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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: I-7293
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TENET HEALTHCARE CORPORATION
(Exact name of Registrant as specified in its charter)
NEVADA 95-2557091
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or No.)
organization)
3820 STATE STREET
SANTA BARBARA, CALIFORNIA 93105
(Address of principal (Zip Code)
executive offices)
AREA CODE (805) 563-7000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------------------------------- ------------------------
Common Stock New York Stock Exchange
Pacific Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
7 3/8% Medium Term Notes due 1997 New York Stock Exchange
9 5/8% Senior Notes due 2002 New York Stock Exchange
8 5/8% Senior Notes due 2003 New York Stock Exchange
7 7/8% Senior Notes due 2003 New York Stock Exchange
8% Senior Notes due 2005 New York Stock Exchange
6% Exchangeable Subordinated Notes due 2005 New York Stock Exchange
10 1/8% Senior Subordinated Notes due 2005 New York Stock Exchange
8 5/8% Senior Subordinated Notes due 2007 New York Stock Exchange
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. / /
As of July 31, 1997, there were 304,733,190 shares of Common Stock
outstanding. The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, based on the closing price of these shares on
the New York Stock Exchange, was $9,116,106,163. For the purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended May 31, 1997, have been incorporated by reference into Parts I, II
and IV of this Report. Portions of the definitive Proxy Statement for the
Registrant's 1997 Annual Meeting of Shareholders have been incorporated by
reference into Part III of this Report.
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT--1997
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
PAGE
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PART I
Item 1. Business................................................................................... 1
Item 2. Properties................................................................................. 19
Item 3. Legal Proceedings.......................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........................................ 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 20
Item 6. Selected Financial Data.................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 20
Item 8. Financial Statements and Supplementary Data................................................ 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 20
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 21
Item 11. Executive Compensation..................................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 21
Item 13. Certain Relationships and Related Transactions............................................. 21
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.......................... 21
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Note: The responses to Items 5 through 8, Item 12 and portions of Items 1, 3,
10, 11 and 14 are included in the Registrant's Annual Report to
Shareholders for the year ended May 31, 1997, or the definitive Proxy
Statement for the Registrant's 1997 Annual Meeting of Shareholders. The
required information is incorporated into this Report by reference to
those documents and is not repeated herein.
PART I
ITEM 1. BUSINESS
GENERAL
Tenet Healthcare Corporation (together with its subsidiaries, "Tenet", the
"Registrant" or the "Company") is the second largest investor-owned healthcare
services company in the United States. At May 31, 1997, Tenet's subsidiaries
owned or operated 128 general hospitals with 27,959 licensed beds and related
healthcare facilities serving urban and rural communities in 22 states and held
investments in other healthcare companies. Tenet's subsidiaries also owned or
operated a small number of rehabilitation hospitals, specialty hospitals,
long-term care facilities, psychiatric facilities and medical office buildings
located on the same campus as, or nearby, its general hospitals, as well as
various ancillary healthcare businesses, including outpatient surgery centers,
home healthcare programs, ambulatory, occupational and rural healthcare clinics,
health maintenance organizations, a preferred provider organization and a
managed care insurance company. Tenet intends to continue its strategic
acquisitions of and partnerships with additional general hospitals and related
healthcare businesses in order to expand and enhance its integrated healthcare
delivery systems.
On January 30, 1997, the Company acquired OrNda HealthCorp ("OrNda"). The
acquisition was accomplished when a subsidiary of Tenet was merged with and into
OrNda (the "Merger"), leaving OrNda and all of its subsidiaries as wholly-owned
subsidiaries of Tenet. OrNda now is known as Tenet HealthSystem HealthCorp. The
Merger was accounted for as a pooling-of-interests and, accordingly, the
consolidated financial statements incorporated herein by reference and all
statistical data shown herein prior to the Merger have been restated to include
the accounts and results of operations of OrNda for all periods presented. Prior
to the Merger, OrNda was the third largest investor-owned provider of healthcare
services in the United States. The Merger joined Tenet's then-existing 77
hospitals and related healthcare operations with OrNda's then-existing 50
general hospitals and related healthcare operations.
As discussed in more detail under Domestic General Hospitals on page 2
below, Tenet's subsidiaries, including OrNda, acquired 11 general hospitals
during fiscal 1997 and four general hospitals during the first quarter of fiscal
1998. In addition, Tenet sold one general hospital and closed one general
hospital during fiscal 1997. Tenet also sold one general hospital and closed one
general hospital during the first quarter of fiscal 1998.
At May 31, 1997, Tenet's subsidiaries also owned or operated various
ancillary healthcare operations, discussed in more detail under Other Domestic
Operations on page 7 below, and held as investments interests in Vencor, Inc.
("Vencor"), Total Renal Care Holdings, Inc. ("TRC") and Health Care Property
Partners ("HCPP"). These investments are discussed in more detail under
Investments on page 8 below.
In connection with the Merger, Tenet issued $400 million of 7 7/8% Senior
Notes due 2003, $900 million of 8% Senior Notes due 2005 and $700 million of
8 5/8% Senior Subordinated Notes due 2007, and entered into a new revolving
credit agreement that allows Tenet to borrow, repay and reborrow up to $2.8
billion prior to its January 31, 2002, maturity date. The Company had
approximately $2.0 billion available under its new revolving credit agreement at
May 31, 1997.
Under segment reporting criteria, Tenet believes that "healthcare" is its
only material business segment. See the discussion of Tenet's revenues and
operations in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in Tenet's 1997 Annual Report to Shareholders.
1
OPERATIONS
DOMESTIC GENERAL HOSPITALS
All of Tenet's operations are conducted through its subsidiaries and
affiliates. Tenet's general hospital and other healthcare operations are
conducted primarily through the following three subsidiaries and their
subsidiaries and affiliates: (i) Tenet HealthSystem Hospitals, Inc., (ii) Tenet
HealthSystem Medical, Inc. and (iii) Tenet HealthSystem HealthCorp. At May 31,
1997, Tenet's subsidiaries and affiliates operated 128 general hospitals (27,959
licensed beds) serving urban and rural communities in 22 states. Of those
general hospitals, 100 are owned by Tenet's subsidiaries and affiliates and 28
are owned by and leased from third parties (including two leased from HCPP, as
discussed on page 8 below, and two owned facilities that are on leased land).
During fiscal 1997, Tenet's subsidiaries, including OrNda, acquired the
ownership of (or interests in) the following 11 general hospitals: (i) the
378-bed Hialeah Hospital in Hialeah, Florida, (ii) the 136-bed Cypress Fairbanks
Medical Center in Houston, Texas, (iii) the 68-bed Westside Medical Center in
Los Angeles, California, (iv) the 400-bed Centinela Hospital Medical Center in
Inglewood, California, (v) the 329-bed St. Vincent Hospital in Worcester,
Massachusetts, (vi) the 319-bed Lloyd Noland Hospital in Birmingham, Alabama,
(vii) the 296-bed Western Medical Center in Santa Ana, California, (viii) the
193-bed Western Medical Center - Anaheim in Anaheim, California, (ix) the
357-bed North Shore Medical Center in Miami, Florida, (x) the 312-bed Brookside
Hospital in San Pablo, California, and (xi) the 398-bed Desert Hospital in Palm
Springs, California. In addition, Tenet sold one general hospital and closed one
general hospital during fiscal 1997.
In the first quarter of fiscal 1998, Tenet acquired the three-hospital
1,030-bed Deaconess Incarnate Word Health System in St. Louis, Missouri, and the
28-bed Sylvan Grove Hospital in Jackson, Georgia, and announced that the
construction of a new hospital in Weston, Florida, under a joint venture with
the Cleveland Clinic has been approved by the State of Florida. During the first
quarter of fiscal 1998, the Company also entered a definitive agreement with
Eastern Health System, Inc. ("Eastern") to form a joint venture, which will be
managed by Tenet, to operate four general hospitals and substantially all of
their related operations in the greater Birmingham, Alabama area. In addition,
Tenet sold one facility and closed one facility during the first quarter of
fiscal 1998. Tenet also entered into a definitive agreement to sell the 90-bed
Plateau Medical Center in Oak Hill, West Virginia.
Each of Tenet's general hospitals offers acute care services and most offer
operating and recovery rooms, radiology services, intensive care and coronary
care nursing units, pharmacies, clinical laboratories, respiratory therapy
services, physical therapy services and outpatient facilities. A number of the
hospitals also offer tertiary care services such as open heart surgery, neonatal
intensive care, neuroscience, orthopedic services and oncology services. Three
of the Company's hospitals, Memorial Medical Center, USC University Hospital and
Sierra Medical Center, offer quaternary care in such areas as heart, lung, liver
and kidney transplants and USC University Hospital and Sierra Medical Center
also offer gamma knife brain surgery. With the exception of one general hospital
that was acquired in fiscal 1996 and one general hospital acquired in the first
quarter of fiscal 1998, each of the Company's facilities that is eligible for
accreditation is fully accredited by the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"), the Commission on Accreditation of
Rehabilitation Facilities (in the case of rehabilitation hospitals) or another
appropriate accreditation agency. Both of the unaccredited general hospitals
referred to above are in the process of becoming accredited for the first time.
With such accreditation, the Company's hospitals are eligible to participate in
the Medicare and Medicaid programs.
Various factors, such as technological developments permitting more
procedures to be performed on an outpatient basis, pharmaceutical advances and
pressures to contain healthcare costs, have led to a shift from inpatient care
to ambulatory or outpatient care. Tenet has responded to this trend by enhancing
its hospitals' outpatient service capabilities, including (i) establishing
freestanding outpatient surgery centers
2
at or near certain of its hospital facilities, (ii) reconfiguring certain
hospitals to more effectively accommodate outpatient treatment, by, among other
things, providing more convenient, dedicated outpatient facilities and (iii)
restructuring existing surgical capacity to allow a greater number and range of
procedures to be performed on an outpatient basis. Tenet's facilities will
continue to emphasize those outpatient services that can be provided on a
quality, cost-effective basis and that the Company believes will experience
increased demand. The patient volumes and net operating revenues at both the
Company's general hospitals and its outpatient surgery centers are subject to
seasonal variations caused by a number of factors, including but not necessarily
limited to, seasonal cycles of illness, climate and weather conditions, vacation
patterns of both patients and physicians and other factors relating to the
timing of elective procedures.
In addition, inpatient care is continuing to move from acute care to
sub-acute care, where a less-intensive level of care is provided. Tenet has been
proactive in the development of a variety of sub-acute inpatient services to
utilize a portion of its unused capacity. By offering cost-effective ancillary
services in appropriate circumstances, Tenet is able to provide a continuum of
care where the demand for such services exists. For example, in certain
hospitals the Company has developed transitional care, rehabilitation and
long-term care sub-acute units. Such units utilize less intensive staffing
levels to provide the range of services sought by payors with a lower cost
structure.
