================================================================================ 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 29, 2000 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 MARCH 31, 2000 THERE WERE 312,758,739 SHARES OF $0.075 PAR VALUE COMMON STOCK OUTSTANDING. ================================================================================
TENET HEALTHCARE CORPORATION INDEX - ------------------------------------------------------------------------------- <TABLE> <CAPTION> PAGE ---- <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of May 31, 1999 and February 29, 2000.............................. 2 Condensed Consolidated Statements of Income for the Three months and Nine months ended February 28, 1999 and February 29, 2000..................................................... 4 Condensed Consolidated Statements of Comprehensive Income for the Nine months ended February 28, 1999 and February 29, 2000..... 5 Condensed Consolidated Statements of Cash Flows for the Nine months ended February 28, 1999 and February 29, 2000..... 6 Notes to Condensed Consolidated Financial Statements....................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................................... 22 Item 6. Exhibits and Reports on Form 8-K........................................... 22 Signature............................................................................... 23 </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
CONDENSED CONSOLIDATED BALANCE SHEETS TENET HEALTHCARE CORPORATION - ------------------------------------------------------------------------------- <TABLE> <CAPTION> MAY 31, FEBRUARY 29, ASSETS 1999 2000 ------------------------ (in millions) <S> <C> <C> Current assets: Cash and cash equivalents.............................. $ 29 $ 38 Short-term investments in debt securities.............. 130 111 Accounts receivable, less allowance for doubtful accounts ($287 at May 31 and $361 at February 29).. 2,318 2,569 Inventories of supplies................................ 221 218 Deferred income taxes.................................. 196 152 Assets held for sale, at the lower of carrying value or fair value less estimated costs to sell......... 655 211 Other current assets................................... 413 484 ------------------------ Total current assets........................... 3,962 3,783 ------------------------ Investments and other assets......................................... 569 451 Property and equipment, at cost...................................... 7,703 7,881 Less accumulated depreciation and amortization......... 1,864 2,088 ------------------------ Net property and equipment............................. 5,839 5,793 ------------------------ Intangible assets, at cost less accumulated amortization ($409 at May 31 and $470 at February 29)............... 3,401 3,365 ------------------------ $13,771 $13,392 ======================== </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 29, LIABILITIES AND SHAREHOLDERS' EQUITY 1999 2000 ------------------------ (in millions) <S> <C> <C> Current liabilities: Accounts payable................................................ $713 $608 Employee compensation and benefits.............................. 390 383 Accrued interest payable........................................ 163 74 Current portion of long-term debt............................... 45 11 Other current liabilities....................................... 711 724 ------------------------ Total current liabilities.............................. 2,022 1,800 ------------------------ Long-term debt, net of current portion............................... 6,391 5,997 Other long-term liabilities and minority interests................... 1,048 1,049 Deferred income taxes................................................ 440 443 Shareholders' equity: Common stock, $0.075 par value; authorized 700,000,000 shares; 314,778,323 shares issued at May 31 and 316,443,647 shares 24 24 issued at February 29....................................... Other shareholders' equity...................................... 3,916 4,149 Less common stock in treasury, at cost, 3,754,708 shares ....... (70) (70) ------------------------ Total shareholders' equity............................. 3,870 4,103 ------------------------ $13,771 $13,392 ------------------------ </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 AND NINE MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 29, 2000 <TABLE> <CAPTION> THREE MONTHS NINE MONTHS 1999 2000 1999 2000 --------------------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND SHARE AMOUNTS) <S> <C> <C> <C> <C> Net operating revenues..................................... $ 2,822 $ 2,850 $ 7,938 $ 8,503 --------------------------------------------------------- Operating expenses: Salaries and benefits................................. 1,160 1,121 3,217 3,392 Supplies.............................................. 403 401 1,104 1,195 Provision for doubtful accounts....................... 190 214 533 647 Other operating expenses.............................. 611 614 1,710 1,843 Depreciation.......................................... 109 103 307 307 Amortization.......................................... 33 30 96 92 Impairment and other unusual charges .............. -- 232 -- 232 --------------------------------------------------------- Operating income........................................... 