EXHIBIT 99.11
Audited financial statements for the acquired assets
Independent Auditors' Report
The Board of Directors
Tenet Healthcare Corporation:
We have audited the accompanying combined balance sheet of Western Medical
Center - Anaheim, Western Medical Center - Santa Ana, Coastal Communities
Hospital and Chapman Medical Center, including certain other healthcare
businesses related to the operations of these hospitals (collectively, the Tenet
Hospitals) as of December 31, 2004, and the related combined statements of
operations and changes in ownership equity, and cash flows for the years ended
December 31, 2004 and 2003. These combined financial statements are the
responsibility of the Tenet Hospitals' management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Oversight Board (United States). 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 combined financial statements referred to above
present fairly, in all material respects, the financial position of the Tenet
Hospitals as of December 31, 2004, and the results of their operations and their
cash flows for the years ended December 31, 2004 and 2003, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Dallas, Texas
May 10, 2005
TENET HOSPITALS
Combined Balance Sheet
December 31, 2004
Assets
Current assets:
Cash $ 244,146
Accounts receivable, less allowance for doubtful accounts
of $12,842,054 37,769,344
Inventories of supplies, at cost 5,913,638
Other receivables 7,597,258
Prepaid expenses and other current assets 982,026
------------
Total current assets 52,506,412
Property and equipment, net 43,556,983
Notes receivable from affiliate 2,396,410
Other assets 1,002,291
Other intangible assets, net of accumulated amortization
of $3,571,506 6,623,718
------------
Total assets $106,085,814
============
Liabilities and Ownership Equity
Current liabilities:
Current portion of capital lease obligation $ 204,141
Accounts payable 21,430,493
Accrued employee compensation and benefits 9,997,093
Medical claims incurred but not reported 3,748,369
Accrued restructuring costs 3,917,768
Other current liabilities 2,488,838
------------
Total current liabilities 41,786,702
Capital lease obligation, net of current portion 3,455,260
Due to affiliate 10,362,970
------------
Total liabilities 55,604,932
Commitments and contingencies
Ownership equity 50,480,882
------------
Total liabilities and ownership equity $106,085,814
============
See accompanying notes to combined financial statements.
2
TENET HOSPITALS
Combined Statements of Operations and Changes in Ownership Equity
Years ended December 31, 2004 and 2003
2004 2003
------------- -------------
Net patient service revenue $ 338,751,643 343,816,749
Other revenue 3,001,098 3,528,865
------------- -------------
Net operating revenues 341,752,741 347,345,614
------------- -------------
Operating expenses:
Salaries and benefits 174,626,636 162,011,591
Supplies 47,704,610 51,337,346
Provision for doubtful accounts 42,038,130 34,351,283
Other operating expenses 97,873,324 98,358,899
Depreciation 3,561,368 10,901,732
Amortization 980,787 604,231
Impairment of goodwill and long-lived assets -- 128,502,536
Restructuring charges 3,917,768 116,904
------------- -------------
Total operating expenses 370,702,623 486,184,522
------------- -------------
Loss from operations (28,949,882) (138,838,908)
Interest income from affiliate (192,238) (200,973)
Interest expense, net 597,052 398,884
------------- -------------
Loss before income taxes (29,354,696) (139,036,819)
Income tax benefit (5,672,000) (15,402,000)
------------- -------------
Net loss (23,682,696) (123,634,819)
Ownership equity, beginning of year 74,163,578 197,798,397
------------- -------------
Ownership equity, end of year $ 50,480,882 74,163,578
============= =============
See accompanying notes to combined financial statements.
3
TENET HOSPITALS
Combined Statements of Cash Flows
Years ended December 31, 2004 and 2003
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $(23,682,696) (123,634,819)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 3,561,368 10,901,732
Amortization 980,787 604,231
Provision for doubtful accounts 42,038,130 34,351,283
Loss on disposal of property and equipment 25,324 272,570
Deferred income tax expense (benefit) 1,542,000 (16,196,000)
Impairment of goodwill and long-lived assets -- 128,502,536
Restructuring charges 3,917,768 116,904
Increase (decrease) in cash from changes in
operating assets and liabilities:
Accounts receivable (29,330,238) (17,709,623)
Inventories, prepaid expenses, and other current assets 2,970,188 2,596,062
Accounts payable, accrued, and other current liabilities (7,422,945) 1,931,093
------------ ------------
Net cash provided by (used in) operating activities (5,400,314) 21,735,969
------------ ------------
Cash flows from investing activities:
Capital expenditures (2,312,670) (6,521,324)
Proceeds from collections on notes receivable -- 603,590
Other investing activities (262,887) 550,677
------------ ------------
Net cash used in investing activities (2,575,557) (5,367,057)
------------ ------------
Cash flows from financing activities:
Net change in due to affiliate 8,350,813 (16,528,641)
Payments under capital leases (204,141) (179,768)
------------ ------------
Net cash provided by (used in) financing activities 8,146,672 (16,708,409)
Net change in cash 170,801 (339,497)
Cash, beginning of year 73,345 412,842
------------ ------------
Cash, end of year $ 244,146 73,345
============ ============
Supplemental disclosure:
Noncash transaction:
Accounts payable related to capital expenditures $ 5,752 379,946
Interest paid $ 603,595 553,971
Income tax payments are made at the parent company level
See accompanying notes to combined financial statements.
4
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Tenet Hospitals are primarily engaged in the operation of
general hospitals and related healthcare facilities. The combined
financial statements of the Tenet Hospitals include the accounts of
the following hospitals and certain other healthcare businesses
related to the operations of these hospitals, which are operated by
various subsidiaries of Tenet Healthcare Corporation (together with
its subsidiaries, "Tenet"):
Western Medical Center - Anaheim Anaheim, CA 188 beds
Western Medical Center - Santa Ana Santa Ana, CA 280 beds
Coastal Communities Hospital Santa Ana, CA 178 beds
Chapman Medical Center Orange, CA 114 beds
All significant intercompany accounts and transactions have been
eliminated in combination.
The accounting and reporting policies of the Tenet Hospitals conform
to accounting principles generally accepted in the United States of
America and prevailing practices for investor-owned entities within
the healthcare industry. The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements and accompanying notes. Management regularly evaluates
the accounting policies and estimates that are used. In general,
management bases the estimates on historical experience and on
assumptions that it believes to be reasonable given the particular
circumstances in which the Tenet Hospitals operate. Although
management believes all adjustments considered necessary for fair
presentation have been included, actual results may vary from those
estimates.
(b) Net Patient Service Revenue
Net patient service revenue is recognized in the period in which
services are performed and is recorded based on established billing
rates (gross charges) less estimated discounts for contractual
allowances, principally for patients covered by Medicare, Medicaid,
managed care and other health plans.
Gross charges are retail charges. They are not the same as actual
pricing, and they generally do not reflect what a hospital is
ultimately paid and therefore are not displayed in the combined
statements of operations and changes in ownership equity. Hospitals
are typically paid amounts that are negotiated with insurance
companies or are set by the government. Gross charges are used to
calculate Medicare outlier payments and to determine certain
elements of payment under managed care contracts (such as stop-loss
payments). Because Medicare requires that a hospital's gross charges
be the same for all patients (regardless of payer category), gross
charges are also what hospitals charge all other patients prior to
the application of discounts and allowances.
5
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
Percentages of net patient service revenue, by payer type, for the
Tenet Hospitals for the years ended December 31, 2004 and 2003 were
as follows:
2004 2003
---------- ----------
Medicare 21% 20%
Medicaid 15% 16%
Managed care 46% 49%
Indemnity, self-pay and other 18% 15%
Revenues under the traditional fee-for-service Medicare and Medicaid
programs are based primarily on prospective payment systems.
