- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 NOVEMBER 30, 1999. 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 1-7293 - -------------------------------------------------------------------------------- TENET HEALTHCARE CORPORATION (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- NEVADA 95-2557091 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3820 STATE STREET SANTA BARBARA, 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 DECEMBER 31, 1999 THERE WERE 311,933,486 SHARES OF $0.075 PAR VALUE COMMON STOCK OUTSTANDING. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- <TABLE> <CAPTION> PAGE ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of May 31, 1999 and November 30, 1999................................................ 2 Condensed Consolidated Statements of Income for the Three Months and Six Months ended November 30, 1998 and 1999.................... 4 Condensed Consolidated Statements of Comprehensive Income for the Six Months ended November 30, 1998 and 1999..................................... 5 Condensed Consolidated Statements of Cash Flows for the Six Months ended November 30, 1998 and 1999..................................... 6 Notes to Condensed Consolidated Financial Statements........................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders .................................... 19 Item 6. Exhibits and Reports on Form 8-K........................................................ 20 Signature................................................................................................. 21 - ------------------ NOTE: ITEM 3 OF PART I AND ITEMS 2, 3 AND 5 OF PART II ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE. </TABLE> 1
CONDENSED CONSOLIDATED BALANCE SHEETS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- <TABLE> <CAPTION> MAY 31, NOVEMBER 30, 1999 1999 ----------------- ----------------- (IN MILLIONS) <S> <C> <C> - ------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------ Current assets: Cash and cash equivalents................................................ $ 29 $ 31 Short-term investments in debt securities................................ 130 123 Accounts receivable, less allowance for doubtful accounts ($287 at May 31 and $293 at November 30).......................................... 2,318 2,468 Inventories of supplies, at cost......................................... 221 218 Deferred income taxes.................................................... 196 126 Assets held for sale, at the lower of carrying value or fair value less estimated costs to sell.............................................. 655 165 Other current assets..................................................... 413 387 ----------------- ----------------- Total current assets............................................ 3,962 3,518 ----------------- ----------------- Investments and other assets.................................................. 569 546 Property and equipment, at cost............................................... 7,703 7,895 Less accumulated depreciation and amortization........................... 1,864 2,052 ----------------- ----------------- Net property and equipment............................................... 5,839 5,843 ----------------- ----------------- Intangible assets, at cost less accumulated amortization ($409 at May 31 and $458 at November 30)................................. 3,401 3,368 ----------------- ----------------- $ 13,771 $ 13,275 ----------------- ----------------- ----------------- ----------------- </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, NOVEMBER 30, 1999 1999 ----------------- ----------------- (IN MILLIONS) <S> <C> <C> - -------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------- Current liabilities: Current portion of long-term debt.................................... $ 45 $ 36 Accounts payable..................................................... 713 605 Employee compensation and benefits................................... 390 327 Accrued interest payable............................................. 163 154 Other current liabilities............................................ 711 803 ----------------- ----------------- Total current liabilities................................... 2,022 1,925 ----------------- ----------------- Long-term debt, net of current portion.................................... 6,391 5,780 Other long-term liabilities and minority interests........................ 1,048 1,054 Deferred income taxes..................................................... 440 427 Shareholders' equity: Common stock, $0.075 par value; authorized 700,000,000 shares; 314,778,323 shares issued at May 31 and 315,588,851 shares issued at November 30............................................ 24 24 Other shareholders' equity........................................... 3,916 4,135 Less common stock in treasury, at cost, 3,754,708 shares ............ (70) (70) ----------------- ----------------- Total shareholders' equity.................................. 3,870 4,089 ----------------- ----------------- $ 13,771 $ 13,275 ----------------- ----------------- ----------------- ----------------- </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1999 <TABLE> <CAPTION> THREE MONTHS SIX MONTHS ---------------------------- --------------------------- 1998 1999 1998 1999 -------------- ------------- ------------- ------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND SHARE AMOUNTS) <S> <C> <C> <C> <C> Net operating revenues........................................ $ 2,563 $ 2,780 $ 5,116 $ 5,653 -------------- ------------- ------------- ------------- Operating expenses: Salaries and benefits.................................... 1,039 1,110 2,057 2,271 Supplies................................................. 351 387 701 794 Provision for doubtful accounts.......................... 184 210 343 433 Other operating expenses................................. 