- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q / X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1998. OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ....... TO ........ COMMISSION FILE NUMBER I-7293 - ------------------------------------------------------------------------------- TENET HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) - ------------------------------------------------------------------------------- NEVADA 95-2557091 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3820 STATE STREET SANTA BARBARA, CA 93105 (Address of principal executive offices) (805) 563-7000 (Registrant's telephone number, including area code) ---------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO --- --- AS OF MARCH 31, 1998 THERE WERE 308,253,598 SHARES OF $0.075 PAR VALUE COMMON STOCK OUTSTANDING. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
TENET HEALTHCARE CORPORATION INDEX <TABLE> <CAPTION> Page ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets - May 31, 1997 and February 28, 1998....................................... 2 Condensed Consolidated Statements of Operations - Three Months and Nine Months Ended February 28, 1997 and 1998..... 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended February 28, 1997 and 1998............................ 5 Notes to Condensed Consolidated Financial Statements........... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 9 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 16 Item 6. Exhibits and Reports on Form 8-K............................... 16 Signature...................................................... 16 </TABLE> - ---------- Note: Item 3 of Part I and Items 2, 3, 4 and 5 of Part II are omitted because they are not applicable. 1
TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> MAY 31, FEBRUARY 28, 1997 1998 ------- ------------ <S> <C> <C> (DOLLAR AMOUNTS IN MILLIONS) ASSETS Current assets: Cash and cash equivalents....................... $ 35 $ 17 Short-term investments in debt securities....... 116 132 Accounts receivable, less allowance for doubtful accounts ($224 at May 31 and $204 at February 28).............................. 1,346 1,725 Inventories of supplies, at cost................ 193 211 Deferred income taxes........................... 294 158 Other current assets............................ 407 478 ------- ------- Total current assets.................. 2,391 2,721 ------- ------- Investments and other assets......................... 678 642 Property and equipment, at cost...................... 6,922 7,563 Less accumulated depreciation and amortization.. 1,432 1,728 ------- ------- Net property and equipment...................... 5,490 5,835 ------- ------- Intangible assets, at cost less accumulated amortization ($226 at May 31 and $316 at February 28)...................................... 3,146 3,517 ------- ------- $11,705 $12,715 ------- ------- ------- ------- </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 2
TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> MAY 31, FEBRUARY 28, 1997 1998 ------- ------------ <S> <C> <C> (DOLLAR AMOUNTS IN MILLIONS) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............... $ 28 $ 13 Accounts payable................................ 540 536 Accrued employee compensation and benefits...... 309 358 Accrued interest payable........................ 144 109 Reserves related to discontinued operations and other non-recurring charges.............. 423 147 Other current liabilities....................... 425 477 ------- ------- Total current liabilities............. 1,869 1,640 ------- ------- Long-term debt, net of current portion............... 5,022 5,755 Deferred income taxes................................ 308 334 Other long-term liabilities and minority interests... 1,282 1,293 Shareholders' equity: Common stock, $0.075 par value; authorized 450,000,000 shares; 305,501,379 shares issued at May 31 and 311,511,837 shares issued at February 28........................ 23 23 Other shareholders' equity...................... 3,240 3,740 Less common stock in treasury, at cost, 2,676,091 shares at May 31 and 3,754,891 shares at February 28........................ (39) (70) ------- ------- Total shareholders' equity............ 3,224 3,693 ------- ------- $11,705 $12,715 ------- ------- ------- ------- </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 3
TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1998 <TABLE> <CAPTION> THREE MONTHS NINE MONTHS ---------------- ---------------- 1997 1998 1997 1998 ------ ------ ------ ------ <S> <C> <C> <C> <C> (DOLLARS IN MILLIONS) Net operating revenues $2,237 $2,564 $6,339 $7,324 ------ ------ ------ ------ Operating expenses: Salaries and benefits............... 911 1,040 2,601 3,013 Supplies............................ 316 365 872 1,016 Provision for doubtful accounts..... 128 163 351 447 Other operating expenses............ 470 518 1,337 1,516 Depreciation........................ 82 89 256 257 Amortization........................ 27 32 81 83 Merger-related expenses............. 272 - 272 - ------ ------ ------ ------ Operating income......................... 31 357 569 992 ------ ------ ------ ------ Interest expense, net of capitalized portion............................... (106) (114) (308) (344) Investment earnings...................... 7 5 21 17 Minority interests in income of consolidated subsidiaries............. (8) (6) (24) (19) Gain from change in value of indexed long-term debt........................ - - - 18 ------ ------ ------ ------ Income (loss) before income taxes........ (76) 242 258 664 Taxes on income.......................... 10 (94) (125) (262) ------ ------ ------ ------ Income (loss) before extraordinary item.. (66) 148 133 402 Extraordinary charge from early extinguishment of debt, less applicable income taxes of $29........ (47) - (47) - ------ ------ ------ ------ Net income (loss)........................ $ (113) $ 148 $ 86 $ 402 ------ ------ ------ ------ ------ ------ ------ ------ </TABLE> (continued) See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 4
TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONT.) THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1998 <TABLE> <CAPTION> THREE MONTHS NINE MONTHS ---------------- ---------------- 1997 1998 1997 1998 ------ ------ ------ ------ <S> <C> <C> <C> <C> Earnings (loss) per share: Basic: Before extraordinary charge.... $(0.21) $ 0.48 $ 0.45 $ 1.32 Extraordinary charge........... (0.16) - (0.16) - ------ ------ ------ ------ Net............................ $(0.37) $ 0.48 $ 0.29 $ 1.32 ------ ------ ------ ------ ------ ------ ------ ------ Diluted: Before extraordinary charge.... $(0.21) $ 0.47 $ 0.44 $ 1.29 Extraordinary charge........... (0.16) - (0.16) - ------ ------ ------ ------ Net............................ $(0.37) $ 0.47 $ 0.28 $ 1.29 ------ ------ ------ ------ ------ ------ ------ ------ Weighted average shares outstanding - basic (in thousands).................. 304,443 306,607 296,493 305,449 Weighted average shares and dilutive securities outstanding - dilutive (in thousands)........................ 304,443 312,816 302,742 311,258 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 5
TENET HEALTHCARE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED FEBRUARY 28, 1997 AND 1998 <TABLE> <CAPTION> 1997 1998 ------- ------- <S> <C> <C> (IN MILLIONS) Cash flows from operating activities: Recurring operations........................... $ 316 $ 444 Net expenditures for discontinued operations and non-recurring charges................... (61) (307) ------- ------- Net cash provided by operating activities........... 255 137 Cash flows from investing activities: Proceeds from sales of facilities and other assets................................ 50 162 Collection of notes receivable................. 70 25 Purchases of property and equipment............ (261) (371) Purchases of new businesses, net of cash acquired.................................... (677) (679) Other items.................................... (15) (77) ------- ------- Net cash used in investing activities..... (833) (940) ------- ------- Cash flows from financing activities: Proceeds from borrowings....................... 4,436 1,916 Payments of borrowings......................... (3,936) (1,189) Other items, primarily stock option exercises.. 36 58 ------- ------- Net cash provided by financing activities. 536 785 ------- ------- Net decrease in cash and cash equivalents........... (42) (18) Cash and cash equivalents at beginning of period.... 103 35 ------- ------- Cash and cash equivalents at end of period.......... $ 61 $ 17 ------- ------- ------- ------- Supplemental disclosures: Interest paid, net of amounts capitalized...... $ 264 $ 338 Income taxes paid, net of refunds received..... 116 11 Fair value of common stock issued for purchase of new business.................... - 9 Fair value of common stock tendered for note receivable............................. - 16 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations 6
TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The financial information furnished herein is unaudited; however, in the opinion of management, the information reflects all adjustments that are necessary to fairly state the financial position of Tenet Healthcare Corporation (together with its subsidiaries, "Tenet" or the "Company"), the results of its operations and its cash flows for the interim periods indicated. All the adjustments are of a normal recurring nature. The Company presumes that users of this interim financial information have read or have access to the Company's audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for the preceding fiscal year, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnotes and other disclosure which would substantially duplicate the disclosure contained in the Company's most recent annual report to security holders have been omitted. The patient volumes and net operating revenues of the Company's hospitals are subject to seasonal variations caused by a number of factors, including but not necessarily limited to, seasonal cycles of illness, climate and weather conditions, vacation patterns of both hospital patients and admitting physicians and other factors relating to the timing of elective hospital procedures. Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including levels of occupancy, interest rates, acquisitions, disposals, revenue allowance and discount fluctuations, the timing of price changes, unusual or non-recurring items and fluctuations in quarterly tax rates. These same considerations apply to all year-to-year comparisons. 