8) (99.7) 0.6% 0.9% 1.3%
Restructuring charges. . . . . . . . . (79.5) (36.9) - 1.9% 0.7% 0.0%
Impairment losses. . . . . . . . . . . - - (85.9) 0.0% 0.0% 1.1%
Merger charges . . . . . . . . . . . . (30.0) - - 0.7% 0.0% 0.0%
----------- ----------- ----------- ------- ------- -------
Operating income . . . . . . . . . . . . $ 382.6 $ 572.4 $ 938.2 9.1% 11.1% 12.2%
----------- ----------- ----------- ------- ------- -------
----------- ----------- ----------- ------- ------- -------
- -----------
(1) Net operating revenues of other domestic operations consist primarily of
revenues from (i) the Company's rehabilitation hospitals, long-term-care
facilities and psychiatric hospitals which have not been divested; (ii)
healthcare joint ventures operated by the Company; (iii) subsidiaries of the
Company offering health maintenance organizations, preferred provider
organizations and indemnity products; and (iv) revenues earned by the Company in
consideration of the guarantees of certain indebtedness and leases of Vencor and
other third parties.
(2) Net operating revenues of divested operations consist of revenues from (i)
TRC prior to the August 1994 sale of the Company's approximately 75% equity
interest; (ii) 29 rehabilitation hospitals and 45 related satellite outpatient
clinics prior to their sales to HealthSouth in January and March of 1994; and
(iii) lease income from long-term care facilities prior to their sales to
Hillhaven in fiscal 1994.
Net operating revenues were $4.2 billion in 1994, $5.2 billion in 1995 and
$7.7 billion in 1996. Fiscal 1996 includes revenues attributable to facilities
acquired in the AMH and Summit acquisitions for the entire fiscal year. Fiscal
1995 includes three months of revenues attributable to the facilities acquired
in the AMH Merger. The American Healthcare merger was accounted for as a
pooling-of-interests and, accordingly, the operations have been combined with
the Company for all periods presented herein.
Operating income before impairment losses, restructuring charges and
merger-related expenses increased 68.1% to $1,024.1 million in 1996 from $609.3
million in 1995 and $492.1 million in 1994. The operating margin on this basis
increased to 13.3% from 11.8% in 1995 and 11.7% in 1994. The increase in the
operating margin is due primarily to effective cost-control programs in the
hospitals and the implementation of overhead reduction plans.
The table below sets forth certain selected historical operating statistics
for the Company's domestic general hospitals and one psychiatric hospital:
INCREASE
(DECREASE)
1995 TO
1994 1995 1996 1996
----------- ----------- ----------- ----------
Number of hospitals (at end of period) . . . 81 116 124 8
7
Licensed beds (at end of period) . . . . . . 14,898 23,691 26,351 11.2%
Net inpatient revenues (in millions) . . . . $2,380.2 $3,050.8 $4,739.6 55.4%
Net outpatient revenues (in millions). . . . $946.5 $1,401.6 $2,278.0 62.5%
Admissions . . . . . . . . . . . . . . . . . 386,953 472,072 725,270 53.6%
Equivalent admissions. . . . . . . . . . . . 517,876 645,417 1,036,330 60.6%
Average length of stay (days). . . . . . . . 5.2 5.5 5.4 (0.1)
Patient days . . . . . . . . . . . . . . . . 2,025,968 2,584,647 3,897,483 50.8%
Equivalent patient days. . . . . . . . . . . 2,695,294 3,509,578 5,528,387 57.5%
Net inpatient revenues per patient day . . . $1,175 $1,180 $1,216 3.1%
Net inpatient revenues per admission . . . . $6,151 $6,463 $6,535 1.1%
Utilization of licensed beds . . . . . . . . 40.9% 41.6% 42.7% 1.1%*
Outpatient visits. . . . . . . . . . . . . . 2,839,274 4,117,685 8,377,544 103.5%
- -----------
* The % change is the difference between the 1995 and 1996 percentages shown.
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals, including those facilities acquired in the
AMH Merger, on a same-store basis:
INCREASE
1995 1996 (DECREASE)
----------- ----------- ----------
Number of hospitals. . . . . . . . . . . 108 108 -
Average licensed beds. . . . . . . . . . 22,933 22,806 (0.6)%
Patient days . . . . . . . . . . . . . . 3,558,291 3,546,586 (0.3)%
Net inpatient revenue per patient day. . $ 1,183 $ 1,234 4.3%
Admissions . . . . . . . . . . . . . . . 634,985 655,581 3.2%
Net inpatient revenue per admission. . . $ 6,632 $ 6,673 0.6%
Outpatient visits. . . . . . . . . . . . 5,930,509 7,716,722 30.1%
Average length of stay (days). . . . . . 5.6 5.4 (0.2) *
*The % change is the difference between 1996 and 1995 percentages shown.
There continue to be 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
improvements and continued pressures by payors to reduce admissions and lengths
of stay.
The Company continues to experience an increase in Medicare revenues as a
percentage of total patient revenues. The Medicare program accounted for
approximately 36% of the net patient revenues of the domestic general hospitals
in 1994 and 38% and 39% in 1995 and 1996, respectively. Historically, rates paid
8
under Medicare's prospective payment system for inpatient services have
increased, but such increases have been less than cost increases. Payments for
Medicare outpatient services are presently cost-reimbursed, but there are
certain proposals pending that would convert Medicare reimbursement for
outpatient services to a prospective payment system which, if implemented, may
result in reduced payments. Medicaid programs in certain states in which the
Company operates also are undergoing changes that will result in reduced
payments to hospitals.
The Company has implemented hospital cost-control programs and overhead
reductions and is forming integrated healthcare delivery systems to address the
reduced payments. Pressures to control healthcare costs have resulted in an
increase in the percentage of revenues attributable to managed care payors. The
percentage of the Company's net patient revenues of the domestic general
hospitals attributable to managed care was approximately 22.8% in 1994, 24.6% in
1995 and 27.6% in 1996. The Company anticipates that its managed care business
will continue to increase in the future.
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 pressures are expected to continue. The Company's general hospitals have
been improving operating margins in a very competitive environment, due in large
part to enhanced cost controls and efficiencies.
Net operating revenues from the Company's other domestic operations was
$275.0 million in 1994 and $310.0 million in 1995, compared with $375.0 million
in 1996. The 21.0% increase from 1995 to 1996 primarily reflects continued
growth of the Company's subsidiaries offering health insurance products and the
growth of its physician practices.
The $163.0 million decrease in net operating revenues from the Company's
international operations for the current fiscal year compared to the prior
fiscal year is attributable to the sales of the Company's hospitals and related
healthcare businesses in Singapore and Australia. Net operating revenues and
operating profits of the sold international facilities for the period from June
1, 1995 through the dates of sales were $51.0 million and $7.0 million,
respectively.
Operating expenses, which include salaries and benefits, supplies,
provision for doubtful accounts, depreciation and amortization, impairment
losses, restructuring charges, merger expenses and other operating expenses,
were $3.8 billion in 1994, $4.6 billion in 1995 and $6.8 billion in 1996.
Operating expenses for fiscal 1996 include 12 months of operating expenses from
the facilities acquired in the AMH Merger and the Summit merger. Fiscal 1995
includes three months of operating expenses from the facilities acquired in the
AMH Merger, and to that extent, the current and prior-year periods are not
comparable. Fiscal 1994 include four months of operating expenses of facilities
acquired in the Summit merger. Fiscal 1994 and 1995
9
also include the operating expenses of the international and other divested
operations discussed above.
Salaries and benefits expense as a percentage of net operating revenues was
44.3% in 1994, 42.1% in 1995 and 40.6% in 1996. The improvement in 1996 and 1995
is attributable primarily to reductions in staffing levels in the hospitals and
corporate offices, implemented following the AMH merger in 1995, and also the
elimination of duplicate corporate functions following the American Healthcare
merger in 1994.
Supplies expense as a percentage of net operating revenues was 11.8% in
1994, 12.9% in 1995 and 13.7% in 1996. The increase over the prior two years is
attributable primarily to a higher supplies expense in the facilities acquired
in the AMH Merger and subsequent thereto. Also, 1996 reflects a reclassification
of $10.6 million of the supply component of major contracts from purchased
services to supplies expense. The increase is also attributable to the sales of
the Company's international operations. Supplies expense as a percentage of net
operating revenues at the international facilities were substantially less than
supplies expense as a percentage of net operating revenues at the domestic
general hospital operations. The Company expects to continue to reduce supplies
expense through incorporating acquired facilities into the Company's existing
group-purchasing program.
The provision for doubtful accounts as a percentage of net operating
revenues was 4.6% in 1994, 5.0% in 1995 and 5.6% in 1996. The increase is
attributable primarily to higher bad debt experience at the facilities acquired
in the AMH Merger and subsequent thereto. The Company, through its collection
subsidiary, Syndicated Office Systems, has been establishing improved follow-up
collection systems by consolidating the collection of accounts receivable in all
the Company's facilities.
Other operating expenses as a percentage of net operating revenues were
22.3% in 1994, 22.8% in 1995 and 21.4% in 1996. The improvement in 1996 reflects
the effects of the cost-control programs and overhead-reduction plans mentioned
herein.
Depreciation and amortization expense was $224.3 million in 1994, $276.1
million in 1995 and $418.5 million in 1996. The increases in 1995 and 1996 were
primarily due to the AMH Merger and various other acquisitions by both Tenet and
OrNda, as described in Note 3 to the Supplemental Consolidated Financial
Statements. In addition, amortization of intangibles increased as a result of
the acquired new business units. Goodwill amortization associated with the AMH
Merger is approximately $64 million annually.
Restructuring charges of $79.5 million in fiscal 1994 were recorded in
connection with a plan to significantly decrease overhead costs through a
reduction in corporate and divisional staffing levels and to review the
resulting office space needs of all corporate operations. Restructuring charges
of $36.9 million in fiscal 1995 were recorded in connection with the AMH Merger.
These charges included severance payments and outplacement services for
involuntary terminations of approximately 890 former employees of the Company
and other costs related to consolidating the operations of the two companies.
10
Impairment losses representing non-cash charges of $85.9 million were
recorded in fiscal 1996 in accordance with Statement of Financial Accounting
Standards No. 121, under which the carrying value of property, plant and
equipment and intangible assets at four general hospitals and three
rehabilitation hospitals and the cost of one undeveloped parcel of land have
been written down to their fair values.
Merger costs of $30.0 million in fiscal 1994 were recorded in connection
with the American Healthcare merger. These charges included severance
payments, investment advisory and professional fees and costs related to
consolidation of information systems.
Interest expense, net of capitalized interest, was $156.7 million in 1994,
$251.3 million in 1995 and $424.7 million in 1996. The increase between 1995 and
1996 was due primarily to the acquisition of AMH and the senior notes and bank
loans used to finance the acquisition and to retire debt in connection with the
merger.
Investment earnings were $30.6 million in 1994, $32.1 million in 1995 and
$26.7 million in 1996, and were derived primarily from notes receivable and
investments in debt and equity securities.
Equity in earnings of unconsolidated affiliates was $27.4 million in 1994,
$42.4 million in 1995 and $24.5 million in 1996. Substantially all of the
decrease between 1995 and 1996 is due to the exchange of the Company's
investment in Hillhaven for common stock in Vencor and the purchase of the
majority interest in Houston Northwest Medical Center. During 1995 the Company's
equity in the earnings of Hillhaven was $16.0 million. In 1996, it was $7.0
million through the date of the exchange and nothing thereafter. The Company's
equity in the earnings of Westminster was $6.0 million in 1995 and $7.0 million
in 1996. The Company sold its investment in Westminster in May 1996.
Minority interest in income of consolidated subsidiaries increased in
the current year due to improved operating results at consolidated, but not
wholly-owned facilities and to the effects of minority interests recorded at
facilities acquired in the AMH Merger and other acquisitions. Minority
interest expense was $12.2 million in 1994, $9.6 million in 1995 and $29.8
million in 1996.