538 604 1,099 1,229 Depreciation............................................. 102 102 198 204 Amortization............................................. 32 30 63 62 -------------- ------------- ------------- ------------- Operating income.............................................. 317 337 655 660 -------------- ------------- ------------- ------------- Interest expense, net of capitalized portion.................. (119) (120) (238) (244) Investment earnings........................................... 6 6 13 11 Minority interests in income of consolidated subsidiaries..... (1) (5) (5) (10) Gains on sales of facilities and long-term investments........ -- 58 -- 68 -------------- ------------- ------------- ------------- Income before income taxes and cumulative effect of accounting change........................................ 203 276 425 485 Taxes on income............................................... (78) (141) (163) (222) -------------- ------------- ------------- ------------- Income before cumulative effect of accounting change.......... 125 135 262 263 Cumulative effect of accounting change, net of taxes.......... -- -- -- (19) -------------- ------------- ------------- ------------- Net income.................................................... $ 125 $ 135 $ 262 $ 244 -------------- ------------- ------------- ------------- -------------- ------------- ------------- ------------- Basic earnings (loss) per share: Income before cumulative effect of accounting change..... $ 0.40 $ 0.43 $ 0.84 $ 0.84 Cumulative effect of accounting change................... -- -- -- $ (0.06) Net income............................................... $ 0.40 $ 0.43 $ 0.84 $ 0.78 Diluted earnings (loss) per share: Income before cumulative effect of accounting change..... $ 0.40 $ 0.43 $ 0.84 $ 0.84 Cumulative effect of accounting change................... -- -- -- $ (0.06) Net income............................................... $ 0.40 $ 0.43 $ 0.84 $ 0.78 Weighted average shares and dilutive securities outstanding (in thousands): Basic.................................................... 309,803 311,512 309,602 311,331 Diluted.................................................. 313,935 313,745 313,799 313,483 </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 4
CONDENSED CONSOLIDATED TENET HEALTHCARE CORPORATION STATEMENTS OF COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1999 <TABLE> <CAPTION> 1998 1999 ------------- -------------- (IN MILLIONS) <S> <C> <C> Net income ............................................................................. $ 262 $ 244 ------------- -------------- Other comprehensive income (loss): Foreign currency translation adjustments.......................................... 12 (6) Unrealized net holding gains (losses) arising during period on securities held as available for sale............................................................. 28 (49) Less reclassification adjustment for realized gains included in net income ........ -- (4) ------------- -------------- Other comprehensive income (loss) before income taxes.............................. 40 (59) Income tax (expense) benefit related to items of other comprehensive income........ (15) 22 ------------- -------------- Other comprehensive income (loss).................................................. 25 (37) ------------- -------------- Comprehensive income.................................................................... $ 287 $ 207 ------------- -------------- ------------- -------------- </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- SIX MONTHS ENDED NOVEMBER 30, 1998 AND 1999 <TABLE> <CAPTION> 1998 1999 ------------- -------------- (IN MILLIONS) <S> <C> <C> Net cash provided by operating activities............................................... $ 297 $ 325 ------------- -------------- Cash flows from investing activities: Proceeds from sales of facilities and other assets................................. 4 643 Purchases of property and equipment................................................ (241) (264) Purchases of businesses, net of cash acquired. .................................... (446) (38) Other items........................................................................ (64) (34) ------------- -------------- Net cash provided by (used in) investing activities............................ (747) 307 ------------- -------------- Cash flows from financing activities: Proceeds from borrowings........................................................... 2,118 802 Repayments of borrowings........................................................... (1,667) (1,430) Other items........................................................................ 8 (2) ------------- -------------- Net cash provided by (used in) financing activities............................ 459 (630) ------------- -------------- Net increase in cash and cash equivalents............................................... 9 2 Cash and cash equivalents at beginning of period........................................ 23 29 ------------- -------------- Cash and cash equivalents at end of period.............................................. $ 32 $ 31 ------------- -------------- ------------- -------------- Supplemental disclosures: Interest paid, net of amounts capitalized.......................................... $ 177 $ 246 Income taxes paid, net of refunds received......................................... (30) 41 </TABLE> SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 6