316 135 971 795 --------------------------------------------------------- Interest expense, net of capitalized portion............... (122) (117) (360) (361) Investment earnings........................................ 8 5 21 16 Minority interests in income of consolidated subsidiaries.. -- (6) (5) (16) Gains on sales of facilities and long-term investments..... -- 51 -- 119 --------------------------------------------------------- Income before income taxes and cumulative effect of accounting change..................................... 202 68 627 553 Taxes on income............................................ (78) (30) (241) (252) --------------------------------------------------------- Income before cumulative effect of accounting change....... 124 38 386 301 Cumulative effect of accounting change, net of taxes....... -- -- -- (19) --------------------------------------------------------- Net income................................................. $124 $38 $386 $282 --------------------------------------------------------- Basic earnings (loss) per share: Income before cumulative effect of accounting change.. $ 0.40 $ 0.12 $ 1.25 $ 0.96 Cumulative effect of accounting change................ -- -- -- $ (0.06) Net income............................................ $ 0.40 $ 0.12 $ 1.25 $ 0.90 Diluted earnings (loss) per share: Income before cumulative effect of accounting change.. $ 0.40 $ 0.12 $ 1.23 $ 0.96 Cumulative effect of accounting change................ -- -- -- $ (0.06) Net income............................................ $ 0.40 $ 0.12 $ 1.23 $ 0.90 Weighted average shares and dilutive securities outstanding (in thousands): Basic ................................................ 310,272 312,279 309,823 311,646 Diluted............................................... 312,945 315,869 313,512 314,277 </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 - ------------------------------------------------------------------------------- NINE MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 29, 2000 <TABLE> <CAPTION> 1999 2000 ------------------------ (IN MILLIONS) <S> <C> <C> Net income .......................................................... $ 386 $ 282 ------------------------ Other comprehensive income (loss): Foreign currency translation adjustments........................ 2 (3) Unrealized net holding losses arising during period on securities held as available for sale....................... (3) (62) Less reclassification adjustment for realized gains included in net income ..................................................... -- (60) ------------------------ Other comprehensive loss before income taxes.................... (1) (125) Income tax benefit related to items of other comprehensive income -- 47 ------------------------ Other comprehensive loss........................................ (1) (78) ------------------------ Comprehensive income................................................. $ 385 $ 204 ======================== </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 - ------------------------------------------------------------------------------- NINE MONTHS ENDED FEBRUARY 28, 1999 AND FEBRUARY 29, 2000 <TABLE> <CAPTION> 1999 2000 ------------------------ (IN MILLIONS) <S> <C> <C> Net cash provided by operating activities............................. $ 315 $ 322 ------------------------ Cash flows from investing activities.................................. Proceeds from sales of facilities and other assets.............. 19 654 Purchases of property and equipment............................. (401) (396) Purchases of businesses, net of cash acquired................... (470) (36) Other Items..................................................... (101) (94) ------------------------ Net cash provided by (used in) investing activities....... (953) 128 ------------------------ Cash flows from financing activities: Proceeds from borrowings........................................ 1,534 1,258 Repayments of borrowings........................................ (872) (1,712) Other Items..................................................... 14 13 ------------------------ Net cash provided by (used in) financing activities....... 676 (441) ------------------------ Net increase in cash and cash equivalents............................. 38 9 Cash and cash equivalents at beginning of period...................... 23 29 ------------------------ Cash and cash equivalents at end of period............................ $ 61 $ 38 ======================== Supplemental disclosures: Interest paid, net of amounts capitalized....................... $ 378 $ 437 Interest taxes paid, net of refunds received, related to: Gains on sales of facilities and long-term investments.... -- 101 All other taxable income.................................. (30) 75 Receivables from sales of facilities and long-term investments........ -- 82 </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 - ------------------------------------------------------------------------------- 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 nine months ended February 29, 2000 as a cumulative effect of accounting change. 