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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended May 31, 1996. [FEE REQUIRED]
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
. [NO FEE REQUIRED]
COMMISSION FILE NUMBER: I-7293
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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, CALIFORNIA 93105
(Address of principal executive (Zip Code)
offices)
AREA CODE (805) 563-7000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
Pacific Stock Exchange
8 5/8% Senior Notes due 2003 New York Stock Exchange
6% Exchangeable Subordinated Notes due 2005 New York Stock Exchange
9 5/8% Senior Notes due 2002 New York Stock Exchange
10 1/8% Senior Subordinated Notes due 2005 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
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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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendments to this Form 10-K. / /
As of July 31, 1996, there were 216,288,503 shares of Common Stock
outstanding. The aggregate market value of the shares of Common Stock held by
non-affiliates of the Registrant, based on the closing price of these shares on
the New York Stock Exchange, was $4,179,259,051. For the purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended May 31, 1996, have been incorporated by reference into Parts I, II
and IV of this Report. Portions of the definitive Proxy Statement for the
Registrant's 1996 Annual Meeting of Shareholders have been incorporated by
reference into Part III of this Report.
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT -- 1996
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
PAGE
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PART I
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 19
Item 3. Legal Proceedings.................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.................................. 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 20
Item 6. Selected Financial Data.............................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 21
Item 8. Financial Statements and Supplementary Data.......................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 21
PART III
Item 10. Directors and Executive Officers of the Registrant................................... 21
Item 11. Executive Compensation............................................................... 21
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 21
Item 13. Certain Relationships and Related Transactions....................................... 21
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.................... 21
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Note: The responses to Items 5 through 8, Items 12 and 13 and portions of Items
1, 3, 10, 11 and 14 are included in the Registrant's Annual Report to
Shareholders for the year ended May 31, 1996, or the definitive Proxy
Statement for the Registrant's 1996 Annual Meeting of Shareholders. The
required information is incorporated into this Report by reference to
those documents and is not repeated herein.
PART I
ITEM 1. BUSINESS
GENERAL
Tenet Healthcare Corporation (together with its subsidiaries, "Tenet", the
"Registrant" or the "Company") is the second-largest investor-owned healthcare
services company in the United States. Tenet's subsidiaries own or operate
general hospitals and related healthcare facilities serving urban and rural
communities in 13 states and hold investments in other healthcare companies. At
May 31, 1996, Tenet operated 74 domestic general hospitals, with a total of
16,666 licensed beds, located in Alabama, Arkansas, California, Florida,
Georgia, Indiana, Louisiana, Missouri, Nebraska, North Carolina, South Carolina,
Tennessee and Texas. During fiscal 1996, Tenet acquired five general hospitals,
converted one general hospital to a specialty hospital and closed one
rehabilitation hospital.
At May 31, 1996, Tenet's subsidiaries also owned or operated various
ancillary healthcare operations, discussed in more detail under Other Domestic
Operations on page 8 below, and held as investments interests in Vencor, Inc.
("Vencor"), Total Renal Care Holdings, Inc. ("TRC") and Health Care Property
Partners ("HCPP"). These investments are discussed in more detail under
Investments on page 8 below.
Tenet continues to focus on its core business of building integrated
healthcare delivery systems within the communities it serves in the United
States. Tenet's focus is reflected in its fiscal 1996 acquisitions and the sales
of substantially all of its international operations, as discussed below.
During fiscal 1996, Tenet acquired (i) the Memorial Medical Center (formerly
known as the Mercy+Baptist Medical Center) and related physician practices in
New Orleans, Louisiana, (ii) the Providence Memorial Hospital in El Paso, Texas,
(iii) the Methodist Hospital of Jonesboro in Jonesboro, Arkansas (iv) a
long-term lease of the Medical Center of Manchester and its home health business
in central Tennessee, and (v) a one-third interest in St. Clair Hospital (which
subsequently was increased to a 50% interest) located outside of Birmingham,
Alabama. In addition, during the first quarter of fiscal 1997 Tenet acquired
Hialeah Hospital in Hialeah, Florida, and entered into a definitive agreement to
purchase Lloyd Noland Hospital in Birmingham, Alabama, which purchase Tenet
expects to complete prior to the end of the second quarter of fiscal 1997.
1
The Company also has been actively pursuing the acquisition and management
of physician practices where doing so would enhance the Company's goal of
building integrated healthcare delivery systems within the communities it
serves. As discussed on page 3 below, during fiscal 1996 the Company acquired or
assumed the management of physician practices in many key geographic areas.
Tenet also has established the Tenet Physician Services department, based at its
Dallas, Texas, Operations Center, to plan Tenet's strategy for and coordinate
its efforts towards developing innovative ways of working with physicians.
In fulfillment of management's decision to focus on the Company's core
business of operating domestic general hospitals, during fiscal 1996 the Company
completed its program of selling substantially all of its international
operations. The Company sold its two Singapore hospitals and its interests in
Australian Medical Enterprises Limited ("AME"), a hospital in Malaysia and a
hospital in Thailand. In addition, in May 1996 Tenet sold its approximately 42%
interest in Westminster Health Care Holdings PLC ("Westminster").
During fiscal 1996, Tenet issued $500 million of 8 5/8% Senior Notes due
2003 and $320 million of 6% Exchangeable Subordinated Notes due 2005 (which are
described in more detail on page 9 below). Tenet used the net proceeds of those
issuances, and the asset sales referred to above, to repay indebtedness under
its then-existing term loan and revolving credit agreement. In March 1996, Tenet
entered into a new $1.55 billion unsecured revolving credit agreement and repaid
amounts then outstanding under its secured term loan and revolving credit
agreement. The new revolving credit agreement allows the Company to reborrow
amounts repaid prior to its March 1, 2001, maturity date. The Company had
approximately $575 million available under its new revolving credit agreement at
May 31, 1996.
Under segment reporting criteria, Tenet believes that "healthcare" is its
only material business segment. See the discussion of Tenet's revenues and
operations in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in Tenet's 1996 Annual Report to Shareholders.
2
OPERATIONS
DOMESTIC GENERAL HOSPITALS
All of Tenet's general hospital and other healthcare operations are owned or
operated by Tenet HealthSystem Hospitals, Inc. (formerly known as NME Hospitals,
Inc.), subsidiaries of Tenet HealthSystem Medical, Inc. (formerly known as
American Medical International, Inc.) and various other subsidiaries and
affiliates. At May 31, 1996, Tenet's subsidiaries and affiliates operated 74
general hospitals (16,666 beds) serving urban and rural communities in 13
states. Of those hospitals, 57 are owned (including one owned facility that is
on leased land) and 17 are owned by and leased from others (including two leased
from HCPP, as discussed on page 8 below).
In July 1995, Tenet acquired a one-third interest (which subsequently was
increased to a 50% interest) in the 82-bed St. Clair Hospital located outside of
Birmingham, Alabama, which formerly was a not-for-profit general hospital. In
August 1995, Tenet acquired Memorial Medical Center (formerly known as
Mercy+Baptist Medical Center), formerly a not-for-profit system, consisting of
two general hospitals with an aggregate of 759 licensed beds located in New
Orleans, Louisiana, and related physician practices. In September 1995, Tenet
acquired the Providence Memorial Hospital located in El Paso, Texas, which also
was a not-for-profit general hospital. Providence is licensed for 471 general
hospital beds (34 of which may be used as skilled nursing beds) and is licensed
for 30 additional rehabilitation and subacute care beds. In October 1995, Tenet
entered into a long-term lease of the 49-bed Medical Center of Manchester and
its home health business, in central Tennessee. In November 1995, Tenet acquired
the 104-bed not-for-profit Methodist Hospital of Jonesboro, a general hospital
located in Jonesboro, Arkansas. That hospital now is owned by a limited
liability company of which Tenet owns 95% and is the manager and Tenet's not-for
profit partner, St. Vincent TotalHealth Corporation, owns 5%. In addition, in
August 1995, Tenet entered into an agreement with the Cleveland Clinic Florida
to develop a new 150-bed general hospital in western Broward County, Florida.
Completion of that project is subject to governmental approvals. In the first
quarter of fiscal 1997, Tenet acquired the 378-bed Hialeah Hospital in Hialeah,
Florida, and entered into a definitive agreement to purchase Lloyd Noland
Hospital in Birmingham, Alabama, which purchase Tenet expects to complete prior
to the end of the second quarter of fiscal 1997. In the fourth quarter of fiscal
1996, Tenet converted the Jo Ellen Smith general hospital in New Orleans,
Louisiana, into a specialty hospital.
The Company also has been actively pursuing the acquisition and management
of physician practices where doing so would enhance the Company's goal of
building integrated healthcare delivery systems within the communities it
serves. During fiscal 1996, the Company acquired or assumed the management of
physician practices in many key geographic areas, such as Alabama, Arkansas,
Southern California, South Carolina, South Florida, the greater New Orleans,
Louisiana, area and Texas. Tenet also has established the Tenet Physician
Services department, based at its Dallas Operations Center, to plan Tenet's
strategy for and coordinate its efforts towards developing innovative ways of
working with physicians. The Company has developed and is continuing to expand
information systems for more efficiently managing all aspects of physician
practices, including billing, medical records, tracking managed care contracts
and accounting.