NOTES TO CONDENSED TENET HEALTHCARE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 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 disclosures that would substantially duplicate the disclosures contained in the Company's most recent annual report to security holders have been omitted. 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. On June 1, 1999, the Company changed its method of accounting for start-up costs to expense such costs as incurred in accordance with Statement of Position 98-5, published by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. The adoption of the Statement resulted in the write-off of previously capitalized start-up costs as of May 31, 1999 in the amount of $19 million, net of tax benefit, which amount is shown in the accompanying consolidated condensed statement of income for the six months ended November 30, 1999 as a cumulative effect of an accounting change. 3. During the six months ended November 30, 1999, the Company sold 16 general hospitals, three skilled nursing facilities and certain other assets for $643 million in cash and $9 million in notes. Also, the Company did not renew an expiring lease for a 49-bed hospital in Tennessee. The net gain on the sales of the above facilities amounted to $64 million. In addition, the Company sold a long-term investment for a realized gain of $4 million. The hospital sales were part of the Company's plan to sell or close certain non-strategic hospitals in order to streamline its organization by concentrating on markets where it already has a strong presence. In December 1999, the Company acquired a 222-bed acute care hospital in Poplar Bluff, Missouri for $46 million in a transaction accounted for as a purchase and sold a 120-bed hospital in Tucson, Arizona. 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TENET HEALTHCARE CORPORATION - ------------------------------------------------------------------------------- 4. There have been no material changes to the description of professional and general liability insurance set forth in Note 9A or significant legal proceedings set forth in Note 9B of Notes to Consolidated Financial Statements of Tenet for its fiscal year ended May 31, 1999, and the Company's Quarterly Report on Form 10-Q for the period ended August 31, 1999. 5. The table below provides a reconciliation between net income and net cash provided by operating activities for the six months ended November 30, 1998 and 1999: <TABLE> <CAPTION> 1998 1999 -------------- ------------- (IN MILLIONS) <S> <C> <C> Net income ......................................................................... $ 262 $ 244 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................. 261 266 Provision for doubtful accounts ............................................... 343 433 Deferred income taxes ......................................................... 41 20 Gains on sales of facilities and long-term investments ...................... -- (68) Other items ................................................................... 12 35 Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of businesses: Accounts receivable ....................................................... (640) (588) Inventories and other current assets ...................................... (37) (27) Income taxes payable ...................................................... 113 161 Accounts payable, accrued expenses and other current liabilities .......... (53) (94) Other long-term liabilities ............................................... 15 (12) Net expenditures for discontinued operations, merger, impairment and other unusual charges ........................................................... (20) (45) -------------- ------------- Net cash provided by operating activities ..................................... $ 297 $ 325 -------------- ------------- -------------- ------------- </TABLE> 8
NOTES TO CONDENSED TENET HEALTHCARE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 6. The following table presents a reconciliation of beginning and ending liability balances in connection with merger, impairment and restructuring charges recorded in fiscal 1997,1998 and 1999 by type of cost for the six-month period ended November 30, 1999 (in millions): <TABLE> <CAPTION> BALANCES AT CASH OTHER BALANCES AT RESERVES RELATED TO: 05/31/99 (1) PAYMENTS ITEM (2) 11/30/99 (1) ----------------------------------------------------- --------------- ------------- ------------- --------------- <S> <C> <C> <C> <C> Estimated costs to sell or close hospitals and other facilities $ 30 $ (5) $ -- $ 25 Severance costs in connection with the implementation of hospital cost control programs, general overhead reduction plans and closure of home health agencies 19 (8) -- 11 Lease cancellation and other exit costs.................. 46 (17) (9) 20 Accruals for unfavorable lease commitments at six medical offices buildings................................... 20 (1) -- 19 1997 merger.............................................. 8 (2) -- 6 Termination of physician contracts....................... 6 -- -- 6 --------------- ------------- ------------- --------------- Total............................................... $ 129 $ (33) $ (9) $ 87 --------------- ------------- ------------- --------------- </TABLE> (1) The above liability balances are included in other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets. (2) The $9 million other item consists of an adjutment to a reserve at a hospital sold during the period and has been included in gains on sales of facilities and long-term investments. Cash payments to be applied against these accruals are expected to approximate $72 million in the remainder of fiscal 2000 and $15 million thereafter. There were no merger, impairment or restructuring charges in the six months ended November 30, 1999. 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- 7. The following is a reconciliation of the numerators and the denominators of the Company's basic and diluted earnings per share computations before the cumulative effect of an accounting change for the three months and six months ended November 30, 1998 and 1999. Income is expressed in millions and weighted average shares are expressed in thousands: <TABLE> <CAPTION> 1998 1999 --------------------------------------- --------------------------------------- WEIGHTED WEIGHTED INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE THREE MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT - --------------------------------- ------------ --------------- --------- ----------- --------------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic earnings per share: Income available to common shareholders................ $ 125 309,803 $ 0.40 $ 135 311,512 $ 0.43 ------------ ----------- Effect of dilutive stock options and warrants (1) ... -- 4,132 -- 2,233 ------------ --------------- ----------- --------------- Diluted earnings per share: Income available to common shareholders................ $ 125 313,935 $ 0.40 $ 135 313,745 $ 0.43 ------------ --------------- --------- -- ----------- --------------- ---------- </TABLE> (1) Outstanding options to purchase 7,797,209 and 21,337,951 shares of common stock were not included in the computation of diluted earnings per share for the three-month periods ended November 30, 1998 and 1999, respectively, because the options' exercise prices were greater than the average market price of the common stock. <TABLE> <CAPTION> 1998 1999 --------------------------------------- --------------------------------------- WEIGHTED WEIGHTED INCOME AVERAGE SHARES PER-SHARE INCOME AVERAGE SHARES PER-SHARE SIX MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT - --------------------------------- ------------ --------------- --------- ----------- --------------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic earnings per share: Income available to common shareholders................ $ 262 309,602 $ 0.84 $ 263 311,331 $ 0.84 --------- ---------- Effect of dilutive stock options and warrants (1) ........... -- 4,197 -- 2,152 ------------ --------------- ----------- --------------- Diluted earnings per share: Income available to common shareholders................ $ 262 313,799 $ 0.84 $ 263 313,483 $ 0.84 ------------ --------------- --------- ----------- --------------- ---------- </TABLE> (1) Outstanding options to purchase 7,800,784 and 22,229,724 shares of common stock were not included in the computation of diluted earnings per share for the six-month periods ended November 30, 1998 and 1999, respectively, because the options' exercise prices were greater than the average market price of the common stock. 10
NOTES TO CONDENSED TENET HEALTHCARE CORPORATION CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 8. The following table sets forth the tax effects allocated to each component of other comprehensive income for the six months ended November 30, 1998 and 1999: <TABLE> <CAPTION> 1998 1999 ------------------------------- ------------------------------ BEFORE- TAX BEFORE- TAX TAX (EXPENSE) NET-OF-TAX TAX (EXPENSE) NET-OF-TAX AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT ---------- ---------- ---------- --------- ---------- --------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> Foreign currency translation adjustment............$ 12 $ (5) $ 7 $ (6) $ 2 $ (4) Unrealized holding gains (losses) on securities.... 28 (10) 18 (49) 19 (30) Reclassification adjustments....................... -- -- -- (4) 1 (3) ---------- ---------- ---------- --------- ---------- --------- Other comprehensive income (loss)..................$ 40 $ (15) $ 25 $ (59) $ 22 $ (37) ---------- -------------------- -- --------- ---------- --------- </TABLE> The following table sets forth the accumulated other comprehensive income balances, by component, as of November 30, 1998 and 1999: <TABLE> <CAPTION> 1998 1999 -------------------------------------- ------------------------------------------ ACCUMULATED FOREIGN UNREALIZED ACCUMULATED FOREIGN UNREALIZED OTHER CURRENCY GAINS OTHER CURRENCY GAINS ON COMPREHENSIVE ITEMS (LOSSES) ON COMPREHENSIVE ITEMS SECURITIES INCOME SECURITIES (1) INCOME ---------------------------------------------------------------------------------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> Beginning balance................... $ -- $ 50 $ 50 $ -- $ 77 $ 77 Current-period change............... 7 18 25 (4) (33) (37) ---------------------------------------------------------------------------------- Ending balance...................... $ 7 $ 68 $ 75 $ (4) $ 44 $ 40 ---------------------------------------------------------------------------------- </TABLE> (1) The 1999 unrealized losses on securities includes a $4 million reclassification adjustment for realized gains included in net income. 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Income before income taxes and cumulative effect of accounting change was $203 million in the quarter ended November 30, 1998 and $276 million in the quarter ended November 30, 1999. For the six-month periods ended November 30, 1998 and 1999, income before income taxes and cumulative effect of accounting change was $425 million and $485 million, respectively. The 1999 quarter and six-month period include pretax gains on sales of facilities and long-term investments of $58 million and $68 million, respectively. Results of operations for the quarter and six months ended November 30, 1999 include the operations of eight general hospitals acquired in November 1998, one in December 1998 and two in March 1999 and exclude, from the dates of sale or closure, the operations of 18 general hospitals and certain other facilities sold or closed since November 30, 1998. The following are summaries of consolidated operations for the three months and six months ended November 30, 1998 and 1999: <TABLE> <CAPTION> THREE MONTHS ENDED NOVEMBER 30, ---------------------------------------------------------- 1998 1999 1998 1999 ---------------------------------------------------------- (IN MILLIONS) (% OF NET OPERATING REVENUES) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals............................... $ 2,340 $ 2,580 91.3% 92.8% Other operations ........................................ 223 200 8.7% 7.2% ---------------------------------------------------------- Net operating revenues........................................ 