The Merger allowed Tenet to acquire a substantial portfolio of hospitals
providing quality care responsive to the current managed care environment. Many
of the general hospitals acquired in the Merger are located in geographic areas
where Tenet already operated hospitals, including southern California and south
Florida. The Merger has allowed Tenet to coordinate the services provided by all
of its subsidiaries, including OrNda, in these geographic areas, which Tenet
believes has accelerated its development of integrated healthcare delivery
systems in these areas. The Merger also expanded Tenet's operations into several
new geographic areas, including Arizona, Iowa, Massachusetts, Mississippi,
Nevada, Oregon, Washington, West Virginia and Wyoming.
The largest concentrations of the Company's hospitals now are in California
(35.2%), Texas (15.6%) and Florida (13.3%). The concentrations of hospitals in
these three states increases the risk that any adverse economic, regulatory or
other developments that may occur in such states may adversely affect the
Company's operations or financial condition.
Tenet believes that its general hospitals are well-positioned to compete
effectively in the rapidly evolving healthcare environment. Tenet continually
analyzes whether each of its hospitals fits within its strategic plans and has
and will continue to analyze ways in which such assets may best be used to
maximize shareholder value. To that end, the Company plans to close, sell or
convert to alternate uses certain of the Company's facilities and services in
order to eliminate duplicate services and excess capacity resulting from the
Merger.
3
The following table lists, by state, the general hospitals owned or (if
indicated below) leased by Tenet's subsidiaries and operated domestically as of
May 31, 1997:
GEOGRAPHIC LICENSED
AREA/STATE FACILITY LOCATION BEDS STATUS
- -------------------- --------------------------------------------------- ------------------- --------- ---------
Alabama Brookwood Medical Center Birmingham 586 Owned
Lloyd Noland Hospital Birmingham 319 Owned
Arizona Community Hospital Medical Center Phoenix 53 Owned
Mesa General Hospital Medical Center (1) Mesa 138 Leased
St. Luke's Medical Center (1) Phoenix 280 Leased
Tempe St. Luke's Hospital (1) Tempe 106 Leased
Tucson General Hospital Tucson 129 Owned
Arkansas Central Arkansas Hospital Searcy 193 Owned
Methodist Hospital of Jonesboro (2) Jonesboro 104 Owned
National Park Medical Center Hot Springs 166 Owned
St. Mary's Regional Medical Center Russellville 170 Owned
California Alvarado Hospital Medical Center San Diego 231 Owned
(Southern) Brotman Medical Center Culver City 438 Owned
Centinela Hospital Medical Center Inglewood 400 Owned
Century City Hospital (1) Los Angeles 190 Leased
Chapman Medical Center (1) Orange 135 Leased
Coastal Communities Hospital (3) Santa Ana 177 Owned
Community Hospital of Huntington Park (1) Huntington Park 81 Leased
Desert Hospital (1) Palm Springs 388 Leased
Encino Hospital (1)(4) Encino 151 Leased
Fountain Valley Regional Hospital and Medical Fountain Valley 395 Owned
Center
Garden Grove Hospital and Medical Center Garden Grove 167 Owned
Garfield Medical Center Monterey Park 211 Owned
Greater El Monte Community Hospital South El Monte 113 Owned
Harbor View Medical Center (5) San Diego 156 Owned
Irvine Medical Center (1) Irvine 176 Leased
John F. Kennedy Memorial Hospital Indio 130 Owned
Lakewood Regional Medical Center Lakewood 161 Owned
Los Alamitos Medical Center Los Alamitos 173 Owned
Medical Center of North Hollywood North Hollywood 160 Owned
Midway Hospital Medical Center Los Angeles 225 Owned
Mission Hospital of Huntington Park Huntington Park 109 Owned
Monterey Park Hospital Monterey Park 102 Owned
Placentia Linda Hospital Placentia 114 Owned
San Dimas Community Hospital San Dimas 93 Owned
Santa Ana Hospital Medical Center (1) Santa Ana 90 Leased
South Bay Medical Center (1) Redondo Beach 201 Leased
Saint Luke Medical Center Pasadena 165 Owned
Suburban Medical Center (1) Paramount 182 Leased
Tarzana Regional Medical Center (1)(4) Tarzana 233 Leased
USC University Hospital (6) Los Angeles 285 Leased
Western Medical Center--Anaheim Anaheim 193 Owned
Western Medical Center Santa Ana 296 Owned
Whittier Hospital Medical Center Whittier 159 Owned
Woodruff Community Hospital Long Beach 96 Owned
California Brookside Hospital (1) San Pablo 233 Leased
(Northern) Community Hospital of Los Gatos (1) Los Gatos 153 Leased
Doctors Hospital of Manteca Manteca 73 Owned
Doctors Medical Center of Modesto Modesto 397 Owned
Doctors Hospital of Pinole (1) Pinole 137 Leased
French Hospital Medical Center (7) San Luis Obispo 147 Owned
Redding Medical Center Redding 185 Owned
San Ramon Regional Medical Center San Ramon 123 Owned
Sierra Vista Regional Medical Center San Luis Obispo 199 Owned
Twin Cities Community Hospital Templeton 84 Owned
Valley Community Hospital (1) Santa Maria 70 Leased
4
GEOGRAPHIC LICENSED
AREA/STATE FACILITY LOCATION BEDS STATUS
- -------------------- --------------------------------------------------- ------------------- --------- ---------
Florida Coral Gables Hospital Coral Gables 273 Owned
(Southern) Delray Medical Center Delray Beach 211 Owned
Florida Medical Center (8) Ft. Lauderdale 459 Owned
Florida Medical Center, South (8) Plantation 202 Owned
Hialeah Hospital Hialeah 378 Owned
Hollywood Medical Center Hollywood 324 Owned
North Ridge Medical Center Ft. Lauderdale 391 Owned
North Shore Medical Center Miami 357 Owned
Palm Beach Gardens Medical Center (1) Palm Beach Gardens 204 Leased
Palmetto General Hospital Hialeah 360 Owned
Parkway Regional Medical Center North Miami 689 Owned
West Boca Medical Center Boca Raton 185 Owned
Florida Memorial Hospital of Tampa Tampa 174 Owned
(Tampa/St. North Bay Medical Center New Port Richey 122 Owned
Petersburg) Palms of Pasadena Hospital St. Petersburg 310 Owned
Seven Rivers Community Hospital Crystal River 128 Owned
Town & Country Hospital Tampa 201 Owned
Georgia North Fulton Regional Hospital (1) Roswell 167 Leased
Spalding Regional Hospital Griffin 160 Owned
Indiana Culver Union Hospital Crawfordsville 120 Owned
Winona Memorial Hospital Indianapolis 317 Owned
Iowa Davenport Medical Center Davenport 150 Owned
Louisiana Doctors Hospital of Jefferson (1) Metairie 138 Leased
Kenner Regional Medical Center Kenner 300 Owned
Meadowcrest Hospital Gretna 200 Owned
Memorial Medical Center, Mid-City New Orleans 272 Owned
Memorial Medical Center, Uptown New Orleans 526 Owned
Minden Medical Center Minden 121 Owned
Northshore Regional Medical Center (1) Slidell 174 Leased
St. Charles General Hospital New Orleans 173 Owned
Massachusetts Saint Vincent Hospital Worcester 398 Owned
Mississippi Gulf Coast Medical Center Biloxi 189 Owned
Missouri Columbia Regional Hospital Columbia 265 Owned
Lucy Lee Hospital (1) Poplar Bluff 201 Leased
Lutheran Medical Center St. Louis 408 Owned
Twin Rivers Regional Medical Center Kennett 118 Owned
Nebraska Saint Joseph Hospital (9) Omaha 404 Owned
Nevada Lake Mead Hospital Medical Center North Las Vegas 198 Owned
North Carolina Central Carolina Hospital Sanford 137 Owned
Frye Regional Medical Center (1) Hickory 355 Leased
Oregon Eastmoreland Hospital Portland 100 Owned
Woodland Park Hospital (6) Portland 209 Leased
South Carolina East Cooper Regional Medical Center Mount Pleasant 100 Owned
Hilton Head Hospital (10) Hilton Head 64 Owned
Piedmont Medical Center Rock Hill 268 Owned
Tennessee John W. Harton Regional Medical Center Tullahoma 137 Owned
Medical Center of Manchester (1) Manchester 49 Leased
Saint Francis Hospital Memphis 693 Owned
University Medical Center Lebanon 261 Owned
5
GEOGRAPHIC LICENSED
AREA/STATE FACILITY LOCATION BEDS STATUS
- -------------------- --------------------------------------------------- ------------------- --------- ---------
Texas Doctors Hospital Dallas 268 Owned
(Dallas) Garland Community Hospital Garland 113 Owned
Lake Pointe Medical Center (11) Rowlett 92 Owned
RHD Memorial Medical Center (1) Dallas 190 Leased
Trinity Medical Center (1) Carrollton 149 Leased
Texas Cypress Fairbanks Medical Center Houston 136 Owned
(Houston) Houston Northwest Medical Center (12) Houston 498 Owned
Park Plaza Hospital Houston 468 Owned
Sharpstown General Hospital Houston 190 Owned
Twelve Oaks Hospital Houston 336 Owned
Texas Brownsville Medical Center Brownsville 177 Owned
(Other) Mid-Jefferson Hospital Nederland 138 Owned
Nacogdoches Medical Center Nacogdoches 150 Owned
Odessa Regional Hospital (13) Odessa 100 Owned
Park Place Medical Center Port Arthur 236 Owned
Providence Memorial Hospital El Paso 501 Owned
Sierra Medical Center El Paso 365 Owned
South Park Hospital and Medical Center Lubbock 101 Owned
Southwest General Hospital San Antonio 286 Owned
Trinity Valley Medical Center Palestine 150 Owned
Washington Puget Sound Hospital Tacoma 160 Owned
West Virginia Plateau Medical Center Oak Hill 90 Owned
Wyoming Lander Valley Medical Center Lander 102 Owned
- ------------------------------
(1) Leased from a third party.
(2) Owned by a limited liability company of which a Tenet subsidiary owns 95%
and is the managing member.
(3) Owned by a partnership in which a Tenet subsidiary owns 50% and is the
managing general partner.
(4) Leased by a partnership in which Tenet's subsidiaries own a 75% interest.
(5) This hospital was closed during the first quarter of fiscal year 1998.
(6) On leased land.
(7) Independently managed and being held for sale as of May 31, 1997. This
hospital was sold during the first quarter of fiscal year 1998.