Taxes on income as a percentage of pretax income from continuing operations
were 46.2% in 1994, 36.2% in 1995 and 43.5% in 1996. The Company's effective
tax-rate in 1994 reflects the effect of operating losses at a subsidiary for
which there were no federal tax benefits. The rate in 1995 includes the benefit
of the realization of certain prior year operating losses. The increase in
1996 is primarily due to additional amortization of goodwill resulting from the
AMH Merger and gains from the sales of international operations. The
amortization expense arising from the AMH Merger is a noncash charge but
provides no income tax benefits.
LIQUIDITY AND CAPITAL RESOURCES
11
The Company's liquidity for the year ended May 31, 1996 was derived
principally from the cash proceeds from operating activities, disposals of
assets and investments, realization of tax benefits associated with losses from
its discontinued psychiatric business, proceeds from the exercises of
performance investment plan options and borrowings under the Company's secured
and unsecured bank credit agreements. Net cash provided by operating activities
for the year ended May 31, 1996 was $349.4 million after net expenditures of
$96.7 million for discontinued operations and restructuring charges. During
1995 net cash provided by operating activities was $126.0 million, after net
expenditures of $427.3 million for discontinued operations and restructuring
charges. Net cash provided by operating activities in 1994 was $183.5 million
after net expenditures of $318.6 million for discontinued operations and
restructuring charges. Management believes that future cash flows from
operations will continue to be positive. This liquidity, along with the
availability of credit under the Company's unsecured credit agreement, should be
adequate to meet debt service requirements and to finance planned capital
expenditures and other known operating needs over the short term (up to 18
months) and the long term (18 months to 3 years).
The Company's cash and cash equivalents at May 31, 1996 were $106.6
million, a decrease of $53.4 million from May 31, 1995. Working capital at May
31, 1996 was $498.7 million, compared to $272.6 million at May 31, 1995. The
increase in working capital at May 31, 1996 is primarily attributable to a
decrease in the current portion of long-term debt as a new March 1996 credit
agreement, described below, eliminated previously required quarterly payments of
debt.
Net proceeds from the sales of facilities, investments and other assets
were $550.5 million during 1996, compared to $190.6 million during 1995 and
$575.9 million in 1994. During 1996 the Company sold its two hospitals and
related businesses in Singapore, its 30% interest in a hospital in Malaysia, its
40% interest in a hospital in Thailand, and its 52% interest in a company owning
nine hospitals and a pathology business in Australia. The net cash proceeds from
all of these sales aggregated approximately $324.0 million. In May 1996, the
Company sold its 42% interest in Westminster in England for approximately
$120.0 million. Also during 1996, the Company received approximately $91.8
million for its Hillhaven preferred stock in connection with the acquisition of
Hillhaven by Vencor, Inc. ("Vencor"). In June 1996, the Company sold its former
corporate headquarters building in Santa Monica, California. The proceeds from
all of these transactions were used to repay bank loans. The Company's
previously announced plan to divest itself of its non-core assets is
substantially complete.
In March 1996, the Company entered into a five-year $1.55 billion unsecured
revolving credit agreement. This agreement replaced the Company's $2.3 billion
secured bank term loan and revolving credit agreement dated February 28, 1995.
Borrowings under this agreement were unsecured and were to have matured on March
1, 2001. In January 1997, in connection with the Merger, the Company entered
into a new five-year, $2.8 billion unsecured revolving credit agreement (the
"New Credit Agreement") with Morgan Guaranty Trust Company of New York, Bank of
America NT&SA, The Bank of New York and the Bank of Nova Scotia and a syndicate
of other lenders. This agreement replaced the Company's $1.55 billion unsecured
revolving credit agreement dated March 1, 1996 described above. Borrowings
under the New
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF SUPPLEMENTAL FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Credit Agreement are unsecured and will mature on January 31, 2002. The Company
generally may repay or prepay loans made under the credit agreement and may
reborrow at any time prior to its maturity date. The New Credit Agreement
provides lower interest margins and generally has less restrictive covenants
than the former agreements. The New Credit Agreement, among other requirements,
has 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 stock
unless its senior long-term unsecured debt securities are rated BBB or higher by
Standard and Poors' Ratings Services and Baa3 or higher by Moody's Investors
Services, Inc., and covenants regarding maintenance 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. Following the
Merger, the Company's unused borrowing capacity under the New Credit Agreement
was $2.1 billion.
In connection with the Merger and related refinancing, the Company sold, on
January 30, 1997, $400 million of 7-7/8% Senior Notes due January 15, 2003, $900
million of 8% Senior Notes due January 15, 2005 (collectively, the "Senior
Notes") and $700 million of 8-5/8% Senior Subordinated Notes due January 15,
2007(the "Senior Subordinated Notes" and, together with The Senior Notes, the
"Notes"). The proceeds to the Company were $1.95 billion, after underwriting
discounts and commissions. The Senior Notes are not redeemable by the Company
prior to maturity. The Senior Subordinated Notes are redeemable at the option
of the Company, in whole or from time to time in part, at any time on or after
January 15, 2002, at redemption prices ranging from 104.313% in 2002 to 100% in
2005 and thereafter.
The Senior Notes are unsecured obligations of the Company ranking senior to
all subordinated indebtedness of the Company, including the Senior Subordinated
Notes, and equally in right of payment with all other indebtedness of the
Company, including borrowings under the New Credit Agreement described above.
The Senior Subordinated Notes also are unsecured obligations of the Company
subordinated in right of payment to all existing and future senior debt,
including the Senior Notes and borrowings under the New Credit Agreement.
Gross proceeds from borrowings amounted to $3.3 billion during the year
ended May 31, 1996, consisting primarily of borrowings of $2.1 billion under the
Company's bank credit agreements, $487.0 million in net proceeds from the sale
of 8-5/8% senior notes, and $311.0 million in net proceeds from the sale of 6%
exchangeable subordinated notes. Borrowings in the prior year amounted to $3.6
billion. Loan repayments were $3.3 billion in 1996 and $2.2 billion and $0.9
billion during 1995 and 1994, respectively.
Cash payments for property and equipment were $232.5 million in fiscal
1994, $335.5 million in
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF SUPPLEMENTAL FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
fiscal 1995 and $472.2 million in fiscal 1996. The Company expects to spend
approximately $400.0 million to $500.0 million annually on capital expenditures,
before any significant acquisitions of facilities and other healthcare
operations and before an estimated $225.0 million commitment to fund the
construction of a new replacement facility for one of its hospitals. Such
capital expenditures relate primarily to the development of healthcare services
networks in selected geographic areas, design and construction of new buildings,
expansion and renovation of existing facilities, equipment additions and
replacements, introduction of new medical technologies and various other capital
improvements.
During fiscal 1996 the Company spent $841.4 million, for purchases of new
businesses, net of cash acquired. These include ten general hospitals and a
number of physician practices. These acquisitions were financed primarily by
borrowings under the Company's credit agreements.
BUSINESS OUTLOOK
The challenge facing the Company and the healthcare industry is to continue
to provide quality patient care in an environment of rising costs, strong
competition for patients, and a general reduction of reimbursement 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 healthcare legislation at the federal and/or state level
will be passed in the future, but it continues to monitor all proposed
legislation and analyze its potential impact in order to formulate the Company's
future business strategies.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Current Report on Form 8-K, including,
without limitation, statements containing the words "believes," "anticipates,"
"expects," 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 involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among others, the following: general
economic and business conditions, both national and in the regions in which the
Company operates; industry capacity; demographic changes; existing laws and
government regulations and changes in, or the failure to comply with safe
harbors in, laws and governmental regulations; legislative proposals for
healthcare reform; the ability to enter into managed care provider arrangements
on acceptable terms; changes in Medicare and Medicaid reimbursement
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF SUPPLEMENTAL FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
levels; liability and other claims asserted against the Company; competition;
the loss of any significant customers; changes in business strategy or
development plans; the ability to attract and retain qualified personnel,
including physicians; the significant indebtedness of the Company after the
acquisition of OrNda; the lack of assurance that the synergies expected from the
acquisition of OrNda will be achieved; and the availability and terms of capital
to fund the expansion of the Company's business, including the acquisition of
additional facilities. 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.
15
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
MAY 31,
----------------------------
1995 1996
------------ ------------
ASSETS (DOLLAR AMOUNTS ARE EXPRESSED
IN MILLIONS)
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160.0 $ 106.6
Short-term investments in debt securities. . . . . . . . . . . . . . . . . . . 138.5 111.8
Accounts and notes receivable, less allowance for doubtful accounts
($241.8 in 1995 and $234.5 in 1996) . . . . . . . . . . . . . . . . . . . . 800.2 1,213.0
Inventories of supplies, at cost . . . . . . . . . . . . . . . . . . . . . . . 150.5 169.8
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432.7 312.1
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184.1 38.8
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . 83.9 87.5
------------ ------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 1,949.9 2,039.6
------------ ------------
Investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 479.5 587.6
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,386.9 4,984.0
Costs in excess of net assets acquired, less accumulated amortization ($36.8
in 1995 and $116.3 in 1996). . . . . . . . . . . . . . . . . . . . . . . . . . 2,829.3 3,072.0
Other intangible assets, at cost, less accumulated amortization
($40.4 in 1995 and $42.5 in 1996). . . . . . . . . . . . . . . . . . . . . . . 141.8 84.4
------------ ------------
$ 9,787.4 $ 10,767.6
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . $ 312.5 $ 119.8
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 455.7 530.3
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . 211.6 172.8
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.9 83.7
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.1 57.4
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 607.5 576.9
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 1,677.3 1,540.9
------------ ------------
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . 4,286.8 4,421.0
Other long-term liabilities and minority interests . . . . . . . . . . . . . . . . 1,117.5 1,097.4
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326.8 431.6
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . 20.1 -
Common stock, $0.075 par value; authorized 450,000,000 shares;
279,298,441 shares issued at May 31, 1995 and 297,352,251 shares
issued at May 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . 20.9 22.3
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 1,912.1 2,171.4
Unrealized gains on investments in debt and equity securities. . . . . . . . . 51.8 27.5
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 645.7 1,095.9
Less common stock in treasury, at cost, 18,775,274 at May 31, 1995 and
2,790,967 shares at May 31, 1996 . . . . . . . . . . . . . . . . . . . . . (271.6) (40.4)
------------ ------------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . 2,379.0 3,276.7
------------ ------------
$ 9,787.4 $ 10,767.6
------------ ------------
------------ ------------
See accompanying Notes to Supplemental Consolidated Financial Statements.
16
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31,
-----------------------------------------
1994 1995 1996
----------- ----------- -----------
(IN MILLIONS,
EXCEPT PER SHARE AND SHARE AMOUNTS)
Net operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,217.6 $ 5,161.1 $ 7,705.7
----------- ----------- -----------
Operating expenses:
Salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,867.6 2,169.9 3,129.7
Supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498.3 667.7 1,055.8
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . 193.2 259.7 431.5
Other operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 942.1 1,178.4 1,646.1
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199.1 232.3 318.8
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.2 43.8 99.7
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79.5 36.9 -
Impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 85.9
Merger-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.0 - -
----------- ----------- -----------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382.6 572.4 938.2
----------- ----------- -----------
Interest expense, net of capitalized portion . . . . . . . . . . . . . . . . . . (156.7) (251.3) (424.7)
Investment earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.6 32.1 26.7
Equity in earnings of unconsolidated affiliates. . . . . . . . . . . . . . . . . 27.4 42.4 24.5
Minority interests in income of consolidated subsidiaries. . . . . . . . . . . . (12.2) (9.6) (29.8)
Net gains on disposals of facilities and long-term investments . . . . . . . . . 42.2 30.5 346.2
----------- ----------- -----------
Income from continuing operations before income taxes. . . . . . . . . . . . . . 313.9 416.5 881.1
Taxes on income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (145.0) (150.8) (382.9)
----------- ----------- -----------
Income from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . 168.9 265.7 498.2
Discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (700.9) (9.6) (25.3)
Extraordinary charges from early extinguishment of debt. . . . . . . . . . . . . (12.3) (19.8) (22.7)
Cumulative effect of a change in accounting principle. . . . . . . . . . . . . . 60.0 - -
----------- ----------- -----------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (484.3) 236.3 450.2
Preferred stock dividend requirements. . . . . . . . . . . . . . . . . . . . . . (1.9) (2.0) (0.3)
----------- ----------- -----------
Net income (loss) applicable to common shareholders. . . . . . . . . . . . . . . $ (486.2) $ 234.3 $ 449.9
----------- ----------- -----------
----------- ----------- -----------
Earnings (loss) per common and common equivalent share:
Primary:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.77 $ 1.10 $ 1.73
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . (3.21) (0.04) (0.09)
Extraordinary charges . . . . . . . . . . . . . . . . . . . . . . . . . . (0.06) (0.08) (0.08)
Cumulative effect of a change in accounting principle . . . . . . . . . . 0.28 - -
----------- ----------- -----------
$ (2.22) $ 0.98 $ 1.56
----------- ----------- -----------
----------- ----------- -----------
Fully diluted:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.75 $ 1.08 $ 1.70
Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . (3.02) (0.04) (0.08)
Extraordinary charges . . . . . . . . . . . . . . . . . . . . . . . . . . (0.05) (0.08) (0.08)
Cumulative effect of a change in accounting principle . . . . . . . . . . 0.26 - -
----------- ----------- -----------
$ (2.06) $ 0.96 $ 1.54
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of shares and share equivalents outstanding (in
thousands):
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,161 237,964 287,129
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,224 254,105 295,062
----------- ----------- -----------
----------- ----------- -----------
See accompanying Notes to Supplemental Consolidated Financial Statements.