3
Each of Tenet's general hospitals offers acute care services and most offer
operating and recovery rooms, radiology services, intensive care and coronary
care nursing units, pharmacies, clinical laboratories, respiratory therapy
services, physical therapy services and outpatient facilities. A number of the
hospitals also offer tertiary care services such as open heart surgery, neonatal
intensive care, neurosciences, orthopedics services and oncology services. Three
of the Company's hospitals, Memorial Medical Center (formerly known as
Mercy+Baptist Medical Center), USC University Hospital and Sierra Medical
Center, offer quartenary care in such areas as heart, lung, liver and kidney
transplants and USC University Hospital and Sierra Medical Center also offer
gamma knife brain surgery. With the exception of one general hospital that was
acquired in fiscal 1996 and has not sought to be accredited, each of the
Company's facilities that is eligible for accreditation is fully accredited by
the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), the
Commission on Accreditation of Rehabilitation Facilities (in the case of
rehabilitation hospitals) or another appropriate accreditation agency. With such
accreditation, the Company's hospitals are eligible to participate in the
Medicare and Medicaid programs.
Technological developments permitting more procedures to be performed on an
outpatient basis, in conjunction with pressures to contain healthcare costs,
have led to a shift from inpatient care to ambulatory or outpatient care. Tenet
has responded to this trend by enhancing its hospitals' outpatient service
capabilities, including (i) establishing freestanding outpatient surgery centers
at or near certain of its hospital facilities, (ii) reconfiguring certain
hospitals to more effectively accommodate outpatient treatment, by, among other
things, providing more convenient registration procedures and separate
entrances, and (iii) restructuring existing surgical capacity to allow a greater
number and range of procedures to be performed on an outpatient basis. Tenet's
facilities will continue to emphasize those outpatient services that can be
provided on a quality, cost-effective basis and that the Company believes will
experience increased demand. The patient volumes and net operating revenues at
both the Company's general hospitals and its outpatient surgery centers 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 patients and physicians and other factors
relating to the timing of elective procedures.
In addition, inpatient care is continuing to move from acute care to
sub-acute care, where a less-intensive level of care is provided. Tenet has been
proactive in the development of a variety of sub-acute inpatient services to
utilize a portion of its unused capacity, thereby retaining a larger share of
overall healthcare expenditures. By offering cost-effective ancillary services
in appropriate circumstances, Tenet is able to provide a continuum of care where
the demand for such services exists. For example, in certain hospitals the
Company has developed transitional care, rehabilitation and long-term care
sub-acute units. Such units utilize less intensive staffing levels to provide
the range of services sought by payors with a lower cost structure.
4
The following table lists, by state, the general hospitals owned or (if
indicated below) leased by Tenet's subsidiaries and operated domestically as of
May 31, 1996:
OWNED OR LEASED GENERAL HOSPITALS
NUMBER OF
NAME OF FACILITY LOCATION LICENSED BEDS
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ALABAMA
Brookwood Medical Center Birmingham 586
St. Clair Hospital(1)(3) Birmingham 82
ARKANSAS
Central Arkansas Hospital Searcy 193
Methodist Hospital of Jonesboro(2) Jonesboro 104
National Park Medical Center Hot Springs 166
St. Mary's Regional Hospital Russellville 170
CALIFORNIA
Alvarado Hospital Medical Center San Diego 231
Century City Hospital(3) Los Angeles 190
Community Hospital & Rehabilitation
Center of Los Gatos(3) Los Gatos 164
Doctors Hospital of Manteca Manteca 73
Doctors Hospital of Pinole(3) Pinole 137
Doctors Medical Center of Modesto Modesto 433
Encino Hospital(3)(4) Encino 151
Garden Grove Hospital and Medical Center Garden Grove 167
Garfield Medical Center Monterey Park 211
Irvine Medical Center(3) Irvine 176
John F. Kennedy Memorial Hospital Indio 130
Lakewood Regional Medical Center Lakewood 175
Los Alamitos Medical Center Los Alamitos 173
Medical Center of North Hollywood North Hollywood 160
Placentia Linda Community Hospital Placentia 114
Redding Medical Center Redding 185
San Dimas Community Hospital San Dimas 99
San Ramon Regional Medical Center San Ramon 123
Sierra Vista Regional Medical Center San Luis Obispo 195
South Bay Hospital(3) Redondo Beach 201
Tarzana Regional Medical Center(3)(4) Tarzana 231
Twin Cities Community Hospital Templeton 84
USC University Hospital(5) Los Angeles 286
FLORIDA
Delray Community Hospital Delray Beach 211
Hollywood Medical Center Hollywood 324
Memorial Hospital of Tampa Tampa 174
North Ridge Medical Center Ft. Lauderdale 391
5
NUMBER OF
NAME OF FACILITY LOCATION LICENSED BEDS
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Palm Beach Gardens Medical Center(3) Palm Beach Gardens 204
Palmetto General Hospital Hialeah 360
Palms of Pasadena Hospital St. Petersburg 310
Seven Rivers Community Hospital Crystal River 128
Town and Country Hospital Tampa 201
West Boca Medical Center Boca Raton 185
GEORGIA
North Fulton Regional Hospital(3) Roswell 167
Spalding Regional Hospital Griffin 160
INDIANA
Culver Union Hospital Crawfordsville 120
LOUISIANA
Doctors Hospital of Jefferson(3) Metairie 138
Kenner Regional Medical Center Kenner 300
Meadowcrest Hospital Gretna 200
Memorial Medical Center Mid-City New Orleans 272
Memorial Medical Center Uptown New Orleans 487
Northshore Regional Medical Center(3) Slidell 174
St. Charles General Hospital New Orleans 173
MISSOURI
Columbia Regional Hospital(6) Columbia 265
Kirksville Osteopathic Medical Center(3) Kirksville 119
Lucy Lee Hospital(3) Poplar Bluff 201
Lutheran Medical Center St. Louis 408
NEBRASKA
Saint Joseph Hospital Omaha 374
NORTH CAROLINA
Central Carolina Hospital Sanford 137
Frye Regional Medical Center(3) Hickory 355
SOUTH CAROLINA
East Cooper Community Hospital Mount Pleasant 100
Hilton Head Hospital(7) Hilton Head 68
Piedmont Medical Center Rock Hill 268
TENNESSEE
John W. Harton Regional Medical Center Tullahoma 137
Medical Center of Manchester(3) Manchester 49
Saint Francis Hospital Memphis 890
University Medical Center Lebanon 260
6
NUMBER OF
NAME OF FACILITY LOCATION LICENSED BEDS
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TEXAS
Brownsville Medical Center Brownsville 177
Doctors Hospital Dallas 268
Mid-Jefferson Hospital Nederland 138
Nacogdoches Medical Center Nacogdoches 150
Odessa Regional Hospital(8) Odessa 100
Park Place Hospital Port Arthur 236
Park Plaza Hospital(9) Houston 468
Providence Memorial Hospital El Paso 471
RHD Memorial Medical Center(3) Dallas 190
Sierra Medical Center El Paso 365
Trinity Medical Center(3) Carrollton 149
Twelve Oaks Hospital Houston 336
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(1) A Tenet subsidiary owns a 50% interest in the limited liability company
that leases this hospital. That hospital's financial results are not
consolidated with Tenet's financial results and it is not included in the
count of the total number of hospitals owned or leased by Tenet because
Tenet does not manage or control the management of this hospital.
(2) Owned by a limited liability company of which Tenet owns 95% and is the
managing member.
(3) Leased from a third party.
(4) Leased by a partnership in which Tenet's subsidiaries own a 75% interest.
(5) On leased land.
(6) Excludes the 64-bed Keller Memorial Hospital in Columbia, Missouri, the
financial results of which were combined with the Columbia Regional
Hospital. The lease for Keller Memorial Hospital was terminated during the
first quarter of fiscal year 1996.
(7) Owned by a partnership in which Tenet's subsidiaries own a 70% interest.
(8) Owned by a partnership in which Tenet's subsidiaries own an 83% interest.
(9) Excludes the 38-bed Plaza Specialty Hospital in Houston, Texas, the
financial results of which are combined with Park Plaza Hospital.
The following table shows certain information about the general hospitals
owned or leased domestically by Tenet, for the fiscal years ended May 31:
1996 1995 1994 1993 1992
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Total number of facilities........................................ 74 70 35 35 35
Total number of licensed beds..................................... 16,666 15,451 6,873 6,818 6,559
Average occupancy during the period............................... 45% 47% 47% 48% 51%
The above tables do not include rehabilitation hospitals, long-term care
facilities, psychiatric facilities, outpatient surgery centers or other
ancillary facilities.
7
INTERNATIONAL HOSPITALS
At May 31, 1996, a subsidiary of the Company continued to operate a 184-bed
tertiary-care hospital in Barcelona, Spain. A subsidiary of the Company also is
developing a 56-bed hospital in Cham, Canton Zug, Switzerland. The opening of
that hospital, which had been scheduled to open in the second quarter of fiscal
1997, has been postponed indefinitely due to a decision by the Cantonal Health
Authority. The decision, purportedly made in an effort to limit the number of
hospital beds available in the area, has the effect of the government not paying
for its portion of the hospital's patients' expenses. The Company is appealing
that decision, but is unable to predict at this time the outcome of the appeal.
If the hospital opens, ownership is to be transferred to a joint venture of
which the Company's subsidiary will own 90% and a local community organization
will own 10%.
In fulfillment of management's decision to focus on the Company's core
business of operating domestic general hospitals, during fiscal 1996 the Company
completed its program of selling substantially all of its international
operations, with the sale of (i) its two Singapore hospitals, (ii) its 52%
interest in AME, (iii) its 30% interest in and management of a hospital in
Malaysia and (iv) its 40% interest in a hospital in Thailand.
OTHER DOMESTIC OPERATIONS
At May 31, 1996, Tenet's subsidiaries owned or operated a small number of
rehabilitation hospitals, specialty hospitals, long-term care facilities and
psychiatric facilities as well as various ancillary healthcare businesses,
including outpatient surgery centers, home healthcare programs, ambulatory,
occupational and rural healthcare clinics, a health maintenance organization, a
preferred provider organization and a managed care insurance company. Tenet
closed one rehabilitation hospital in the first quarter of fiscal 1996 and
converted one general hospital into a specialty hospital in the fourth quarter
of fiscal 1996.