(8) Owned by a partnership in which Tenet's subsidiaries own an 85% interest.
Tenet is in the process of repurchasing the minority interest in the
partnership.
(9) Owned by a limited liability company in which a Tenet subsidiary owns a 74%
interest and is the managing member.
(10) Owned by a partnership in which Tenet's subsidiaries own a 90% interest.
(11) This hospital is owned by a partnership in which Tenet's subsidiaries own
an 80% interest. The partnership leases the land on which the facility is
located from a wholly owned Tenet subsidiary.
(12) This hospital is owned by a partnership in which Tenet's subsidiaries own a
70% interest. The partnership leases the land on which the facility is
located from a wholly owned Tenet subsidiary.
(13) Owned by a partnership in which Tenet's subsidiaries own a 78% interest.
6
The following table shows certain information about the general hospitals
owned or leased domestically by Tenet's subsidiaries, including OrNda, for the
fiscal years ended May 31:
1995 1996 1997
--------- --------- ---------
Total number of facilities....................................... 116 123 128
Total number of licensed beds.................................... 23,691 26,265 27,959
Average occupancy during the period.............................. 41.6% 42.7% 42.6%
The above tables do not include rehabilitation hospitals, long-term care
facilities, psychiatric facilities, outpatient surgery centers or other
ancillary facilities.
BUSINESS STRATEGY
The Company's strategic objective is to provide quality healthcare services
responsive to the current managed care environment. Tenet believes that
competition among healthcare providers occurs primarily at the local level.
Accordingly, the Company tailors its local strategies to address the specific
competitive characteristics of the geographic areas in which it operates,
including the number of facilities operated by Tenet, the nature and structure
of physician practices and physician groups, the extent of managed care
penetration, the number and size of competitors and the demographic
characteristics of the area. Key elements of the Company's strategy are:
- to develop integrated healthcare delivery systems by coordinating the
operations and services of the Company's facilities with other hospitals
and ancillary care providers and through alliances with physicians and
physician groups;
- to reduce costs through enhanced operating efficiencies while improving
the quality of care provided;
- to develop or maintain its strong relationships with physicians and
generally to foster a physician-friendly culture;
- to enter into discounted fee for service arrangements, capitated contracts
and other managed care contracts with third party payors; and
- to acquire or enter into strategic partnerships with hospitals, groups of
hospitals, other healthcare businesses, ancillary healthcare providers,
physician practices and physician practice assets where appropriate to
expand and enhance quality integrated healthcare delivery systems
responsive to the current managed care environment.
INTERNATIONAL HOSPITALS
At May 31, 1997, a subsidiary of the Company continued to operate a 184-bed
tertiary-care hospital in Barcelona, Spain. A subsidiary of the Company also is
developing a 56-bed hospital in Cham, Canton Zug, Switzerland. The opening of
that hospital, which had been scheduled for the second quarter of fiscal 1997,
has been postponed indefinitely due to a decision by the Cantonal Health
Authority. Although an appeal of that decision has been denied, the Company is
exploring alternatives to open the facility.
OTHER DOMESTIC OPERATIONS
At May 31, 1997, Tenet's subsidiaries owned or operated a small number of
rehabilitation hospitals, specialty hospitals, long-term care facilities,
psychiatric facilities and medical office buildings located on the same campus
as, or nearby, its general hospitals, as well as various ancillary healthcare
businesses, including outpatient surgery centers, home healthcare programs,
ambulatory, occupational and rural healthcare clinics, health maintenance
organizations, a preferred provider organization and a managed care insurance
company.
7
INVESTMENTS
At May 31, 1997, Tenet held as investments (i) 8,301,067 shares, an
approximately 12.0% interest, in Vencor, a healthcare services provider
primarily focusing on the needs of the elderly, (ii) 3,000,000 shares, an
approximately 11.3% interest, in TRC, which operates kidney dialysis units and
certain related healthcare businesses and (iii) an approximately 23.0% interest
in HCPP, a partnership originally formed by the Company and Health Care Property
Investors, Inc. for the purpose of acquiring from and leasing back to the
Company 21 long-term care facilities, two general hospitals and one psychiatric
facility. Since that time, the Company has assigned to Vencor (as successor to
The Hillhaven Corporation) and other third parties its leasehold interests in
the 21 long-term care facilities and the psychiatric hospital, but remains
contingently liable for the lease payments on those facilities. The Company
continues to lease the two general hospitals from HCPP. HCPP does not own any
properties other than those originally purchased from the Company. In January
1996, Tenet sold $320 million principal amount of its 6% Exchangeable
Subordinated Notes due 2005, which Notes are exchangeable into Tenet's 8,301,067
shares of Vencor common stock 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 exchange price equivalent to the exchange rate is $38.55 per share.
PROPERTIES
Tenet's principal executive offices are located at 3820 State Street, Santa
Barbara, CA 93105. That building is leased by a Tenet subsidiary under a
five-year lease with one five-year renewal option. The telephone number of
Tenet's Santa Barbara headquarters is (805) 563-7000. Hospital support services
for Tenet's subsidiaries are located in space leased by a subsidiary in its
operations center in Dallas, Texas. At May 31, 1997, Tenet and its subsidiaries
also were leasing space for regional offices in Alabama, Arizona, Arkansas,
California, Florida, Georgia, Louisiana, Tennessee and Texas. In addition,
Tenet's subsidiaries operated domestically 147 medical office buildings, most of
which are adjacent to Tenet's general hospitals.
The number of licensed beds and locations of the Company's general hospitals
are described on pages 4 through 6 above. As of May 31, 1997, Tenet had
approximately $128 million of outstanding loans secured by real property and
approximately $60 million of capitalized lease obligations. The Company believes
that all of these properties, as well as the administrative and medical office
buildings described above, are suitable for their intended purposes.
MEDICAL STAFF AND EMPLOYEES
Tenet's hospitals are staffed by licensed physicians who have been admitted
to the medical staff of individual hospitals. Members of the medical staffs of
Tenet's hospitals often also serve on the medical staffs of hospitals not owned
by the Company and may terminate their affiliation with the Tenet hospital or
shift some or all of their admissions to competing hospitals at any time.
Although the Company purchases physician practices and, where permitted by law,
employs physicians, most of the physicians who practice at the Company's
hospitals are not employees of the Company. The Company also manages physician
practices in states where corporations are not permitted to purchase physician
practices or employ physicians. Nurses, therapists, lab technicians, facility
maintenance staff and the administrative staff of hospitals, however, normally
are employees of the Company.
Tenet's operations are dependent on the efforts, ability and experience of
its officers, employees and physicians. Tenet's continued growth depends on its
ability to attract and retain skilled employees, on the ability of its officers
to manage growth successfully and on Tenet's ability to attract and retain
physicians and other healthcare professionals at its hospitals. In addition, the
success of Tenet is, in part, dependent upon the quality, number and
specialities of physicians on its hospitals' medical staffs, most of whom have
no long-term contractual relationship with Tenet and may terminate their
association with Tenet's hospitals at any time. Although Tenet currently
believes it will continue to be able to successfully attract and retain
8
key officers, qualified physicians and other healthcare professionals, the loss
of some or all of its key officers or an inability to attract or retain
sufficient numbers of qualified physicians and other healthcare professionals
could have a material adverse impact on future results of operations.
The number of Tenet's employees (of which approximately 32% were part-time
employees) at May 31, 1997, was approximately as follows:
General Hospitals and Other Businesses(1).......................... 104,200
Dallas Operations Center and Regional and Support Offices.......... 698
Corporate Headquarters............................................. 102
---------
Total.............................................................. 105,000
---------
---------
- ------------------------
(1) Includes employees whose employment relates to the operations of the
Company's general hospitals, rehabilitation hospitals, psychiatric
facilities, specialty hospitals, outpatient surgery centers, managed
services organizations (including physicians whose practices have been
acquired by the Company), print center, debt collection subsidiaries, other
domestic healthcare operations, and the international hospitals.
Tenet is subject to the Federal minimum wage and hour laws and maintains
various employee benefit plans. Labor relations at Tenet's facilities have been
satisfactory. A small percentage of Tenet's employees are represented by labor
unions. Although the Company currently is not experiencing a shortage of nursing
personnel, the availability of nursing personnel fluctuates from year to year,
and the Company cannot predict the degree to which it will be affected by the
future availability and cost of nursing personnel.
COMPETITION
Tenet's general hospitals and other healthcare businesses operate in
competitive environments. A facility's competitive position within the
geographic area in which it operates is affected by such competitive factors as
the quality of care provided, including the number, quality and specialties of
the physicians, nurses and other healthcare professionals on its staff, the
quality of services provided by such facility to patients and their physicians,
its reputation, its managed care contracting relationships, the extent to which
it is part of an integrated network, the number of competitive facilities, the
state of its buildings and improvements, the quality and the state of the art of
its medical equipment, its location and its charges for services. Tax-exempt
competitors may have certain financial advantages, such as endowments,
charitable contributions, tax-exempt financing and exemption from sales,
property and income taxes, not available to Tenet facilities. The length of time
a facility has been a part of the community and the availability of other
healthcare alternatives also are competitive factors.
One factor of ever-increasing importance in the competitive position of
Tenet's facilities is the ability of those facilities to obtain managed care
contracts. The importance of obtaining managed care contracts has increased over
the years and is expected to continue to increase as employers, private and
government payors and others turn to the use of managed care in an attempt to
control rising healthcare costs. The revenues and operating results of most of
the Company's hospitals' are significantly affected by the hospitals' ability to
negotiate favorable contracts with managed care payors. Under such contracts,
healthcare providers agree to provide services on a discounted-fee or capitated
basis in exchange for the payors agreeing to send some or all of their
members/employees to those providers. With capitated contracts, a healthcare
provider such as Tenet receives specific fixed periodic payments from a health
maintenance organization, preferred provider organization or employer based on
the number of members of such organization being serviced by the provider. In
return, the provider agrees to provide healthcare services to such members
regardless of the actual costs incurred and services provided. The profitability
of such contracts depends upon the provider's ability to negotiate payments per
patient that, in the aggregate,
9
are adequate to cover the cost of meeting the healthcare needs of the covered
persons. In some cases, a provider may contract with an insurance carrier to
cover some or all of the costs of providing the necessary healthcare.
