SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended . |
OR | |
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Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from June 1, 2002 to December 31, 2002. |
Commission file number 1-7293
TENET HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of incorporation or organization) |
95-2557091
(IRS Employer Identification No.) |
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3820 State Street Santa Barbara, CA 93105 (Address of principal executive offices) |
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(805) 563-7000 (Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which registered
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Common stock | New York Stock Exchange and Pacific Stock Exchange | |
8 5 / 8 % Senior Notes due 2003 | New York Stock Exchange | |
7 7 / 8 % Senior Notes due 2003 | New York Stock Exchange | |
8% Senior Notes due 2005 | New York Stock Exchange | |
5 3 / 8 % Senior Notes due 2006 | New York Stock Exchange | |
5% Senior Notes due 2007 | New York Stock Exchange | |
6 3 / 8 % Senior Notes due 2011 | New York Stock Exchange | |
6 1 / 2 % Senior Notes due 2012 | New York Stock Exchange | |
7 3 / 8 % Senior Notes due 2013 | New York Stock Exchange | |
6 7 / 8 % Senior Notes due 2031 | New York Stock Exchange | |
8 1 / 8 % Senior Subordinated Notes due 2008 | New York Stock Exchange |
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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 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 amendment to this Form 10-K. ý
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes ý No o
As of November 29, 2002 there were 473,718,479 shares of common stock outstanding. The aggregate market value of the shares of common stock held by non-affiliates of the Registrant as of November 29, 2002, based on the closing price of these shares on the New York Stock Exchange, was $8,703,344,109. This information is being provided pursuant to SEC rules. As of April 30, 2003, there were 466,624,622 shares of common stock outstanding. The aggregate market value of the shares of common stock held by non-affiliates of the Registrant as of April 30, 2003, based on the closing price of these shares on the New York Stock Exchange, was $6,888,053,091. Reporting this information as of April 30, 2003 is not required by SEC rules, but the Registrant is furnishing it to give our shareholders a more recent statement of the value of our stock held by non-affiliates. For the purposes of the foregoing calculations only, all directors and executive officers of the Registrant have been deemed affiliates.
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ITEM 1. BUSINESS
GENERAL
Tenet Healthcare Corporation (together with its subsidiaries referred to as "Tenet," the "Company," "we," or "us") is the second largest investor-owned health care services company in the United States. At December 31, 2002, our subsidiaries and affiliates (collectively "subsidiaries") owned or operated 114 domestic general hospitals with 27,870 licensed beds and related health care facilities serving urban and rural communities in 16 states. They also owned one general hospital and related health care facilities in Barcelona, Spain, and held investments in other health care companies. Our related health care facilities included a small number of rehabilitation hospitals, specialty hospitals, long-term-care facilities, a psychiatric facility and medical office buildingsall of which are located on the same campus as, or nearby, one of our general hospitals. Our subsidiaries also owned physician practices and various ancillary health care businesses, including outpatient surgery centers, home health care agencies, occupational and rural health care clinics and health maintenance organizations.
In March 2003, our board of directors approved a change in our fiscal year. Instead of a fiscal year ending on May 31, we will now have a fiscal year that coincides with the calendar year, effective December 31, 2002. Our next quarterly report will cover the three months ended March 31, 2003 and will be the first quarterly report for the fiscal year ending December 31, 2003. We plan to file that report by May 15, 2003.
Tenet's operating strategies include initiatives to (1) focus on core services such as cardiology, orthopedics and neurology designed to meet the health care needs of the aging baby-boomer generation, (2) improve the quality of care provided at its hospitals by identifying best practices and exporting those best practices to all of its hospitals, (3) improve operating efficiencies and reduce costs while maintaining or improving the quality of care provided, (4) reduce bad debts and improve cash flow, (5) acquire new, or expand and enhance existing, integrated health care delivery systems, (6) improve patient, physician and employee satisfaction, and (7) improve recruitment and retention of nurses and other employees.
We regularly review our subsidiaries' portfolio of facilities to assess performance and allocate resources. We intend to continue our strategic acquisitions of, and partnerships or affiliations with, additional general hospitals and related health care businesses in order to expand and enhance our integrated health care delivery systems. At times, we also may close or sell facilities or convert them to alternate uses.
As discussed in more detail under Operations on page 3, our subsidiaries acquired one general hospital, closed one, and sold another during the seven-month transition period ended December 31, 2002 ("reporting period"). During this period, we also began construction on a general hospital in Frisco, Texas. On March 18, 2003, we announced our intention to divest 14 general hospitals.
On March 1, 2001, we entered into a senior unsecured $500 million 364-day credit agreement and a senior unsecured $1.5 billion 5-year revolving credit agreement. On February 28, 2002, we renewed the 364-day agreement. Those credit agreements allowed us to borrow, repay and reborrow up to $2 billion prior to March 1, 2003 and up to $1.5 billion prior to March 1, 2006. We had $1.0 billion available under our credit agreements at December 31, 2002. Subsequently, Tenet's January 2003 issuance of $1 billion of 7 3 / 8 % Senior Notes due 2013 enabled us to repay our then current borrowings under those credit facilities. The $500 million 364-day credit agreement expired on February 28, 2003; it was undrawn and not renewed.
The Company and its subsidiaries operate in one line of business: the provision of health care through general hospitals and related health care facilities. Our domestic general hospitals generated
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93.4%, 95.8% and 96.9% of our net operating revenues in the years ended May 31, 2000, 2001 and 2002, respectively, and 97.1% in the seven-month period ended December 31, 2002.
Through March 10, 2003, we had organized these general hospitals and our other health care related facilities into three operating segments or divisions. The divisions' economic characteristics, the nature of their operations, the regulatory environment in which they operated and the manner in which they were managed were all similar. The components of these divisions shared certain resources and they benefited from many common clinical and management practices. Accordingly, we aggregated these divisions into a single reportable operating segment, as that term is defined by Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information."
On March 10, 2003, we announced the consolidation of our operating divisions from three to two with five new underlying regions. Our new Eastern Division will consist of three regionsFlorida, Central-Northeast and Southern States. These regions will initially include 59 of our general hospitals located in Alabama, Arkansas, Florida, Georgia, Louisiana, Massachusetts, Mississippi, Missouri, North Carolina, Pennsylvania, South Carolina and Tennessee. Our new Western Division will consist of two regionsCalifornia and Texasand will initially include 55 of our hospitals located in California, Nebraska, Nevada and Texas.
OPERATIONS
All of Tenet's operations are conducted through its subsidiaries. At December 31, 2002, our subsidiaries operated 114 domestic general hospitals with 27,870 licensed beds serving urban and rural communities in 16 states. Of those general hospitals, 94 are owned by Tenet subsidiaries and 20 are owned by third parties and leased by Tenet subsidiaries (including one Tenet-owned facility that is on land leased from a third party). A Tenet subsidiary also owns one general hospital and ancillary health care operations in Barcelona, Spain.
During the reporting period, a subsidiary acquired Roxborough Memorial Hospital, a 125-bed hospital that has served the Roxborough community of Philadelphia for 112 years. Included in the acquisition was a 100-year-old school of nursing, which Tenet has pledged to continue to operate. During the reporting period, Tenet sold Winona Memorial Hospital in Indianapolis, Indiana, and closed St. Luke Medical Center in Pasadena, California.
During the reporting period, Tenet subsidiaries began construction on a 150-bed general hospital and medical complex in Frisco, Texas, and completed the initial phase of construction on a 90-bed hospital in Bartlett, Tennessee.
Each of our general hospitals offers acute care services, operating and recovery rooms, radiology services, respiratory therapy services, clinical laboratories, and pharmacies; most offer intensive care, critical care and/or coronary care units, physical therapy, and orthopedic, oncology and outpatient services. A number of the hospitals also offer tertiary care services such as open-heart surgery, neonatal intensive care and neuroscience. Eight of our hospitalsMemorial Medical Center, USC University Hospital, St. Louis University Hospital, Hahnemann University Hospital, Sierra Medical Center, Western Medical Center, St. Christopher's Hospital for Children and the Cleveland Clinic Florida Hospitaloffer quaternary care in such areas as heart, lung, liver and kidney transplants. USC University Hospital, Sierra Medical Center and Good Samaritan Hospital also offer gamma-knife brain surgery and St. Louis University Hospital, Hahneman University Hospital and Memorial Medical Center offer bone marrow transplants. Except for one small hospital that has not sought to be accredited, each of our hospitals that are eligible for accreditation is fully accredited by the Joint Commission on Accreditation of Healthcare Organizations, the Commission on Accreditation of Rehabilitation Facilities (in the case of rehabilitation hospitals), The American Osteopathic Association (in the case of two hospitals) or another appropriate accreditation agency. With such accreditation, our
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hospitals are eligible to participate in the Medicare and Medicaid programs. The one hospital that is not accredited participates in the Medicare program through a special waiver that must be renewed each year.
For many years, such factors as significantly underutilized beds at U.S. hospitals, payor-required preadmission authorization, and payor pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients created an environment where hospital admissions and length of stay declined significantly. More recently, as the baby-boomer generation enters the stage of life where hospital utilization increases, admissions have begun to increase.
Among the various initiatives that we have implemented to address this trend is a focus on core services, such as cardiology, orthopedics and neurology, to meet the health care needs of the baby-boomer generation. Our hospitals also will continue to emphasize those outpatient services that can be provided on a quality, cost-effective basis and that we believe will meet the needs of the communities served by the facilities. The patient volumes and net operating revenues at our general hospitals and related health care facilities are subject to seasonal variations caused by a number of factors, including, but not 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.
The following table lists, by state, the general hospitals owned or leased by our subsidiaries and operated domestically as of December 31, 2002:
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Twelve Oaks Medical Center | Houston | 524 | Owned |
The largest concentrations of our licensed beds are in California (30.0 percent), Florida (16.8 percent) and Texas (12.6 percent). Strong concentrations of hospital beds within geographic areas help us contract more successfully with managed-care payors, reduce management, marketing and other expenses, and more efficiently utilize resources. However, such concentrations increase the risk that, should any adverse economic, regulatory or other development occur within these states, our business, financial position or results of operations could be adversely affected.
We believe that our hospitals are well-positioned to compete effectively in the rapidly evolving health care environment. We continually analyze whether each of our hospitals fits within our strategic plans and also analyze ways in which such assets could best be used to maximize shareholder value. To that end, we occasionally close, sell or consolidate certain facilities and services in order to eliminate duplicate services, non-core assets, or excess capacity, or because of changing market conditions. On March 18, 2003, we announced our intention to divest 14 hospitals.
The following table shows certain information about the general hospitals owned or leased domestically by our subsidiaries for the fiscal years ended May 31, 2000, 2001 and 2002 and for the reporting period. (Information about our general hospital in Barcelona, Spain, our rehabilitation hospitals, long-term-care facilities, psychiatric facility, outpatient surgery centers or other ancillary facilities is not included.)
PROPERTIES
Our principal executive offices are located at 3820 State Street, Santa Barbara, California 93105. We purchased our headquarters building in January 2003. The building is on land that is leased by a Tenet subsidiary under a long-term ground lease that expires in 2068. The telephone number of our Santa Barbara headquarters is (805) 563-7000. Support services for our subsidiaries and their hospitals are primarily located at our Dallas, Texas service center. A Tenet subsidiary leases the space for our service center under a lease that terminates in 2010 subject to the lessee's exercise of one or both of its two 5-year renewal options. At December 31, 2002, our subsidiaries were also leasing space for regional
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offices in California, Florida, Georgia, Louisiana, Missouri, Pennsylvania and Texas. In addition, our subsidiaries domestically operated 163 medical office buildings, most of which are adjacent to our general hospitals. The number of licensed beds and locations of our general hospitals are described on pages 4 through 7.
As of December 31, 2002, we had approximately $51 million of outstanding loans secured by property and equipment, and we had approximately $46 million of capitalized lease obligations. We believe 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 our hospitals also often serve on the medical staffs of hospitals not owned by Tenet. Members of our medical staffs are free to terminate their affiliation with Tenet hospitals or shift some or all of their admissions to competing hospitals at any time. Although Tenet owns some physician practices and, where permitted by law, employs some physicians, the overwhelming majority of the physicians who practice at our hospitals are not employees. Nurses, therapists, lab technicians, facility maintenance staff and the administrative staff of hospitals, however, normally are employees. Tenet is subject to the federal minimum wage and hour laws and maintains various employee benefit plans.
Our operations depend on the efforts, ability and experience of our employees and affiliated physicians. Our continued growth depends on (1) our ability to attract and retain skilled employees, (2) our ability to attract and retain physicians and other health care professionals, and (3) our ability to manage growth successfully. Therefore, the success of Tenet, in part, depends upon the quality, quantity and specialties of physicians on our hospitals' medical staffs, most of whom have no long-term contractual relationship with Tenet. Although we believe we will continue to successfully attract and retain key employees, qualified physicians and other health care professionals, the loss of some or all of our key employees or the inability to attract or retain sufficient numbers of qualified physicians and other health care professionals could have a material adverse effect on our business, financial position or results of operations.
At December 31, 2002, the approximate number of Tenet employees (of which approximately 30 percent were part-time employees) was as follows:
General hospital and related health care facilities(1) | 113,788 | ||
Tenet Service Center and regional and support offices | 1,174 | ||
Corporate headquarters | 167 | ||
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Total | 115,129 | ||
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The largest concentrations of our employees are in those states in which we have the largest concentrations of licensed hospital beds:
Approximately 8 percent of our employees are represented by labor unions, and labor relations at our facilities generally have been satisfactory. The hospital industry, including Tenet hospitals, is seeing an increase in the amount of union activity, particularly in California. In May 2003, we entered into an agreement with the Service Employees International Union and the American Federation of Federal, State, County and Municipal Employees with respect to all of our California hospitals and two hospitals in Florida. The agreement is expected to streamline the contract negotiation process if employees choose to organize into collective bargaining units at a facility. The agreement provides a framework for pre-negotiated salaries and benefits at these hospitals, and includes a no-strike agreement by these organizations at our other facilities for up to three years.
The hospital industry is experiencing a nationwide nursing shortage. This shortage is more serious in certain specialties and in certain geographic areas than others, including several areas in which we operate hospitals, such as South Florida, Southern California and Texas. The nursing shortage has become a significant operating issue to health care providers, including Tenet, and has resulted in increased costs for nursing personnel. We cannot predict the degree to which Tenet will be affected by the future availability or cost of nursing personnel, but we expect the nursing shortage to continue. We may be required to enhance wages and benefits to recruit and retain nurses. We may also be required to increase our use of more expensive temporary personnel. Among the steps we are taking to attract and retain employees in generally, and nurses in particular, is our "employer of choice" program, through which we strive to be the employer of choice in the regions in which we are located.
COMPETITION
Tenet's general hospitals and other health care businesses operate in competitive environments. We believe that competition among health care providers occurs primarily at the local level. We believe that a hospital's competitive position within the geographic area in which it operates is affected by a number of competitive factors, including: the scope, breadth and quality of services a hospital offers to its patients and physicians; the number, quality and specialties of the physicians who refer patients to the hospital; nurses and other health care professionals employed by the hospital or on its staff; its reputation; its managed-care contracting relationships; the extent to which it is part of an integrated health care delivery system; its location; the location and number of competitive facilities and other health care alternatives; the physical condition of its buildings and improvements; the quality, age and state of the art of its medical equipment; its parking or proximity to public transportation; the length of time it has been a part of the community; and its charges for services. Tax-exempt competitors may have certain financial advantages not available to Tenet's facilities, such as endowments, charitable contributions, tax-exempt financing, and exemptions from sales, property and income taxes. Accordingly, we tailor our local and regional strategies to address these specific competitive factors.
INTEGRATED HEALTH CARE DELIVERY SYSTEMS
The importance of our hospitals' obtaining managed-care contracts has increased over the years as employers, private and government payors, and others try to control rising health care costs. Our domestic general hospitals' net patient revenues from managed care contracts comprised 46.2% of our total net patient revenues for the seven-month period ended December 31, 2002. The revenues and
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operating results of most of our hospitals are significantly affected by our ability to negotiate favorable contracts with managed-care payors.
A health care provider's ability to compete for favorable managed-care contracts is affected by many factors, including the competitive factors referred to above. We believe that one of the most important of those factors is whether the hospital is part of an integrated health care delivery system. A hospital that is part of a system with many hospitals in a geographic area is more likely to obtain managed-care contractsand to obtain more favorable terms in those contractsthan a hospital that is not. Other important factors are the scope, breadth and quality of services offered by such a system as compared to those offered by competing systems.
We evaluate changing circumstances in each of our geographic areas on an ongoing basis, and we position ourselves to compete in the managed-care market either by forming our own integrated health care delivery systems or by joining with others to do so. A majority of our hospitals are located in geographic areas where they have the number one or number two market share. In those areas, we negotiate with managed-care providers with the goal of including all of our hospitals within the region in each managed-care contract.
Our networks in Southern California, South Florida, the greater New Orleans area, St. Louis, Philadelphia and Atlanta are models of how we have developed networks of our own hospitals and related health care facilities to meet the health care needs of those communities. In geographic areas where Tenet has fewer hospitals, those hospitals may join with other hospitals and health care providers to create integrated health care delivery systems in order to better compete for managed-care contracts.
PHYSICIAN AND EMPLOYEE SATISFACTION
Another important factor in Tenet's future success is the ability of its hospitals to continue to attract and retain staff physicians. We attract physicians to our hospitals by equipping our hospitals with technologically advanced equipment and physical plant, properly maintaining the equipment and physical plant, sponsoring training programs to educate physicians on advanced medical procedures providing high-quality care to our patients and otherwise creating an environment within which physicians prefer to practice. We also attract physicians to our hospitals by using local governing boards, consisting primarily of physicians and community members, to develop short-and long-term plans for the hospital and review and approve, as appropriate, actions of the medical staff, including staff appointments, credentialing, peer review and quality assurance. While physicians may terminate their association with a hospital at any time, Tenet believes that by striving to maintain and improve the quality of care at its hospitals and by maintaining ethical and professional standards, it will attract and retain qualified physicians with a variety of specialties.
"Target 100" and "Partnership for Change" are two important programs that we have adopted to enhance physician satisfaction and make our hospitals more attractive to physicians. The "Target 100" program targets 100 percent satisfaction rates among patients, physicians and employees at Tenet's facilities. Under the program, employees at every hospital are trained to focus on the following five pillars in every aspect of their jobs: Service, Quality, Cost, People and Growth. Tenet's Partnership for Change program is designed to create a quality monitoring culture among Tenet's employees, physicians and other health care professionals who practice at Tenet's hospitals. The program employs a computerized outcomes-management system that contains clinical and demographic information from our hospitals and physicians and allows users to identify "best practices" for treating specific diagnosis-related groups. As discussed in Tenet's earnings announcement on April 10, 2003, our goal is to improve the quality of care provided at its hospitals by maximizing the most effective clinical practices and eliminating those that have proven not to be effective.
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The health care industry continues to contend with a nursing shortage and increased competition for nurses and other health care professionals. These issues are described in the discussion concerning Medical Staff and Employees on pages 8-9.
The health care industry has seen a significant rise in malpractice expense due to unfavorable pricing and availability trends in the professional and general liability insurance markets and increases in the magnitude of claim settlements. We expect this trend may continue unless meaningful tort reform legislation is enacted.
Changes in medical technology, existing and future legislation, regulations, interpretations of those regulations, competitive contracting for provider services by payors and other competitive factors may require changes in our facilities, equipment, personnel, procedures, rates and/or services in the future. We believe we have the capital available to respond to those challenges.
To meet the foregoing challenges, we have implemented the business strategies described above and in the Business Strategies & Outlook section of Management's Discussion and Analysis on pages 31-33.
HEALTH CARE REGULATION AND LICENSING
CERTAIN BACKGROUND INFORMATION
Health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. Changes in Medicare, Medicaid and other programs, hospital cost-containment initiatives by public and private payors, proposals to limit payments and health care spending and industry-wide competitive factors are highly significant to the health care industry. In addition, the health care 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 we believe we are in compliance in all material respects with such laws, rules and regulations, if a determination is made that we were in material violation of such laws, rules or regulations, our business, financial position or results of operations could be adversely affected.
As discussed under Government Programs starting on page 33, the Balanced Budget Act of 1997 has had the effect of reducing payments to hospitals and other health care providers under Medicare programs. Although mitigated to some extent by the Benefits Improvement and Protection Act of 2000 and the Balanced Budget Refinement Act of 1999, the reductions in payments and other changes mandated by the act have had a significant impact on our revenues under Medicare programs. In addition, there continue to be federal and state proposals that would, and actions that do, impose more limitations on payments to providers such as Tenet and proposals to increase copayments and deductibles from patients.
In addition to certain statutory coverage limits and exclusions, federal law and regulations require healthcare providers, including hospitals that furnish or order health care services that may be paid for under the Medicare or state health care programs, to assure that claims for reimbursement are for services or items that are (1) provided economically and only when, and to the extent, they are medically necessary; (2) of a quality that meets professionally recognized standards of health care; and (3) supported by appropriate evidence of medical necessity and quality. In addition, the Centers for Medicare and Medicaid Services has requested quality improvement organizations to monitor hospital admission and coding patterns by ongoing analysis of Medicare discharge data. The quality improvement organizations have the authority to deny payment for services provided and recommend to the Department of Health and Human Services that a provider that is in substantial noncompliance with the certain standards be excluded from participating in the Medicare program. Managed-care
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organizations also have concurrent utilization review protocols, as well as prepayment utilization review procedures.