17
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
CONVERTIBLE
COMMON STOCK PREFERRED STOCK
--------------------- ------------------- ADDITIONAL
OUTSTANDING ISSUED PAID-IN UNREALIZED RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL GAINS EARNINGS STOCK
----------- ------ -------- ------- ---------- ---------- -------- --------
(DOLLAR AMOUNTS ARE EXPRESSED IN MILLIONS, SHARE AMOUNTS IN THOUSANDS)
BALANCES, MAY 31, 1993 . . . . . . . . 212,451 $ 17.4 1,194 $ 18.1 $ 1,300.8 $ - $ 914.2 $ (286.4)
Net loss . . . . . . . . . . . . . . . (484.3)
Cash dividends ($0.12 per share) . . . (19.9)
Paid-in-kind dividends . . . . . . . . 123 1.8 (1.9)
Issuance of common stock . . . . . . . 10,167 0.8 95.0
Conversion of convertible
preferred stock. . . . . . . . . . 9 (7) (0.1) 0.1
Stock options exercised. . . . . . . . 2,222 0.1 8.6 4.2
Restricted share cancellations . . . . (110) 9.0
Unrealized gains from changes in
market value of investments in
debt and equity securities, net
of income taxes. . . . . . . . . . 70.9
Pooling adjustment to conform
American Healthcare's fiscal
year to OrNda s fiscal year. . . . (0.6)
----------- ------ -------- ------- ---------- ---------- -------- --------
BALANCES, MAY 31, 1994 . . . . . . . . 224,739 18.3 1,310 19.8 1,411.6 70.9 409.4 (282.2)
Net income . . . . . . . . . . . . . . 236.3
Shares issued in connection
with AMH merger. . . . . . . . . . . . 33,156 2.5 486.2
Paid-in-kind dividends . . . . . . . . 134 2.0 (2.0)
Issuance of common stock . . . . . . . 343 3.9
Conversion of convertible
preferred stock. . . . . . . . . . . . 154 (114) (1.7) 1.7
Stock options exercised. . . . . . . . 2,135 0.1 10.3 10.6
Restricted share cancellations . . . . (4) 0.4
Decrease in unrealized gains
on debt and equity securities,
net of income taxes. . . . . . . . . . (19.1)
----------- ------ -------- ------- ---------- ---------- -------- --------
BALANCES, MAY 31, 1995 . . . . . . . . 260,523 20.9 1,330 20.1 1,912.1 51.8 645.7 (271.6)
Net income . . . . . . . . . . . . . . 450.2
Performance investment plan
options exercised. . . . . . . . . 13,499 39.0 195.3
Paid-in-kind dividends . . . . . . . . 33 0.3 (0.3)
Issuance of common stock . . . . . . . 15,525 1.2 191.5
Conversion of convertible
preferred stock. . . . . . . . . . 1,831 0.1 (1,356) (20.3) 20.2
Redemption of preferred stock. . . . . - (7) (0.1)
Stock options exercised. . . . . . . . 3,183 0.1 8.9 35.9
Unrealized gains from changes in
market value of investments in
debt and equity securities,
net of income taxes. . . . . . . . 22.7
Elimination of unrealized gain
on investment in unconsolidated
affiliate upon acquisition
of controlling equity interest . . (47.0)
----------- ------ -------- ------- ---------- ---------- -------- --------
BALANCES, MAY 31, 1996 . . . . . . . . 294,561 $22.3 - $ - $2,171.4 $27.5 $1,095.9 $(40.4)
----------- ------ -------- ------- ---------- ---------- -------- --------
----------- ------ -------- ------- ---------- ---------- -------- --------
See accompanying Notes to Supplemental Consolidated Financial Statements.
18
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31,
--------------------------------------
1994 1995 1996
---- ---- ----
(DOLLAR AMOUNTS ARE EXPRESSED
IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $(484.3) $236.3 $450.2
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 265.0 280.1 424.0
Deferred income taxes . . . . . . . . . . . . . . . . . . . . (253.6) 83.0 247.3
Gains on sales of facilities and long-term investments. . . . (42.2) (30.5) (346.2)
Additions to reserves for discontinued operations,
impairment losses and restructuring charges. . . . . . . . 1,174.7 51.4 127.4
Extraordinary charges from early extinguishment of debt . . . 12.3 19.8 22.7
Non-cash merger-related expenses. . . . . . . . . . . . . . . 13.2 - -
Other items . . . . . . . . . . . . . . . . . . . . . . . . . (22.8) (21.4) 8.5
Increases (decreases) in cash from changes in operating
assets and liabilities, net of effects from purchases
of new businesses:
Accounts and notes receivable, net. . . . . . . . . . . . . . (71.7) (140.4) (277.3)
Inventories, prepaid expenses and other current assets. . . . (14.8) (36.0) (90.5)
Accounts payable, accrued expenses and income taxes payable . (42.1) (9.6) (100.3)
Noncurrent accrued expenses and other liabilities . . . . . . (31.6) 120.6 (40.1)
Proceeds from sale of trading investment security. . . . . . . . - - 20.6
Net expenditures for discontinued operations and
restructuring charges . . . . . . . . . . . . . . . . . . . . (318.6) (427.3) (96.9)
---------- --------- --------
Net cash provided by operating activities . . . . . . . . 183.5 126.0 349.4
---------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment. . . . . . . . . . (232.5) (335.5) (472.2)
Purchases of new businesses, net of cash acquired . . . . . . (366.6) (1,489.1) (841.4)
Proceeds from sales of facilities, long-term investments and
other assets . . . . . . . . . . . . . . . . . . . . . . . 575.9 190.6 550.5
Other items . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 10.9 (37.3)
---------- --------- --------
Net cash used in investing activities. . . . . . . . . . . (15.0) (1,623.1) (800.4)
---------- --------- --------
See accompanying Notes to Supplemental Consolidated Financial Statements.
19
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED MAY 31,
-----------------------------------
1994 1995 1996
------- ------ -------
(DOLLAR AMOUNTS ARE EXPRESSED
IN MILLIONS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . 930.8 3,546.0 3,278.0
Loan payments. . . . . . . . . . . . . . . . . . . . . . . . . (913.8) (2,233.8) (3,307.1)
Proceeds from exercises of performance investment plan options - - 202.0
Proceeds from exercises of stock options . . . . . . . . . . . 7.0 10.5 37.5
Proceeds from sales of common stock. . . . . . . . . . . . . . - - 192.5
Cash dividends paid to shareholders. . . . . . . . . . . . . . (39.6) - -
Other items. . . . . . . . . . . . . . . . . . . . . . . . . . 13.8 3.8 (5.3)
------- -------- --------
Net cash provided by (used in) financing activities. . . . . . . (1.8) 1,326.5 397.6
------- -------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . 166.7 (170.6) (53.4)
Cash and cash equivalents at beginning of year . . . . . . . . . 166.8 330.6 160.0
Pooling adjustment to beginning of period balance to
conform fiscal years . . . . . . . . . . . . . . . . . . . . . . (2.9) - -
Cash and cash equivalents at end of year . . . . . . . . . . . . $330.6 $160.0 $106.6
------- -------- --------
------- -------- --------
SUPPLEMENTAL DISCLOSURES
The Company paid interest (net of amounts capitalized) of $148.6 million,
$221.6 million, and $386.4 million for the years ended May 31, 1994, 1995 and
1996, respectively. Income taxes paid during the same years amounted to $30.4
million, $46.8 million and $57.0 million, respectively. The fair value of common
stock issued for acquisitions of hospitals and other assets was $96.2 million in
1994 and $492.6 million in 1995.
The fair value of the assets acquired in connection with the AMH Merger in
1995 was approximately $4.6 billion, including goodwill of approximately $2.5
billion. Liabilities assumed were approximately $2.6 billion.
See accompanying Notes to Supplemental Consolidated Financial Statements.
20
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accounting and reporting policies of Tenet conform to generally
accepted accounting principles and prevailing practices within the healthcare
industry. Certain prior year amounts have been reclassified to conform to
current year classifications.
On January 30, 1997, the Company acquired OrNda, a provider of healthcare
services operating general acute care hospitals, surgery centers, outpatient and
specialty clinics, a psychiatric hospital and a managed healthcare Medicaid
plan, when a subsidiary of the Company was merged into OrNda, leaving OrNda and
all of its subsidiaries as wholly-owned subsidiaries of the Company. The
Merger has been accounted for as a pooling-of-interests combination and,
accordingly, the supplemental consolidated financial statements and all
statistical data shown herein prior to the combination have been restated to
include the accounts and results of operations of OrNda for all periods
presented. (See Note 3 for further details pertaining to the Merger.)
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the Merger. Generally accepted accounting principles
proscribe giving effect to a consummated business combination accounted for by
the pooling-of-interests method in financial statements that do not include the
date of consummation. These supplemental financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of the corporation after financial statements
covering the date of consummation of the business combination are issued.
The supplemental consolidated financial statements reflect the combination
of the historical consolidated balances sheets of Tenet as of May 31, 1995 and
1996 with the historical consolidated balance sheets of OrNda as of August 31,
1995 and 1996 and the related historical consolidated statements of operations,
changes in shareholders' equity and cash flows of Tenet for the years ended May
31, 1994, 1995 and 1996 with the historical consolidated statements of
operations, changes in shareholders' equity and cash flows of OrNda for the
years ended August 31, 1994, 1995 and 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
A. THE COMPANY
Tenet is an investor-owned healthcare services company that owns or
operates, through its subsidiaries and affiliates, general hospitals and related
healthcare facilities serving urban and rural communities in 22 states and holds
investments in other healthcare companies. At May 31, 1996, the Company's
subsidiaries operated 123 domestic general hospitals, with a total of 26,265
licensed beds, located in Alabama, Arizona, Arkansas, California, Florida,
Georgia, Iowa, Indiana, Louisiana, Maine, Mississippi, Missouri, Nebraska,
Nevada, North Carolina, Oregon, South Carolina, Tennessee, Texas, Washington,
West Virginia and Wyoming. The largest concentrations of hospitals are in
California (34.1%), Texas (16.3%) and Florida (12.2%). The concentrations of
hospitals in these three states increases the risk that any adverse
21
economic, regulatory or other development that may occur in such states may
adversely affect the Company's operations or financial condition.
At May 31, 1996, the Company's subsidiaries also owned or operated a small
number of rehabilitation hospitals, long-term-care facilities and psychiatric
facilities located on the same campus as, or nearby, the Company's general
hospitals, in addition to numerous other ancillary healthcare operations.
B. PRINCIPLES OF CONSOLIDATION
The supplemental consolidated financial statements include the accounts of
Tenet and its wholly-owned and majority-owned subsidiaries. Significant
investments in other affiliated companies generally are accounted for by the
equity method. Intercompany accounts and transactions are eliminated in
consolidation. The results of operations acquired in purchase transactions are
included from their respective acquisition dates.
C. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Company to make
estimates and assumptions that affect the amounts reported in the supplemental
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
D. NET OPERATING REVENUES
Net operating revenues consist primarily of net patient-service revenues,
which are based on the hospitals' established billing rates less allowances and
discounts principally for patients covered by Medicare, Medicaid and other
contractual programs. These allowances and discounts were $4.0 billion, $5.5
billion and $8.6 billion for the years ended May 31, 1994, 1995 and 1996,
respectively. Payments under these programs are based on either predetermined
rates or the costs of services. Settlements for retrospectively determined
rates are estimated in the period the related services are rendered and are
adjusted in future periods as final settlements are determined. Management
believes that adequate provision has been made for adjustments that may result
from final determination of amounts earned under these programs. These
contractual allowances and discounts are deducted from accounts receivable in
the accompanying supplemental consolidated balance sheets. Approximately 45% of
fiscal 1994 consolidated net operating revenues were from participation of the
Company's hospitals in Medicare and Medicaid programs. In 1995 it was
approximately 43% and in 1996 it was approximately 45%.
The Company provides care to patients who meet certain financial or
economic criteria without charge or at amounts substantially less than its
established rates. Because the Company does not pursue collection of amounts
determined to qualify as charity care, they are not reported as gross revenue
and are not included in deductions from revenue or in operating and
administrative expenses.
22
F. CASH EQUIVALENTS
The Company treats highly liquid investments with an original maturity of
three months or less as cash equivalents. The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents approximates fair
value.
G. INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investments in debt and equity securities are classified as
available-for-sale, held-to-maturity or as part of a trading portfolio. At May
31, 1996, the Company has no significant investments in securities classified as
either held-to-maturity or trading. Securities classified as available-for-sale
are carried at fair value if unrestricted and their unrealized gains and losses,
net of tax, are reported as an adjustment to shareholders' equity. Restricted
securities are carried at cost, adjusted for dividends in excess of earnings
subsequent to the date of invesment and for decreases in value that are other
than temporary. Realized gains or losses are included in net income on the
specific identification method, and are immaterial for all years presented.
H. LONG-LIVED ASSETS
Property and Equipment: The Company uses the straight-line method of
depreciation for buildings, building improvements and equipment over their
estimated useful lives as follows: buildings and improvements - generally 10 to
40 years; equipment - three to 25 years. Capital leases are recorded at the
beginning of the lease term as assets and liabilities at the lower of the
present value of the minimum lease payments or the fair value of the assets, and
such assets, including improvements, are amortized over the shorter of the
lease term or their useful life. The Company capitalizes interest costs related
to construction projects. Capitalized interest was $5.0 million, $7.5 million
and $11.7 million in 1994, 1995 and 1996, respectively.
Intangible Assets: Preopening costs are amortized over one year. Costs in
excess of the fair value of the net assets of purchased businesses (goodwill)
generally are amortized over 20 to 40 years. The straight-line method is used to
amortize most intangible assets. Deferred financing costs are amortized over
the lives of the related loans using the interest method.
Impairment of long-lived assets, including goodwill related to such assets,
is recognized whenever events or changes in circumstances indicate that the
carrying amount of the asset, or related groups of assets, may not be
recoverable. Measurement of the amount of impairment may be based on appraisal,
market values of similar assets or estimates of future discounted cash flows
resulting from use and ultimate disposition of the asset.
I. INTEREST RATE SWAP AGREEMENTS
23
The differentials to be paid or received under interest rate swap
agreements are accrued as the interest rates change and are recognized over the
lives of the agreements as adjustments to interest expense.
J. SALES OF COMMON STOCK OF SUBSIDIARIES
At the time a subsidiary or equity affiliate sells existing or newly issued
common stock to unrelated parties at a price in excess of its book value, the
Company records a gain reflecting its share of the change in the subsidiary's
shareholders' equity resulting from the sale.
K. EARNINGS PER SHARE
Primary earnings per share of common stock is based on after-tax income
applicable to common stock and the weighted average number of shares of common
stock and common stock equivalents outstanding during each period as
appropriate. Fully diluted earnings-per-share calculations are based on the
assumption that all dilutive convertible debentures issued by Tenet and
redeemable convertible preferred shares issued by OrNda are converted into
shares of Tenet common stock as of the beginning of the year, or as of the issue
date if later, and (i) that those shares are added to the weighted average
number of common shares and share equivalents outstanding used in the
calculation of primary earnings per share, and (ii) that after-tax income is
adjusted accordingly.
L. TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52. Exchange gains and losses on forward
exchange contracts designated as hedges of foreign net investments are reported
as an adjustment to shareholders' equity. Currency translation adjustments and
the effect of transaction gains and losses and exchange gains and losses on
forward exchange contracts are insignificant for all years presented. At
May 31, 1996, the Company had sold substantially all of its foreign operations.
3. ACQUISITIONS AND DISPOSALS OF FACILITIES
MERGER WITH ORNDA:
On January 30, 1997, the Company acquired OrNda, a provider of heathcare
services operating general acute care hospitals, surgery centers, outpatient and
specialty clinics, a psychiatric hospital and a managed healthcare Medicaid
plan, when a subsidiary of the Company was merged into OrNda, leaving OrNda, and
all of its subsidiaries, as wholly-owned subsidiaries of the Company. In
connection with the Merger, the Company issued 81,439,910 shares of its common
stock in a tax-free exchange for all of OrNda's outstanding common stock. The
Merger has been accounted for as a pooling-of-interests and, accordingly, the
supplemental consolidated financial statements and all statistical data shown
herein prior
24
to the combination have been restated to include the accounts and results of
operations of OrNda for all periods presented.
The results of operations previously reported by the separate companies and
the combined amounts presented in the accompanying supplemental consolidated
financial statements are summarized below.
SIX MONTHS ENDED
YEARS ENDED MAY 31 NOVEMBER 30
-------------------------------------- --------------------------
1994 1995 1996 1995 1996
-------- ---------- ----------- ---------- ----------
(UNAUDITED)
Net operating revenues:
Tenet $2,943.2 $3,318.4 $5,558.5 $2,654.8 $2,914.7
OrNda 1,274.4 1,842.7 2,147.2 975.6 1,190.0
-------- -------- -------- -------- --------
Combined $4,217.6 $5,161.1 $7,705.7 $3,630.4 $4,104.7
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Extraordinary charges:
Tenet - $ (19.8) $ (22.7) - -
OrNda (12.3) - - - -
-------- -------- -------- -------- --------
Combined $ (12.3) $ (19.8) $ (22.7) - -
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income:
Tenet $ (425.0) $ 165.0 $ 350.3 $ 301.1 $ 149.2
OrNda (59.3) 71.3 99.9 35.8 49.6
-------- -------- -------- -------- --------
Combined $ (484.3) $ 236.3 $ 450.2 $ 336.9 $ 198.8
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Prior to the Merger, OrNda's fiscal year ended August 31. In recording the
pooling-of-interests combination, OrNda's financial statements for the years
ended August 31, 1994, 1995 and 1996 have been combined with Tenet's financial
statements for the years ended May 31, 1994, 1995 and 1996. OrNda's financial
statements for the twelve months ended May 31, 1997 will be combined with
Tenet's financial statements for the same period and an adjustment will be made
to shareholders' equity as of May 31, 1997, to eliminate the effect of including
OrNda's results of operations for the three months ended August 31, 1996, in
both years ended May 31, 1997 and 1996. OrNda's unaudited results of operations
for the three months ended August 31, 1996 included net operating revenues of
$552.9 million and net income of $23.2 million.
OTHER DOMESTIC:
During the fiscal year ended May 31, 1996, Tenet's subsidiaries,
including OrNda, acquired the following: (1) in July 1995, a one-third interest
(which subsequently has been increased to a 50% interest) in the leased 82-bed
St. Clair Hospital located outside Birmingham, Alabama; (2) in August 1995,
Memorial Medical Center (formerly known as Mercy+Baptist Medical Center), a
system of two general hospitals with an aggregate of 759 licensed beds located
in New Orleans, Louisiana, and a related physician practice; (3) in September
1995, Providence Memorial Hospital, a general
25
hospital located in El Paso, Texas, licensed for 471 general hospital beds (34
of which may be used as skilled nursing beds) and licensed for 30 additional
rehabilitation and sub-acute care beds; (4) in October 1995, a long-term lease
of the 49-bed Medical Center of Manchester in central Tennessee; (5) in November
1995, the 104-bed Methodist Hospital of Jonesboro, a general hospital located in
Jonesboro, Arkansas, and the 202-bed Universal Medical Center (subsequently
renamed Florida Medical Center - South) located in Plantation, Florida; and (6)
in January 1996, the controlling equity interest in Houston Northwest Medical
Center, a 498-bed acute care facility located in Houston, Texas. The Jonesboro
facility is now owned by a limited liability company of which Tenet owns 95%
and is the manager. In fiscal 1996, the Company also acquired several physician
practices and other healthcare operations. All of these transactions have been
accounted for as purchases. The results of operations of the acquired
businesses, which are not material in the aggregate, have been included in the
Company's supplemental consolidated statements of operations from the dates of
acquisition.
Subsequent to May 31, 1996, Tenet's subsidiaries, including OrNda,
acquired: (1) on June 1, 1996, Hialeah Hospital, a 378-bed acute care
hospital in Hialeah, Florida; (2) in July 1996, Cypress Fairbanks Medical
Center, a 149-bed acute care hospital, in Houston, Texas, and the 68-bed
Westside Hospital in Los Angeles, California; (3) in August 1996, Centinela
Hospital Medical Center, a 400-bed acute care hospital in Inglewood,
California and related healthcare businesses; (4) in September 1996, The
Saint Vincent Healthcare System, located in Worcester, Massachusetts,
consisting of a 432-bed acute care teaching hospital, three skilled nursing
facilities and other health related companies, and a minority interest in a
280-member multi-specialty group physician practice; (5) in October 1996,
Lloyd Noland Hospital, a 319-bed acute care hospital in Birmingham, Alabama;
(6) in December 1996, substantially all of the assets of United Western
Medical Centers, a not-for-profit corporation headquartered in Santa Ana,
California, which assets consist primarily of Western Medical Center, a
288-bed acute care hospital in Santa Ana, California; Western Medical
Center-Anaheim, a 193-bed acute care hospital in Anaheim, California; and
Western Medical Center-Bartlett, a 202-bed skilled nursing facility in Santa
Ana, California; and (7) in January 1997, North Shore Medical Center, a
357-bed acute care hospital in Miami, Florida and Brookside Hospital, a
312-bed hospital in San Pablo, California. All of these transactions have
been or will be accounted for as purchases. The results of operations of the
acquired businesses, which are not material in the aggregate, will be
included in the Company's consolidated statements of operations from the
dates of acquisition. In December 1996, the Company sold its lease of the
Kirksville Osteopathic Medical Center, a 119-bed hospital in Kirksville,
Missouri.The Company has committed to fund the construction, estimated at
$225.0 million, of a new replacement hospital for the Saint Vincent facility.
In March 1995, in a transaction accounted for as a purchase, Tenet acquired
all the outstanding common stock of AMH for $1.5 billion in cash and 33,156,614
shares of Tenet's common stock valued at $488 million. The total purchase
price was allocated to the assets and liabilities of AMH based on their
estimated fair values. The total purchase price exceeded the fair value of the
net assets acquired by approximately $2.5 billion.
In April 1994, OrNda completed mergers with American Healthcare and with
Summit. Both American Healthcare and Summit were health care services companies
engaged in the operations of general acute care hospitals. Summit also was
engaged in the operation of (i) a managed care entity contracting to provide
services to the Arizona Health Care Cost
26
Containment System and (ii) outpatient surgery centers. In connection with the
American Healthcare merger, OrNda recorded $30.0 million of nonrecurring charges
and an extraordinary loss of $8.4 million as a result of refinancing OrNda's and
American Healthcare's senior credit facilities.