A healthcare provider's ability to compete for such contracts is affected by
many factors, such as the competitive factors referred to above, the scope,
breadth and quality of services a hospital offers in a given geographic area,
its ability to form its own, or to join with other healthcare providers to form,
integrated healthcare delivery systems and the scope, breadth and quality of
services offered by competing healthcare providers and/or systems. Tenet
evaluates changing circumstances in each geographic area on an ongoing basis and
positions itself to compete in the managed care market by forming its own, or
joining with others to form integrated healthcare delivery systems, such as
Tenet South Florida HealthSystem in south Florida, Sierra Providence Health
Network in El Paso, Texas, Tenet Louisiana HealthSystem in the greater New
Orleans area, Tenet California HealthSystem in California and Tenet Houston
HealthSystem in Houston, Texas, that actively pursue and enter into managed care
contracts. Tenet's integrated healthcare delivery systems also compete for
traditional fee-for-service patients and contracts with traditional healthcare
insurers and employers.
As discussed more fully on page 14, recent changes in the Federal Medicare
laws permit providers to create Provider Service Organizations to contract
directly with the Federal government for the provision of medical care to
Medicare beneficiaries on a fully capitated basis. As part of the Health Care
Financing Administration's demonstration project in this area, Tenet and its
physician partners launched Tenet Choices 65 in July 1997. Tenet Choices 65 is a
Medicare managed care plan for Medicare patients in the greater New Orleans
area. If it proves successful, Tenet Choices 65 could serve as a model for
similar plans for seniors throughout the country.
The healthcare industry, including Tenet, has been characterized in recent
years by increased competition for patients and staff physicians, significant
excess capacity at general hospitals, a shift from inpatient to outpatient
treatment settings and increased consolidation. New competitive strategies of
hospitals and other healthcare providers place increasing emphasis on the use of
alternative healthcare delivery systems (such as home healthcare services,
outpatient surgery and emergency and diagnostic centers) that eliminate or
reduce lengths of hospital stays. The principal factors contributing to these
trends are advances in medical technology and pharmaceuticals, cost-containment
efforts by managed care payors, employers and traditional healthcare insurers,
changes in regulations and reimbursement policies, increases in the number and
type of competing healthcare providers and changes in physician practice
patterns. Tenet's future success will depend, in part, on the ability of its
hospitals to continue to attract and retain staff physicians, enter into managed
care contracts and organize and structure integrated healthcare delivery
systems, including those with other healthcare providers and physician practice
groups, while continuing to provide quality, cost-effective care.
The Company's hospitals, and the healthcare industry as a whole, also face
the challenge of continuing to provide quality patient care while dealing with
strong competition for patients and with pressure on reimbursement rates not
only by private payors, but also by government payors. National and state
efforts to reform the healthcare system in the United States may further impact
reimbursement rates. Changes in medical technology, existing and future
legislation, regulations and interpretations and competitive contracting for
provider services by payors may require changes in the Company's facilities,
equipment, personnel, procedures, rates and/or services in the future.
Inpatient admissions, average lengths of stay and average occupancy at
general hospitals throughout the industry, including the Company's general
hospitals, continue to be adversely affected by payor-required pre-admission
authorization and utilization review and payor pressure to maximize outpatient
and alternative healthcare delivery services for less acutely ill patients.
Increased competition, admissions constraints and payor pressures are expected
to continue. Inpatient acuity and intensity of services continue to increase as
less intensive services shift from an inpatient to an outpatient basis or to
alternative
10
healthcare delivery services because of various factors such as technological
improvements, pharmaceutical advances and payor pressures to limit or reduce
payments. Those pressures imposed by government and private payors and the
increasing percentage of business negotiated with purchasers of group healthcare
services are expected to continue to adversely affect the per-patient revenues
received by the Company.
To meet these challenges, the Company (i) has expanded or converted many of
its general hospitals' facilities to include distinct outpatient centers, (ii)
offers discounts to private payor groups, (iii) enters into capitation contracts
in some service areas, (iv) upgrades facilities and equipment, and (v) offers
new programs and services. The Company has been reducing its costs, for example,
through the implementation of a case management system designed to maximize
efficiency by identifying cost-per-procedure variables among physicians
performing the same procedures, standardizing supplies used and negotiating
volume discounts for purchases. In addition, the Company has developed a
computerized outcomes management system that contains clinical and demographic
information from the Company's hospitals and physicians and allows users to
identify "best practices" for treating specific diagnostic related groups.
Nevertheless, there can be no assurance that these measures will be successful
or, if successful, will serve to compensate for the reduction in inpatient
admissions, average lengths of stay and average occupancy, and the consequent
reductions in per-patient revenue, resulting from the payor pressures referred
to above.
As noted above, the Company also is responding to these changes by forming
integrated healthcare delivery systems. Components of these systems include: (i)
encouraging physicians practicing at its hospitals to form independent physician
associations ("IPAs"), (ii) having the Company join with those IPAs, physicians
and physician group practices to form physician hospital organizations ("PHOs")
to contract with managed care and other payors as well as directly with
employers and (iii) forming management services organizations ("MSOs") to (A)
purchase physician practices or their assets, as appropriate, (B) provide
management and administrative services to physicians, physician group practices
and IPAs and (C) enter into managed care contracts both on behalf of those
groups and, in certain circumstances, on behalf of PHOs.
In large part, a hospital's revenues, whether from managed care payors,
traditional health insurance payors or directly from patients, depends on the
quality and scope of practices of physicians on staff. Physicians refer patients
to hospitals on the basis of the quality of services provided by the hospital to
patients and their physicians, the hospital's location, the quality of the
medical staff affiliated with the hospital and the quality and state of the art
of the hospital's facilities, equipment and employees. The Company attracts
physicians to its hospitals by equipping its hospitals with technologically
advanced equipment, sponsoring training programs to educate physicians on
advanced medical procedures, using governing boards for each hospital, the
members of which primarily are physicians and community members, to develop
short and long-term plans for the hospital and review and approve, as
appropriate, actions of the medical staff, including staff appointments,
credentialing, peer review and quality assurance, and otherwise creating an
environment within which physicians prefer to practice. While physicians may
terminate their association with a hospital at any time, Tenet believes that by
striving to maintain and improve the level of care at its hospitals and by
maintaining ethical and professional standards, it will attract and retain
qualified physicians with a variety of specialties.
There has been significant consolidation in the hospital industry over the
past decade due, in large part, to continuing pressures on payments from
government and private payors and increasing shifts away from the provision of
traditional in-patient services. Those economic trends have caused many
hospitals to close and many to consolidate either through acquisitions or
affiliations. Tenet's management believes that these cost-containment pressures
will continue and will lead to further consolidation in the hospital industry.
Tenet and its hospitals strive, on terms favorable to the Company, to
attract and retain physicians to their staffs, enter into managed care
contracts, organize and structure integrated healthcare delivery systems,
acquire hospitals or other healthcare facilities and acquire or assume the
management of
11
physician practices. Other healthcare companies with greater financial
resources, with more facilities in a given geographic area or offering a wider
range of services may be competing in each of these areas. These competitive
factors may result in Tenet and its hospitals being less successful than they
would hope to be in accomplishing one or more of these goals.
MEDICARE, MEDICAID AND OTHER REVENUES
Tenet receives payments for patient care from private insurance carriers,
Federal Medicare programs for elderly and disabled patients, health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), state
Medicaid programs for indigent and cash grant patients, the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS"), employers and patients
directly. General hospital inpatient services are reimbursed under Medicare
based on a prospective payment system ("PPS"), as discussed below. Historically,
Medicare payments for outpatient services provided by general hospitals, all
services provided by rehabilitation hospitals and home healthcare services have
been based on the lower of charges or allowable costs, subject to certain
limits. The Balanced Budget Act of 1997 (the "1997 Act") mandates that the
historical method of reimbursement for those services be changed to a PPS, which
will be phased in over time as discussed below. Payments from state Medicaid
programs are based on reasonable costs with certain limits or are at fixed
rates. Substantially all Medicare and Medicaid payments are below retail rates
for Tenet facilities. Payments from other sources usually are based on the
hospital's established charges, a percentage discount or all-inclusive per diem
rates.
The approximate percentages of Tenet's net patient revenue by payment
sources for Tenet's domestic general hospitals owned or operated by its
subsidiaries, including OrNda, are as follows:
YEARS ENDED MAY 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
Medicare........................................... 36.2% 39.0% 38.7% 39.6% 42.2%
Medicaid........................................... 11.9 10.1 8.9 8.6 8.6
Private and Other.................................. 51.9 50.9 52.4 51.8 51.2
--------- --------- --------- --------- ---------
Totals............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Medicare payments for general hospital inpatient care are based on a PPS
(the "DRG-PPS"), which generally has been applicable to Tenet's facilities since
1984. Under the DRG-PPS, a general hospital receives as reimbursement for its
operating costs related to each Medicare patient discharged from the hospital a
fixed amount based on the Medicare patient's assigned diagnostic related group
("DRG"). DRG payments do not consider a specific hospital's operating costs, but
are adjusted for area wage differentials. As discussed below, DRG payments
exclude the reimbursement of (a) capital costs, including depreciation, interest
relating to capital expenditures, property tax and lease expenses and (b)
outpatient services. These reimbursements are made in advance based on estimates
and later are increased or decreased, as the case may be.
Historically, DRG rates were increased each year to take into account the
increased cost of goods and services purchased by hospitals and non-hospitals
(the "Market Basket"). With the exception of Federal fiscal year 1997, in which
the increase in DRG Rates was equal to the 2.5% Market Basket, the percentage
increases to the DRG rates for the past several years have been lower than the
Market Basket and, as a result, the amount of reimbursement received by general
hospitals under the DRG-PPS has not kept up with the cost of goods and services.
Moreover, the 1997 Act freezes DRG rates at their 1997 levels through Federal
fiscal year 1998, which ends September 30, 1998. The 1997 Act also limits the
rate of increase in DRG rates thereafter to the annual Market Basket for such
year minus (a) 1.9%from October 1, 1998 through September 30, 1999, (b) 1.8%
from October 1, 1999 through September 30, 2000, and (c) 1.1% from October 1,
2000 through September 30, 2003.
12
Medicare reimburses general hospitals' capital costs separately from DRG
payments. Beginning in 1992, a PPS for Medicare reimbursement of general
hospitals' inpatient capital costs ("PPS-CC") generally became effective with
respect to the Company's general hospitals. During Tenet's fiscal year ended May
31, 1997, Tenet's general hospitals received, in the aggregate, reimbursement
for substantially all of their actual capital costs under the PPS-CC. The 1997
Act provides that the amount of reimbursement that Tenet's general hospitals
otherwise would have received for their capital costs under the PPS-CC will be
reduced by approximately 18% effective October 1, 1997.