2,563 2,780 100.0% 100.0% ---------------------------------------------------------- Operating expenses: Salaries and benefits.................................... (1,039) (1,110) 40.5% 39.9% Supplies................................................. (351) (387) 13.7% 13.9% Provision for doubtful accounts.......................... (184) (210) 7.2% 7.6% Other operating expenses................................. (538) (604) 21.0% 21.7% Depreciation............................................. (102) (102) 4.0% 3.7% Amortization............................................. (32) (30) 1.2% 1.1% ---------------------------------------------------------- Operating income.............................................. $ 317 $ 337 12.4% 12.1% ---------------------------------------------------------- ---------------------------------------------------------- </TABLE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF TENET HEALTHCARE CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- <TABLE> <CAPTION> SIX MONTHS ENDED NOVEMBER 30, ---------------------------------------------------------- 1998 1999 1998 1999 ---------------------------------------------------------- (IN MILLIONS) (% OF NET OPERATING REVENUES) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals............................... $ 4,653 $ 5,247 91.0% 92.8% Other operations ........................................ 463 406 9.0% 7.2% ---------------------------------------------------------- Net operating revenues........................................ 5,116 5,653 100.0% 100.0% ---------------------------------------------------------- Operating expenses: Salaries and benefits.................................... (2,057) (2,271) 40.2% 40.2% Supplies................................................. (701) (794) 13.7% 14.0% Provision for doubtful accounts.......................... (343) (433) 6.7% 7.7% Other operating expenses................................. (1,099) (1,229) 21.5% 21.7% Depreciation............................................. (198) (204) 3.9% 3.6% Amortization............................................. (63) (62) 1.2% 1.1% ---------------------------------------------------------- Operating income.............................................. $ 655 $ 660 12.8% 11.7% ---------------------------------------------------------- ---------------------------------------------------------- </TABLE> Net operating revenues of other operations in the tables above consist primarily of revenues from: (i) physician practices, (ii) rehabilitation hospitals, long-term care facilities, psychiatric and specialty hospitals that are located on or near the same campuses as the Company's general hospitals; (iii) the Company's hospital in Barcelona, Spain; (iv) health care joint ventures operated by the Company; (v) subsidiaries of the Company offering managed care and indemnity products; 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 NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30, ----------------------------------------- ---------------------------------------- INCREASE INCREASE 1998 1999 (DECREASE) 1998 1999 (DECREASE) ------------ ------------ -------------- ------------ ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Number of hospitals (at end of period) 128 113 (15)* 128 113 (15)* Licensed beds (at end of period)..... 30,410 27,625 (9.2)% 30,410 27,625 (9.2)% Net inpatient revenues (in millions). $ 1,538 $ 1,700 10.5% $ 3,012 $ 3,403 13.0% Net outpatient revenues (in millions) $ 755 $ 823 9.0% $ 1,541 $ 1,725 11.9% Admissions........................... 221,499 227,647 2.8% 440,666 467,025 6.0% Equivalent admissions................ 322,035 329,667 2.4% 644,834 683,378 6.0% Average length of stay (days)........ 5.1 5.2 0.1* 5.1 5.2 0.1* Patient days......................... 1,136,595 1,184,765 4.2% 2,249,910 2,408,203 7.0% Equivalent patient days.............. 1,638,011 1,695,214 3.5% 3,262,052 3,482,930 6.8% Net inpatient revenue per patient day $ 1,353 $ 1,435 6.1% $ 1,339 $ 1,413 5.5% Net inpatient revenue per admission.. $ 6,944 $ 7,468 7.5% $ 6,835 $ 7,287 6.6% Utilization of licensed beds......... 43.8% 44.7% 0.9%* 43.5% 43.9% 0.4%* Outpatient visits.................... 2,326,712 2,289,819 (1.6)% 4,747,340 4,758,646 0.2% </TABLE> * The change is the difference between 1998 and 1999 amounts shown. 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- 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 NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30, ----------------------------------------- ---------------------------------------- INCREASE INCREASE 1998 1999 (DECREASE) 1998 1999 (DECREASE) ------------ ------------ -------------- ------------ ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Average licensed beds................ 22,895 22,715 (0.8)% 24,456 24,279 (0.7)% Patient days......................... 1,024,663 1,045,562 2.0% 2,106,681 2,130,628 1.1% Net inpatient revenue per patient day $ 1,375 $ 1,429 3.9% $ 1,352 $ 1,409 4.2% Admissions........................... 198,756 201,100 1.2% 411,847 415,374 0.9% Net inpatient revenue per admission.. $ 7,089 $ 7,431 4.8% $ 6,918 $ 7,229 4.5% Outpatient visits.................... 2,043,167 1,965,127 (3.8)% 4,401,646 4,163,381 (5.4)% Average length of stay (days)........ 5.2 5.2 -- 5.1 5.1 -- </TABLE> The table below sets forth the sources of net patient revenues for the Company's domestic general hospitals for the three- and six-month periods ended November 30, 1998 and 1999, expressed as percentages of net patient revenues from all sources: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED NOVEMBER 30, NOVEMBER 30, ------------------------ ----------------------- 1998 1999 1998 1999 ----------- ----------- ----------- ---------- <S> <C> <C> <C> <C> Medicare ..................................... 33.8% 31.6% 34.5% 32.1% Medicaid ..................................... 