INTERNATIONAL:
In June 1995, the Company sold two hospitals and related healthcare
businesses in Singapore for approximately $243 million, net of $78 million in
debt assumed by the buyer. In October 1995, the Company sold its interest in
AME for a net cash consideration of approximately $68 million, and the Company
sold its interest in a hospital in Malaysia for net cash consideration of
approximately $12 million. In February 1996, the Company also sold its 40%
interest in a hospital in Thailand for net cash consideration of approximately
$21 million. These transactions resulted in gains of approximately $158
million. The net proceeds from these sales were used to repay secured bank loans
under the Company's February 28, 1995 credit agreement. Net operating revenues
of the sold facilities were $202 million in 1995 and $51 million in 1996.
Operating profits, before general corporate overhead costs, were $39 million in
1995 and $7 million in 1996.
In May 1996, the Company sold its approximately 42% interest in Westminster
for a gain of $34 million. Pretax cash proceeds from this transaction were
approximately $120 million and were used to repay bank loans.
4. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, short-term borrowings
and notes, current portion of long-term debt, accounts payable and interest
payable approximate fair value because of the short maturity of these
instruments. The carrying values of investments, both short-term and long-term
(excluding investments accounted for by the equity method), long-term
receivables and long-term debt are not materially different from the estimated
fair values of these instruments. The estimated fair values of interest rate
swap agreements are not material to the Company's financial position.
5. PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and consists of the following:
1995 1996
-------- --------
(IN MILLIONS)
Land. . . . . . . . . . . . . . . . . . . . $ 364.3 $ 418.0
Buildings and improvements. . . . . . . . . 3,463.9 3,926.3
Construction in progress. . . . . . . . . . 96.8 117.6
27
Equipment . . . . . . . . . . . . . . . . . 1,574.7 1,841.7
---------- ----------
5,499.7 6,303.6
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . 1,112.8 1,319.6
---------- ----------
Net property and equipment. . . . . . . . . $ 4,386.9 $ 4,984.0
---------- ----------
---------- ----------
6. LONG-TERM DEBT AND LEASE OBLIGATIONS
A. LONG-TERM DEBT
Long-term debt consists of the following:
1995 1996
-------- -------
(IN MILLIONS)
Secured loans payable to banks. . . . . . . $2,210.7 $692.3
Unsecured loans payable to banks. . . . . . - 974.5
8 5/8% Senior Notes due 2003, $500 million
face value, net of $11.9 million
unamortized discount. . . . . . . . . . . - 488.1
9 3/8% Senior Notes due 2002, $300 million
face value, net of $5.9 unamortized
discount. . . . . . . . . . . . . . . . . 293.4 294.1
10 1/8% Senior Subordinated Notes due 2005,
$900 million face value, net of $21.8
million unamortized discount. . . . . . . 876.7 878.2
12 1/4% Senior Subordinated Notes due 2002. 400.0 400.0
6% Exchangeable Subordinated Notes due
2005, $320 million face value, net of
$9.0 million unamortized discount . . . . - 310.9
11 3/8 Senior Subordinated Notes due 2004. 125.0 125.0
13 1/2% Senior Subordinated Notes due 2001 16.4 16.3
Zero-coupon guaranteed bonds due 1997 and
2002, $130.6 million face value, net of
$28.9 million unamortized discount. . . . 95.6 101.7
6 1/2% Swiss franc/dollar dual currency
debentures due 1997. . . . . . . . . . . 16.4 16.4
5% Swiss franc bonds due 1996 . . . . . . . 18.0 -
15% Junior Subordinated Notes due 2005. . . 25.4 -
Convertible floating-rate debentures. . . . 219.0 -
Notes and capital lease obligations,
secured by plant and equipment, weighted
average interest rate of approximately
10.3% in 1995 and 11.5% in 1996, payable
in installments to 2009 . . . . . . . . . 222.8 187.8
Unsecured medium-term notes due through
1997 . . . . . . . . . . . . . . . . . . 72.7 35.9
Other notes, primarily unsecured. . . . . . 7.2 19.6
-------- --------
4,599.3 4,540.8
28
Less current portion. . . . . . . . . . . . (312.5) (119.8)
-------- --------
$4,286.8 $4,421.0
-------- --------
-------- --------
LOANS PAYABLE TO BANKS - In March 1996, the Company entered into a five-
year $1.55 billion unsecured revolving credit agreement with a syndicate of
banks. The agreement replaced the Company's $2.3 billion secured bank term loan
and revolving credit agreement dated February 28, 1995. Unamortized costs of
issuance written off in connection with the refinancing were $36 million. The
write-off was reflected as an extraordinary charge from early extinguishment of
debt in the quarter ended May 31, 1996 in the amount of $23 million, which is
net of tax benefits of $13 million. The $2.3 billion in secured bank loans was
used to finance the AMH Merger and repay existing indebtedness. The early
extinguishment of debt in 1995 resulted in an extraordinary loss of $20 million,
net of tax benefits of $12 million. During the three months ended May 31, 1996,
the weighted average interest rate on these borrowings was 6.1%. The Company's
unused borrowing capacity under the March 1996 agreement was $575 million as of
May 31, 1996.
In January 1997, in connection with the Merger, the Company entered into
the New Credit Agreement with a syndicate of banks. This agreement replaced the
Company's $1.55 billion unsecured revolving credit agreement dated March 1, 1996
described above. As a result of this refinancing, as well as the refinancing of
OrNda's existing credit facility and 12.25% Senior Subordinated Notes and
11.375% Senior Subordinated Notes (described below) the Company will record an
extraordinary charge from early extinguishment of debt in the quarter ending
February 28, 1997 in the amount of $47.4 million, net of taxes.
Loans under the New Credit Agreement are unsecured and will mature on
January 31, 2002. The Company generally may repay or prepay loans made under the
agreement and may reborrow at any time prior to such maturity date. Loans under
the New Credit Agreement generally bear interest at a base rate equal to the
prime rate or, if higher, the federal funds rate plus 0.50%, or, at the option
of the Company, an adjusted London interbank offered rate ("LIBOR") for one-,
two-, three-, or six-month periods plus an interest margin of from 22.50 to
68.75 basis points. The Company has agreed to pay the lenders under the new
credit agreement a facility fee on the total loan commitment at rates ranging
from 12.50 to 31.25 basis points. The interest margins and facility fee rates
are based on the ratio of the Company's consolidated total debt to net earnings
before interest, taxes, depreciation and amortization.
On October 27, 1995, OrNda executed an amended and restated credit
agreement ("Restated Credit Facility") which increased OrNda's borrowing
capacity under its credit facility from approximately $660.0 million to $900.0
million, of which $692.2 million was outstanding on August 31, 1996 and of which
commitment availability had been reduced by issued letters of credit of $27.4
million and scheduled principal payments of $33.8 million, resulting in
available credit of $146.6 million. The Restated Credit Facility amended
OrNda's previous credit agreement dated April 19, 1994, and was to have matured
on October 30, 2001. All outstanding loans under Restated Credit Facility were
repaid by Tenet in connection with the Merger on January 30, 1997.
Loans under the Restated Credit Facility bore interest, at the option of
the Company, at a rate equal to either (i) the
29
"alternate base rate" plus 0.25% or (ii) LIBOR plus 1.25%, in each case subject
to potential decreases or increases dependent on the Company's leverage ratio.
The weighted average interest rate on the Company's borrowings under the
Restated Credit Facility at August 31, 1996, was 6.7%.
SENIOR NOTES AND SENIOR SUBORDINATED NOTES - In connection with the AMH
Merger and related refinancing, the Company sold, on March 1, 1995, $300 million
of 9 3/8% Senior Notes due September 1, 2002 and $900 million of 10 1/8% Senior
Subordinated Notes due March 1, 2005. The proceeds to the Company were
$1.17 billion, after underwriting discounts and commissions. The senior notes
are not redeemable by the Company prior to maturity. The senior subordinated
notes are redeemable at the option of the Company, in whole or from time to time
in part, at any time after March 1, 2000, at redemption prices ranging from
105.063% in 2000 to 100% in 2003 and thereafter.
In October 1995, the Company sold $500 million of Senior Notes due
December 2003. The notes have a coupon of 8 5/8% and were priced at 99.666%
of par to yield 8.68%. In January 1996, the Company issued $320 million of
6% Exchangeable Subordinated Notes due 2005 that will be exchangeable at the
option of the holder for shares of common stock of Vencor (see Note13) at any
time on or after November 6, 1997 at an exchange rate of 25.9403 shares per
$1,000 principal amount of the notes, subject to the Company's right to pay
an amount in cash equal to the market price of the shares of Vencor common
stock in lieu of delivery of such shares. The notes will be redeemable at
the option of the Company at any time on or after January 15, 1999 at the
redemption prices set forth in the indenture, plus accrued and unpaid
interest. The net proceeds from the notes sold in October 1995 and January
1996 were applied to repay secured bank loans under the Company's February
28, 1995 credit agreement.
If the fair market value of the Company's investment in the common stock
of Vencor ever exceeds the carrying value of the notes, the Company will adjust
the carrying value of the notes to the fair market value of the investment
through a charge or credit to earnings. Corresponding adjustments to the
carrying value of the investment in Vencor will be credited or charged directly
to shareholders' equity as unrealized gains or losses.
In connection with the Merger and related refinancing, the Company sold,
on January 30, 1997, $400 million of 7 7/8% Senior Notes due January 15,
2003, $900 million of 8% Senior Notes due January 15, 2005 (collectively, the
"Senior Notes") and $700 million of 8 5/8% Senior Subordinated Notes due
January 15, 2007(the "Senior Subordinated Notes" and, together with the
Senior Notes, the "Notes"). The proceeds to the Company were $1.95 billion,
after underwriting discounts and commissions. The Senior Notes are not
redeemable by the Company prior to maturity. The Senior Subordinated Notes
are redeemable at the option of the Company, in whole or from time to time in
part, at any time on or after January 15, 2002, at redemption prices ranging
from 104.313% in 2002 to 100% in 2005 and thereafter.
The Senior Notes are unsecured obligations of the Company ranking senior to
all subordinated indebtedness of the Company, including the Senior Subordinated
Notes, and equally in right of payment with all other indebtedness of the
Company, including borrowings under the New Credit Agreement described above.
The Senior Subordinated Notes also are unsecured obligations of the Company
subordinated in right of payment to all existing and future senior debt,
30
including the Senior Notes and borrowings under the New Credit Agreement.
In May 1992, OrNda issued $400 million aggregate principal amount of 12.25%
senior subordinated notes due May 2002. In August 1994, OrNda issued $125
million aggregate principal amount of 11.375% senior subordinated notes due
August 15, 2004. Both issues were redeemed by Tenet in connection with the
Merger on January 30, 1997.
CONVERTIBLE FLOATING-RATE DEBENTURES - All of the Company's Convertible
Floating-Rate Debentures due in April 1996 were redeemed or converted prior to
that date into shares of the Company's common stock through the exercise of
performance investment plan options purchased by key employees of the Company.
The performance investment plan options permitted the holder to purchase
debentures at 95% of their $105,264 face value. The debentures were convertible
into preferred stock, which, in turn, was convertible into common stock at an
exercise price equivalent to $15.83 per share. The proceeds from the
conversions during the year were used to repay bank loans under the Company's
credit agreements. During 1996, the Company reduced taxable income by the excess
of the fair market value of the stock obtained at the date of exercise over the
principal amount of the debentures redeemed. The resulting tax benefit of $20
million, was credited to additional paid-in capital. As a result of the
redemption and/or conversions of all of the Company's convertible floating-rate
debentures during fiscal 1996, at May 31, 1996 there are no potentially dilutive
securities except for warrants and employee stock options, which are common
stock equivalents for purposes of calculating earnings per share.
LOAN COVENANTS - The New Credit Agreement and the indentures governing the
Company's outstanding public debt have, among other requirements, limitations on
borrowings by, and liens on the assets of, the Company or its subsidiaries,
investments, the sale of all or substantially all assets and prepayment of
subordinated debt, a prohibition against the Company declaring or paying
dividends on or purchasing its stock unless its senior long-term unsecured debt
securities are rated BBB or higher by Standard and Poors' Rating Services and
Baa3 or higher by Moody's Investors Service, Inc., and covenants regarding
maintenance of specified levels of net worth, debt ratios and fixed-charge
coverage ratios. Because of the dividend restrictions, all of the Company's
retained earnings are restricted. The Company is in compliance with its loan
covenants. There are no compensating balance requirements for any credit line
or borrowing.