Discounts for retrospectively cost-based revenues, which were more
prevalent in earlier periods, and certain other payments, which are
based on the hospitals' cost reports, are estimated using historical
trends and current factors. Cost report settlements for
retrospectively cost-based revenues under these programs are subject
to audit and administrative and judicial review, which can take
several years until final settlement of such matters are determined
and completely resolved. Because the laws, regulations, instructions
and rule interpretations governing Medicare and Medicaid
reimbursement are complex and change frequently, the estimates
recorded by the Tenet Hospitals could change by material amounts.
Prior to the year ended December 31, 2003, the Tenet Hospitals
recorded estimates for contractual allowances and cost report
settlements for Medicare and Medicaid based on amounts generated
from information accumulated from various accounting and information
systems. Adjustments to these accruals were generally made upon the
final settlement of Medicare and Medicaid cost reports. During the
year ended December 31, 2003, the Tenet Hospitals completed the
implementation of a new system and methodology for recording
Medicare net revenue and estimated cost report settlements. This
resulted in a refinement in recording the accruals to more closely
reflect the expected final settlements on its cost reports. For
filed cost reports, the Tenet Hospitals now record the accrual based
on those cost reports and subsequent activity, and records a
valuation allowance against Medicare cost reports based on
historical settlement trends. The accrual for cost reports not yet
filed is now recorded based on estimates of what the Tenet Hospitals
expect to report on the filed cost reports and a corresponding
valuation allowance is recorded as previously described. Cost
reports must be filed generally within the five months after the end
of the annual cost report reporting period. After the cost report is
filed, the accrual and corresponding valuation allowance may need to
be adjusted. Adjustments for valuation allowances and cost report
settlements related to Medicare and Medicaid increased (decreased)
net patient service revenue by approximately $2,894,000 and
$(8,205,000) during the years ended December 31, 2004 and 2003,
respectively.
Outlier payments, which were established by Congress as part of the
diagnosis-related groups (DRG) prospective payment system, are
additional payments made to hospitals for treating Medicare patients
who are costlier to treat than the average patient in the same DRG.
To qualify as a cost outlier, a hospital's billed (or gross)
charges, adjusted to cost, must exceed the payment rate for the DRG
by a fixed threshold established annually by the Centers for
Medicare and Medicaid Services of the United States Department of
Health and Human Services (CMS). The Medicare fiscal intermediary
calculates the cost of a claim by multiplying the billed charges by
the cost-to-charge ratio from the hospital's most recent filed cost
report. If the computed cost exceeds the sum of the DRG payment plus
the fixed threshold, the hospital receives 80% of the difference as
an outlier payment.
6
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
Under Sections 1886(d) and 1886(g) of the Social Security Act, CMS
must project aggregate annual outlier payments to all prospective
payment system hospitals to be not less than 5% or more than 6% of
total DRG payments (Outlier Percentage). The Outlier Percentage is
determined by dividing total outlier payments by the sum of DRG and
outlier payments. CMS annually adjusts the fixed threshold to bring
expected outlier payments within the mandated limit. A change to the
fixed threshold affects total outlier payments by changing (1) the
number of cases that qualify for outlier payments, and (2) the
dollar amount hospitals receive for those cases that still qualify.
The most recent change to the cost outlier threshold that became
effective on October 1, 2004 was a decrease from $31,000 to $25,800,
which CMS projects will result in an Outlier Percentage of 5.1%.
On January 6, 2003, in response to concerns raised by CMS regarding
the level of outlier payments Tenet subsidiary hospitals were
receiving, Tenet voluntarily submitted a proposal to CMS that would
reduce outlier payments to its hospitals, including the Tenet
Hospitals, retroactive to January 1, 2003. During 2003, CMS issued
new regulations governing the calculation of outlier payments to
hospitals. Those regulations, which became effective August 8, 2003,
included several significant changes, many of which were
contemplated in Tenet's proposal. Medicare outlier revenue
recognized by the Tenet Hospitals was approximately $886,000 for the
year ended December 31, 2004 compared with approximately $2,224,000
for the year ended December 31, 2003.
Tenet's proposal to CMS included a provision to reconcile the
payments it would receive under Tenet's proposed interim arrangement
to those it would have received if the new CMS regulations had gone
into effect on January 1, 2003 up to the effective date of the final
rules and regulations (the Reconciliation Period). Effective August
8, 2003, outlier payments to Tenet subsidiary hospitals, including
the Tenet Hospitals, began to be calculated by the fiscal
intermediary in accordance with the final rule, which applies to all
hospitals. The final determination and outcome of outlier payments
under the reduction arrangement continues to be the subject of
further review and approval by CMS. The final outcome could result
in an additional material increase to the ultimate amount of outlier
revenue Tenet, including the Tenet Hospitals, could potentially
recognize for the Reconciliation Period, but this remains unknown at
this point.
Management believes that adequate provision has been made for any
adjustments that may result from final determination of amounts
earned under all the above arrangements with Medicare and Medicaid.
Revenues under managed care plans are based primarily on payment
terms involving predetermined rates per diagnosis, per-diem rates,
discounted fee-for-service rates and/or other similar contractual
arrangements. These revenues are also subject to review and possible
audit by the payers. The payers are billed for patient services on
an individual patient basis. An individual patient's bill is subject
to adjustment on a patient-by-patient basis in the ordinary course
of business by the payers following their review and adjudication of
each particular bill. The Tenet Hospitals estimate the discounts for
contractual allowances utilizing billing data on an individual
patient basis. At the end of each month, the Tenet Hospitals attempt
to estimate their expected reimbursement for patients of managed
care plans based on the applicable contract terms. These estimates
are continuously reviewed for accuracy by taking into consideration
known contract terms as well as payment history. Although the Tenet
Hospitals do not separately accumulate and disclose the aggregate
amount of adjustments to the estimated reimbursements for every
patient bill, management believes the estimation and review process
allows for timely identification of instances where such estimates
need to be revised. Management does not believe there were any
adjustments to estimates of individual patient bills that were
material to its net patient service revenue.
7
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
Management is not aware of any material claims, disputes, or
unsettled matters with any payers that would affect revenues that
have not been adequately provided for in the accompanying combined
financial statements.
The Tenet Hospitals provide charity care to patients whose income
level is below 200% of the Federal Poverty Level with only a
co-payment charged to the patient. The Tenet Hospitals' policy is to
not pursue collection of amounts determined to qualify as charity
care; and accordingly, the Tenet Hospitals do not report the amounts
in net patient service revenue or in the provision for doubtful
accounts. Patients whose income level is between 200% and 300% of
the Federal Poverty Level may also be considered under a
catastrophic provision of the charity care policy. Patients without
insurance who do not meet the Federal Poverty Level guidelines are
offered assistance in applying for Medicaid and other programs they
may be eligible for, such as state disability, Victims of Crime, or
county indigent programs. Patient advocates from the Tenet
Hospitals' Medical Eligibility Program (MEP) screen patients in the
hospital and determine potential linkage to financial assistance
programs. They also expedite the process of applying for these
government programs. The amount of gross charges foregone under the
charity policy, including indigent care accounts, for the years
ended December 31, 2004 and 2003 was approximately $30,067,000 and
$24,013,000, respectively.
Receivables from patients who are potentially eligible for Medicaid
are classified as Medicaid pending, under the MEP, with appropriate
contractual allowances recorded. If the patient does not qualify for
Medicaid, the receivables are reclassified to charity care and
written off, or they are reclassified to self-pay and adjusted to
their net realizable value through the provision for doubtful
accounts. Reclassifications of Medicaid pending accounts to self-pay
do not typically have a material impact on the results of operations
as the estimated Medicaid contractual allowances initially recorded
are not materially different than the estimated provision for
doubtful accounts recorded when the accounts are reclassified. All
accounts classified as pending Medicaid are fully reserved when they
reach 180 days old.