3. During the nine months ended February 29, 2000, the Company sold 17 general hospitals, three skilled nursing facilities and certain other assets for $654 million in cash and $16 million in notes. Also, the Company did not renew an expiring lease for a 49-bed hospital in Tennessee. The net pre-tax gain on the sales of the above facilities amounted to $63 million. In addition, the Company sold certain long-term investments for realized gains of $56 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. 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TENET HEALTHCARE CORPORATION - ------------------------------------------------------------------------------- 4. During the quarter ended February 29, 2000, the Company recorded impairment and other unusual charges of $232 million. Of the total charge, $177 million relates to the Company's previously announced plans to terminate or allow the expiration of certain employment and management contracts with approximately 440 physicians over the next 18 months and $55 million relates to the Company's decision to close or sell two general hospitals and other property and equipment. The charge consists of $148 million in impairment charges to value property and equipment and other assets at the lower of carrying value or estimated fair values, $66 million for lease cancellation and other exit costs, $5 million for the estimated costs to close or sell the general hospitals, $9 million in severance costs for the termination of approximately 504 employees at the hospital to be closed and at the above physician practices and $4 million to buy out physician employment contracts. The $148 million impairment charge includes $44 million for the write-down of property and equipment and $104 million for the write-down of goodwill and other assets. Over the past several years, the Company has employed, or entered into full-risk management agreements with physicians in most of its markets. A large percentage of these physician practices were acquired as part of large hospital acquisitions or through the formation of integrated health care delivery systems. These physician practices, however, have not been profitable. Accordingly, during the latter part of fiscal 1999, the Company undertook the process of evaluating its physician strategy in each of its markets and began to develop plans to either terminate or allow a significant number of its existing contracts to expire. During the quarter ended February 29, 2000, Company management, with the authority to do so, authorized the termination of the contractual relationships with approximately 50% of its contracted physicians. The physicians, employees and property owners/lessors affected by this decision have been duly notified. The Company expects to incur additional charges in the future as the balance of its physician contracts are evaluated for possible termination. The net operating revenues and operating losses from these activities have not been material. 8
TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- The following table presents a reconciliation of beginning and ending liability balances in connection with the merger, impairment and restructuring charges recorded in fiscal 1997,1998 and 1999, as well as the charges recorded during the current quarter, by type of cost for the nine-month period ended February 29, 2000 (in millions): <TABLE> <CAPTION> BALANCES AT CASH OTHER BALANCES AT RESERVES RELATED TO: 05/31/99(1) CHARGES PAYMENTS ITEMS(2) 2/29/00(1) - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Estimated costs to sell or close hospitals and other facilities......... $ 30 $ 5 $ (13) $ -- $22 Impairment losses to value property, equipment, goodwill and other assets, at estimated fair values.............. -- 148 -- (148) -- Severance costs in connection with the implementation of hospital cost control programs, general overhead reduction plans, closure of home health agencies and, in fiscal 2000, closure of hospitals and termination of physician contracts................ 19 9 (11) -- 17 Lease cancellation and other exit costs......... 46 66 (28) (9) 75 Accruals for unfavorable lease commitments at six medical offices buildings......... 20 -- (4) -- 16 1997 merger..................................... 8 -- (4) -- 4 Termination of physician contracts.............. 6 4 (6) -- 4 -------------------------------------------------------- Total...................................... $ 129 $ 232 $ (66) $ (157) $ 138 ======================================================== </TABLE> (1) The above liability balances are included in other current liabilities and other long-term liabilities in the accompanying consolidated balance sheets. (2) Other items primarily include write-offs of long-lived assets, including property and equipment, goodwill and other assets. Cash payments to be applied against these accruals are expected to approximate $66 million in the remainder of fiscal 2000 and $72 million thereafter. 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TENET HEALTHCARE CORPORATION - ------------------------------------------------------------------------------- 5. The table below provides a reconciliation between net income and net cash provided by operating activities for the nine months ended February 28, 1999 and February 29, 2000: <TABLE> <CAPTION> 1999 2000 --------------------- (IN MILLIONS) <S> <C> <C> Net income ...................................................................... $386 $282 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .............................................. 