Tenet Healthcare Corporation
TENET
1999 ANNUAL REPORT
TENET and its subsidiaries own and operate general hospitals and many related
health care services. In communities across the U.S., our 126,000 dedicated
employees treated millions of patients last year. Their work embodied the
core business philosophy reflected in our name: the importance of shared
values among partners providing a full spectrum of quality health care.
1 Letter to Shareholders
7 Financial Summary
8 Management's Discussion and Analysis
19 Report of Independent Auditors
20 Consolidated Balance Sheets
21 Consolidated Statements of Operations
22 Consolidated Statements of Comprehensive Income
22 Consolidated Statements of Changes in Shareholders' Equity
23 Consolidated Statements of Cash Flows
24 Notes to Consolidated Financial Statements
45 Supplementary Financial Information
46 Directors and Management
48 Corporate Information
[LOGO]
3820 State Street, Santa Barbara, California 93105
805.563.7000
www.tenethealth.com
LETTER TO SHAREHOLDERS
NO DOUBT ABOUT IT: 1999 was a tough year for U.S. hospitals.
Funding cuts legislated by the Balanced Budget Act of 1997 (BBA)
dramatically reduced Medicare reimbursement to hospitals and health systems
across the country. When Congress passed the BBA, it did so with the intent
of saving $103 billion over the course of five years. In fact, according to
the latest Congressional Budget Office estimates, the actual savings will be
approximately $206 billion - twice what was originally intended.
In this harsh economic climate, however - and despite the overall
decline in earnings Tenet experienced in fiscal 1999 - one fact remains
clear: Our strategy of developing integrated health care delivery systems in
specific regions is working. Tenet hospitals are gaining market share,
growing revenues and holding the line on costs, with the notable exception of
bad debt expense, which I will return to later.
The effectiveness of our strategy is underscored by the substantial
progress we have made in turning around operations in our newest integrated
market - Philadelphia - where we acquired eight hospitals out of bankruptcy
in November 1998. Only two months after taking over this troubled system
- - reportedly the largest nonprofit health care system failure in U.S. history
- - we had stopped the financial hemorrhaging and achieved positive operating
income before depreciation and amortization.
PUTTING FISCAL 1999 INTO PERSPECTIVE
If ever there was a year in which the statistics alone failed to tell
the whole story, it was Tenet's fiscal 1999. That's why I think it's crucial
to put our financial performance for the year in the proper perspective.
Earnings per share from operations before special charges declined 5
percent in fiscal 1999 - to $1.65 per share versus $1.73 in the prior year.
It should be noted, however, that this decline in fiscal 1999 comes after
three years of strong, uninterrupted growth in earnings per share from
operations before special charges, with average gains of more than 17 percent
over the preceding 12 quarters.
A major cause of this recent decline in Tenet's earnings was the impact
of the BBA. Simply stated, our single biggest customer, the federal
government, decided to pay us about $100 million less in fiscal 1999 - with
no corresponding reduction in the level of services we provide. That cost us
20 cents per share.
To help mitigate the adverse financial impact of the BBA, we've launched
initiatives to dramatically cut costs not directly related to patient care.
In fiscal 1999, we reduced our corporate overhead expense by cutting our
staffing above the hospital level, eliminating nonessential programs and
1 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
LETTER TO SHAREHOLDERS (continued)
finding more efficient ways to continue to deliver essential
services. As part of that process, we reexamined how we support our
hospitals and looked for ways to do so more cost-effectively.
Though difficult, we expect these reductions will better position
us in fiscal 2000 and beyond.
At the hospital level, we sought to reduce our costs by taking
full advantage of the inherent strengths of our integrated delivery
systems. For example, by leveraging our size, we are able to
negotiate reduced-rate volume contracts with vendors for supplies
and services, as well as gain access to new managed care contracts
- or achieve better terms in existing contracts. We have also begun
outsourcing so-called hotel services - things like laundry,
dietary, housekeeping and maintenance - to gain substantial cost
savings. This presents a significant opportunity for us companywide
and is one we intend to pursue in fiscal 2000.
To appreciate the underlying strength of our integrated
delivery system strategy, it's important to focus on the
performance of hospitals we've owned for more than a year. For
example, excluding the impact of bad debts, we managed to absorb
all the BBA cuts and still hold same-facility operating margins
before depreciation, amortization and special charges essentially
flat for the year - down only one-tenth of one percent. Labor
expense was excellent, declining to 40 percent of revenues, down
from 40.8 percent in the prior year. Some of this decline is
explained by outsourcing, but we believe it also shows that our
employees are highly productive. We held supply expense at 13.9
percent. Other operating expense for the year increased somewhat -
to 21.8 percent, compared to 20.9 percent in the prior year,
largely as a result of outsourcing.
While our expense control has been excellent in most areas,
the greater-than-expected increase in our bad debt expense in
fiscal 1999 was a source of great frustration. Same-facility bad
debt expense as a percent of revenues rose to 6.8 percent for the
year, compared to 5.9 percent in the prior year, costing us
approximately 18 cents a share on a same-facility basis in fiscal
1999, plus an additional 5 cents per share to finance higher
receivables. Among the many factors influencing this increase are a
shift in our payor mix from Medicare to managed care, "slow-pay"
initiatives by certain managed care companies and an increase in
care provided to uninsured patients at certain hospitals.
To help reduce our bad debt expense, we consolidated
responsibility for patient financial services - all the steps from
admission through the billing and collections process - in a new
department specially created for that purpose. Actions taken so far
by the department include focusing on admitting procedures at our
hospitals to identify best practices; simplifying certain managed
care contracts to reduce disputes over bills; developing special
teams
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 2
LETTER TO SHAREHOLDERS (continued)
to focus on hospitals with significant bad debt problems, and enhancing our
information systems so that we can better monitor and respond to those
problems. We saw some improvement in bad debt expense toward the end of
fiscal 1999 as a result of these initiatives. On a same-facility basis, our
bad debt expense dropped slightly from the second to third quarter, and again
from the third to the fourth quarter.
STRENGTHENING OUR INTEGRATED DELIVERY SYSTEMS
To better support our integrated delivery systems, we made some major
changes to our operational structure in fiscal 1999, grouping our 130
hospitals into three operating divisions instead of two. This enabled our
most-senior divisional managers to focus their attention on fewer hospitals.
Instead of being responsible for 60 or 70 hospitals, they will oversee 30 to
40 facilities. Similarly, each of our 11 regions or markets will be
responsible for between five and 12 hospitals, instead of as many as 18.
Although integrated delivery systems have been central to our strategy
for four years, there are some hospitals in our portfolio that either are not
part of - or are not essential to - a network. For that reason, we have
identified 20 hospitals as candidates for sale in fiscal 2000 and we are
currently evaluating bids for many of them. The first definitive agreement
was announced in July 1999 and we expect other announcements to follow in the
coming months. Divesting hospitals that do not fit our strategic profile is
part of our continuing effort to strengthen our overall portfolio.
We also strengthened our existing integrated delivery systems through
strategic acquisitions in fiscal 1999.
Further augmenting our strong Southern California network, we acquired
Queen of Angels-Hollywood Presbyterian Medical Center, a 409-bed hospital
located in the densely populated area of Los Angeles, and Rancho Springs
Medical Center, a 99-bed hospital in Murrieta, Calif. Additionally, we
expanded our assets in New England with the acquisition of an 80 percent
interest in MetroWest Medical Center, a two-hospital system in Framingham and
Natick, Mass. The remaining 20 percent interest in the medical center is
owned by a local not-for-profit organization.
Philadelphia - the site of our largest acquisition in fiscal 1999
- - dramatically illustrates our strategy for entering a new market. By
acquiring the eight Allegheny Health, Education and Research Foundation
(AHERF) hospitals out of bankruptcy in November 1998, we gained instant
access to a new market for Tenet and immediately became an important force in
the market.
The AHERF hospitals were losing vast sums of money and near collapse
when we acquired them. We quickly mobilized an extensive array of
3 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
LETTER TO SHAREHOLDERS (continued)
in-house expertise to evaluate the system, diagnose its problems
and develop solutions. On the day we completed the acquisition we
had a management team in place, ready to quickly implement those
solutions. The result was an immediate improvement in profitability.
Today, our Philadelphia operations are performing better than
we initially expected. Operating income before depreciation and
amortization turned positive in January 1999, our second full month
of operation. We are stabilizing and enhancing physician relations
at these facilities and rebuilding the community's confidence in
them. We've also made significant progress in cutting costs - by
reducing the work force through attrition and layoffs,
renegotiating contracts to lower supply costs, buying out expensive
equipment leases and negotiating regional purchasing contracts for
local services, leveraging the network's size to obtain volume
discounts.
Philadelphia has been a crucial test of what we believe is a
unique competency of Tenet - our ability to diagnose and treat
ailing large hospital systems. While fiscal 1999 was certainly a
difficult year for Tenet, we believe the reimbursement and other
pressures affecting us are even tougher on not-for-profit hospitals
and systems, which typically have slimmer margins and
less-effective cost controls. Going forward, we believe this will
lead to the kind of acquisition opportunities we are looking for -
carefully selected acquisitions that offer significant growth
opportunities.
A NEW MANAGEMENT TEAM
Fiscal 1999 brought significant changes within the company's
leadership. After 20 years with the company, Michael H. Focht Sr.
retired as Tenet's President and Chief Operating Officer. While he
is no longer involved in day-to-day operations, Mike remains a
member of Tenet's Board of Directors and is available as a
consultant. Mike and I joined the board of Tenet's predecessor
company on the same day, and he was the one I turned to in 1993 to
help fix what was then a very troubled company. Mike helped turn
our company into an industry leader, growing core revenues from
approximately $2 billion to nearly $11 billion in the space of five
short years. The leadership, integrity and intelligence he
displayed during his career with Tenet will be greatly missed.
Instead of replacing Mike directly, we took this opportunity
to reorganize our senior management structure, emphasizing a
hands-on management approach that is consistent with our strategy
of focusing more intently on improving our existing operations. We
created a new Office of the President consisting of Trevor Fetter,
Chief Corporate Officer and Chief Financial Officer, and Thomas B.
Mackey, Chief Operating Officer. Trevor, whose previous title was
Executive Vice President and Chief Financial Officer, now
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 4
LETTER TO SHAREHOLDERS (continued)
is also responsible for all of the company's corporate functions, while Tom,
who previously served as Executive Vice President for Operations in the
western half of the country, is responsible for all hospital operations.
We also appointed three highly regarded new members to our Board of
Directors within the last 16 months - Sanford Cloud Jr., President and Chief
Executive of The National Conference for Community and Justice (NCCJ); The
Rev. Lawrence Biondi S.J., President of Saint Louis University, and Floyd D.
Loop M.D., Chairman and Chief Executive Officer of The Cleveland Clinic
Foundation.
Mr. Cloud, the first African-American leader of the NCCJ (known for most
of its 70-year history as The National Conference of Christians and Jews), is
a board member for various corporations and philanthropic organizations, as
well as a lecturer, lawyer, former legislator and corporate executive. His
insight and counsel have been invaluable in helping us meet the diverse needs
of the many communities we serve. Fr. Biondi, a Catholic, Jesuit priest,
brings his expertise as the successful head of a major university with a
renowned medical school, as well as his insight into medical ethics. Dr.
Loop, a noted thoracic and cardiovascular surgeon, adds his background in
health care administration with the prestigious Cleveland Clinic Foundation,
known worldwide for the quality of its clinical care, research and education.
LOOKING AHEAD
We continue to face a number of serious challenges in fiscal 2000, the
most significant of which is an additional $100 million reduction in
government reimbursement. This estimate, based on information currently
available, includes incremental Medicare reimbursement cuts from the BBA, as
well as proposed reductions in both Medicare "outlier" payments and
disproportionate share Medicaid reimbursement to some of our California
hospitals. These outlier payments are intended to reimburse hospitals for
high-acuity patients whose length of stay and cost of treatment is well
beyond the averages established in the diagnostic-related group (DRG)
payment. The California disproportionate share program compensates hospitals
that care for a higher-than-average mix of Medicaid and uninsured patients.
As discussed earlier in this letter, we have developed and are
implementing various strategies to absorb these cuts and grow in spite of
them. Our actual results will depend importantly on the success of each of
these initiatives.
Further, Tenet has many inherent strengths, as well as strategic
advantages, that give me cause for optimism in fiscal 2000 and beyond. Our
portfolio of hospitals is strong - and will be even stronger when our
divestiture program is complete. It includes facilities that are cornerstones
in their communities,
5 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
LETTER TO SHAREHOLDERS (continued)
institutions that are renowned for the quality care they provide
their patients. Two of our hospitals - Saint Louis University
Hospital and Memorial Medical Center in New Orleans - were recently
included in U.S. News & World Report's list of America's Top
Hospitals. Both facilities are key components of our integrated
delivery systems in their markets.
Our integrated market strategy continues to reward us with
significant cost-saving opportunities, market share gains and
better pricing for commercial customers.
We continue to enjoy all the advantages of a large national
provider network. Our hospitals represent 130 individual learning
laboratories in which we can develop and test innovative ideas and
approaches, then pass along the best of them to our other
facilities and integrated systems.
Above all, we are fortunate in the quality and professionalism
of our 126,000 employees, the vast majority of whom work at our
hospitals. Their dedication to providing quality, compassionate
care to our patients remains one of this company's strongest assets.
I thank you for supporting Tenet in fiscal 1999. We are
working very hard to make fiscal 2000 a better year for our
company, our employees and our shareholders.