9.8% 8.3% 9.4% 8.1% Managed care ................................. 37.0% 41.9% 36.4% 40.9% Indemnity and other .......................... 19.4% 18.2% 19.7% 18.9% </TABLE> Changes in Medicare payments mandated by the Balanced Budget Act of 1997 (the "BBA"), which became effective October 1, 1997, as well as certain changes to various states' Medicaid programs, have significantly reduced revenues and earnings during the periods presented herein and will continue to reduce revenues and earnings as these changes are phased in over the next year and a half. The most significant changes were phased in by October 1, 1998. Recent legislation will mitigate some of these changes, but not significantly. Pressures to control health care costs and a shift from traditional Medicare to Medicare managed care plans after the BBA was enacted have resulted in an increase in the number of patients whose health care coverage is provided under managed care plans. The Company generally receives lower payments per patient from managed care payors than it does from traditional indemnity insurers. However, one of the most significant trends in the quarter ended November 30, 1999 was the improvement in net inpatient revenue per admission. On a total store basis, this statistic increased 7.5% and, on a same-store basis, it increased by 4.8%, the largest periodic increases in recent years. While increases in any quarter will vary, there now appears to be an upward trend that the Company expects will continue. The pricing environment for managed care and other non-government payors has improved and the Company expects continuing 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF TENET HEALTHCARE CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- benefits as it renegotiates and renews contracts with improved terms and as it continues to terminate capitated arrangements with managed care payors and employers. In most of the large markets served by the Company, capitation arrangements generally have been disappointing to both physicians and hospitals. To address all the changes impacting the health care industry, while continuing to provide quality care to patients, the Company has implemented strategies to reduce inefficiencies, create synergies, obtain additional business and control costs. In the past 12 months, such strategies have included hospital cost-control programs and overhead reduction plans and the enhancement of integrated health care delivery systems. In certain markets, for example, the Company has outsourced services such as housekeeping, laundry, dietary and plant maintenance. The Company has achieved significant cost savings and is now applying this strategy to its other hospitals, the benefits of which are expected to occur in the second half of this fiscal year. Further consolidations and implementation of additional cost-control programs and other operating efficiencies may be undertaken in the future. Net operating revenues from the Company's other operations were $223 million for the quarter ended November 30, 1998, compared to $200 million for the current quarter. The decrease is primarily the result of disposals of certain physician practices. The Company has employed or entered into management agreements with physicians in most of its markets. These agreements generally have not been profitable for the Company. The Company is in the process of reevaluating its physician contract strategy and is developing plans to either terminate or allow a significant number of its existing contracts to expire over the next two or three years. The Company expects to incur significant charges beginning in the third quarter of fiscal 2000 as these plans are executed. Such charges might require significant cash outlays as contract settlements with physicians and physician groups are executed. The future benefits of such a strategy could be significant, but would not likely occur until fiscal 2001 and beyond. Salaries and benefits expense as a percentage of net operating revenues was 40.5% in the quarter ended November 30, 1998 and 39.9% in the current quarter. This decrease is primarily the result of continuing cost control measures and the outsourcing of certain hospital services. Supplies expense as a percentage of net operating revenues was 13.7% in the quarter ended November 30, 1998 and 13.9% in the current quarter. The increase primarily was due to greater patient acuity, higher supplies expenses at the recently acquired hospitals, and higher prices for new products. The Company continues to focus on reducing supplies expense by developing and expanding programs designed to improve the purchasing and utilization of supplies. The provision for doubtful accounts as a percentage of net operating revenues was 7.6% in the current quarter compared to 7.2% for the quarter ended November 30, 1998. It was 7.8% in the quarter ended August 31, 1999. Management believes the rise in bad debts is generally attributable to a number of factors, including (a) the continuing shift of business from traditional Medicare to managed care, (b) a rise in the volume of care provided to uninsured patients in certain of the Company's hospitals, (c) delays in 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- payment and denial of claims by managed care payors, and (d) price increases. Although management is unable to quantify the effect of each factor, management believes that, to the extent that the Company continues to experience a fundamental shift in its payor mix, this expense is likely to remain at higher levels than in past years. The Company has taken a series of actions to mitigate these recent increases in bad debt expense, including the creation of a corporate-level department combining all patient billing and account collection activities in order to improve collection of receivables, accelerate payments from managed care payors, standardize and improve billing systems and develop best