403 399 Provision for doubtful accounts ............................................ 533 647 Deferred income taxes ...................................................... 95 (27) Gains on sales of facilities and long-term investments ..................... -- (119) Impairment and other unusual charges ....................................... -- 232 Cumulative effect of accounting change, net of taxes..................... -- 19 Other items ................................................................ 15 27 Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases and sales of businesses: Accounts receivable .................................................... (1,120) (965) Inventories and other current assets ................................... (94) (49) Income taxes payable ................................................... 145 99 Accounts payable, accrued expenses and other current liabilities ....... 17 (132) Other long-term liabilities ............................................ (28) (9) Net expenditures for discontinued operations, merger, impairment and other unusual charges ........................................................ (37) (82) ===================== Net cash provided by operating activities .................................. $ 315 $ 322 ===================== </TABLE> 10
TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 6. 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 nine months ended February 28, 1999 and February 29, 2000. Income is expressed in millions and weighted average shares are expressed in thousands: <TABLE> <CAPTION> 1999 2000 WEIGHTED WEIGHTED AVERAGE AVERAGE INCOME SHARES PER-SHARE INCOME 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............... $ 124 310,272 $ 0.40 $ 38 312,279 $ 0.12 ------- --------- Effect of dilutive stock options and warrants(1).... -- 2,673 -- 3,590 ------------------------ ----------------------- Diluted earnings per share: Income available to common shareholders............... $ 124 312,945 $ 0.40 $ 38 315,869 $ 0.12 ------------------------------------------------------------------------------ </TABLE> (1) Outstanding options to purchase 18,224,951 and 16,454,797 shares of common stock were not included in the computation of diluted earnings per share for the three-month periods ended February 28, 1999 and February 29, 2000, respectively, because the options' exercise prices were greater than the average market price of the common stock. <TABLE> <CAPTION> 1999 2000 WEIGHTED WEIGHTED AVERAGE AVERAGE INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE NINE MONTHS (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ---------------------------------------------------------------------------- -------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic earnings per share: Income available to common shareholders............... $ 386 309,823 $ 1.25 $ 301 311,646 $ 0.96 ======= ========= Effect of dilutive stock options and warrants(1).... -- 3,689 -- 2,631 ------------------------ ----------------------- Diluted earnings per share: Income available to common shareholders............... $ 386 313,512 $ 1.23 $ 301 314,277 $ 0.96 ============================================================================== </TABLE> (1) Outstanding options to purchase 11,275,506 and 20,304,748 shares of common stock were not included in the computation of diluted earnings per share for the nine-month periods ended February 28, 1999 and February 29, 2000, respectively, because the options' exercise prices were greater than the average market price of the common stock. 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TENET HEALTHCARE CORPORATION - ------------------------------------------------------------------------------- 7. The following table sets forth the tax effects allocated to each component of other comprehensive income for the nine months ended February 28, 1999 and February 29, 2000: <TABLE> <CAPTION> 1999 2000 BEFORE- TAX NET-OF BEFORE- TAX NET-OF TAX (EXPENSE) TAX TAX (EXPENSE) TAX AMOUNT OR BENEFIT AMOUNT AMOUNT OR BENEFIT AMOUNT -------------------------------- ---------------------------------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> Foreign currency translation adjustment.......... $ 2 $(1) $ 1 $ (3) $ 1 $ (2) Unrealized holding gains (losses) on securities.. (3) 1 (2) (62) 26 (36) Reclassification adjustments..................... -- -- -- (60) 20 (40) -------------------------------------------------------------------- Other comprehensive income (loss)................ $(1) $ 0 $(1) $(125) $47 $(78) ==================================================================== </TABLE> The following table sets forth the accumulated other comprehensive income balances, by component, as of February 28, 1999 and February 29, 2000: <TABLE> <CAPTION> 1999 2000 ACCUMULATED UNREALIZED ACCUMULATED FOREIGN UNREALIZED OTHER FOREIGN GAINS OTHER CURRENCY GAINS ON COMPREHENSIVE CURRENCY (LOSSES) ON RECLASSIFICATION COMPREHENSIVE ITEMS SECURITIES INCOME ITEMS SECURITIES ADJUSTMENTS INCOME ------------------------------------ ------------------------------------------------------- (IN MILLIONS) <S> <C> <C> <C> <C> <C> <C> <C> Beginning balance...... $-- $50 $50 $-- $ 77 -- $ 77 Current-period change.. 