Sincerely,
/s/ Jeffrey C. Barbakow
Jeffrey C. Barbakow
Chairman and Chief Executive Officer
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 6
FINANCIAL SUMMARY
SELECTED FINANCIAL DATA CONTINUING OPERATIONS
YEARS ENDED MAY 31,
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1995 1996 1997 1998 1999
OPERATING RESULTS
Net operating revenues $ 5,161 $ 7,706 $ 8,691 $ 9,895 $ 10,880
Operating expenses:
Salaries and benefits 2,170 3,139 3,595 4,052 4,412
Supplies 668 1,056 1,197 1,375 1,525
Provision for doubtful accounts 260 436 498 588 743
Other operating expenses 1,189 1,658 1,878 2,071 2,342
Depreciation 232 319 335 347 421
Amortization 44 100 108 113 135
Merger, impairment and other unusual charges 37 86 619 221 363
--------------------------------------------------------
Operating income 561 912 461 1,128 939
Interest expense, net of capitalized portion (251) (425) (417) (464) (485)
Investment earnings 32 27 27 22 27
Equity in earnings of unconsolidated subsidiaries 43 25 -- -- --
Minority interests in income of consolidated subsidiaries (10) (30) (27) (22) (7)
Net gains (losses) on disposals of facilities and long-term investments 31 346 (18) (17) --
Income from continuing operations before income taxes 406 855 26 647 474
Taxes on income (128) (373) (89) (269) (225)
--------------------------------------------------------
Income (loss) from continuing operations $ 278 $ 482 $ (63) $ 378 $ 249
- ----------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share from continuing operations $ 1.17 $ 1.71 $ (0.21) $ 1.23 $ 0.80
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share from continuing operations $ 1.12 $ 1.65 $ (0.21) $ 1.22 $ 0.79
- ----------------------------------------------------------------------------------------------------------------------------------
AS OF MAY 31,
1995 1996 1997 1998 1999
BALANCE SHEET DATA
Working capital $ 273 $ 499 $ 621 $ 1,182 $ 1,940
Total assets 9,787 10,768 11,606 12,774 13,771
Long-term debt, excluding current portion 4,287 4,421 5,022 5,829 6,391
Shareholders' equity 2,385 3,267 3,224 3,558 3,870
Book value per common share 9.15 11.09 10.65 11.50 12.44
7 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The health care industry continues to undergo tremendous change, driven
primarily by (1) cost-containment pressures by government payors, managed
care providers and others, and (2) technological advances that require
increased capital expenditures. To address these changes, Tenet has
implemented various cost-control programs and overhead-reduction plans and
continues to create strong integrated health care delivery systems.
The Company reported income from continuing operations before income
taxes of $26 million in 1997, $647 million in 1998 and $474 million in 1999.
The most significant items affecting the results of continuing operations in
the last three years have been: (1) acquisitions and disposals (see Note 3 of
Notes to Consolidated Financial Statements herein), and (2) merger,
impairment and other unusual charges (see Note 4 of Notes to Consolidated
Financial Statements herein). Fiscal 1997 also includes a noncash charge
relating to increases in the index value of certain of the Company's
long-term debt. Fiscal 1998 includes losses on the disposition of shares of
common stock in unconsolidated affiliates and a reversal of the noncash
charge taken in fiscal 1997. The pretax impact of these items is shown below:
(DOLLARS IN MILLIONS) 1997 1998 1999
Losses on sales of facilities and long-term investments, net $ (18) $ (17) $ --
Merger, impairment and other unusual charges (619) (221) (363)
-------------------------------------
Net pretax impact (after tax, diluted per share: $(1.44) in 1997,
$(0.51) in 1998 and $(0.86) in 1999) $(637) $(238) $(363)
- ----------------------------------------------------------------------------------------------------------------
Excluding the items in the table above, income from continuing
operations before income taxes would have been $663 million in 1997, $885
million in 1998 and $837 million in 1999.
In November 1998, subsidiaries of the Company purchased eight general
hospitals and certain other assets, including several physician practices, in
the Philadelphia, Pennsylvania area that were in bankruptcy proceedings. This
acquisition was dilutive to its earnings per share in fiscal 1999 by
approximately $0.05 per share. The operations of these hospitals have been
improving steadily since the date of acquisition and the Company expects that
they will continue this trend in fiscal 2000.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The following is a summary of operating income for the past three fiscal
years:
1997 1998 1999 1997 1998 1999
(DOLLARS IN MILLIONS) (PERCENTAGE OF NET OPERATING REVENUES)
Net operating revenues:
Domestic general hospitals $ 7,932 $ 8,997 $ 9,958 91.3% 90.9% 91.5%
Other operations (1) 759 898 922 8.7% 9.1% 8.5%
----------------------------------------------------------------------
$ 8,691 $ 9,895 $10,880 100.0% 100.0% 100.0%
- -----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Salaries and benefits (3,595) (4,052) (4,412) 41.4% 41.0% 40.6%
Supplies (1,197) (1,375) (1,525) 13.8% 13.9% 14.0%
Provision for doubtful accounts (498) (588) (743) 5.7% 5.9% 6.8%
Other operating expenses (1,878) (2,071) (2,342) 21.6% 20.9% 21.5%
Depreciation (335) (347) (421) 3.9% 3.5% 3.9%
Amortization (108) (113) (135) 1.2% 1.2% 1.2%
----------------------------------------------------------------------
Operating income before merger,
impairment and other unusual charges 1,080 1,349 1,302 12.4% 13.6% 12.0%
Merger, impairment and other unusual charges (619) (221) (363) 7.1% 2.2% 3.4%
----------------------------------------------------------------------
Operating income $ 461 $ 1,128 $ 939 5.3% 11.4% 8.6%
- -----------------------------------------------------------------------------------------------------------------------
(1) Net operating revenues of other operations consist primarily of revenues
from (i) physician practices; (ii) rehabilitation hospitals, long-term-care
facilities, psychiatric and specialty hospitals that are located on or near
the same campuses as the Company's general hospitals; (iii) health care
joint ventures operated by the Company; and (iv) subsidiaries of the
Company offering managed care and indemnity products.
The table below sets forth certain selected historical operating statistics
for the Company's domestic general hospitals:
INCREASE (DECREASE)
1997 1998 1999 1998 TO 1999
Number of hospitals (at end of period) 128 122 130 8 (2)
Licensed beds (at end of period) 27,959 27,867 30,791 10.5%
Net inpatient revenues (in millions) $ 5,227 $ 5,843 $ 6,516 11.5%
Net outpatient revenues (in millions) $ 2,515 $ 2,978 $ 3,185 7.0%
Admissions 786,887 872,433 940,247 7.8%
Equivalent admissions (1) 1,124,397 1,268,264 1,360,024 7.2%
Average length of stay (days) 5.2 5.2 5.2 --
Patient days 4,099,709 4,547,312 4,881,439 7.3%
Equivalent patient days (1) 5,817,251 6,557,525 6,997,079 6.7%
Net inpatient revenues per patient day $ 1,275 $ 1,285 $ 1,335 3.9%
Net inpatient revenues per admission $ 6,643 $ 6,697 $ 6,930 3.5%
Utilization of licensed beds 42.5% 44.0% 45.4% 1.4%(2)
Outpatient visits 9,997,266 10,402,957 9,654,975 (7.2)%
(1) Equivalent admissions/patient days represents actual admissions/patient
days adjusted to include outpatient and emergency room services by
multiplying actual admissions/patient days by the sum of gross inpatient
revenues and outpatient revenues and dividing the result by gross inpatient
revenues.
(2) The change is the difference between the 1998 and 1999 amounts shown.
9 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals, on a same-facility basis:
INCREASE
1998 1999 (DECREASE)
Average licensed beds 25,948 25,777 (0.7)%
Patient days 4,393,956 4,418,992 0.6%
Net inpatient revenue per patient day $ 1,294 $ 1,317 1.8%
Admissions 845,202 859,330 1.7%
Net inpatient revenue per admission $ 6,725 $ 6,770 0.7%
Outpatient visits 10,006,646 8,819,694 (11.9)%
Average length of stay (days) 5.2 5.1 (0.1)
The table below sets forth the sources of net patient revenue for the
Company's domestic general hospitals:
INCREASE
(DECREASE)
1997 1998 1999 1998 TO 1999(1)
Medicare 40.2% 38.0% 34.2% (3.8)%
Medicaid 8.6% 8.4% 9.1% 0.7%
Managed care 29.5% 33.7% 37.6% 3.9%
Indemnity and other 21.7% 19.9% 19.1% (0.8)%
(1) The change is the difference between the 1998 and 1999 amounts shown.
Changes in Medicare payments mandated by the Balanced Budget Act of 1997
(the "BBA"), which became effective October 1, 1997, as well as certain
proposed changes to various states' Medicaid programs, have reduced and will
continue to reduce revenues and earnings significantly as these changes are
phased in over the next two years. The most significant changes were phased
in by October 1, 1998.
The Company continues to experience increases in inpatient acuity and
intensity of services as less intensive services shift from an inpatient to
an outpatient basis or to alternative health care delivery services because
of technological and pharmaceutical improvements and continued pressures by
payors to reduce admissions and lengths of stay. In spite of the historical
shifts from inpatient to outpatient services, the Company experienced a 4.7%
decline in the number of same-facility outpatient visits during 1998 compared
to 1997 and an 11.9% decline during 1999 compared to 1998. In response to the
changes in Medicare payments to home health agencies mandated by the BBA, the
Company has consolidated or closed several home health care agencies, which
resulted in the decline in visits.
Pressures to control health care costs and a shift from traditional
Medicare to Medicare managed care plans after the BBA was enacted have
resulted in an increase in the number of patients whose health care coverage
is provided
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
under managed care plans. The Company anticipates that its managed care
business will continue to increase in the future. The Company generally
receives lower payments per patient from managed care payors than it does
from traditional indemnity insurers. The Company has been assuming a greater
share of risk by entering into capitated arrangements with managed care
payors and employers. The Company estimates that approximately 5.5% of its
revenues were derived from capitated arrangements in the year ended May 31,
1999 compared to 5.0% in 1998. However, the Company expects its capitated
business to decline in the future since, in most of the large markets served
by the Company, capitation arrangements generally have been disappointing to
both physicians and hospitals.
To address the effect of reduced payments for services, while continuing
to provide quality care to patients, the Company has implemented strategies
to reduce inefficiencies, create synergies, obtain additional business and
control costs. Such strategies include hospital cost-control programs and
overhead reduction plans and the formation of integrated health care delivery
systems. In certain markets the Company has outsourced many services such as
housekeeping, laundry, dietary and plant maintenance. In each case it has
gained significant cost savings by doing so and is now rolling out this
strategy to all its hospitals. Further consolidations or implementation of
additional cost-control programs may be implemented in the future to offset
the reduced payments under the BBA and the continuing shift from traditional
Medicare to managed care.
Net operating revenues from the Company's other operations were $759
million in 1997, $898 million in 1998 and $922 million in 1999. The increases
are primarily the result of new physician practices acquired as part of
hospital acquisitions. The Company has employed or entered into full-risk
management agreements with physicians in most of its markets. A large
percentage of these physician practices were acquired as part of large
hospital acquisitions or through the formation of integrated health care
delivery systems. However, the physician practice business has not been
profitable.
The Company is in the processs of reevaluating its physician strategy in
every one of its markets and is developing plans to allow a significant
number of its existing contracts to expire. Such plans could result in a
decision to exit the physician practice business during fiscal 2000. The
Company would expect to incur significant charges on the disposal of this
business, including estimated operating losses during the phase-out period,
if it decides to exit the business entirely. Such charges may require
significant cash expenditures as contract settlements with physicians and
physician groups are made. The benefits of such a strategy, which could be
significant, would not be expected to occur until fiscal 2001 and beyond.
Salaries and benefits expense as a percentage of net operating revenues
was 41.4% in 1997, 41.0% in 1998 and 40.6% in 1999. The decreases have
primarily resulted from continuing cost control measures and the outsourcing
of certain hospital services.
Supplies expense as a percentage of net operating revenues was 13.8% in
1997, 13.9% in 1998 and 14.0% in 1999. These increases relate primarily to
greater patient acuity and higher supplies expenses at recently acquired
facilities. The Company continues to focus on reducing supplies expense by
incorporating acquired facilities into the Company's existing
group-purchasing program and by developing and expanding various other
programs designed to improve the purchasing and utilization of supplies.
The provision for doubtful accounts as a percentage of net operating
revenues was 5.7% in 1997, 5.9% in 1998 and 6.8% in 1999. Management believes
the rise in bad debts is generally attributable to a number of factors,
including (a) the continuing shift of business from traditional Medicare,
which has no associated bad debts, to managed care, (b) a rise in the volume
of care provided to uninsured patients in certain of the Company's hospitals
and (c) delays in payment and denial of claims by managed care payors.
Although management is unable to quantify
11 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
the effect of each factor, management believes that, to the extent that the
Company continues to experience a fundamental shift in its payor mix, this
expense is likely to remain at higher levels than in past years. The Company
is taking a series of actions to mitigate these recent increases in bad debt
expense. In March 1999, the Company created a new, corporate-level department
combining all patient billing and account collection activities in order to
improve collection of receivables, accelerate payments from managed care
payors, standardize and improve billing systems and develop best practices in
the patient admissions and registration process. The Company is strengthening
its medical eligibility programs, as well as its business office and related
operations, including admitting, medical records and coding, and the
recruitment, training and compensation of business office staff. In certain
markets, the Company is also setting up dedicated managed care collection
units to focus on problem accounts, problem payors and the highly complex
reimbursement terms in managed care contracts.
Other operating expenses as a percentage of net operating revenues were
21.6% in 1997, 20.9% in 1998 and 21.5% in 1999. The expenses in 1997 include
unusual operating expenses of $17 million to conform accounting methodologies
used to estimate professional liability and other self-insurance reserves in
connection with the January 30, 1997 acquisition of OrNda HealthCorp (the
"OrNda Merger") and $32 million for the estimated costs to settle a
government investigation of an OrNda facility and other OrNda litigation. The
increase in 1999 is primarily due to the outsourcing of certain hospital
services mentioned earlier.
Depreciation and amortization expense was $443 million in 1997, $460
million in 1998 and $556 million in 1999. The increases are primarily due to
the effects of facility acquisitions and increased capital expenditures
partially offset by the effect of disposals, write-downs for impairment of
the carrying values of long-lived assets of certain general hospitals and
medical office buildings and the write-off of goodwill and other long-lived
assets related to the Company's physician practices. Goodwill amortization is
approximately $105 million annually or $0.29 per share.
Merger, impairment and other unusual charges of $619 million, $221
million and $363 million were recorded in fiscal 1997, 1998 and 1999,
respectively.
The charges recorded in fiscal 1999 consisted of (1) $277 million of
impairment losses for the Company's plan to sell 20 general hospitals and
close one general and one specialty hospital, (2) $48 million of
restructuring charges related to the implementation of hospital cost-control
programs and general overhead reduction plans, and (3) $38 million for the
impairment of carrying values of property, equipment and goodwill at
facilities and physician practices to be held and used.