(c) Provision for Doubtful Accounts
The Tenet Hospitals provide for accounts receivable that could
become uncollectible by establishing an allowance to reduce the
carrying value of such receivables to their estimated net realizable
value. The Tenet Hospitals estimate this allowance based on the
aging of their accounts receivable, historical collection experience
for each type of payer and other relevant factors. There are various
factors that can impact the collection trends, such as changes in
the economy, which in turn have an impact on unemployment rates and
the number of uninsured and underinsured patients, volume of
patients through the emergency department, the increased burden of
co-payments to be made by patients with insurance and business
practices related to collection efforts. These factors continuously
change and can have an impact on collection trends and the
estimation process.
The Tenet Hospitals' policy is to attempt to collect amounts due
from patients, including co-payments and deductibles due from
patients with insurance, at the time of service while complying with
all federal and state laws and regulations, including, but not
limited to, the Emergency Medical Treatment and Labor Act (EMTALA).
Generally, as required by EMTALA, patients may not be denied
emergency treatment due to inability to pay. Therefore, until the
legally required medical screening examination is complete and
stabilization of the patient has begun, services are performed prior
to the verification of the patient's insurance, if any. In
non-emergency circumstances or for elective procedures and services,
it is the Tenet Hospitals' policy, when appropriate, to verify
insurance prior to a patient being treated.
8
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
During the year ended December 31, 2004, the Tenet Hospitals
recorded additional provisions for doubtful accounts of
approximately $7,320,000 as a result of modifying the process for
estimating and writing down all existing self-pay accounts (and all
future self-pay accounts receivable when they are recorded) to their
net realizable value. This change in how the net realizable value of
self-pay accounts is estimated was primarily attributable to the
continued increase in numbers of uninsured and underinsured
patients. Management believes this trend in self-pay is due to a
combination of broad economic factors, including unemployment
levels, reductions in state Medicaid budgets, increasing numbers of
individuals and employers who choose not to purchase insurance, and
the increasing burden of co-payments and deductibles to be made by
patients instead of insurers. Additionally, many of these patients,
who delay or do not seek routine medical care because of the costs,
are being admitted through the emergency department and often
require more costly care, resulting in higher billings, which are
the least collectible of all accounts. These factors cause a change
in the Tenet Hospitals' business mix as admissions of uninsured and
underinsured patients grow.
During the year ended December 31, 2003, the Tenet Hospitals
recorded additional provisions for doubtful accounts of
approximately $3,241,000 to write down their patient receivables to
their estimated net realizable value. The significant increase in
the provision for doubtful accounts resulted primarily from an
adverse change in the Tenet Hospitals' business mix as admissions of
uninsured patients grew at an escalating rate. The Tenet Hospitals
believe this trend was due to a combination of broad economic
factors, including higher unemployment rates, increasing numbers of
patients who are uninsured, and the increasing burden of co-payments
to be made by patients instead of insurers. The additional charge
consisted of two components (1) the effect of accelerating the
write-down of self-pay accounts, and (2) the effect of re-evaluating
the historical collection patterns for self-pay and managed care
accounts receivable in light of the trends at that time. During the
year ended December 31, 2003, the Tenet Hospitals' practice was to
write down all self-pay accounts receivable, including accounts
receivable related to the co-payments and deductibles due from
patients with insurance, to their estimated net realizable value as
they age over the course of 120 days, at which time any uncollected
balances are assigned to an in-house collection agency. Prior to the
year ended December 31, 2003, the Tenet Hospitals employed a
methodology that utilized graduated write-downs that escalated
toward the end of the 120-day period. Given the speed and severity
of the trends at that time in self-pay account collection, the Tenet
Hospitals changed to a straight-line write-down methodology during
the year ended December 31, 2003.
(d) Other Receivables
Other receivables primarily consist of amounts due for government
disproportionate share payments and one to three year financial
arrangements with physicians related to their recruitment and
relocation to the Tenet Hospitals' service areas. These amounts are
amortized over the terms of the respective arrangements.
(e) Property and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and impairment write-downs related to assets held and
used. Additions and improvements to property and equipment are
capitalized at cost. Expenditures for maintenance and repairs are
charged to expense as incurred. Capital leases are recorded at the
beginning of the lease term as assets and liabilities. The value
recorded is the lower of either the present value of the minimum
lease payments or the fair value of the asset. Such assets,
including improvements, are amortized over the shorter of either the
lease term or their estimated useful life.
9
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
The Tenet Hospitals use the straight-line method of depreciation for
buildings, building improvements, and equipment over their estimated
useful lives as follows:
Buildings and improvements 4 to 40 years
Equipment 3 to 15 years
The Tenet Hospitals evaluate their long-lived assets for possible
impairment whenever circumstances indicate that the carrying amount
of the asset, or related group of assets, may not be recoverable
from estimated future cash flows. However, there is an evaluation
performed at least annually. Fair value estimates are derived from
independent appraisals, established market values of comparable
assets or internal calculations of estimated future net cash flows.
The estimates of future net cash flows are based on assumptions and
projections believed by management to be reasonable and supportable.
These assumptions take into account patient volumes, changes in
payer mix, revenue, and expense growth rates and changes in
legislation and other payer payment patterns. An impairment
evaluation was performed as of December 31, 2003 and, based on the
calculations, the Tenet Hospitals recorded an impairment charge of
$103,282,940 (see note 9).
Long-lived assets to be disposed of are reported at the lower of
either their carrying amounts or fair values less costs to sell or
close. In such circumstances, the Tenet Hospitals' estimates of fair
value are based on independent appraisals, established market prices
for comparable assets or internal calculations of estimated future
net cash flows.
(f) Goodwill
Goodwill represents the excess of costs over the fair value of
assets of businesses acquired. Goodwill and other intangible assets
acquired in a purchase business combination and determined to have
an indefinite useful life are not amortized, but instead are subject
to impairment tests performed at least annually. For goodwill, the
test is performed at the reporting unit level when events occur that
require an evaluation to be performed or at least annually. If the
Tenet Hospitals find the carrying value of goodwill or other
intangible assets with an indefinite useful life to be impaired, or
if the carrying value of a business that is to be sold or otherwise
disposed of exceeds its fair value, then the Tenet Hospitals must
reduce the carrying value, including any allocated goodwill, to fair
value. Estimates of fair value are based on independent appraisals,
established market prices for comparable assets or internal
calculations of estimated future net cash flows. The annual
impairment evaluation was performed as of December 31, 2003 and,
based on the calculations, the Tenet Hospitals recorded an
impairment charge of $25,219,596 (see note 9).
(g) Other Intangible Assets
Other intangible assets consist primarily of capitalized software
costs, which are amortized using the straight-line method over the
estimated useful life of the software, which ranges from 3 to 15
years.
(h) Medical Claims Incurred but not Reported
The Tenet Hospitals record estimates of claims incurred but not
reported (IBNR) to the Tenet Hospitals for their obligations under
agreements with various HMOs. Claims incurred but not reported are
estimated using historical claims patterns, current enrollment
trends, hospital preauthorizations, member utilization patterns,
timeliness of claims submissions, and other factors. These estimates
are periodically reviewed and any adjustments are reflected
prospectively in operations.
10
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
The Tenet Hospitals believe that IBNR claims reserves are adequate
to satisfy ultimate claims liabilities; however, establishment of
IBNR claims estimates is an inherently uncertain process and actual
experience could result in prospective revisions to these estimated
reserves.
(i) Income Taxes
Tenet files consolidated federal and state income tax returns for
the respective states in which it does business, which include the
operating results of the Tenet Hospitals. Tenet allocates taxes to
the Tenet Hospitals on a separate return basis whereby current and
deferred taxes are allocated to the Tenet Hospitals pursuant to the
asset and liability method as if the Tenet Hospitals were separate
taxpayers. For balance sheet purposes, such allocations are recorded
in "Due from (to) affiliate."