1 (2) (1) (2) (36) (40) (78) ------------------------------------------------------------------------------------------- Ending balance......... $ 1 $48 $49 $(2) $ 41 $(40) $ (1) =========================================================================================== </TABLE> 8. On March 24, 2000 the Company redeemed and effectively terminated all of the rights issued under the stockholder rights plan adopted on December 22, 1998. The rights were redeemed at a price of $0.01 per right with one right per common share, or 312,689,221 rights in total. At the Company's 1999 annual meeting, a majority of the Company's common shares were voted in favor of a shareholder recommendation that the Board of Directors redeem and terminate the shareholder rights agreement. The board took its action in light of that vote. 9. In December 1999, a wholly owned subsidiary of Tenet Healthcare Corporation and Ventro Corporation (formerly known as Chemdex Corporation) announced the formation of a new company, Broadlane, Inc. Broadlane was organized to provide a business-to-business e-commerce marketplace to streamline and eliminate inefficiencies from the existing ways in which suppliers and distributors sell, and health care providers purchase, health care supplies. As of February 29, 2000, the Tenet subsidiary owned 66.6% and Ventro Corporation owned 21.0% of Broadlane's outstanding shares. 12
TENET HEALTHCARE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 10. 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 November 30, 1999. 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS Operatingresults for the quarter ended February 29, 2000 included the following highlights: - strong growth in patient volumes and revenues - continuing improvements in cost controls - significant improvements in operating margins - progress in the Company's initiatives with respect to its physician practices On a same-facility basis, admissions improved 3.6% over the year-ago quarter, patient revenues were up 10.6% and net inpatient revenues per admission were up 8.5%. Total Company EBITDA margins (the ratio of earnings before interest, taxes, depreciation and amortization and impairment and other unusual charges to net operating revenues) increased from 16.2% to 17.5%. Income before income taxes and cumulative effect of accounting change was $202 million in the quarter ended February 28, 1999 and $68 million in the quarter ended February 29, 2000. For the nine-month periods ended February 28, 1999 and February 29, 2000, income before income taxes and cumulative effect of accounting change was $627 million and $553 million, respectively. The 2000 quarter includes impairment and other unusual charges of $232 million, described below. The 2000 quarter and nine-month period also include pretax gains on sales of facilities and long-term investments of $51 million and $119 million, respectively. Results of operations for the quarter and nine months ended February 29, 2000 include the operations of seven general hospitals acquired in November 1998, one in December 1998, two in March 1999 and one in December 1999 and exclude, from the dates of sale or closure, the operations of 18 general hospitals and certain other facilities sold or closed since February 28, 1999. The following are summaries of consolidated operations for the three months and nine months ended February 28, 1999 and February 29, 2000: <TABLE> <CAPTION> THREE MONTHS ENDED FEBRUARY 28 AND 29, 1999 2000 1999 2000 ---------------------------------------------------- (IN MILLIONS) (% OF NET OPERATING REVENUES) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals................... $2,581 $2,683 91.5% 94.1% Other operations ............................. 241 167 8.5% 5.9% ---------------------------------------------------- Net operating revenues...................................... 2,822 2,850 100.0% 100.0% ---------------------------------------------------- Operating expenses: Salaries and benefits......................... (1,160) (1,121) 41.1% 39.3% Supplies...................................... (403) (401) 14.3% 14.1% Provision for doubtful accounts............... (190) (214) 6.7% 7.5% Other operating expenses...................... (611) (614) 21.7% 21.5% Depreciation.................................. (109) (103) 3.8% 3.7% Amortization.................................. (33) (30) 1.2% 1.1% Impairment and other unusual charges ......... -- (232) -- 8.1% </TABLE> 14
TENET HEALTHCARE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS - ------------------------------------------------------------------------------- <TABLE> <S> <C> <C> <C> <C> --------------------------------------------- Operating income............................................ $316 $135 11.2% 4.7% ============================================= </TABLE> <TABLE> <CAPTION> NINE MONTHS ENDED FEBRUARY 28 AND 29, 1999 2000 1999 2000 --------------------------------------------------- (IN MILLIONS) (% OF NET OPERATING REVENUES) <S> <C> <C> <C> <C> Net operating revenues: Domestic general hospitals............................. $7,234 $7,930 91.1% 93.3% Other operations ...................................... 704 573 8.9% 6.7% --------------------------------------------------- Net operating revenues...................................... 