The charges recorded in fiscal 1998 consisted of asset impairment losses
related primarily to (1) the planned closure or sale of three general
hospitals, two specialty hospitals and 29 home health agencies, (2) the
write-down of the carrying values of certain long-lived assets of one
additional general hospital and 16 home health agencies to be held and used
to their fair values and (3) the write-off of goodwill and other assets and
additional costs to terminate contracts related to physician practices and an
increase to the charges incurred in 1997 for the planned closures and sales.
The fiscal 1997 charges include impairment losses of $413 million,
related to the planned closure, sale or conversion to alternate uses of
certain of the Company's facilities and services in order to eliminate
duplication of services and excess capacity following the OrNda Merger and
the write-off of goodwill and other assets related to the Company's physician
practices. In fiscal 1997, the Company recorded other charges in connection
with the OrNda Merger of $188 million, which included: investment banking and
other professional fees, other transaction costs, severance payments for
substantially all of OrNda's corporate and regional employees, closure of
OrNda's corporate office and regional offices, reorganization of operations
and information systems consolidation, primarily related to
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
the buy-out of vendor contracts and the write-down of computer equipment and
capitalized software. The Company also recorded $18 million to restructure
its physician practices in fiscal 1997.
The Company begins its process of determining if its facilities are
impaired (other than those related to the elimination of duplicate facilities
or excess capacity) by reviewing all of the facilities' three-year historical
and one-year projected cash flows. Facilities whose cash flows are negative
or trending significantly downward on this basis are selected for further
impairment analysis. Their future cash flows (undiscounted and without
interest charges) are estimated over the expected useful life of the facility
and consider patient volumes, changes in payor mix, revenue and expense
growth rates and reductions in Medicare payments due to the BBA, which vary
by facility. In 1997, 1998 and 1999, these factors caused significant
declines in cash flows at certain facilities such that estimated future cash
flows were inadequate to recover the carrying values of the long-lived
assets. Marked deterioration of operating results relative to past trends for
certain of the Company's physician practices also led to impairment and
restructuring charges related to these businesses in all three years.
Impairment charges have resulted in minor reductions in depreciation and
amortization expense.
In addition to striving to continuously improve its portfolio of general
hospitals through acquisitions, the Company also divests, from time to time,
hospitals that are not essential to its strategic objectives. In April 1999,
the Company announced a plan to sell approximately 20 non-strategic
hospitals. For the most part, these facilities are not part of an integrated
delivery system. The size and performance of these facilities varies, but on
average they are smaller, with lower margins. The hospitals in the
divestiture plan also include certain rural facilities. These divestitures
will allow the Company to streamline its organization by concentrating on
markets where it already has a strong presence. The anticipated proceeds from
these sales will be used to reduce debt. The Company expects to close these
sales by the end of the third quarter of fiscal 2000.
The charges recorded in fiscal 1999 included approximately $298 million
for noncash write-downs of assets and $65 million for accruals requiring
future cash disbursements, most of which are expected to occur in fiscal
2000. The charges recorded in fiscal 1998 included approximately $140 million
for noncash write-downs of assets and $81 million for accruals requiring
future cash disbursements. The charges recorded in fiscal 1997 included
approximately $387 million for noncash write-downs of assets and $232 million
for cash disbursements of $68 million in fiscal 1997 and accruals requiring
future cash disbursements estimated to be approximately $164 million.
Costs remaining in the accrued liability at May 31, 1999 for the 1998
charges include $7 million for the estimated costs to sell or close
hospitals, $4 million in home heath agency severance costs and $6 million in
estimated costs to terminate physician contracts, all of which are expected
to be spent in fiscal 2000.
Costs remaining in the accrued liability at May 31, 1999 for the 1997
charges include $19 million for estimated costs to sell or close facilities,
$20 million of accruals for unfavorable lease commitments and $8 million of
costs relating to the OrNda Merger. Cash payments are expected to be $41
million in fiscal 2000 and $6 million thereafter, primarily for unfavorable
lease commitments.
Interest expense, net of capitalized interest, was $417 million in 1997,
$464 million in 1998 and $485 million in 1999. The increases are primarily
due to increased borrowings for acquisitions and increases in working capital
offset by the effect of interest rate reductions.
Investment earnings were $27 million in 1997, $22 million in 1998 and
$27 million in 1999 and were derived primarily from notes receivable and
investments in debt securities.
Minority interests in income of consolidated but not wholly owned
subsidiaries were $27 million in 1997, $22 million in 1998 and $7 million in
1999. The decline in 1999 was primarily due to the purchase of the minority
13 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
interests in two hospitals and one insurance subsidiary in fiscal 1999.
The $17 million of net losses from the disposals of facilities and other
long-term investments in 1998 is comprised of $35 million in losses on the
disposals of the Company's investments in the common stock of Vencor, Inc.
("Vencor") (received as a dividend from Ventas, Inc. ("Ventas")) and Total
Renal Care Holdings, Inc. ("TRC"), and an $18 million gain from changes in
the index value of the Company's 6% Subordinated Exchangeable Notes.
The Company's tax provision in 1997 includes the effect of certain
nondeductible merger costs and impairment charges that provide no tax
benefits. The tax provision in 1998 includes a benefit for the charitable
contribution of TRC common stock, offset by nondeductible amortization of
goodwill. The Company's 1999 tax provision includes certain nondeductible
impairment charges related to certain facilities held for sale that provide
no tax benefits. The Company's tax rate in 1999 before the effect of
impairment and other unusual charges was 38.3%. The Company expects this tax
rate to increase slightly in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity for the year ended May 31, 1999 was derived
principally from the proceeds from borrowings under its unsecured revolving
bank agreement ("Credit Agreement") and net cash proceeds from operating
activities. Net cash provided by operating activities for the years ended May
31, 1997, 1998 and 1999 was $512 million, $788 million and $657 million,
respectively, before net expenditures for discontinued operations, merger,
impairment and other unusual charges of $108 million in 1997, $385 million in
1998 and $75 million in 1999. The expenditures in 1998 include the settlement
of significant litigation related to the Company's discontinued psychiatric
business.
Management believes that future cash provided by recurring operating
activities, the availability of credit under the Credit Agreement, the sale
of assets and, depending on capital market conditions and to the extent
permitted by the restrictive covenants of the Credit Agreement and the
indentures governing the Company's Senior and Senior Subordinated notes,
other borrowings or the sale of equity securities should be adequate to meet
known debt-service requirements and to finance planned capital expenditures,
acquisitions and other presently known operating needs for the next three
years. The Company expects to refinance the Credit Agreement on or before its
January 31, 2002 maturity date.
Proceeds from borrowings under the Credit Agreements amounted to $3.1
billion in 1997, $2.0 billion in 1998 and $5.6 billion in 1999. Loan
repayments under the Credit Agreement were $1.9 billion during 1997, $1.3
billion in 1998 and $5.1 billion in 1999.
In May 1998, the Company sold $1.355 billion of Senior and Senior
Subordinated notes due 2008. The aggregate proceeds to the Company were $1.32
billion, after underwriting discounts and commissions, and were used to
redeem certain of the Company's Senior and Senior Subordinated notes.
During fiscal 1997, 1998 and 1999, the Company received net proceeds
from the sales of assets of $50 million, $170 million and $72 million,
respectively. As discussed earlier, the Company has announced a plan to sell
20 hospitals in fiscal 2000, the proceeds of which will be used to repay
borrowings under the Credit Agreement. The Company expects that it may divest
other hospitals in the future if it determines they are not essential to its
strategic objectives.
Cash payments for property and equipment were $406 million in fiscal
1997, $534 million in fiscal 1998 and $592 million in fiscal 1999. The
Company expects to spend approximately $400-$500 million annually on capital
expenditures, before any significant acquisitions of facilities and other
health care operations and before an estimated $216 million commitment to
complete construction of two new hospitals over the next two years. Such
capital expenditures relate primarily to the development of health care
service networks in selected geographic areas, design
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
and construction of new buildings, expansion and renovation of existing
facilities, equipment additions and replacements, introduction of new medical
technologies and various other capital improvements, including those related
to its year 2000 compliance program.
During fiscal 1997, 1998 and 1999, the Company spent $787 million, $679
million and $646 million, respectively, for purchases of new businesses, net
of cash acquired. These acquisitions were financed primarily by borrowings.
The Company does not expect its acquisition activity to continue at these
levels in fiscal 2000.
The Company's strategy includes the prudent development of integrated
health care systems, including the possible acquisition of general hospitals
and related health care businesses or joining with others to develop
integrated health care delivery networks. In addition, as previously
discussed herein, the Company is reevaluating its physician strategy. These
strategies may be financed by net cash provided by recurring operating
activities, the availability of credit under the Credit Agreement, sales of
assets and, to the extent permitted by the restrictive covenants of the
Credit Agreement and the indentures governing the Company's Senior and Senior
Subordinated notes, and depending on capital market conditions, the sale of
additional debt or equity securities or other bank borrowings. The Company's
unused borrowing capacity under the Credit Agreement was $632 million at May
31, 1999.
The Company's Credit Agreement and the indentures governing its Senior
and Senior Subordinated notes have, among other requirements, affirmative,
negative and financial covenants with which the Company must comply. These
covenants include, among other requirements, limitations on other borrowings,
liens, investments, the sale of all or substantially all assets and
prepayment of subordinated debt, a prohibition against the Company declaring
or paying a dividend or purchasing its common stock unless its senior
long-term unsecured debt securities are rated BBB- or higher by Standard and
Poors' Rating Services and Baa3 or higher by Moody's Investors Service, Inc.,
and covenants regarding maintenance of specified levels of net worth, debt
ratios and fixed charge coverages. Current debt ratings on the Company's
senior debt securities are BB+ by Standard and Poors and Ba1 by Moody's. The
Company is in compliance with its loan covenants.
MARKET RISK ASSOCIATED WITH FINANCIAL INSTRUMENTS
The table below presents information about certain of the Company's
market-sensitive financial instruments as of May 31, 1999. The fair values
were determined based on quoted market prices for the same or similar
instruments.
MATURITY DATE, FISCAL YEAR ENDING MAY 31,
(DOLLARS IN MILLIONS) 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
Fixed-rate long-term debt $ 45 $ 11 $ 8 $464 $505 $3,330 $4,363 $4,252
Average interest rates 13.2% 13.2% 13.2% 8.6% 9.1% 8.4% 8.6% --
Variable-rate long-term debt -- -- $2,168 -- -- -- $2,168 $2,168
Average interest rates -- -- 5.9% -- -- -- 5.9% --
Interest rate swaps:
Notional amounts for agreements
under which the Company
pays fixed rates $ 18 $ 50 -- -- -- -- $ 68 $ 2
Average pay rate 8.8% 8.3% -- -- -- -- 8.4% --
Average received rate 5.2% 5.2% -- -- -- -- 5.2% --
Euro denominated foreign currency
forward exchange contracts $ 22 -- -- -- -- -- $ 22 $ 18
15 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Company utilizes, to a limited extent, interest rate swaps and
foreign currency forward exchange contracts to manage certain of its interest
rate and currency exchange rate risk exposures. The interest rate swaps and
foreign currency contracts were entered into for periods consistent with
related underlying exposures and do not constitute positions independent of
those exposures. The Company does not hold or issue derivative instruments
for trading purposes and is not a party to any instruments with leverage or
prepayment features. In entering into these contracts, the Company has
assumed the risk, which it considers slight, that might arise from the
possible failure of the counterparties to perform. Because the other parties
are creditworthy financial institutions, generally commercial banks, the
Company does not expect any losses as a result of counterparty defaults.
At May 31, 1999, the Company's principal long-term investments sensitive
to changes in market price are shown in the following table. They are carried
at market value on the Company's consolidated balance sheets:
(DOLLARS IN MILLIONS) NUMBER OF SHARES MARKET VALUE
Ion Beam Applications, S.A. common stock 511,045 $166
iVillage, Inc. common stock 962,679 46
Total Renal Care Holdings, Inc. common stock 2,865,000 44
Ventas, Inc. common stock 8,301,067 45
Investment portfolio of debt securities n.a. 77
------------------------------
$378
- ------------------------------------------------------------------------------------------------
At May 31, 1999, the investment portfolio of debt securities consisted
of investments in U.S. Treasury Bills, and Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association Notes, with an
average maturity of 180 days. The Company's market risk associated with its
short-term investments in debt securities is substantially mitigated by the
frequent turnover of the portfolio.
Included in the Company's fixed-rate long-term debt are 6% Exchangeable
Subordinated Notes due 2005 with an aggregate principal balance of $320
million. These notes are exchangeable at the option of the holder for 25.9403
shares of Ventas, Inc. common stock plus $239.36 in cash per $1,000 principal
amount of the notes, subject to the Company's right to also pay an amount in
cash equal to the market price of the Ventas shares in lieu of delivery of
such shares. To the extent that the fair market value of the Company's
investment in Ventas common stock and the related portfolio of debt
securities exceeds the carrying value of the notes, the Company must adjust
the carrying value of the notes to such fair market value through a charge or
credit to earnings. Corresponding adjustments to the carrying values of the
investments are credited or charged directly to other comprehensive income.
THE YEAR 2000 ISSUE
The Company is continuing its six-phase Year 2000 compliance program.
The first phase of the program, conducting an inventory of systems and
programs that may be affected by the Year 2000 issue, the second phase,
assessment of how the Year 2000 issues may affect each piece of equipment and
system, and the third phase, planning corrections of any problems discovered,
have been completed for both the Company's information technology systems
("IT Systems") and its non-IT Systems such as bio-medical equipment ("Non-IT
Items"), except for the 12 general hospitals and related operations that were
acquired in fiscal year 1999, with respect to which the first three phases
have been substantially completed. Phases four through six (executing the
plans developed, testing the corrections
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
and implementing the corrections across all of the Company's systems and
programs) are well under way and will run concurrently through the fall of
calendar 1999 for both IT-Systems and Non-IT Items.