Outpatient services provided at general hospitals, physical rehabilitation
hospitals and psychiatric facilities historically have been reimbursed by
Medicare at the lower of customary charges or 94.2% of actual cost. In addition,
Congress historically has established additional limits on the reimbursement of
operating costs for the following outpatient services: (a) clinical laboratory
services, which have been reimbursed based on a fee schedule, and (b) ambulatory
surgery procedures and certain imaging and other diagnostic procedures, which
have been reimbursed based on a blend of the hospital's specific cost and the
rate paid by Medicare to non-hospital providers for such services. Under the
1997 Act, reimbursement for outpatient services provided at general hospitals
will be converted from the cost-based system to a PPS, which will be phased in
over a three-year period beginning January 1, 1999. The 1997 Act also corrects a
flaw in the existing payment formula for ambulatory surgery services referred to
as the "formula driven overpayment." That flaw resulted in general hospitals
receiving payments that were higher than those anticipated by the Health Care
Financing Administration ("HCFA"), but were still below the actual cost of
providing the services. The correction of the formula-driven overpayment will
result in reimbursement to general hospitals for outpatient services performed
by them being reduced even further below the cost of providing those services.
Hospitals and hospital units currently exempt from the DRG-PPS, such as
qualified psychiatric facilities and physical rehabilitation hospitals ("Exempt
Hospitals/Units"), traditionally have been reimbursed by Medicare on a
cost-based system under which target rates for each facility were used in
applying various limitations and calculating incentive payments. Tenet's Exempt
Hospitals/Units received a Market Basket increase of 2.5% in target rates for
cost reporting periods commencing in Federal fiscal year 1997. Under the 1997
Act, however, Exempt Hospitals/Units will receive no increase to their target
rates for cost reporting periods from October 1, 1997 through September 30,
1998. Increases in target rates after that date will vary between a Market
Basket increase and no increase at all, depending upon the extent to which the
Exempt Hospitals/Units' actual costs are below their target rates. An additional
change under the 1997 Act is that the Company's Exempt Hospitals/Units will lose
certain incentive payments they have been receiving for keeping their costs
lower than their pre-established base rates. The 1997 Act also provides that
reimbursement for rehabilitation hospitals will change from the existing
cost-based system to a PPS, which change will be phased in over three years
beginning October 1, 1997.
Home health services historically have been exempt from the DRG-PPS and have
been reimbursed by Medicare at cost, subject to certain limits. The 1997 Act
requires that HCFA develop a PPS for home health services, which is to be phased
in over a four-year period beginning October 1, 2000. In the interim,
reimbursement rates in effect under the current system will be reduced. The 1997
Act provides that rates in effect on September 30, 1999 will be reduced by 15%
under the PPS. The 1997 Act further provides that rates in effect on September
30, 1999 will be reduced by 15% effective October 1, 1999, even if HCFA has not
yet begun to implement the PPS. As a result of these changes, the Company
expects that its hospitals will receive significantly lower reimbursement for
home health services.
Hospitals that treat a disproportionately large number of low-income
patients (Medicaid and Medicare patients eligible to receive supplemental social
security income) currently receive additional reimbursement from the Federal
government in the form of Disproportionate Share Payments. The 1997 Act provides
that such payments will be reduced by 1% for each Federal fiscal year from 1998
through 2002.
13
A general hospital historically has been reimbursed its full DRG payment for
patients discharged from an acute-care setting regardless of whether the patient
received home health services or services in a rehabilitation hospital,
rehabilitation unit or skilled nursing facility (collectively, a "post-acute
setting") after being discharged from the general hospital. Under the 1997 Act,
if a patient is discharged from a general hospital to a post-acute setting prior
to being in the general hospital for the mean length of stay for the patient's
DRG, which mean length of stay varies for each DRG, the general hospital will
receive only a pro-rated payment for that DRG depending on the length of time
the patient was in the hospital. This new provision will become effective for
discharges after October 1, 1998, but will apply only with respect to the DRG's
that account for the top 10 discharges from general hospitals to a post acute
setting. HCFA is charged with the responsibility of identifying the 10 DRG's to
which the foregoing will apply.
Under current law, if a hospital is unable to collect a Medicare
beneficiary's deductible or co-payment (a "Bad Debt"), the hospital may be
reimbursed by the Federal government for the Bad Debt provided certain
conditions are met. The 1997 Act provides that the amount of a Bad Debt for
which the Company otherwise would be reimbursed will be reduced: 25% beginning
October 1, 1997, 40% beginning October 1, 1998, and 45% beginning October 1,
1999.
As discussed above, the 1997 Act dramatically changes the manner in which
the Company will be reimbursed for all services provided to Medicare
beneficiaries. While none of the changes individually is expected to have a
significant impact on the amount of reimbursement received by the Company, the
changes taken as a whole are expected to significantly reduce the amount of
reimbursement received by the Company from the Federal government. The aggregate
effect of those reduced payments, however, is not expected to have a material
adverse effect on the Company's overall results of operations.
The purpose of the 1997 Act is to balance the Federal budget by Federal
fiscal year 2002. The Company believes that while the 1997 Act is a good start
towards assuring the solvency of the Social Security system for the near term,
if the Federal budget is not balanced by Federal fiscal year 2002 and the
Federal deficit is not reduced thereafter, reimbursement rates are likely to be
further reduced to ensure the solvency of the Social Security system. The
Company is unable to predict at this time if there will be any further
reductions in reimbursement rates in future years and, if there are further
reductions, how significant those reductions will be.
The 1997 Act also contains various provisions that create new opportunities
for the Company. Certain of those provisions, such as those allowing for the
creation of Provider Service Organizations, allow providers such as Tenet to
contract directly with the Federal government for the provision of medical care
to Medicare beneficiaries on a fully capitated basis. Under capitation, the
Company receives a certain amount from the Federal government for each Medicare
beneficiary enrolled in its plans and assumes the risks and rewards of meeting
the healthcare needs of those enrolled in its plans. The Company may purchase
insurance to cover all or a portion of the cost of meeting the healthcare needs
of those covered.
The Medicare, Medicaid and CHAMPUS programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and new governmental funding restrictions,
all of which may materially increase or decrease program payments as well as
affect the cost of providing services and the timing of payments to facilities.
The final determination of amounts earned under the programs often requires many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical reimbursement provisions.
Management believes that adequate provision has been made for such adjustments.
Until final adjustment, however, significant issues remain unresolved and
previously determined allowances could be more or less than ultimately required.
14
HEALTHCARE REFORM, REGULATION AND LICENSING
CERTAIN BACKGROUND INFORMATION. Healthcare, as one of the largest
industries in the United States, continues to attract much legislative interest
and public attention. Medicare, Medicaid, mandatory and other public and private
hospital cost-containment programs, proposals to limit healthcare spending,
proposals to limit prices and industry competitive factors are highly
significant to the healthcare industry. In addition, the healthcare industry is
governed by a framework of Federal and state laws, rules and regulations that
are extremely complex and for which the industry has the benefit of little or no
regulatory or judicial interpretation. Although the Company believes it is in
compliance in all material respects with such laws, rules and regulations, if a
determination is made that the Company was in material violation of such laws,
rules or regulations, its operations and financial results could be materially
adversely affected.
As discussed under Medicare, Medicaid and Other Revenues on pages 12 through
14 above, the 1997 Act has the effect of reducing payments that will be made to
the Company under the Federal Medicare program. In addition, there continue to
be Federal and state proposals that would, and actions that do, impose more
limitations on government and private payments to providers such as Tenet and
proposals to increase co-payments and deductibles from government-program and
private patients. Tenet's facilities also are affected by controls imposed by
government and private payors designed to reduce admissions and lengths of stay.
Such controls, including what is commonly referred to as "utilization review",
have resulted in fewer of certain treatments and procedures being performed.
Utilization review entails the review of the admission and course of treatment
of a patient by a third party. Utilization review by third-party peer review
organizations ("PROs") is required in connection with the provision of care paid
for by Medicare and Medicaid. Utilization review by third parties also is a
requirement of many managed care arrangements.
Many states have enacted or are considering enacting measures that are
designed to reduce their Medicaid expenditures and to make certain changes to
private healthcare insurance. Various states have applied, or are considering
applying, for a Federal waiver from current Medicaid regulations to allow them
to serve some of their Medicaid participants through managed care providers.
Tennessee has implemented such a program and Texas has passed a law mandating
the State to apply for such a waiver. Louisiana is considering wider use of
managed care for its Medicaid population. California has created a voluntary
health insurance purchasing cooperative that seeks to make healthcare coverage
more affordable for businesses with five to 50 employees and, effective January
1, 1995, began changing the payment system for participants in its Medicaid
program in certain counties from fee-for-service arrangements to managed care
plans. Florida limits the amount by which a hospital's net revenues per
admission may be increased each year, has enacted a program creating a system of
local purchasing cooperatives and has proposed other changes that have not yet
been enacted. Florida also has adopted, and other states are considering
adopting, legislation imposing a tax on revenues of hospitals to help finance or
expand those states' Medicaid systems. A number of other states are considering
the enactment of managed care initiatives designed to provide universal low-cost
coverage. These proposals also may attempt to include coverage for some people
who presently are uninsured.
CERTIFICATE OF NEED REQUIREMENTS. Some states require state approval for
construction and expansion of healthcare facilities, including findings of need
for additional or expanded healthcare facilities or services. Certificates of
Need, which are issued by governmental agencies with jurisdiction over
healthcare facilities, are at times required for capital expenditures exceeding
a prescribed amount, changes in bed capacity or services and certain other
matters. Following a number of years of decline, the number of states requiring
Certificates of Need is once again on the rise as state legislators once again
are looking at the Certificate of Need process as a way to contain rising
healthcare costs. At May 31, 1997, Tenet operated hospitals in 18 states that
require state approval under Certificate of Need Programs. Tenet is unable to
predict whether it will be able to obtain any Certificates of Need in any
jurisdiction where such Certificates of Need are required.
15
ANTIKICKBACK AND SELF-REFERRAL REGULATIONS. The healthcare industry is
subject to extensive Federal, state and local regulation relating to licensure,
conduct of operations, ownership of facilities, addition of facilities and
services and prices for services. In particular, Medicare and Medicaid
antikickback and antifraud and abuse amendments codified under Section 1128B(b)
of the Social Security Act (the "Antikickback Amendments") prohibit certain
business practices and relationships that might affect the provision and cost of
healthcare services reimbursable under Medicare, Medicaid or other government
programs, including the payment or receipt of remuneration for the referral of
patients whose care will be paid for by such programs. Sanctions for violating
the Antikickback Amendments include criminal penalties and civil sanctions,
including fines and possible exclusion from government programs such as the
Medicare and Medicaid programs.
The "Health Insurance Portability and Accountability Act of 1996," which
became effective January 1, 1997, amends, among other things, Title XI (42
U.S.C. 1301 ET SEQ.) to broaden the scope of current fraud and abuse laws to
include all health plans, whether or not they are reimbursed as a Federal
program.