Many states have enacted or are considering enacting measures that are designed to reduce their Medicaid expenditures and to make certain changes to private health care insurance. Various states have applied, or are considering applying, for a federal waiver from current Medicaid regulations to allow them to serve some of their Medicaid participants through managed-care providers. Texas was denied a waiver under Section 1115 of the Balanced Budget Act but has implemented regional managed-care programs under a more limited waiver. Texas also has applied for federal funds for children's health programs under the Balanced Budget Act. Louisiana is considering wider use of managed care for its Medicaid population. California has created a voluntary health insurance purchasing cooperative that seeks to make health care coverage more affordable for businesses with five to 50 employees, and changed the payment system for participants in its Medicaid program in certain counties from fee-for-service arrangements to managed-care plans. Florida also has legislation, and other states are considering adopting legislation, imposing a tax on net revenues of hospitals to help finance or expand the provision of health care to uninsured and underinsured persons. Several 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 currently are uninsured.
CERTIFICATE OF NEED REQUIREMENTS
Some states require state approval for construction and expansion of health care facilities, including findings of need for additional or expanded health care facilities or services. Certificates of need, which are issued by governmental agencies with jurisdiction over health care 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 are looking at the certificate of need process as a way to contain rising health care costs. At December 31, 2002, Tenet operated hospitals in nine states that require state approval under certificate of need programs. Tenet is unable to predict whether it will be able to obtain any additional certificates of need in any jurisdiction where such Certificates of Need are required.
ANTIKICKBACK AND SELF-REFERRAL REGULATIONS
The health care 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 and 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 health care services payable under the Medicare, Medicaid and other government programs, including the payment or receipt of remuneration for the referral of patients whose care will be paid for by such programs. Sanctions for violating the Antikickback Amendments include criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid. Many states have statutes similar to the federal Anitikickback Amendments, except that the state statutes usually apply to referrals for services reimbursed by all third-party payors, not just federal programs.
In addition, it is a violation of the Federal Civil Monetary Penalties Law to offer or transfer anything of value to Medicare or Medicaid beneficiaries that is likely to influence their decision to obtain covered goods or services from one provider or service over another.
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In addition to addressing other matters, as discussed below, the Health Insurance Portability and Accountability Act of 1996 amends Title XI (42 U.S.C. 1301 et seq. ) to broaden the scope of current fraud and abuse laws to include all health plans, whether or not payments under such health plans are made pursuant to a federal program.
Section 1877 of the Social Security Act (commonly referred to as the "Stark" laws) restricts referrals by physicians of Medicare or Medicaid patients to providers of a broad range of designated health services with which they or an immediate family member have ownership or certain other financial arrangements, unless one of several exceptions applies. These exceptions cover a broad range of common financial relationships. These statutory and regulatory exceptions are available to protect certain employment relationships, leases, group practice arrangements, medical directorships, and other common relationships between physicians and providers of designated health services. A violation of the Stark laws may result in a denial of payment, required refunds to patients and to the Medicare program, civil monetary penalties of up to $15,000 for each violation, civil monetary penalties of up to $100,000 for "sham" arrangements, civil monetary penalties of up to $10,000 for each day in which an entity fails to report required information and exclusion from participation in the Medicare, Medicaid and other federal programs. 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.
On January 4, 2001, the Department of Health and Human Services issued final regulations, subject to comment, intended to clarify parts of the Stark laws and some of the exceptions to them. These regulations are considered the first phase of a two-phase process, with the remaining regulations to be published at an unknown future date. While the Department of Health and Human Services may add new exceptions to the final regulations, the current statutory exceptions, discussed above, will continue to be available. We cannot predict the final form that these regulations will take or the effect that the final regulations will have on our operations.
The federal government has issued regulations that describe some of the conduct and business relationships that are permissible under the Antikickback Amendments ("Safe Harbors"). The fact that certain conduct or a given business arrangement does not fall within a Safe Harbor does not render the conduct or business arrangement automatically illegal under the Antikickback Amendments. Such conduct and business arrangements, however, do risk increased scrutiny by government enforcement authorities. Tenet may be less willing than some of its competitors to enter into conduct or business arrangements that do not clearly satisfy the Safe Harbors. Passing up certain of those opportunities of which its competitors are willing to take advantage may put Tenet at a competitive disadvantage. Tenet has a voluntary regulatory compliance program and systematically reviews all of its operations to ensure that they comply with federal and state laws related to health care, such as the Antikickback Amendments, the Stark laws and similar state statutes.
Both federal and state government agencies continue heightened and coordinated civil and criminal enforcement efforts against the health care industry. As part of an announced work plan, which is implemented through the use of national initiatives against health care providers, including Tenet, the government is scrutinizing, among other things, the terms of acquisitions of physician practices and the coding practices related to certain clinical laboratory procedures and inpatient procedures. We believe that the health care industry will continue to be subject to increased government scrutiny and investigations such as this.
Another trend impacting health care providers, including Tenet, is the increased use of the False Claims Act, particularly by individuals who bring actions. Such qui tam or "whistleblower" actions allow
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private individuals to bring actions on behalf of the government alleging that a hospital has defrauded the federal government. If the government intervenes in the action and prevails the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 and $11,000 for each false claim submitted to the government. As part of the resolution of a qui tam case, the party filing the initial complaint may share in a portion of any settlement or judgment. If the government does not intervene in the action, the qui tam plaintiff may pursue the action independently. Although companies in the health care industry in general, and Tenet in particular, have been and may continue to be subject to qui tam actions, we are unable to predict the impact of such actions on its business, financial position or results of operations.
We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations (discussed on pages 36 through 37). Further changes in the regulatory framework could have a material adverse effect on our business, financial position or results of operations.
HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT
The Health Insurance Portability and Accountability Act mandates the adoption of standards for the exchange of health information in an effort to encourage overall administrative simplification and enhance the effectiveness and efficiency of the health care industry. Ensuring privacy and security of patient information"accountability"is one of the key factors driving the legislation. The other major factor"portability"refers to Congress' intention to ensure that individuals may take their medical and insurance records with them when they change employers.
In August 2000, the Department of Health and Human Services issued final regulations establishing electronic data transmission standards that health care providers must use when submitting or receiving certain health care data electronically. All affected entities, including Tenet, were required to comply with these regulations by October 16, 2002.
On December 27, 2001, President George W. Bush signed into law H.R. 3323, the Administrative Simplification Compliance Act. This act requires that, by October 16, 2002, hospitals and other covered entities must either: (1) be in compliance with the electronic data transmission standards under the Health Insurance Portability and Accountability Act, or (2) submit a summary plan to the Secretary of Health and Human Services describing how the entity will come into full compliance with the standards by October 16, 2003. Tenet continues to work toward compliance with the electronic data transmission standards. Tenet submitted a summary plan to the Secretary of Health and Human Services and expects to be in compliance with the standards by October 16, 2003.
In December 2000, Health and Human Services issued final regulations concerning the privacy of health care information. These regulations, which were amended in August 2002, regulate the use and disclosure of individuals' health care information, whether communicated electronically, on paper or orally. All affected entities, including Tenet, were required to comply with these regulations by April 14, 2003. The regulations also provide patients with significant new rights related to understanding and controlling how their health information is used or disclosed. We are substantially in compliance with these regulations.
On February 20, 2003, Health and Human Services issued final regulations concerning the security of electronic health care information. These regulations require health care providers to implement administrative, physical and technical safeguards to protect the security of patient information. We are required to comply with these regulations by April 21, 2005.
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In April 2003, Health and Human Services published an interim final rule that establishes procedures for the imposition, by the Secretary of Health and Human Services, of civil monetary penalties on entities that violate the administrative simplification provisions of the Health Insurance Portability and Accountability Act. This was the first installment of the enforcement rule. When issued in complete form, the enforcement rule will set forth procedural and substantive requirements for imposition of civil monetary penalties. The act also provides for criminal penalties for violations. We have established a plan and committed the resources necessary to comply with the act. At this time, we anticipate that we will be able to fully comply with the act's regulations that have been issued and with the proposed regulations. Based on the existing and proposed regulations, we believe that the cost of our compliance with the act will not have a material adverse effect on our business, financial position or results of operations.
ENVIRONMENTAL REGULATIONS
Our health care operations generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. Our operations, as well as our purchases and sales of facilities, also are subject to compliance with various other environmental laws, rules and regulations. We believe that the cost of such compliance will not have a material effect on our future capital expenditures, earnings or competitive position.
HEALTH CARE FACILITY LICENSING REQUIREMENTS
Tenet's health care facilities are subject to extensive federal, state and local legislation and regulation. In order to maintain their operating licenses, health care 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 health care facilities hold all required governmental approvals, licenses and permits. Except for one small hospital that has not sought to be accredited, each of Tenet's facilities that is eligible for accreditation is fully accredited by the Joint Commission on Accreditation of Healthcare Organizations, Commission on Accreditation of Rehabilitation Facilities (in the case of rehabilitation hospitals), The American Osteopathic Association (in the case of two hospitals) or other appropriate accreditation agencies. With such accreditation, our hospitals are eligible to participate in government-sponsored provider programs such as the Medicare and Medicaid programs. The one hospital that is not accredited participates in the Medicare program through a special waiver that must be renewed each year.
UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE
Tenet's health care facilities are subject to and comply with various forms of utilization review. In addition, under the Medicare prospective payment system, each state must have a quality improvement organization 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 health care facility, are overseen by each health care facility's local governing board, the members of which primarily are physicians and community members, and are reviewed by Tenet's quality assurance personnel. The local hospital governing board also helps 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 AND ETHICS PROGRAMS
We voluntarily maintain a multifaceted corporate compliance and ethics program that meets or exceeds all applicable federal guidelines and industry standards. The program is designed to monitor
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and raise awareness of various regulatory issues among employees, to stress the importance of complying with all governmental laws and regulations and to promote the Company's Standards of Conduct.
All of our employees, including our chief executive officer, chief financial officer, chief accounting officer and controller, are required to abide by our Standards of Conduct to ensure that our business is conducted in a consistently legal and ethical manner. These standards reflect our basic values and form the foundation of a comprehensive process that includes compliance with all corporate policies, procedures and practices. Our standards cover such areas as quality patient care, compliance with all applicable laws and regulations, appropriate use of our assets, appropriate treatment of patient and company records and avoidance of conflicts of interest.
As part of the program, we provide annual ethics and compliance training to every employee. We also provide additional compliance training in specialized areas to the employees responsible for these areas. All employees are required to report incidents that they believe in good faith may be in violation of the standards, and are encouraged to contact our toll-free Ethics Action Line when they have questions about the standards or other ethics concerns. All reports are confidential, and employees have the option to remain anonymous. Tenet maintains a zero-tolerance retaliation policy.
The full text of our standards is published on our web site, at tenethealth.com, under the "Corporate Governance" caption. A copy of our standards is also available upon written request of our corporate secretary.
MANAGEMENT
Our executive officers who are not also directors are:
|
Position
|
Age
|
||
---|---|---|---|---|
Stephen D. Farber | Chief Financial Officer (effective November 7, 2002) | 33 | ||
Trevor Fetter | President (effective November 7, 2002) | 43 | ||
Reynold J. Jennings | PresidentEastern Division (effective March 10, 2003) | 56 | ||
Raymond L. Mathiasen | Executive Vice President and Chief Accounting Officer | 59 | ||
Barry P. Schochet | Vice Chairman | 52 | ||
W. Randolph Smith | PresidentWestern Division (effective March 10, 2003) | 54 | ||
Christi R. Sulzbach | Chief Corporate Officer (effective November 22, 2002) and General Counsel | 48 |
Mr. Farber was elected Chief Financial Officer on November 7, 2002. Prior to his current position, Mr. Farber served as Tenet's Senior Vice President of Corporate Finance and Treasurer. Mr. Farber rejoined Tenet in May 1999 from J.P. Morgan & Co. in New York, where he served as Vice President, health care investment banking. He previously served Tenet as Vice President, Corporate Finance, from February 1997 to October 1998. From 1993 to 1997, Mr. Farber worked as an investment banker in the Los Angeles office of Donaldson, Lufkin & Jenrette. Mr. Farber has a bachelor of science degree in economics from the University of Pennsylvania's Wharton School of Business and completed the Advanced Management Program at Harvard Business School.
Mr. Fetter was elected President effective November 7, 2002. Prior to that, he was Chairman and Chief Executive Officer of Broadlane, Inc. from March 2000 to November 2002. He remains Chairman of Broadlane. From 1995 to February 2000, he served in several senior management positions at Tenet, including Executive Vice President and Chief Financial Officer and Chief Corporate Officer in the office of the President. Prior to joining Tenet, Mr. Fetter served as Executive Vice President and Chief Financial Officer at Metro-Goldwyn-Mayer, Inc. Before joining MGM in 1988, Mr. Fetter worked in the investment banking division of Merrill Lynch Capital Markets. Mr. Fetter holds a M.B.A. from the Harvard Business School and a bachelor's degree in economics from Stanford University.
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Mr. Jennings was promoted to President of our Eastern Division on March 10, 2003. Prior to that, he served as Executive Vice President of the former Southeast Division. Jennings rejoined Tenet in 1997 from Ramsay Health Care Inc., where he was President and Chief Executive Officer from 1993 to 1996. Before that, he served as Senior Vice President, Operations, for National Medical Enterprises' Dallas region from 1991 to 1993. His career experience includes executive directorships at a number of acute care hospitals. He has a master's degree in business administration from the University of South Carolina and a bachelor's degree in pharmacy from the University of Georgia. Jennings is a fellow of the American College of Healthcare Executives and a board member of the American Federation of Hospitals.
Mr. Mathiasen was elected Executive Vice President on March 22, 1999. Since March 1996, Mr. Mathiasen has been Chief Accounting Officer. From February 1994 to March 1996, Mr. Mathiasen served as Senior Vice President and Chief Financial Officer 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 Ernst & Young. Mr. Mathiasen holds a bachelor's degree in accounting from California State University, Long Beach.
Mr. Schochet was elected Vice Chairman of Tenet in January 1999. Mr. Schochet joined Tenet in 1979 and has held a variety of executive positions since that time, including Executive Vice President of Operations from March 1995 to January 1999. He is a diplomat of the American College of Healthcare Executives and is Chair of the Board of Directors of the Federal of American Hospitals. Mr. Schochet holds a bachelor's degree in zoology from the University of Maine and a master's degree in hospital administration from George Washington University.
Mr. Smith was promoted to President of our Western Division on March 10, 2003. Prior to that, he was Executive Vice President of the former Central-Northeast Division. Before joining Tenet in 1995, Mr. Smith served as Executive Vice President, Operations, for American Medical International, where he held various positions over 16 years. Mr. Smith has a bachelor's degree in business administration from Furman University and a master's degree in health care administration from Duke University. He has served in leadership positions for a variety of health care and community organizations, including the Federation of American Hospitals, Esoterix, Inc., and Epic Healthcare Corporation.
Ms. Sulzbach was elected Chief Corporate Officer on November 22, 2002. Ms. Sulzbach has served as General Counsel since February 1999, and was an Executive Vice President from February 1999 until her appointment as Chief Corporate Officer. Ms. Sulzbach previously served as Associate General Counsel in charge of Compliance and Litigation and as Senior Vice President, Public Affairs. She joined Tenet in 1983 and has held a variety of positions in the Law Department since that time. She serves on the boards of directors of the Federation of American Hospitals, the Los Angeles Chapter of the Federal Bar Association and Laguna Blanca School. Ms. Sulzbach holds bachelor degrees in political science and psychology from the University of Southern California and a J.D. from Loyola University in Los Angeles.
PROFESSIONAL AND GENERAL LIABILITY INSURANCE
Through May 31, 2002, we insured substantially all of our professional and comprehensive general liability risks in excess of self-insured retentions through a majority-owned insurance subsidiary (Hospital Underwriting Group) under a mature claims-made policy with a 10-year discovery period. These self-insured retentions were $1 million per occurrence for the three years ended May 31, 2002, and in prior years varied by hospital and by policy period from $500,000 to $5 million per occurrence. Hospital Underwriting Group's retentions covered the next $2 million per occurrence. Claims in excess
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of $3 million per occurrence were, in turn, reinsured with major independent insurance companies. Effective June 1, 2002, we formed a new insurance subsidiary. This subsidiary insures these risks under a first-year only claims-made policy, and, in turn, reinsures its risks in excess of $5 million per occurrence with major independent insurance companies. Subsequent to May 31, 2002, our retention limit is $2 million. Our new subsidiary's retention covers the next $3 million. That program will expire on May 31, 2003. Effective June 1, 2003, we anticipate having a new insurance program in place.
In addition to the reserves recorded by the above insurance subsidiaries, we maintain reserves based on actuarial estimates for the portion of our professional liability risks, including incurred but not reported claims, for which we do not have insurance coverage. Reserves for losses and related expenses are estimated using expected loss-reporting patterns and are discounted to their present value under a risk-free rate approach using a Federal Reserve 10-year maturity composite rate at December 31, 2002 that approximates our claims payout period. If actual payments of claims materially exceed projected estimates of claims, Tenet's financial position or results of operations could be materially adversely affected.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Transition Report on Form 10-K, including, but not limited to, statements containing the words "believe," "anticipate," "expect," "will," "may," "might," "should," "estimate," "intend," "appear" and words of similar import, and statements regarding our business strategy and plans, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations. They involve known and unknown risks, uncertainties and other factorsmany of which we are unable to predict or controlthat may cause our actual results, performance or achievements, or health care industry results, to be materially different from those expressed or implied by forward-looking statements. Such factors include, among others, the following:
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Given these uncertainties, investors and prospective investors are cautioned not to rely on such forward-looking statements. We disclaim any obligation, and make no promise, to update any such factors or forward-looking statements or to publicly announce the results of any revisions to any such forward-looking statements, whether as a result of changes in underlying factors, to reflect new information, as a result of the occurrence of events or developments or otherwise.
ITEM 2. PROPERTIES
Note: Item 2. Properties is included with Item 1.
ITEM 3. LEGAL PROCEEDINGS
We are subject to claims and lawsuits in the normal course of our business. We believe that our liability for damages resulting from such claims and lawsuits is adequately covered by insurance or is adequately provided for in our consolidated financial statements. Although the results of these claims and lawsuits cannot be predicted with certainty, we believe that the ultimate resolution of these claims and lawsuits will not have a material adverse effect on our business, financial position or results of operations.
In addition, we currently are subject to the following unusual claims, lawsuits and investigations. The existence of each action marked with an asterisk (*) has been previously disclosed in reports we have filed with the SEC or in press releases, and a current description of the status of each of those actions, as well as other more recent actions, is set forth below.
IN RE TENET HEALTHCARE CORPORATION SECURITIES LITIGATION, UNITED STATES DISTRICT COURT, CENTRAL DISTRICT OF CALIFORNIA, CASE NO. 02-8462 RSWL*
From November 2002 through January 2003, twenty securities class action lawsuits were filed against Tenet Healthcare Corporation (the "Parent") and certain of its officers and directors in the United States District Court for the Central District of California and the Southern District of New York on behalf of all persons or entities who purchased the Parent's securities during the various class periods specified in the complaints. All of these actions have been consolidated under the above-listed case number in the United States District Court for the Central District of California. The procedures of the Private Litigation Securities Reform Act ("PLSRA") apply to these cases.
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Under the procedures set forth in the PLSRA, on February 10, 2003, the State of New Jersey was appointed "lead" plaintiff in the consolidated actions and its counsel, the law firm of Schiffrin & Barroway, was appointed as lead class counsel. On March 27, 2003, the Rudman Partners and related entities, who were not selected as lead plaintiffs, filed a writ of mandamus in the United States Court of Appeals for the Ninth Circuit seeking to overturn the appointment of the State of New Jersey as lead plaintiff and requesting that they be appointed lead plaintiffs.
We have entered into a stipulation with lead plaintiffs' counsel concerning the filing of a single Consolidated Amended Complaint that will become the operative complaint for purposes of the consolidated actions. Pursuant to the stipulation, the State of New Jersey will file the Consolidated Amended Complaint on or before May 16, 2003. The defendants will file their responses on or before July 18, 2003. Under the PLSRA, discovery is stayed until a motion to dismiss is denied or defendants' file an answer to the consolidated amended complaint.
Although we do not know the class period that will be alleged in the Consolidated Amended Complaint, the longest class period alleged in the complaints that have been filed was from July 2000 to November 2002. Similarly, we do not know what factual allegations and legal claims will be asserted in the Consolidated Amended Complaint. The complaints that have been filed allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)-5. The complaints seek compensatory damages, attorney's fees and injunctive relief. While the specific factual allegations vary slightly in each case, the complaints generally allege that defendants falsely represented the Parent's financial results by failing to disclose that they were inflated by (i) wrongfully inducing patients into undergoing unnecessary invasive coronary procedures at Redding Medical Center, alleged to be a "key profit center" for the Parent and (ii) the Parent's policy of charging "too aggressive" prices that enabled it to obtain excessive Medicare outlier payments.