2. During the nine months ended February 28, 1998, Tenet acquired six general hospitals and several related healthcare businesses. All these transactions have been accounted for as purchases. The results of operations of the acquired businesses, which are not material in the aggregate, have been included in the Company's consolidated statements of operations and cash flows from the dates of acquisition. Also during the nine months ended February 28, 1998, the Company sold five general hospitals, two rehabilitation hospitals and one psychiatric hospital. The operations of the sold businesses were also not material. 3. There have been no material changes to the description of i) Professional and General Liability Insurance set forth in Note 8A or ii) Significant Legal Proceedings set forth in Note 8B of Notes to Consolidated Financial Statements of Tenet for its fiscal year ended May 31, 1997. 4. During the three-month and nine-month periods ended February 28, 1998, net cash expenditures charged against the Company's reserves for discontinued operations and other non-recurring charges were approximately $75 million and $307 million, respectively. The reserve balances are included in the Company's balance sheets at May 31, 1997 and February 28, 1998 as reserves related to discontinued operations and other non-recurring charges or as other long-term liabilities. 5. The gain from changes in the value of indexed long-term debt resulted from a decrease in the fair market value of the Company's investment in common stock of Vencor, Inc., into which certain of the Company's notes are exchangeable. 7
TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(CONT.) 6. The Company adopted, during the quarter ended February 28, 1998, Statement of Financial Accounting Standards ("SFAS") No. 128, issued recently by the Financial Accounting Standards Board ("FASB") and required to be adopted for financial statements issued for periods ended after December 15, 1997. This statement establishes new, simplified standards for computing and presenting earnings per share. It replaces the traditional presentation of primary earnings per share and fully-diluted earnings per share with presentations of basic earnings per share and diluted earnings per share, respectively. For the Company, the differences between earnings per share calculated under the former standard and the new one are negligible. All prior periods have been restated for the new standard. 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 before extraordinary item for the three months and nine months ended February 28, 1997 and 1998. Income or loss is expressed in millions and weighted average shares are expressed in thousands: <TABLE> <CAPTION> THREE MONTHS NINE MONTHS ------------------------------------ ------------------------------------ WEIGHTED WEIGHTED INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE 1997 (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ------------------------------------------- ----------- -------------- --------- ----------- -------------- --------- <S> <C> <C> <C> <C> <C> <C> Income (loss) before extraordinary item.... $(66) $133 ----- ---- Basic earnings (loss) per share: Income (loss) available to common shareholders........................... $(66) 304,443 $(0.21) $133 296,493 $0.45 ------- ----- ------- ----- Effective of dilutive securities: Stock options and warrants............... - - - 6,249 ----- ------- ---- ------- Dilutive earnings(loss) per share: Income (loss) available to common shareholders........................... $(66) 304,443 $(0.21) $133 302,742 $0.44 ----- ------- ------- ---- ------- ----- ----- ------- ------- ---- ------- ----- <CAPTION> 1998 ------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Income before extraordinary item........... $148 $402 ---- ---- Basic earnings per share: Income available to common shareholders.. $148 306,607 $0.48 $402 305,449 $1.32 ----- ----- ----- ----- Effective of dilutive securities: Stock options and warrants............... - 6,209 - 5,809 ---- ------- ---- ------- Dilutive earnings per share: Income available to common shareholders.. $148 312,816 $0.47 $402 311,258 $1.29 ---- ------- ----- ---- ------- ----- ---- ------- ----- ---- ------- ----- </TABLE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Income before income taxes was $242 million in the quarter ended February 28, 1998. In the quarter ended February 28, 1997, the Company reported a pre-tax loss of $76 million. For the nine-month periods ended February 28, 1997 and 1998, income before income taxes was $258 million and $664 million, respectively. The quarter and nine month periods ended February 28, 1997 include non-recurring merger-related expenses of $272 million. The following is a summary of operations for the three months and nine months ended February 28, 1997 and 1998: <TABLE> <CAPTION> THREE MONTHS ENDED FEBRUARY 28, --------------------------------- 1997 1998 1997 1998 ------ ------ ------ ------ <S> <C> <C> <C> <C> (DOLLARS IN (% OF NET OPERATING MILLIONS) REVENUES) Net operating revenues: Domestic general hospitals........... $2,064 $2,331 92.3% 90.9% Other domestic operations............ 173 233 7.7% 9.1% ------ ------ ------ ------ Net operating revenues.................... 