SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 8-K
(CURRENT REPORT)
___________
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: NOVEMBER 10, 1998
(DATE OF EARLIEST EVENT REPORTED)
COMMISSION FILE NUMBER: 1-7293
___________
TENET HEALTHCARE CORPORATION
(Exact name of Registrant as specified in its charter)
NEVADA 95-2557091
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3820 STATE STREET
SANTA BARBARA, CALIFORNIA 93105
(Address of principal executive offices) (Zip Code)
AREA CODE (805) 563-7000
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
ACQUISITION OF ASSETS
On November 10, 1998, subsidiaries of Tenet Healthcare Corporation, a
Nevada corporation (the "Company"), purchased for cash eight general
hospitals, approximately 150 physician practices and other related facilities
(the "Acquired Operations") in the Philadelphia, Pennsylvania, area from the
Allegheny Health Education and Research Foundation ("AHERF"). The Acquired
Operations were purchased by the Company's subsidiaries out of bankruptcy
through a bidding process conducted pursuant to an order of sale issued by
the United States Bankruptcy Court for the Western District of Pennsylvania.
The purchase price for the Acquired Operations was approximately $345
million (excluding the effect of certain working capital and other
adjustments), which the Company borrowed under its existing $2.8 billion bank
credit facility. As of November 20, 1998, the Company's unused borrowing
capacity under its $2.8 billion bank credit facility was $725 million. The
acquisition of the Acquired Operations is being accounted for as a purchase.
Also included in the bankruptcy estate were the assets comprising the
MCP Hahnemann University of the Health Sciences (formerly known as Allegheny
University of the Health Sciences) (the "University"), which now is owned by
a not-for-profit entity and is managed by Drexel University. In connection
with the bankruptcy proceedings, (1) AHERF's creditors agreed that $60
million of the purchase price would be directed to the University, (2) the
Company made a contribution of $30 million (which is not included in the $345
purchase price referred to above) to the University for working capital
purposes and (3) the Company entered into a long-term Academic Affiliation
Agreement with the University, pursuant to which (a) three of the eight
hospitals acquired by the Company will serve as teaching hospitals for the
University, and (b) the Company will pay the University $33 million in each
of the next two years in consideration for the University providing
supervision and training of medical residents at, and providing other support
for, the three teaching hospitals.
BACKGROUND OF THE ACQUISITION
The Company believes that there were several factors that led AHERF to
file for bankruptcy with respect to the Acquired Operations and the
University. The factors affecting the Acquired Operations include, in no
particular order, (1) the large overhead expenses incurred to operate the
Acquired Operations, (2) unfavorable (a) managed care contracts, including
capitated contracts under which AHERF agreed to meet the health care needs of
those covered in exchange for a fixed fee per covered person per month, (b)
service and supply contracts, (c) leases, and (d) employment contracts with
physicians and (3) an unfavorable operating structure.
The Company has taken and is taking various actions to address those
factors. The steps taken or being taken by the Company include (1) reducing
the overhead expenses incurred to operate the Acquired Operations, (2)
terminating through the bankruptcy proceedings unfavorable (a) managed care
contracts, (b) service and supply contracts, (c) leases, and (d) employment
contracts with physicians, and (3) putting in place a more favorable
operating structure.
-2-
RISKS ASSOCIATED WITH THE ACQUISITION
Although the Company has taken steps to address each of the foregoing
factors, substantial risks continue to exist with respect to the Company's
operation of the Acquired Operations. For example, as a result of the
uncertainty facing the Acquired Operations throughout the bankruptcy process,
physicians, including those on the faculty of the University, began referring
their patients to other hospitals, which led to a substantial reduction in
the number of patients served by the eight hospitals that are part of the
Acquired Operations. There can be no assurance that physicians will reverse
that trend and resume referring their patients to the eight hospitals.
Furthermore, while the Company has entered into new managed care contracts to
replace some of the unfavorable managed care contracts that have been or will
be terminated in the bankruptcy proceedings, there can be no assurance that
the Company will be able to enter into additional managed care contracts. A
substantial portion of the Philadelphia area population is covered by managed
care contracts. If the Company is unable to negotiate additional contracts
with managed care providers, patients whose care is covered by those managed
care providers may be referred to competing hospitals. Even if the Company
is able to negotiate additional contracts with managed care providers, the
terms of those contracts, as well as the contracts already entered into, may
end up being unfavorable to the Company. Finally, the Philadelphia area has
an excess capacity of hospital beds. Since the supply of hospital beds
exceeds the demand for such beds, the Company may not be successful in
attracting patients or may have to spend more money on capital improvements
and other goods and services than it otherwise had planned to spend in order
to attract patients.
Other operational risks also exist. It is often the case that
non-essential maintenance is deferred by entities that are in bankruptcy. As
the Company begins operating the Acquired Operations, it may discover that
the capital needed to operate the Acquired Operations to the Company's
standards is greater than had been contemplated when the Company formulated
its bid for the Acquired Operations. The Company also may be faced with the
need to make certain staffing adjustments, as employees of a bankrupt entity
often choose to seek employment elsewhere. There can be no assurance that
the Company will be able to locate essential personnel without paying
salaries or providing benefits that are greater than the Company had
anticipated when formulating its bid. The Company also faces the
considerable task of bringing the operating and financial reporting systems
of the Acquired Operations into compliance with the rest of the Company's
operating and financial reporting systems. That task could prove to be more
time-consuming and costly than originally had been anticipated.