In addition, a class action has been filed in the California Superior Court of Los Angeles County against Parent and its board of directors for breach of fiduciary duty in connection with the Parent's stock purchase plan for employees. Hamner v. Tenet Healthcare Corporation, et al. , Case No. BC290646.* Although the complaint does not plead a cause of action under the federal securities laws, the plaintiff's theory is that stock purchase plan participants were not advised that their investments in the Parent's stock were at substantial risk due to the Parent's business strategies and allegedly illegal conduct, including the purportedly unnecessary surgeries performed by Drs. Moon and Realyvasquez at Redding Medical Center. On April 2, 2003, we removed the case to the United States District Court for the Central District of California on the basis that action was preempted by the Securities Litigation Uniform Standards Act and ERISA. We intend to seek to have the case consolidated with the other securities class actions pending there or, in the alternative, to move to dismiss it.
We believe the allegations in these cases are without merit and we intend to vigorously defend these actions. The Parent and its directors are beneficiaries of several layers of directors' and officers' insurance, which includes coverage for securities claims. The carriers have been notified of the pendency of the actions, but have not provided a formal position on coverage.
SHAREHOLDER DERIVATIVE ACTIONS
Included actions:
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The listed cases are shareholder derivative actions filed against members of the board of directors and senior management of the Parent by shareholders purporting to pursue the action on behalf of the Parent and for its benefit. No pre-lawsuit demand to investigate the allegations or bring the action was made on the board of directors. The Parent also is named as a nominal defendant in each of the cases.
In the California derivative litigation, which involves ten cases that have been consolidated, the lead plaintiff filed a Consolidated Amended Complaint on March 3, 2003. On May 1, 2003, defendants filed a motion to stay the California derivative litigation in favor of the federal derivative litigation and demurrers to all of the causes of action alleged in the Consolidated Amended Complaint. The complaint alleges claims for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, indemnification and insider trading under California law. The complaint alleges that the individual defendants breached their fiduciary duties and engaged in gross mismanagement by allegedly ignoring indicators of the lack of control over the Parent's accounting and management practices, allowing the Parent to engage in improper conduct, permitting misleading information to be disseminated to shareholders, failing to monitor hospitals and doctors to prevent improper actions and otherwise failing to carry out their duties and obligations to Parent. Plaintiffs further allege that the defendants violated the California insider trading statute, Sections 25402 and 25502.5 of the California Corporation Code, because they allegedly knew, but did not disclose, that: (i) physicians at hospitals owned by subsidiaries of the Parent were routinely performing unnecessary procedures in order to take advantage of Medicare outlier reimbursement; (ii) the Parent deliberately raised its prices to take advantage of Medicare outlier reimbursement; (iii) the Parent's growth was dependent primarily on its continued receipt of Medicare outlier payments; and (iv) the rules and regulations related to Medicare outlier payments were being reformed to limit outlier payments, which would have a material negative effect on the Parent's revenues and earnings going forward.
In addition to the derivative litigation pending in California Superior Court, four derivative cases have also been filed in federal court. These four cases have been consolidated in the United States District Court for the Central District of California. Plaintiffs served their Consolidated Amended Complaint on March 28, 2003. Defendants' responses are currently due on May 20, 2003. In addition to common law claims of breach of fiduciary duty, abuse of control, waste of corporate assets, indemnification, insider trading and unjust enrichment, the Consolidated Amended Complaint alleges violations of Section 14(a) of the Securities Exchange Act of the 1934 and Rule 14a-9 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The Exchange Act claims involve allegations of false or misleading statements made in connection with (1) proxy statements regarding the election of certain directors and the approval of stock option grants and (2) Parent's purchase of stock as part of its stock repurchase program.
REDDING CIVIL LITIGATION
Included actions:
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Generally these cases were filed as a result of an advertising campaign by various plaintiffs' counsel subsequent to the announcement of the government's investigation concerning whether two physicians, who are independent contractors with medical staff privileges at Redding Medical Center, may have performed unnecessary coronary procedures. When filed, these complaints alleged various claims including fraud, conspiracy to commit fraud, unfair and deceptive business practices in violation of California Business & Professions Code section 17200, elder abuse, battery, and intentional infliction of emotional distress. One of the cases also alleged a wrongful death claim. Although the specific claims varied from case to case, the complaints generally alleged that the physician defendants knowingly performed unnecessary coronary procedures on patients and that the Parent and RMC knew or should have known that such unnecessary procedures were being performed. These complaints sought injunctive relief, restitution, disgorgement and compensatory and punitive damages. Because we believed the complaints were without merit, we filed demurrers and motions to strike in response to the complaints. In each case the Court has either sustained the demurrers in their entirety or plaintiffs have voluntarily withdrawn their original complaints. Amended complaints are now being or already have been filed in these cases, and they allege various claims including fraud and conspiracy to commit fraud, breach of fiduciary duty and conspiracy to breach fiduciary duty, intentional infliction of emotional distress and conspiracy to intentionally inflict emotional distress, battery, elder abuse and negligence. The claim for unfair and deceptive business practices in violation of California Business & Professions Code section 17200 has been dropped from all but the California Foundation case. The wrongful death claim also has been dropped. Although the specific claims alleged in the amended complaints once again vary from case to case, they generally allege that the physician defendants knowingly performed unnecessary coronary procedures on patients and that the Parent and RMC knew or should have known that such unnecessary procedures were being performed. We believe the plaintiffs' claims are without merit and have again filed demurrers and motions to strike with respect to the amended complaints. We intend to vigorously defend these actions. We anticipate that additional actions with similar allegations will be filed.
During the period November 2002 to the present, the Parent was also served with several hundred notices of intent to commence civil actions for negligence with respect to allegedly unnecessary cardiac procedures performed at RMC by the non-employed physicians. Several such actions have been filed in California Superior Court in Shasta County and Sacramento County. These cases have not yet been served on the Parent. In addition to claims for professional negligence, the Parent anticipates these cases will also include other tort causes of action, such as battery, fraud and deceit, conspiracy, intentional infliction of emotional distress, negligent supervision and loss of consortium. The complaints in these cases seek compensatory and punitive damages and other relief. We anticipate that additional cases with similar allegations will be filed. Once the complaints are served, we intend to vigorously defend these actions.
UNITED STATES V. TENET HEALTHCARE CORP., ET AL.*
The U.S. Department of Justice, in conjunction with the U.S. Department of Health & Human Services, Office of Inspector General, has been investigating certain hospital billings to Medicare for
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inpatient stays reimbursed pursuant to diagnosis-related groups ("DRG") 79 (pneumonia), 415 (operating room procedure for infectious and parasitic diseases), 416 (septicemia), and 475 (respiratory system diagnosis with mechanical ventilator). The investigation is believed to have stemmed initially from the government's nationwide pneumonia "upcoding" initiative and focuses on 103 acute care hospitals owned by subsidiaries of the Parent or its predecessors during the period September 1992 through December 1998. On January 9, 2003, the government filed a lawsuit in regard to this matter alleging violations, among other things, of the federal False Claims Act. We will defend ourselves vigorously against the allegations. On March 24, 2003, Parent filed a motion to dismiss the complaint and another motion attacking the government's complaint.
PHARMACEUTICAL PRICING LITIGATION
Included actions:
Since December 2002, the plaintiffs in the cases listed above brought suit against the Parent on behalf of themselves and a purported class of persons who allegedly paid unlawful or unfair prices for prescription drugs or medical products or procedures at hospitals or other medical facilities owned by the Parent and/or its subsidiaries. While the specific allegations vary from case to case, the plaintiffs generally allege that the Parent has engaged in an unlawful scheme to inflate the charges for medical services and procedures, pharmaceutical supplies and other products, and prescription drugs. The complaints primarily allege violations of California's unfair competition statutes (Cal. Bus. & Prof. Code Section 17200, et seq.) and the California Consumers' Legal Remedies Act (Cal. Civ. Code Section 1750). Several of the complaints also allege common law claims such as breach of contract and fraud and equitable claims such as unjust enrichment. Plaintiffs seek to enjoin the Parent from
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continuing the alleged unfair pricing policies and practices, and to recover all sums wrongfully obtained by those policies and practices, including compensatory damages, punitive damages, restitution, disgorgement of profits, treble damages, and attorneys' fees and costs.
The Parent has not yet filed a responsive pleading in any of these matters. The parties requested that the Judicial Council of California to coordinate the first three actions that were filed (Bishop, Congress of California Seniors and Watson) in a single forum. The Judicial Council assigned the petition for coordination to a Shasta County Superior Court judge for decision. On March 17, 2003, the judge recommended that the three cases subject to the petition be coordinated in Los Angeles County. On March 27, 2003, the Judicial Council followed that recommendation, coordinating the cases and assigning them to Los Angeles County. The parties agree that the remaining cases (which were initiated after the petition for coordination of the first three cases had already been filed with the Judicial Council) also should be coordinated and we intend to file an "add on" request to coordinate those cases as well. We believe the allegations in these coordinated cases are without merit and we intend to vigorously defend them.
In addition, a similar class action ( Wade v. Tenet Healthcare Corporation , et al., Case No.Ct-000250-03*) has been filed in Circuit Court in Memphis, Tennessee. The complaint alleges claims of violation of the Tennessee Consumer Protection Act, unjust enrichment, fraudulent concealment, declaratory relief and breach of contract. These claims are based on allegations that Parent excessively inflated its charges for medical products, medical services and prescription drugs at its hospitals. We filed a motion to dismiss the complaint on April 28, 2003. We believe the allegations in this case are without merit and we intend to vigorously defend it.
Finally, on March 31, 2003, Parent was served with a similar action filed in Louisiana. Jordan, et al. v. Tenet Healthcare Corporation, et al. , Case No. 591-374, 24 th Judicial District, Jefferson Parish, Louisiana.* The class action complaint alleges that the seven hospitals in Louisiana owned by subsidiaries of Parent charged excessive amounts for prescription drugs, medical services and medical products. The complaint alleges causes of action for violation of the Louisiana Unfair Trade Practice and Consumer Protection Law, L.S.A. § 51:1405 and seeks on behalf of the alleged class an accounting, injunctive relief, restitution, compensatory damages and attorneys' fees and costs. A nearly identical action, Wright v. Tenet Healthcare Corporation , Case No. 03-06262, Civil District Court, Orleans Parish, Louisiana, was filed on April 22, 2003. We believe the allegations in these cases are without merit and we intend to vigorously defend them. We anticipate that additional actions with similar allegations will be filed.
United States ex rel. Barbera v. Amisub (North Ridge Hospital), Inc., et al., United States District Court for the Southern District of Florida, Case No. 97-6590-CIV-JORDAN.*
As previously disclosed in our 1998 Form 10-K, this qui tam lawsuit under the False Claims Act, 31 U.S.C. Section 3729 et seq. , was filed under seal by a former employee in 1997 after his employment with a subsidiary of the Parent was terminated after six months. The relator's original qui tam action, which was brought against the Parent and various subsidiaries, including the third-tier subsidiary that owns North Ridge Medical Center ("North Ridge"), a hospital located in Fort Lauderdale, Florida, contends that certain physician employment contracts violate (1) the federal anti-kickback statute, 42 U.S.C. Section 1320-7b(b), and (2) the Stark Act, 42 U.S.C. Section 1395nn. The relator also alleges that the Parent and North Ridge submitted improperly coded bills from certain physician practices to the Medicare program that caused them to receive excessive reimbursements.
The government intervened as to the Stark Act claims and also contends that North Ridge's cost reports for fiscal years 1993 through 1997 were false, principally because they improperly included non-reimbursable costs related solely to the physicians' private practices. The government also has brought various state law claims based on the same allegations.
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The Parent filed answers denying all of the allegations made by the government and the relator. We believe the claims made by the relator and the government are without merit and we intend to vigorously defend this action. The case is set for trial on October 14, 2003.
FRANKLIN FUND LITIGATION
Franklin California Tax Free Income Fund et al. v. OrNda Hospital Corporation, et al., California Superior Court, Los Angeles County, Case No. BC 247479 and Vista Hospital Systems, Inc. v. OrNda Hospital Corporation, et al., California Superior Court, Los Angeles County, Case No. BC 272850.*
This action was filed on March 26, 2001 by ten separate mutual funds that in 1997 purchased $53,160,000 of "certificates of participation" (the "Bonds") issued by the City of San Luis Obispo as a tax-free "conduit" for the benefit of Vista Hospital Systems, Inc. ("Vista"). The Bonds were sold to finance Vista's acquisition of the French Hospital Medical Center from OrNda Hospital Corporation ("OrNda"), one of Parent's subsidiaries.
Plaintiffs assert causes of action for fraud, negligent misrepresentation and violation of the California Corporations Code against Parent, OrNda and Tenet HealthSystem HealthCorp., also a subsidiary (collectively "Defendants"). The claims are essentially based on the allegations that the Defendants provided false and misleading information to Vista and the Plaintiffs about French Hospital and that as a result Vista defaulted on the Bonds and the Plaintiffs suffered damages. The complaint seeks compensatory damages, punitive damages, and fees and costs. Defendants have denied all of the material allegations made by Plaintiffs.
On April 26, 2002, Vista filed its own complaint against Defendants. Following successful demurrers by Defendants, Vista subsequently withdrew certain of the claims and filed a First Amended Complaint alleging causes of action for fraud, negligent misrepresentation, breach of contract and unfair business practices under Section 17200 of the California Business and Professions Code. The allegations made by Vista are similar to those asserted by the Plaintiffs in the Franklin Fund case, except that Vista also asserts a claim for breach of the Stock Purchase Agreement by which OrNda sold the Hospital to Vista. The complaint seeks compensatory and punitive damages, rescission and fees and costs. On October 3, 2002, Defendants filed an Answer denying the material allegations made by Vista and also filed a Cross-Complaint against Vista, alleging causes of action for equitable indemnity, contribution, breach of contract and declaratory relief. Vista has denied the material allegations in the Cross-Complaint.
Both the Vista action and the Franklin Fund action are pending in the same court before the same judge. We believe the allegations in these cases are without merit and intend to vigorously defend these actions. Trial in both cases is set for September 8, 2003.
INVESTIGATIONS
Historically, the Parent and its subsidiaries have received subpoenas and other requests for information relating to a variety of subjects, including physician relationships, actions of certain independent contractors and employers, and other regulatory areas. In the present environment, we expect these historically routine enforcement activities to take on additional importance and for government enforcement activities to intensify.
The following matters represent those of which we are aware and that either could potentially impact a broad base of our operations or may, if adversely determined, have a material impact on our results of operations or financial position.
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Transfer/DischargeGlobal Investigation*
The U.S. Department of Justice, in conjunction with the U.S. Department of Health & Human Services, Office of Inspector General, currently is investigating certain hospital billings to Medicare for inpatient stays reimbursed under the DRG system during the period from January 1, 1992, to June 30, 2000. The investigation is focusing on the coding of the patients' post-discharge status. The investigation stemmed from the government's nationwide transfer-discharge initiative. We are cooperating with the government regarding this investigation.
Redding Investigation*
On October 30, 2002, agents of the Federal Bureau of Investigation and the U.S. Department of Health & Human Services, Office of Inspector General, served a federal search warrant at Redding Medical Center ("RMC"), a hospital owned by a second-tier subsidiary of the Parent, which hospital is located in Redding, California. According to the affidavit filed in support of the search warrant application, the criminal investigation targets two physicians who are independent contractors with medical staff privileges at RMC and claims that the two physicians may have performed unnecessary invasive coronary procedures. At the same time the RMC search warrant was executed, the government also served search warrants at the medical offices of these two physicians. To date, no charges have been filed against anyone in connection with this matter. The Parent and RMC are cooperating with law enforcement authorities in regard to this investigation. As outlined above, RMC and the Parent also are experiencing a greater than normal level of civil litigation with respect to these physicians at RMC.
Alvarado Investigation*
On December 19, 2002, agents of the IRS and the U.S. Department of Health & Human Services, Office of Inspector General, served federal search warrants at two administrative offices within Alvarado Hospital Medical Center ("Alvarado"), a hospital owned by a second-tier subsidiary of the Parent, which hospital is located in San Diego, California. The searches focused on the offices of the hospital CEO and Director of Business Development. The investigation appears to relate to physician relocation, recruitment and consulting arrangements. To date, no charges have been filed against anyone in this matter. We are cooperating with law enforcement authorities in regard to this investigation.
Outlier Audit*
The Office of Audit Services of the U.S. Department of Health & Human Services is conducting an audit to determine whether outlier payments made to certain hospitals owned by the Parent's subsidiaries were paid in accordance with Medicare laws and regulations. We believe that this audit will demonstrate that those hospitals owned by the Parent's subsidiaries complied with relevant Medicare rules.
Outlier Investigation*
On January 2, 2003, the U.S. Attorney's office for the Central District of California issued an administrative investigative demand subpoena seeking production of documents related to Medicare outlier payments by the Parent and 19 hospitals owned by subsidiaries.
We are cooperating with the Office of Audit Services and the U.S. Attorney's Office, respectively, in regard to both of these investigations.
26
Women's Cancer Center
On or about April 17, 2003, we received an administrative subpoena duces tecum from the U.S. Department of Health and Human Services, Office of Inspector General, seeking documents relating to any agreements with the Women's Cancer Center, a physician's group practicing in the field of gynecologic oncology, and certain physicians affiliated with that group. The subpoena seeks documents from us as well as five subsidiary hospitals: Community Hospital of Los Gatos; Doctors Medical Center of Modesto; San Ramon Regional Medical Center; St. Luke Medical Center in Pasadena (now closed) and Lake Mead Hospital Medical Center.
We are cooperating with the Office of Inspector General in regard to this inquiry.
We cannot presently determine the ultimate resolution of these investigations and lawsuits. Accordingly, the likelihood of a loss, if any, for these matters, cannot be reasonably estimated and we have not recognized in the accompanying consolidated financial statements all of the potential liability that may arise from these matters. If adversely determined, the outcome of these matters could have a material adverse effect on our liquidity, financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. MARKET PRICE FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION, HOLDERS AND DIVIDENDS
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Quarters of Year ended May 31, 2001
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Quarters of Year ended May 31, 2002
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Seven Months ended
December 31, 2002 |
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Fourth
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Price Range | ||||||||||||||||||||||||||||
High | $ | 21.79 | $ | 28.96 | $ | 31.33 | $ | 31.83 | $ | 39.26 | $ | 41.85 | $ | 44.27 | $ | 50.30 | $ | 52.50 | ||||||||||
Low | $ | 16.50 | $ | 20.38 | $ | 24.67 | $ | 25.33 | $ | 29.82 | $ | 35.00 | $ | 37.80 | $ | 37.67 | $ | 13.70 |
All periods have been adjusted to reflect a 3-for-2 stock split declared in May 2002 and distributed on June 28, 2002.
At April 30, 2003, there were approximately 9,700 holders of record of the Parent's common stock. The Parent's common stock is listed and traded on the New York Stock Exchange. The stock prices above are the high and low sale prices as reported in the NYSE composite tape for the last two fiscal years and the seven-month period ended December 31, 2002. The Parent has not paid cash dividends to its shareholders since the first quarter of fiscal 1994, nor does it intend to pay cash dividends in the foreseeable future.
Information regarding securities authorized for issuance under equity compensation plans is disclosed on pages 113-114.
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ITEM 6. SELECTED FINANCIAL DATA
OPERATING RESULTS
In March 2003, our board of directors approved a change in our fiscal year. Instead of a fiscal year ending on May 31, we will now have a fiscal year that coincides with the calendar year, effective December 31, 2002. The following table presents selected audited consolidated financial data for Tenet Healthcare Corporation and its wholly owned and majority-owned subsidiaries for the years ended May 31, 1998 through 2002 and the seven-month transition period ended December 31, 2002. It also presents unaudited, comparable data for the seven months ended December 31, 2001.
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The selected financial data presented in the previous table are not necessarily indicative of our future financial condition or results of operations. Reasons for this include, but are not limited to, future changes in Medicare regulations, our adoption of a new method for calculating Medicare outlier payments effective January 1, 2003, the ultimate resolution of investigations and lawsuits, fluctuations in revenue allowances and discounts and changes in interest rates, tax rates, occupancy levels and patient volumes. Other items include the effects of impairment and restructuring charges, losses from early extinguishment of debt, and acquisitions and disposals of facilities and other assets, all of which have also occurred during all or some of the periods presented in the previous table above.