In addition, Section 1877 of the Social Security Act, which restricts
referrals by physicians of Medicare, Medicaid and other government-program
patients to providers of a broad range of designated health services with which
they have ownership or certain other financial arrangements, was amended
effective January 1, 1995, to significantly broaden the scope of prohibited
physician referrals under the Medicare and Medicaid programs to providers with
which they have ownership or certain other financial arrangements. Many states
have adopted or are considering similar legislative proposals, some of which
extend beyond the Medicaid program to prohibit the payment or receipt of
remuneration for the referral of patients and physician self-referrals
regardless of the source of the payment for the care. Tenet's participation in
and development of joint ventures and other financial relationships with
physicians could be adversely affected by these amendments and similar state
enactments.
The Federal government has issued regulations that describe some of the
conduct and business relationships permissible under the Antikickback Amendments
and the Physician Self-Referral Laws ("Safe Harbors"). The fact that a given
business arrangement does not fall within a Safe Harbor does not render the
arrangement per se illegal. Business arrangements of healthcare service
providers that fail to satisfy the applicable Safe Harbor criteria, however,
risk increased scrutiny by enforcement authorities. Because Tenet may be less
willing than some of its competitors to enter into business arrangements that do
not clearly satisfy the Safe Harbors, it could be at a competitive disadvantage
in entering into certain transactions and arrangements with physicians and other
healthcare providers. The Company systematically reviews all of its operations
to ensure that it complies with the Social Security Act and similar state
statutes.
Both Federal and state government agencies have announced heightened and
coordinated civil and criminal enforcement efforts. One project, Operation
Restore Trust, is focused on investigating healthcare providers in the home
health and nursing home industries as well as on medical suppliers to these
providers in California, Florida, Illinois, New York and Texas. Over the next
two years, the project will be expanded to Arizona, Colorado, Georgia,
Louisiana, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee,
Virginia and Washington and may be expanded to include healthcare providers in
additional industries. Eventually, the project is intended to include all 50
states. The Company provides home health and/or nursing home care in each of the
states in which it operates general hospitals, including Arizona, California,
Florida, Georgia, Louisiana, Massachusetts, Missouri, Texas and Washington.
Tenet is unable to predict the future course of Federal, state and local
regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on Tenet's business, financial condition and results of
operations.
16
ENVIRONMENTAL REGULATIONS. The Company's healthcare operations generate
medical waste that must be disposed of in compliance with Federal, state and
local environmental laws, rules and regulations. The Company's operations, as
well as the Company's purchases and sales of facilities, also are subject to
compliance with various other environmental laws, rules and regulations. Such
compliance does not, and the Company anticipates that such compliance will not,
materially affect the Company's capital expenditures, earnings or competitive
position.
HEALTHCARE FACILITY LICENSING REQUIREMENTS. Tenet's healthcare facilities
are subject to extensive Federal, state and local legislation and regulation. In
order to maintain their operating licenses, healthcare facilities must comply
with strict standards concerning medical care, equipment and hygiene. Various
licenses and permits also are required in order to dispense narcotics, operate
pharmacies, handle radioactive materials and operate certain equipment. Tenet's
healthcare facilities hold all required governmental approvals, licenses and
permits. With the exception of one general hospital that was acquired in fiscal
1996 and one general hospital acquired in the first quarter of fiscal 1998, each
of Tenet's facilities that is eligible for accreditation is fully accredited by
the JCAHO, the Commission on Accreditation of Rehabilitation Facilities (in the
case of rehabilitation hospitals) or another appropriate accreditation agency.
Both of the unaccredited facilities referred to above are in the process of
becoming accredited for the first time. With such accreditation, the Company's
hospitals are eligible to participate in government-sponsored provider programs
such as the Medicare and Medicaid programs.
UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE. Tenet's healthcare
facilities are subject to and comply with various forms of utilization review.
In addition, under the Medicare PPS, each state must have a PRO to carry out a
Federally mandated system of review of Medicare patient admissions, treatments
and discharges in general hospitals. Medical and surgical services and practices
are extensively supervised by committees of staff doctors at each healthcare
facility, are overseen by each healthcare facility's local governing board, the
members of which primarily are physicians and community members, and are
reviewed by Tenet's quality assurance personnel. The local governing boards also
help maintain standards for quality care, develop long-range plans, establish,
review and enforce practices and procedures and approve the credentials and
disciplining of medical staff members.
COMPLIANCE PROGRAM
The Company maintains a multi-faceted corporate compliance and ethics
program. A portion of the program results from a 1994 settlement between the
Company and HHS. The mandated portion of the program, which is in effect until
June 1999, provides, in part, that the Company will not own or operate
psychiatric facilities (defined for the purposes of the agreement to include
residential treatment centers and substance abuse facilities) except as
specifically provided for under the terms of the agreement (which permits the
Company's subsidiaries to own and operate a small number of psychiatric
facilities on the same campus as or nearby certain of Tenet's general hospitals)
and requires self-reporting of credible evidence of violations of criminal law
or material violations of civil laws, rules or regulations governing Federally
funded programs. The Company now has in place a program designed to provide
annual ethics training to every employee and to encourage all employees to
report any ethical violations to a toll-free telephone hotline.
17
MANAGEMENT
The executive officers of the Company who also are not Directors as of
August 22, 1997 are:
NAME POSITION AGE
- -------------------------- -------------------------------------------------------------------------------- ---
Scott M. Brown Senior Vice President, General Counsel and Secretary 52
Trevor Fetter Executive Vice President and Chief Financial Officer 37
Raymond L. Mathiasen Senior Vice President and Chief Accounting Officer 54
Scott M. Brown is Senior Vice President, General Counsel and Secretary of
the Company. He joined Tenet in 1981. Mr. Brown was elected Secretary in 1984
and Senior Vice President in 1990. He was appointed acting General Counsel in
July 1993 and General Counsel in February 1994.
Trevor Fetter is Executive Vice President and Chief Financial Officer of the
Company. Mr. Fetter joined Tenet as an Executive Vice President in October 1995.
In March 1996, he was appointed to the additional position of Chief Financial
Officer. Mr. Fetter served as Executive Vice President and Chief Financial
Officer of Metro-Goldwyn-Mayer, Inc. ("MGM") from September 1993 to October
1995, as Executive Vice President of MGM from October 1990 to September 1993,
and as Senior Vice President of MGM from 1988 to October 1990. From 1982 to
1988, Mr. Fetter worked in various corporate finance positions in the investment
banking division of Merrill Lynch Capital Markets.
Raymond L. Mathiasen is Senior Vice President and, since March 1996, Chief
Accounting Officer of the Company. From February 1994 to March 1996, Mr.
Mathiasen served as Senior Vice President and Chief Financial Officer of the
Company and from September 1993 to February 1994, Mr. Mathiasen served as Senior
Vice President and acting Chief Financial Officer. Mr. Mathiasen was elected to
the position of Senior Vice President in 1990 and Chief Operating Financial
Officer in 1991. Prior to joining Tenet as a Vice President in 1985, he was a
partner with Arthur Young & Company (now known as Ernst & Young).
PROFESSIONAL AND GENERAL LIABILITY INSURANCE
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 a majority-owned insurance subsidiary. A significant portion of these
risks is, in turn, reinsured with major independent insurance companies. Prior
to fiscal 1995, the Company insured its professional and comprehensive general
liability risks related to its psychiatric and rehabilitation hospitals through
a wholly-owned insurance subsidiary, which reinsured risks in excess of $500,000
with major independent insurance companies. The Company has reached the policy
limits provided by this insurance subsidiary related to the psychiatric
hospitals in several coverage years. In addition, damages, if any, arising from
fraud and conspiracy claims in psychiatric malpractice cases (described under
Legal Proceedings below) may not be insured. If actual payments of claims
materially exceed projected payments of claims, Tenet's financial condition
could be materially adversely affected.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-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 laws and governmental
regulations; legislative proposals for healthcare reform; the ability to enter
into managed
18
care provider arrangements on acceptable terms; a shift from fee-for-service
payment to capitated and other risk-based payment systems; changes in Medicare
and Medicaid reimbursement levels; liability and other claims asserted against
the Company; competition; the loss of any significant customers; technological
and pharmaceutical improvements that increase the cost of providing, or reduce
the demand for, healthcare; changes in business strategy or development plans;
the ability to attract and retain qualified personnel, including physicians; the
significant indebtedness of the Company; the lack of assurance that the
synergies expected from the OrNda Merger 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.
ITEM 2. PROPERTIES.
The response to this item is included in Item 1.
ITEM 3. LEGAL PROCEEDINGS.
The Company has been involved in significant legal proceedings of an unusual
nature related principally to its discontinued psychiatric business. During the
years ended May 31, 1995, 1996 and 1997, 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, 1997, and
an estimate of the fees to be incurred subsequent to May 31, 1997, represent
management's estimate of the remaining net costs of the ultimate disposition of
these matters. There can be no assurance, however, that the ultimate liability
will not exceed such estimates. Although, based upon information currently
available to it, management believes that the amount of damages, if any, in
excess of its reserves for unusual litigation costs that may be awarded in any
of the following unresolved legal proceedings cannot reasonably be estimated,
management does not believe it is likely that any such damages will have a
material adverse effect on the Company's results of operations, liquidity or
capital resources.
Tenet 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 Tenet and certain of its
subsidiaries and former employees. Also named as defendants are numerous doctors
and other healthcare professionals. Tenet believes that the increase in
litigation arose primarily from advertisements by certain lawyers seeking former
psychiatric patients in order to file claims against Tenet and certain of its
subsidiaries. The advertisements focused, in many instances, on Tenet's
settlement of past disputes involving the operations of its discontinued
psychiatric business subsidiaries, including Tenet's 1994 resolution of the
Federal government's investigation and a corresponding criminal plea agreement
involving such discontinued psychiatric business of Tenet. From June 1, 1994 to
the present, approximately 1,000 cases alleging fraud and conspiracy have been
filed against the Company and certain of its subsidiaries. Most of the cases
have been filed in Texas and Washington, D.C. To date, the Company has resolved
approximately 700 of these cases.
19
Tenet expects that additional lawsuits with similar allegations will be
filed. Tenet believes it has a number of defenses to each of these actions and
will defend these and any additional lawsuits vigorously. Until the lawsuits are
resolved, however, Tenet will continue to incur substantial legal expenses.
Two Federal class actions filed in August 1993 were consolidated into one
action pending in U.S. District Court in the Central District of California
captioned In re: National Medical Enterprises Securities Litigation II. This
consolidated action is on behalf of a purported class of shareholders who
purchased or sold stock of Tenet between January 14, 1993 and August 26, 1993,
and alleges violations of the securities laws by the Company and certain of its
executive officers. Based on these claims, plaintiffs seek compensatory damages,
injunctive relief, attorneys' fees, interest and costs. 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. Although in March 1997 the defendants' motion was denied, the Company
believes it has meritorious defenses to this action and will continue to defend
this litigation vigorously.