practices in the patient admission and registration process. The Company is also strengthening its business office operations, including admitting, medical records and coding, and the recruitment, training and compensation of business office staff. In certain markets, the Company has set up dedicated managed care collection units to focus on problem accounts and payors and the highly complex claim payment terms in managed care contracts. In addition, the Company has resorted to arbitration and litigation in its efforts to settle long-outstanding past due accounts with certain managed care companies. Other operating expenses as a percentage of net operating revenues were 21.0% for the quarter ended November 30, 1998 and 21.7% for the quarter ended November 30, 1999. The increase is due to outsourcing of certain hospital services, which services were previously performed by employees and were reported as salaries and benefits, and higher costs at the recently acquired hospitals. Taxes on income as a percentage of income before income taxes were 38.4% in the current quarter, excluding the effect of gains on sales of facilities and investments. Income taxes related to the $58 million gain on sales of facilities and investments in the current quarter were $57 million due to the effect of nondeductible goodwill for tax purposes included in the book basis of the assets sold. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity for the six months ended November 30, 1999 was derived primarily from the proceeds of borrowings under its unsecured revolving bank credit agreement (the "Credit Agreement"), sales of assets, and net cash provided by operating activities. Net cash provided by operating activities for the six months ended November 30, 1999 was $370 million before net expenditures of $45 million for discontinued operations, merger, impairment and other unusual charges. Net cash provided by operating activities for the six months ended November 30, 1998 was $317 million before $20 million in expenditures for such charges. Management believes that future cash provided by recurring operating activities, the availability of credit under the Credit Agreement, the sale of assets and, depending on capital market conditions and to the extent permitted by the restrictive covenants of the Credit Agreement and the indentures governing the Company's senior and senior subordinated notes, other borrowings or the sale of equity securities should be adequate to meet known debt service requirements and to finance planned capital expenditures, acquisitions and other presently known operating needs over the next three years. The Company expects to refinance the Credit Agreement on or before its January 31, 2002 maturity date. 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF TENET HEALTHCARE CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- During the six months ended November 30, 1999 the Company borrowed $802 million under its long-term credit agreement and repaid $1.4 billion. Payments of other long-term debt amounted to $17 million. Cash payments for property and equipment were $264 million in the six months ended November 30, 1999 compared to $241 million in the corresponding prior year six-month period. The Company expects to spend approximately $400 - $500 million annually on capital expenditures, before any significant acquisitions of facilities and other health care operations and before an estimated $151 million in remaining commitments to fund the construction of two new hospitals over the next two years. Such capital expenditures primarily relate to the development of integrated health care systems in selected geographic areas, design and construction of new buildings, expansion and renovation of existing facilities, equipment and information systems additions and replacements, introduction of new medical technologies and various other capital improvements. The Company's strategy continues to include the prudent development of integrated health care delivery systems, including the possible acquisition of general hospitals and related ancillary health care businesses or joining with others to develop integrated health care delivery networks. In addition, as previously discussed herein, the Company is reevaluating its employment and management relationships with physicians. All or portions of these activities can be financed by either net cash provided by operating activities, the availability of credit under the Credit Agreement, the sale of assets and, depending on capital market conditions and to the extent permitted by restrictive debt covenants, other borrowings or the sale of equity securities. The Company's unused borrowing capacity under the Credit Agreement was $1.2 billion as of December 31, 1999. The Credit Agreement and the indentures governing the Company's senior and senior subordinated notes have, among other requirements, covenants with which the Company must comply. These covenants include, among other requirements, limitations on other borrowings, liens, investments, the sale of all or substantially all assets and prepayment of subordinated debt, a prohibition against the Company declaring or paying a dividend or purchasing its common stock, unless its senior long-term unsecured debt securities are rated BBB- or higher by Standard and Poors' Rating Services and Baa3 or higher by Moody's Investors Service, Inc., and covenants regarding maintenance of specified levels of net worth, debt ratios and fixed charge coverages. Current debt ratings on the Company's senior debt securities are BB+ by Standard and Poors and Ba1 by Moody's. The Company is in compliance with its loan covenants. THE YEAR 2000 ISSUE The Company has not experienced any significant adverse consequences as a result of the Year 2000 Issue. Its patient care equipment, other equipment and information technology systems performed satisfactorily as the calendar changed from December 31, 1999 to January 1, 2000. The Company estimates that its total cost for addressing all Year 2000 issues will be approximately $90 million, substantially all of which has been incurred as of December 31, 1999 and has been accounted for as capital expenditures. 