2,237 2,564 100.0% 100.0% ------ ------ ------ ------ Operating expenses: Salaries and benefits................ (911) (1,040) 40.7 40.6% Supplies............................. (316) (365) 14.1% 14.2% Provision for doubtful accounts...... (128) (163) 5.7% 6.4% Other operating expenses............. (470) (518) 21.0% 20.2% Depreciation......................... (82) (89) 3.7% 3.5% Amortization......................... (27) (32) 1.2% 1.2% ------ ------ ------ ------ Operating income before merger related expenses....................... $ 303 $ 357 13.6% 13.9% ------ ------ ------ ------ ------ ------ ------ ------ <CAPTION> NINE MONTHS ENDED FEBRUARY 28, --------------------------------- 1997 1998 1997 1998 ------ ------ ------ ------ <S> <C> <C> <C> <C> (DOLLARS IN (% OF NET OPERATING MILLIONS) REVENUES) Net operating revenues: Domestic general hospitals........... $5,797 $6,652 91.4% 90.8% Other domestic operations............ 542 672 8.6% 9.2% ------ ------ ------ ------ Net operating revenues.................... 6,339 7,324 100.0% 100.0% ------ ------ ------ ------ Operating expenses: Salaries and benefits................ (2,601) (3,013) 41.0% 41.1% Supplies............................. (872) (1,016) 13.8% 13.9% Provision for doubtful accounts...... (351) (447) 5.5% 6.1% Other operating expenses............. (1,337) (1,516) 21.1% 20.7% Depreciation......................... (256) (257) 4.0% 3.5% Amortization......................... (81) (83) 1.3% 1.1% ------ ------ ------ ------ Operating income before merger- related expenses........................ $ 841 $ 992 13.3% 13.5% ------ ------ ------ ------ ------ ------ ------ ------ </TABLE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Net operating revenues of other domestic operations in the table above consist primarily of revenues from (i) physician practices, (ii) rehabilitation hospitals, long-term care facilities and psychiatric hospitals that are located on or near the same campuses as the Company's general hospitals; (iii) healthcare joint ventures operated by the Company; (iv) subsidiaries of the Company offering managed care and indemnity products; (v) revenues earned by the Company in consideration of the guarantees of certain indebtedness and leases of third parties; and (vi) equity in the earnings of unconsolidated affiliates. The table below sets forth certain selected historical operating statistics for the Company's domestic general hospitals. <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28, FEBRUARY 28, -------------------------------- -------------------------------- INCREASE INCREASE 1997 1998 (DECREASE) 1997 1998 (DECREASE) ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Number of hospitals (at end of period).. 127 125 (2) * 127 125 (2) * Licensed beds (at end of period)........ 27,366 28,433 3.9% 27,366 28,433 3.9% Net inpatient revenues (in millions).... $ 1,383 $ 1,564 13.1% $ 3,847 $ 4,316 12.2% Net outpatient revenues (in millions)... $ 630 $ 724 14.9% $ 1,855 $ 2,197 18.4% Admissions.............................. 212,850 230,955 8.5% 575,918 649,797 12.8% Equivalent admissions................... 301,703 326,322 8.2% 836,057 943,733 12.9% Average length of stay (days)........... 5.3 5.3 - 5.2 5.2 - Patient days............................ 1,119,362 1,230,830 10.0% 2,996,795 3,385,081 13.0% Equivalent patient days................. 1,571,915 1,728,411 10.0% 4,303,669 4,876,520 13.3% Net inpatient revenue per patient day... $ 1,236 $ 1,271 2.8% $ 1,284 $ 1,275 (0.7)% Net inpatient revenue per admission..... $ 6,498 $ 6,772 4.2% $ 6,680 $ 6,642 (0.6)% Utilization of licensed beds............ 46.6% 48.3% 1.7%* 41.6% 44.1% 2.5%* Outpatient visits....................... 2,594,877 2,535,187 (2.3)% 7,281,006 7,837,645 7.6% </TABLE> * The change is the difference between 1997 and 1998 amounts shown. The table below sets forth certain selected operating statistics for the Company's domestic general hospitals on a same-store basis: <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED FEBRUARY 28, FEBRUARY 28, ------------------------------- ----------------------------------- INCREASE INCREASE 1997 1998 (DECREASE) 1997 1998 (DECREASE) --------- --------- ---------- --------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> Average licensed beds................... 24,745 24,797 0.2% 24,585 24,477 (0.4)% Patient days............................ 1,061,487 1,087,559 2.5% 2,872,755 2,945,169 2.5% Net inpatient revenue per patient day... $1,237 $1,277 3.2% $1,279 $1,283 0.3% Admissions.............................. 200,262 205,146 2.4% 550,750 567,022 3.0% Net inpatient revenue per admission..... $6,555 $6,769 3.3% $6,670 $6,662 (0.1)% Outpatient visits....................... 2,471,470 2,293,884 (7.2)% 6,983,144 6,832,682 (2.2)% Average length of stay (days)........... 