The costs the Company has incurred to date in connection with its Year
2000 compliance program amount to approximately $51 million. This amount and
the estimated total cost do not include internal salaries and other internal
costs of the year 2000 compliance program. The Company estimates that its
total cost for addressing all Year 2000 issues will be approximately $100
million, substantially all of which will be accounted for as capital
expenditures. The Company cautions that its estimate is based on the
information available to the Company at this time. As the Company continues
to evaluate the full scope of its Year 2000 issues, its estimate of the costs
it may incur may change. Although the total cost of the Company's Year 2000
compliance program is presently not expected to have a material adverse
effect on its operations, liquidity or financial condition, many factors,
such as the number of pieces of equipment and systems with Year 2000 issues
and the cost of replacing equipment or systems that cannot be brought into
compliance or with respect to which it is more cost-effective in the long run
to replace or take out of service, are not fully known at this time and could
have an aggregate material impact on the Company's estimate. The Company will
receive additional information concerning these and other matters as it
completes phases 4-6 of its Year 2000 compliance program.
The Company is continuing to develop contingency plans to address any
Year 2000 issues that do arise. Since any piece of equipment that is not Year
2000 compliant will be made compliant, replaced or taken out of service, the
Company does not expect the Year 2000 issues to have an adverse impact on
patient care. Furthermore, the Company has developed or is developing a
back-up plan for each piece of critical equipment in case it unexpectedly
fails. Many contingency plans already are in place since contingency plans
are required in order for a hospital to obtain and retain its license. The
Company's contingency plans also include plans to address third parties' Year
2000 issues that may arise. Examples include (i) making certain that each
hospital's back-up power generator is operational if there is a power
failure, (ii) if the Company does not receive assurance that delivery of key
medical supplies will not be interrupted by Year 2000 issues, the Company
will identify reliable alternative sources for those supplies or will make
appropriate alternative arrangements, and (iii) if regular payments from a
principal payor might be adversely affected by Year 2000 issues, the Company
will endeavor to negotiate an alternative payment system.
The Securities and Exchange Commission's recent guidance for Year 2000
disclosure also calls on companies to describe their most likely worst case
Year 2000 scenarios. While one can imagine a scenario in which medical
equipment fails as a result of a Year 2000 problem, which could lead to
serious injury or death, the Company does not believe that such a scenario is
likely to occur. As noted above, since any piece of equipment that is not
Year 2000 compliant will be made compliant, replaced or taken out of service,
the Company does not expect the Year 2000 issues to have an adverse impact on
patient care. Furthermore, there will be a back-up plan for each piece of
critical equipment in case it unexpectedly fails. The most likely worst case
scenario is that the Company will have to replace or take out of service some
of its existing equipment and add additional staff and/or reassign existing
staff during the time period leading up to and immediately following December
31, 1999, in order to address any Year 2000 issues that unexpectedly arise.
BUSINESS OUTLOOK
The general hospital industry in the United States and the Company's
general hospitals continue to have significant unused capacity, and thus
there is substantial competition for patients. Inpatient utilization
continues to be negatively affected by payor-required pre-admission
authorization and by payor pressure to maximize outpatient and
17 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
alternative health care delivery services for less acutely ill patients.
Increased competition, admission constraints and payor pressure are expected
to continue.
The ongoing challenge facing the Company and the health care industry as
a whole is to continue to provide quality patient care in an environment of
rising costs, strong competition for patients and a general reduction of
reimbursement rates by both private and government payors. Because of
national, state and private industry efforts to reform health care delivery
and payment systems, the health care industry as a whole faces increased
uncertainty. The Company is unable to predict whether any new health care
legislation at the federal and/or state level will be passed in the future
and what action it may take in response to such legislation, but it continues
to monitor all proposed legislation and analyze its potential impact in order
to formulate its future business strategies.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report, including, without
limitation, statements containing the words believes, anticipates, expects,
will, may, might, should, estimates, and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
management's current expectations and involve known and unknown risks,
uncertainties and other factors, many of which the Company is unable to
predict or control, that may cause the actual results, performance or
achievements of the Company or industry results to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, both nationally and in
the regions in which the Company operates; industry capacity; demographic
changes; existing laws and government regulations and changes in, or the
failure to comply with, laws and governmental regulations; legislative
proposals for health care reform; the ability to enter into managed care
provider arrangements on acceptable terms; a shift from fee-for-service
payment to capitated and other risk-based payment systems; changes in
Medicare and Medicaid reimbursement levels; liability and other claims
asserted against the Company; competition; the loss of any significant
customers; technological and pharmaceutical improvements that increase the
cost of providing, or reduce the demand for, health care; changes in business
strategy or development plans; the ability to attract and retain qualified
personnel, including physicians; the significant indebtedness of the Company;
the availability and terms of capital to fund the expansion of the Company's
business, including the acquisition of additional facilities; and the impact
of the Year 2000 Issues. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking
statements contained herein to reflect future events or developments.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 18
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Tenet Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Tenet
Healthcare Corporation and subsidiaries as of May 31, 1998 and 1999, and the
related consolidated statements of operations, comprehensive income, changes
in shareholders' equity and cash flows for each of the years in the
three-year period ended May 31, 1999. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tenet
Healthcare Corporation and subsidiaries as of May 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended May 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Jeffrey C. Barbakow
Los Angeles, California
July 27, 1999
19 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31,
(DOLLARS IN MILLIONS) 1998 1999
ASSETS
Current assets:
Cash and cash equivalents $ 23 $ 29
Short-term investments in debt securities 132 130
Accounts receivable, less allowance for doubtful accounts ($191 in 1998 and $287 in 1999) 1,742 2,318
Inventories of supplies, at cost 214 221
Deferred income taxes 275 196
Assets held for sale, at the lower of carrying value or fair value less estimated costs to sell 33 655
Other current assets 471 413
-------------------
Total current assets 2,890 3,962
-------------------
Investments and other assets 498 569
Property and equipment, net 5,987 5,839
Costs in excess of net assets acquired, less accumulated amortization ($270 in 1998 and $339 in 1999) 3,317 3,283
Other intangible assets, at cost, less accumulated amortization ($55 in 1998 and $70 in 1999) 82 118
-------------------
$12,774 $13,771
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS` EQUITY
Current liabilities:
Current portion of long-term debt $ 10 $ 45
Accounts payable 657 713
Employee compensation and benefits 355 390
Accrued interest payable 106 163
Other current liabilities 580 711
-------------------
Total current liabilities 1,708 2,022
-------------------
Long-term debt, net of current portion 5,829 6,391
Other long-term liabilities and minority interests 1,256 1,048
Deferred income taxes 423 440
Commitments and contingencies
Shareholders' equity:
Common stock, $0.075 par value; authorized 700,000,000 shares; 313,044,417 shares issued at
May 31, 1998 and 314,778,323 shares issued at May 31, 1999 23 24
Additional paid-in capital 2,475 2,510
Accumulated other comprehensive income 50 77
Retained earnings 1,080 1,329
Less common stock in treasury, at cost, 3,754,891 shares at May 31, 1998 and 3,754,708 at May 31, 1999 (70) (70)
-------------------
Total shareholders' equity 3,558 3,870
-------------------
$12,774 $13,771
- ---------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 20
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MAY 31,
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1998 1999
Net operating revenues $ 8,691 $ 9,895 $ 10,880
-------------------------------------------
Operating expenses:
Salaries and benefits 3,595 4,052 4,412
Supplies 1,197 1,375 1,525
Provision for doubtful accounts 498 588 743
Other operating expenses 1,878 2,071 2,342
Depreciation 335 347 421
Amortization 108 113 135
Merger, impairment and other unusual charges 619 221 363
-------------------------------------------
Operating income 461 1,128 939
-------------------------------------------
Interest expense, net of capitalized portion (417) (464) (485)
Investment earnings 27 22 27
Minority interests in income of consolidated subsidiaries (27) (22) (7)
Net losses on disposals of facilities and long-term investments (18) (17) --
-------------------------------------------
Income from continuing operations before income taxes 26 647 474
Taxes on income (89) (269) (225)
-------------------------------------------
Income (loss) from continuing operations (63) 378 249
Discontinued operations (134) -- --
Extraordinary charges from early extinguishment of debt (47) (117) --
-------------------------------------------
Net income (loss) $ (244) $ 261 $ 249
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common and common equivalent share:
Basic:
Continuing operations $ (0.21) $ 1.23 $ 0.80
Discontinued operations (0.44) -- --
Extraordinary charges (0.16) (0.38) --
-------------------------------------------
$ (0.81) $ 0.85 $ 0.80
- ---------------------------------------------------------------------------------------------------------------------
Diluted:
Continuing operations $ (0.21) $ 1.22 $ 0.79
Discontinued operations (0.44) -- --
Extraordinary charges (0.16) (0.38) --
-------------------------------------------
$ (0.81) $ 0.84 $ 0.79
- ---------------------------------------------------------------------------------------------------------------------
Weighted shares and dilutive securities outstanding (in thousands):
Basic 303,947 306,255 310,050
Diluted 303,947 312,113 313,386
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED MAY 31,
(DOLLARS IN MILLIONS) 1997 1998 1999
Net income (loss) $(244) $ 261 $ 249
Other comprehensive income (loss):
Unrealized gains (losses) on securities held as available for sale:
Unrealized net holding gains (losses) arising during period 134 (56) 51
Less: reclassification adjustment for realized gains included in net income -- (40) --
Foreign currency translation adjustments -- -- (5)
-------------------------------
Other comprehensive income (loss), before income taxes 134 (96) 46
Income tax benefit (expense) related to items of other comprehensive income (52) 36 (19)
-------------------------------
Other comprehensive income (loss) 82 (60) 27
-------------------------------
Comprehensive income (loss) $(162) $ 201 $ 276
- --------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
OUTSTANDING ISSUED PAID-IN COMPREHENSIVE RETAINED TREASURY
(DOLLARS IN MILLIONS, SHARE AMOUNTS IN THOUSANDS) SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK
Balances, May 31, 1996 294,561 $ 22 $ 2,171 $ 28 $ 1,086 $ (40)
Net loss (244)
Other comprehensive income 82
Issuance of common stock 1,171 22 1
Stock options exercised 7,093 1 118
Pooling adjustment related to the OrNda Merger (23)
--------------------------------------------------------------------
Balances, May 31, 1997 302,825 23 2,311 110 819 (39)
Net income 261
Other comprehensive loss (60)
Issuance of common stock 997 26
Stock options exercised 5,468 138 (31)
--------------------------------------------------------------------
Balances, May 31, 1998 309,290 23 2,475 50 1,080 (70)
Net income 249
Other comprehensive income 27
Issuance of common stock 1,044 1 22
Stock options exercised 690 13
--------------------------------------------------------------------
Balances, May 31, 1999 311,024 $ 24 $ 2,510 $ 77 $ 1,329 $ (70)
- ---------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31,
(DOLLARS IN MILLIONS) 1997 1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (244) $ 261 $ 249
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 443 460 556
Provision for doubtful accounts 494 588 743
Additions to reserves for discontinued operations, merger,
impairment and other unusual charges 955 221 363
Deferred income taxes (200) 131 101
Extraordinary charges from early extinguishment of debt 47 117 --
Other items 44 38 17
Increases (decreases) in cash from changes in operating assets and liabilities,
net of effects from purchases of new businesses:
Accounts receivable (791) (988) (1,347)
Inventories and other current assets (7) (100) (114)
Accounts payable, accrued expenses and other current liabilities (145) 143 197
Other long-term liabilities and minority interests (84) (83) (108)
Net expenditures for discontinued operations, merger,
impairment and other unusual charges (108) (385) (75)
-----------------------------------
Net cash provided by operating activities 404 403 582
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (406) (534) (592)
Purchases of new businesses, net of cash acquired (787) (679) (646)
Proceeds from sales of facilities, long-term investments and other assets 50 170 72
Other items 18 (40) 19
-----------------------------------
Net cash used in investing activities (1,125) (1,083) (1,147)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 5,117 3,349 5,634
Loan payments (4,512) (2,762) (5,085)
Proceeds from exercises of stock options 59 80 13
Proceeds from sales of common stock 12 17 23
Other items (23) (16) (14)
-----------------------------------
Net cash provided by financing activities 653 668 571
-----------------------------------
Net increase (decrease) in cash and cash equivalents (68) (12) 6
Cash and cash equivalents at beginning of year 107 35 23
Pooling adjustment related to the OrNda Merger (4) --
-----------------------------------
Cash and cash equivalents at end of year $ 35 $ 23 $ 29
- ------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
- -------------------------------------------------------------------------------
The accounting and reporting policies of Tenet Healthcare Corporation
(together with its subsidiaries, "Tenet" or the "Company") conform to
generally accepted accounting principles and prevailing practices for
investor-owned entities within the health care industry. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management of the Company to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
A. THE COMPANY
Tenet is an investor-owned health care services company that owns or
operates, through its subsidiaries and affiliates (collectively,
"subsidiaries"), general hospitals and related health care facilities and
holds investments in other companies, including health care companies. The
Company's provision of health care through its domestic general hospitals,
physician practices and related health care facilities comprises a single
reportable operating segment under Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information." At May 31, 1999, the Company's subsidiaries operated 130
domestic general hospitals serving urban and rural communities in 18 states,
with a total of 30,791 licensed beds. The Company's subsidiaries also owned
or operated physician practices, a small number of rehabilitation hospitals,
specialty hospitals, long-term-care facilities and psychiatric facilities
located on the same campus as, or nearby, the Company's general hospitals and
various other ancillary health care businesses.
At May 31, 1999, the Company's largest concentration of hospital beds
was in California with 26.4%, Texas with 14.7% and Florida with 14.4%. The
concentration of hospital beds 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 results of operations or financial
condition.
The Company is subject to changes in government legislation that could
impact Medicare and Medicaid payment levels and to increased levels of
managed care penetration and changes in payor patterns that may impact the
level and timing of payments for services rendered.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Tenet and
its wholly owned and majority-owned subsidiaries. Significant investments in
other affiliated companies generally are accounted for using the equity
method. Intercompany accounts and transactions are eliminated in
consolidation. The results of operations of acquired businesses in purchase
transactions are included from their respective acquisition dates.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
C. NET OPERATING REVENUES
Net operating revenues consist primarily of net patient service
revenues, which are based on established billing rates less allowances and
discounts, principally for patients covered by Medicare, Medicaid and other
contractual programs. Payments under these programs are based on either
predetermined rates or the costs of services. Settlements for retrospectively
determined rates are estimated in the period the related services are
rendered and are adjusted in future periods as final settlements are
determined. Such adjustments have not been material during the years
presented herein. These estimates of governmental contractual allowances
(Medicare and Medicaid) are based on historically developed models adjusted
for currently effective reimbursement or contract rates, the results of which
are adjusted as final settlements of filed cost reports are reached, and are
determined on a hospital-by-hospital year-by-year basis. Estimates of
commercial contractual allowances are based primarily on the terms of
contractual arrangements with commercial payors. Contractual allowances and
discounts are deducted from accounts receivable in the accompanying
consolidated balance sheets. Management believes that adequate provision has
been made for adjustments that may result from final determination of amounts
earned under these programs. There are no known material claims, disputes or
unsettled matters with third-party payors not adequately provided for in the
consolidated financial statements. Approximately 45% of consolidated net
operating revenues were from participation of the Company's hospitals in
Medicare and Medicaid programs in 1997. It was approximately 42% in 1998 and
41% in 1999.