7,938 8,503 100.0% 100.0% --------------------------------------------------- Operating expenses: Salaries and benefits.................................. (3,217) (3,392) 40.5% 39.9% Supplies............................................... (1,104) (1,195) 13.9% 14.1% Provision for doubtful accounts........................ (533) (647) 6.7% 7.6% Other operating expenses............................... (1,710) (1,843) 21.6% 21.7% Depreciation........................................... (307) (307) 3.9% 3.6% Amortization........................................... (96) (92) 1.2% 1.1% Impairment and other unusual charges .............. -- (232) -- 2.7% --------------------------------------------------- Operating income............................................ $ 971 $ 795 12.2% 9.3% =================================================== </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 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 FEBRUARY 28 AND 29, NINE MONTHS ENDED FEBRUARY 28 AND 29 INCREASE INCREASE 1999 2000 (DECREASE) 1999 2000 (DECREASE) ------------------------------------- ------------------------------------ <S> <C> <C> <C> <C> <C> <C> Number of hospitals (at end of period).............................. 129 112 (17) * 129 112 (17)* Licensed beds (at end of period)..... 30,471 27,414 (10.0)% 30,471 27,414 (10.0)% Net inpatient revenues (in millions). $ 1,725 $ 1,831 6.1% $ 4,737 $5,242 10.7% Net outpatient revenues (in millions) $807 $ 795 (1.5)% $ 2,348 $2,512 7.0% Admissions........................... 248,407 239,792 (3.5)% 688,629 706,287 2.6% Equivalent admissions................ 351,849 335,658 (4.6)% 996,683 1,019,036 2.2% Average length of stay (days)........ 5.3 5.3 -- 5.2 5.2 -- Patient days......................... 1,304,313 1,274,739 (2.3)% 3,554,223 3,682,942 3.6% Equivalent patient days.............. 1,832,782 1,770,750 (3.4)% 5,094,834 5,253,680 3.1% Net inpatient revenue per patient day $ 1,323 $ 1,436 8.5% $ 1,333 $1,423 6.8% Net inpatient revenue per admission. $ 6,944 $ 7,636 10.0% $ 6,879 $7,422 7.9% Utilization of licensed beds......... 47.6% 51.1% 3.5% * 44.9% 46.2% 1.3%* Outpatient visits.................... 2,372,360 2,220,852 (6.4)% 7,119,700 6,979,498 (2.0)% </TABLE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - -------------------------------------------------------------------------------- * The change is the difference between 1999 and 2000 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 February 28 and 29, Nine months Ended February 28 and 29 Increase Increase 1999 2000 (Decrease) 1999 2000 (Decrease) ------------------------------------- ------------------------------------ <S> <C> <C> <C> <C> <C> <C> Average licensed beds............... 26,622 26,731 0.4% 26,283 26,184 (0.4)% Patient days........................ 1,186,589 1,242,863 4.7% 3,293,270 3,373,491 2.4% Net inpatient revenue per patient day................................. $ 1,349 $ 1,448 7.3% $ 1,351 $ 1,426 5.6% Admissions.......................... 224,789 232,940 3.6% 636,354 648,086 1.8% Net inpatient revenue per admission. $ 7,122 $ 7,727 8.5% $ 6,993 $ 7,424 6.2% Outpatient visits................... 2,096,116 2,099,685 0.2% 6,497,762 6,263,066 (3.6)% Average length of stay (days)....... 5.3 5.3 -- 5.2 5.2 -- </TABLE> The table below sets forth the sources of net patient revenues for the Company's domestic general hospitals for the three and nine-month periods ended February 28, 1999 and February 29, 2000, expressed as percentages of net patient revenues from all sources: <TABLE> <CAPTION> Three Months Ended Nine Months Ended February 28 and 29, February 28 and 29, 1999 2000 1999 2000 ------------------------------------------- <S> <C> <C> <C> <C> Medicare ........................................................... 34.5% 33.0% 34.5% 32.4% Medicaid ........................................................... 8.7% 8.6% 9.1% 8.4% Managed care ....................................................... 38.4% 40.6% 37.1% 40.8% Indemnity and other ................................................ 18.4% 17.8% 19.3% 18.4% </TABLE> Pressures to control health care costs and a shift from traditional Medicare to Medicare managed care plans after the Balanced Budget Act of 1997 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. In spite of this, one of the most significant trends in the quarter ended February 29, 2000 was the continuing improvement in net inpatient revenue per admission. On a total store basis, this statistic increased 10.0% and, on a same-store basis, it increased by 8.5%, 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 benefits as it renegotiates and renews contracts with improved terms and 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. 