5.3 5.3 - 5.2 5.2 - </TABLE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) 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 healthcare 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 2.3% decline in the number of outpatient visits during the quarter ended February 28, 1998 compared to the year-ago quarter. This decline was due to fewer home health care visits, primarily due to the effect of new Medicare reimbursement rules. Excluding home health care visits, outpatient visits increased approximately 11% over the year-ago quarter. In response to these recent developments, the Company is consolidating certain home health care agencies and closing others and has begun to focus on increasing the numbers of higher intensity home visits. The Medicare program accounted for approximately 41.0% of the net patient revenues of the Company's domestic general hospitals for the quarter ended February 28, 1997 and 37.8% for the current quarter. The percentages for the nine-month periods ended February 28, 1997 and 1998 were 40.4% and 38.0%, respectively. Changes in Medicare reimbursement mandated by the Balanced Budget Act of 1997 ("the 1997 Act") which became effective October 1, 1997, as well as certain proposed changes to various states' Medicaid programs, have and will continue to reduce payments as the changes are phased in over the next three years. The 1997 Act also contains various provisions that allow providers such as Tenet to contract directly with the federal government for the provision of medical care to Medicare beneficiaries on a fully capitated basis. Under capitation, the Company receives a certain amount for each person enrolled in its plans and assumes the risks and rewards of meeting the healthcare needs of those persons so enrolled. The Company may purchase insurance to cover a portion of the cost of meeting the healthcare needs of those covered. The Company cannot predict at this time what the ultimate effect of these capitated services will be. Pressures to control healthcare costs have resulted in an increase in the percentage of revenues attributable to managed care payors. The percentage of net patient revenues of the Company's domestic general hospitals attributable to managed care increased from approximately 30.4% for the three months ended February 28, 1997 to approximately 33.7% for the current quarter. The percentages for the nine-month periods ended February 28, 1997 and 1998 were 28.9% and 32.9%, respectively. The Company anticipates that its managed care business will continue to increase in the future. The Company generally receives lower payments from managed care payors than it does from traditional indemnity insurers. The Company also is assuming a greater share of risk by entering into capitated arrangements with managed care payors and employers. The Company estimates that approximately 4.8% of its revenues were derived from capitated arrangements in the quarter ended February 28, 1998. To address the effect of reduced payments for services, while continuing to provide quality care to patients, the Company has implemented hospital cost-control programs and overhead reduction plans and continues to form integrated healthcare delivery systems in an effort to reduce inefficiencies, create synergies, obtain additional business and control costs. As a result of these efforts, all of the reduced payments described earlier are not expected to have a material adverse effect on the Company's results of operations. 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Net operating revenues from the Company's other domestic operations were $173 million for the three months ended February 28, 1997, compared to $233 million for the current period. For the nine-month periods ended February 28, 1997 and 1998, net operating revenues from other domestic operations were $542 million and $672 million, respectively. These increases primarily relate to the growth of its physician practices. Salaries and benefits expense as a percentage of net operating revenues was 40.7% in the quarter ended February 28, 1997 and 40.6% in the current quarter. Salaries and benefits expense as a percentage of net operating revenues for the prior and current nine-month periods were 41.0% and 41.1%, respectively. The increases, though slight, relate primarily to the recent acquisitions of several general hospitals. Supplies expense as a percentage of net operating revenues was 14.1% in the quarter ended February 28, 1997 and 14.2% in the current quarter. Supplies expense as a percentage of net operating revenues for the prior and current nine-month periods were 13.8% and 13.9%, respectively. These increases relate primarily to greater patient acuity. The Company expects to continue to focus on reducing supplies expense through incorporating acquired facilities into the Company's existing group-purchasing program and by developing and expanding various 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 the quarter ended February 28, 1997, and 6.4% in the current quarter. The provision for doubtful accounts as a percentage of net operating revenues for the prior and current nine-month periods were 5.5% and 6.1%, respectively. The increases are partially attributable to a shift in revenues from Medicare and Medicaid to managed-care. Also, they relate to recent acquisitions and payment delays by various payors. The Company, through its collection subsidiary, Syndicated Office Systems, has established improved follow-up collection systems by consolidating the collection of accounts receivable in all the Company's facilities. Other operating expenses as a percentage of net operating revenues was 21.0% for the quarter ended February 28, 1997 and 20.2% for the quarter ended February 28, 1998. Other operating expenses as a percentage of net operating revenues for the prior and current nine-month periods were 21.1% and 20.7%, respectively. The improvement in the current quarter is the result of the continued emphasis on cost-control and overhead reduction plans. Depreciation and amortization expense as a percentage of net operating revenues was 4.9% in the quarter ended February 28, 1997, and 4.7% in the current quarter. Depreciation and amortization expense as a percentage of net operating revenues for the prior and current nine-month periods were 5.3% and 4.6%, respectively. The decrease is primarily due to the effect of the May 1997 write-down 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 some of the Company's physician practices, offset somewhat by the effects of facility additions. 