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- 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 health care delivery services for less acutely ill patients. Increased competition, admission constraints and payor pressure, as well as the shift in patient mix to managed care, are expected to continue. The ongoing challenge facing the Company and the health care industry as a whole is to continue to provide quality patient care in an environment of rising costs, strong competition for patients and continued pressure on payment rates by government and other payors. Because of national, state and private industry efforts to reform health care delivery and payment systems, the health care industry as a whole faces increased uncertainty. The Company is unable to predict whether any other health care legislation at the federal and/or state level will be passed in the future and what action it may take in response to such legislation, but it continues to monitor all proposed legislation and analyze its potential impact in order to formulate its future business strategies. FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words believes, anticipates, expects, will, may, might, should, estimates, appears, and words of similar import, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current expectations and involve known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which the Company operates; industry capacity; demographic changes; existing laws and government regulations and changes in, or the failure to comply with, laws and governmental regulations; legislative proposals for health care reform; the ability to enter into managed care provider arrangements on acceptable terms; a shift from fee-for-service payment to capitated and other risk-based payment systems; changes in Medicare and Medicaid reimbursement levels; liability and other claims asserted against the Company; competition; the loss of any significant customers; technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, health care; changes in business strategy or development plans; the ability to attract and retain qualified personnel, including physicians; the significant indebtedness of the Company; 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. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 18
TENET HEALTHCARE CORPORATION OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS Material Developments in Previously Reported Legal Proceedings: There have been no material developments in the legal proceedings previously described in the Company's Annual Report on Form 10-K for its fiscal year ended May 31, 1999, and the Company's Quarterly Report on Form 10-Q for the period ended August 31, 1999. ITEMS 2, 3 AND 5 ARE NOT APPLICABLE. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on October 6, 1999. The shareholders elected all of the Company's nominees for director. The shareholders approved three proposals: a proposal to amend the Employee Stock Purchase Plan; a non-binding shareholder proposal regarding declassification of the Board of Directors and a non-binding shareholder proposal to terminate the Company's shareholders rights plan. The shareholders also ratified the selection of KPMG LLP as the Company's independent auditors for the fiscal year ended May 31, 2000. The votes were as follows: <TABLE> <CAPTION> 1. Election of Directors FOR WITHHELD --- -------- <S> <C> <C> <C> Bernice B. Bratter 260,085,328 25,093,605 Michael H. Focht Sr. 260,047,274 25,131,659 Lester B. Korn 260,343,048 24,835,885 Floyd D. Loop, M.D. 260,076,319 25,102,614 </TABLE> <TABLE> <CAPTION> 2. Proposal to amend the Employee Stock Purchase Plan: <S> <C> <C> For: 275,628,138 Against: 8,842,342 Abstaining: 708,453 </TABLE> <TABLE> <CAPTION> 3. Shareholder proposal regarding declassification of the Company's Board of Directors: <S> <C> <C> For: 163,346,307 Against: 99,455,258 Abstaining: 1,031,322 </TABLE> 19
OTHER INFORMATION TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- <TABLE> <CAPTION> 4. Shareholder proposal to terminate the Company's Shareholders Rights Plan: <S> <C> <C> For: 200,284,495 Against: 62,332,407 Abstaining: 1,215,985 </TABLE> <TABLE> <CAPTION> 5. Ratification of selection of KPMG LLP: <S> <C> <C> For: 284,255,560 Against: 376,790 Abstaining: 546,583 </TABLE> ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. (10)jj $2,800,000,000 Credit Agreement, dated as of January 30, 1997, as amended by Amendment No. 1, dated as of July 25, 1997, Amendment No. 2, dated as of March 16, 1999 and Amendment No. 3, dated as of October 1, 1999, among the Company, as Borrower, the Lenders, Managing Agents and Co-Agents party thereto, the Swingline Bank party thereto, the Bank of New York and the Bank of Nova Scotia, as Documentation Agents, Bank of America National Trust and Savings Association, as Syndication Agent, and Morgan Guaranty Trust Company of New York, as Administrative Agent. (27.1) Financial Data Schedule for the six months ended November 30, 1999 (included only in the EDGAR filing). (b) Reports on Form 8-K None 20
TENET HEALTHCARE CORPORATION OTHER INFORMATION - -------------------------------------------------------------------------------- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TENET HEALTHCARE CORPORATION (Registrant) Date: January 13, 2000 /s/ TREVOR FETTER --------------------------------------------------- Trevor Fetter Office of the President, Chief Corporate Officer and Chief Financial Officer (Principal Financial Officer) /s/ RAYMOND L. MATHIASEN --------------------------------------------------- Raymond L. Mathiasen Executive Vice President, Chief Accounting Officer (Principal Accounting Officer) 21