The Company provides care to patients who meet certain financial or
economic criteria without charge or at amounts substantially less than its
established rates. Because the Company does not pursue collection of amounts
determined to qualify as charity care, they are not reported in net operating
revenues or in operating and administrative expenses.
D. CASH EQUIVALENTS
The Company treats highly liquid investments with an original maturity
of three months or less as cash equivalents. The carrying amounts reported in
the consolidated balance sheets for cash and cash equivalents approximate
fair value.
E. INVESTMENTS IN DEBT AND EQUITY SECURITIES
Investments in debt and equity securities are classified as
available-for-sale, held-to-maturity or as part of a trading portfolio. At
May 31, 1998 and 1999, the Company had no significant investments in
securities classified as either held-to-maturity or trading. Securities
classified as available-for-sale are carried at fair value if unrestricted
and their unrealized gains and losses, net of tax, are reported as
accumulated other comprehensive income. Realized gains or losses are included
in net income on the specific identification method.
F. LONG-LIVED ASSETS
The Company uses the straight-line method of depreciation for buildings,
building improvements and equipment over their estimated useful lives as
follows: buildings and improvements, 25 to 40 years; equipment, three to 15
years. Capital leases are recorded at the beginning of the lease term as
assets and liabilities at the lower of the present value
25 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
of the minimum lease payments or the fair value of the assets, and such
assets, including improvements, are amortized over the shorter of the lease
term or their estimated useful life. The Company capitalizes interest costs
related to construction projects. Capitalized interest was $12 million in
1997, $16 million in 1998 and $20 million in 1999.
Costs in excess of the fair value of the net assets of purchased
businesses (goodwill) generally are amortized over 20 to 40 years. The
straight-line method is used to amortize most intangible assets. Deferred
financing costs are amortized over the lives of the related loans using the
interest method.
Impairment of long-lived assets, including goodwill related to such
assets, is recognized whenever events or changes in circumstances indicate
that the carrying amount of the asset, or related groups of assets, may not
be fully recoverable from estimated future cash flows. The Company also
assesses the recoverability of goodwill at the enterprise level in a similar
manner. Measurement of the amount of impairment may be based on appraisal,
market values of similar assets or estimates of future discounted cash flows
resulting from use and ultimate disposition of the asset.
The Company begins its process of determining if its facilities are
impaired at each fiscal year-end by reviewing all of the facilities'
three-year historical and one-year projected cash flows. Facilities whose
cash flows are negative or trending significantly downward on this basis are
selected for further impairment analysis. Their future cash flows
(undiscounted and without interest charges) are estimated over the expected
useful life of the facility and consider patient volumes, changes in payor
mix, revenue and expense growth rates and reductions in Medicare payments due
to the Balanced Budget Act of 1997 (the "BBA") and other regulatory actions,
which assumptions vary by hospital, home health agency and physician
practice. The sum of those expected future cash flows is compared to the
carrying value of the assets. If the sum of the expected future cash flows is
less than the carrying amount of the assets, the Company recognizes an
impairment loss.
G. INDEXED DEBT INSTRUMENTS
Changes in liability resulting from increases or decreases in the index
value of the Company's 6% Exchangeable Subordinated Notes are accounted for
as adjustments of the carrying amount of the notes with corresponding charges
(or credits) to earnings.
H. INCOME TAXES
The Company accounts for income taxes under the asset and liability
method. This approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
NOTE 3 - ACQUISITIONS AND DISPOSALS OF FACILITIES
- -------------------------------------------------------------------------------
On January 30, 1997, the Company acquired OrNda HealthCorp ("OrNda") by
issuing 81,439,910 shares of its common stock in a tax-free exchange for all
of OrNda's outstanding common stock in a transaction accounted for as a
pooling-of-interests.
Tenet's subsidiaries acquired 11 other general hospitals in fiscal 1997,
six general hospitals in fiscal 1998 and 12 general hospitals in fiscal 1999.
During the past three years, the Company also acquired a number of physician
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
practices, home health agencies and other health care operations. All of
these transactions have been accounted for as purchases. The results of
operations of the acquired businesses have been included in the Company's
consolidated statements of operations, comprehensive income, changes in
shareholders' equity and cash flows from the dates of acquisition. During the
year ended May 31, 1998, the Company sold or closed 10 general hospitals,
exchanged its ownership interest in one hospital for a minority interest in a
joint venture, combined the operations of two other general hospitals and
sold certain ancillary health care operations. During the year ended May 31,
1999, the Company sold two general hospitals, closed one and combined the
operations of two general hospitals and closed 29 home-health agencies. The
results of operations of the sold or closed businesses were not significant.
NOTE 4 - MERGER, IMPAIRMENT AND OTHER UNUSUAL CHARGES
- -------------------------------------------------------------------------------
1999
In the fourth quarter of the year ended May 31, 1999, the Company
recorded impairment and restructuring charges of $363 million relating to (in
millions):
The Company's 1999 Plan to sell 20 general hospitals and close one general and one specialty hospital by February 28, 2000 $277
Impairment of the carrying values of property, equipment and goodwill at 20 physician practices and other ancillary
health care businesses to be held and used 38
Implementation of hospital cost control programs and general overhead reduction plans 48
-----
$363
- ----------------------------------------------------------------------------------------------------------------------------------
The charges in the 1999 Plan above primarily consist of $264 million in
impairment charges to value property and equipment and other assets at the
lower of carrying value or estimated fair values for those facilities
included in the Company's plan that are to be closed or expected to be sold
at losses, including $10 million for estimated costs to sell, and $13 million
in other costs of closure, primarily lease cancellations. The Company expects
to dispose of other facilities at gains that will be recorded in the periods
of sale. The $38 million impairment charge includes $19 million for the
write-off of goodwill, $10 million for the write-down of property and
equipment to estimated fair values and $9 million for the write-down of other
assets. The principal elements of the $48 million restructuring charge for
the implementation of hospital cost control programs and general overhead
reduction plans are $18 million in lease cancellation costs, $15 million in
severance costs related to the termination of 233 employees in facilities and
120 employees in corporate overhead departments and $15 million in other exit
costs.
The Company decided to sell or close the above facilities because, for
the most part, they are in non-strategic markets and are not essential to the
Company's strategic objectives. The hospitals in the 1999 Plan also include
certain rural facilities. The execution of the plan will allow the Company to
concentrate on markets where it already has a strong presence.
The aggregate carrying amount of assets held for sale following the
above charges was $631 million and is included in assets held for sale in the
accompanying consolidated balance sheet at May 31, 1999. The results of
operations of the assets held for sale and the effect of suspending future
depreciation and amortization on these assets are not significant.
27 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1998
In the fourth quarter of the year ended May 31, 1998, the Company recorded
impairment charges of $221 million relating to (in millions):
The Company's 1998 Plan to close or sell:
Three general hospitals by May 31, 1999 $ 77
Two specialty hospitals by May 31, 1999 24
Twenty-nine home health agencies by August 31, 1998 38
Write-off of goodwill and other assets and additional costs to terminate contracts related to 33 of the Company's
physician practices by May 31, 1999 41
Impairment of the carrying value of goodwill at an additional general hospital 20
Impairment of the carrying values of property, equipment, goodwill and other assets at 16 home health agencies
to be held and used 7
A net increase in the estimate for losses from the 1997 Plan described below 14
-----
$ 221
- ------------------------------------------------------------------------------------------------------------------------
The charges in the 1998 Plan above primarily consisted of $42 million in
impairment charges to value property and equipment and other assets and $40
million to value goodwill at estimated fair values, which included, in the
case of facilities to be sold, $1 million for costs to sell. For the
hospitals to be closed, the charges also include $36 million of lease
commitments, demolition and other costs of closure. For the home health
agencies to be closed, the charges above also include (a) $14 million in
severance costs related to the termination of 489 employees at the agencies
and in the corporate overhead departments involved with these exit
activities, and (b) $6 million in other exit costs. The Company decided to
terminate the physician contracts because they were generating and were
projected to continue to generate operating losses. The $41 million charge
includes $32 million for the write-off of goodwill and other assets and $9
million for the estimated costs to cancel the employment or management
service agreements with the physicians. The $14 million increase in the
estimate for losses from the 1997 Plan was primarily to record $33 million of
additional impairment charges at five hospitals from the 1997 Plan based on
revised estimates of fair value and costs to sell or close, less $19 million
of favorable adjustments at two other hospitals while they were held for
disposal and whose fair market values increased during the year ended May 31,
1998. The aggregate carrying amount of assets held for disposal following the
above charges was $38 million. The results of operations of the assets held
for disposal and the effect of suspending future depreciation on impaired
assets are not significant.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1997
In the third and fourth quarters of the year ended May 31, 1997, the
Company recorded merger, restructuring and impairment charges totaling $619
million, relating to (in millions):
The OrNda Merger, including the following:
Closure of OrNda's corporate and regional offices; consolidation of operations $ 90
Severance for 230 identified employees 56
Investment banking, professional fees and other transaction costs 27
Information systems consolidations, primarily related to the buy-out of vendor contracts,
and the write-down of computer equipment and capitalized software 15
The Company's 1997 Plan to close seven general hospitals and to sell eight
general hospitals and one other health care business in order to eliminate
the duplication of services and excess capacity following the OrNda Merger 219
Impairment of the carrying values of long-lived assets to their estimated fair
values and other related costs at four general hospitals and three
medical office buildings and unfavorable lease commitments at six
medical office buildings acquired from OrNda 134
Write-off of goodwill and other long-lived assets related to some of the
Company's physician practices which are deemed not to be fully recoverable
based on the trends of operating results 60
A restructuring of physician practices, including severance for physicians,
write-offs of computer equipment and software, physician contract
terminations and the costs to reorganize regional management service
organizations 18
-----
$ 619
- --------------------------------------------------------------------------------------------------------------------
The $219 million charge for the Company's 1997 Plan consists of $129
million of impairment losses to value property, equipment and other assets at
estimated fair values, $34 million of impairment losses to write-down
goodwill and $56 million of estimated costs to sell or close facilities
subject to the 1997 Plan (including demolition costs). The other impairment
charges of $134 million above consist of $65 million in write-downs of
property and equipment, $44 million in write-downs of goodwill to estimated
fair values and $25 million for the unfavorable lease commitments.
Three of the hospitals to be closed under the 1997 Plan were converted
to alternate uses. The aggregate carrying amount of assets held for disposal
following the above charges was $130 million. The results of operations of
assets held for disposal and the effect of suspending future depreciation on
impaired assets were not significant. At May 31, 1998 management reclassified
two of these facilities from assets to be disposed of to assets to be held
and used, adjusted the fair values while they were held for disposal based on
the Company's revised expectation of future positive cash flows from
operations and eliminated the portion of the reserve set aside in fiscal 1997
for estimated costs to sell. All sold facilities were sold for amounts that
approximated the estimated sales proceeds.
In the third and fourth quarters of the year ended May 31, 1997 the
Company also recorded unusual operating expenses related to OrNda, which
expenses are reflected in the related expense line item in the consolidated
statement of operations for the following:
Costs to terminate or convert OrNda's employee benefit programs $ 18
Costs to conform accounting methodologies used to estimate allowances for doubtful accounts 5
Costs to conform accounting methodologies for estimating allowance for self-insurance reserves 19
Estimated costs to settle a government investigation of an OrNda facility and other OrNda litigation 32
------
$ 74
- -------------------------------------------------------------------------------------------------------------------------
29 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below presents a reconciliation of beginning and ending
liability balances in connection with merger and impairment charges recorded
in fiscal 1997, 1998 and 1999, as of May 31, 1997, 1998 and 1999.
TRANSACTIONS IN FISCAL 1998 TRANSACTIONS IN FISCAL 1999
BALANCES AT BALANCES AT BALANCES AT
MAY 31, CASH OTHER MAY 31, CASH OTHER MAY 31,
DESCRIPTION OF CHARGES 1997(2) CHARGES PAYMENTS ITEMS(1) 1998(2) CHARGES PAYMENTS ITEMS(1) 1999(2)
The OrNda Merger:
Closure of corporate and
regional offices $ 39 $-- $ (15) $ (12) $ 12 $-- $ (4) $-- $ 8
Severance costs 21 -- (16) -- 5 -- (5) -- --
Transaction costs 3 -- (2) -- 1 -- (1) -- --
Information systems consolidation 11 -- (10) -- 1 -- (1) -- --
Estimated costs to close or sell
facilities in 1997 Plan 56 14 (35) -- 35 -- (2) (14) 19
Accruals for unfavorable lease
commitments at six medical
office buildings 25 -- (3) -- 22 -- (2) -- 20
Restructuring of physician practices 18 -- (13) (5) -- -- -- -- --
Impairment losses to value
property, equipment and goodwill
at estimated fair values 141 -- (141) -- -- -- -- --
Estimated costs to close or sell
facilities in 1998 Plan 37 -- -- 37 -- (8) (22) 7
Severance costs in connection with
the closure of 29 home health
agencies 14 -- -- 14 -- (10) -- 4
Other home health agency exit costs 6 -- -- 6 -- (6) -- --
Physician contract termination costs 9 -- -- 9 -- (3) -- 6
Impairment losses to value
property, equipment and goodwill
at estimated fair values 292 -- (292) --
Estimated costs to sell
facilities in 1999 Plan 10 -- (6) 4
Severance costs in connection with
the implementation of hospital
cost-control programs and
general overhead reduction plans 15 -- -- 15
Lease cancellation and other exit costs 46 -- -- 46
--------------------------------------------------------------------------------------
Total $ 173 $ 221 $ (94) $(158) $ 142 $ 363 $(42) $(334) $ 129
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Other items primarily include write-offs or write-downs of long-lived
assets, including property and equipment, goodwill and other assets.