Developing the provision for income taxes and analysis of potential
tax exposure items requires significant judgment and knowledge of
federal and state income tax laws, regulations and strategies,
including the determination of deferred tax assets and liabilities
and, if necessary, any valuation allowances that may be required for
deferred tax assets.
Tenet assesses the realization of the deferred tax assets of its
subsidiaries, including the Tenet Hospitals, to determine whether an
income tax valuation allowance is required. Based on all available
evidence, both positive and negative, and the weight of that
evidence to the extent such evidence can be objectively verified,
Tenet determines whether it is more likely than not that all or a
portion of the deferred tax assets will be realized. The main
factors that are considered include:
o cumulative losses in recent years;
o income/loss expected in future years;
o unsettled circumstances that, if unfavorably resolved, would
adversely affect future operations and profit levels;
o the availability, or lack thereof, of taxable income in prior
carryback periods that would limit realization of tax
benefits;
o the carryforward period associated with the deferred tax
assets and liabilities; and
o prudent and feasible tax-planning strategies.
(2) Property and Equipment
Property and equipment consist of the following as of December 31, 2004:
2004
------------
Land $ 28,139,996
Buildings and improvements 14,802,683
Equipment 3,868,632
------------
46,811,311
Less accumulated depreciation (note 9) (3,254,328)
------------
Property and equipment, net $ 43,556,983
============
11
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
The Tenet Hospitals are affected by State of California Senate Bill 1953
(SB 1953), which requires certain seismic safety building standards for
acute care hospital facilities. The Tenet Hospitals are currently
reviewing the SB 1953 compliance requirements and developing multiple
plans of action to achieve such compliance, the estimated time frame for
complying with such requirements, and the cost of performing necessary
remediation of certain of the properties. The Tenet Hospitals cannot
currently estimate with reasonable accuracy the remediation costs that
will need to be incurred in order to make the facilities SB
1953-compliant, but such remediation costs could be significant. Effective
January 1, 2004, based upon its current assessment of the SB-153
requirements, the Tenet Hospitals shortened the lives of the buildings and
improvements at certain of the properties to a four year useful life
resulting in an annual increase to depreciation expense of approximately
$1,800,000 ($1,100,000 after-tax) for the year ended December 31, 2004.
(3) Related Party Transactions
Related party transactions consist of the following:
(a) The Tenet Hospitals have a cash management arrangement with Tenet.
Pursuant to this arrangement, the Tenet Hospitals' cash receipts are
routinely transferred into a bank account of Tenet. Cash
disbursements of the Tenet Hospitals are funded by Tenet through
zero-balance bank accounts as checks are presented for payment.
Tenet Hospitals' cash on deposit in the accounts of Tenet is
presented net of amounts payable to Tenet and is classified in "Due
from (to) affiliate" in the accompanying combined balance sheet, a
non-interest bearing account.
(b) Tenet advanced funds to the Tenet Hospitals for insurance coverage,
other operating costs, and asset purchases during the years ended
December 31, 2004 and 2003. Additionally, Tenet charged the Tenet
Hospitals a management fee recorded in other operating expenses of
$17,917,592 and $15,600,479 for 2004 and 2003, respectively, for
administrative, financial, and technical support, which are
generally allocated on a pro rata basis utilizing net operating
revenues for all of Tenet's hospitals. Such expense allocations to
the Tenet Hospitals may not be representative of the costs to be
incurred in the future or on a stand-alone basis. Management
believes the allocation method described above is reasonable.
(c) During the year ended December 31, 2002, an affiliate of the Medical
Center contributed capital of $3,000,000 in the form of notes
receivable bearing interest at 8%. The notes receivable from
affiliate are restricted by management indefinitely through the
formation of a grantor trust for purposes of potentially funding
designated liabilities, if any, and are generally not available for
current operating activities. During the years ended December 31,
2004 and 2003, collections received from the affiliate under the
notes amounted to $0 and $603,590, respectively. Interest earned
under the notes was $192,238 and $200,973, respectively, during the
years ended December 31, 2004 and 2003.
(d) Substantially all of the Tenet Hospitals' professional and
comprehensive general liability risks in excess of self-insured
retentions, which vary by policy year from $1 million to $3 million
per occurrence, are insured through majority owned insurance
subsidiaries of Tenet. A significant portion of these risks is, in
turn, reinsured with major independent insurance companies. The
Tenet Hospitals are charged an allocation of cost by Tenet for their
portion of cost relating to this program. The amount allocated to
the Tenet Hospitals for these costs was approximately $10,512,000
and $11,574,000 in the years ended December 31, 2004 and 2003,
respectively.
12
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
(e) On December 31, 2004, Tenet terminated its five-year revolving
credit agreement and entered into a one-year letter of credit
facility. On March 16, 2005, Tenet amended its letter of credit
facility. The facility provides for the issuance of up to $250
million in letters of credit. Prior to its amendment, the letter of
credit facility was collateralized by the stock of certain of
Tenet's subsidiaries, including the Tenet Hospitals, and by cash
equal to 105% of the facility. Under the amended letter of credit
facility, the lenders have agreed to release their liens on the
stock of Tenet's subsidiaries, including the Tenet Hospitals, at
Tenet's request any time after April 15, 2005, so long as no default
exists. At the time of such release, the termination date of the
letter of credit facility will be extended from December 31, 2005 to
June 30, 2006. The facility will remain collateralized by cash as
described above. On April 19, 2005, the stock certificates were
returned to Tenet, and subsequently, termination notices for all
liens were submitted to each state and are pending confirmation. In
accordance with the amended facility, the termination date of the
letter of credit facility was extended from December 31, 2005 to
June 30, 2006.
(4) Claims and Lawsuits
Tenet and the Tenet Hospitals are subject to a significant number of
claims and lawsuits. Tenet is also the subject of federal and state
agencies' heightened and coordinated civil and criminal investigations and
enforcement efforts, and has received subpoenas and other requests for
information relating to a variety of subjects. In the present environment,
management expects these enforcement activities will take on additional
importance, that government enforcement activities may intensify and that
additional matters concerning Tenet and its subsidiaries may arise.
Management also expects new claims and lawsuits to be brought against
Tenet and its subsidiaries from time to time.
The results of these claims, lawsuits and investigations cannot be
predicted, and it is possible that the ultimate resolution of these
matters, individually or in the aggregate, may have a material adverse
effect on the Tenet Hospitals' business (both in the near and long term),
financial position, results of operations or cash flows. Although Tenet
and the Tenet Hospitals defend themselves vigorously against claims and
lawsuits and cooperate with investigations, these matters (1) could
require payment of substantial damages or amounts in judgments or
settlements, which individually or in the aggregate could exceed amounts,
if any, that may be recovered under insurance policies where coverage
applies and is available, (2) cause substantial expenses to be incurred,
(3) require significant time and attention from management and (4) could
cause Tenet to close or sell hospitals or otherwise modify the way its
business is conducted. Reserves for claims and lawsuits are recorded when
they are probable and reasonably estimable.
Currently pending legal proceedings and investigations that are not in the
ordinary course of business are principally related to the subject matters
set forth below.
On July 3, 2003, Tenet and several of its subsidiaries received
administrative subpoenas from the United States Attorney's Office for the
Central District of California seeking documents from 1997 to 2003 related
to physician relocation agreements at seven Southern California hospitals
owned by Tenet subsidiaries during that period, as well as summary
information about physician relocation agreements related to all of its
hospital subsidiaries, including the Tenet Hospitals. Specifically, the
subpoenas, issued in connection with a criminal investigation, seek
information from Tenet, three intermediary corporate subsidiaries and
subsidiaries that own or owned seven of Tenet's Southern California
hospitals. Tenet is cooperating with the government with respect to this
investigation.