INVESTMENTS
At May 31, 1996, Tenet held as investments (i) an approximately 11.5%
interest in Vencor, which operates nursing homes and other healthcare
businesses, (ii) an approximately 11.6% interest in TRC, which operates kidney
dialysis units and certain related healthcare businesses and (iii) an
approximately 23% interest in HCPP, a partnership originally formed by the
Company and Health Care Property Investors, Inc. for the purpose of acquiring
from and leasing back to the Company 21 long-term care facilities, two general
hospitals and one psychiatric facility. Since that time, the Company has
assigned to Vencor (as successor to The Hillhaven Corporation ("Hillhaven")),
and other third parties its leasehold interests in the 21 long-term care
facilities and the psychiatric hospital, but remains contingently liable for the
lease payments on those facilities. The Company continues to lease the two
general hospitals from HCPP. HCPP does not own any properties other than those
originally purchased from the Company. In May 1996, Tenet sold its approximately
42% interest in Westminster.
In connection with the September 1995 merger transaction in which Vencor
acquired Hillhaven, Tenet received 8,301,067 shares of Vencor common stock in
exchange for its 8,878,147 shares of Hillhaven common stock. As part of that
transaction, Tenet also received approximately $92 million for the redemption of
its Hillhaven Series C Preferred Stock and Hillhaven Series D Preferred Stock.
In January 1996, Tenet sold $320 million principal amount of its 6% Exchangeable
Subordinated Notes due 2005, which Notes are exchangeable into Tenet's 8,301,067
shares of Vencor common stock.
8
PROPERTIES
In fiscal 1996, Tenet relocated its principal executive offices from an
approximately 310,000-square-foot building owned by a Tenet subsidiary in Santa
Monica, California to an approximately 31,000-square-foot office building
located at 3820 State Street, Santa Barbara, CA 93105. The Santa Barbara
building is leased by a Tenet subsidiary under a five-year lease with one
five-year renewal option. The Santa Monica building was sold in June 1996. The
telephone number of Tenet's Santa Barbara headquarters is (805) 563-7000.
Hospital support services for Tenet's subsidiaries are located in space leased
by a subsidiary in its operations center in Dallas, Texas. At May 31, 1996,
Tenet and its subsidiaries also were leasing space for regional offices in
Little Rock, Arkansas; Carlsbad, Encino, San Ramon and Santa Ana, California;
Fort Lauderdale, Florida; Atlanta, Georgia; Metairie, Louisiana; and Dallas,
Texas.
As of May 31, 1996, Tenet's subsidiaries operated domestically 69 medical
office buildings, including 22 that are leased from others, most of which are
adjacent to Tenet's general hospitals. These buildings are occupied by
approximately 2,500 physicians.
The number of licensed beds and locations of the Company's general hospitals
are described on pages 5 through 7 above. As of May 31, 1996, Tenet had
approximately $83 million of outstanding loans secured by real property and
approximately $33 million of capitalized lease obligations. The Company believes
that all of these properties, as well as the administrative and medical office
buildings described above, are suitable for their intended purposes.
MEDICAL STAFF AND EMPLOYEES
Tenet's hospitals are staffed by licensed physicians who have been admitted
to the medical staff of individual hospitals. Members of the medical staffs of
Tenet's hospitals often serve on the medical staffs of hospitals not owned by
the Company and may terminate their affiliation with the Tenet hospital or shift
some or all of their admissions to competing hospitals at any time. Although the
Company recently has begun to purchase more physician practices and, where
permitted by law, employ physicians, most of the physicians who practice at the
Company's hospitals are not employees of the Company. The Company also has begun
to manage more physician practices in states where corporations are not
permitted to purchase physician practices. Nurses, therapists, lab technicians,
facility maintenance staff and the administrative staff of hospitals, however,
normally are employees of the Company.
Tenet's operations are dependent on the efforts, ability and experience of
its officers, employees and physicians. Tenet's continued growth depends on its
ability to attract and retain skilled employees, on the ability of its officers
to manage growth successfully and on Tenet's ability to attract and retain
physicians and other healthcare professionals at its hospitals. In addition, the
success of Tenet is, in part, dependent upon the quality, number and
specialities of physicians on its hospitals' medical staffs, most of whom have
no long-term contractual relationship with Tenet and may terminate their
association with Tenet's hospitals at any time. Although Tenet currently
believes it will continue to be able to successfully attract and retain key
officers, qualified physicians and other healthcare professionals, the loss of
some or all of its key officers or an inability to attract or retain sufficient
numbers of qualified physicians and other healthcare professionals could have a
material adverse impact on future results of operations.
9
The number of Tenet employees (of which approximately 30% were part-time
employees) at May 31, 1996, was approximately as follows:
General Hospitals and Other Businesses(1)...................................... 64,000
Dallas Operations Center and Regional and Support Offices...................... 600
Corporate Headquarters......................................................... 80
---------
Total.......................................................................... 64,680
---------
---------
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(1) Includes employees whose employment relates to the operations of general
hospitals, rehabilitation hospitals, psychiatric facilities, specialty
hospitals, outpatient surgery centers, the Company's managed services
organizations, including physicians whose practices have been acquired by
the Company, the Company's print center and debt collection subsidiaries,
other domestic healthcare operations, a hospital in Barcelona, Spain, and a
hospital under development in Cham, Switzerland.
Tenet is subject to the federal minimum wage and hour laws and maintains
various employee benefit plans. Labor relations at Tenet's facilities have been
satisfactory. A small percentage of Tenet's employees are represented by labor
unions. Although the Company currently is not experiencing a shortage of nursing
personnel, the availability of nursing personnel fluctuates from year to year,
and the Company cannot predict the degree to which it will be affected by the
future availability and cost of nursing personnel.
COMPETITION
Tenet's general hospitals, rehabilitation hospitals, specialty hospitals,
long-term care facilities, psychiatric facilities, outpatient surgery centers
and other ancillary businesses operate in competitive environments. A facility's
competitive position within the geographic area in which it operates is affected
by such competitive factors as the quality of care provided, including the
number, quality and specialties of the physicians, nurses and other healthcare
professionals on staff, the quality of services provided by the hospital to
patients and their physicians, its reputation, the number of competitive
facilities, the state of its physical plant, the quality and the state of the
art of its medical equipment, its location and its charges for services.
Tax-exempt competitors may have certain financial advantages such as endowments,
charitable contributions, tax-exempt financing and exemption from sales,
property and income taxes not available to Tenet facilities. The length of time
a facility has been a part of the community and the availability of other
healthcare alternatives also are competitive factors.
One factor of ever-increasing importance in the competitive position of
Tenet's facilities is the ability of those facilities to obtain managed care
contracts. The importance of obtaining managed care contracts has increased over
the years and is expected to continue to increase as employers, private and
government payors and others turn to the use of managed care in an attempt to
control rising healthcare costs. In fact, the revenues and operating results of
most of the Company's hospitals' are significantly affected by the hospitals'
ability to negotiate favorable contracts with managed care payors. Under such
contracts, healthcare providers agree to provide services on a discounted-fee or
capitated basis in exchange for the payors agreeing to send some or all of their
members/employees to those providers. With capitated contracts, a healthcare
provider such as Tenet receives specific fixed periodic payments from a health
maintenance organization, preferred provider organization or employer based on
the number of members of such organization being serviced by the provider. In
return, the provider agrees to provide healthcare services to such members
regardless of the actual costs incurred and services provided. A healthcare
provider's ability to compete for such contracts is affected by many factors,
such as the competitive factors referred to above, the scope, breadth and
quality of services a hospital offers in a given geographic area, its ability to
form its own, or to join with other healthcare providers to form,
10
integrated healthcare delivery systems and the scope, breadth and quality of
services offered by competing healthcare providers and/or systems. Tenet
evaluates changing circumstances in each geographic area on an ongoing basis and
positions itself to compete in the managed care market by forming its own or
joining with others to form integrated healthcare delivery systems, such as
Tenet South Florida HealthSystem in South Florida, Sierra Providence Health
Network in El Paso, Texas, and Tenet Louisiana HealthSystem in the greater New
Orleans area, that actively pursue and enter into managed care contracts.
Tenet's integrated healthcare delivery systems also compete for traditional fee-
for-service patients and contracts with traditional health insurers.
The healthcare industry also has been characterized in recent years by
increased competition for patients and staff physicians, significant excess
capacity at general hospitals, a shift from inpatient to outpatient treatment
settings and increased consolidation. The principal factors contributing to
these trends are cost-containment efforts by managed care payors, employers and
traditional health insurers, advances in medical technology, changes in
regulations and reimbursement policies, increases in the number and type of
competing healthcare providers and changes in physician practice patterns.
Tenet's future success will depend, in part, on the ability of the Company's
hospitals to continue to attract staff physicians, enter into managed care
contracts and organize and structure integrated healthcare delivery systems,
including those with other healthcare providers and physician practice groups.
The Company's hospitals, and the healthcare industry as a whole, also face
the challenge of continuing to provide quality patient care while dealing with
strong competition for patients and with pressure on reimbursement rates not
only by private payors, but also by government payors. National and state
efforts to reform the United States healthcare system may further impact
reimbursement rates. Changes in medical technology, existing and future
legislation, regulations and interpretations and competitive contracting for
provider services by payors may require changes in the Company's facilities,
equipment, personnel, procedures, rates and/or services in the future.