(2) The above liability balances are included in other current liabilities and
other long-term liabilities in the accompanying consolidated balance
sheets.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - OTHER CURRENT ASSETS
- -------------------------------------------------------------------------------
Other current assets consist of the following:
(DOLLARS IN MILLIONS) 1998 1999
Other receivables $ 361 $ 278
Prepaid expenses and other current items 110 135
---------------------
$ 471 $ 413
- ------------------------------------------------------------------------------------------------------------------------
NOTE 6 - PROPERTY AND EQUIPMENT
- -------------------------------------------------------------------------------
Property and equipment is stated at cost less any impairment write-downs
related to assets held and used and consists of the following:
(DOLLARS IN MILLIONS) 1998 1999
Land $ 524 $ 527
Buildings and improvements 4,511 4,348
Construction in progress 409 388
Equipment 2,304 2,440
---------------------
7,748 7,703
Less accumulated depreciation and amortization (1,761) (1,864)
---------------------
Net property and equipment $ 5,987 $ 5,839
- ------------------------------------------------------------------------------------------------------------------------
31 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - LONG-TERM DEBT AND LEASE OBLIGATIONS
- -------------------------------------------------------------------------------
A. LONG-TERM DEBT
Long-term debt consists of the following:
(DOLLARS IN MILLIONS) 1998 1999
Loans payable to banks--Unsecured $ 1,587 $ 2,168
8 5/8% Senior Notes due 2003, $500 million face value, net of $8 million unamortized discount 491 492
7 7/8% Senior Notes due 2003, $400 million face value, net of $5 million unamortized discount 394 395
8% Senior Notes due 2005, $900 million face value, net of $18 million unamortized discount 879 882
7 5/8% Senior Notes due 2008, $350 million face value, net of $6 million unamortized discount 343 344
8 5/8% Senior Subordinated Notes due 2007, $700 million face value, net of $14 million unamortized discount 685 686
8 1/8% Senior Subordinated Notes due 2008, $1,005 million face value, net of $25 million unamortized discount 979
980
6% Exchangeable Subordinated Notes due 2005, $320 million face value, net of $7 million unamortized discount 312
313
Zero-coupon guaranteed bonds due 2002 30 33
Notes and capital lease obligations, secured by property and equipment payable in installments to 2016 121 125
Other notes, primarily unsecured 18 18
-----------------
5,839 6,436
-----------------
Less current portion (10) (45)
-----------------
$ 5,829 $ 6,391
- ---------------------------------------------------------------------------------------------------------------------------------
LOANS PAYABLE TO BANKS -- In January 1997, in connection with the OrNda
Merger, the Company entered into a revolving credit agreement (the "Credit
Agreement") with a syndicate of banks that allows the Company to borrow,
repay and reborrow up to $2.8 billion prior to the agreement's January 31,
2002 maturity date. This agreement replaced the Company's previous unsecured
revolving credit agreement with a syndicate of banks. As a result of this
refinancing, as well as the refinancing of OrNda's debt, the Company recorded
an extraordinary charge from early extinguishment of debt in the amount of
$47 million, net of taxes of $29 million.
Loans under the Credit Agreement are unsecured and generally bear
interest at a base rate equal to the prime rate or, if higher, the federal
funds rate plus 0.50%, or, at the option of the Company, an adjusted London
interbank offered rate ("LIBOR") for one-, two-, three-, or six-month periods
plus an interest margin of from 22.50 to 68.75 basis points. The Company has
agreed to pay the lenders an annual facility fee on the total loan commitment
at rates ranging from 12.50 to 31.25 basis points. The interest margins and
facility fee rates are based on the ratio of the Company's consolidated total
debt to net earnings before interest, taxes, depreciation, amortization and
certain other similar noncash charges. During the year ended May 31, 1999 the
weighted average interest rate on loans payable to banks under the Credit
Agreement was 5.9%.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
SENIOR NOTES AND SENIOR SUBORDINATED NOTES -- In May 1998, the Company
sold $350 million of 7 5/8% Senior Notes due 2008 and $1.005 billion of 8
1/8% Senior Subordinated Notes due 2008. The senior notes are redeemable at
any time at the option of the Company. The senior subordinated notes are not
redeemable by the Company prior to June 1, 2003. The net proceeds from the
sales of these notes were used to redeem $286 million of the Company's 9 5/8%
Senior Notes due 2002 and $897 million of 10 1/8% Senior Subordinated Notes
due 2005. In connection with this redemption, the Company recorded an
extraordinary charge from early extinguishment of debt in the amount of $117
million, net of tax benefits of $72 million.
In connection with the OrNda Merger and related refinancing, the Company
issued, on January 30, 1997, $400 million of 7 7/8% Senior Notes due January
15, 2003, $900 million of 8% Senior Notes due January 15, 2005 and $700
million of 8 5/8% Senior Subordinated Notes due January 15, 2007. These
Senior Notes and the $500 million of 8 5/8% Senior Notes due 2003 are not
redeemable by the Company prior to maturity. Subject to certain limitations
in the Credit Agreement, these Senior Subordinated Notes are redeemable at
the option of the Company, in whole or from time to time in part, at any time
on or after January 15, 2002.
The senior notes are unsecured obligations of the Company ranking senior
to all subordinated indebtedness of the Company, including the senior
subordinated notes, and equally in right of payment with all other
indebtedness of the Company, including borrowings under the Credit Agreement
described above. The senior subordinated notes also are all unsecured
obligations of the Company and are subordinated in right of payment to all
existing and future senior debt, including the senior notes and borrowings
under the Credit Agreement.
6% EXCHANGEABLE SUBORDINATED NOTES -- The 6% Exchangeable Subordinated
Notes due 2005 are exchangeable at the option of the holder for shares of
common stock of Ventas, Inc., formerly known as Vencor, Inc. ("Ventas"), at
an exchange rate of 25.9403 shares and $239.36 in cash (see Note 14) per
$1,000 principal amount of the notes, subject to the Company's right to also
pay an amount in cash equal to the market price of the shares of Ventas
common stock in lieu of delivery of such shares. Subject to certain
limitations in the Credit Agreement, the notes are now redeemable at the
option of the Company at any time. The notes also are unsecured obligations
of the Company subordinated in right of payment to all existing and future
senior and senior subordinated debt and borrowings under the Credit Agreement.
In May 1998, Ventas, in connection with a plan of reorganization, split
into two public companies: a self-administered, self-managed realty company
(Ventas), and an operating company now known as Vencor, Inc. ("Vencor"),
which leases hospitals and nursing facilities from Ventas. In May 1998, the
Company sold its Vencor common stock and invested the proceeds in a portfolio
of investments in U.S. government and U.S. government-sponsored agency
securities. These investments, which are held in escrow for the benefit of
the holders of the 6% Exchangeable Subordinated Notes, are treated as
available for sale.
To the extent that the fair market value of the Company's investment in
the common stock of Ventas and, from May 1998, the related investment
portfolio, exceeds the carrying value of the notes at the end of any
accounting period, the Company adjusts the carrying value of the notes to the
fair market value of the investments through a charge or credit to earnings.
Corresponding adjustments to the carrying value of the investments are
credited or charged directly to other comprehensive income as unrealized
gains or losses. At May 31, 1997, the market price of
33 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Ventas' common stock was $2.20 per share over the then-existing exchange
price of the stock. The Company accordingly recognized a noncash charge to
earnings in the amount of $18 million. This charge was included with the net
gain (or loss) on disposals of facilities and long-term investments in the
accompanying consolidated statement of operations for the year ended May 31,
1997. At the end of the Company's second quarter in fiscal 1998, the Company
reversed that charge because the market price of Ventas' common stock had
dropped below the exchange price. The combined value of the Ventas common
stock and the investment portfolio remained below the exchange price through
May 31, 1999.
LOAN COVENANTS -- The Credit Agreement and the indentures governing the
Company's outstanding public debt have, among other requirements, limitations
on borrowings by, and liens on the assets of, the Company or its
subsidiaries, investments, the sale of all or substantially all assets and
prepayment of subordinated debt, a prohibition against the Company declaring
or paying dividends on or purchasing its stock unless its senior long-term
unsecured debt securities are rated BBB- or higher by Standard and Poors'
Rating Services and Baa3 or higher by Moody's Investors Service, Inc., and
covenants regarding maintenance of specified levels of net worth, debt ratios
and fixed-charge coverage ratios. Because of the dividend restrictions, all
of the Company's retained earnings are restricted. The Company is in
compliance with its loan covenants. There are no compensating balance
requirements for any credit line or borrowing.
B. LONG-TERM DEBT MATURITIES AND LEASE OBLIGATIONS
- -------------------------------------------------------------------------------
Future long-term debt cash maturities and minimum operating lease
payments are as follows:
(DOLLARS IN MILLIONS) 2000 2001 2002 2003 2004 LATER YEARS
Long-term debt $ 45 $ 11 $2,176 $ 464 $ 505 $3,330
Long-term leases 174 165 149 133 120 383
Rental expense under operating leases, including short-term leases, was
$253 million in 1997, $283 million in 1998 and $290 million in 1999.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - INCOME TAXES
- -------------------------------------------------------------------------------
Taxes on income from continuing operations consist of the following
amounts:
(DOLLARS IN MILLIONS) 1997 1998 1999
Currently payable:
Federal $ 131 $ 66 $ 97
State 27 28 25
-------------------------------------
158 94 122
Deferred:
Federal (97) 112 83
State (4) 19 18
-------------------------------------
(101) 131 101
Other 32 44 2
-------------------------------------
$ 89 $ 269 $ 225
- ----------------------------------------------------------------------------------------------------------
A reconciliation between the amount of reported income tax expense and
the amount computed by multiplying income before tax by the statutory Federal
income tax rate is shown below:
(DOLLARS IN MILLIONS) 1997 1998 1999
Tax provision at statutory federal rate of 35% $ 9 $ 227 $ 166
State income taxes, net of federal income tax benefit 17 27 28
Goodwill amortization 26 26 25
Donation of TRC common stock -- (25) --
Nondeductible merger costs 14 -- --
Nondeductible asset impairment charges 29 12 38
Change in valuation allowances and tax contingency reserves -- 10 (35)
Other items (6) (8) 3
-------------------------------------
$ 89 $ 269 $ 225
- ----------------------------------------------------------------------------------------------------------
35 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred tax assets and liabilities as of May 31, 1998 and 1999 relate to
the following:
1998 1999
(DOLLARS IN MILLIONS) ASSETS LIABILITIES ASSETS LIABILITIES
Depreciation and fixed-asset basis differences $ -- $824 $ -- $754
Reserves related to discontinued operations, merger,
impairment and other unusual charges 32 -- 152 --
Receivables-- doubtful accounts and adjustments 50 -- 44 --
Accruals for insurance risks 121 -- 101 --
Intangible assets -- 13 -- 8
Other long-term liabilities 235 -- 64 --
Benefit plans 80 -- 98 --
Other accrued liabilities 150 -- 92 --
Investments and other assets -- 57 -- 75
Federal and state net operating loss carryforwards 87 -- 41 --
Other items -- 9 1 --
--------------------------------------------------
$ 755 $903 $ 593 $837
- ------------------------------------------------------------------------------------------------------------
Management believes that realization of the deferred tax assets is more
likely than not to occur as temporary differences reverse against future
taxable income.
At May 31, 1999, the Company's carryforwards from prior OrNda tax
returns available to offset future federal net taxable income consisted of 1)
net operating loss carryforwards of approximately $118 million, expiring in
2000 through 2008, and 2) approximately $6 million in alternative minimum
taxes with no expiration.
Allowable federal deductions relating to net operating losses of OrNda
and certain of its subsidiaries are subject to annual limitations. These
limitations are not expected to significantly affect the ability of the
Company to ultimately recognize the benefit of these net operating loss
deductions in future years.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 9 - CLAIMS AND LAWSUITS
- -------------------------------------------------------------------------------
A. PROFESSIONAL AND GENERAL LIABILITY INSURANCE
In its normal course of business, the Company is subject to claims and
lawsuits relating to patient treatment. The Company believes that its
liability for damages resulting from such claims and lawsuits is adequately
covered by insurance or is adequately provided for in its consolidated
financial statements.
The Company insures substantially all of its professional and
comprehensive general liability risks in excess of self-insured retentions
through a majority-owned insurance subsidiary. These self-insured retentions
currently are $1 million per occurrence and in prior years varied by hospital
and by policy period from $500,000 to $3 million per occurrence. 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 per occurrence with
major independent insurance companies. The Company has reached the policy
limits provided by this insurance subsidiary related to the psychiatric
hospitals in most of its 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.
In addition to the reserves recorded by the above insurance
subsidiaries, the Company maintains an unfunded reserve based on actuarial
estimates for the self-insured portion of its professional liability risks.
Reserves for losses and related expenses are estimated using expected
loss-reporting patterns and have been discounted to their present value.
Adjustments to the reserves are included in results of operations.
B. SIGNIFICANT LEGAL PROCEEDINGS
The Company has been involved in significant legal proceedings of an
unusual nature related principally to its subsidiaries' discontinued
psychiatric business and, although it has settled the most significant of
these matters, continues to defend a greater-than-normal level of civil
litigation relating to certain of its subsidiaries' former psychiatric
operations. In prior fiscal years the Company resolved these matters
primarily through settlement. Based on its experience in these cases,
however, and on recent lawsuits generated by continued advertisements by
certain lawyers seeking former patients in order to file claims against the
Company and certain of its subsidiaries, the Company now believes that the
vigorous defense and trial of these cases, and any additional lawsuits that
may be filed, ultimately will be the most cost-effective means of resolving
these issues.
In prior years, 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 remaining reserves are for unusual
litigation costs and fees that relate to matters that had not been settled as
of May 31, 1999 and primarily represent management's estimate of the legal
fees and other related costs to be incurred subsequent to May 31, 1999. There
can be no assurance 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 unresolved
legal proceedings cannot reasonably be estimated, management does not believe
it is likely that any such damages will have a material adverse effect on the
Company's results of operations, liquidity or capital resources. All of the
costs associated with these legal proceedings are classified in discontinued
operations.