In November 2003, the California Department of Health Services announced
that it had completed its audit of one hospital in California owned by
Tenet and intends to expand its audits to all California hospitals owned
by Tenet, including the Tenet Hospitals, and refer the findings to other
state and federal agencies.
13
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
Tenet, including the Tenet Hospitals, has been sued in class action
lawsuits in a number of states, including California, regarding the
pricing of pharmaceuticals and other products and services. In California,
various actions have been coordinated into one proceeding entitled Tenet
Healthcare Cases II, J.C.C.P. No. 4289, now pending in the Los Angeles
County Superior Court. On December 24, 2003, after the court overruled
most of Tenet's demurrers to plaintiffs' First Amended and Consolidated
Complaint, plaintiffs in the coordinated California action filed a Second
Amended and Consolidated Class Action and Representative Complaint against
Tenet and all of its California hospitals on behalf of plaintiffs and a
purported class consisting of certain uninsured, self-insured and Medicare
patients who allegedly paid excessive or unfair prices for prescription
drugs or medical products or procedures at hospitals or other medical
facilities owned by Tenet or its subsidiaries. The complaint asserts
claims for violation of California's unfair competition law, violation of
California's Consumers' Legal Remedies Act, breach of contract, breach of
the implied covenant of good faith and fair dealing, and unjust
enrichment. Plaintiffs seek to enjoin Tenet from continuing the alleged
unfair pricing policies and practices, and to recover all sums wrongfully
obtained by those policies and practices, including compensatory damages,
punitive damages, restitution, disgorgement of profits, treble damages,
and attorneys' fees and costs. On January 20, 2004, Tenet answered the
Second Amended and Consolidated Complaint and filed counterclaims against
the majority of the named plaintiffs for failure to pay the outstanding
balances on their respective patient bills. The case is in the class
discovery phase, and no due date has been set for plaintiffs' motion for
class certification. On March 14, 2005, Tenet received preliminary court
approval of a settlement of certain class action lawsuits as referred to
above that should be nationwide in effect. Under the proposed settlement,
for a period of four years Tenet has agreed to:
(a) Provide financial counseling to all uninsured patients, including
help in understanding and applying for governmental financial
assistance and charity care programs. Subject to applicable legal
requirements, Tenet will also post information on the availability
of such financial assistance on hospital websites and at certain
locations in its hospitals.
(b) Treat uninsured patients fairly and with respect during and after
treatment, and regardless of their ability to pay for the treatment
they receive.
(c) Offer uninsured patients reasonable payments and payment schedules.
If a patient has applied for financial assistance, Tenet will not
attempt to collect fees from the patient while an eligibility
determination on the patient's completed application is pending.
(d) Follow a uniform credit and collection policy, including, among
other things, a commitment not to pursue legal action for nonpayment
of bills against any patient who is unemployed or without other
significant assets or to place a lien on a patient's home.
(e) Disclose to uninsured patients the estimated charges for anticipated
treatment, subject to applicable legal requirements.
(f) Offer uninsured patients discounted pricing at rates comparable to
the hospital's current managed care rates.
14
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
In addition, Tenet has agreed to provide a reimbursement mechanism for
uninsured patients who received medically necessary services at any of its
hospitals, including the Tenet Hospitals, between June 15, 1999 and
December 31, 2004 - the period covered by the lawsuits - and who paid more
than a certain percentage of the hospital's gross charges. The specific
percentage varies depending on the year the patient was treated. Tenet
also has agreed to offer to discount outstanding unpaid bills for
uninsured patients who were treated at its hospitals, including the Tenet
Hospitals, during the settlement class period, and to make a $4 million
charitable contribution to a health care-related charity specified by the
plaintiffs' counsel. As part of the settlement agreement, Tenet and its
subsidiaries, including the Tenet Hospitals, made no admission of
wrongdoing and continue to vigorously deny the allegations made in the
lawsuits. Under the settlement, detailed notices describing the steps to
be taken by eligible patients who wish to request a refund or a revised
bill will be mailed to class members and published in various periodicals.
Tenet may terminate the settlement if more than 1,000 members of the
settlement class opt not to participate in the settlement or if the court
does not certify a nationwide settlement class. The settlement is subject
to other conditions, including final court approval following completion
of a fairness hearing and any appeals. At the fairness hearing, which is
scheduled to take place on August 5, 2005, settlement class members may
object to the fairness, adequacy and reasonableness of the settlement.
Written objections to the settlement are due to be filed by June 10, 2005.
If a nationwide settlement is approved by the court and given full faith
and credit in each of the states where class actions have been filed,
class action lawsuits pending against Tenet and certain of its hospitals,
including the Tenet Hospitals, should be subject to dismissal. Tenet has
filed or plans to file a request for a stay of each of these cases pending
final approval of the settlement. Those cases that are not stayed will
move forward. At this time, there can be no assurance that the conditions
of the settlement will be satisfied or that the settlement will receive
final court approval. Tenet has adequately provided for the settlement of
this matter as of December 31, 2004 in its consolidated financial
statements. No amount of the settlement has been allocated to the Tenet
Hospitals as of December 31, 2004.
The United States Department of Justice, in conjunction with the Office of
Inspector General of the Department of Health and Human Services, has been
investigating certain hospital billings to Medicare for inpatient stays
reimbursed pursuant to diagnosis-related groups 79 (pneumonia), 415
(operating room procedure for infectious and parasitic diseases), 416
(septicemia), and 475 (respiratory system diagnosis with mechanical
ventilator). The investigation is believed to have stemmed initially from
the government's nationwide pneumonia "upcoding" initiative and focuses on
103 acute care hospitals owned or acquired by subsidiaries of Tenet,
including the Tenet Hospitals, during the period September 1992 through
December 1998. On January 9, 2003, the government filed a lawsuit in the
United States District Court for the Central District of California in
regard to this matter, alleging violations of the federal False Claims Act
and various common law theories of liability. The government seeks treble
damages and other relief, including punitive damages. On November 19,
2003, the District Court (1) granted Tenet's motion to dismiss for failure
to plead fraud with the requisite particularity, with leave to amend, (2)
granted, in part, Tenet's motion to sever, with leave to amend, and (3)
dismissed, with prejudice, the government's claims for unjust enrichment,
disgorgement and recoupment. Pursuant to the District Court's order, on
February 6, 2004, the government filed a Second Amended Complaint and two
additional related complaints against Tenet and various subsidiaries
alleging successor liability for claims submitted by the hospitals' prior
owners. On July 19, 2004, Tenet answered the complaints relating to Case
Nos. CV-03-206-GAF and CV-04-859-GAF, and, on November 1, 2004, Tenet
answered the complaint relating to Case No. CV-04-857-GAF. Discovery has
commenced and the trial is set to begin March 6, 2007.
15
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
(5) Benefit Plan
Substantially all of the employees of the Tenet Hospitals, upon
qualification, are eligible to participate in Tenet's defined contribution
401(k) plan. Employees who elect to participate may contribute 1% to 25%
of their eligible compensation and Tenet matches such contributions up to
a maximum percentage. Effective in 2004, matching contributions are made
annually for personnel actively employed as of December 31. Expenses
allocated to the Tenet Hospitals for the plan were $3,573,560 and
$3,223,648 for the years ended December 31, 2004 and 2003, respectively.
(6) Leases
The Tenet Hospitals have long-term lease obligations for certain land and
buildings located at Chapman Medical Center. For financial reporting
purposes, the leases have been classified as capital leases; accordingly,
assets with a net book value of approximately $1,800,000 are included in
property and equipment in the accompanying combined balance sheet. These
lease obligations are guaranteed by Tenet HealthSystem Health Corp, a
Tenet subsidiary. Effective March 8, 2005 these lease obligations were
also guaranteed by Tenet Healthcare Corporation.