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - ------------------------------------------------------------------------------- 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 18 months, such strategies have included hospital cost-control programs and overhead reduction plans and the enhancement of integrated health care delivery systems. The Company has positioned itself for additional cost savings in the years to come, for example, by recently outsourcing housekeeping, laundry, dietary and plant maintenance services in nearly two-thirds of its hospitals nationwide. Further consolidations and implementation of additional cost-control programs and other operating efficiencies may be undertaken in the future. Salaries and benefits expense as a percentage of net operating revenues improved significantly, dropping from 41.1% in the quarter ended February 28, 1999 to 39.3% in the current quarter. This decrease is primarily the result of continuing cost control measures, improved labor productivity and the outsourcing of certain hospital services described above. Supplies expense as a percentage of net operating revenues was 14.3% in the quarter ended February 28, 1999 and 14.1% in the current quarter. The slight decrease was primarily was due to continuing cost control measures, offset by greater patient acuity, which requires the use of more expensive supplies, and higher prices for new products. The Company continues to focus on reducing supplies expense through improved utilization and by developing and expanding programs designed to improve the purchasing of supplies through its group purchasing organization. The provision for doubtful accounts as a percentage of net operating revenues rose to 7.5% in the current quarter from 6.7% for the quarter ended February 28, 1999, but has been declining for the past two quarters. It was 7.8% in the quarter ended August 31, 1999 and 7.6% in the quarter ended November 30, 1999. The Company has taken a series of actions to mitigate the increase in bad debt expense over the prior year, including improving the process for collecting receivables, pursuing the acceleration of payments from managed care payors, standardizing and improving billing systems and developing a set of best practices in the patient admission and registration process. Other operating expenses as a percentage of net operating revenues for the quarters ended February 28, 1999 and February 29, 2000 were 21.7% and 21.5%, respectively. This decrease is primarily the result of continuing cost control measures, despite the increase in other expenses as a result of the outsourcing of certain hospital services. Taxes on income as a percentage of income before income taxes were 38.7% in the current quarter, excluding the effect of impairment and other unusual charges, as well as gains on sales of facilities and long-term investments. Income taxes related to the gains on sales of facilities and long-term investments were $20 million for the three months ended February 29, 2000 and $82 million for the nine months ended February 29, 2000 due to the effect of nondeductible goodwill related to assets sold. 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF TENET HEALTHCARE CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- In addition to striving to continuously improve its portfolio of general hospitals through acquisitions, the Company also divests, from time to time, hospitals that are not essential to its strategic objectives. During the quarter ended February 29, 2000, management approved plans that commit the Company to close or sell two general hospitals and other property and equipment. Accordingly, the Company recorded impairment and restructuring charges of $55 million during the quarter. The charge consists of $46 million in impairment charges to value property and equipment and other assets at the lower of carrying value or estimated fair values, $2 million for lease cancellation and other exit costs, $5 million for the estimated costs to close or sell the general hospitals, and $2 million in severance costs for the termination of approximately 284 employees at the hospital to be closed. The impairment charge includes $25 million for the write-down of property and equipment and $21 million for the write-down of goodwill and other assets. Net operating revenues from the Company's other operations were $241 million for the quarter ended February 28, 1999, compared to $167 million for the current quarter. The decrease is primarily the result of disposals, terminations and contract expirations of physician practices. Over the past several years, the Company has employed, or entered into full-risk management agreements with physicians in most of its markets. A large percentage of these physician practices were acquired as part of large hospital acquisitions or through the formation of integrated health care delivery systems. These physician practices, however, have not been profitable. Accordingly, during the latter part of fiscal 1999, the Company undertook the process of evaluating its physician strategy in each of its markets and began to develop plans to either terminate or allow a significant number of its existing contracts to expire. During the quarter ended February 29, 2000, Company management, with the authority to do so, authorized the termination of the contractual relationships with approximately 50% of its contracted physicians. Accordingly, the Company recorded impairment and other unusual charges of $177 million relating to the plans to terminate or allow the expiration of employment and management contracts with approximately 440 physicians. The charge consists of $102 million in impairment charges to value property and equipment and other assets at the lower of carrying value or estimated fair values, $64 million for lease cancellation and other exit costs, $7 million in