37 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 10 - SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
A. PREFERRED STOCK PURCHASE RIGHTS AND PREFERRED STOCK
On December 7, 1998, the Company's Board of Directors adopted a new
stockholder rights plan to replace a similar plan upon its expiration on
December 22, 1998. The rights generally will be exercisable 10 business days
after a person or group acquires beneficial ownership of, or commences a
tender offer or exchange offer that would result in such person or group
beneficially owning, 15% or more of Tenet's common stock, unless such
transaction is approved by a majority of Board members not affiliated with
the acquiring person or group.
When exercisable, each right entitles the holder thereof to purchase
from the Company one one-thousandth of a share of Series B Junior
Participating Preferred Stock ("Preferred Stock") at a price of $120.00,
subject to adjustment. Each share of Preferred Stock will entitle its holder
(other than the acquiring person or group) to purchase shares of the
Company's common stock having a value of $240.00, as adjusted.
Subject to the foregoing, in the event the Company is acquired in a
merger or other business combination transaction in which shares of the
Company's common stock are exchanged for shares of another company or more
than 50% of the Company's assets are sold (in each case without approval of
the Board of Directors), each holder of a right generally will be entitled
upon exercise to purchase, for $120.00 as adjusted, common stock of the
surviving company having a market value equal to $240.00, as adjusted.
The Company may redeem the rights in whole but not in part at any time
prior to their becoming exercisable for $0.01 per right. The rights will
expire on the earlier to occur of (i) the Board ordering their redemption and
(ii) December 22, 2008.
The Series B Preferred Stock is nonredeemable and has a par value of
$0.01 per share. None of the 350,000 authorized shares of Series B Preferred
Stock are issued or outstanding.
B. WARRANTS
At May 31, 1999, there were warrants outstanding to purchase 124,064
shares of common stock at an exercise price of $13.25 per share. These
warrants may be exercised through April 30, 2000.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 11 - STOCK BENEFIT PLANS
The Company has stock-based compensation plans, which are described
below. The Company has elected to continue to apply Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for stock options under
the plans because the exercise prices for all options granted during 1997,
1998 and 1999 were the quoted market prices on the option grant dates and all
option grants were to employees or directors.
At May 31, 1999, there were 9,844,397 shares of common stock available
for future grants of stock options and performance-based incentive awards to
the Company's key employees, advisors and consultants. The exercise price of
each option generally equals the market price of the Company's stock on the
date of grant and options are normally exercisable at the rate of one-third
per year beginning one year from the date of grant. Stock options generally
expire 10 years from the date of grant. No performance-based incentive stock
awards have been made since fiscal 1994.
The Company has a Directors Stock Option Plan that makes available for
issuance to nonemployee directors options to purchase shares of common stock.
At May 31, 1999 there were 192,500 shares available for future grant. Under
this plan each nonemployee director receives a stock option for 7,500 common
shares upon initially being elected to the Board of Directors and on the
fourth Thursday of each January thereafter. Awards have an exercise price
equal to the fair market value of the Company's shares on the date of grant,
vest one year after the date of grant and expire 10 years after the date of
grant.
All awards granted under the foregoing plans will vest under
circumstances defined in the plans or under certain employment arrangements,
including a change in control of the Company without the approval of the
Board of Directors.
The following table summarizes certain information about the Company's
stock options outstanding at May 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-AVERAGE
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER OF OPTIONS CONTRACTUAL LIFE EXERCISE PRICE NUMBER OF OPTIONS EXERCISE PRICE
$4.69 to $9.88 2,531,493 4.4 years $ 9.39 2,531,493 $ 9.39
$11.11 to $15.88 4,872,734 5.4 13.46 4,872,734 13.46
$16.25 to $21.63 5,035,236 7.0 20.51 3,904,402 20.65
$22.44 to $26.38 5,685,735 6.9 24.28 3,655,391 24.18
$29.94 to $35.13 13,262,321 9.0 31.30 1,869,541 33.11
---------- ----------
31,387,519 7.4 23.76 16,833,561 19.02
---------- ----------
39 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the status of the Company's stock option plans as of May
31, 1997, 1998 and 1999, and changes during the years ending on those dates
is presented below:
1997 1998 1999
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 26,299,166 $ 14.20 24,850,790 $ 17.25 23,284,572 $ 21.58
Granted 6,436,800 24.07 5,608,259 33.07 9,144,750 28.89
Exercised (7,093,224) 13.85 (6,547,332) 14.89 (690,102) 15.69
Forfeited (791,952) 19.92 (627,145) 22.27 (351,701) 28.07
---------- ---------- ----------
Outstanding at end of year 24,850,790 17.25 23,284,572 21.58 31,387,519 23.76
---------- ---------- ----------
Options exercisable at year-end 14,450,670 14.08 12,169,407 15.63 16,833,561 19.02
---------- ---------- ----------
Weighted average fair value of options
granted during the year 11.62 14.66 13.48
- ------------------------------------------------------------------------------------------------------------------------
The fair values of the option grants in the table above, and for purposes
of the pro forma disclosures below, have been estimated as of the date of each
grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions:
(DOLLARS IN MILLIONS) 1997 1998 1999
Expected volatility 40% 33% 35%
Risk-free interest rates 6.5% 5.9% 4.9%
Expected lives, in years 5.8 6.1 7.2
Expected dividend yield 0% 0% 0%
Had compensation cost for the Company's stock options been determined based
on these fair values for awards granted during the past four years, the
Company's net income (loss) and earnings (loss) per share would have been the
pro forma amounts indicated below:
(DOLLARS IN MILLIONS) 1997 1998 1999
Net income (loss):
As reported $ (244) $ 261 $ 249
Pro forma (260) 231 199
Basic earnings (loss) per share:
As reported (0.81) 0.85 0.80
Pro forma (0.86) 0.76 0.65
Diluted earnings (loss) per share:
As reported (0.81) 0.84 0.79
Pro forma (0.86) 0.75 0.64
These pro forma disclosures only account for stock options granted since
June 1, 1995. The pro forma impact is likely to increase in future years as
additional options are granted and amortized ratably over the vesting period.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 12 - EMPLOYEE STOCK PURCHASE PLAN
- -------------------------------------------------------------------------------
The Company has an Employee Stock Purchase Plan under which it is
authorized to issue up to 5 million shares of common stock to eligible
employees of the Company or its designated subsidiaries. Under the terms of
the plan, eligible employees can elect to have between 1% and 10% of their
base earnings withheld each calendar quarter to purchase, on the last day of
the quarter, shares of the Company's common stock at a purchase price equal
to 85% of the lower of the closing price on the first day of the quarter or
its closing price on the last day of the quarter. Under the plan, the Company
sold 727,954 shares to employees in the year ended May 31, 1997 at a weighted
average price of $17.64 per share, 703,832 shares in the year ended May 31,
1998 at a weighted average price of $24.87 per share and 1,043,804 shares in
the year ended May 31, 1999 at a weighted average exercise price of $21.58
per share.
NOTE 13 - EMPLOYEE RETIREMENT PLANS
- -------------------------------------------------------------------------------
Substantially all employees who are employed by the Company or its
subsidiaries, upon qualification, are eligible to participate in a defined
contribution 401(k) plan. Employees who elect to participate generally make
contributions from 1% to 20% of their eligible compensation, and the Company
matches such contributions up to a maximum percentage. Company contributions
to the plans were approximately $32 million for fiscal 1997, $39 million for
fiscal 1998, and $49 million for fiscal 1999.
NOTE 14 - INVESTMENTS
- -------------------------------------------------------------------------------
The Company's principal long-term investments in unconsolidated
affiliates at May 31, 1999 included 511,045 shares of common stock of Ion
Beam Applications, S.A., 962,679 shares of iVillage, Inc., 8,301,067 shares
of Ventas and 2,865,000 shares of Total Renal Care Holdings, Inc. ("TRC").
Also included in the Company's long-term investments at May 31, 1999 is an
investment portfolio of U.S. government securities aggregating $77 million,
which resulted from the investment of the proceeds from the Company's sale of
8,301,067 shares of Vencor common stock that it received as a dividend from
Ventas in May 1998. This sale resulted in a pretax loss to the Company of $30
million in 1998. The portfolio is being held in an escrow account for the
benefit of the holders of the Company's 6% Exchangeable Notes (see Note 7).
The Company classifies all these investments as "available for sale" whereby
the carrying values of the shares and debt instruments are adjusted to market
value at the end of each accounting period through a credit or charge, net of
income taxes, to other comprehensive income. At May 31, 1998 and 1999, the
aggregate market value of these investments was approximately $299 million
and $378 million, respectively.
In March 1998, the Company contributed 2,135,000 shares of its TRC
common stock, with a fair market value of $75 million and an original cost
basis of $4 million, to the newly created Tenet Healthcare Foundation, a
charitable foundation through which Tenet conducts substantially all of the
Company's philanthropic grant making. The effect of the contribution to the
foundation, less the gain on the disposition of the TRC shares, has been
reflected in net losses on disposals of facilities and long-term investments
in the 1998 consolidated statement of operations.
41 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - DISCONTINUED OPERATIONS -- PSYCHIATRIC HOSPITAL BUSINESS
- -------------------------------------------------------------------------------
In fiscal 1997, the Company recorded $215 million (less income tax
benefits of $81 million) to reflect settlements of patient and other
litigation and to record the estimated future costs to settle the remaining
litigation all related to certain of its former psychiatric hospitals and to
increase the reserves of its wholly owned insurance subsidiary for
professional liability claims related to its former psychiatric hospitals by
an additional $42 million.
NOTE 16 - EARNINGS PER SHARE
- -------------------------------------------------------------------------------
The following is a reconciliation of the numerators and the denominators
of the Company's basic and diluted earnings (loss) per share computations for
income or loss from continuing operations for each of the three years ended
May 31, 1997 through 1999. Income or loss is expressed in millions and
weighted average shares are expressed in thousands:
EFFECT OF DILUTIVE SECURITIES
BASIC EARNINGS (LOSS) STOCK OPTIONS DILUTIVE EARNINGS (LOSS)
PER SHARE AND WARRANTS PER SHARE
1997 Income (Numerator) $ (63) -- $ (63)
Weighted average shares (Denominator) 303,947 -- 303,947
Per share amount $ (0.21) $ (0.21)
- -------------------------------------------------------------------------------------------------------------------
1998 Income (Numerator) $ 378 -- $ 378
Weighted average shares (Denominator) 306,255 5,858 312,113
Per share amount $ 1.23 $ 1.22
- -------------------------------------------------------------------------------------------------------------------
1999 Income (Numerator) $ 249 -- $ 249
Weighted average shares (Denominator) 310,050 3,336 313,386
Per share amount $ 0.80 $ 0.79
- -------------------------------------------------------------------------------------------------------------------
Outstanding options to purchase 18,948,056 shares of common stock were
not included in the computation of earnings per share for fiscal 1999 because
the options' exercise prices were greater than the average market price of
the common stock.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------------------------------------------
The carrying amounts of cash and cash equivalents, accounts receivable,
current portion of long-term debt, accounts payable and accrued interest
payable approximate fair value because of the short maturity of these
instruments. The carrying values of investments, both short-term and
long-term (excluding investments accounted for by the equity method) are
reported at fair value. Long-term receivables are carried at cost and are not
materially different from their estimated fair values. The fair value of
long-term debt is based on quoted market prices and approximates its carrying
value.
NOTE 18 - SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
The Company paid interest (net of amounts capitalized) of $346 million,
$489 million and $417 million for the years ended May 31, 1997, 1998 and
1999, respectively. Income taxes paid, net of refunds received, during the
years ended May 31, 1997 and 1998 amounted to $147 million and $11 million,
respectively. Income tax refunds, net of taxes paid, during the year ended
May 31, 1999 were $7 million. The fair value of common stock issued for
acquisitions of hospitals and other assets was $11 million in 1997 and $9
million in 1998. During 1998, the Company received 1,078,800 shares of common
stock having a fair market value of $31 million as payment for a note and the
exercise of stock options.
NOTE 19 - SUPPLEMENTAL DISCLOSURES FOR OTHER COMPREHENSIVE INCOME
The following table sets forth the tax effects allocated to each
component of other comprehensive income for the years ended May 31, 1997,
1998 and 1999.
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
(DOLLARS IN MILLIONS) AMOUNT OR BENEFIT AMOUNT
Year ended May 31, 1997
Unrealized gains (losses) on securities held as available for sale $ 134 $ (52) $ 82
- ------------------------------------------------------------------------------------------------------------------------
Year ended May 31, 1998
Unrealized gains (losses) on securities held as available for sale $ (56) $ 36 $ (20)
Less: reclassification adjustment for realized gains included in net income (40) -- (40)
--------------------------------
$ (96) $ 36 $ (60)
- ------------------------------------------------------------------------------------------------------------------------
Year ended May 31, 1999
Foreign currency translation adjustment $ (5) $ 2 $ (3)
Unrealized gains (losses) on securities held as available for sale 51 (21) 30
--------------------------------
$ 46 $ (19) $ 27
- ------------------------------------------------------------------------------------------------------------------------
43 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 20 - RECENTLY ISSUED ACCOUNTING STANDARDS
- -------------------------------------------------------------------------------
The Company has adopted Statement of Financial Accounting Standards No.
131 "Disclosures About Segments of an Enterprise and Related Information."
Because the Company's business of providing health care through its domestic
general hospitals, physician practices, and related health care facilities is
a single reportable operating segment under this accounting standard, no new
or additional disclosures are required of the Company. The Company's chief
operating decision maker, as that term is defined in the accounting standard,
regularly reviews financial information about each of the Company's
facilities and subsidiaries for assessing performance and allocating
resources. Operating and resource allocation decisions are not made on a
market, regional or other geographical basis.
In March and in April 1998, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued two
Statements of Position ("SOPs") that are effective for financial statements
for fiscal years beginning after December 15, 1998, which will apply to the
Company beginning June 1, 1999. SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," provides guidance
on the circumstances under which the costs of certain computer software
should be capitalized and/or expensed. SOP 98-5, "Reporting on the Costs of
Start-Up Activities," requires such costs to be expensed as incurred instead
of capitalized and amortized.