BALANCE SHEET DATA
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May 31
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December 31
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(unaudited)
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Current assets | 2,890 | 3,962 | 3,594 | 3,226 | 3,394 | 3,339 | 3,792 | |||||||||||||||
Current liabilities | (1,708 | ) | (2,022 | ) | (1,912 | ) | (2,166 | ) | (2,584 | ) | (2,234 | ) | (2,381 | ) | ||||||||
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Working capital | $ | 1,182 | $ | 1,940 | $ | 1,682 | $ | 1,060 | $ | 810 | $ | 1,105 | $ | 1,411 | ||||||||
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Total assets | 12,774 | 13,771 | 13,161 | 12,995 | 13,814 | 13,550 | 13,780 | |||||||||||||||
Long-term debt, net of current portion | 5,829 | 6,391 | 5,668 | 4,202 | 3,919 | 4,392 | 3,872 | |||||||||||||||
Shareholders' equity | 3,558 | 3,870 | 4,066 | 5,079 | 5,619 | 5,314 | 5,723 |
CASH FLOW DATA
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Years ended May 31
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Seven months ended
December 31 |
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1998
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1999
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2000
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2001
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2002
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(unaudited)
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Net cash provided by operating activities | $ | 403 | $ | 582 | $ | 869 | $ | 1,818 | $ | 2,315 | $ | 1,113 | $ | 1,126 | ||||||||
Net cash used in investing activities | (1,083 | ) | (1,147 | ) | (36 | ) | (574 | ) | (1,227 | ) | (823 | ) | (389 | ) | ||||||||
Net cash provided by (used in) financing activities | 668 | 571 | (727 | ) | (1,317 | ) | (1,112 | ) | (290 | ) | (565 | ) |
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS STRATEGIES & OUTLOOK
OPERATING STRATEGIES
Our mission and objective is to provide quality health care services within existing regulatory and managed-care environments that are responsive to the needs of the communities we serve. We believe that competition among health care providers occurs primarily at the local level. A hospital's competitive position within the geographic area in which it operates is affected by a number of competitive factors, including, but not limited to: the scope, breadth and quality of services a hospital offers to its patients and physicians; the number, quality and specialties of the physicians who refer patients to the hospital; nurses and other health care professionals employed by the hospital or on the hospital's staff; its reputation; its managed-care contracting relationships; the extent to which it is part of an integrated health care delivery system; its location; the location and number of competitive facilities and other health care alternatives; the physical condition of its buildings and improvements; the quality, age and state of the art of its medical equipment; its parking or proximity to public transportation; the length of time it has been a part of the community; and its prices for services. Accordingly, we tailor our local strategies to address these competitive factors.
We adjust these strategies as needed in response to changes in the economic climate in which we operate and the success or failure of our various efforts. Effective January 1, 2003, we adopted a new method for calculating Medicare outlier payments (see page 35); we have restructured our operating divisions and regions; and we have realigned our senior executive management team.
On March 10, 2003, we announced the consolidation of our operating divisions from three to two, with five new underlying regions. Our new Eastern Division will consist of three regionsFlorida, Central-Northeast and Southern States. These regions will initially include 59 of our general hospitals located in Alabama, Arkansas, Florida, Georgia, Louisiana, Massachusetts, Mississippi, Missouri, North Carolina, Pennsylvania, South Carolina and Tennessee. Our new Western Division will consist of two regionsCalifornia and Texasand will initially include 55 of our hospitals located in California, Nebraska, Nevada and Texas.
In March 2003, we also announced a series of initiatives to sharpen our strategic focus, reduce operating expenses, and accelerate repurchases of our common stock.
We plan to divest or consolidate 14 general hospitals that no longer fit our core operating strategy of building competitive networks of quality hospitals in major markets. We intend to use the proceeds from these divestitures to repurchase our common stock and repay indebtedness.
Our operating expense reduction plan consists of (1) staff and expense reductions above the hospital level, as well as reductions in hospital departments that are not directly involved with patient care, (2) leveraging our size and strength to gain cost savings as well as enhanced levels of service through a comprehensive nurse agency contracting program, (3) changes in corporate travel policies, and (4) leveraging our regional strength to reduce the cost of energy procurement. We presently estimate that these plans will result in future savings of approximately $100 million annually.
PRICING APPROACH
In fiscal 2000, certain of our hospitals began to significantly increase gross charges. We believe that this practice, combined with the Medicare-prescribed formula for determining Medicare outlier payments, contributed to those hospitals receiving outlier payments that exceeded the norm. (Medicare outlier payments are described in more detail in the Government Programs section, page 33.
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Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid for providing patient care. Hospitals typically receive amounts that are negotiated by insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of managed-care contracts (such as stop-loss payments). And, because Medicare requires a hospital's gross charges to be the same for all patients (regardless of payor category), gross charges are also what hospitals charge self-pay patients.
In early December 2002, we announced a new pricing approach for our hospitals. The new approach de-emphasizes gross charges and refocuses on actual pricing.
We believe our hospitals' pricing practices are, and have been, in compliance with Medicare rules. However, by de-emphasizing gross charges and refocusing on actual pricing, the new pricing approach should create a structure with a larger fixed component. Our new approach includes the following components:
In addition to having a new pricing approach, on January 6, 2003, we announced to the Centers for Medicare and Medicaid Services ("CMS") that we had voluntarily adopted a new method for calculating Medicare outlier payments, retroactive to January 1, 2003. Using this new method, Medicare reimburses our hospitals in amounts equivalent to those amounts we anticipate receiving once the expected changes by CMS to Medicare outlier formulas are implemented. We decided to do this now to demonstrate our good faith and to support CMS's likely industrywide solution to the outlier issue. (See "Outlier Payments" in the Government Programs section, page 33, for further information on developments regarding the expected CMS changes.)
In the past, our hospitals' managed-care contracts were primarily charge-based. Over many years, some of them have evolved into contracts based primarily on negotiated, fixed per diem rates or case rates, combined with stop-loss payments (for high-cost patients) and pass-through payments (for high-cost devices and pharmaceuticals).
Our hospitals have thousands of managed-care contracts with various renewal/expiration dates. A majority of those contracts are "evergreen" contracts. Evergreen contracts extend automatically every year, but may be renegotiated or terminated by either party after 90 to 120 days notice.
In general, our new pricing approach will not involve any broad rollback of charges.
Our new pricing approach is intended to create a reimbursement structure with a larger fixed component that will become less dependent on gross charges. We expect that this new approach will provide a more predictable and sustainable payment structure for us. Although we believe that our new pricing approach will continue to allow for increases in prices and continued growth in net operating revenues in the future, we do not expect that the growth rates experienced in the past two years can be sustained. Additionally, our proposal is new in the industry and may take time to implement. We can offer no assurances that our managed-care contracting parties will agree to the changes we propose or any changes that result in higher prices. Nor can we offer assurances that this new pricing approach, in
32
the form implemented, will not have a material adverse effect on our business, financial condition or results of operations.
OUTLOOK
To address all the changes impacting the health care industry, while continuing to provide quality care to patients, we have implemented strategies to reduce inefficiencies, create synergies, obtain additional business, and control costs. Such strategies include selective acquisitions, sales or closures of certain facilities, the enhancement of integrated health care delivery systems, hospital cost-control programs, and overhead-reduction plans. We may acquire, sell or close some additional facilities and implement additional cost-control programs and other operating efficiencies in the future.
We believe that the key ongoing challenges facing us and the health care industry as a whole are (1) providing quality patient care in a competitive and highly regulated environment, (2) obtaining adequate compensation for the services we provide, and (3) managing our costs. The primary cost pressure facing us and the industry is the ongoing increase of labor costs due to a nationwide shortage of nurses. We expect the nursing shortage to continue, and we have implemented various initiatives to improve productivity, to better position our hospitals to attract and retain qualified nursing personnel, and to otherwise manage labor-cost pressures. In May 2003, we entered into an agreement with the Service Employees International Union and the American Federation of Federal, State, County and Municipal Employees with respect to all of our California hospitals and two hospitals in Florida. The agreement is expected to streamline the contract negotiation process if employees choose to organize into collective bargaining units at a facility. The agreement provides a framework for pre-negotiated salaries and benefits at these hospitals, and includes a no-strike agreement by these organizations at our other facilities for up to three years.
We are also experiencing cost pressure as a result of the sharp increase in professional and general liability insurance costs.
GOVERNMENT PROGRAMS
Payments from Medicare constitute a significant portion of our net operating revenues. The Medicare program is subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and new governmental funding restrictionsall of which could materially increase or decrease program payments, as well as affect the cost of providing services to patients and the timing of payments to facilities. We are unable to predict the effect of future policy changes on our operations. However, if either the rates paid or scope of services covered by government payors is reduced, there could be a material adverse effect on our business, financial condition, or results of operations.
A final determination of certain amounts earned under the Medicare program often takes many years to resolve because of audits by the program representatives, providers' rights of appeal, and the application of numerous technical reimbursement provisions. We believe that adequate provision has been made in our consolidated financial statements for probable adjustments to historical net operating revenues. However, until final settlement, significant issues remain unresolved, and previously determined allowances could be more or less than ultimately required.
33
The major components of our Medicare net patient revenues for the years ended May 31, 2000, 2001, 2002 and the seven-month periods ended December 31, 2001 and 2002 approximate the following:
DIAGNOSIS-RELATED-GROUP PAYMENTS
Medicare payments for general hospital inpatient services are based on a prospective payment system that uses diagnosis-related groups. Under this system, a hospital receives a fixed amount for each Medicare patient based on the patient's assigned diagnosis-related group. Although these payments are adjusted for area-wage differentials, the adjustments do not take into consideration the hospital's operating costs. Moreover, as discussed below, diagnosis-related-group payments also exclude the reimbursement of capital costs (such as property taxes, lease expenses, depreciation, and interest related to capital expenditures).
The diagnosis-related-group rates are updated annually, giving consideration to the increased cost of goods and services purchased by hospitals. The rate increase that became effective on October 1, 2002 was 2.95 percent. As in prior years, this was below the cost increases for goods and services purchased by our hospitals. We expect that future rate increases will also be below such cost increases.
CAPITAL COST PAYMENTS
Medicare reimburses general hospitals for their capital costs separately from diagnosis-related-group payments. In 1992, a prospective payment system covering the reimbursement of inpatient capital costs generally became effective. As of October 1, 2002, after a gradual phase in, all of our hospitals are being reimbursed at a capital-cost rate that increases annually by a capital-cost-market-basket-update factor. However, as with the diagnosis-related-group rate increases, we expect that these increases will be below the cost increases of our capital asset purchases.
OUTLIER PAYMENTS
Outlier payments, which were established by Congress as part of the diagnosis-related-group prospective payment system, are additional payments made to hospitals for treating patients who are costlier to treat than the average patient.
A hospital receives outlier payments when its costs (as determined using gross charges, adjusted by the hospital's cost-to-charge ratio) exceed a certain threshold established annually by CMS. As mandated by Congress, CMS must limit total outlier payments to between 5 and 6 percent of total
34
diagnosis-related-group payments. CMS periodically changes the threshold in order to bring expected outlier payments within the mandated limit. An increase to the cost threshold reduces total outlier payments by (1) reducing the number of cases that qualify for outlier payments, and (2) reducing the dollar amount hospitals receive for those cases that still qualify. The most recent increase in the threshold became effective on October 1, 2002.
CMS currently uses a hospital's most recently settled cost report to set the hospital's cost-to-charge ratio. Those cost reports are typically two to three years old. Additionally, if a hospital's cost-to-charge ratio falls below a certain threshold (derived from the cost-to-charge ratios for all hospitals nationwide), then the cost-to-charge ratio used to calculate Medicare outlier payments defaults to the statewide average, which is considerably higher. The statewide average is also used when settled cost reports are not available (such as with newly acquired hospitals).
On February 28, 2003, CMS announced that it was proposing three changes to its rules governing the calculation of outlier payments: (1) Medicare would be allowed to use more recent data to calculate outlier payments, (2) the use of the statewide average ratio of costs to charges would be eliminated for hospitals with very low computed cost-to-charge ratios, and (3) Medicare would be allowed to recover overpayments if the actual costs of a hospital stay (which are reflected in the settled cost report) are less than that which was claimed by the provider. We expect these changes to have a material effect on the amount of outlier payments we receive.
In anticipation of these changes, on January 6, 2003, we announced to CMS that we had voluntarily adopted a new method for calculating Medicare outlier payments, retroactive to January 1, 2003. With this new method, instead of using recently settled cost reports for our outlier calculations, we are using current year cost-to-charge ratios. We have also eliminated the use of the statewide average, and we continue to use the current threshold amounts. These two changes have resulted in a drop of Medicare inpatient outlier payments from approximately $65 million per month to approximately $6 million per month. We voluntarily adopted this new method to demonstrate our good faith and to support CMS's likely industrywide solution to the outlier issue.
The proposed new rule is not yet final. Our voluntary proposal to CMS included a provision to reconcile the payments we received under our interim arrangement to those we would have received if the CMS rule had gone into effect on January 1, 2003. This could result in our receiving additional outlier payments, or it could result in our refunding some of the outlier payments recorded under the interim arrangement.
OUTPATIENT PAYMENTS
An outpatient prospective payment system was implemented as of August 1, 2000. This payment system established groups called ambulatory payment classifications for all outpatient procedures. Medicare pays for outpatient services based on the classification. The outpatient prospective payment system provides a transitional period that limits each hospital's losses during the first three and one-half years of the program. If a hospital's costs are less than the payment, the hospital keeps the difference. If a hospital's costs are higher than the payment, the hospital is subsidized for part of the loss. The outpatient prospective payment system has not had a material impact on our results of operations.
DISPROPORTIONATE SHARE PAYMENTS
Certain of our hospitals treat a disproportionately large number of low-income patients (i.e., Medicaid and Medicare patients eligible to receive supplemental Social Security income), and, therefore, receive additional payments from the federal government in the form of disproportionate-share payments. Congress recently mandated CMS to study the present formula used to calculate these payments. One change being considered would give greater weight to the amount of uncompensated
35
care provided by a hospital than it would to the number of low-income patients treated. We cannot predict the impact on our hospitals if CMS revises the formula, however, we do not expect that this change would have a material impact on our results of operations.
GRADUATE AND INDIRECT MEDICAL EDUCATION
Several of our hospitals are currently approved as teaching sites for the training of interns and residents under graduate medical education programs. Our participating hospitals receive additional paymentsgraduate-medical-education paymentsfor the cost of training residents. In addition, these hospitals receive indirect-medical-education payments, which are related to the teaching programs. These payments are add-ons to the regular diagnosis-related-group payments.
The current indirect-medical-education payment level is set at 5.5% of total diagnosis-related-group payments. However, CMS may recommend that the level be reduced to 2.7%. Such a reduction would require Congressional approval. If approved, the change would not become effective until October 1, 2003. Indirect-medical-education payments received by our hospitals for the three years ended May 31, 2000, 2001, 2002 and the seven-month periods ended December 31, 2001 and 2002 were approximately $79 million, $89 million, $110 million, $59 million and $56 million, respectively. If the above reduction is implemented, those payments to our hospitals could be reduced by approximately 50%.
PROPOSED CHANGES TO MEDICARE PAYMENTS
Under the Medicare law, CMS is required to annually update the prospective payments for acute, rehabilitation, and skilled nursing facilities. The updated payments are effective on October 1, the beginning of the federal fiscal year. CMS recently issued proposed rules affecting Medicare payments to acute hospitals, rehabilitation hospitals and units, and skilled nursing facilities. These proposed rules are subject to public comment, and we expect the final regulations to be issued on or about August 1, 2003.
On May 9, 2003, CMS proposed a rule for inpatient acute care that includes a 3.5 percent increase in payment rates, beginning October 1, 2003. Under the proposed rule, the outlier threshold would increase to $50,645, up from $33,560. CMS anticipates that its proposed rules governing outlier payments described above will be finalized during the comment period for the inpatient prospective payments rule, and changes to the outlier payment methodology adopted in that final rule may make it possible to significantly lower the outlier threshold in the final inpatient rule.
In addition, the proposed rules update other payment factors, including the wage index, DRG weights, and other factors that influence the prospective payments. Consequently, the percentage increases described above may not be fully realized in the final payments. We are currently analyzing the impact of all of the proposed changes.
MEDICAID
Payments we receive under various state Medicaid programs constitute approximately 8% of our net patient revenues. These payments are typically based on fixed rates determined by the individual states. (Only two states in which we operate have a Medicaid outlier payment formula.) We also receive disproportionate-share payments under various state Medicaid programs. For the three years ended May 31, 2000, 2001, 2002 and the seven-month periods ended December 31, 2001 and 2002, these payments were approximately $160 million, $161 million, $171 million, $91 million and $104 million, respectively.
Many of the states in which we operate are experiencing serious budgetary problems and have proposed, or are proposing, new legislation that would significantly reduce the payments they make to
36
hospitals under their Medicaid programs. These pending actions could have a material adverse effect on our financial condition and results of operations.
RESULTS OF OPERATIONS
The paragraphs in this section primarily discuss our historical results of operations. However, in light of recent events and our voluntary adoption of a new method for calculating Medicare outlier payments, and the fact that CMS has indicated its intent to change the program's rules regarding Medicare outlier payments, discussed on page 34, we are supplementing certain of the historical information with information presented on an adjusted basis (as if we had received no Medicare outlier revenues during the periods indicated). This adjusted-basis information includes numerical measures of our historical or future performance, financial position or cash flows that have the effect of depicting such measures of financial performance differently from that presented in our financial statements prepared in accordance with generally accepted accounting principles ("GAAP") and are defined under Securities and Exchange Commission rules as "non-GAAP financial measures." We believe that the information on this basis is important to our shareholders in order to show more clearly the significant effect that Medicare inpatient outlier revenue has had on elements of our historical results of operations, without necessarily estimating or suggesting their effect on future results of operations. Among the information presented on an adjusted basis are operating expenses expressed as percentages of net operating revenues, net inpatient revenues per patient day and per admission, net cash provided by operating activities, and EBITDA margins (which we define as the ratio of income from continuing operations before interest net of investment earnings, taxes, depreciation and amortization, and also excluding minority interests, impairment and restructuring charges, loss from early extinguishment of debt and gains or losses from assets sales to net operating revenues). Because costs in our business are largely influenced by volumes and thus generally analyzed as percentages of operating revenues, we provide this additional analytical information to better enable investors to measure expense categories between periods.
EBITDA, which is a non-GAAP financial measure, is commonly used as an analytical indicator within the healthcare industry. We use EBITDA as an analytical indicator for purposes of assessing hospitals' relative performance. EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from EBITDA are significant components in understanding and assessing such financial performance. Because EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, EBITDA as presented may not be comparable to other similarly titled measures of other companies. Investors are encouraged to use GAAP measures when evaluating our performance.
For the seven months ended December 31, 2002, on a same-facility basis, admissions grew 3.5% over the prior-year period, net patient revenues were up 11.2% and net inpatient revenue per admission was up 7.2%.
On a same-facility basis, net patient revenues for the year ended May 31, 2002 improved 13.7%, admissions were up 2.4% and net inpatient revenue per admission improved 12.9% over the prior year. Total company operating margins (the ratio of operating income to net operating revenues) decreased from 12.4% to 12.3%. Net cash provided by operating activities increased by $497 million during the year to $2.32 billion.
We reported income from continuing operations before income taxes of $590 million in the seven months ended December 31, 2001 and pretax income of $758 million in the seven months ended December 31, 2002. We reported income from continuing operations before income taxes of $618 million in fiscal 2000, $1.09 billion in fiscal 2001, and $1.38 billion in fiscal 2002.
The table below shows the pretax and after-tax impact of (1) impairments of long-lived assets, (2) restructuring charges, (3) losses from early extinguishment of debt, (4) goodwill amortization,
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(5) impairment of investment securities, and (6) net gains on sales of facilities and long-term investments for the years ended May 31, 2000 through 2002 and for the seven months ended December 31, 2001 and 2002:
Adjusted diluted earnings per share in the above table excludes the effects of certain items that may not relate to the conditions and circumstances of the current operating environment, including differences in accounting policies, portfolio changes and financing actions, as well as the impact of impairment and restructuring charges. It is a metric used by senior management to measure the effectiveness of our operating strategies in the current operating environment and to allow more direct comparisons of operating performance trends between periods. It is not a measure of financial performance under GAAP, and the items excluded from it are significant components in understanding and assessing such financial performance. Because it is not a measure determined in accordance with GAAP, and is thus susceptible to varying calculations, as presented herein it may not be comparable to other similarly titled measures of other companies. Investors are encouraged to use GAAP measures when evaluating our financial performance.
The table below is a reconciliation of operating income to EBITDA and our EBITDA margins for the years ended May 31, 2000 to 2002 and the seven-month periods ended December 31, 2001 and 2002. Operating income is a performance measure under GAAP, whereas EBITDA is not. EBITDA is commonly used as an analytical indicator of operating performance within the healthcare industry. We use EBITDA as an analytical indicator for purposes of assessing hospitals' relative operating performance. EBITDA should not be considered as a measure of financial performance under GAAP, and the items excluded from EBITDA are significant components in understanding and assessing such financial performance. Because EBITDA is not a measurement determined in accordance with GAAP and is thus susceptible to varying calculations, it may not be comparable to other similarly titled
38
measures of other companies. Investors are encouraged to use GAAP measures when evaluating our financial performance.
The table below is a reconciliation of net operating revenues to adjusted net operating revenues and EBITDA to adjusted EBITDA (as if we had received no Medicare outlier revenue) and our adjusted EBITDA margins for the years ended May 31, 2000 to 2002 and the seven-month periods ended December 31, 2001 and 2002. Net operating revenue is a performance measure under GAAP, whereas adjusted net operating revenue is not. EBITDA is commonly used as an analytical indicator of operating performance within the healthcare industry. We use EBITDA and adjusted EBITDA as analytical indicators for purposes of assessing hospitals' relative operating performance. EBITDA and adjusted EBITDA should not be considered as measures of financial performance under GAAP, and the items excluded from EBITDA and adjusted EBITDA are significant components in understanding and assessing such financial performance. Because EBITDA and adjusted EBITDA are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations, they may not be comparable to other similarly titled measures of other companies. Investors are encouraged to use GAAP measures when evaluating our performance.