B. LONG-TERM DEBT MATURITIES AND LEASE OBLIGATIONS
Future long-term debt cash maturities and minimum operating lease payments
are as follows:
1997 1998 1999 2000 2001 LATER YEARS
------ ------- ------ ------- -------- -----------
(IN MILLIONS)
Long-term debt . . . . . . . . . $121.8 $178.9 $100.6 $124.8 $1,107.6 $2,985.7
Long-term leases . . . . . . . . 197.6 181.2 158.5 119.8 106.6 516.5
Rental expense under operating leases, including short-term leases, was
$130.8 million in 1994, $169.6 million
31
in 1995, and $239.1 million in 1996.
C. NOTE REDEMPTION
In addition to the above redemptions of OrNda's senior and senior
subordinated notes in connection with the Merger, the Company, on August 15,
1996, redeemed AMH's 13 1/2% Senior Subordinated Notes due 2001 for $1,038.60
per $1,000 original principal amount.
7. INCOME TAXES
Taxes on income from continuing operations consist of the following
amounts:
1994 1995 1996
------ ------ ------
(IN MILLIONS)
Currently payable:
Federal . . . . . . . . . . . $159.1 $115.6 $216.9
State . . . . . . . . . . . . 31.9 22.8 43.9
Foreign . . . . . . . . . . . 6.0 9.0 5.0
------ ------ ------
197.0 147.4 265.8
Deferred:
Federal . . . . . . . . . . . (46.0) (3.6) 80.0
State . . . . . . . . . . . . (6.0) 2.0 14.1
------ ------ ------
(52.0) (1.6) 94.1
------ ------ ------
Other . . . . . . . . . . . . - 5.0 23.0
------ ------ ------
$145.0 $150.8 $382.9
------ ------ ------
------ ------ ------
The difference between the Company's effective income tax rate and the
statutory federal income tax rate is shown below:
1994 1995 1996
------------------- ------------------ ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------ -------
(IN MILLIONS OF DOLLARS AND AS A PERCENT OF PRETAX INCOME)
Tax provision at statutory federal rate . . . . . $109.9 35.0% $145.8 35.0% $308.4 35.0%
State income taxes, net of federal income
tax benefit . . . . . . . . . . . . . . . . . 17.9 5.7% 17.1 4.1% 36.8 4.2%
Goodwill amortization . . . . . . . . . . . . . . - - 7.8 1.9% 26.9 3.1%
Gain on sale of foreign operations. . . . . . . . - - - - 30.0 3.4%
32
Net operating losses without tax benefit. . . . . 16.1 5.1% - - - -
Benefit of prior year net operating losses. . . . - - (20.6) (4.9)% (23.8) (2.7)%
Other . . . . . . . . . . . . . . . . . . . . . . 1.1 0.4% 0.7 0.1% 4.6 0.5%
------ ----- ------ ----- ------ -----
Taxes on income from continuing operations
and effective tax rates . . . . . . . . . . . $145.0 46.2% $150.8 36.2% $382.9 43.5%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
The Company recognized $60 million as income in the fiscal year ended
May 31, 1994 for the cumulative effect on prior years of adopting Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities as of May 31, 1995 and 1996 relate to
the following:
1995 1996
------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(IN MILLIONS)
Depreciation and fixed-asset basis differences . . . . . . . - $645.4 - $652.2
Reserves related to discontinued operations and
restructuring charges. . . . . . . . . . . . . . . . . . 81.0 - 87.0 -
Receivables-doubtful accounts and adjustments. . . . . . . . 131.9 - 143.8 -
Cash-basis accounting change . . . . . . . . . . . . . . . . - 21.0 - 9.2
Accruals for insurance risks . . . . . . . . . . . . . . . . 90.4 - 102.6 -
Intangible assets. . . . . . . . . . . . . . . . . . . . . . - 2.0 4.0 -
Other long-term liabilities. . . . . . . . . . . . . . . . . 125.6 - 86.0 -
Benefit plans. . . . . . . . . . . . . . . . . . . . . . . . 99.0 - 78.0 -
Other accrued liabilities. . . . . . . . . . . . . . . . . . 71.9 - 78.7 -
Investments and other assets . . . . . . . . . . . . . . . . 17.0 - - 87.0
Excess book basis over tax basis of certain investments. . . - 21.9 - -
Federal and state net operating loss carryforwards . . . . . 219.2 - 69.6 -
Other items. . . . . . . . . . . . . . . . . . . . . . . . . 14.9 8.0 17.5 -
------- ------- ------- -------
$850.9 $698.3 $667.2 $748.4
Valuation allowances . . . . . . . . . . . . . . . . . . . . (48.1) - (41.5) -
------- ------- ------- -------
$802.8 $698.3 $625.7 $748.4
------- ------- ------- -------
------- ------- ------- -------
Management believes that realization of the deferred tax assets in excess of
valuation allowances recorded at May 31, 1996 are more likely than not to occur
as temporary differences reverse against future taxable income.
33
The 1994 merger with American Healthcare caused an "ownership change" within the
meaning of Section 382(g) of the Internal Revenue Code for both Ornda and
American Healthcare. Consequently, allowable federal deductions relating to net
operating losses of OrNda and American Healthcare arising in periods prior to
the American Healthcare merger are thereafter subject to annual limitations of
approximately $19.0 million for OrNda and $16.0 million for American Healthcare.
In addition, approximately $55.0 million of the net operating loss deductions
are subject to an annual limitation of approximately $3.0 million due to prior
"ownership changes" of OrNda. The net operating loss deductions from pre-merger
tax years of American Healthcare may only be applied against the prospective
taxable income of the American Healthcare entities. These limitations are not
expected to significantly affect the ability of the Company to ultimately
recognize the benefit of these net operating loss deductions in future years.
8. CLAIMS AND LAWSUITS
A. PROFESSIONAL AND GENERAL LIABILITY INSURANCE
In its normal course of business, the Company is subject to claims and
lawsuits relating to injuries arising from patient treatment. The Company
believes that its liability for damages resulting from such claims and lawsuits
is adequately covered by insurance or is adequately provided for in its
supplemental consolidated financial statements.
Except for the facilities acquired in the Merger, the Company insures
substantially all of its professional and comprehensive general liability risks
in excess of self-insured retentions, which vary by hospital and by policy
period from $500,000 to $3.0 million per occurrence, through an insurance
company owned by several healthcare companies and in which the Company has a
majority equity interest. A significant portion of these risks is, in turn,
reinsured with major independent insurance companies. The general and
professional liabilitiy risks of the facilities acquired in the Merger were
self-insured up to $3.0 million on a per-occurrence basis and up to $30.0
million on an aggregate-per-claim-year basis. Through May 31, 1994, the Company
insured its professional and comprehensive general liability risks related to
its psychiatric and rehabilitation hospitals through a wholly-owned insurance
subsidiary, which reinsured risks in excess of $500,000 with major independent
insurance companies. The Company has reached the policy limits provided by this
insurance subsidiary related to the psychiatric hospitals in certain years. In
addition, damages, if any, arising from fraud and conspiracy claims in
psychiatric malpractice cases may not be insured.
In addition to the reserves recorded by the above insurance subsidiaries,
the Company maintains an unfunded reserve based on actuarial estimates for the
self-insured portion of its professional liability risks. Reserves for losses
and related expenses are estimated using expected loss-reporting patterns and
have been discounted to their present value using a weighted average discount
rate of approximately 9%. Adjustments to the reserves are included in results
of operations.
B. SIGNIFICANT LEGAL PROCEEDINGS
34
The Company has been involved in significant legal proceedings of an
unusual nature related principally to its psychiatric business. During the
years ended May 31, 1994, 1995 and 1996, the Company recorded provisions to
estimate the cost of the ultimate disposition of all of these proceedings and to
estimate the legal fees that it expected to incur. The Company has settled the
most significant of these matters. The remaining reserves for unusual
litigation costs that relate to matters that had not been settled as of May 31,
1996 and an estimate of the legal fees to be incurred subsequent to May 31, 1996
represent management's estimate of the remaining net costs of the ultimate
dispostion of these matters. There can be no assurance, however, that the
ultimate liability will not exceed such estimates. Although, based upon
information currently available to it, management believes that the amount of
damages, if any, in excess of its reserves for unusual litigation costs that may
be awarded in any of the following unresolved legal proceedings cannot
reasonably be estimated, management does not believe it is likely that any such
damages will have a material adverse effect on the Company's results of
operations, liquidity or capital resources. All of the costs associated with
these legal proceedings are classified in discontinued operations.
PSYCHIATRIC MALPRACTICE CASES - The Company continues to defend a greater
than normal level of litigation relating to certain of its subsidiaries' former
psychiatric operations. The majority of the lawsuits filed contain allegations
of medical malpractice as well as allegations of fraud and conspiracy against
the Company and certain of its subsidiaries and former employees. Also named as
defendants are numerous doctors and other healthcare professionals. The Company
believes that the increase in litigation stems, in whole or in part, from
advertisements by certain lawyers seeking former psychiatric patients in order
to file claims against the Company and certain of its subsidiaries. The
advertisements focus, in many instances, on the Company's settlement of past
disputes involving the operations of its psychiatric subsidiaries, including the
Company's 1994 resolution of the government's investigation and a corresponding
criminal plea agreement involving a psychiatric subsidiary of the Company.
Among the suits filed during fiscal 1995 were two lawsuits in Texas state court
with approximately 740 individual plaintiffs at present who purport to have been
patients in certain Texas psychiatric facilities. During fiscal 1996, 64
plaintiffs voluntarily withdrew from one of the lawsuits, and the Company's
motion to recuse the original trial judge in that lawsuit has been granted. In
the second lawsuit, the Texas Supreme Court has ruled that lead counsel for the
plaintiffs may not continue to represent the plaintiffs due to a conflict of
interest as asserted by the defendants. Neither of the two cases currently is
set for trial.
During fiscal 1995 and 1996, lawsuits with approximately 210 plaintiffs at
present who purport to have been patients in certain Washington, D.C.
psychiatric facilities, containing allegations similar to those contained in the
Texas cases described above, were filed in the District of Columbia.
In addition to the above, a purported class action was filed in Texas state
court in May 1995 also containing allegations of fraud and conspiracy similar to
those described in the preceding paragraphs. The plaintiff purports to
represent all persons who were voluntarily admitted to one of 11 psychiatric
hospitals in Texas between January 1, 1981, and December 31, 1991, and who also
fit into one or more of eight categories based on such factors as their age at
the time of admission, status of their insurance at the time of discharge and
whether a certain type of examination was
35
conducted prior to their being admitted. In February 1996, an insurance company
that purports to have paid claims on behalf of the potential class intervened in
the action and the case was removed to the U.S. District Court in Houston,
Texas. A motion by the plaintiffs to remand the case to Texas state court has
been denied. The class has not been certified and the Company believes that
the class is not capable of being certified.
The Company expects that additional lawsuits with similar allegations will
be filed. The Company believes it has a number of defenses to each of these
actions and will defend the litigation vigorously. Until the lawsuits are
resolved, however, the Company will continue to incur substantial legal
expenses. At May 31, 1996, the reserves for unusual litigation costs related to
these actions primarily represent the estimated costs of defending the actions.
SHAREHOLDER LAWSUITS - As a result of mediation, the parties in the
shareholder derivative and class action suits filed against the Company in 1991
agreed to a global settlement of all plaintiffs' claims. Pursuant to the
settlement, which was approved by the court in January 1996, a total of $63.75
million plus interest was paid by or on behalf of the defendants. Of this
amount, Tenet's directors' and officers' liability insurance ("D&O") carriers
paid a total of $32.5 million plus interest on behalf of the individual
defendants. In addition, one of the D&O carriers reimbursed the Company for
$5.5 million in attorneys' fees expended on the litigation.
Two additional federal class actions filed in August 1993 were consolidated
into one action. This consolidated action is on behalf of a purported class of
shareholders who purchased or sold stock of the Company between January 14, 1993
and August 26, 1993, and alleges violations of securities laws by the Company
and certain of its executive officers. After unsuccessful mediation, the
parties agreed in May 1995 to proceed with the litigation. In June 1995, the
defendants filed a motion to dismiss and to strike plaintiffs' complaint, which
motion was still pending as of January 30, 1997. The defendants' motion was
subsequently denied.