The following is a schedule of future minimum lease payments under
capitalized leases together with the present value of the net minimum
lease payments as of December 31, 2004:
Year ending December 31:
2005 $ 686,292
2006 686,292
2007 686,292
2008 686,292
2009 686,292
Thereafter 2,745,168
----------
Total minimum lease payments 6,176,628
Less amount representing interest 2,517,227
----------
Present value of net minimum lease payments 3,659,401
Less current portion 204,141
----------
Long-term portion $3,455,260
==========
16
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
The Tenet Hospitals have several noncancelable operating leases, primary
for certain land, office space and equipment, with lease terms expiring at
various dates. The following is a schedule of future minimum operating
lease payments that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 2004:
Year ending December 31:
2005 $ 2,183,069
2006 2,017,059
2007 1,661,229
2008 1,163,027
2009 844,267
Thereafter 8,569,793
-----------
$16,438,444
===========
Total rental expense for all operating leases was $4,090,186 and
$4,220,315 for the years ended December 31, 2004 and 2003, respectively.
(7) Income Taxes
Income tax expense (benefit) allocated to the Tenet Hospitals by Tenet on
a separate return basis for the years ended December 31, 2004 and 2003
consists of:
2004 2003
------------ ------------
Current:
Federal $ (7,214,000) 713,000
State -- 81,000
------------ ------------
(7,214,000) 794,000
------------ ------------
Deferred:
Federal 1,780,000 (14,919,000)
State (238,000) (1,277,000)
------------ ------------
1,542,000 (16,196,000)
------------ ------------
$ (5,672,000) (15,402,000)
============ ============
17
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
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:
2004 2003
------------ ------------
Tax provision (benefit) at statutory federal rate of 35% $(10,274,000) (48,663,000)
State income taxes, net of federal income tax benefit (343,000) (3,423,000)
Valuation allowance 4,875,000 36,561,000
Other items 70,000 123,000
------------ ------------
$ (5,672,000) (15,402,000)
============ ============
Deferred tax assets and liabilities as of December 31, 2004 relate to the
following:
2004
-------------------------------
Assets Liabilities
------------ ------------
Depreciation and fixed asset basis differences $ 27,570,000 --
Reserves relating to restructuring charges 1,501,000 --
Receivable - doubtful accounts and adjustments 2,915,000 --
Accruals for insurance risks 5,902,000 --
Other accrued liabilities 1,140,000 --
Intangible assets 2,152,000 --
Benefit plans 1,296,000 --
Investments and other assets -- 131,000
Net operating loss carryforward 452,000 --
Other items -- 45,000
------------ ------------
42,928,000 176,000
Valuation allowance (41,435,000) --
------------ ------------
$ 1,493,000 176,000
============ ============
Through the end of 2002, Tenet has concluded that it was more likely than
not that the deferred tax assets of the Tenet Hospitals were realizable.
However, Tenet has determined that it was appropriate to record a
valuation allowance as of December 31, 2003 and 2004 after considering and
weighing all evidence. In making this assessment, the Tenet Hospitals'
adverse results of operations was a negative factor. In addition, the
negative factor of having a cumulative pre-tax loss at the end of the
three-year periods ended December 31, 2003 and 2004, together with the
possibility of losses in early future years, imposed a high standard for
compelling objective evidence to exist in order to overcome the negative
factors indicating that the deferred tax assets may not be realized. Tenet
established the valuation allowance as a result of assessing the
realization of its deferred tax assets based on the fact that the Tenet
Hospitals incurred significant impairment charges and adverse results of
operations, which is considered "negative evidence" under SFAS 109,
Accounting for Income Taxes (SFAS 109). Tenet concluded that as a result
of this negative evidence, SFAS 109 precludes the Tenet Hospitals from
relying upon management's forecasts of future income for the purpose of
supporting the realization of the deferred tax assets under the more
likely than not standard.
18
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
Income tax expense in the year ended December 31, 2003 included the impact
of establishing the valuation allowance for deferred tax assets. Based on
the assessment of the realization of the deferred tax assets and the
balance of those deferred tax assets, which are adjusted each year for
changes in temporary differences, an adjustment of the valuation allowance
is recorded each year. Given the magnitude of the valuation allowance, the
Tenet Hospitals' future income/losses could result in a significant
adjustment to this valuation allowance.
The Internal Revenue Service ("IRS") has completed an examination of
Tenet's consolidated federal tax returns for the fiscal year ended May 31,
1995 through May 31, 1997 and has issued a Revenue Agent's Report, which
contains several disputed adjustments. The disputed adjustments related to
the Tenet Hospitals include an adjustment with respect to the timing of
the recognition of income for tax purposes pertaining to Medicare and
Medicaid net revenues and an adjustment with respect to depreciation
expense claimed on building improvements placed in service during the
audit period. Tenet has filed a protest with the Appeals Division of the
IRS. Tenet believes it has adequately provided for all disputed tax
matters contained in the Revenue Agent's Report.
In addition, the IRS has commenced an examination of Tenet's consolidated
federal tax returns for the fiscal year ended May 31, 1998 through the
seven-month transition period ended December 31, 2002. Tenet cannot
determine the ultimate resolution of this examination.
(8) Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable, and
accrued liabilities approximate fair value because of the short-term
maturity of these instruments. The carrying value of the "Due from (to)
affiliate" account, while classified as long-term since the total account
balance is not required to be settled within one year, approximates fair
value based on the high level of cash receipts and disbursements routinely
processed through this account. In addition, the carrying value of notes
receivable from affiliate approximates fair value.
(9) Impairment of Goodwill and Long-Lived Assets
The Tenet Hospitals performed a goodwill impairment evaluation as of
December 31, 2003, and, as a result, recorded an impairment charge of
$25,219,596 with respect to Western Medical Center - Santa Ana. The
goodwill impairment charge is the result of a lower estimated fair value
for Western Medical Center - Santa Ana due to adverse industry and
company-specific challenges that have affected its operating results.
During 2003, the Tenet Hospitals experienced significant reductions in
cash flows from operations, which indicated that the carrying value of the
Tenet Hospitals' long-lived assets may not be fully recoverable. As a
result, the Tenet Hospitals recorded an impairment charge of $103,282,940
to write-down the carrying value of its long-lived assets to their
estimated fair value based upon independent appraisals. The write-down of
the long-lived assets resulted in a new cost basis in the assets.
(10) Restructuring Charges
The Tenet Hospitals recorded restructuring charges of $3,917,768 and
$116,904 during the years ended December 31, 2004 and 2003, respectively,
related to employee severance and retention costs.
(11) Subsequent Event
On September 29, 2004, Tenet through various subsidiaries entered into an
Asset Sale Agreement, as amended, to sell the Tenet Hospitals and related
other healthcare businesses for approximately $70,000,000, plus or minus
the value of net working capital and certain excluded assets, as defined
in the Asset Sale Agreement. The transaction closed during March 2005. No
adjustments have been made to the accompanying combined financial
statements related to this transaction.