An agreement has been executed with the Department of Justice resolving the
investigation related to certain physician relationships at 12 of the hospitals
acquired by OrNda in its April 1994 acquisition of Summit Health Ltd. ("Summit")
and one OrNda hospital outside of the group acquired from Summit.
In its normal course of business the Company also 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
in its normal course of business is adequately covered by insurance or is
adequately provided for in its consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The response to this item is included on page 43 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1997. The required information
hereby is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The response to this item is included on page 7 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1997. The required information
hereby is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The response to this item is included on pages 8 through 16 of the
Registrant's Annual Report to Shareholders for the year ended May 31, 1997. The
required information hereby is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included on pages 17 through 40 and page 43 of
the Registrant's Annual Report to Shareholders for the year ended May 31, 1997.
The required information hereby is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
20
PART III
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE
COMPENSATION.
Information concerning the Directors of the Registrant, including executive
officers of the Registrant who also are Directors, and other information
required by Items 10 and 11, is included on pages 2 through 5 of the definitive
Proxy Statement for Registrant's 1997 Annual Meeting of Shareholders and hereby
is incorporated by reference. Similar information regarding executive officers
of the Registrant who, except as noted therein, are not Directors is set forth
on page 18 above. Information regarding compensation of executive officers and
Directors of the Registrant is included on pages 7 through 16 and pages 22
through 27 of the definitive Proxy Statement for the Registrant's 1997 Annual
Meeting of Shareholders and hereby is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this item is included on pages 6 and 27 of the definitive
Proxy Statement for the Registrant's 1997 Annual Meeting of Shareholders. The
required information hereby is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements to be included in Part II, Item 8, are
incorporated by reference to the Registrant's 1997 Annual Report to
Shareholders. (See Exhibit (13)).
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II--Valuation and Qualifying Accounts and Reserves (included on
page F-1)
All other schedules and Condensed Financial Statements of Registrant are
omitted because they are not applicable or not required or because the required
information is included in the financial statements or notes thereto.
3. EXHIBITS.
(3) Articles of Incorporation and Bylaws
(a) Restated Articles of Incorporation of Registrant, as amended October
13, 1987 and June 22, 1995 (Incorporated by reference to Exhibit 3(a)
to Registrant's Annual Report on Form 10-K, dated August 25, 1995,
for the fiscal year ended May 31, 1995)
(b) Restated Bylaws of Registrant, as amended October 16, 1996
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Indenture, dated as of March 1, 1991, between the Registrant and The
Bank of New York, as Trustee, relating to Medium Term Notes
(Incorporated by reference to Exhibit 4(a) to Registrant's Annual
Report on Form 10-K, dated August 26, 1996, for the fiscal year ended
May 31, 1996)
21
(b) Indenture, dated as of March 1, 1995, between Tenet and The Bank of
New York, as Trustee, relating to 9 5/8% Senior Notes due 2002
(Incorporated by reference to Exhibit 4(a) to Registrant's Quarterly
Report on Form 10-Q, dated April 14, 1995, for the fiscal quarter
ended February 28, 1995)
(c) First Supplemental Indenture, dated as of October 30, 1995, between
Tenet and The Bank of New York, as Trustee, relating to 9 5/8% Senior
Notes due 2002
(d) Second Supplemental Indenture, dated as of August 21, 1997, between
Tenet and The Bank of New York, as Trustee, relating to 9 5/8% Senior
Notes due 2002
(e) Indenture, dated as of March 1, 1995, between Tenet and The Bank of
New York, as Trustee, relating to 10 1/8% Senior Subordinated Notes
due 2005 (Incorporated by reference to Exhibit 4(b) to Registrant's
Quarterly Report on Form 10-Q, dated April 14, 1995, for the fiscal
quarter ended February 28, 1995)
(f) First Supplemental Indenture, dated as of October 27, 1995, between
Tenet and The Bank of New York, as Trustee, relating to 10 1/8%
Senior Subordinated Notes due 2005
(g) Second Supplemental Indenture, dated as of August 21, 1997, between
Tenet and The Bank of New York, as Trustee, relating to 10 1/8%
Senior Subordinated Notes due 2005
(h) Indenture, dated as of October 16, 1995, between Tenet and The Bank
of New York, as Trustee, relating to 8 5/8% Senior Notes due 2003
(Incorporated by reference to Exhibit 4(d) to Registrant's Annual
Report on Form 10-K, dated August 26, 1996, for the fiscal year ended
May 31, 1996)
(i) First Supplemental Indenture, dated as of October 30, 1995, between
Tenet and The Bank of New York, as Trustee, relating to 8 5/8% Senior
Notes due 2003
(j) Second Supplemental Indenture, dated as of August 21, 1997, between
Tenet and The Bank of New York, as Trustee, relating to 8 5/8% Senior
Notes due 2003
(k) Indenture, dated as of January 10, 1996, between Tenet and The Bank
of New York, as Trustee, relating to 6% Exchangeable Subordinated
Notes due 2005 (Incorporated by reference to Exhibit 4(a) to
Registrant's Quarterly Report on Form 10-Q, dated January 15, 1996,
for the fiscal quarter ended November 30, 1995)
(l) Escrow Agreement, dated as of January 10, 1996, among the Company,
NME Properties, Inc., NME Property Holding Co., Inc. and The Bank of
New York, as Escrow Agent (Incorporated by reference to Exhibit 4(b)
to Registrant's Quarterly Report on Form 10-Q, dated as of January
15, 1996, for the fiscal quarter ended November 30, 1995)
(m) Indenture, dated January 15, 1997, between Tenet and The Bank of New
York, as Trustee, relating to 7 7/8% Senior Notes due 2003
(n) Indenture, dated January 15, 1997, between Tenet and The Bank of New
York, as Trustee, relating to 8% Senior Notes due 2005
(o) Indenture, dated January 15, 1997, between Tenet and The Bank of New
York, as Trustee, relating to 8 5/8% Senior Subordinated Notes due
2007
(10) Material Contracts
(a) $91,350,000 Amended and Restated Letter of Credit and Reimbursement
Agreement, dated as of February 28, 1995, among the Company, as
Account Party, and Bank of America National Trust and Savings
Association, The Bank of New York, Bankers Trust Company and
22
Morgan Guaranty Trust Company of New York, as Banks, and The Bank of
New York, as Issuing Bank (Incorporated by reference to Exhibit 10(b)
to Registrant's Quarterly Report on Form 10-Q, dated April 14, 1995,
for the fiscal quarter ended February 28, 1995)
(b) Amendment to Reimbursement Agreement, dated as of March 1, 1996,
among the Company, as Account Party, Bank of America National Trust
and Savings Association, The Bank of New York, Bankers Trust Company
and Morgan Guaranty Trust Company of New York, as Banks, and The Bank
of New York, as the Issuing Bank (Incorporated by reference to
Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q, dated as
of April 12, 1996, for the fiscal quarter ended February 29, 1996)
(c) Amendment No. 2 to Reimbursement Agreement, dated January 30, 1997,
among the Company, as Account Party, Bank of America National Trust
and Savings Corporation, The Bank of New York and Morgan Guaranty
Trust Company of New York, as Banks, and The Bank of New York, as
Issuing Bank
(d) Agreement, dated August 22, 1995, among the Registrant, The Hillhaven
Corporation and Vencor, Inc. (Incorporated by reference to Exhibit
10(n) to Registrant's Annual Report on Form 10-K, dated August 25,
1995, for the fiscal year ended May 31, 1995)
(e) $2,800,000,000 Credit Agreement, dated as of January 30, 1997, among
Tenet, as Borrower, the Lenders, Managing Agents and Co-Agents party
thereto, the Swingline Bank party thereto, The Bank of New York and
the Bank of Nova Scotia, as Documentation Agents, Bank of America
National Trust and Savings Association, as Syndication Agent, and
Morgan Guaranty Trust Company of New York, as Administrative Agent
(Incorporated by reference to Exhibit 10(a) to Registrant's Quarterly
Report on Form 10-Q, dated as of April 14, 1997, for the fiscal
quarter ended February 28, 1997)
(f) Amendment, dated as of July 25, 1997, to the Credit Agreement, dated
as of January 30, 1997, among Tenet the Lenders, Managing Agents and
Co-Agents party thereto, the Swingline Bank party thereto, The Bank
of New York and The Bank of Nova Scotia, as Documentation Agents,
Bank of America National Trust and Savings Association, as
Syndication Agent, and Morgan Guaranty Trust Company of New York, as
Administrative Agent
(g) Letter from the Registrant to Jeffrey C. Barbakow, dated May 26, 1993
(Incorporated by reference to Exhibit 10(l) to Registrant's Annual
Report on Form 10-K, dated August 30, 1993, for the fiscal year ended
May 31, 1993)
(h) Letter from the Registrant to Jeffrey C. Barbakow, dated June 1, 1993
(Incorporated by reference to Exhibit 10(m) to Registrant's Annual
Report on Form 10-K, dated August 30, 1993, for the fiscal year ended
May 31, 1993)
(i) Memorandum from the Registrant to Jeffrey C. Barbakow, dated June 14,
1993 (Incorporated by reference to Exhibit 10(n) to Registrant's
Annual Report on Form 10-K, dated August 30, 1993, for the fiscal
year ended May 31, 1993)
(j) Memorandum of Understanding, dated May 21, 1996, from Jeffrey C.
Barbakow to the Company (Incorporated by reference to Exhibit 10(t)
to Registrant's Annual Report on Form 10-K, dated as of August 26,
1996, for the fiscal year ended May 31, 1996)
(k) Memorandum of Understanding, dated May 21, 1996, from Michael H.