Inpatient admissions, average lengths of stay and average occupancy at
general hospitals, including the Company's general hospitals, continue to be
adversely affected by payor-required pre-admission authorization and utilization
review and payor pressure to maximize outpatient and alternative healthcare
delivery services for less acutely ill patients. Increased competition,
admissions constraints and payor pressures are expected to continue. Inpatient
acuity and intensity of services continue to increase as less intensive services
shift from an inpatient to an outpatient basis or to alternative healthcare
delivery services because of technological improvements and as payors continue
to limit or reduce payments. Those pressures imposed by government and private
payors and the increasing percentage of business negotiated with purchasers of
group healthcare services are expected to continue to put pressure on the
per-patient revenues received by the Company. To meet these challenges, the
Company (i) has expanded or converted many of its general hospitals' facilities
to include distinct outpatient centers, (ii) offers discounts to private payor
groups, (iii) enters into capitation contracts in some service areas, (iv)
upgrades facilities and equipment, (v) offers new programs and services, (vi)
has been reducing its costs, for example, through the implementation of a case
management system designed to maximize efficiency by identifying
cost-per-procedure variables among physicians performing the same procedures,
standardizing supplies used and negotiating volume discounts for purchases and
(vii) has developed a computerized outcomes management system that contains
clinical and demographic information from the Company's hospitals and physicians
and allows users to identify "best practices" for treating specific diagnostic
related groups. Nevertheless, there can be no assurance that these measures will
be successful or, if successful, will serve to compensate for the reduction in
inpatient admissions, average lengths of stay and average occupancy, and the
consequent reductions in per-patient revenue, resulting from the payor pressures
referred to above.
As noted above, the Company also is responding to these changes by forming
integrated healthcare delivery systems. Components of these systems include: (i)
encouraging physicians practicing at
11
its hospitals to form independent physician associations ("IPAs"), (ii) having
the Company join with those IPAs, physicians and physician group practices to
form physician hospital organizations ("PHOs") to contract with managed care and
other payors and (iii) forming management services organizations ("MSOs") to (A)
purchase physician practices or their assets, as appropriate, (B) provide
management and administrative services to physicians, physician group practices
and IPAs and (C) enter into managed care contracts both on behalf of those
groups and, in certain circumstances, on behalf of PHOs.
In large part, a hospital's revenues, whether from managed care payors,
traditional health insurance payors or directly from patients, depends on the
quality and scope of practices of physicians on staff. Physicians refer patients
to hospitals on the basis of the quality of services provided by the hospital to
patients and their physicians, the hospital's location, the quality of the
medical staff affiliated with the hospital and the quality and state of the art
of the hospital's facilities, equipment and employees. The Company attracts
physicians to its hospitals by equipping its hospitals with sophisticated
equipment, providing physicians with a large degree of independence in
conducting their hospital practices, sponsoring training programs to educate
physicians on advanced medical procedures and otherwise creating a healthcare
environment within which physicians prefer to practice. While physicians may
terminate their association with a hospital at any time, Tenet believes that by
striving to maintain and improve the level of care at its hospitals and by
maintaining ethical and professional standards, it will attract and retain
qualified physicians with a variety of specialties.
There has been significant consolidation in the hospital industry over the
past decade due, in large part, to continuing pressures on payments from
government and private payors and increasing shifts away from the provision of
traditional in-patient services. Those economic trends have caused many
hospitals to close and many to consolidate either through acquisitions or
affiliations. Tenet's management believes that these cost-containment pressures
will continue and will lead to further consolidation in the hospital industry.
Tenet and its hospitals strive, on terms favorable to the Company, to
attract physicians to their staffs, enter into managed care contracts, organize
and structure integrated healthcare delivery systems, acquire hospitals or other
healthcare facilities and acquire or assume the management of physician
practices. Other healthcare companies with greater financial resources, with
more facilities in a given geographic area or offering a wider range of services
may be competing in each of these areas. These competitive factors may result in
Tenet and its hospitals being less successful than they would hope to be in
accomplishing one or more of these goals.
MEDICARE, MEDICAID AND OTHER REVENUES
Tenet receives payments for patient care from private insurance carriers,
Federal Medicare programs for elderly and disabled patients, health maintenance
organizations ("HMOs"), preferred provider organizations ("PPOs"), state
Medicaid programs for indigent and cash grant patients, the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS"), employers and patients
directly. In general, Medicare payments for general hospital outpatient
services, psychiatric care, physical rehabilitation and nursing home care are
based on the lower of charges and allowable costs, subject to certain limits.
General hospital inpatient services are reimbursed under Medicare based on a
prospective payment system, discussed below. Payments from state Medicaid
programs are based on reasonable costs or are at fixed rates. Substantially all
Medicare and Medicaid payments are below retail rates for Tenet facilities.
Payments from other sources usually are based on the hospital's established
charges, a percentage discount or all-inclusive per diem rates.
12
The approximate percentages of Tenet's net patient revenue by payment
sources for Tenet's general hospitals are as follows:
YEARS ENDED MAY 31,
---------------------------------------------------------------
1996 1995(1) 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Medicare........................................ 39.7% 38.9% 35.9% 33.9% 32.1%
Medicaid........................................ 6.7 7.2 8.5 7.5 6.4
Private and Other............................... 53.6 53.9 55.6 58.6 61.5
----- ----- ----- ----- -----
Totals.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
(1) Fiscal year 1995 includes twelve months of results for general hospitals
owned by Tenet prior to its March 1, 1995, acquisition of American Medical
Holdings, Inc. (now known as Tenet HealthSystem Holdings, Inc.) ("TH
Holdings") (the "Merger") and three months of results for the general
hospitals acquired by Tenet in connection with the Merger.
The following table presents the percentage of net patient revenues of the
general hospitals acquired by Tenet in connection with the Merger for TH
Holding's fiscal years 1994, 1993 and 1992 under each of the following programs:
YEARS ENDED AUGUST 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
Medicare............................................................... 36.2% 32.6% 32.3%
Medicaid............................................................... 7.5 6.2 4.8
Private and Other...................................................... 56.3 61.2 62.9
----- ----- -----
Totals................................................................. 100.0% 100.0% 100.0%
Medicare payments for general hospital inpatient care are based on a
prospective payment system ("PPS") that generally has been applicable to Tenet's
facilities since 1984. Under the PPS, a general hospital receives for each
Medicare patient a fixed amount for operating costs based on each Medicare
patient's assigned diagnostic related group ("DRG"). DRG payments do not
consider a specific hospital's costs, but are adjusted for area wage
differentials. As discussed below, DRG payments exclude the reimbursement of (a)
capital costs, including depreciation, interest relating to capital
expenditures, property tax and lease expenses and (b) outpatient services.
For several years the percentage increases to the DRG rates have been lower
than the percentage increases in the cost of goods and services purchased by
general hospitals. The index used by the Health Care Financing Administration to
adjust the DRG rates gives consideration to the cost of goods and services
purchased by hospitals as well as non-hospitals (the "Market Basket"). The
increase in the Market Basket for the year beginning October 1, 1996, currently
is projected to be 2.7%. The Omnibus Budget Reconciliation Act of 1993 ("OBRA
'93") provides that the DRG rates for urban hospitals will be adjusted by the
annual Market Basket percentage change: (1) minus 2.5%, effective October 1,
1994, (2) minus 2.0%, effective October 1, 1995, (3) minus .5%, effective
October 1, 1996, and (4) without reduction, effective October 1, 1997 and each
year thereafter, unless altered by subsequent legislation (which legislation
Tenet believes has become more likely in light of the stated desire of both the
current Administration and Congress to balance the Federal budget). Unless
changed by subsequent legislation, the result will be an increase of 2.2% in the
DRG rates for Federal fiscal year 1997 over what they were for Federal fiscal
year 1996. Congress is in the process of establishing the healthcare budget for
future periods, including Federal fiscal year 1997. Tenet anticipates that
payments to hospitals will be reduced as a result of future legislation but is
unable to predict what the amount of the final reduction will be.
13
Medicare reimburses general hospitals' capital costs separately from DRG
payments. Beginning in 1992, a prospective payment system for Medicare
reimbursement of general hospitals' inpatient capital costs ("PPS-CC") generally
became effective with respect to the Company's general hospitals. During Tenet's
fiscal year ended May 31, 1996, Tenet's hospitals in the aggregate received
reimbursement for approximately 95% of their actual capital costs under the
PPS-CC. Tenet anticipates that future legislation may reduce the aggregate
reimbursement received, but is unable to predict what the amount of the final
reduction will be.
Outpatient services provided at general hospitals, physical rehabilitation
hospitals and psychiatric facilities generally are reimbursed by Medicare at the
lower of customary charges or 94.2% of actual cost. Notwithstanding the
foregoing, Congress has established additional limits on the reimbursement of
the following outpatient services: (i) clinical laboratory services, which are
reimbursed based on a fee schedule and (ii) ambulatory surgery procedures and
certain imaging and other diagnostic procedures, which are reimbursed based on a
blend of the hospital's specific cost and the rate paid by Medicare to
non-hospital providers for such services.
Hospitals exempt from the PPS, such as qualified psychiatric facilities and
physical rehabilitation hospitals, are reimbursed by Medicare on a cost-based
system wherein target rates for each facility are used in applying various
limitations and incentives. Tenet's exempt facilities received a Market Basket
increase of 3.4% in target rates effective for cost reporting periods commencing
in Federal fiscal year 1996. Based on OBRA '93, the target rates for Tenet's
hospitals exempt from the PPS are scheduled to be adjusted in cost reporting
years 1996 and 1997 by the applicable annual Market Basket percentage change
minus 1%. Proposals have been made that would change the method of payment for
services provided at these facilities to a prospective payment system. The
Omnibus Budget Reconciliation Act of 1990 requires the Department of Health and
Human Services ("HHS") to develop a proposal to modify the current target rate
system or to replace it with a prospective payment system. It is not known if
any such proposals will be implemented.
OBRA '93 provides for certain budget targets through Federal fiscal year
1997, which, if not met, may result in adjustments in payment rates. Both
Congress and the current Administration have proposed healthcare budgets that
reduce Federal payments to hospitals and other providers. The Company
anticipates that payments to hospitals will be reduced as a result of future
legislation but is unable to predict what the amount of the final reduction will
be.