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Results of operations for the seven months ended December 31, 2002 include the operations of one general hospital acquired after December 31, 2001 and exclude the operations of three general hospitals sold, closed or consolidated and certain other facilities closed since then. Results of operations for the year ended May 31, 2002 include the operations of two general hospitals acquired in 2001, five general hospitals acquired in 2002 and a new 51%-owned general hospital opened after May 31, 2001, and exclude, from the dates of sale or closure, the operations of one general hospital and certain other facilities sold or closed since May 31, 2001. Results of operations for the year ended May 31, 2001 include the operations of one general hospital acquired in 2000 and two general hospitals acquired in 2001 and exclude, from the dates of sale or closure, the operations of one general hospital and certain other facilities sold or closed since May 31, 2000. The following is a summary of consolidated operations for the years ended May 31, 2000 through 2002 and the seven-month periods ended December 31, 2001 and 2002:
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Years ended May 31
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Seven Months ended December 31
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2000
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2001
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2001
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2002
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(% of Net Operating Revenues)
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Net operating revenues: | ||||||||||||
Domestic general hospitals(1) | 93.4 | % | 95.8 | % | 96.9 | % | 96.5 | % | 97.1 | % | ||
Other operations(2) | 6.6 | % | 4.2 | % | 3.1 | % | 3.5 | % | 2.9 | % | ||
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Net operating revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||
|
|
|
|
|
||||||||
Operating expenses: | ||||||||||||
Salaries and benefits | 39.5 | % | 38.8 | % | 38.4 | % | 38.5 | % | 38.1 | % | ||
Supplies | 14.0 | % | 13.9 | % | 14.1 | % | 13.9 | % | 14.2 | % | ||
Provision for doubtful accounts | 7.5 | % | 7.0 | % | 7.1 | % | 7.6 | % | 7.7 | % | ||
Other operating expenses | 22.1 | % | 21.6 | % | 20.3 | % | 20.5 | % | 20.8 | % | ||
Depreciation | 3.6 | % | 3.6 | % | 3.4 | % | 3.5 | % | 3.2 | % | ||
Amortization | 1.0 | % | 1.0 | % | 0.9 | % | 1.0 | % | 0.2 | % | ||
|
|
|
|
|
||||||||
Operating income before impairment and restructuring charges and loss from early extinguishment of debt | 12.3 | % | 14.0 | % | 15.8 | % | 15.1 | % | 15.7 | % | ||
Impairment and restructuring charges | 3.1 | % | 1.2 | % | 0.7 | % | 1.3 | % | 4.5 | % | ||
Loss from early extinguishment of debt | | 0.5 | % | 2.8 | % | 3.6 | % | | ||||
|
|
|
|
|
||||||||
Operating income | 9.2 | % | 12.4 | % | 12.3 | % | 10.2 | % | 11.1 | % | ||
|
|
|
|
|
Although our hospitals expect to receive some level of Medicare outlier revenue in future periods, as discussed earlier, the following two tables show a summary of consolidated results of operations for
41
the years ended May 31, 2000 through 2002 and the seven-month periods ended December 31, 2001 and 2002 as if we had received no Medicare outlier revenue during those periods:
|
Years ended May 31
|
Seven Months ended December 31
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000
|
2001
|
2002
|
2001
|
2002
|
||||||||||||
|
(Dollars in Millions)
|
||||||||||||||||
Net operating revenues | $ | 11,414 | $ | 12,053 | $ | 13,913 | $ | 7,832 | $ | 8,743 | |||||||
Less Medicare outlier revenue | (368 | ) | (570 | ) | (765 | ) | (416 | ) | (495 | ) | |||||||
|
|
|
|
|
|||||||||||||
Adjusted net operating revenues | $ | 11,046 | $ | 11,483 | $ | 13,148 | $ | 7,416 | $ | 8,248 | |||||||
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|
|
|
|
|||||||||||||
Operating expenses: | |||||||||||||||||
Salaries and benefits | 4,508 | 4,680 | 5,346 | 3,012 | 3,327 | ||||||||||||
Supplies | 1,595 | 1,677 | 1,960 | 1,092 | 1,245 | ||||||||||||
Provision for doubtful accounts | 851 | 849 | 986 | 594 | 676 | ||||||||||||
Other operating expenses | 2,525 | 2,603 | 2,824 | 1,602 | 1,819 | ||||||||||||
Depreciation | 411 | 428 | 472 | 273 | 284 | ||||||||||||
Amortization | 122 | 126 | 132 | 78 | 18 | ||||||||||||
|
|
|
|
|
|||||||||||||
Adjusted operating income before impairment and restructuring charges and loss from early extinguishment of debt | 1,034 | 1,120 | 1,428 | 765 | 879 | ||||||||||||
Impairment and restructuring charges | 355 | 143 | 99 | 99 | 396 | ||||||||||||
Loss from early extinguishment of debt | | 56 | 383 | 281 | 4 | ||||||||||||
|
|
|
|
|
|||||||||||||
Adjusted operating income | 679 | 921 | 946 | 385 | 479 | ||||||||||||
Add back Medicare outlier revenue | 368 | 570 | 765 | 416 | 495 | ||||||||||||
|
|
|
|
|
|||||||||||||
Operating income | $ | 1,047 | $ | 1,491 | $ | 1,711 | $ | 801 | $ | 974 | |||||||
|
|
|
|
|
|
Years ended May 31
|
Seven Months ended December 31
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000
|
2001
|
2002
|
2001
|
2002
|
|||||||
|
(% of Net Operating Revenues)
|
|||||||||||
Adjusted net operating revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||
|
|
|
|
|
||||||||
Operating expenses: | ||||||||||||
Salaries and benefits | 40.8 | % | 40.8 | % | 40.7 | % | 40.6 | % | 40.3 | % | ||
Supplies | 14.4 | % | 14.6 | % | 14.9 | % | 14.7 | % | 15.1 | % | ||
Provision for doubtful accounts | 7.7 | % | 7.4 | % | 7.5 | % | 8.0 | % | 8.2 | % | ||
Other operating expenses | 22.9 | % | 22.7 | % | 21.5 | % | 21.6 | % | 22.1 | % | ||
Depreciation | 3.7 | % | 3.7 | % | 3.6 | % | 3.7 | % | 3.4 | % | ||
Amortization | 1.1 | % | 1.1 | % | 1.0 | % | 1.1 | % | 0.2 | % | ||
|
|
|
|
|
||||||||
Adjusted operating income before impairment and restructuring charges and loss from early extinguishment of debt | 9.4 | % | 9.8 | % | 10.9 | % | 10.3 | % | 10.7 | % | ||
Impairment and restructuring charges | 3.2 | % | 1.2 | % | 0.8 | % | 1.3 | % | 4.8 | % | ||
Loss from early extinguishment of debt | | 0.5 | % | 2.9 | % | 3.8 | % | | ||||
|
|
|
|
|
||||||||
Adjusted operating income | 6.1 | % | 8.0 | % | 7.2 | % | 5.2 | % | 5.8 | % | ||
Medicare outlier revenue | 3.1 | % | 4.4 | % | 5.1 | % | 5.0 | % | 5.3 | % | ||
|
|
|
|
|
||||||||
Operating income | 9.2 | % | 12.4 | % | 12.3 | % | 10.2 | % | 11.1 | % | ||
|
|
|
|
|
42
The table below shows certain selected historical operating statistics for our domestic general hospitals:
|
|
|
|
Seven months ended December 31
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years ended May 31
|
||||||||||||
|
|
|
Increase
(Decrease) |
||||||||||
|
2000
|
2001
|
2002
|
2001
|
2002
|
||||||||
Number of hospitals (at end of period) | 110 | 111 | 116 | 116 | 114 | (2 | )(1) | ||||||
Licensed beds (at end of period) | 26,939 | 27,277 | 28,667 | 28,748 | 27,870 | (3.1 | )% | ||||||
Net inpatient revenues (in millions)(2)(4) | $7,029 | $7,677 | $9,140 | $5,086 | $5,695 | 12.0 | % | ||||||
Net outpatient revenues (in millions)(2) | $3,394 | $3,603 | $4,108 | $2,336 | $2,648 | 13.4 | % | ||||||
Admissions | 936,142 | 939,601 | 1,001,036 | 566,454 | 592,503 | 4.6 | % | ||||||
Equivalent admissions(3) | 1,351,295 | 1,341,138 | 1,429,552 | 813,601 | 842,739 | 3.6 | % | ||||||
Average length of stay (days) | 5.2 | 5.3 | 5.3 | 5.3 | 5.3 | | (1) | ||||||
Patient days | 4,888,649 | 4,936,753 | 5,335,919 | 2,992,929 | 3,144,560 | 5.1 | % | ||||||
Equivalent patient days(3) | 6,975,306 | 6,956,539 | 7,516,306 | 4,240,038 | 4,411,780 | 4.1 | % | ||||||
Utilization of licensed beds | 46.8 | % | 50.0 | % | 51.6 | % | 49.8 | % | 52.4 | % | 2.6 | %(1) | |
Outpatient visits | 9,276,372 | 9,054,117 | 9,320,743 | 5,308,580 | 5,413,841 | 2.0 | % | ||||||
Net inpatient revenue per patient day(4) | $1,438 | $1,555 | $1,713 | $1,699 | $1,811 | 6.6 | % | ||||||
Net inpatient revenue per admission(4) | $7,508 | $8,170 | $9,131 | $8,979 | $9,612 | 7.0 | % |
43
The table below shows certain selected historical operating statistics for our continuing domestic general hospitals on a same-facility basis as of May 31, 2002 for the years ended May 31, 2001 and 2002, and as of December 31, 2002 for the seven-month periods ended December 31, 2001 and 2002:
|
Years ended May 31
|
Seven months ended December 31
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
2001
|
2002
|
2001
|
2002
|
Increase
|
||||||
Average licensed beds | 26,712 | 26,563 | 26,787 | 26,930 | 0.5 | % | |||||
Patient days | 4,891,119 | 5,075,670 | 2,914,978 | 3,039,684 | 4.3 | % | |||||
Admissions | 929,778 | 952,202 | 553,783 | 573,287 | 3.5 | % | |||||
Outpatient visits | 8,963,138 | 8,857,252 | 5,188,184 | 5,244,813 | 1.1 | % | |||||
Average length of stay (days) | 5.3 | 5.3 | 5.3 | 5.3 | | ||||||
Net inpatient revenue per patient day(1) | $1,559 | $1,737 | $1,717 | $1,828 | 6.5 | % | |||||
Net inpatient revenue per admission(1) | $8,201 | $9,259 | $9,040 | $9,693 | 7.2 | % |
The table below shows the sources of net patient revenues for our domestic general hospitals, expressed as percentages of net patient revenues from all sources:
|
|
|
|
Seven months ended December 31
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Years ended May 31
|
||||||||||||
|
|
|
Increase
(Decrease)(1) |
||||||||||
|
2000
|
2001
|
2002
|
2001
|
2002
|
||||||||
Medicare | 32.6 | % | 30.8 | % | 31.8 | % | 30.7 | % | 30.7 | % | | ||
Medicaid | 8.3 | % | 8.2 | % | 8.6 | % | 8.1 | % | 8.0 | % | (0.1 | )% | |
Managed care | 40.7 | % | 43.3 | % | 43.9 | % | 43.8 | % | 46.2 | % | 2.4 | % | |
Indemnity and other | 18.4 | % | 17.7 | % | 15.7 | % | 17.4 | % | 15.1 | % | (2.3 | )% |
In comparing the seven-month period ended December 31, 2002 to the same period of 2001, total-facility admissions increased by 4.6%. Total-facility admissions for the year ended May 31, 2002 increased by 6.5% compared to 2001.
On a total-facility basis, net inpatient revenue per admission for the seven-months ended December 31, 2002 increased 7.0%, and on a same-facility basis, it increased by 7.2% over the prior-year period. For the year ended May 31, 2002, on a total-facility basis, this statistic increased 11.8% over the prior year and on a same-facility basis, it increased by 12.9%. Those percentages reflect lower Medicare outlier revenue, offset by changes in payor classes. As mentioned earlier, our new pricing approach, combined with our voluntary changes to the method we use to calculate Medicare outlier payments, and the anticipated change in Medicare regulations for determining outlier payments,
44
are expected to adversely impact our future revenues. For example, if we had received no Medicare outlier revenue, our net inpatient revenue per admission for the seven-month period ended December 31, 2002 would have increased by 6.5% instead of 7.0%. On a same-facility basis, the increase would have been 6.6% instead of 7.2% (see table on page 43 for our explanations of these adjusted performance measures).
Outpatient surgery and outpatient diagnostic procedures continue to increase, while the home health business, which generates lower per-visit revenues, continues to decrease. We experienced a 1.1% increase in same-facility outpatient visits during the seven-month period ended December 31, 2002 compared to the same period a year ago. Net outpatient revenues increased by 13.4% on a total-facility basis and by 11.6% on a same-facility basis compared to the prior-year period. Net outpatient revenues on a total-facility basis increased by 6.2% during the years ended May 31, 2001 compared to 2000 and increased 14.0% during 2002 compared to 2001.
Net operating revenues from the Company's other operations were $274 million and $257 million in the seven-month periods ended December 31, 2001 and 2002, respectively, and $748 million in fiscal 2000, $511 million in fiscal 2001 and $425 million in fiscal 2002. The decreases are primarily the result of terminations and contract expirations of unprofitable physician practices and sales of facilities other than general hospitals.
Salaries and benefits expense as a percentage of net operating revenues was 38.5% in the seven-month period ended December 31, 2001 and 38.1% in the current period. Without outlier revenue the percentages would have been 40.6% and 40.3%. Salaries and benefits expense as a percentage of net operating revenues was 39.5% in the year ended May 31, 2000, 38.8% in 2001 and 38.4% in 2002. Without outlier revenue the percentages would have been 40.8%, 40.8% and 40.7%. (See table on page 42 for our explanations of these adjusted performance measures.) We have experienced and expect to continue to experience significant wage and benefit pressures created by the current nursing shortage throughout the country and escalating state-mandated nurse staffing ratios. Also, we are seeing an increase in labor union activity at our hospitals, particularly in California, in attempts to organize our employees. Approximately 8% of our employees were represented by labor unions as of March 31, 2003. As union activity continues to increase at our hospitals and as additional states enact new laws regarding nurse-staffing ratios, our salaries and benefits expense is likely to increase more rapidly than our net operating revenues. In May 2003, we entered into an agreement with the Service Employees International Union and the American Federation of Federal, State, County and Municipal Employees with respect to all of our California hospitals and two hospitals in Florida. The agreement is expected to streamline the contract negotiation process if employees choose to organize into collective bargaining units at a facility. The agreement provides a framework for pre-negotiated salaries and benefits at these hospitals, and includes a no-strike agreement by these organizations at our other facilities for up to three years.
In March 2003, our board of directors approved a change in accounting for stock options granted to employees and directors from the intrinsic-value method to the fair-value method, as recommended by SFAS No. 123, effective for the new fiscal year ending December 31, 2003. Based on options granted through March 31, 2003, we estimate that this change will increase salaries and benefits expense by approximately $39 million each quarter throughout the 2003 calendar year.
The transition method we have chosen to report this change in accounting is the retroactive-restatement method. As such, future presentations of periods with dates ending prior to January 1, 2003 will be restated to reflect the fair-value method of accounting, as if the change had been effective throughout those earlier periods. For example, the results of operations for the four quarters prior to the change will be restated to reflect additional salaries and benefits expense ranging between $33 million and $37 million each quarter.
45
Supplies expense as a percentage of net operating revenues was 13.9% in the seven-month period ended December 31, 2001 and 14.2% in the current period. Without outlier revenue the percentages would have been 14.7% and 15.1%. (See table on page 42 for our explanations of these adjusted performance measures.). Supplies expense as a percentage of net operating revenues was 14.0% in the year ended May 31, 2000, 13.9% in 2001 and 14.1% in 2002. Without outlier payments the percentages would have been 14.4%, 14.6% and 14.9%. (See table on page 42 for our explanations of these adjusted performance measures.) We control supplies expense through improved utilization and by improving the supply chain process. We also utilize the group-purchasing and supplies-management services of Broadlane, Inc. Broadlane is a 67.3%-owned subsidiary that offers group-purchasing procurement strategy, outsourcing and e-commerce services to the health care industry.
The provision for doubtful accounts as a percentage of net operating revenues was 7.6% in the seven-month period ended December 31, 2001 and 7.7% in the current period. Without outlier revenue the percentages would have been 8.0% and 8.2%. (See table on page 42 for our explanations of these adjusted performance measures.) The provision for doubtful accounts as a percentage of non-program patient revenues (that is, revenues from all sources other than Medicare and Medicaid) was 12.1% in the seven-month period ended December 31, 2001 and 12.4% in the current period. The provision for doubtful accounts as a percentage of net operating revenues was 7.5% in year ended May 31, 2000, 7.0% in 2001 and 7.1% in 2002. Without outlier payments the percentages would have been 7.7%, 7.4% and 7.5%. (See table on page 42 for our explanations of these adjusted performance measures.) We continue to focus on initiatives that improve cash flow, which include improving the process for collecting receivables, pursuing timely payments from all payors, and standardizing and improving contract terms, billing systems and the patient registration process. Accounts receivable days outstanding declined from 68.4 days at May 31, 2001 to 59.7 days at May 31, 2002 and increased to 62.8 days at December 31, 2002.
Other operating expenses as a percentage of net operating revenues were 20.5% for the seven-month period ended December 31, 2001 and 20.8% for the current period. Without outlier revenue the percentages would have been 21.6% and 22.1%. (See table on page 42 for our explanations of these adjusted performance measures.) Other operating expenses as a percentage of net operating revenues were 22.1% in year ended May 31, 2000, 21.6% in 2001 and 20.3% in 2002. Without outlier revenue the percentages would have been 22.9%, 22.7% and 21.5%. (See table on page 42 for our explanations of these adjusted performance measures.) Included in other operating expenses is malpractice expense of $115 million in the seven-month period ended December 31, 2001 and $270 million in the current period. Malpractice expense was $120 million in the year ended May 31, 2000, $144 million in 2001 and $240 million in 2002. We continue to experience unfavorable pricing and availability trends in the professional and general liability insurance markets and increases in the size of claim settlements and awards in this area. We expect this trend to deteriorate further unless meaningful tort reform legislation is enacted. Our current coverage expires on May 31, 2003, but we anticipate having a new insurance program in place by then. We believe our future coverage will be more costly and may require us to assume more of these risks.
The $270 million of malpractice expense for the seven-month period ended December 31, 2002 includes charges of (1) approximately $36 million as a result of lowering the discount rate used from 7.5% to 4.61% at December 31, 2002, (2) $29 million due to an increase in reserves at our majority-owned insurance subsidiaryHospital Underwriting Groupas a result of an increase in the average cost of claims being paid by this subsidiary, and (3) $86 million to increase our self-insured retention reserves which are also due to a significant increase in the average cost of claim settlements and awards. The 7.5% rate was based on our average cost of borrowings. The 4.61% rate is based on a risk-free, Federal Reserve 10-year maturity composite rate for a period that approximates our estimated claims payout period.
46
In addition, the aggregate amount of claims reported to Hospital Underwriting Group for the year ended May 31, 2001 are approaching the $50 million aggregate policy limit for that year. Once the aggregate limit is exhausted for the policy year, we will bear the first $25 million of loss before any excess insurance coverage would apply.
Physicians, including those who practice at some of our hospitals, face similar increases in malpractice insurance premiums and limitations on availability, which could result in lower admissions to our hospitals.
Depreciation expense was $273 million in the seven-month period ended December 31, 2001 and $284 million in the current period. Depreciation and amortization expense was $533 million in the year ended May 31, 2000, $554 million in 2001 and $604 million in 2002. The increases were primarily due to increased capital expenditures, acquisitions, and the opening of new hospitals in fiscal 2001 and 2002.
Goodwill amortization expense was $59 million before taxes in the seven-months ended December 31, 2001. As a result of adopting a new accounting standard for goodwill and other intangible assets, we stopped amortizing goodwill on June 1, 2002.
In addition to the cessation of goodwill amortization, the new accounting standards require initial transition tests for goodwill impairment and call for subsequent impairment tests at least annually. In accordance with the new standards, we completed the initial transitional impairment evaluation by November 30, 2002 and as determined by this initial evaluation a transition impairment charge was not required. Because of the change in our fiscal year-end and recent changes in our business environment, particularly those related to changes in our method of calculating Medicare outlier payments and proposed changes in government policies regarding Medicare outlier payments, we completed an additional goodwill impairment evaluation as of December 31, 2002 and determined that an impairment charge was not required as of that date either. However, because our reporting units (as defined under SFAS No. 142) will change, due to the consolidation of our operating divisions and regions (announced in March and described on page 3), we recorded a goodwill impairment charge of approximately $187 million in March 2003 related to our Central-Northeast Region.