19
Tenet Hospitals
Notes to Combined Financial Statements
December 31, 2004 and 2003
Supplemental Schedule 1
TENET HOSPITALS
Combining Schedule - Balance Sheet
December 31, 2004
Western Western
Medical Medical Coastal Chapman
Center - Center - Communities Medical
Assets Anaheim Santa Ana Hospital Center
----------- ----------- ----------- -----------
Current assets:
Cash $ 201,091 -- -- 43,055
Accounts receivable 8,501,228 14,470,822 6,833,128 7,964,166
Inventories of supplies, at cost 1,175,549 3,099,426 693,242 945,421
Other receivables 1,838,632 1,913,309 3,811,289 34,028
Prepaid expenses and other current assets 176,687 488,411 92,682 224,246
----------- ----------- ----------- -----------
Total current assets 11,893,187 19,971,968 11,430,341 9,210,916
Property and equipment, net 8,897,950 21,233,466 7,268,772 6,156,795
Due from affiliate -- 50,017,254 -- --
Notes receivable from affiliate -- 2,396,410 -- --
Other assets -- 667,291 335,000 --
Other intangible assets 1,261,633 2,622,407 1,399,251 1,340,427
----------- ----------- ----------- -----------
Total assets $22,052,770 96,908,796 20,433,364 16,708,138
=========== =========== =========== ===========
Liabilities and Ownership Equity (Deficit)
Current liabilities:
Current portion of capital lease obligation $ -- -- -- 204,141
Accounts payable 4,038,052 12,684,746 1,632,241 3,075,454
Accrued employee compensation and benefits 2,143,593 4,883,694 1,726,341 1,243,465
Medical claims incurred but not reported -- 2,119,044 1,629,325 --
Accrued restructuring costs 937,269 1,091,720 1,100,358 788,421
Other current liabilities 831,129 402,166 1,126,306 129,237
----------- ----------- ----------- -----------
Total current liabilities 7,950,043 21,181,370 7,214,571 5,440,718
Capital lease obligation, net of current portion -- -- -- 3,455,260
Due to affiliate 8,092,695 -- 31,799,323 20,488,206
----------- ----------- ----------- -----------
Total liabilities 16,042,738 21,181,370 39,013,894 29,384,184
Commitments and contingencies
Ownership equity (deficit) 6,010,032 75,727,426 (18,580,530) (12,676,046)
----------- ----------- ----------- -----------
Total liabilities and ownership equity
(deficit) $22,052,770 96,908,796 20,433,364 16,708,138
=========== =========== =========== ===========
Total
Assets Eliminations 2004
------------ -----------
Current assets:
Cash -- 244,146
Accounts receivable -- 37,769,344
Inventories of supplies, at cost -- 5,913,638
Other receivables -- 7,597,258
Prepaid expenses and other current assets -- 982,026
----------- -----------
Total current assets -- 52,506,412
Property and equipment, net -- 43,556,983
Due from affiliate (50,017,254) --
Notes receivable from affiliate -- 2,396,410
Other assets -- 1,002,291
Other intangible assets -- 6,623,718
----------- -----------
Total assets (50,017,254) 106,085,814
=========== ===========
Liabilities and Ownership Equity (Deficit)
Current liabilities:
Current portion of capital lease obligation -- 204,141
Accounts payable -- 21,430,493
Accrued employee compensation and benefits -- 9,997,093
Medical claims incurred but not reported -- 3,748,369
Accrued restructuring costs -- 3,917,768
Other current liabilities -- 2,488,838
----------- -----------
Total current liabilities -- 41,786,702
Capital lease obligation, net of current portion -- 3,455,260
Due to affiliate (50,017,254) 10,362,970
----------- -----------
Total liabilities (50,017,254) 55,604,932
Commitments and contingencies
Ownership equity (deficit) -- 50,480,882
----------- -----------
Total liabilities and ownership equity
(deficit) (50,017,254) 106,085,814
=========== ===========
See accompanying independent auditors' report
Supplemental Schedule 2
TENET HOSPITALS
Combining Schedule - Statement of Operations and Changes in Ownership Equity
(Deficit)
Year ended December 31, 2004
Western Western
Medical Medical Coastal Chapman
Center - Center - Communities Medical Total
Anaheim Santa Ana Hospital Center 2004
------------ ------------ ------------ ------------ ------------
Net patient service revenue $ 68,406,607 166,547,934 61,575,246 42,221,856 338,751,643
Other revenue 432,046 903,084 1,092,196 573,772 3,001,098
------------ ------------ ------------ ------------ ------------
Net operating revenues 68,838,653 167,451,018 62,667,442 42,795,628 341,752,741
------------ ------------ ------------ ------------ ------------
Operating expenses:
Salaries and benefits 38,468,922 78,734,037 35,319,084 22,104,593 174,626,636
Supplies 8,822,401 25,657,464 6,531,792 6,692,953 47,704,610
Provision for doubtful accounts 8,024,259 20,609,813 8,703,158 4,700,900 42,038,130
Other operating expenses 20,481,092 48,354,847 16,303,220 12,734,165 97,873,324
Depreciation 465,557 879,887 477,584 1,738,340 3,561,368
Amortization 200,228 404,112 140,721 235,726 980,787
Restructuring charges 937,269 1,091,720 1,100,358 788,421 3,917,768
------------ ------------ ------------ ------------ ------------
Total operating expenses 77,399,728 175,731,880 68,575,917 48,995,098 370,702,623
------------ ------------ ------------ ------------ ------------
Loss from operations (8,561,075) (8,280,862) (5,908,475) (6,199,470) (28,949,882)
Interest income from affiliate -- (192,238) -- -- (192,238)
Interest expense, net 68,254 25,859 4,090 498,849 597,052
------------ ------------ ------------ ------------ ------------
Loss before income taxes (8,629,329) (8,114,483) (5,912,565) (6,698,319) (29,354,696)
Income tax benefit (1,540,000) (658,000) (1,387,000) (2,087,000) (5,672,000)
------------ ------------ ------------ ------------ ------------
Net loss (7,089,329) (7,456,483) (4,525,565) (4,611,319) (23,682,696)
Ownership equity (deficit), beginning of year 13,099,361 83,183,909 (14,054,965) (8,064,727) 74,163,578
------------ ------------ ------------ ------------ ------------
Ownership equity (deficit), end of year $ 6,010,032 75,727,426 (18,580,530) (12,676,046) 50,480,882
============ ============ ============ ============ ============
See accompanying independent auditors' report.
Supplemental Schedule 3
TENET HOSPITALS
Combining Schedule - Statement of Cash Flows
Year ended December 31, 2004
Western Western
Medical Medical Coastal
Center - Center - Communities
Anaheim Santa Ana Hospital
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(7,089,329) (7,456,483) (4,525,565)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 465,557 879,887 477,584
Amortization 200,228 404,112 140,721
Provision for doubtful accounts 8,024,259 20,609,813 8,703,158
(Gain) loss on disposal of property and equipment 25,729 6,244 (6,649)
Deferred income tax expense (benefit) 807,000 1,855,000 (371,000)
Restructuring charges 937,269 1,091,720 1,100,358
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable (4,198,083) (14,087,418) (6,986,349)
Inventories, prepaid expenses, and other current assets 865,309 374,386 1,734,342
Accounts payable, accrued, and other liabilities (5,115,911) (1,780,836) (1,151,188)
----------- ----------- -----------
Net cash provided by (used in) operating activities (5,077,972) 1,896,425 (884,588)
Cash flows from investing activities:
Capital expenditures (790,711) (957,049) (413,556)
Other investing activities (148,344) (96,812) 5,917
----------- ----------- -----------
Net cash used in investing activities (939,055) (1,053,861) (407,639)
Cash flows from financing activities:
Net change in due from/to affiliate 6,213,876 (872,506) 1,292,227
Payments under capital leases -- -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities 6,213,876 (872,506) 1,292,227
Net change in cash 196,849 (29,942) --
Cash, beginning of year 4,242 29,942 --
----------- ----------- -----------
Cash, end of year $ 201,091 -- --
=========== =========== ===========
Supplemental disclosure:
Noncash transaction:
Accounts payable related to capital expenditures $ -- -- --
Interest paid 68,616 26,320 9,562
Chapman
Medical Total
Center 2004
----------- -----------
Cash flows from operating activities:
Net loss (4,611,319) (23,682,696)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 1,738,340 3,561,368
Amortization 235,726 980,787
Provision for doubtful accounts 4,700,900 42,038,130
(Gain) loss on disposal of property and equipment -- 25,324
Deferred income tax expense (benefit) (749,000) 1,542,000
Restructuring charges 788,421 3,917,768
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable (4,058,388) (29,330,238)
Inventories, prepaid expenses, and other current assets (3,849) 2,970,188
Accounts payable, accrued, and other liabilities 624,990 (7,422,945)
----------- -----------
Net cash provided by (used in) operating activities (1,334,179) (5,400,314)
Cash flows from investing activities:
Capital expenditures (151,354) (2,312,670)
Other investing activities (23,648) (262,887)
----------- -----------
Net cash used in investing activities (175,002) (2,575,557)
Cash flows from financing activities:
Net change in due from/to affiliate 1,717,216 8,350,813
Payments under capital leases (204,141) (204,141)
----------- -----------
Net cash provided by (used in) financing activities 1,513,075 8,146,672
Net change in cash 3,894 170,801
Cash, beginning of year 39,161 73,345
----------- -----------
Cash, end of year 43,055 244,146
=========== ===========
Supplemental disclosure:
Noncash transaction:
Accounts payable related to capital expenditures 5,752 5,752
Interest paid 499,097 603,595
Income tax payments are made at the parent company level.