As of June 1, 1999, the Company changed its method of accounting for
start-up costs in accordance with SOP 98-5. The change in accounting
principle will result in the write-off of the start-up costs capitalized as
of May 31, 1999 ($19 million, net of tax benefit). The write-off will be
shown as a cumulative effect of a change in accounting principle.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which is effective for financial statements for
fiscal years beginning after June 15, 2000, and which will apply to the
Company beginning June 1, 2001. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities.
The Company does not expect the adoption of these new accounting standards
and statements of position to have a material effect on its future results of
operations.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 44
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
FISCAL 1998 QUARTERS FISCAL 1999 QUARTERS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
Net operating revenues $2,331 $2,429 $2,564 $2,571 $2,553 $2,563 $2,822 $2,942
Income (loss) from continuing operations 116 138 148 (24) 137 125 124 (137)
Net income (loss) 116 138 148 (141) 137 125 124 (137)
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share from continuing
operations:
Basic $ 0.38 $ 0.45 $ 0.48 $(0.08) $ 0.44 $ 0.40 $ 0.40 $(0.44)
Diluted $ 0.38 $ 0.44 $ 0.47 $(0.08) $ 0.44 $ 0.40 $ 0.40 $(0.44)
- ---------------------------------------------------------------------------------------------------------------------------------
Quarterly operating results are not necessarily representative of
operations for a full year. For example, fiscal 1997 includes expenses of
$151 million recorded in the third quarter and $37 million recorded in the
fourth quarter in connection with the OrNda Merger, and restructuring charges
of $18 million, impairment losses of $413 million and an $18 million loss for
the additional liability related to the Company's indexed debt instruments,
recorded in the fourth quarter, as well as a $47 million extraordinary charge
from early extinguishment of debt in the third quarter and a $134 million
charge to discontinued operations in the fourth quarter. Fiscal 1998 includes
an $18 million gain recorded in the second quarter related to a change in the
index value of the Company's 6% Exchangeable Notes, and a $35 million loss
from disposal of long-term investments, impairment charges of $221 million,
as well as a $117 million extraordinary charge from early extinguishment of
debt in the fourth quarter. Fiscal 1999 includes impairment and restructuring
charges of $363 million recorded in the fourth quarter.
COMMON STOCK INFORMATION (UNAUDITED)
FISCAL 1998 QUARTERS FISCAL 1999 QUARTERS
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
Price range:
High 31 1/2 33 1/4 37 1/2 40 15/16 35 3/8 31 1/4 31 15/16 26 3/4
Low 25 1/2 26 7/16 30 3/8 34 3/4 25 3/8 25 5/8 19 16
At May 31, 1999, there were approximately 16,500 holders of record of
the Company's common stock. The Company's common stock is listed and traded
on the New York and Pacific stock exchanges. The stock prices above are the
high and low sales prices as reported in the NYSE Composite Tape for the last
two fiscal years. The Company's credit facility prohibits the declaration or
payment of dividends unless its senior long-term unsecured debt securities
are rated BBB-or higher by Standard and Poors Rating Services and Baa3 or
higher by Moody's Investors Services, Inc.
45 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
DIRECTORS AND MANAGEMENT
BOARD OF DIRECTORS
Jeffrey C. Barbakow 1, 4
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
TENET HEALTHCARE CORPORATION
Lawrence Biondi, S.J. 2, 4, 5
PRESIDENT, ST. LOUIS UNIVERSITY
Bernice B. Bratter 1, 3, 4
PRESIDENT, LOS ANGELES WOMEN'S FOUNDATION
Sanford Cloud Jr. 5, 6, 7
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
NATIONAL CONFERENCE FOR COMMUNITY AND JUSTICE
Maurice J. DeWald 1, 2, 3, 7
CHAIRMAN, VERITY FINANCIAL GROUP, INC.
Michael H. Focht Sr. 1, 5
RETIRED PRESIDENT AND CHIEF OPERATING
OFFICER, TENET HEALTHCARE CORPORATION
Raymond A. Hay 2, 4, 5, 7
CHAIRMAN, ABERDEEN ASSOCIATES
Lester B. Korn 1, 3, 6
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
KORN TUTTLE CAPITAL GROUP
Floyd D. Loop, M.D. 2, 6
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
THE CLEVELAND CLINIC FOUNDATION
Richard S. Schweiker 2, 5
RETIRED PRESIDENT,
AMERICAN COUNCIL OF LIFE INSURANCE
BOARD COMMITTEES
1 Executive Committee
2 Audit Committee
3 Compensation and Stock Option Committee
4 Nominating Committee
5 Ethics and Quality Assurance Committee
6 Pension Committee
7 Shareholder Proposals Committee
PRINCIPAL MANAGEMENT
Jeffrey C. Barbakow
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Trevor Fetter
OFFICE OF THE PRESIDENT, CHIEF CORPORATE
OFFICER AND CHIEF FINANCIAL OFFICER
Thomas B. Mackey
OFFICE OF THE PRESIDENT, CHIEF OPERATING OFFICER
Stephen F. Brown
EXECUTIVE VICE PRESIDENT
AND CHIEF INFORMATION OFFICER
Alan R. Ewalt
EXECUTIVE VICE PRESIDENT, HUMAN RESOURCES
Reynold J. Jennings
EXECUTIVE VICE PRESIDENT, SOUTHEAST DIVISION
Raymond L. Mathiasen
EXECUTIVE VICE PRESIDENT
AND CHIEF ACCOUNTING OFFICER
David R. Mayeux
EXECUTIVE VICE PRESIDENT,
ACQUISITION & DEVELOPMENT
Barry P. Schochet
VICE CHAIRMAN
W. Randolph Smith
EXECUTIVE VICE PRESIDENT,
CENTRAL-NORTHEAST DIVISION
Neil M. Sorrentino
EXECUTIVE VICE PRESIDENT, WESTERN DIVISION
Christi R. Sulzbach
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND CHIEF COMPLIANCE OFFICER
SENIOR VICE PRESIDENTS
William L. Bradley
CENTRAL STATES AND MASSACHUSETTS REGION
Dennis M. Brown
NORTHERN REGION
David S. Dearman
OPERATIONS FINANCE
Lee Domanico
PENNSYLVANIA REGION
Steven Dominguez
GOVERNMENT PROGRAMS
Michael W. Gallo
PATIENT FINANCIAL SERVICES
Jeffrey S. Heinemann
TENET PHYSICIAN SERVICES
Bruce L. Johnson
AUDIT SERVICES
T. Dennis Jorgensen
ETHICS, BUSINESS CONDUCT AND ADMINISTRATION
Ben F. King
FINANCE, CENTRAL-NORTHEAST DIVISION
Kenneth B. Love Jr.
FINANCE, WESTERN DIVISION
David S. McAdam
CORPORATE COMMUNICATIONS
Martin J. Paris, M.D., M.P.H.
MEDICAL AFFAIRS AND QUALITY IMPROVEMENT
Suzanne T. Porter
STRATEGY & DEVELOPMENT
Timothy L. Pullen
CONTROLLER
David C. Ricker
MATERIEL RESOURCE MANAGEMENT
Paul J. Russell
INVESTOR RELATIONS
Don S. Steigman
FLORIDA REGION
Michael E. Tyson
FINANCE, SOUTHEAST DIVISION
Kenneth K. Westbrook
ORANGE COUNTY MARKET
Barry A. Wolfman
QUAD COUNTIES MARKET
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 46
VICE PRESIDENTS
Jacinta Titialii Abbott
ASSISTANT GENERAL COUNSEL
Michael P. Appelhans
ASSISTANT GENERAL COUNSEL
Craig C. Armin
GOVERNMENT PROGRAMS
William A. Barrett
ASSISTANT GENERAL COUNSEL
Steven R. Blake
FINANCE, NORTHERN REGION
Monica L. Bowman
OPERATIONS, TENET PHYSICIAN SERVICES
Sanford M. Bragman
RISK MANAGEMENT
Sam I. Brandt, M.D.
MEDICAL INFORMATICS & CLINICAL PROCESSES
Mark H. Bryan
FLORIDA REGION
Gregory H. Burfitt
SOUTHERN STATES REGION
Lourdes Cordero
HUMAN RESOURCES, OPERATIONS
Alan N. Cranford
OPERATIONS, INFORMATION SYSTEMS
Stephen F. Diaz
CORPORATE FINANCIAL PLANNING
Curtis L. Dosch
FINANCE, SOUTHERN STATES REGION
William R. Durham
FINANCE, SOUTHEAST DIVISION
Robert Duzan
FINANCE, WESTERN DIVISION
Donna E. Erb
ASSISTANT GENERAL COUNSEL
Deborah J. Ettinger
BUSINESS DEVELOPMENT, WESTERN DIVISION
Stephen D. Farber
TREASURER
Richard W. Fiske
ACQUISITION & DEVELOPMENT
Lynn S. Hart
GOVERNMENT RELATIONS
Robert S. Hendler, M.D.
MEDICAL EDUCATION & TECHNOLOGY ASSESSMENT
Lawrence G. Hixon
CORPORATE FINANCIAL REPORTING
Michael S. Hongola
FINANCIAL SYSTEMS
Jeffrey Koury
FINANCE, WESTERN DIVISION
Matthew A. Kurs
ST. LOUIS MARKET
Paul Kusserow
CORPORATE STRATEGY & VENTURES
William W. Leyhe
INTEGRATED DELIVERY, WESTERN DIVISION
William Loorz
CONSTRUCTION & DESIGN
John A. Lynn
COMPENSATION
Deborah A. Maicach
PATIENT MANAGEMENT APPLICATIONS
Stephen L. Newman, M.D.
GULF STATES REGION
Paul E. O'Neill
ACQUISITION & DEVELOPMENT
Steven T. Pfeil
BUYPOWER
Douglas E. Rabe
TAX
Rodney Reasoner
FINANCE, CENTRAL STATES & MASSACHUSETTS REGION
Norma Resneder
HUMAN RESOURCES, OPERATIONS
J. Scott Richardson
FINANCE, TEXAS REGION
Gary W. Robinson
ASSISTANT GENERAL COUNSEL
Mario E. Rodriguez
GOVERNMENT PROGRAMS
Leonard H. Rosenfeld
QUALITY MANAGEMENT
C. David Ross
FINANCE, FLORIDA REGION
Richard B. Silver
ASSOCIATE GENERAL COUNSEL AND
CORPORATE SECRETARY
Charles R. Slaton
TEXAS REGION
Gerald L. Stevens
STRATEGIC PROJECTS
Donald W. Thayer
ACQUISITION & DEVELOPMENT
Eric A. Tuckman
ACQUISITION & DEVELOPMENT
Gustavo A. Valdespino
LOS ANGELES COUNTY MARKET
Paul A. Walker
PENNSYLVANIA REGION
Davis L. Watts
BUSINESS OFFICE SERVICES
Steven Weiss
FINANCE, ST. LOUIS MARKET
William R. Wilson
FINANCE, PENNSYLVANIA REGION
SUBSIDIARIES
Jay A. Silverman
CHIEF EXECUTIVE OFFICER, SYNDICATED
OFFICE SYSTEMS
47 TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
COMMON STOCK LISTING
The Company's common stock is listed under the symbol THC on the New York and
Pacific stock exchanges.
Debt securities listed on the New York Stock Exchange are:
9 5/8% Senior Notes due 2002
7 7/8% Senior Notes due 2003
8 5/8% Senior Notes due 2003
6% Exchangeable Subordinated
Notes due 2005
8% Senior Notes due 2005
10 1/8% Senior Subordinated
Notes due 2005
8 5/8% Senior Subordinated
Notes due 2007
7 5/8% Series B Senior Notes
due 2008
8 1/8% Series B Senior Subordinated
Notes due 2008
INVESTOR CONTACTS
TRUSTEE/REGISTRAR
The Bank of New York
101 Barclay Street
New York, NY 10286
(800) 524-4458
COMMON STOCK TRANSFER AGENT AND REGISTRAR
The Bank of New York
(800) 524-4458
shareowner-svcs@bankofny.com
Holders of National Medical Enterprises, Inc. (NME) stock certificates who
would like to exchange them for Tenet certificates may do so by contacting
the transfer agent. Former shareholders of American Medical Holdings, Inc.
(AMI) and OrNda HealthCorp who have not yet redeemed their AMI or OrNda stock
for cash and Tenet stock should also contact the transfer agent.
Please send certificates for transfer and address changes to:
Receive and Deliver Dept. - 11W
P.O. Box 11002
Church Street Station
New York, NY 10286
Please address other inquiries for the transfer agent to:
Shareholder Relations Dept. - 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
COMPANY INFORMATION
The Company reports annually to the Securities and Exchange Commission on
Form 10-K. The Company also publishes an annual report to shareholders and
reports quarterly earnings. You may obtain copies of these and other
documents as listed below. Please note that the Company no longer mails
quarterly letters to shareholders; instead it has made available new means
for shareholders to obtain information on a more timely basis:
VIA THE WORLD WIDE WEB
The Company's web site, www.tenethealth.com, offers extensive information
about the Company's operations and financial performance, including a
comprehensive series of investor pages. Current and archived quarterly
earnings reports, annual reports and other documents can be accessed and/or
downloaded.
VIA FACSIMILE
To request that the Company's current quarterly earnings report be delivered
via facsimile, please call (888) 896-9016.
VIA MAIL
To request any financial literature be mailed to you, please call the
Company's literature request hotline at (805) 563-6969 or write to Tenet
Investor Relations.
INVESTOR RELATIONS
For all other shareholder inquiries, please contact:
Paul J. Russell
Senior Vice President,
Investor Relations
P.O. Box 31907
Santa Barbara, CA 93130
Phone: (805) 563-7188
Fax: (805) 563-6877
E-mail: paul.russell@tenethealth.com
Diana L. Takvam
Senior Director, Investor Relations
P.O. Box 31907
Santa Barbara, CA 93130
Phone: (805) 563-6883
Fax: (805) 563-6877
E-mail: diana.takvam@tenethealth.com
ANNUAL MEETING
The annual meeting of shareholders of Tenet Healthcare Corporation will be
held at 11:00 a.m. on Wednesday, October 6, 1999, at the Westin Galleria
Hotel, 13340 Dallas Parkway, Dallas, Texas.
CORPORATE HEADQUARTERS
Tenet Healthcare Corporation
3820 State Street
Santa Barbara, CA 93105
(805) 563-7000
www.tenethealth.com
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES 48