The Medicare, Medicaid and CHAMPUS programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and new governmental funding restrictions,
all of which may materially increase or decrease program payments as well as
affect the cost of providing services and the timing of payments to facilities.
The final determination of amounts earned under the programs often requires many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical reimbursement provisions.
Management believes that adequate provision has been made for such adjustments.
Until final adjustment, however, significant issues remain unresolved and
previously determined allowances could become either inadequate or more than
ultimately required.
14
HEALTHCARE REFORM, REGULATION AND LICENSING
CERTAIN BACKGROUND INFORMATION. Healthcare, as one of the largest industries
in the United States, continues to attract much legislative interest and public
attention. Medicare, Medicaid, mandatory and other public and private hospital
cost-containment programs, proposals to limit healthcare spending, proposals to
limit prices and industry competitive factors are highly significant to the
healthcare industry. In addition, the healthcare industry is governed by a
framework of Federal and state laws, rules and regulations that are extremely
complex and for which the industry has the benefit of little or no regulatory or
judicial interpretation. Although the Company believes it is in compliance in
all material respects with such laws, rules and regulations, if a determination
is made that the Company was in material violation of such laws, rules or
regulations, its operations and financial results could be materially adversely
affected.
There continue to be Federal and state proposals that would, and actions
that do, impose more limitations on government and private payments to providers
such as Tenet and proposals to increase co-payments and deductibles from program
and private patients. Tenet's facilities also are affected by controls imposed
by government and private payors designed to reduce admissions and lengths of
stay. Such controls, including what is commonly referred to as "utilization
review," have resulted in fewer of certain treatments and procedures being
performed. Utilization review entails the review of the admission and course of
treatment of a patient by a third party. Utilization review by third-party peer
review organizations ("PROs") is required in connection with the provision of
care paid for by Medicare and Medicaid. Utilization review by third parties also
is a requirement of many managed care arrangements.
Many states have enacted or are considering enacting measures that are
designed to reduce their Medicaid expenditures and to make certain changes to
private healthcare insurance. Tennessee has implemented a revision to its
Medicaid program that covers its Medicaid and uninsured population through a
managed care program. Louisiana and Texas also are considering wider use of
managed care for their Medicaid populations. California has created a voluntary
health insurance purchasing cooperative that seeks to make healthcare coverage
more affordable for businesses with five to 50 employees and, effective January
1, 1995, began changing the payment system for participants in its Medicaid
program in certain counties from fee-for-service arrangements to managed care
plans. Florida limits the amount by which a hospital's net revenues per
admission may be increased each year, has enacted a program creating a system of
local purchasing cooperatives and has proposed other changes that have not yet
been enacted. Florida also has adopted, and other states are considering
adopting, legislation imposing a tax on revenues of hospitals to help finance or
expand those states' Medicaid systems. A number of other states are considering
the enactment of managed care initiatives designed to provide universal low-cost
coverage. These proposals also may attempt to include coverage for some people
who presently are uninsured.
There is an initiative that will appear on the ballot in California on
November 5, 1996, which, if passed and implemented, would require all general
hospitals in California to maintain specified nurse-to-patient ratios. The
proposed ratios would require the Company to hire additional nurses. If the
proposal is passed and implemented, and the Company is not able to pass on the
increased costs of hiring the additional nurses, the Company's financial
performance could be materially adversely affected. The Company opposes the
ballot measure because it believes the ballot measure would impose staffing
levels that are not medically necessary and will result in increased healthcare
costs. The Company is unable to predict whether the ballot measure will be
passed, or if it is passed, whether it will overcome legal challenges and be
implemented.
CERTIFICATE OF NEED REQUIREMENTS. Some states require state approval for
construction and expansion of healthcare facilities, including findings of need
for additional or expanded healthcare facilities or
15
services. Certificates of Need, which are issued by governmental agencies with
jurisdiction over healthcare facilities, are at times required for capital
expenditures exceeding a prescribed amount, changes in bed capacity or services
and certain other matters. Following a number of years of decline, the number of
states requiring Certificates of Need is once again on the rise as state
legislators once again are looking at the Certificate of Need process as a way
to contain rising healthcare costs. Tenet operates hospitals in eight states
that require state approval under Certificate of Need Programs. Tenet is unable
to predict whether it will be able to obtain any Certificates of Need in any
jurisdiction where such Certificates of Need are required.
ANTIKICKBACK AND SELF-REFERRAL REGULATIONS. The healthcare industry is
subject to extensive Federal, state and local regulation relating to licensure,
conduct of operations, ownership of facilities, addition of facilities and
services and prices for services. In particular, Medicare and Medicaid
antikickback, antifraud and abuse amendments codified under Section 1128B(b) of
the Social Security Act (the "Antikickback Amendments") prohibit certain
business practices and relationships that might affect the provision and cost of
healthcare services reimbursable under Medicare and Medicaid, including the
payment or receipt of remuneration for the referral of patients whose care will
be paid for by Medicare or other government programs. Sanctions for violating
the Antikickback Amendments include criminal penalties and civil sanctions,
including fines and possible exclusion from government programs such as the
Medicare and Medicaid programs. Pursuant to the Medicare and Medicaid Patient
and Program Protection Act of 1987, HHS has issued regulations that describe
some of the conduct and business relationships permissible under the
Antikickback Amendments ("Safe Harbors"). The fact that a given business
arrangement does not fall within a Safe Harbor does not render the arrangement
per se illegal. Business arrangements of healthcare service providers that fail
to satisfy the applicable Safe Harbor criteria, however, risk increased scrutiny
by enforcement authorities. Because Tenet may be less willing than some of its
competitors to enter into business arrangements that do not clearly satisfy the
Safe Harbors, it could be at a competitive disadvantage in entering into certain
transactions and arrangements with physicians and other healthcare providers.
In addition, Section 1877 of the Social Security Act, which restricts
referrals by physicians of Medicare and other government-program patients to
providers of a broad range of designated health services with which they have
ownership or certain other financial arrangements, was amended effective January
1, 1995, to significantly broaden the scope of prohibited physician referrals
under the Medicare and Medicaid programs to providers with which they have
ownership or certain other financial arrangements (the "Self-Referral
Prohibitions"). Many states have adopted or are considering similar legislative
proposals, some of which extend beyond the Medicaid program to prohibit the
payment or receipt of remuneration for the referral of patients and physician
self-referrals regardless of the source of the payment for the care. Tenet's
participation in and development of joint ventures and other financial
relationships with physicians could be adversely affected by these amendments
and similar state enactments. The Company systematically reviews all of its
operations to ensure that it complies with the Social Security Act and similar
state statutes.
Both Federal and state government agencies have announced heightened and
coordinated civil and criminal enforcement efforts. One pilot project, Operation
Restore Trust, is focused on investigating healthcare providers in the home
health and nursing home industries as well as on medical suppliers to these
providers in California, Florida, Texas, Illinois and New York. The Company
provides home health and nursing home care in California, Florida and Texas.
Tenet is unable to predict the future course of Federal, state and local
regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on Tenet's financial condition.
16
ENVIRONMENTAL REGULATIONS. The Company's healthcare operations generate
medical waste that must be disposed of in compliance with Federal, state and
local environmental laws, rules and regulations. The Company's operations, as
well as the Company's purchases and sales of facilities, are also subject to
compliance with various other environmental laws, rules and regulations. Such
compliance does not, and the Company anticipates that such compliance will not,
materially affect the Company's capital expenditures, earnings or competitive
position.
HEALTHCARE FACILITY LICENSING REQUIREMENTS. Tenet's healthcare facilities
are subject to extensive Federal, state and local legislation and regulation. In
order to maintain their operating licenses, healthcare facilities must comply
with strict standards concerning medical care, equipment and hygiene. Various
licenses and permits also are required in order to dispense narcotics, operate
pharmacies, handle radioactive materials and operate certain equipment. Tenet's
healthcare facilities hold all required governmental approvals, licenses and
permits. With the exception of one general hospital that has not sought to be
accredited, each of Tenet's facilities that is eligible for accreditation is
fully accredited by the JCAHO, the Commission on Accreditation of Rehabilitation
Facilities (in the case of rehabilitation hospitals) or another appropriate
accreditation agency. With such accreditation, the Company's hospitals are
eligible to participate in government-sponsored provider programs such as the
Medicare and Medicaid programs.
UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE. Tenet's healthcare
facilities are subject to and comply with various forms of utilization review.
In addition, under the Medicare PPS, each state must have a PRO to carry out a
federally mandated system of review of Medicare patient admissions, treatments
and discharges in general hospitals. Medical and surgical services and practices
are extensively supervised by committees of staff doctors at each healthcare
facility, are overseen by each healthcare facility's local governing board,
comprised of healthcare professionals, community members and hospital
representatives, and are reviewed by Tenet's quality assurance personnel. The
local governing boards also help maintain standards for quality care, develop
long-range plans, establish, review and enforce practices and procedures and
approve the credentials and disciplining of medical staff members.
COMPLIANCE PROGRAM
The Company maintains a multi-faceted corporate compliance and ethics
program. A portion of the program results from a 1994 settlement between the
Company and HHS. The mandated portion of the program, which is in effect until
June 1999, provides, in part, that the Company will not own or operate
psychiatric facilities (defined for the purposes of the agreement to include
residential treatment centers and substance abuse facilities) except as
specifically provided for under the terms of the agreement (which permits the
Company's subsidiaries to own and operate a small number of psychiatric
facilities on the same campus as or nearby certain of Tenet's general hospitals)
and requires self-reporting of credible evidence of violations of criminal law
or material violations of civil laws, rules or regulations governing federally
funded programs. The Company now has in place a program designed to provide
annual ethics training to every employee and to encourage all employees to
report any ethical violations to a toll-free telephone hotline.