C. LITIGATION RELATING TO THE AMERICAN MEDICAL HOLDINGS MERGER
A total of nine purported class actions were filed challenging the American
Medical AMH Merger in both Delaware and California. In April 1996, the parties
to the class actions executed a stipulation of settlement, and the court has
issued an order approving the settlement. Under the terms of that settlement,
the Company agreed to pay $350,000 for the plaintiffs' attorneys fees and agreed
that for a period of one year following final approval of the settlement it will
not engage in any transaction that will be dilutive to existing shareholders
without that transaction being approved by a majority of its outside directors.
D. ORNDA INVESTIGATION
OrNda currently is under civil investigation under the direction of the
Civil Division of the Department of Justice concerning possible violations of
Medicare rules and regulations and the False Claims Act. The investigation is
primarily related to arrangements between physicians and 12 hospitals that OrNda
acquired from Summit
36
in 1994. OrNda is cooperating fully with the government investigation and
has produced documents related to the investigation. Also, in an apparently
unrelated matter, the government has requested OrNda to provide similar
records from a single hospital outside the group acquired from Summit. If
any wrongdoing has occurred, civil and possibly criminal liability could
result, and OrNda could be subject to fines, penalties and damages and could
be excluded from Medicare and other government reimbursement programs. An
agreement in principle, however, has been reached with the Department of
Justice and the qui tam relator with respect to the investigation related to
the former Summit hospitals. Based in part on the agreement in principle,
management believes that the final outcome of this investigation is not
expected to have a material adverse effect on the Company's financial
position or results of operations.
9. SHAREHOLDERS' EQUITY
A. COMMON STOCK
On November 6, 1995, OrNda completed the sale of 10,000,000 shares of its
common stock (equivalent to 13,500,000 shares of Tenet common stock) at a
$17.525 per share public offering price. On November 9, 1995, the underwriters
exercised an option to purchase an additional 1,500,000 shares to cover over-
allotments (equivalent to 2,025,000 shares of Tenet common stock). The net
proceeds of approximately $192.7 million, after deducting offering expenses and
underwriting discounts, were used to reduce all of the indebtedness under the
revolving portion of the Restated Credit Facility in the amount of $27.2
million. The remaining proceeds were used for general corporate purposes.
B. PREFERRED STOCK PURCHASE RIGHTS AND PREFERRED STOCK
In 1988, Tenet distributed Preferred Stock Purchase Rights to holders of
Tenet's common stock and authorized the issuance of additional rights for common
stock issued after that date. The rights expire in December 1998 unless
previously exercised or redeemed and do not entitle the holders thereof to vote
as shareholders or receive dividends.
The Company may redeem the rights at $.025 per right at any time up to the
10th business day after a public announcement that a person has acquired 20% or
more of the Company's common stock in a transaction or transactions not approved
by the Board of Directors. The rights are not exercisable until after the date
on which the Company's right to redeem the rights has expired. When
exercisable, each right entitles the holder thereof to purchase from the Company
one two-thousandth of a share of Series A Junior Participating Preferred Stock
("Series A Preferred Stock") at a price of $40.61, subject to adjustment.
Subject to the foregoing, in the event the Company is acquired in a merger
or other business combination
37
transaction in which shares of the Company's common stock are exchanged for
shares of another company or more than 50% of the Company's assets are sold,
each holder of a right generally will be entitled upon exercise to purchase, for
the then-current exercise price of the right, common stock of the surviving
company having a market value equal to two times the exercise price of the
rights. The plan also provides that, in the event of certain other mergers or
business combinations, certain self-dealing transactions or the acquisition by a
person of stock having 30% or more of the Company's general voting power, each
holder of a right generally will be entitled upon exercise to purchase, for the
then-current exercise price of the right, the number of shares of Series A
Preferred Stock having a market value equal to two times the exercise price of
the rights.
The Series A Junior Participating Preferred Stock for which the Preferred
Stock Purchase Rights may be exchanged is nonredeemable and has a par value of
$0.15 per share. On January 27, 1997, the Board of Directors approved an
increase in the number of preferred shares authorized from 225,000 to 350,000.
None of the 350,000 authorized shares are outstanding.
On October 15, 1991, OrNda issued 1 million shares of $.01 par value
Payable in Kind Cumulative Redeemable Convertible Preferred Stock (the "PIK
Preferred"). The PIK Preferred has an aggregate liquidation value of $15
million and is entitled to dividends at the rate of 9% of the liquidation value
thereof until October 31, 1999, 9.9% from November 1, 1999 through October 31,
2000, 10.8% from November 1, 2000 through October 31, 2001, and 15% thereafter.
OrNda issued additional shares of PIK Preferred as paid-in-kind dividends of
123,468 in fiscal 1994, 133,474 in fiscal 1995, and 33,234 in fiscal 1996.
On November 7, 1995, OrNda issued a notice of redemption to the holders of
its PIK Preferred for $15 per share with a redemption date of December 8, 1995.
In the fiscal quarter ended November 30, 1995, 1,355,519 shares of PIK Preferred
were converted into 1,355,519 shares of OrNda's common stock (equivalent to
1,829,950 shares of Tenet common stock). On December 8, 1995, the remaining
7,416 shares of PIK Preferred were redeemed for $15 per share plus dividends of
$0.16 per share accrued through the redemption date.
C. WARRANTS
At August 31, 1996, there were warrants outstanding to purchase 125,009
shares of common stock at an exercise price of $13.25 per share. Warrants can
be exercised through April 30, 2000.
10. STOCK BENEFIT PLANS
Under Tenet's 1983, 1991 and 1995 stock incentive plans and OrNda's 1994
stock incentive plan and 1995 directors' stock option plan, stock options and
incentive stock awards have been and may be made to certain officers and other
key employees. Stock options generally are granted at an exercise price equal
to the fair market value of the
38
Company's shares on the date of grant and are normally exercisable at the rate
of one-third per year beginning one year from the date of grant. Stock options
generally expire 10 years from the date of grant. No incentive stock awards
have been granted since 1994.
All awards granted under Tenet's 1983, 1991 and 1995 plans will vest under
circumstances defined in the plans or under certain employment arrangements,
including, with the consent of the Compensation and Stock Option Committee of
the Board of Directors, upon a change in control of the Company. All awards
granted under OrNda's plans vested upon consummation of the Merger on January
30, 1997 and no new options will be granted.
Charges to continuing operations associated with these stock benefit plans
were $14.5 million in 1994, $4.0 million in fiscal 1995, and $2.0 million in
fiscal 1996.
New stock awards may be made only under Tenet's 1991 and 1995 plans and,
until January 30, 1997, under OrNda's 1994 plan. At May 31, 1996, there were
295,647 shares of common stock available under the 1991 plan, 8,842,500 shares
available under the 1994 plan and 9,137,472 shares available under the 1995 plan
for future awards. The table below summarizes the transactions in all stock
option plans in which employees participate:
1995 1996
----------- -----------
(SHARES OF COMMON STOCK)
Outstanding at beginning of year. . . . . . . . 22,838,393 25,444,192
Granted ($13.875 to $20.875 per
share in 1995 and 1996) . . . . . . . . . . . . 6,477,950 5,717,921
Exercised ($1.637 to $17.50 per
share in 1995 and 1996). . . . . . . . . . . (1,917,773) (3,094,542)
Canceled and other adjustments. . . . . . . . . (1,954,378) (2,096,225)
----------- -----------
Outstanding at end of year ($2.904 to $22.438
per share at May 31, 1996) . . . . . . . . . 25,444,192 25,971,346
----------- -----------
----------- -----------
Exercisable at end of year. . . . . . . . . . . 12,363,586 13,135,675
----------- -----------
----------- -----------
In September 1994 a new 1994 Directors Stock Option Plan replaced the 1991
Director Restricted Share Plan which replaced a 1985 Director Stock Option Plan.
Awards previously made under the 1985 and 1991 plans remain outstanding, but new
awards are made only under the 1994 plan. The plan makes available for issuance
to nonemployee directors options to purchase 500,000 shares of common stock.
Under the plan each nonemployee director will receive a stock option for 5,000
common shares upon initially being elected to the Board of Directors and on each
January thereafter. Awards will have an excercise price equal to the fair
market value of the Company's shares on the date of grant, will vest one year
after the date of grant and will expire 10 years after the date of grant. At
May 31, 1996, there were options outstanding under the Directors plans for
322,820 shares of common stock at exercise prices of $8.67 to $21.50 per share.
39
In November 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 - "Accounting for Stock-Based Compensation," which establishes a
new accounting standard for the measurement and recognition of stock-based
awards to employees and others. This standard permits entities to continue to
account for stock-based awards using present standards prescribed by APB Opinion
No. 25 - "Accounting for Stock Issued to Employees." The Company has elected to
continue using the provisions of APB Opinion No. 25 in accounting for its stock-
based awards. Under this option, however, the Company will be required to
disclose the pro forma effect of stock-based awards on net income and earnings
per share as if SFAS No. 123 had been adopted. The disclosure requirements of
SFAS No. 123 are effective for fiscal years beginning after December 15, 1995.
The pro forma disclosures will include the effect of all awards granted in
fiscal years that began after December 15, 1994.
11. EMPLOYEE STOCK PURCHASE PLAN
On September 27, 1995, the Company's shareholders approved its 1995
Employee Stock Purchase Plan under which the Company is authorized to issue up
to 2,000,000 shares of common stock to eligible employees of the Company or its
designated subsidiaries who customarily work at least 20 hours per week and six
months per year. Under the terms of the plan, employees can elect to have
between 1% and 10% of their base earnings withheld each calendar quarter to
purchase, on the last day of the quarter, shares of the Company's common stock
at a purchase price equal to 85% of the lower of the closing price on the first
day of the quarter or its closing price on the last day of the quarter. The plan
commenced on April 1, 1996. Under the plan, the Company sold 114,876 shares to
3,666 employees on June 30, 1996 at a price of $17.85 per share.
12. EMPLOYEE RETIREMENT PLANS
Substantially all domestic employees who are employed by the Company or
its subsidiaries, upon qualification, are eligible to participate in Tenet or
OrNda defined contribution 401(k) plans. Employees who elect to participate
generally make mandatory contributions from 1% to 16% of their eligible
compensation, and the Company matches such contributions up to a maximum
percentage which varies by plan. Company contributions to the plan were
approximately $20.2 million in 1994, $21.5 million in 1995 and $31.8 million
for fiscal 1996.
Substantially all employees who were employed by American Medical
International (a wholly-owned subsidiary of AMH) prior to the AMH Merger were
eligible to participate in one of several defined benefit pension plans (the
"AMI Plans"). The benefits under the plans are based on years of service and
the employee's base compensation as defined in the AMI Plans. The Company's
policy is to fund pension costs accrued within the limits allowed under federal
income tax regulations. Contributions are intended to provide not only for
benefits attributed to credited service to date, but also for those expected to
be earned in the future. Effective December 31, 1995, the AMI Plans were frozen.
As of that date, participants under the AMI Plans ceased accruing new benefits
and the AMI Plans ceased accepting new participants.
40
The Company continues to fund benefits accrued prior to that date.
The following table sets forth the funded status of the AMI Plans and
amounts recognized in the consolidated financial statements as of May 31, 1995
and 1996:
1995 1996
------- ------
(IN MILLIONS)
Actuarial present value of accumulated
benefit obligation:
Vested. . . . . . . . . . . . . . . . . . $ 271 $ 249
------ -----
------ -----
Accumulated . . . . . . . . . . . . . . . 282 264
------ -----
------ -----
Projected benefit obligation. . . . . . . . . 285 264
Plan assets at fair value, primarily listed
stocks and corporate bonds . . . . . . . . (223) (296)
------ -----
Shortfall/(excess) of plan assets compared
to projected benefit obligation. . . . . . 62 (32)
Unrecognized net gain . . . . . . . . . . . . 13 80
------ -----
Pension liability . . . . . . . . . . . . . . $ 75 $ 48
------ -----
------ -----
Net pension cost for the AMI Plans was $2 million and $4 million for the
three months ended May 31, 1995 and for the year ended May 31, 1996,
respectively. The discount rate used in determining the actuarial present value
of the projected benefit obligation for the AMI Plans approximated 7.0% at May
31, 1995 and 8.0% as of May 31, 1996. The Company does not have a plan that
provides any postretirement benefits other than pensions to retired employees.