As noted above, the Acquired Operations include approximately 150
physician practices. Returning those practices to profitability presents the
Company with additional challenges. As part of the bankruptcy proceedings,
the employment contracts of each of the 150 physicians were rejected and
therefore terminated. Over the next approximately 120 days the Company will
attempt to negotiate new contracts with those physicians. The Company cannot
predict at this time the number of physicians with whom it will be able to
negotiate new contracts or whether any new contracts it does negotiate will
be on terms favorable to the Company.
If the Company is unable to favorably address the substantial risks with
respect to the Acquired Operations, the Company's business, financial
condition or results of operations could be materially adversely affected.
-3-
LACK OF AUDITED FINANCIAL STATEMENTS
Another area of concern for the Company is the state of the unaudited
consolidated financial statements for the Acquired Operations. AHERF
operates on a June 30 fiscal year. AHERF's fiscal year 1997 financial
statements had been audited, but AHERF'S independent accountants have
withdrawn their audit report covering those consolidated financial
statements. Furthermore, AHERF has announced that it expects to restate its
unaudited consolidated financial statements, which include the Acquired
Operations and their related operations, for the year ended June 30, 1997.
In July 1998, AHERF filed for bankruptcy protection with respect to the
Acquired Operations and the University. AHERF has not made public any fiscal
year 1998 consolidated financial statements. Although unaudited combined
financial statements for the Acquired Operations are available for fiscal
years 1997 and 1998, AHERF'S announcement that it expects to restate its 1997
unaudited consolidated financial statements and other factors cast doubt on
the reliability of those unaudited combined financial statements, including
with respect to the assets and revenues of the Acquired Operations.
UNAUDITED FINANCIAL INFORMATION
Based on the unaudited financial information currently available to the
Company concerning the Acquired Operations (which, as explained above, may
not be reliable and accordingly, the Company makes no representation as to
their accuracy), the table below sets forth the Company's investments in and
advances to the Acquired Operations, the total assets of the Acquired
Operations and the net operating revenues of the Acquired Operations, all
expressed in millions of dollars and as percentages of the Company's
consolidated total assets as of the end of the Company's most recent fiscal
year, which was May 31, 1998, or net operating revenues for the fiscal year
then ended.
AMOUNTS SHOWN AS
PERCENTAGES OF THE
COMPANY'S CONSOLIDATED
(a) TOTAL ASSETS OR
AMOUNT (b) NET OPERATING
MEASURE OF SIGNIFICANCE (IN MILLIONS) REVENUES
- ---------------------------------------------------------------------------------------------------------
Investments in and advances to the Acquired Operations (1) $345 (a) 2.7%
- ---------------------------------------------------------------------------------------------------------
Unaudited total assets of the Acquired Operations (2) $843 (a) 6.6%
- ---------------------------------------------------------------------------------------------------------
Unaudited net operating revenues of the Acquired Operations (3) $1,127 (b) 11.4%
- ---------------------------------------------------------------------------------------------------------
(1) Investments in and advances to the Acquired Operations represent the
purchase price for the Acquired Operations.
(2) Unaudited total assets of the Acquired Operations are as of June 30,
1998.
(3) Unaudited net operating revenues of the Acquired Operations are for the
fiscal year ended June 30, 1998.
-4-
FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 8-K, including, without
limitation, statements containing the words "believes, anticipates, expects,
intends, will, may, and might" and words of similar import and statements
regarding our business strategy and plans, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements are based on management's
current expectations and involve known and unknown risks, uncertainties and
other factors, many of which we are unable to predict or control, that may
cause our actual results, performance or achievements or industry results to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business
conditions, both nationally and regionally; industry capacity; demographic
changes; existing laws and government regulations and changes in, or the
failure to comply with, laws and governmental regulations; legislative
proposals for healthcare reform; the ability to enter into managed care
provider arrangements on acceptable terms; shifts from fee-for-service
payments to capitated and other risk-based payment systems; changes in
Medicare and Medicaid payment levels; liability and other claims asserted
against us; competition; the loss of any significant customers; technological
and pharmaceutical improvements that increase the cost of providing, or
reduce the demand for, healthcare; changes in business strategy or
development plans; the ability to attract and retain qualified personnel,
including physicians and nurses; our significant indebtedness; the
availability of suitable acquisition opportunites and the length of time it
takes to accomplish acquisitions; our ability to integrate new businesses
with our existing operations; the availability and terms of capital to fund
the expansion of our business, including the acquisition of additional
facilities; the impact of the computer problems with respect to two-digit
codes not being able to properly recognize the year 2000 and related issues;
and other factors referenced in this Form 8-K. GIVEN THESE UNCERTAINTIES,
PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH
FORWARD-LOOKING STATEMENTS. We disclaim any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to refelct future events or
developments.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
Not applicable
(b) PRO FORMA FINANCIAL STATEMENTS
Not applicable
(c) EXHIBITS
Exhibit 99.1: Press Release, dated November 10, 1998
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Company has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
TENET HEALTHCARE CORPORATION
By: /s/ RAYMOND L. MATHIASEN
-------------------------
Raymond L. Mathiasen
Senior Vice President and
Chief Accounting Officer
November 24, 1998
EXHIBIT INDEX
Number Exhibit
99.1 Press Release, dated November 10, 1998