MANAGEMENT
The executive officers of the Company who also are not Directors as of
August 22, 1996 are:
NAME POSITION AGE
- --------------------------- ------------------------------------------------------------------------------- ---
Scott M. Brown Senior Vice President, General Counsel and Secretary 51
Trevor Fetter Executive Vice President and Chief Financial Officer 36
Raymond L. Mathiasen Senior Vice President and Chief Accounting Officer 53
17
Scott M. Brown is Senior Vice President, General Counsel and Secretary of
the Company. He joined Tenet in 1981. Mr. Brown was elected Secretary in 1984
and Senior Vice President in 1990. He was appointed acting General Counsel in
July 1993 and General Counsel in February 1994.
Trevor Fetter is Executive Vice President and Chief Financial Officer of the
Company. Mr. Fetter joined Tenet as an Executive Vice President in October 1995.
In March 1996, he was appointed to the additional position of Chief Financial
Officer. Mr. Fetter served as Executive Vice President and Chief Financial
Officer of Metro-Goldwyn-Mayer, Inc. ("MGM") from 1990 to October 1995, and as
Senior Vice President of MGM from 1988 to 1990. From 1982 to 1988, Mr. Fetter
worked in the investment banking division of Merrill Lynch Capital Markets.
Raymond L. Mathiasen is Senior Vice President and, since March 1996, Chief
Accounting Officer of the Company. From February 1994 to March 1996, Mr.
Mathiasen served as Senior Vice President and Chief Financial Officer of the
Company and from September 1993 to February 1994, Mr. Mathiasen served as Senior
Vice President and acting Chief Financial Officer. Mr. Mathiasen was elected to
the position of Senior Vice President in 1990 and Chief Operating Financial
Officer in 1991. Prior to joining Tenet as a Vice President in 1985, he was a
partner with Arthur Young & Company (now known as Ernst & Young).
PROFESSIONAL AND GENERAL LIABILITY INSURANCE
The Company insures substantially all of its professional and comprehensive
general liability risks in excess of self-insured retentions, which vary by
hospital and by policy period from $500,000 to $3 million per occurrence,
through an insurance company owned by several healthcare companies and in which
the Company has a majority equity interest. A significant portion of these risks
is, in turn, reinsured with major independent insurance companies. Through May
31, 1994, the Company insured its professional and comprehensive general
liability risks related to its psychiatric and physical rehabilitation hospitals
through a wholly owned insurance subsidiary that reinsured risks in excess of
$500,000 with major independent insurance companies. The Company has reached the
policy limits provided by this insurance subsidiary related to the psychiatric
hospitals in certain years. In addition, damages, if any, arising from fraud and
conspiracy claims in psychiatric malpractice cases (described under Legal
Proceedings below) may not be insured. If actual payments of claims materially
exceed projected payments of claims, Tenet's financial condition could be
materially adversely affected.
INCOME TAX EXAMINATION
The Internal Revenue Service (the "IRS") currently is examining Tenet's
Federal income tax returns for fiscal years 1986 through 1994 and TH Holding's
Federal income tax returns for fiscal years 1992 through 1994. The IRS has not
yet begun examining any of Tenet's or TH Holding's returns for subsequent years
(collectively, the "Open Years"). Various state taxing authorities currently are
examining Tenet's and its subsidiaries' income and franchise tax returns for the
Open Years. Although the IRS and the states have not proposed any material
adjustments to Tenet's returns in the Open Years, there can be no assurance that
significant issues will not be raised. While management has no reason to believe
that the reserves for tax liabilities it has recorded will be inadequate, if
audits of the Open Years or fiscal 1996, for which Tenet has not yet filed a tax
return, result in determinations materially in excess of such reserves, Tenet's
financial condition could be materially adversely affected. Although, based upon
information currently available to it, management believes that additional
income tax liabilities, if any, in excess of the recorded reserves for tax
liabilities that might be due as a result of any of the foregoing IRS or state
examinations cannot reasonably be estimated, management does not believe it is
likely that any such additional tax liabilities will have a material adverse
effect on the Company's results of operations, liquidity or capital resources.
18
ITEM 2. PROPERTIES.
The response to this item is included in Item 1.
ITEM 3. LEGAL PROCEEDINGS.
The Company continues to defend a greater than normal level of litigation
relating to its subsidiaries' former psychiatric operations. The majority of the
lawsuits filed contain allegations of medical malpractice as well as allegations
of fraud and conspiracy against the Company and certain of its subsidiaries and
former employees. Also named as defendants are numerous doctors and other
healthcare professionals. The Company believes that the increase in litigation
stems, in whole or in part, from advertisements by certain lawyers seeking
former psychiatric patients in order to file claims against the Company and
certain of its subsidiaries. The advertisements focus, in many instances, on the
Company's settlement of past disputes involving the operations of its
psychiatric subsidiaries, including the Company's 1994 resolution of the
government's investigation and a corresponding criminal plea agreement involving
a psychiatric subsidiary of the Company. As previously reported in the Company's
Annual Report on Form 10-K for fiscal year 1995, among the suits filed during
fiscal 1995 were two lawsuits in Texas state court with approximately 740
individual plaintiffs at present who purport to have been patients in certain
Texas psychiatric facilities. During fiscal 1996, 64 plaintiffs voluntarily
withdrew from one of the lawsuits and the Company's motion to recuse the
original trial judge in that lawsuit has been granted. In the second lawsuit,
the Texas Supreme Court has ruled that lead counsel for the plaintiffs may not
continue to represent the plaintiffs due to a conflict of interest as asserted
by the defendants. Neither of the two cases currently is set for trial.
During fiscal 1995 and 1996, lawsuits with approximately 210 plaintiffs at
present who purport to have been patients in certain Washington, D.C.
psychiatric facilities, containing allegations similar to those contained in the
Texas cases described above, were filed in the District of Columbia.
In addition to the above, as previously reported in the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 1995, a purported class
action was filed in Texas state court in May, 1995, entitled Justin Love vs.
National Medical Enterprises, et al. The case contains allegations of fraud and
conspiracy similar to those described in the preceding paragraphs. The plaintiff
purports to represent all persons who were voluntarily admitted to one of 11
psychiatric hospitals in Texas between January 1, 1981, and December 31, 1991,
and who also fit into one or more of eight categories based on such factors as
their age at the time of admission, status of their insurance at the time of
discharge and whether a certain type of examination was conducted prior to their
being admitted. In February 1996, an insurance company that purports to have
paid claims on behalf of the potential class intervened in the action and the
case was removed to the U.S. District Court in Houston, Texas. A motion by the
plaintiffs to remand the case to Texas state court currently is pending. The
class has not been certified and the Company believes that the class is not
capable of being certified.
The Company expects that additional lawsuits with similar allegations will
be filed. The Company believes it has a number of defenses to each of these
actions and will defend the litigation vigorously. Until the lawsuits are
resolved, however, the Company will continue to incur substantial legal
expenses. Although, based upon information currently available to it, management
believes that the amount of damages, if any, in excess of the reserves the
Company has recorded for unusual litigation costs that may be awarded in any of
the foregoing unresolved legal proceedings cannot reasonably be estimated,
management does not believe it is likely that any such damages will have a
material adverse effect on the Company's results of operations, liquidity or
capital resources. There can be no assurance, however, that the ultimate
liability will not exceed such reserves.
19
Two additional federal class actions filed in August 1993 and previously
reported in the Company's Annual Report on Form 10-K for the fiscal years ended
May 31, 1994, and May 31, 1995, were consolidated into one action pending in the
U.S. District Court in the Central District of California captioned In re:
National Medical Enterprises Securities Litigation II. These consolidated
actions are on behalf of a purported class of shareholders who purchased or sold
stock of the Company between January 14, 1993 and August 26, 1993, and allege
that each of the defendants violated Section 10(b) of the Securities Exchange
Act of 1934. Specifically, plaintiffs allege that each defendant knew or
recklessly disregarded that the public statements made by the Company and
several of its officers and directors in reports to the Securities and Exchange
Commission, in press releases, communications with shareholders, and
communications with the financial community were false and misleading because
the financial data and projections were based upon a number of alleged illegal
practices at many of the Company's psychiatric facilities. Plaintiffs claim that
each of the defendants was a direct participant in this wrongdoing and conspired
with and aided and abetted each of the other defendants in perpetrating the
alleged fraudulent scheme. Based on these claims, plaintiffs seek compensatory
damages, injunctive relief, attorneys' fees, interest and costs. The parties
commenced a voluntary mediation in July, 1994. The mediation efforts were
unsuccessful and in May 1995 the parties agreed to proceed with the litigation.
On June 23, 1995, the defendants filed a motion to dismiss and to strike
plaintiffs' complaint, which motion is still pending. The Company believes it
has meritorious defenses to this action and will defend this litigation
vigorously.
As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1995, a total of nine purported class actions,
entitled In re: American Medical Holdings, Inc., Shareholders Litigation, C.A.
No. 13797, Ruth LeWinter and Raymond Cayuso v. the AMH Directors (with the
exception of Harold S. Williams), NME and AMH, Case No. BC-115206, and David F.
and Sylvia Goldstein v. O'Leary, NME, AMH, et al., Case No. BC-116104 (the
"Merger Class Actions"), were filed challenging the Merger in both Delaware and
California. In April 1996, the parties to the Merger Class Actions executed a
stipulation of settlement and in August 1996, the court issued an order
approving the settlement. Under the terms of that settlement, the Company agreed
to pay $350,000 for the plaintiffs' attorneys fees and agreed that for a period
of one year following final approval of the settlement it will not engage in any
transaction that will be dilutive to existing shareholders without that
transaction being approved by a majority of its outside directors.