Our estimates of future cash flows from these assets or asset groups were based on assumptions and projections that we believe to be reasonable and supportable. The fair value estimates of our long-lived assets were derived from either independent appraisals, established market values of comparable assets, or internal calculations of estimated future net cash flows.
In March 2003, we announced a plan to dispose of or consolidate 14 general hospitals that no longer fit our core operating strategy of building and maintaining competitive networks of quality hospitals in major markets. Four of the ten general hospitals for which we recorded impairment charges in the seven months ended December 31, 2002 are part of that plan. We recorded additional impairment charges of approximately $61 million in March 2003 as a loss on the disposals of this asset group, primarily for the write-down of long-lived assets and goodwill allocated to these disposed businesses to estimated fair values, less costs to sell, at six of the facilities, using the relative fair-value method. The carrying values of the remaining facilities are less than their estimated fair values.
As previously disclosed, we anticipate selling 11 of the hospitals by the end of the calandar year. We will cease operations at one hospital when the long-term lease expires in August 2003. We plan to sell, consolidate or close two other hospitals. We intend to use the proceeds from the divestitures to repurchase common stock and repay indebtedness. These hospitals reported net operating revenues of $953 million for the 12-month period ended December 31, 2002. The income from operations of the asset group was $105 million for the same period.
We begin our process of determining if our long-lived assets are impaired (other than those related to the elimination of duplicate facilities or excess capacity) by reviewing the historical and projected
47
cash flows of each facility. Facilities whose cash flows are negative and/or trending significantly downward on this basis are selected for further impairment analysis. Future cash flows (undiscounted and without interest charges) for these selected facilities are estimated over the expected useful life of the facility, taking into account patient volumes, our analyses of expected changes in growth rates for revenues and expenses, changes in payor mix, changes in certain managed-care contract terms and the effect of projected reductions in Medicare outlier payments and other Medicare reimbursement and other payor payment patterns, which assumptions vary by type of facility. Over the past several years these factors have caused significant declines in cash flows at certain facilities such that estimated future cash flows were deemed inadequate to recover the carrying values of the related long-lived assets. Continued deterioration of operating results for certain of our physician practices also led to impairment and restructuring charges. Impairment charges have resulted in subsequent minor reductions in depreciation and amortization expense.
In addition to striving to continually improve our portfolio of general hospitals through acquisitions, we, at times, divest hospitals that are not essential to our strategic objectives. For the most part, these facilities are not part of an integrated delivery system. The size and performance of these facilities vary, but on average they are smaller, with lower margins. Such divestitures allow us to concentrate on markets in which we already have a strong presence.
Over the past several years, our subsidiaries have employed or entered into at-risk management agreements with physicians. A significant percentage of these physician practices were acquired as part of large hospital acquisitions or through the formation of integrated health care delivery systems. Many of these physician practices, however, were not profitable. During the latter part of fiscal 1999, we undertook the process of evaluating our physician strategy and began to develop plans to divest, terminate or allow to expire a number of our existing unprofitable physician contracts. During the year ended May 31, 2000, our management, with the authority to do so, authorized the termination, divesture or expiration of the contractual relationships with approximately 50% of our contracted physicians. The termination, divesture or expiration of additional unprofitable physician contracts similarly was authorized in the year ended May 31, 2001. As of May 31, 2002 we had exited most of the unprofitable contracts that management had authorized be terminated or allowed to expire.
In December 2002, we recorded impairment charges of $383 million for the write-down of long-lived assets to their estimated fair values at ten general hospitals, one psychiatric hospital and other properties which represent the lowest level of identifiable cash flows that are independent of other asset-group cash flows. We recognized the impairment of these long-lived assets because events or changes in circumstances indicated that the carrying amount of the assets or groups of assets might not be fully recoverable from estimated future cash flows. The facts and circumstances leading to that conclusion include: (1) our analyses of expected changes in growth rates for revenues and expenses and changes in payor mix, changes in certain managed-care contract terms, and (2) the effect of projected reductions in Medicare outlier payments on net operating revenues and operating cash flows.
The $64 million charge for impairment of investment securities in the seven months ended December 31, 2002 relates to our decision in November 2002 to sell our investment of 8,301,067 shares of common stock in Ventas, Inc. We sold the shares on December 20, 2002 for $86 million. Because the fair value of the shares at November 30, 2002 was less than their cost basis and because we did not expect the fair value of the shares to recover prior to the expected time of sale, we recorded the impairment charge in November 2002.
During the year ended May 31, 2002 we recorded impairment and restructuring charges of $99 million, primarily relating to the planned closure of two general hospitals and the sales of certain other health care businesses. The impairment and restructuring charges included the write-downs of $39 million for property and equipment, $13 million for goodwill and $24 million for other assets. The principal elements of the balance of the charges are $7 million in lease cancellation costs, $5 million in
48
severance costs related to the termination of 691 employees, $2 million in legal costs and settlements and $9 million in other exit costs. We decided to close these hospitals because they were operating at a loss and were not essential to our strategic objectives.
During the seven-month period ended December 31, 2002, we recorded restructuring charges of $13 million primarily for consulting fees and severance and employee relocation costs incurred in connection with changes in our senior executive management team. We expect to incur additional restructuring costs as we move forward with our plans to reduce our operating expenses.
Costs remaining in accrued liabilities at December 31, 2002 for impairment and restructuring charges include $43 million primarily for lease cancellations, $9 million in severance and other related costs, $7 million for unfavorable lease commitments and $4 million in estimated costs to buy out unprofitable physician contracts.
The $143 million of impairment and restructuring charges recorded in the year ended May 31, 2001 included $98 million related to the completion of our program to divest, terminate or allow to expire the unprofitable physician contracts mentioned above. That was the final charge for this program. Additional charges of $45 million were related to asset impairment write-downs for the closure of one hospital and certain other health care businesses. The total charge consists of $55 million in impairment write-downs of property, equipment and other assets to estimated fair values and $88 million for expected cash disbursements related to costs of terminating unprofitable physician contracts, severance costs, lease cancellation and other exit costs. The impairment charge consists of $29 million for the write-down of property and equipment and $26 million for the write-down of other assets. The principal elements of the balance of the charges are $56 million for the buyout of unprofitable physician contracts, $6 million in severance costs related to the termination of 322 employees, $3 million in lease cancellation costs and $23 million in other exit costs.
The $355 million of charges recorded in the year ended May 31, 2000 include $177 million relating to the divestiture or termination of unprofitable physician contracts and $178 million relating to the closure or planned sale of five general hospitals and other property and equipment.
Interest expense, net of capitalized interest, was $209 million in the seven-months ended December 31, 2001 and $147 million in the current period. Interest expense, net of capitalized interest, was $479 million in the year ended May 31, 2000, $456 million in 2001 and $327 million in 2002. The decreases were due to decreases in interest rates and the reduction of debt. From May 31, 2002 to December 31, 2002, we reduced our debt balance by $99 million. During the years ended May 31, 2001 and 2002, we refinanced most of our then-existing publicly traded debt with new publicly traded debt at lower rates, doubling the average maturity of such debt from five years to more than 10 years.
In connection with the refinancing of debt, we recorded extraordinary charges from early extinguishment of debt in the amounts of $56 million in the year ended May 31, 2001 and $383 million in the year ended May 31, 2002 (which includes $281 million in the seven-month period ended December 31, 2001). Under the provisions of Statement of Financial Accounting Standards No. 145, issued by the Financial Accounting Standards Board in April 2002 and adopted by us as of June 1, 2002, these extraordinary charges have been reclassified in the prior periods presented herein on a pretax basis as part of income from continuing operations. The new standard generally eliminates the previous requirement to report gains or losses from early extinguishment of debt as extraordinary items, net of taxes, in the income statement.
Investment earnings were earned primarily from notes receivable and investments in debt and equity securities.
Fluctuations in minority interests are primarily related to the changes in profitability of certain of these majority-owned subsidiaries.
49
The $49 million net gains from sales of facilities and other long-term investments in the year ended May 31, 2000 comprises $50 million in gains on sales of 17 general hospitals, three long-term-care facilities and various other businesses, and $61 million in gains from sales of investments in Internet-related health care ventures, offset by $62 million in net losses from sales of other investments. The $28 million net gains in the year ended May 31, 2001 comprise gains from sales of investments in various health care ventures. There were no such gains or losses in fiscal 2002 or the seven-month periods ended December 31, 2001 and 2002.
Our tax rate before the effect of impairment and restructuring charges and the loss from early extinguishment of debt was 41.2% for the seven months ended December 31, 2001 and 39.0% in the current seven-month period. The tax rates for the years ended May 31, 2000, 2001 and 2002 were 38.4%, 40.2% and 41.3%, respectively. The decline in the tax rates from the 2001 seven-month period to the 2002 seven-month period is primarily due to the cessation of non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity for the seven-month period ended December 31, 2002 and for the year ended May 31, 2002 was derived primarily from net cash provided by operating activities, proceeds from the sales of new senior notes, and borrowings under our unsecured revolving credit agreement. The revolving credit agreements allow us to borrow, repay and reborrow up to $2.0 billion prior to March 1, 2003 and $1.5 billion prior to March 1, 2006. Our 364-day revolving credit agreement for $500 million expired on February 28, 2003. It was undrawn and was not renewed.
Net cash provided by operating activities for the seven-month periods ended December 31, 2001 and 2002 was $1.1 billion in each period. Net cash provided by operating activities for the years ended May 31, 2000, 2001 and 2002 was $869 million, $1.8 billion and $2.3 billion, respectively. Although our hospitals expect to receive some level of Medicare outlier revenue in future periods, as discussed earlier, if we had received no Medicare outlier revenue during the periods, net cash provided by operating activities would have been $495 million less for the seven months ended December 31, 2002 and $416 million less for the same period a year ago.
During the seven months ended December 31, 2002, proceeds from borrowings under our revolving credit agreements amounted to $1.3 billion. Loan payments under the credit agreements were $1.5 billion.
Cash proceeds from the sale of new 5% Senior Notes were $395 million in the seven months ended December 31, 2002. We used the proceeds to redeem at par the $282 million balance of our 6% Exchangeable Subordinated Notes and to retire existing bank loans under the credit agreements.
In January 2003, we sold $1 billion of new 7 3 / 8 % Senior Notes due 2013. We used the proceeds to repay indebtedness outstanding under our credit agreements and for general corporate purposes. These new senior notes are unsecured and rank equally with all of our other unsecured senior indebtedness and are redeemable at any time at our option with a redemption premium calculated at the time of redemption. With this transaction and other similar transactions in the past two years, the maturities of $2.6 billion of our long-term debt fall between the fiscal years ending December 31, 2011 and 2013. An additional $450 million is not due until 2031. We have no significant long-term debt that becomes due until March 1, 2006.
We believe that future cash provided by operating activities, the availability of credit under the credit agreement, and, depending on capital market conditions, other borrowings should be adequate to meet known debt service requirements. It should also be adequate to finance planned capital expenditures, acquisitions and other presently known operating needs over the next three years.
50
We are currently involved in significant investigations and legal proceedings. (See Part I. Item 3. Legal Proceedings beginning on page 19 for a description of these matters.) Although we cannot presently determine the timing or the amounts of any potential liabilities resulting from the ultimate resolutions of these investigations and lawsuits, we will incur significant costs in defending them and their outcomes could have a material adverse effect on our liquidity, financial position and results of operations.
During the years ended May 31, 2001 and 2002, we expended $556 million and $4.1 billion, respectively, to purchase $514 million and $3.7 billion principal amounts, respectively, of our senior and senior subordinated notes. The expenditures include payments for premiums and transaction costs.
During the years ended May 31, 2000, 2001 and 2002, we received net proceeds from the sales of facilities, long-term investments and other assets of $764 million, $132 million and $28 million, respectively.
Capital expenditures were $490 million in the seven months ended December 31, 2002, compared to $472 million in the corresponding period in 2001. Capital expenditures were $619 million in the year ended May 31, 2000, $601 million in 2001 and $889 million in 2002. We expect the level of capital expenditures in the near-term future to be somewhat lower. Our capital expenditures primarily relate to the development of integrated health care systems in selected geographic areas focusing on core services such as cardiology, orthopedics and neurosurgery, the design and construction of new buildings, expansion and renovation of existing facilities, equipment and systems additions and replacements, introduction of new medical technologies and various other capital improvements.
During the seven-month periods ended December 31, 2001 and 2002, we spent $324 million and $27 million, respectively, for purchases of new businesses, net of cash acquired. During the years ended May 31, 2000, 2001 and 2002, we spent $38 million, $29 million and $324 million, respectively, for purchases of new businesses, net of cash acquired.
During the year ended May 31, 2002, the Parent's board of directors authorized the repurchase of up to 30 million shares of its common stock to offset the dilutive effect of employee stock option exercises. On July 24, 2002, the board of directors authorized the repurchase of up to an additional 20 million shares of stock, not only to offset the dilutive effect of anticipated employee stock option exercises, but also to enable us to take advantage of opportunistic market conditions. On December 11, 2002, the board of directors authorized the use of net cash flows from operating activities after August 31, 2002, less capital expenditures, plus proceeds from asset sales (which includes the anticipated proceeds from the sales of the general hospitals whose planned divestitures we announced in March 2003) to repurchase up to 30 million shares of Parent's common stock (which includes 13,763,900 shares that remained under the previous authorizations). During the year ended May 31, 2002 and the seven months ended December 31, 2002, we repurchased a total of 36,263,100 shares for approximately $1.2 billion at an average cost of $33.53 per share. Through March 31, 2003, we have repurchased a total of 42,263,100 shares for approximately $1.3 billion at an average cost of $31.36 per share. As of March 31, 2003, we had a cumulative total of $120 million available for future share repurchases, of which amount $98 million was committed to purchase shares under a 10b5-1 plan between April 12 and May 15, 2003. The repurchased shares are held as treasury stock.
We have not purchased, nor do we intend to purchase, any shares from our directors, officers or employees.
At times, we have entered into forward-purchase agreements to repurchase common stock owned by unaffiliated counterparties. On October 29, 2002, we settled all of the then outstanding forward-purchase agreements and have not entered into any forward-purchase agreements since then.
Our growth strategy continues to include the prudent development of integrated health care delivery systems, such as acquiring general hospitals and related health care businesses or joining with
51
others to develop integrated health care delivery networks. These endeavors may be financed by net cash provided by operating activities, available credit under the credit agreement, the sale of assets, the sale of additional debt, or other bank borrowings. As of March 31, 2003, the available credit under our credit agreement was $1.39 billion.
Our existing credit agreement and the indentures governing our senior and senior subordinated notes contain affirmative, negative and financial covenants which have, among other requirements, limitations on (1) liens, (2) consolidations, merger or the sale of all or substantially all assets unless no default exists and, in the case of a consolidation or merger, the surviving entity assumes all of our obligations under the credit agreements, and (3) subsidiary debt. The covenants also provide that we may declare and pay a dividend and purchase our common stock so long as no default exists and our leverage ratio is less than 3.5-to-1. The leverage ratio is defined in the credit agreement as the ratio of our consolidated total debt to consolidated operating income plus the sum of depreciation, amortization, impairment and other unusual charges. This leverage ratio was 1.34 at December 31, 2002. The credit agreement was amended March 1, 2003 to change our leverage covenant from a maximum ratio of 3.0-to-1 to 2.5-to-1. The amendment also requires us to maintain specified levels of net worth ($3.7 billion at December 31, 2002) and a fixed-charge coverage greater than 2.0-to-1. At December 31, 2002, our fixed-charge coverage was 6.3-to-1. We are in compliance with all of our loan covenants.
Our obligations to make future cash payments under contracts (such as debt and lease agreements) and under contingent commitments (such as debt guarantees and standby letters of credit) are summarized in the table below, as of December 31, 2002:
CRITICAL ACCOUNTING POLICIES
In preparing our financial statements in conformity with accounting principles generally accepted in the United States of America, we must use estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. We regularly evaluate the accounting policies and estimates we use. In general, we base the estimates on historical experience and on assumptions that we believe to be reasonable, given particular circumstances. Actual results may vary from those estimates.
We consider our critical accounting policies to be those that (1) involve significant judgments and uncertainties, (2) require estimates that are more difficult for management to determine, and (3) may produce materially different outcomes under different conditions or when using different assumptions. Our critical accounting policies cover the following areas:
52
REVENUE RECOGNITION
We recognize net operating revenues in the period in which services are performed. Net operating revenues consist primarily of net patient service revenues that are recorded based on established billing rates (i.e., gross charges), less estimated discounts for contractual allowances (principally for patients covered by Medicare, Medicaid and managed-care and other health plans).
The discounts for Medicare and Medicaid contractual allowances are based primarily on prospective payment systems. Discounts for retrospectively cost-based revenues, which were more prevalent in earlier periods, are estimated based on historical and current factors and are adjusted in future periods when settlements of filed cost reports are received. Final settlements under these programs are subject to adjustment based on administrative review and audit by third parties, which can take several years to resolve completely. Because the laws and regulations governing the Medicare and Medicaid programs are ever-changing and complex, the estimates recorded by the Company could change by material amounts. We record adjustments to our previously recorded contractual allowances in future periods as final settlements of Medicare and Medicaid cost reports are determined. Adjustments related to final settlements increased revenues in each of the years ended May 31, 2000, 2001 and 2002 by $103 million, $4 million and $36 million, respectively, and by $8 million and $5 million in the seven-month periods ended December 31, 2001 and 2002.
Revenues under managed-care health plans are based primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and/or other similar contractual arrangements. These revenues also are subject to review and possible audit by the payors.
Management believes that adequate provision has been made for any adjustments that may result from final determination of amounts earned under all the above arrangements. There are no known material claims, disputes or unsettled matters with any payors that are not adequately provided for in the accompanying consolidated financial statements.
ACCRUALS FOR GENERAL AND PROFESSIONAL LIABILITY RISKS
Through May 31, 2002, we insured substantially all of our professional and comprehensive general liability risks in excess of self-insured retentions through a majority-owned insurance subsidiaryHospital Underwriting Groupunder a mature claims-made policy with a 10-year discovery period. These self-insured retentions were $1 million per occurrence for years ended May 31, 1996 through May 31, 2002, and in prior years varied by hospital and by policy period from $500,000 to $5 million per occurrence. Hospital Underwriting Group's retentions covered the next $2 million per occurrence. Claims in excess of $3 million per occurrence were, in turn, reinsured with major independent insurance companies. Effective June 1, 2002, we formed a new insurance subsidiary. This subsidiary insures these risks under a first-year only claims-made policy, and, in turn, reinsures its risks in excess of $5 million per occurrence with major independent insurance companies. Subsequent to May 31, 2002, our retention limit is $2 million. Our new subsidiary's retention covers the next $3 million.
In addition to the reserves recorded by the above insurance subsidiaries, we maintain reserves based on actuarial estimates by an independent third party for the portion of our professional liability risks, including incurred but not reported claims, for which we do not have insurance coverage. Reserves for losses and related expenses are estimated using expected loss-reporting patterns and are discounted to their present value under a risk-free rate approach using a Federal Reserve 10-year maturity composite rate that corresponds to our claims payout period. There can be no assurance that the ultimate liability will not exceed such estimates. Adjustments to the reserves are included in results of operations in the periods when such amounts are determined. These costs are included in other operating expenses.
53
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL
We evaluate our long-lived assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future cash flows. Measurement of the amount of the impairment, if any, may be based on independent appraisals, established market values of comparable assets or estimates of future net cash flows expected to result from the use and ultimate disposition of the asset. The estimates of these future cash flows are based on assumptions and projections believed by management to be reasonable and supportable. They require management's subjective judgments and take into account assumptions about revenue and expense growth rates. These assumptions may vary by type of facility.
In general, long-lived assets to be disposed of are reported at the lower of their carrying amounts or fair values less costs to sell or close. In such circumstances, our estimates of fair value are usually based on independent appraisals, established market prices for comparable assets or internal calculations of estimated future cash flows.
Goodwill represents the excess of costs over the fair value of assets of businesses acquired. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, that we adopted on June 1, 2002, goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are subject to impairment tests performed at least annually. For goodwill, the test is performed at the reporting unit level as defined by SFAS No. 142. If we find the carrying value of goodwill to be impaired, or if the carrying value of a business that is to be sold or otherwise disposed of exceeds its fair value, then we must reduce the carrying value, including any allocated goodwill, to fair value.
ACCOUNTING FOR INCOME TAXES
We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
Developing our provision for income taxes and analysis of potential tax exposure items requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. Our judgments and tax strategies are subject to audit by various taxing authorities. While we believe we have provided adequately for our income tax liabilities in our consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on our consolidated financial condition and results of operations.
PROVISIONS FOR DOUBTFUL ACCOUNTS
We provide for accounts receivable that could become uncollectible in the future by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable and our historical collection experience by hospital and for each type of payor.
54
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
The table below presents information about certain of our market-sensitive financial instruments as of December 31, 2002. The fair values were determined based on quoted market prices for the same or similar instruments. We are exposed to interest rate changes on our variable rate long-term debt. A 1% change in interest rates on that debt would have resulted in changes in net income of approximately $4 million in the seven-month period ended December 31, 2002.