13. INVESTMENTS
In September 1995, Vencor acquired all of the outstanding common stock of
Hillhaven. As a result of the transaction, the shares of Hillhaven common stock
that had been owned by the Company were exchanged for 8,301,067 shares of Vencor
common stock. In addition, the Company received approximately $92 million in
cash for its Hillhaven Series C and Series D preferred stock. The exchange and
sale of preferred stock resulted in a gain of approximately $176 million. The
Company's investment in Hillhaven previously had been accounted for under the
equity method. Following the exchange, the Company owned approximately 20% of
Vencor's common stock and began to account for its investment in Vencor common
stock in accordance with SFAS No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." The Company classifies such securities as
"available for sale" whereby the carrying value of the unrestricted Vencor
shares will be adjusted to market value at the end of each accounting period
through a credit or charge, net of income taxes, to shareholders' equity. At
May 31, 1996, the market value of the investment was approximately $263 million.
(See Note 6.)
41
The Company is contingently liable under various guarantees for $146
million of Vencor's obligations to third parties, including $139 million of
lease obligations and $7 million of long-term debt obligations. The Company is
also contingently liable for approximately $75 million in lease obligations
relating to certain rehabilitation facilities sold in 1994.
In August 1994, the Company completed the sale of a controlling interest in
TRC, an operator of outpatient renal dialysis centers. This transaction
resulted in a $32 million gain to the Company. As part of the transaction, the
Company also received a $75 million cash distribution from TRC prior to the sale
and retained an approximate 25% minority interest. In October 1995, TRC
completed an initial public offering of 6,000,000 shares of its common stock,
which resulted in an additional gain to the Company of approximately $17 million
in fiscal. The Company's ownership interest was reduced to approximately 11.6%
as a result of a secondary offering by TRC in April 1996.
Because the Company owned less than 20% of the common shares after the
October 1995 stock sale by TRC, and does not exercise significant influence
over TRC, the Company began accounting for its investment in accordance with
SFAS No. 115. At May 31, 1996, the Company's carrying value in its investment
in TRC was $49 million and the fair market value of this investment was
approximately $104 million.
14. IMPAIRMENT LOSSES
In March 1995, the FASB issued SFAS No. 121 - "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
The statement is effective for fiscal years beginning after December 15, 1995,
but the Company has elected to adopt it for the year ended May 31, 1996.
Accordingly, the Company recorded, in the fourth quarter of fiscal 1996, an
impairment loss of approximately $86 million, before tax benefits of
approximately $32 million ($0.18 per fully diluted share). The assets deemed to
be impaired consist of three rehabilitation hospitals, four general hospitals
and a parcel of undeveloped land. Two of the seven facilities are being held for
sale. In the case of the rehabilitation hospitals, the principal facts and
circumstances leading to the impairment include recent and forecast reductions
in hospital admissions and payment rates caused by payor-driven shifts in care
from traditional rehabilitation services to lower-cost skilled nursing
facilities. The impairment of the general hospitals is the result of (i) a
change in the use of one of the facilities from acute care to less-intense
specialty care, (ii) lower patient volumes, and (iii) adverse changes in payor
mix.
In determining the amount of the impairment loss, the assets' fair values
were determined by specific market appraisals, reference to recent sales
prices of comparable facilities, either on a per-bed or earnings multiple basis,
or by the present values of discounted expected future cash flows. The two
facilities held for sale had operating losses aggregating $5 million in fiscal
1996, have carrying amounts totaling $34 million as of May 31, 1996 and are
expected to be sold by December 31, 1996.
42
15. RESTRUCTURING CHARGES
In connection with the AMH Merger, the Company relocated substantially all
of its hospital support activities previously located in Southern California and
Florida to AMH's former corporate headquarters located in Dallas, Texas.
Severance payments and outplacement services for involuntary terminations of
approximately 890 former employees and other related costs in connection with
this move were estimated to be $37 million ($0.09 per fully diluted share) and
were classified as restructuring charges in the accompanying supplemental
consolidated statements of operations for the year ended May 31, 1995.
During the fourth quarter of fiscal 1994, the Company initiated a plan to
significantly decrease overhead costs through a reduction in corporate and
division staffing levels and to review the resulting office space needs of all
corporate operations. The Company decided to sell its Santa Monica, California
corporate headquarters building and to lease substantially less office space in
that building or at an alternative site. Costs of the write-down of the
building, employee severance benefits for approximately 110 employees and other
expenses directly related to the overhead reduction plan were estimated to be
approximately $77 million. The Company's corporate headquarters were moved to
new leased office space in Santa Barbara, California in May 1996, and the former
headquarters building was sold the following month.
Actual costs incurred and charged against the restructuring reserves were
approximately $35 million in 1994, $23 million in 1995 and $32 million in 1996.
The balances of the reserves are included in other current liabilities or other
long-term liabilities in the Company's supplemental consolidated balance sheets
at May 31, 1995 and 1996.
16. DISCONTINUED OPERATIONS - PSYCHIATRIC HOSPITAL BUSINESS
In November 1993, the Company decided to discontinue its psychiatric
hospital business and adopted a plan to dispose of its psychiatric hospitals and
substance abuse recovery facilities. The supplemental consolidated statements
of operations reflect the operating results of the discontinued business
separately from continuing operations. All operating results and gains or
losses on disposals of facilities for the discontinued business for periods
subsequent to November 30, 1993, have been charged to the reserve for estimated
losses during the phase-out period, except for the following: (i) in the fourth
quarter of fiscal 1995, the Company recorded an additional $16 million of
estimated litigation costs (less income tax benefits of $7 million) and (ii) in
the fourth quarter of fiscal 1996, the Company recorded $16 million (less income
tax benefits of $6 million) for additional estimated legal costs and $25 million
(less tax benefits of $10 million) to increase the reserves of the Company's
wholly-owned insurance subsidiary for professional liability claims, all of
which related to the former psychiatric hospitals.
Net operating revenues for the discontinued operations for fiscal 1994 were
$476 million. Losses from operations during the year were $266 million, before
income tax benefits of $111 million. In fiscal 1994, the Company recognized a
charge for estimated losses upon disposal amounting to $414 million, including
$379 million of costs to settle federal
43
and state investigations and other unusual legal costs related to the
psychiatric hospital business, along with $433 million of estimated operating
losses during the phase-out period, less tax benefits of $301 million. By May
31, 1995, substantially all of the assets of the discontinued operations had
been sold.
17. DERIVATIVE FINANCIAL INSTRUMENTS
The Company has only limited involvement with derivative financial
instruments and does not use them for trading purposes. These derivatives are
nonleveraged and involve little complexity. They are used to manage well-defined
interest risks. The notional amounts of derivatives in the tables below do not
represent amounts exchanged by the parties and, thus, are not a measure of the
exposure of the Company through its use of derivatives. There are no cash or
collateral requirements in connection with these agreements.
INTEREST RATE SWAPS - These derivative financial instruments allow the
Company to make long-term borrowings at floating rates and then swap them into
fixed rates that are lower than those available to the Company if fixed-rate
borrowings were made directly. Under interest rate swaps, the Company agrees
with other parties to exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by reference to an
agreed notional principal amount. Cross-currency interest rate swaps allow
borrowings to be made in foreign currencies, gaining access to additional
sources of financing while limiting foreign exchange risk. The Company's
exposure to credit loss under these agreements is limited to the interest rate
spread in the event of nonperformance by the other parties. Because the other
parties are creditworthy financial institutions, generally commercial banks, the
Company does not expect nonperformance.
The following table shows the Company's interest rate swaps and their
weighted average interest rates as of the end of the most recent two fiscal
years. Variable interest rates may change significantly, affecting future cash
flows.
1995 1996
--------- ---------
(IN MILLIONS)
Notional amount for agreements under which the
Company receives fixed rates . . . . . . . . . . $ 29 $ 29
Average receive rate . . . . . . . . . . . . . . 7.0% 7.0%
Average pay rate . . . . . . . . . . . . . . . . 5.7% 6.0%
Contract duration. . . . . . . . . . . . . . . . 2 years 1 year
Notional amount for agreements under which the
Company pays fixed rates . . . . . . . . . . . . $ 120 $ 69
Average pay rate . . . . . . . . . . . . . . . . 8.5% 8.7%
Average receive rate . . . . . . . . . . . . . . 5.6% 5.8%
Contract duration. . . . . . . . . . . . . . . . 1-5 years 3-4 years
44
18. SUPPLEMENTAL SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Supplemental quarterly financial information combining the three-month
periods inTenet's fiscal years ended May 31, 1995 and 1996 with OrNda's
corresponding three-month periods, respectively is summarized below (in
millions, except for per share data):
FISCAL 1995 QUARTERS FISCAL 1996 QUARTERS
(IN MILLIONS, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------------------------------------
Net operating revenues . . . . . . . . . . . . $1,057.8 $1,056.5 $1,102.2 $1,853.6 $1,767.1 $1,863.3 $1,972.8 $2,028.2
Income from continuing operations. . . . . . . $ 40.0 $ 59.5 $ 68.8 $ 57.3 $ 134.3 $ 202.6 $ 98.2 $ 55.8
Net income . . . . . . . . . . . . . . . . . . $ 35.9 $ 59.5 $ 68.8 $ 28.0 $ 134.3 $ 202.6 $ 98.2 $ 7.6
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Earnings per share from continuing operations:
Primary. . . . . . . . . . . . . . . $ 0.18 $ 0.27 $ 0.30 $ 0.22 $ 0.51 $ 0.75 $ 0.33 $ 0.19
Fully diluted. . . . . . . . . . . . $ 0.18 $ 0.25 $ 0.29 $ 0.21 $ 0.49 $ 0.72 $ 0.33 $ 0.19
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Quarterly operating results are not necessarily representative of
operations for a full year. Net operating revenues, amortization and interest
expense, for example, increased significantly in the quarters following the AMH
Merger on March 1, 1995. Income from continuing operations and net income in
the first quarter of 1995 includes the effects of a $32 million gain from the
sale of a subsidiary's common stock. The fourth quarter of 1995 was impacted by
a restructuring charge of $37 million, a $9 million charge for discontinued
operations and a $20 million extraordinary charge from early extinguishment of
debt. Unusual items in 1996 include a $124 million gain on asset disposals in
the first quarter, a $171 million gain on asset disposals in the second quarter,
a $17 million gain from the sale of a subsidiary's common stock in the second
quarter, impairment losses of $86 million and asset disposal gains of $34
million in the fourth quarter, as well as a $25 million net charge to
discontinued operations and a $23 million extraordinary charge from early
extinguishment of debt in the fourth quarter.
45
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Tenet Healthcare Corporation:
We have audited the accompanying supplemental consolidated balance sheets
of Tenet Healthcare Corporation and subsidiaries as of May 31, 1995 and 1996,
and the related supplemental consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years in the three-year
period ended May 31, 1996. These supplemental consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these supplemental consolidated financial statements based
on our audits. We did not audit the financial statements of OrNda HealthCorp
and subsidiaries, which financial statements reflect total assets constituting
20% and 23% as of May 31, 1995 and 1996, respectively, and total revenues
constituting 30%, 36% and 28% for each of the years in the three-year period
ended May 31, 1996, respectively, of the related consolidated totals. Those
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for OrNda HealthCorp and subsidiaries, is based solely on the report of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect
to the merger of Tenet Healthcare Corporation and OrNda HealthCorp on January
30, 1997, which has been accounted for as a pooling-of-interests as described in
Note 1 to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of Tenet Healthcare
Corporation and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tenet Healthcare
Corporation and subsidiaries as of May 31, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended May 31, 1996, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the business combination.
As discussed in Note 7 to the supplemental consolidated financial
statements, the Company changed its method of accounting for income taxes
effective June 1, 1993.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 1, 1997
46