In its normal course of business the Company also is subject to claims and
lawsuits relating to injuries arising from patient treatment. The Company
believes that its liability for damages resulting from such claims and lawsuits
in its normal course of business is adequately covered by insurance or is
adequately provided for in its consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The response to this item is included on page 48 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1996. The required information
hereby is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The response to this item is included on page 16 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1996. The required information
hereby is incorporated by reference.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The response to this item is included on pages 17 through 23 of the
Registrant's Annual Report to Shareholders for the year ended May 31, 1996. The
required information hereby is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included on pages 24 through 45 and page 48 of
the Registrant's Annual Report to Shareholders for the year ended May 31, 1996.
The required information hereby is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE
COMPENSATION.
Information concerning the Directors of the Registrant, including executive
officers of the Registrant who also are Directors, and other information
required by Items 10 and 11, is included on pages 2 through 6 of the definitive
Proxy Statement for Registrant's 1996 Annual Meeting of Shareholders and hereby
is incorporated by reference. Similar information regarding executive officers
of the Registrant who, except as noted therein, are not Directors is set forth
on page 20 above. Information regarding compensation of executive officers and
Directors of the Registrant is included on pages 9 through 17 and pages 22
through 27 of the definitive Proxy Statement for the Registrant's 1996 Annual
Meeting of Shareholders and hereby is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this item is included on pages 7 and 28 of the definitive
Proxy Statement for the Registrant's 1996 Annual Meeting of Shareholders. The
required information hereby is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this item is included on page 27 of the definitive Proxy
Statement for the Registrant's 1996 Annual Meeting of Shareholders. The required
information hereby is incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(A) 1. FINANCIAL STATEMENTS.
The consolidated financial statements to be included in Part II, Item 8, are
incorporated by reference to the Registrant's 1996 Annual Report to
Shareholders. (See Exhibit (13)).
21
2. FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts and Reserves (included on
page F-1)
All other schedules and Condensed Financial Statements of Registrant are omitted
because they are not applicable or not required or because the required
information is included in the financial statements or notes thereto.
3. EXHIBITS.
(3) Articles of Incorporation and Bylaws
(a) Restated Articles of Incorporation of Registrant, as amended October
13, 1987 and June 22, 1995 (Incorporated by reference to Exhibit 3(a) to
Registrant's Annual Report on Form 10-K dated August 25, 1995, for the
fiscal year ended May 31, 1995)
(b) Restated Bylaws of Registrant, as amended July 31, 1996
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Indenture, dated as of March 1, 1991, between the Registrant and The
Bank of New York, as Trustee, relating to Medium Term Notes
(b) Indenture, dated as of March 1, 1995, between Tenet and The Bank of
New York, as Trustee, relating to 9 5/8% Senior Notes due 2002
(Incorporated by reference to Exhibit 4(a) to Registrant's Quarterly
Report on Form 10-Q dated April 14, 1995, for the fiscal quarter ended
February 28, 1995)
(c) Indenture, dated as of March 1, 1995, between Tenet and The Bank of
New York, as Trustee, relating to 10 1/8% Senior Subordinated Notes due
2005 (Incorporated by reference to Exhibit 4(b) to Registrant's
Quarterly Report on Form 10-Q dated April 14, 1995, for the fiscal
quarter ended February 28, 1995)
(d) Indenture, dated as of October 16, 1995, between Tenet and The Bank of
New York, as Trustee, relating to 8 5/8% Senior Notes due 2003
(e) Indenture, dated as of January 10, 1996, between Tenet and The Bank of
New York, as Trustee, relating to 6% Exchangeable Subordinated Notes due
2005 (Incorporated by reference to Exhibit 4(a) to Registrant's
Quarterly Report on Form 10-Q dated January 15, 1996, for the fiscal
quarter ended November 30, 1995)
(f) Escrow Agreement, dated as of January 10, 1996, among the Company,
NME Properties, Inc., NME Property Holding Co., Inc. and The Bank of New
York, as Escrow Agent (Incorporated by reference to Exhibit 4(b) to
Registrant's Quarterly Report on Form 10-Q, dated as of January 15,
1996, for the fiscal quarter ended November 30, 1995)
(10) Material Contracts
(a) Guaranty Reimbursement Agreement, dated as of January 31, 1990, by and
between the Registrant and The Hillhaven Corporation (Incorporated by
reference to Exhibit 10(e) to Registrant's Annual Report on Form 10-K
dated August 21, 1992, for the fiscal year ended May 31, 1992)
22
(b) First Amendment to Guarantee Reimbursement Agreement, dated as of May
30, 1991, by and between the Registrant and The Hillhaven Corporation
(c) Second Amendment to Guarantee Reimbursement Agreement, dated as of
October 2, 1991, between the Registrant and The Hillhaven Corporation
(Incorporated by reference to Exhibit 10(w) to Registrant's Annual
Report on Form 10-K dated August 21, 1992, for the fiscal year ended May
31, 1992)
(d) Third Amendment to Guarantee Reimbursement Agreement, dated as of
April 1, 1992, between the Registrant and The Hillhaven Corporation
(Incorporated by reference to Exhibit 10(dd) to Registrant's Annual
Report on Form 10-K dated August 21, 1992, for the fiscal year ended May
31, 1992)
(e) Fourth Amendment to Guarantee Reimbursement Agreement, dated as of
November 12, 1992, between the Registrant and Hillhaven (Incorporated by
reference to Exhibit 10(pp) to Registrant's Annual Report on Form 10-K
dated August 30, 1993, for the fiscal year ended May 31, 1993)
(f) Fifth Amendment to Guarantee Reimbursement Agreement, dated as of
February 19, 1993, between the Registrant and Hillhaven (Incorporated by
reference to Exhibit 10(qq) to Registrant's Annual Report on Form 10-K
dated August 30, 1993, for the fiscal year ended May 31, 1993)
(g) Sixth Amendment to Guarantee Reimbursement Agreement, dated as of May
28, 1993, between the Registrant and Hillhaven (Incorporated by
reference to Exhibit 10(RR) to Registrant's Annual Report on Form 10-K
dated August 30, 1993, for the fiscal year ended May 31, 1993)
(h) Seventh Amendment to Guarantee Reimbursement Agreement, dated as of
May 28, 1993, between the Registrant and The Hillhaven Corporation
(Incorporated by reference to Exhibit 10(h) the Registrant's Annual
Report on Form 10-K dated August 25, 1994, for the fiscal year ended May
31, 1994)
(i) Eighth Amendment to Guarantee Reimbursement Agreement, dated
September 2, 1993, between the Registrant and The Hillhaven Corporation
(Incorporated by reference to Exhibit 10(i) to Registrant's Annual
Report on Form 10-K dated August 25, 1994, for the fiscal year ended May
31, 1994)
(j) $91,350,000 Amended and Restated Letter of Credit and Reimbursement
Agreement, dated as of February 28, 1995, among the Company, as Account
Party, and Bank of America National Trust and Savings Association, The
Bank of New York, Bankers Trust Company and Morgan Guaranty Trust
Company of New York, as Banks, and The Bank of New York, as Issuing Bank
(Incorporated by reference to Exhibit 10(b) to Registrant's Quarterly
Report on Form 10-Q dated April 14, 1995, for the fiscal quarter ended
February 28, 1995)
(k) Amendment to Reimbursement Agreement, dated as of March 1, 1996, among
the Company, as Account Party, Bank of America National Trust and
Savings Association, The Bank of New York, Bankers Trust Company and
Morgan Guaranty Trust Company of New York, as Banks, and The Bank of New
York, as the Issuing Bank (Incorporated by reference to Exhibit 10(b) to
Registrant's Quarterly Report on Form 10-Q, dated as of April 12, 1996,
for the fiscal quarter ended February 29, 1996)
23
(l) Credit Agreement, dated as of March 1, 1996, among the Company, as
Borrower, the Lenders and Managing Agents party thereto, Bank of America
National Trust and Savings Association, as Documentation Agent, The Bank
of New York as, Syndication Agent, and Morgan Guaranty Trust Company of
New York, as Administrative Agent (Incorporated by reference to Exhibit
10(a) to Registrant's Quarterly Report on Form 10-Q, dated as of April
12, 1996, for the fiscal quarter ended February 29, 1996)
(m) Agreement, dated August 22, 1995, among the Registrant, The Hillhaven
Corporation and Vencor, Inc. (Incorporated by reference to Exhibit 10(n)
to Registrant's Annual Report on Form 10-K dated August 25, 1995, for
the fiscal year ended May 31, 1995)
(n) Asia Stock Purchase Agreement, dated as of May 24, 1995, between the
Registrant and Parkway Holdings Limited (Incorporated by reference to
Exhibit 10(o) to Registrant's Annual Report on Form 10-K dated August
25, 1995, for the fiscal year ended May 31, 1995)
(o) Australian Stock Purchase Agreement, dated as of July 5, 1995, between
the Registrant and Parkway Holdings Limited (Incorporated by reference
to Exhibit 10(p) to Registrant's Annual Report on Form 10-K dated August
25, 1995, for the fiscal year ended May 31, 1995)
(p) Amending Agreement to the Australia Stock Purchase Agreement, dated as
of August 14, 1995, between the Registrant and Parkway Holdings Limited
(Incorporated by reference to Exhibit 10(q) to Registrant's Annual
Report on Form 10-K dated August 25, 1995, for the fiscal year ended May
31, 1995)
(q) Letter from the Registrant to Jeffrey C. Barbakow, dated May 26, 1993
(Incorporated by reference to Exhibit 10(l) to Registrant's Annual
Report on Form 10-K dated August 30, 1993, for the fiscal year ended May
31, 1993)
(r) Letter from the Registrant to Jeffrey C. Barbakow, dated June 1, 1993
(Incorporated by reference to Exhibit 10(m) to Registrant's Annual
Report on Form 10-K dated August 30, 1993, for the fiscal year ended May
31, 1993)
(s) Memorandum from the Registrant to Jeffrey C. Barbakow, dated June 14,
1993 (Incorporated by reference to Exhibit 10(n) to Registrant's Annual
Report on Form 10-K dated August 30, 1993, for the fiscal year ended May
31, 1993)
(t) Memorandum of Understanding, dated May 21, 1996, from Jeffrey C.