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Interest expense, net of capitalized interest, was $106 million in the quarter ended February 28, 1997 and $114 million in the current quarter. Interest expense, net of capitalized interest for the prior and current nine-month periods was $308 million and $344 million, respectively. The increase is primarily due to increased borrowings for acquisitions. The $18 million gain from changes in the value of the Company's indexed long-term debt instruments (its 6% Subordinated Exchangeable Notes) in the current year resulted from a reduction in the carrying value of the exchangeable notes due to a decline in the fair market value of the Company's investment in the common stock of Vencor, Inc. ("Vencor") at the end of the Company's second quarter to a price below the $38.55 per share exchange price. The investment in Vencor stock is treated as available for sale with changes in value recorded in shareholders' equity. At February 28, 1998, the market price of Vencor's common stock was $28.6875 per share. At the end of the fourth quarter of fiscal 1997, the Company had recorded a pre-tax, non-cash charge to earnings amounting to $18 million because and to the extent that the fair market value of its investment in Vencor stock exceeded the carrying value of the exchangeable notes at the end of that accounting period. The gain recorded in the current year reverses that charge. Taxes on income as a percentage of income before income taxes were 38.8% in the current quarter and 39.5% for the nine months ended February 28, 1998. The Company does not expect its tax rates for the quarter and year ending May 31, 1998 to change significantly. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity for the nine months ended February 28, 1998 was derived primarily from borrowings under the Company's unsecured bank credit agreement and the sale of certain assets. Net cash provided by recurring operating activities for the nine months ended February 28, 1997 was $316 million before expenditures of $61 million for discontinued operations and non-recurring charges. Net cash provided by recurring operating activities for the nine months ended February 28, 1998 was $444 million before expenditures of $307 million for discontinued operations and non-recurring charges. Management believes that future cash provided by recurring operating activities, along with the availability of credit under the Company's unsecured revolving credit agreement, should be adequate to meet debt service requirements and to finance planned capital expenditures, acquisitions and other known operating needs, over the short-term (up to 18 months) and the long-term (18 months to three years). Net proceeds from borrowings under the Company's unsecured revolving bank credit agreement were $870 million during the nine months ended February 28, 1998. Cash proceeds from the sales of facilities, and other assets were $162 million. The Company's cash and cash equivalents at February 28, 1998 were $17 million, a decrease of $18 million over May 31, 1997. Working capital at February 28, 1998 was $1.1 billion, compared to $522 million at May 31, 1997. Cash payments for property and equipment were $261 million in the nine months ended February 28, 1997, compared to $371 million in the current period. The Company expects to spend approximately $400 million to $500 million annually on capital expenditures, before any significant acquisitions of 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) facilities and other healthcare operations and before an estimated $338 million in commitments to fund the construction of two new hospitals over the next three years. Such capital expenditures relate primarily to the development of healthcare services networks in selected geographic areas, design and construction of new buildings, expansion and renovation of existing facilities, equipment additions and replacements, introduction of new medical technologies and various other capital improvements. Purchases of new businesses, net of cash acquired, were $677 million in the nine months ended February 28, 1997 and $679 million for the nine months ended February 28, 1998. These acquisitions were financed substantially by borrowings under the Company's credit agreement. The Company's strategy includes the pursuit of growth through acquisitions and partnerships, including the development of integrated healthcare systems in certain strategic geographic areas, hospital acquisitions and partnerships and, to a lesser extent, physician practice acquisitions and partnerships. All or portions of this growth may be financed through available credit under the existing credit facility or, depending on capital market conditions, sale of additional debt or equity securities or other bank borrowings. The Company's unused borrowing capacity under its unsecured revolving credit agreement was $1.1 billion as of February 28, 1998. The Company's unsecured revolving 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. The Company is in compliance with its loan covenants. 