We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.
|
Maturity Date, Year ending December 31
|
|
|
||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2003
|
2004
|
2005
|
2006
|
2007
|
Thereafter
|
Total
|
Fair Value
|
|||||||||||||||||
Fixed-rate long-term debt | $ | 47 | $ | 19 | $ | 26 | $ | 555 | $ | 423 | $ | 2,087 | $ | 3,157 | $ | 2,812 | |||||||||
Average interest rates | 9.7 | % | 10.9 | % | 8.5 | % | 5.4 | % | 5.3 | % | 6.6 | % | 6.3 | % | | ||||||||||
Variable-rate long-term debt | | | | $ | 830 | | | $ | 830 | $ | 830 | ||||||||||||||
Average interest rates | | | | 2.6 | % | | | 2.6 | % | |
At December 31, 2002, we had no significant long-term, market-sensitive investments. Our market risk associated with our investments in debt securities classified as a current asset is substantially mitigated by the frequent turnover of the portfolio.
We have no affiliation with partnerships, trusts or other entities (sometimes referred to as special-purpose or variable-interest entities) whose purpose is to facilitate off-balance sheet financial transactions or similar arrangements. Thus, we have no exposure to the financing, liquidity, market or credit risks associated with such entities.
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
To Our Shareholders:
The management of Tenet Healthcare Corporation (together with its subsidiaries, "Tenet") is responsible for the preparation, integrity and objectivity of Tenet's consolidated financial statements and all other information in this transition report for the seven-month period ended December 31, 2002. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and, accordingly, include certain amounts that are based on management's informed judgment and best estimates.
Tenet maintains a comprehensive system of internal accounting controls to assist management in fulfilling its responsibility for financial reporting. These controls are supported by the careful selection and training of qualified personnel and an appropriate division of responsibilities. Management believes that these controls provide reasonable assurance that assets are safeguarded from loss or unauthorized use and that Tenet's financial records are a reliable basis for preparing the consolidated financial statements.
The audit committee of the board of directors (the "board"), comprised solely of directors who (1) are neither current nor former officers or employees, (2) otherwise meet the independence standards set forth in Tenet's corporate governance principles, and (3) the board has determined are "independent" as that term is defined by the New York Stock Exchange, meets regularly with Tenet's management, internal auditors and independent certified public accountants to review matters relating to financial reporting (including the quality of accounting principles), internal accounting controls and auditing. The independent accountants and the internal auditors report to the audit committee and have direct and confidential access to the audit committee at all times to discuss the results of their audits.
Tenet's independent certified public accountants, selected and engaged by the audit committee of the board, perform periodic audits of the consolidated financial statements of the Company in accordance with auditing standards generally accepted in the United States of America. These standards require a consideration of the system of internal controls and tests of transactions to the extent deemed necessary by the independent certified public accountants for purposes of supporting their opinion as set forth in their independent auditors' report. Their report expresses an independent opinion on the fairness of presentation of the consolidated financial statements.
Stephen D. Farber
Chief Financial Officer |
Raymond L. Mathiasen
Executive Vice President, Chief Accounting Officer |
56
INDEPENDENT AUDITORS' REPORT
The
Board of Directors and Shareholders
Tenet Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of Tenet Healthcare Corporation and subsidiaries as of May 31, 2001 and 2002 and December 31, 2002, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended May 31, 2002 and for the seven-month transition period ended December 31, 2002. In connection with our audits of the consolidated financial statements, we have also audited the consolidated financial statement schedule included in Part IV of the Form 10-K. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tenet Healthcare Corporation and subsidiaries as of May 31, 2001 and 2002 and December 31, 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended May 31, 2002 and for the seven-month transition period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 2H to the consolidated financial statements, effective June 1, 2002, the Company changed its method of accounting for goodwill.
KPMG LLP
Los
Angeles, California
May 14, 2003
57
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Dollars in Millions
|
May 31
|
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31
2002 |
|||||||||||
|
2001
|
2002
|
||||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 62 | $ | 38 | $ | 210 | ||||||
Investments in debt securities | 104 | 100 | 85 | |||||||||
Accounts receivable, less allowance for doubtful accounts ($333 at May 31, 2001; $315 at May 31, 2002; and $350 at December 31, 2002) | 2,386 | 2,425 | 2,590 | |||||||||
Inventories of supplies, at cost | 214 | 231 | 241 | |||||||||
Deferred income taxes | 155 | 199 | 245 | |||||||||
Other current assets | 305 | 401 | 421 | |||||||||
|
|
|
||||||||||
Total current assets | 3,226 | 3,394 | 3,792 | |||||||||
|
|
|
||||||||||
Investments and other assets | 395 | 363 | 185 | |||||||||
Property and equipment, at cost less accumulated depreciation and amortization | 5,976 | 6,585 | 6,359 | |||||||||
Goodwill | 3,265 | 3,289 | 3,260 | |||||||||
Other intangible assets, at cost, less accumulated amortization ($90 at May 31, 2001; $107 at May 31, 2002; and $110 at December 31, 2002) | 133 | 183 | 184 | |||||||||
|
|
|
||||||||||
$ | 12,995 | $ | 13,814 | $ | 13,780 | |||||||
|
|
|
||||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Current portion of long-term debt | $ | 25 | $ | 99 | $ | 47 | ||||||
Accounts payable | 775 | 968 | 898 | |||||||||
Accrued compensation and benefits | 476 | 591 | 555 | |||||||||
Accrued interest payable | 132 | 59 | 24 | |||||||||
Income taxes payable | | 34 | 213 | |||||||||
Other current liabilities | 758 | 833 | 644 | |||||||||
|
|
|
||||||||||
Total current liabilities | 2,166 | 2,584 | 2,381 | |||||||||
|
|
|
||||||||||
Long-term debt, net of current portion | 4,202 | 3,919 | 3,872 | |||||||||
Other long-term liabilities and minority interests | 994 | 1,003 | 1,278 | |||||||||
Deferred income taxes | 554 | 689 | 526 | |||||||||
Commitments and contingencies | ||||||||||||
Shareholders' equity: | ||||||||||||
Common stock, $0.05 par value; authorized 1,050,000,000 shares; 493,833,000 shares issued at May 31, 2001, 512,354,001 shares issued at May 31 2002 and 515,633,555 shares issued at December 31, 2002 | 25 | 26 | 26 | |||||||||
Additional paid-in capital | 2,898 | 3,367 | 3,483 | |||||||||
Accumulated other comprehensive loss | (44 | ) | (44 | ) | (15 | ) | ||||||
Retained earnings | 2,270 | 3,055 | 3,514 | |||||||||
Less common stock in treasury, at cost, 5,632,062 at May 31, 2001; 23,812,812 shares at May 31, 2002; 41,895,162 shares at December 31, 2002 | (70 | ) | (785 | ) | (1,285 | ) | ||||||
|
|
|
||||||||||
Total shareholders' equity | 5,079 | 5,619 | 5,723 | |||||||||
|
|
|
||||||||||
$ | 12,995 | $ | 13,814 | $ | 13,780 | |||||||
|
|
|
See accompanying Notes to Consolidated Financial Statements.
58
CONSOLIDATED STATEMENTS OF INCOME
Dollars in Millions, Except Per-Share Amounts
|
Years ended May 31
|
Seven months ended December 31
|
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000
|
2001
|
2002
|
2001
|
2002
|
|||||||||||||
|
|
|
|
(unaudited)
|
|
|||||||||||||
Net operating revenues | $ | 11,414 | $ | 12,053 | $ | 13,913 | $ | 7,832 | $ | 8,743 | ||||||||
Operating expenses: | ||||||||||||||||||
Salaries and benefits | 4,508 | 4,680 | 5,346 | 3,012 | 3,327 | |||||||||||||
Supplies | 1,595 | 1,677 | 1,960 | 1,092 | 1,245 | |||||||||||||
Provision for doubtful accounts | 851 | 849 | 986 | 594 | 676 | |||||||||||||
Other operating expenses | 2,525 | 2,603 | 2,824 | 1,602 | 1,819 | |||||||||||||
Depreciation | 411 | 428 | 472 | 273 | 284 | |||||||||||||
Goodwill amortization | 94 | 99 | 101 | 59 | | |||||||||||||
Other amortization | 28 | 27 | 31 | 19 | 18 | |||||||||||||
Impairment of goodwill and long-lived assets and restructuring charges | 355 | 143 | 99 | 99 | 396 | |||||||||||||
Loss from early extinguishment of debt | | 56 | 383 | 281 | 4 | |||||||||||||
|
|
|
|
|
||||||||||||||
Operating income | 1,047 | 1,491 | 1,711 | 801 | 974 | |||||||||||||
|
|
|
|
|
||||||||||||||
Interest expense | (479 | ) | (456 | ) | (327 | ) | (209 | ) | (147 | ) | ||||||||
Investment earnings | 22 | 37 | 32 | 20 | 14 | |||||||||||||
Minority interests | (21 | ) | (14 | ) | (38 | ) | (22 | ) | (19 | ) | ||||||||
Net gains on sales of facilities and long-term investments | 49 | 28 | | | | |||||||||||||
Impairment of investment securities | | | | | (64 | ) | ||||||||||||
|
|
|
|
|
||||||||||||||
Income before income taxes | 618 | 1,086 | 1,378 | 590 | 758 | |||||||||||||
|
|
|
|
|
||||||||||||||
Income taxes | (278 | ) | (443 | ) | (593 | ) | (262 | ) | (299 | ) | ||||||||
Income from continuing operations, before discontinued operations and cumulative effect of accounting change | 340 | 643 | 785 | 328 | 459 | |||||||||||||
Discontinued operations, net of taxes | (19 | ) | | | | | ||||||||||||
Cumulative effect of accounting change, net of taxes | (19 | ) | | | | | ||||||||||||
|
|
|
|
|
||||||||||||||
Net income | $ | 302 | $ | 643 | $ | 785 | $ | 328 | $ | 459 | ||||||||
|
|
|
|
|
||||||||||||||
Earnings (loss) per common share and common equivalent share | ||||||||||||||||||
Basic | ||||||||||||||||||
Continuing operations | $ | 0.73 | $ | 1.34 | $ | 1.60 | $ | 0.67 | $ | 0.95 | ||||||||
Discontinued operations | (0.04 | ) | | | | | ||||||||||||
Cumulative effect of accounting change | (0.04 | ) | | | | | ||||||||||||
|
|
|
|
|
||||||||||||||
$ | 0.65 | $ | 1.34 | $ | 1.60 | $ | 0.67 | $ | 0.95 | |||||||||
|
|
|
|
|
||||||||||||||
Diluted | ||||||||||||||||||
Continuing operations | $ | 0.72 | $ | 1.31 | $ | 1.56 | $ | 0.65 | $ | 0.93 | ||||||||
Discontinued operations | (0.04 | ) | | | | | ||||||||||||
Cumulative effect of accounting change | (0.04 | ) | | | | | ||||||||||||
|
|
|
|
|
||||||||||||||
$ | 0.64 | $ | 1.31 | $ | 1.56 | $ | 0.65 | $ | 0.93 | |||||||||
|
|
|
|
|
||||||||||||||
Weighted average shares and dilutive securities outstanding (in thousands): | ||||||||||||||||||
Basic | 467,970 | 479,621 | 489,717 | 489,046 | 484,877 | |||||||||||||
Diluted | 472,377 | 490,728 | 502,899 | 502,959 | 493,530 |
See accompanying Notes to Consolidated Financial Statements.
59
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Dollars in Millions, Share Amounts in Thousands
|
Shares Outstanding
|
Issued Par Amount
|
Additional Paid-in Capital
|
Other Comprehensive Income (Loss)
|
Retained Earnings
|
Treasury Stock
|
Total Shareholders' Equity
|
||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balances, May 31, 1999 | 466,536 | $ | 24 | $ | 2,510 | $ | 77 | $ | 1,329 | $ | (70 | ) | $ | 3,870 | |||||||
Net income | 302 | 302 | |||||||||||||||||||
Other comprehensive loss | (147 | ) | (147 | ) | |||||||||||||||||
Issuance of common stock | 1,833 | 20 | 20 | ||||||||||||||||||
Stock options exercised, including tax benefit | 1,821 | 25 | 25 | ||||||||||||||||||
Redemption of shareholder rights | (4 | ) | (4 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
Balances, May 31, 2000 | 470,190 | $ | 24 | $ | 2,555 | $ | (70 | ) | $ | 1,627 | $ | (70 | ) | $ | 4,066 | ||||||
Net income | 643 | 643 | |||||||||||||||||||
Other comprehensive income | 26 | 26 | |||||||||||||||||||
Issuance of common stock | 840 | 1 | 15 | 16 | |||||||||||||||||
Stock options exercised, including tax benefit | 17,171 | 328 | 328 | ||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
Balances, May 31, 2001 | 488,201 | $ | 25 | $ | 2,898 | $ | (44 | ) | $ | 2,270 | $ | (70 | ) | $ | 5,079 | ||||||
Net income | 785 | 785 | |||||||||||||||||||
Other comprehensive income | | | |||||||||||||||||||
Issuance of common stock | 692 | 21 | 21 | ||||||||||||||||||
Stock options exercised, including tax benefit | 17,829 | 1 | 448 | 449 | |||||||||||||||||
Repurchases of common stock | (18,181 | ) | (715 | ) | (715 | ) | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
Balances, May 31, 2002 | 488,541 | $ | 26 | $ | 3,367 | $ | (44 | ) | $ | 3,055 | $ | (785 | ) | $ | 5,619 | ||||||
Net income | 459 | 459 | |||||||||||||||||||
Other comprehensive income | 29 | 29 | |||||||||||||||||||
Issuance of common stock | 376 | | 36 | 36 | |||||||||||||||||
Stock options exercised, including tax benefit | 2,903 | | 80 | 80 | |||||||||||||||||
Repurchases of common stock | (18,082 | ) | (500 | ) | (500 | ) | |||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||
Balances, December 31, 2002 | 473,738 | $ | 26 | $ | 3,483 | $ | (15 | ) | $ | 3,514 | $ | (1,285 | ) | $ | 5,723 | ||||||
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
60
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
|
Years ended May 31
|
Seven months ended
December 31 |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000
|
2001
|
2002
|
2001
|
2002
|
|||||||||||||
|
|
|
|
(unaudited)
|
|
|||||||||||||
Net income | $ | 302 | $ | 643 | $ | 785 | $ | 328 | $ | 459 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||
Depreciation and amortization | 533 | 554 | 604 | 351 | 302 | |||||||||||||
Provision for doubtful accounts | 851 | 849 | 986 | 594 | 676 | |||||||||||||
Impairments and restructuring charges | 355 | 143 | 99 | 99 | 460 | |||||||||||||
Income tax benefit related to stock option exercises | 3 | 74 | 176 | 49 | 37 | |||||||||||||
Deferred income taxes | 2 | 48 | 90 | 19 | (255 | ) | ||||||||||||
Loss from early extinguishment of debt | | 56 | 383 | 281 | 4 | |||||||||||||
Other items | 19 | (1 | ) | 46 | 28 | 44 | ||||||||||||
Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases of new businesses and sales of facilities: | ||||||||||||||||||
Accounts receivable | (1,139 | ) | (735 | ) | (1,075 | ) | (654 | ) | (841 | ) | ||||||||
Inventories of supplies and other current assets | 51 | 45 | (104 | ) | (86 | ) | (26 | ) | ||||||||||
Income taxes payable | 41 | 54 | 51 | 93 | 208 | |||||||||||||
Accounts payable, accrued expenses and other current liabilities | (56 | ) | 237 | 332 | 28 | (195 | ) | |||||||||||
Other long-term liabilities | 17 | (20 | ) | 19 | 16 | 271 | ||||||||||||
Net expenditures for discontinued operations and restructuring charges | (110 | ) | (129 | ) | (77 | ) | (33 | ) | (18 | ) | ||||||||
|
|
|
|
|
||||||||||||||
Net cash provided by operating activities | $ | 869 | $ | 1,818 | $ | 2,315 | $ | 1,113 | $ | 1,126 | ||||||||
|
|
|
|
|
||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||
Purchases of property and equipment | (619 | ) | (601 | ) | (889 | ) | (472 | ) | (490 | ) | ||||||||
Purchases of new businesses, net of cash acquired | (38 | ) | (29 | ) | (324 | ) | (324 | ) | (27 | ) | ||||||||
Proceeds from sales of facilities, long-term investments and other assets | 764 | 132 | 28 | 15 | 6 | |||||||||||||
Other items, including expenditures related to prior-year purchases of new businesses | (143 | ) | (76 | ) | (42 | ) | (42 | ) | 122 | |||||||||
|
|
|
|
|
||||||||||||||
Net cash used in investing activities | (36 | ) | (574 | ) | (1,227 | ) | (823 | ) | (389 | ) | ||||||||
|
|
|
|
|
||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||
Proceeds from borrowings | 1,298 | 992 | 4,394 | 2,883 | 1,332 | |||||||||||||
Sale of new senior notes | | 395 | 2,541 | 1,925 | 395 | |||||||||||||
Repurchases of senior, senior subordinated and exchangeable subordinated notes | | (556 | ) | (4,063 | ) | (3,052 | ) | (282 | ) | |||||||||
Payments of borrowings | (2,085 | ) | (2,389 | ) | (3,513 | ) | (1,907 | ) | (1,551 | ) | ||||||||
Repurchases of common stock | | | (715 | ) | (246 | ) | (500 | ) | ||||||||||
Proceeds from exercise of stock options | 25 | 254 | 273 | 99 | 43 | |||||||||||||
Proceeds from sales of common stock | 20 | 15 | 21 | | 15 | |||||||||||||
Other items | 15 | (28 | ) | (50 | ) | 8 | (17 | ) | ||||||||||
|
|
|
|
|
||||||||||||||
Net cash used in financing activities | (727 | ) | (1,317 | ) | (1,112 | ) | (290 | ) | (565 | ) | ||||||||
|
|
|
|
|
||||||||||||||
Net increase (decrease) in cash and cash equivalents | 106 | (73 | ) | (24 | ) | | 172 | |||||||||||
Cash and cash equivalents at beginning of period | 29 | 135 | 62 | 62 | 38 | |||||||||||||
|
|
|
|
|
||||||||||||||
Cash and cash equivalents at end of period | $ | 135 | $ | 62 | $ | 38 | $ | 62 | $ | 210 | ||||||||
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 BASIS OF PRESENTATION
The accounting and reporting policies of Tenet Healthcare Corporation (together with its subsidiaries referred to as "Tenet," the "Company," "we" or "us") conform to accounting principles generally accepted in the United States of America and prevailing practices for investor-owned entities within the health care industry. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
As previously announced on March 18, 2003, our board of directors approved a change in our fiscal year. Instead of a fiscal year ending on May 31, we will now have a fiscal year that coincides with the calendar year, effective December 31, 2002. As a result of this change, our audited consolidated statements of income, cash flows and changes in shareholders' equity presented herein include the seven-month transition period ended December 31, 2002 and each of the three previous fiscal years ended May 31, 2000, 2001 and 2002. For comparative purposes only, we also include unaudited information for the seven-month period ended December 31, 2001.
Certain prior-year balances in the accompanying consolidated financial statements have been reclassified to conform to the current period's presentation of financial information. These reclassifications have no impact on total assets, liabilities, shareholders' equity, net income or cash flows. Our operating results for the seven-month period ended December 31, 2002 are not necessarily indicative of the results we would have had for a full twelve months. Reasons for this include overall revenue and cost trends, impairment charges, fluctuations in revenue allowances, revenue discounts and quarterly tax rates, the timing and magnitude of price changes, changes in Medicare regulations, our adoption of a new method for calculating Medicare outlier payments effective January 1, 2003, acquisitions and disposals of facilities and other assets, and changes in occupancy levels and patient volumes. Factors that affect patient volumes include seasonal cycles of illness, climate and weather conditions, vacation patterns of hospital patients and their admitting physicians, and other factors related to the timing of elective hospital procedures.
NOTE 2 SIGNIFICANT ACCOUNTING POLICIES
A. THE COMPANY
Tenet is an investor-owned health care services company whose subsidiaries and affiliates (collectively, "subsidiaries") own or operate general hospitals and related health care facilities, and hold investments in other companies (including health care companies). At December 31, 2002, our subsidiaries operated 114 domestic general hospitals serving urban and rural communities in 16 states, with a total of 27,870 licensed beds. They also owned or operated a small number of rehabilitation hospitals, specialty hospitals, long-term-care facilities, a psychiatric facility, and medical office buildingsall of which are located on, or nearby, one of our general hospital campuses; a general hospital and related health care facilities in Barcelona, Spain; physician practices; and various other ancillary health care businesses (including outpatient surgery centers, home health care agencies, occupational and rural health care clinics, and health maintenance organizations).
At December 31, 2002, our largest concentrations of hospital beds were in California with 30.0%, Florida with 16.8% and Texas with 12.6%. These high concentrations increase the risk that, should any adverse economic, regulatory or other such development occur within these states, our business, results of operations, or financial position could be adversely affected.
62
We are also subject to changes in government legislation that could impact Medicare and Medicaid payment levels, and to increased levels of managed-care penetration and changes in payor patterns that may impact the level and timing of payments for services rendered.