Barbakow to the Company
(u) Memorandum of Understanding, dated May 21, 1996, from Michael H.
Focht, Sr. to the Company
(v) Executive Officers Relocation Protection Agreement
(w) Executive Officers Severance Protection Plan
(x) Board of Directors Retirement Plan, effective January 1, 1985
24
(y) First Amendment to Board of Directors Retirement Plan, effective as of
August 18, 1993 (Incorporated by reference to Exhibit 10(xx) to
Registrant's Annual Report on Form 10-K dated August 30, 1993, for the
fiscal year ended May 31, 1993)
(z) Amendment to Directors Retirement Plan, dated as of April 25, 1994
(Incorporated by reference to Exhibit 10(oo) to Registrant's Annual
Report on Form 10-K dated August 25, 1994, for the fiscal year ended May
31, 1994)
(aa) Supplemental Executive Retirement Plan, as amended May 21, 1986
(Incorporated by reference to Exhibit 10(o) to Registrant's Annual
Report on Form 10-K dated August 21, 1992, for the fiscal year ended
May 31, 1992)
(bb) Amendment to Supplemental Executive Retirement Plan, dated as of
April 25, 1994 (Incorporated by reference to Exhibit 10(ss) to
Registrant's Annual Report on Form 10-K dated August 25, 1994, for the
fiscal year ended May 31, 1994)
(cc) Amendment to Supplemental Executive Retirement Plan, dated as of July
25, 1994 (Incorporated by reference to Exhibit 10(tt) to Registrant's
Annual Report on Form 10-K dated August 25, 1994, for the fiscal year
ended May 31, 1994)
(dd) 1994 NME Supplemental Executive Retirement Plan Trust Agreement,
dated as of May 25, 1994, as amended July 25, 1994, between the
Registrant, and United States Trust Company of New York (Incorporated
by reference to Exhibit 10(uu) to Registrant's Annual Report on Form
10-K dated August 25, 1994, for the fiscal year ended May 31, 1994)
(ee) Long Term Incentive Plan (Incorporated by reference to Exhibit 10(p)
to Registrant's Annual Report on Form 10-K dated August 21, 1992, for
the fiscal year ended May 31, 1992)
(ff) 1994 Annual Incentive Plan (Incorporated by reference to Exhibit B
to the Definitive Proxy Statement, dated as of August 25, 1994, for
the Registrant's 1994 Annual Meeting of Shareholders)
(gg) Deferred Compensation Plan, effective March 23, 1983
(hh) First Amendment to Deferred Compensation Plan, dated as of August 15,
1994 (Incorporated by reference to Exhibit 10(zz) to Registrant's
Annual Report on Form 10-K dated August 25, 1994, for the fiscal year
ended May 31, 1994)
(ii) 1994 NME Deferred Compensation Plan Trust Agreement, dated as of May
25, 1994, as amended July 25, 1994, between the Registrant and United
States Trust Company of New York (Incorporated by reference to Exhibit
10(aaa) to Registrant's Annual Report on Form 10-K dated August 25,
1994, for the fiscal year ended May 31, 1994)
(jj) 1994 Directors Stock Option Plan (Incorporated by reference to
Exhibit A to the Definitive Proxy Statement, dated as of August 25,
1994, for the Registrant's 1994 Annual Meeting of Shareholders)
(kk) 1991 Stock Incentive Plan
25
(ll) 1995 Stock Incentive Plan (Incorporated by reference to Exhibit A to
the definitive Proxy Statement, dated as of August 25, 1995, for the
Registrant's 1995 Annual Meeting of Shareholders)
(mm) 1995 Employee Stock Purchase Plan (Incorporated by reference to
Exhibit B to the definitive Proxy Statement, dated as of August 25,
1995, for the Registrant's 1995 Annual Meeting of Shareholders)
(11) Statement Re: Computation of Per Share Earnings, page 31
(13) 1996 Annual Report to Shareholders of Registrant
(21) Subsidiaries of the Registrant
(23) Consent of Experts
(a) Accountants' Consent and Report on Consolidated Schedule (KPMG Peat
Marwick LLP)
(27) Financial Data Schedule (included only in the EDGAR filing)
(B) REPORTS ON FORM 8-K
Tenet filed no reports on Form 8-K during the last quarter of the 1996
fiscal year.
26
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
(1) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(EXHIBIT 11)
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at beginning of period....... 199,938 166,081 165,898 166,963 174,765
Shares issued in connection with merger......... -- 8,358 -- -- --
Shares issued upon exercise of stock options.... 1,015 311 60 27 299
Dilutive effect of outstanding stock options.... 2,961 2,068 1,114 172 495
Shares issued as grants of restricted stock, net
of cancellations............................... -- (1) (48) (52) 75
Shares repurchased as treasury stock............ -- -- -- (999) (4,295)
Shares issued upon conversion of notes and
debentures..................................... 5,578 -- -- -- 529
Other........................................... -- -- -- -- (15)
----------- ----------- ----------- ----------- -----------
Weighted average number of shares and share
equivalents outstanding........................ 209,492 176,817 167,024 166,111 171,853
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income from continuing operations............... $ 398,330 $ 194,381 $ 215,901 $ 263,644 $ 218,199
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per share from continuing operations... $ 1.90 $ 1.10 $ 1.29 $ 1.59 $ 1.27
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
FOR FULLY DILUTED EARNINGS PER SHARE
Weighted average number of shares used in
primary calculation............................ 209,492 176,817 167,024 166,111 171,853
Additional dilutive effect of stock options..... 294 203 97 23 1
Assumed conversion of dilutive convertible notes
and debentures................................. 6,890 13,119 13,966 14,356 20,990
----------- ----------- ----------- ----------- -----------
Fully diluted weighted average number of
shares......................................... 216,676 190,139 181,087 180,490 192,844
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Income from continuing operations used in
primary calculation............................ $ 398,330 $ 194,381 $ 215,901 $ 263,644 $ 218,199
Adjustments:
Interest expense on convertible debentures...... 9,061 14,596 10,537 8,752 23,040
Reduced reimbursement of above interest expense
by Medicare.................................... (2,422) (2,203) (650) (974) (3,029)
Income tax on interest less Medicare
reimbursement.................................. (2,602) (4,846) (3,906) (3,150) (7,804)
----------- ----------- ----------- ----------- -----------
Adjusted income from continuing operations...... $ 402,367 $ 201,928 $ 221,882 $ 268,272 $ 230,406
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Earnings per share from continuing operations... $ 1.86 $ 1.06 $ 1.23 $ 1.49 $ 1.19
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
- ------------------------
(1) All numbers of shares in these tables are weighted on the basis of the
number of days the shares were outstanding or assumed to be outstanding
during each period.
27
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on August 26, 1996.
Tenet Healthcare Corporation
By: /s/ Trevor Fetter By: /s/ Scott M. Brown
- -------------------------------------------- --------------------------------------------
Trevor Fetter Scott M. Brown
Executive Vice President and Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Raymond L. Mathiasen
- --------------------------------------------
Raymond L. Mathiasen
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on August 26, 1996, by the following persons on
behalf of the registrant and in the capacities indicated:
SIGNATURE TITLE
- -------------------------------------------------------- --------------------------------------------------------
/s/ Jeffrey C. Barbakow Chairman, Chief Executive Officer
- -------------------------------------------- and Director (Principal Executive
Jeffrey C. Barbakow Officer)
/s/ Michael H. Focht, Sr.
- -------------------------------------------- President, Chief Operating Officer
Michael H. Focht, Sr. and Director
28
SIGNATURE TITLE
- ------------------------------------------------- -------------------------------------------------
/s/ Bernice Bratter
- --------------------------------------- Director
Bernice Bratter
/s/ Maurice J. DeWald
- --------------------------------------- Director
Maurice J. DeWald
/s/ Peter de Wetter
- --------------------------------------- Director
Peter de Wetter
/s/ Edward Egbert, M.D.
- --------------------------------------- Director
Edward Egbert, M.D.
/s/ Raymond A. Hay
- --------------------------------------- Director
Raymond A. Hay
/s/ Lester B. Korn
- --------------------------------------- Director
Lester B. Korn
/s/ James P. Livingston
- --------------------------------------- Director
James P. Livingston
/s/ Thomas J. Pritzker
- --------------------------------------- Director
Thomas J. Pritzker
/s/ Richard S. Schweiker
- --------------------------------------- Director
Richard S. Schweiker
29
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1994, 1995 AND 1996
(IN MILLIONS)
ADDITIONS CHARGED TO:
------------------------------
BALANCE AT CONTINUING BALANCE AT
BEGINNING OF OPERATIONS DISCONTINUED DEDUCTIONS OTHER END OF
PERIOD (1) OPERATIONS (2) ITEMS (3) PERIOD
--------------- ------------- --------------- ------------- ----------- -------------
Allowance for
doubtful accounts
1994.......................... $ 115 $ 111 $ 35 $ (128) $ (56) $ 77
1995.......................... $ 77 $ 140 $ 25 $ (153) $ 95 $ 184
1996.......................... $ 184 $ 290 -- $ (331) $ 13 $ 156
- ------------------------
(1) Before considering recoveries on accounts or notes previously written off.
(2) Accounts written off.
(3) Beginning balances of purchased businesses, net of balances of businesses
sold.
F-1