Focht, Sr. to the Company (Incorporated by reference to Exhibit 10(u)
to Registrant's Annual Report on Form 10-K, dated as of August 26,
1996, for the fiscal year ended May 31, 1996)
(l) Executive Officers Relocation Protection Agreement (Incorporated by
reference to Exhibit 10(v) to Registrant's Annual Report on Form
10-K, dated as of August 26, 1996, for the fiscal year ended May 31,
1996)
23
(m) Executive Officers Severance Protection Plan (Incorporated by
reference to Exhibit 10(w) to Registrant's Annual Report on Form
10-K, dated as of August 26, 1996, for the fiscal year ended May 31,
1996)
(n) Board of Directors Retirement Plan, effective January 1, 1985
(Incorporated by reference to Exhibit 10(x) to Registrant's Annual
Report on Form 10-K, dated as of August 26, 1996, for the fiscal year
ended May 31, 1996)
(o) First Amendment to Board of Directors Retirement Plan, effective as
of August 18, 1993 (Incorporated by reference to Exhibit 10(xx) to
Registrant's Annual Report on Form 10-K, dated August 30, 1993, for
the fiscal year ended May 31, 1993)
(p) Amendment to Directors Retirement Plan, dated as of April 25, 1994
(Incorporated by reference to Exhibit 10(oo) to Registrant's Annual
Report on Form 10-K, dated August 25, 1994, for the fiscal year ended
May 31, 1994)
(q) Third Amendment to the Board of Directors Retirement Plan, effective
as of July 30, 1997
(r) Supplemental Executive Retirement Plan, as amended May 21, 1986
(Incorporated by reference to Exhibit 10(o) to Registrant's Annual
Report on Form 10-K, dated August 21, 1992, for the fiscal year ended
May 31, 1992)
(s) Amendment to Supplemental Executive Retirement Plan, dated as of
April 25, 1994 (Incorporated by reference to Exhibit 10(ss) to
Registrant's Annual Report on Form 10-K, dated August 25, 1994, for
the fiscal year ended May 31, 1994)
(t) Amendment to Supplemental Executive Retirement Plan, dated as of July
25, 1994 (Incorporated by reference to Exhibit 10(tt) to Registrant's
Annual Report on Form 10-K, dated August 25, 1994, for the fiscal
year ended May 31, 1994)
(u) Third Amendment to Supplemental Executive Retirement Plan, dated as
of January 28, 1997
(v) 1994 NME Supplemental Executive Retirement Plan Trust Agreement,
dated as of May 25, 1994, as amended July 25, 1994, between the
Registrant, and United States Trust Company of New York (Incorporated
by reference to Exhibit 10(uu) to Registrant's Annual Report on Form
10-K, dated August 25, 1994, for the fiscal year ended May 31, 1994)
(w) Agreement, dated October 30, 1996, between Tenet and United States
Trust Company of New York, as Trustee, regarding the First Amendment
to the 1994 Tenet Supplemental Executive Retirement Plan Trust
(Incorporated by reference to Exhibit 10(b) to Registration Statement
on Form S-3 (Registration No. 333-26621) dated May 7, 1997, filed
with the Commission on May 7, 1997)
(x) 1994 Annual Incentive Plan (Incorporated by reference to Exhibit B to
the Definitive Proxy Statement, dated as of August 25, 1994, for the
Registrant's 1994 Annual Meeting of Shareholders)
(y) 1997 Annual Incentive Plan (Incorporated by reference to Exhibit B to
the Definitive Proxy Statement, dated as of August 26, 1997, for the
Registrant's 1997 Annual Meeting of Shareholders)
(z) Deferred Compensation Plan, effective March 23, 1983 (Incorporated by
reference to Exhibit 10(gg) to Registrant's Annual Report on Form
10-K, dated August 26, 1996, for the fiscal year ended May 31, 1996)
(aa) First Amendment to Deferred Compensation Plan, dated as of August
15, 1994 (Incorporated by reference to Exhibit 10(zz) to
Registrant's Annual Report on Form 10-K, dated August 25, 1994, for
the fiscal year ended May 31, 1994)
24
(bb) 1994 NME Deferred Compensation Plan Trust Agreement, dated as of May
25, 1994, as amended July 25, 1994, between the Registrant and
United States Trust Company of New York (Incorporated by reference
to Exhibit 10(aaa) to Registrant's Annual Report on Form 10-K, dated
August 25, 1994, for the fiscal year ended May 31, 1994)
(cc) Agreement, dated October 30, 1996, between Tenet and United State
Trust Company of New York, as Trustee, Regarding the First Amendment
to the 1994 Tenet Deferred Compensation Plan Trust (Incorporated by
reference to Exhibit 10(d) to Registration Statement on Form S-3
(Registration No. 333-26621) dated May 7, 1997, filed with the
Commission on May 7, 1997)
(dd) First Amended and Restated 1994 Directors Stock Option Plan
(Incorporated by reference to Exhibit A to the Definitive Proxy
Statement, dated as of August 26, 1997, for the Registrant's 1997
Annual Meeting of Shareholders)
(ee) 1991 Stock Incentive Plan (Incorporated by reference to Exhibit
10(kk) to Registrant's Annual Report on Form 10-K, dated as of
August 26, 1996, for the fiscal year ended May 31, 1996)
(ff) Amended and Restated 1995 Stock Incentive Plan (Incorporated by
reference to Annex D to the Proxy Statement/Prospectus, dated as of
December 18, 1997, for the Registrant's Special Meeting of
Shareholders held on January 28, 1997)
(gg) First Amended and Restated 1995 Employee Stock Purchase Plan
(Incorporated by reference to Exhibit C to the definitive Proxy
Statement, dated as of August 26, 1997, for the Registrant's 1997
Annual Meeting of Shareholders)
(11) Statement Re: Computation of Per Share Earnings, page 26
(13) 1997 Annual Report to Shareholders of Registrant
(21) Subsidiaries of the Registrant
(23) Consent of Experts
(a) Accountants' Consent and Report on Consolidated Schedule (KPMG Peat
Marwick LLP)
(27.1) Financial Data Schedule for fiscal year 1997 (included only in the
EDGAR filing)
(27.2) Restated Financial Data Schedule for fiscal year 1996 (included only
in the EDGAR filing)
(B) REPORTS ON FORM 8-K
(1) On April 11, 1997, the Company filed with the Commission a Current
Report on Form 8-K, dated April 10, 1997, for Item 5, Other Events, and
Item 7, Financial Statements, Pro Forma Financial Information and
Exhibits. The Form 8-K was filed to report the Company's earnings for the
fiscal quarter ended February 28, 1997.
(2) On April 17, 1997, the Company filed with the Commission a Current
Report on Form 8-K, dated April 16, 1997, for Item 5 Other Events, and
Item 7, Financial Statements, Pro Forma Financial Information and
Exhibits. The Form 8-K included the following supplemental financial
information required as a result of the Merger: (i) Selected Supplemental
Financial Information, (ii) Management's Discussion and Analysis of
Supplemental Financial Condition and Results of Operations, (iii)
Supplemental Consolidated Balance Sheets of Tenet 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 Three Years in the Period Ended May 31, 1996, (iv) the
Notes to Supplemental Consolidated Financial Statements, and (v) the
Report of KPMG Peat Marwick LLP. The supplemental consolidated financial
statements give retroactive effect to the Merger.
25
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(EXHIBIT 11)
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
PRIMARY EARNINGS PER SHARE
Weighted average number of shares of common stock outstanding......... 213 213 234 282 304
Dilutive effect of common stock equivalents (stock options and
warrants)........................................................... 1 5 4 5 --
--------- --------- --------- --------- ---------
TOTAL................................................................. 214 218 238 287 304
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) from continuing operations, adjusted for preferred stock
dividends........................................................... $ 276 $ 167 $ 264 $ 498 $ (73)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per common and common equivalent share-- continuing
operations.......................................................... $ 1.29 $ 0.77 $ 1.10 $ 1.73 $ (0.24)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of shares used in primary calculation......... 214 218 238 287 304
Additional dilutive effect of common stock equivalents................ 1 1 1 1 --
Assumed conversion of dilutive convertible notes and debentures....... 14 14 13 7 --
Assumed conversion of redeemable preferred stock...................... -- -- 2 -- --
--------- --------- --------- --------- ---------
TOTAL................................................................. 229 233 254 295 304
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) from continuing operations used in primary
calculation......................................................... $ 276 $ 167 $ 264 $ 498 $ (73)
Adjustments:
Interest expense on convertible debentures.......................... 9 11 14 9 --
Reduced reimbursement of above interest expense by Medicare......... (1) (1) (2) (2) --
Income tax on interest less Medicare reimbursement.................. (3) (4) (5) (3) --
Preferred stock dividends........................................... 1 2 2 -- --
--------- --------- --------- --------- ---------
Adjusted income (loss) from continuing operations..................... $ 282 $ 175 $ 273 $ 502 $ (73)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings (loss) per common and common equivalent share-- continuing
operations.......................................................... $ 1.24 $ 0.75 $ 1.08 $ 1.70 $ (0.24)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
26
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 26, 1997.
TENET HEALTHCARE CORPORATION
By: /s/ TREVOR FETTER By:
----------------------------------------
Trevor Fetter
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
By: /s/ RAYMOND L. MATHIASEN
----------------------------------------
Raymond L. Mathiasen
SENIOR VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
By: /s/ SCOTT M. BROWN
----------------------------------------
Scott M. Brown
SENIOR VICE PRESIDENT
By:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on August 26, 1997, by the following persons on
behalf of the registrant and in the capacities indicated:
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
/s/ JEFFREY C. BARBAKOW
------------------------------------------- Chairman, Chief Executive Officer and Director (Principal
Jeffrey C. Barbakow Executive Officer)
/s/ MICHAEL H. FOCHT, SR.
------------------------------------------- President, Chief Operating Officer and Director
Michael H. Focht, Sr.
/s/ BERNICE BRATTER
------------------------------------------- Director
Bernice Bratter
/s/ MAURICE J. DEWALD
------------------------------------------- Director
Maurice J. DeWald
/s/ PETER DE WETTER
------------------------------------------- Director
Peter de Wetter
/s/ EDWARD EGBERT, M.D.
------------------------------------------- Director
Edward Egbert, M.D.
27
SIGNATURE TITLE
- ------------------------------------------------------ ---------------------------------------------------------
/s/ RAYMOND A. HAY
------------------------------------------- Director
Raymond A. Hay
/s/ LESTER B. KORN
------------------------------------------- Director
Lester B. Korn
/s/ RICHARD S. SCHWEIKER
------------------------------------------- Director
Richard S. Schweiker
28
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1995, 1996 AND 1997
(IN MILLIONS)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
ADDITIONS CHARGED TO:
BALANCE AT --------------------------------
BEGINNING CONTINUING DISCONTINUED DEDUCTIONS OTHER BALANCE AT
OF PERIOD OPERATIONS (1) OPERATIONS (2) ITEMS (3) END OF PERIOD
----------- --------------- --------------- ------------- ----------- -------------
1995.................... $ 122 $ 245 $ 25 $ (283) $ 103 $ 212
1996.................... 212 431 -- (471) 33 205
1997.................... 205 499 -- (474) (6) 224
- ------------------------
(1) Before considering recoveries on accounts or notes previously written off.
(2) Accounts written off.
(3) Primarily beginning balances for purchased businesses, net of balances for
businesses sold, and, in 1997, also net of the elimination of the effects of
including OrNda's results of operations for the three months ended August
31, 1996 in both years ended May 31, 1996 and 1997.
F-1