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 alternative healthcare delivery services for less acutely ill patients. Increased competition, admission constraints and payor pressure are expected to continue. The continuing challenge facing the Company and the healthcare 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 healthcare delivery and payment systems, the healthcare industry as a whole faces increased uncertainty. The Company is unable to predict whether any other healthcare legislation at the federal and/or state level will be passed in the future, but it continues to monitor all proposed legislation and analyze its potential impact in order to formulate the Company's future business strategies. 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) THE YEAR 2000 ISSUE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. In connection with this problem ("the Year 2000 Issue"), Tenet has initiated a comprehensive assessment of its computer systems and applications, including the embedded systems which control certain medical equipment and other equipment. Most third-party application vendors have been contacted regarding the compliance status of their products. The Company's assessment of its own systems and the third-party applications is expected to be completed by the end of the current fiscal year. The Company's financial and general ledger systems are substantially compliant already. Modifications to payroll and patient accounting systems are underway and are expected to be completed by early 1999. The Company expects that costs to upgrade these systems will not be material, since most of the costs are primarily the contractual obligation of the Company's principal information systems vendor. The Company has not yet completed an estimate of the costs of bringing its other applications, including embedded systems, into compliance. Furthermore, the Company presently has no assurance that the systems of the Federal and State governments, other payors or other companies with which the Company's systems interface or on which they rely, will be upgraded on a timely basis. The Company, therefore, is not able to determine whether the Year 2000 Issue will materially affect future financial results or future financial conditions. Generally accepted accounting principles require that the costs of modifying computer software for the Year 2000 Issue be charged to expense as they are incurred. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "expects," and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements 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 national and in the regions in which the Company operates; industry capacity; demographic changes; existing laws and government regulations and changes in, or the failure to comply with laws and governmental regulations; legislative proposals for healthcare reform; the ability to enter into managed care provider arrangements on acceptable terms; a shift from fee-for-service payment to capitated and other risk-based payment systems; changes in Medicare and Medicaid reimbursement levels; liability and other claims asserted against the Company; competition; the loss of any significant customers; technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, healthcare; changes in business strategy or development plans; the ability to attract and retain qualified personnel, including physicians; the significant indebtedness of the Company; and the availability and terms of capital to fund the expansion of the Company's business, including the acquisition of additional facilities. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. Tenet disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 15
PART II. OTHER INFORMATION Item 1. Legal Proceedings Material Developments in Previously Reported Legal Proceedings: There have been no material developments in the legal proceedings described in the Company's Annual Report on Form 10-K for its fiscal year ended May 31, 1997. Items 2, 3, 4 and 5 are not applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. (27.1) Financial Data Schedule for the nine months ended February 28, 1998 (included only in the EDGAR filing). (27.2) Restated Financial Data Schedule for the nine months ended February 28, 1997 (included only in the EDGAR filing). (b) Reports on Form 8-K (a) None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TENET HEALTHCARE CORPORATION (Registrant) Date: April 13, 1998 /s/ TREVOR FETTER --------------------------------- Trevor Fetter Executive Vice President, Chief Financial Officer (Principal Financial Officer) /s/ RAYMOND L. MATHIASEN --------------------------------- Raymond L. Mathiasen Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) 16