severance costs for the termination of 220 employees at the physician practices and $4 million to buy out physician employment contracts. The impairment charge includes $19 million for the write-down of property and equipment and $83 million for the write-down of goodwill and other assets. The charge taken in the current quarter relates to approximately 50% of the Company's contracted physicians at February 29, 2000. The Company expects to incur additional charges in the future as the balance of its physician contracts are evaluated for possible termination. The future benefits of all these actions could be significant, but would not likely occur until fiscal 2001 and beyond. Future cash expenditures related to the hospital and physician practice charges recorded during the current quarter are expected to be $79 million, of which $22 million is expected to be spent during the balance of fiscal 2000 and $57 million thereafter. 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TENET HEALTHCARE CORPORATION - ------------------------------------------------------------------------------- The Company has invested approximately $37 million in several internet-related health care ventures in order to facilitate adaptation of these new technologies to the Company's core business. Patient care, medical education, consumer information and day-to-day business transaction efficiency are examples of areas of focus that the Company believes can be significantly improved by appropriate internet applications. During the quarters ended November 30, 1999 and February 29, 2000, the Company recorded $5 million and $51 million, respectively, in realized gains from sales of certain of these investments. The unrealized gains from market appreciation of the balance of this investment portfolio amounted to $43 million at the end of the quarter. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity for the nine months ended February 28, 1999 and February 29, 2000 was derived primarily from the proceeds of borrowings under its unsecured revolving bank credit agreement, sales of assets, and net cash provided by operating activities, as shown in the following table: <TABLE> <CAPTION> NINE MONTHS ENDED --------------------------- FEBRUARY 28, FEBRUARY 29, 1999 2000 --------------------------- (IN MILLIONS) <S> <C> <C> Proceeds from borrowings.............................. $1,534 $ 1,258 Proceeds from sales of facilities and other assets.... 19 654 Net cash provided by operating activities............. 315 322 Repayments of borrowings.............................. (872) (1,712) Purchases of property and equipment................... (401) (396) Purchases of businesses, net of cash acquired......... (470) (36) Other net investing and financing activities.......... (87) (81) --------------------------- Net increase in cash and cash equivalents ....... $ 38 $ 9 =========================== </TABLE> Net cash provided by operating activities for the nine months ended February 28, 1999 was $352 million before $37 million in expenditures for discontinued operations, merger, impairment and other unusual charges. Net cash provided by operating activities for the nine months ended February 29, 2000 was $404 million before net expenditures of $82 million for such charges. Management believes that future cash provided by recurring operating activities, the availability of credit under its 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's unused borrowing capacity under its credit agreement was $1.1 billion as of March 31, 2000. The Company expects to refinance the credit agreement on or before its January 31, 2002 maturity date. 19
TENET HEALTHCARE MANAGEMEMENT'S DISCUSSION AND ANALYSIS OF CORPORATION FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- Cash payments for property and equipment were $396 million in the nine months ended February 29, 2000 compared to $401 million in the corresponding prior year nine-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 $100 million in remaining commitments to fund the construction of two new hospitals over the next year and a half. 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 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 and continue to perform 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 was approximately $90 million, substantially all of which has been accounted for as capital expenditures. 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. 20
MANAGEMEMENT'S DISCUSSION AND ANALYSIS OF TENET HEALTHCARE FINANCIAL CONDITION AND RESULTS OF OPERATIONS STATEMENTS CORPORATION - ------------------------------------------------------------------------------- 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. 21
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 November 30, 1999. 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 29, 2000 (included only in the EDGAR filing). (b) Reports on Form 8-K (i) Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 24, 2000. 22
OTHER INFORMATION TENET HEALTHCARE CORPORATION - ------------------------------------------------------------------------------- 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: April 13, 2000 /s/ DAVID L. DENNIS -------------------------------------------------- David L. Dennis Vice Chairman, 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) 23