See accompanying independent auditors' report.
Supplemental Schedule 4
TENET HOSPITALS
Combining Schedule - Statement of Operations and Changes in Ownership Equity
(Deficit)
Year ended December 31, 2003
Western Western
Medical Medical Coastal Chapman
Center - Center - Communities Medical Total
Anaheim Santa Ana Hospital Center 2003
------------ ------------ ------------ ------------ ------------
Net patient service revenue $ 78,406,774 156,279,291 59,712,772 49,417,912 343,816,749
Other revenue 735,813 1,157,374 1,066,374 569,304 3,528,865
------------ ------------ ------------ ------------ ------------
Net operating revenues 79,142,587 157,436,665 60,779,146 49,987,216 347,345,614
------------ ------------ ------------ ------------ ------------
Operating expenses:
Salaries and benefits 36,693,542 74,809,050 29,548,135 20,960,864 162,011,591
Supplies 10,236,909 25,779,010 6,389,435 8,931,992 51,337,346
Provision for doubtful accounts 7,840,061 16,171,906 6,939,215 3,400,101 34,351,283
Other operating expenses 20,780,525 47,520,509 15,749,752 14,308,113 98,358,899
Depreciation 1,983,962 5,534,842 1,284,524 2,098,404 10,901,732
Amortization 128,346 279,885 88,920 107,080 604,231
Impairment of goodwill and long-lived assets 16,067,970 83,515,653 7,351,439 21,567,474 128,502,536
Restructuring charges 5,790 6,822 104,292 -- 116,904
------------ ------------ ------------ ------------ ------------
Total operating expenses 93,737,105 253,617,677 67,455,712 71,374,028 486,184,522
------------ ------------ ------------ ------------ ------------
Loss from operations (14,594,518) (96,181,012) (6,676,566) (21,386,812) (138,838,908)
Interest income from affiliate -- (200,973) -- -- (200,973)
Interest expense (income), net (25,980) (56,490) (1,380) 482,734 398,884
------------ ------------ ------------ ------------ ------------
Loss before income taxes (14,568,538) (95,923,549) (6,675,186) (21,869,546) (139,036,819)
Income tax expense (benefit) (1,239,000) (11,676,000) 1,525,000 (4,012,000) (15,402,000)
------------ ------------ ------------ ------------ ------------
Net loss (13,329,538) (84,247,549) (8,200,186) (17,857,546) (123,634,819)
Ownership equity (deficit), beginning of year 26,428,899 167,431,458 (5,854,779) 9,792,819 197,798,397
------------ ------------ ------------ ------------ ------------
Ownership equity (deficit), end of year $ 13,099,361 83,183,909 (14,054,965) (8,064,727) 74,163,578
============ ============ ============ ============ ============
See accompanying independent auditors' report.
Supplemental Schedule 5
TENET HOSPITALS
Combining Schedule - Statement of Cash Flows
Year ended December 31, 2003
Western Western
Medical Medical Coastal
Center - Center - Communities
Anaheim Santa Ana Hospital
------------ ------------ ------------
Cash flows from operating activities:
Net loss $(13,329,538) (84,247,549) (8,200,186)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 1,983,962 5,534,842 1,284,524
Amortization 128,346 279,885 88,920
Provision for doubtful accounts 7,840,061 16,171,906 6,939,215
(Gain) loss on disposal of property and equipment 287,025 (41,269) 20,540
Deferred income tax expense (benefit) (1,473,000) (11,132,000) 104,000
Impairment of goodwill and long-lived assets 16,067,970 83,515,653 7,351,439
Restructuring charges 5,790 6,822 104,292
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable (12,167,277) 4,744,483 (6,358,704)
Inventories, prepaid expenses, and other current assets (2,098,349) 2,696,813 1,451,728
Accounts payable, accrued, and other liabilities 369,167 (511,610) 2,452,205
------------ ------------ ------------
Net cash provided by (used in) operating activities (2,385,843) 17,017,976 5,237,973
Cash flows from investing activities:
Capital expenditures (2,575,979) (2,155,296) (842,470)
Proceeds from collections on notes receivable -- 603,590 --
Other investing activities (181,678) 434,478 317,583
------------ ------------ ------------
Net cash used in investing activities (2,757,657) (1,117,228) (524,887)
Cash flows from financing activities:
Net change in due from/to affiliate 4,959,702 (16,095,608) (4,713,086)
Payments under capital leases -- -- --
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,959,702 (16,095,608) (4,713,086)
Net change in cash (183,798) (194,860) --
Cash, beginning of year 188,040 224,802 --
------------ ------------ ------------
Cash, end of year $ 4,242 29,942 --
============ ============ ============
Supplemental disclosure:
Noncash transaction:
Accounts payable related to capital expenditures $ 154,167 164,957 5,635
Interest paid 6,830 22,679 5,881
Chapman
Medical Total
Center 2003
------------ ------------
Cash flows from operating activities:
Net loss (17,857,546) (123,634,819)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 2,098,404 10,901,732
Amortization 107,080 604,231
Provision for doubtful accounts 3,400,101 34,351,283
(Gain) loss on disposal of property and equipment 6,274 272,570
Deferred income tax expense (benefit) (3,695,000) (16,196,000)
Impairment of goodwill and long-lived assets 21,567,474 128,502,536
Restructuring charges -- 116,904
Increase (decrease) in cash from changes in operating assets and
liabilities:
Accounts receivable (3,928,125) (17,709,623)
Inventories, prepaid expenses, and other current assets 545,870 2,596,062
Accounts payable, accrued, and other liabilities (378,669) 1,931,093
------------ ------------
Net cash provided by (used in) operating activities 1,865,863 21,735,969
Cash flows from investing activities:
Capital expenditures (947,579) (6,521,324)
Proceeds from collections on notes receivable -- 603,590
Other investing activities (19,706) 550,677
------------ ------------
Net cash used in investing activities (967,285) (5,367,057)
Cash flows from financing activities:
Net change in due from/to affiliate (679,649) (16,528,641)
Payments under capital leases (179,768) (179,768)
------------ ------------
Net cash provided by (used in) financing activities (859,417) (16,708,409)
Net change in cash 39,161 (339,497)
Cash, beginning of year -- 412,842
------------ ------------
Cash, end of year 39,161 73,345
============ ============
Supplemental disclosure:
Noncash transaction:
Accounts payable related to capital expenditures 55,187 379,946
Interest paid 518,581 553,971
Income tax payments are made at the parent company level.
See accompanying independent auditors' report.