B. PRINCIPLES OF CONSOLIDATION
Our consolidated financial statements include the accounts of Tenet Healthcare Corporation and its wholly owned and majority-owned subsidiaries. Generally, we account for significant investments in other affiliated companies using the equity method. We eliminate intercompany accounts and transactions in consolidation, and we include the results of operations of businesses that are newly acquired in purchase transactions from their dates of acquisition.
C. NET OPERATING REVENUES
We recognize net operating revenues in the period in which services are performed. Net operating revenues consist primarily of net patient service revenues that are recorded based on established billing rates (gross charges), less estimated discounts for contractual allowances (principally for patients covered by Medicare, Medicaid and managed-care and other health plans).
Gross charges are retail charges. They are not the same as actual pricing, and they generally do not reflect what a hospital is ultimately paid and therefore are not displayed in our consolidated statements of income. Hospitals are typically paid amounts that are negotiated with insurance companies or are set by the government. Gross charges are used to calculate Medicare outlier payments and to determine certain elements of managed-care contracts (such as stop-loss payments). And, because Medicare requires that a hospital's gross charges be the same for all patients (regardless of payor category), gross charges are also what hospitals charge self-pay patients.
Percentages of consolidated net patient revenues, by payor type, for Tenet's domestic general hospitals for the past three fiscal years and the seven-month periods ended December 31, 2001 and 2002 are shown in the table below:
We recorded approximately $368 million, $570 million and $765 million of revenues related to Medicare outliers in the years ended May 31, 2000, 2001 and 2002, respectively. For the seven-month periods ended December 31, 2001 and 2002, we recorded $416 million and $495 million, respectively. These amounts represent approximately 10.3%, 16.0% and 17.8% of Medicare revenues and approximately 3.2%, 4.7% and 5.5% of total net operating revenues for fiscal 2000, 2001 and 2002, respectively, and approximately 17.9% and 18.9% of Medicare revenues and approximately 5.3% and 5.7% of total net operating revenues for the seven-month periods ended December 31, 2001 and 2002, respectively. On February 28, 2003, Centers for Medicare and Medicaid Services ("CMS") announced a proposed rule that would substantially change the methodology used to determine outlier payments. In addition, CMS increased the outlier cost threshold effective October 1, 2002, which will reduce the number of cases that qualify for outlier payments and the amount of payments for outlier cases that continue to qualify. In anticipation of these changes, on January 6, 2003, we announced to CMS that we had voluntarily adopted a new method for calculating Medicare outlier payments, retroactive to
63
January 1, 2003. With this new method, instead of using recently settled cost reports for our outlier calculations, we are using current year cost-to-charge ratios. We have also eliminated the use of the statewide average, and we continue to use the current threshold amounts. These two changes have resulted in a drop of Medicare inpatient outlier payments from approximately $65 million per month to approximately $6 million per month. We voluntarily adopted this new method to demonstrate our good faith and to support CMS's likely industrywide solution to the outlier issue.
The discounts for Medicare and Medicaid contractual allowances are based primarily on prospective payment systems. Discounts are estimated based on historical and current factors. Before final settlement of cost reports, claims are subjected to administrative reviews and audits by third parties. This process can take several years to complete. Because the laws and regulations governing the Medicare and Medicaid programs are ever-changing and complex, our recorded estimates could change by material amounts. We record adjustments to our previously recorded contractual allowances as final settlements are determined.
Adjustments related to final settlements of Medicare and Medicaid cost reports increased revenues in each of the years ended May 31, 2000, 2001 and 2002 by $103 million, $4 million and $36 million, respectively, and by $8 million and $5 million in the seven-month periods ended December 31, 2001 and 2002, respectively.
Our revenues under managed-care health plans are determined primarily on payment terms involving predetermined rates per diagnosis, per-diem rates, discounted fee-for-service rates and other similar contractual arrangements combined with stop-loss payments (for high-cost patients) and pass-through payments (for high-cost devices and pharmaceuticals). These revenues also are subject to review and possible audit by the payors.
We believe that we have made adequate provision for any adjustments that may result from final determination of amounts earned under all the above arrangements. We know of no material claims, disputes or unsettled matters with any payors for which we have not adequately provided for in the accompanying consolidated financial statements.
We provide care without charge, or at rates substantially lower than our established billing rates, to patients who meet certain financial or economic criteria. Because we do not pursue collection of amounts determined to qualify as charity care, we do not report them in net operating revenues or in operating expenses.
The approximate amounts of charges foregone under our charity policy for the years ended May 31, 2000 through May 31, 2002 and for the seven-month periods ended December 31, 2001 and December 31, 2002 are shown in the following table (unaudited and in millions):
Years ended May 31: | |||||
2000 | $ | 285 | |||
2001 | $ | 556 | |||
2002 | $ | 733 | |||
Seven months ended December 31: |
|
|
|
|
|
2001 | $ | 390 | |||
2002 | $ | 591 |
D. CASH EQUIVALENTS
We treat highly liquid investments with original maturities of three months or less as cash equivalents. Cash equivalents were less than $50 million at May 31, 2001 and 2002 and were approximately $181 million at December 31, 2002.
64
E. INVESTMENTS IN DEBT AND EQUITY SECURITIES
We classify investments in debt and equity securities as either available-for-sale, held-to-maturity or as part of a trading portfolio. At May 31, 2001 and 2002 and at December 31, 2002, we had no significant investments in securities classified as either held-to-maturity or trading. We carry securities classified as available-for-sale at fair value if unrestricted. We report their unrealized gains and losses, net of taxes, as accumulated other comprehensive income (loss) unless we determine that a loss is other than temporary, at which point we would record a realized loss in the statement of income. We include realized gains or losses in net income on the specific identification method.
F. PROVISION FOR DOUBTFUL ACCOUNTS
We provide for accounts receivable that could become uncollectible in the future by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. We estimate this allowance based on the aging of our accounts receivable and our historical collection experience by hospital and by each type of payor.
G. PROPERTY AND EQUIPMENT
We use the straight-line method of depreciation for buildings, building improvements and equipment. The estimated useful lives for buildings and improvements is primarily 25 to 40 years, and for equipment, 3 to 15 years. We record capital leases at the beginning of the lease term as assets and liabilities. The value recorded is the lower of either the present value of the minimum lease payments or the fair value of the asset. Such assets, including improvements, are amortized over the shorter of either the lease term or the estimated useful life. Interest costs related to construction projects are capitalized. In the years ended May 31, 2000, 2001 and 2002, capitalized interest was $29 million, $8 million and $9 million, respectively. In the seven months ended December 31, 2002 it was $4 million.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, which we adopted on June 1, 2002, we evaluate our long-lived assets for possible impairment whenever circumstances indicate that the carrying amount of the asset, or related group of assets, may not be recoverable from estimated future cash flows. Fair value estimates are derived from independent appraisals, established market values of comparable assets, or internal calculations of estimated future net cash flows. Our estimates of future cash flows are based on assumptions and projections we believe to be reasonable and supportable. Our assumptions take into account revenue and expense growth rates, patient volumes, changes in payor mix, and changes in legislation and other payor payment patterns. These assumptions vary by type of facility.
In general, we report long-lived assets to be disposed of at the lower of either their carrying amounts or their fair values less costs to sell or close. In such circumstances, our estimates of fair value are usually based on independent appraisals, established market prices for comparable assets or internal calculations of estimated future cash flows.
H. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over the fair value of assets of businesses acquired. In accordance with SFAS No. 142, which we adopted on June 1, 2002, goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead are subject to impairment tests performed at least annually. For goodwill, the test is performed at the reporting unit level as defined by SFAS No. 142. If we find the carrying value of goodwill to be impaired, or if the carrying value of a business that is to be sold or otherwise disposed of exceeds its fair value, then we must reduce the carrying value, including any allocated goodwill, to fair value.
65
Prior to our adoption of the new standard, we amortized goodwill on a straight-line basis, primarily over 40 years.
I. ACCRUAL FOR GENERAL AND PROFESSIONAL LIABILITY RISKS
We maintain reserves, which are based on actuarial estimates by an independent third party, for the portion of our professional liability risks, including incurred but not reported claims, to the extent we do not have insurance coverage. We estimate reserves for losses and related expenses using expected loss-reporting patterns. Reserves are discounted to their estimated present value under a risk-free rate approach using a Federal Reserve 10-year maturity composite rate that approximates our claims payout period. There can be no assurance that the ultimate liability will not exceed our estimates. Adjustments to the estimated reserves in our results of operations are recorded in the periods when such amounts are determined.
J. INCOME TAXES
We account for income taxes using the asset-and-liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
Developing our provision for income taxes requires significant judgment and expertise in federal and state income tax laws, regulations and strategies. That includes expertise determining deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. Our judgments and tax strategies are subject to audit by various taxing authorities. While we believe we have provided adequately for our income tax liabilities, determinations by these taxing authorities could have a material adverse effect on our consolidated financial position and results of operations.
K. STOCK OPTIONS
Through December 31, 2002, we applied the intrinsic-value-based method of accounting, prescribed by Accounting Principles Board Opinion No. 25, and its related interpretations (including FASB Interpretation No. 44, an interpretation of APB No. 25 issued in March 2000), to our stock-based compensation plans. In accordance with that method, no compensation cost was recognized for stock options granted to employees or directors under the plans through that date because the exercise prices for options granted were equal to the quoted market prices on the option grant dates.
In March 2003, we adopted Statement of Accounting Standards No. 123. The new policy had a retroactive effective date of January 1, 2003 (the first day of our new fiscal year). The accounting statement establishes a fair-value method of accounting for stock-based compensation plans (i.e., compensation costs will be based on the fair value of stock options granted). We also adopted the retroactive-restatement method to transition from the former accounting standard to the new one.
We have adopted, as of December 31, 2002, the disclosure only provisions of SFAS No. 123 for options issued, as amended by SFAS No. 148. Had compensation cost for the options we granted to our
66
employees and directors been determined based on the fair values at the grant dates, our net income and earnings per share would have been the amounts indicated below:
The estimated weighted-average fair values of options we granted in the years ended May 31, 2000, 2001 and 2002 and the seven-month period ended December 31, 2002 were $5.47, $14.01, $18.45 and $9.09, respectively. These were calculated, as of the date of each grant, using a Black-Scholes option-pricing model with the following weighted-average assumptions:
Expected volatility is derived using daily data drawn from the five years preceding the date of grant. The risk-free interest rate is the approximate yield on 7-year and 10-year United States Treasury Bonds on the date of grant. The expected life is an estimate of the number of years the option will be held before it is exercised. The valuation model was not adjusted for nontransferability, risk of forfeiture, or the vesting restrictions of the optionsall of which would reduce the value if factored into the calculation.
L. SEGMENT REPORTING
We operate in one line of business: the provision of health care through general hospitals and related health care facilities. Our domestic general hospitals generated 93.4%, 95.8% and 96.9% of our net operating revenues in the years ended May 31, 2000, 2001 and 2002, respectively, and 97.1% in the seven-month period ended December 31, 2002.
Through March 10, 2003, we had organized these general hospitals and our other health care related facilities into three operating segments or divisions. Subsequently, we consolidated into two
67
divisions. The divisions' economic characteristics, the nature of their operations, the regulatory environment in which they operate and the manner in which they are managed are all similar. These divisions share certain resources and they benefit from many common clinical and management practices. Accordingly, we aggregate these divisions into a single reportable operating segment, as that term is defined by Statement of Financial Accounting Standards No. 131.
NOTE 3 GOODWILL AND OTHER INTANGIBLE ASSETS
As of June 1, 2002, we adopted SFAS No. 142. Among the changes implemented by this new accounting standard is the cessation of amortization of goodwill and other intangible assets having indefinite useful lives. This change applies to the periods following the date of adoption.
The table below shows our income from continuing operations and net income for the seven months ended December 31, 2002 and the comparative pro forma amounts for the seven months ended December 31, 2001 and the years ended May 31, 2000, 2001 and 2002 as if the cessation of goodwill amortization had occurred as of June 1, 1999:
|
Years ended May 31
|
Seven months ended December 31
|
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000
|
2001
|
2002
|
2001
|
2002
|
||||||||||
|
(Dollars in Millions, except Per-Share Amounts)
|
||||||||||||||
|
|
|
|
(unaudited)
|
|
||||||||||
Income from continuing operations, as reported | $ | 340 | $ | 643 | $ | 785 | $ | 328 | $ | 459 | |||||
Goodwill amortization, net of applicable income tax benefits | 84 | 86 | 86 | 50 | | ||||||||||
|
|
|
|
|
|||||||||||
Pro forma income from continuing operations | $ | 424 | $ | 729 | $ | 871 | $ | 378 | $ | 459 | |||||
|
|
|
|
|
|||||||||||
Net income, as reported |
|
$ |
302 |
|
$ |
643 |
|
$ |
785 |
|
$ |
328 |
|
$ |
459 |
Goodwill amortization, net of applicable income tax benefits | 84 | 86 | 86 | 50 | | ||||||||||
|
|
|
|
|
|||||||||||
Pro forma net income | $ | 386 | $ | 729 | $ | 871 | $ | 378 | $ | 459 | |||||
|
|
|
|
|
|||||||||||
Diluted Earnings Per Common and Common Equivalent Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations, as reported | $ | 0.72 | $ | 1.31 | $ | 1.56 | $ | 0.65 | $ | 0.93 | |||||
Goodwill amortization, net of applicable income tax benefits | 0.17 | 0.17 | 0.17 | 0.10 | | ||||||||||
|
|
|
|
|
|||||||||||
Pro forma continuing operations | $ | 0.89 | $ | 1.48 | $ | 1.73 | $ | 0.75 | $ | 0.93 | |||||
|
|
|
|
|
|||||||||||
Net income, as reported |
|
$ |
0.64 |
|
$ |
1.31 |
|
$ |
1.56 |
|
$ |
0.65 |
|
$ |
0.93 |
Goodwill amortization, net of applicable income tax benefits | 0.17 | 0.17 | 0.17 | 0.10 | | ||||||||||
|
|
|
|
|
|||||||||||
Pro forma net income | $ | 0.81 | $ | 1.48 | $ | 1.73 | $ | 0.75 | $ | 0.93 | |||||
|
|
|
|
|
In accordance with SFAS No. 142, we completed our initial transitional impairment evaluation in the fiscal quarter ended November 30, 2002. As determined by this evaluation, we did not need to record an impairment charge. Because of recent changes in our business environment, particularly those related to changes in our method of calculating Medicare outlier payments and proposed changes in government policies regarding Medicare outlier payments, we completed an additional goodwill impairment evaluation as of December 31, 2002 and determined that we did not need to record an impairment charge as of that date either.
On March 10, 2003, we announced the consolidation of our operating divisions from three to two. Our new Eastern Division will consist of three regionsFlorida, Central-Northeast and Southern States. These regions will initially include 59 of our general hospitals located in Alabama, Arkansas, Florida, Georgia, Louisiana, Massachusetts, Mississippi, Missouri, North Carolina, Pennsylvania, South
68
Carolina and Tennessee. Our new Western Division will consist of two regionsCalifornia and Texasand will initially include 55 of our hospitals located in California, Nebraska, Nevada and Texas.
Because of the restructuring of our operating divisions and regions, along with a realignment of our executive management team and other factors, our goodwill "reporting units" (as defined under SFAS No. 142) have changed. Prior to the restructuring, they consisted of our three divisions; now they consist of our five new regions. Because of this change in reporting units, we performed another goodwill impairment evaluation, at March 31, 2003 resulting in a goodwill impairment charge of approximately $187 million related to our Central-Northeast Region.
NOTE 4 IMPAIRMENT OF LONG-LIVED ASSETS AND RESTRUCTURING CHARGES
In accordance with SFAS No. 144, in the seven-month period ended December 31, 2002, we recorded impairment charges of $383 million for the write-down of long-lived assets to their estimated fair values at ten general hospitals, one psychiatric hospital and other properties which represent the lowest level of identifiable cash flows that are independent of other asset-group cash flows. We recognized the impairment of these long-lived assets because events or changes in circumstances indicated that the carrying amount of the assets or groups of assets might not be fully recoverable from estimated future cash flows. The facts and circumstances leading to that conclusion include: (1) our analyses of expected changes in growth rates for revenues and expenses and changes in payor mix, changes in certain managed-care contract terms, and (2) the effect of projected reductions in Medicare outlier payments on net operating revenues and operating cash flows.
Our estimates of future cash flows from these assets or asset groups were based on assumptions and projections that we believe to be reasonable and supportable. The fair value estimates of our long-lived assets were derived from either independent appraisals, established market values of comparable assets, or internal calculations of estimated future net cash flows.
During the seven-month period ended December 31, 2002, we recorded restructuring charges of $13 million. The charges consist primarily of consulting fees and severance and employee relocation costs incurred in connection with changes in our senior executive management team. We expect to incur additional restructuring costs as we move forward with our plans to reduce our operating expenses.
YEAR ENDED MAY 31, 2002.
In the second quarter of the year ended May 31, 2002 we recorded impairment and restructuring charges of $99 million primarily related to the planned closure of two general hospitals and the sales of certain other health care businesses. The total charge consists of (1) impairment write-downs of property, equipment and other assets to estimated fair value, $76 million, and (2) expected cash disbursements related to lease cancellation costs, severance costs and other exit costs, $23 million.
The impairment charge consists of write-downs of $39 million for property and equipment, $13 million for goodwill and $24 million for other assets. The balance of the charges consist of $7 million in lease cancellation costs, $5 million in severance costs related to the termination of 691 employees, $2 million in legal costs and settlements and $9 million in other exit costs. We decided to close those two hospitals because they were operating at a loss, which was not significant, and were not essential to our strategic objectives. One of these hospitals has been closed and the other was sold.
YEAR ENDED MAY 31, 2001
In the fourth quarter of the year ended May 31, 2001, we recorded impairment and restructuring charges of $143 million relating to (1) completion of our program to terminate or buy out certain employment and management contracts with approximately 248 physicians, $98 million, and
69
(2) impairment of the carrying values of property and equipment and other assets in connection with the closure of one hospital and certain other health care businesses, $45 million.
The total charge consists of $55 million in impairment write-downs of property, equipment and other assets to estimated fair values and $88 million for expected cash disbursements related to costs of terminating unprofitable physician contracts, severance costs, lease cancellation and other exit costs. The impairment charge consists of write-downs of $29 million for property and equipment and $26 million for other assets. The balance of the charges consist of $56 million for the buyout of unprofitable physician contracts, $6 million in severance costs related to the termination of 322 employees, $3 million in lease cancellation costs, and $23 million in other exit costs.
We decided to terminate or buy out the physician contracts because they were not profitable. During the latter part of fiscal 1999, we evaluated our physician strategy and began developing plans to either terminate or allow to expire a significant number of our existing unprofitable contracts. During fiscal 2000, our management, with the authority to do so, authorized the termination of approximately 50% of our unprofitable physician contracts. The termination of additional physician contracts that were not profitable was similarly authorized in fiscal 2001. As of May 31, 2002, we had exited most of the unprofitable contracts that management had authorized to be terminated or allowed to expire. Substantially all such remaining contracts were terminated by July 31, 2002. The physicians, employees and property owners/lessors affected by this decision were duly notified, prior to our respective fiscal year-ends.
YEAR ENDED MAY 31, 2000
In the third and fourth quarters of the year ended May 31, 2000, we recorded impairment and restructuring charges of $355 million relating to (1) our plan to terminate or buy out certain employment and management contract with approximately 440 physicians, $177 million, and (2) the closure or sale of five general hospitals and other property and equipment, $178 million.
Of the $355 million in charges, $244 million was impairment write-downs of property, equipment and other assets to the lower of either the carrying values or the estimated fair values. The remaining $111 million was for the expected cash expenditures for lease cancellation and other exit costs, the estimated and actual costs to close or sell the five general hospitals, severance costs, and costs to terminate or buy out the unprofitable physician contracts. The impairment charge includes write-downs of $116 million for property and equipment, $69 million for goodwill, and $59 million for other assets. The other charges consist of $38 million in lease cancellation costs, $12 million in severance costs related to the termination of 713 employees, and $61 million in other exit costs.
70
The tables below are reconciliations of beginning and ending liability balances in connection with impairment, restructuring and other charges recorded during the years ended May 31, 2001 and 2002 and during the seven months ended December 31, 2002.
|
Balances at Beginning of Period(1)
|
Charges
|
Cash Payments
|
Other Items(2)
|
Balances at End of
Period(1) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in Millions)
|
||||||||||||||
Year ended May 31, 2001 | |||||||||||||||
Lease cancellations, exit costs and estimated costs to sell or close hospitals and other facilities | $ | 106 | $ | 26 | $ | (42 | ) | $ | (5 | ) | $ | 85 | |||
Impairment losses to value property, equipment, goodwill and other assets at estimated fair values | | 55 | | (55 | ) | | |||||||||
Severance costs in connection with the implementation of hospital cost-control programs, general overhead-reduction plans, closure of home health agencies and closure of hospitals and termination of physician contracts | 17 | 6 | (11 | ) | | 12 | |||||||||
Accruals for unfavorable lease commitments at six medical office buildings | 12 | | (2 | ) | | 10 | |||||||||
Buyout of physician contracts | 4 | 56 | (32 | ) | | 28 | |||||||||
Other items | 2 | | (2 | ) | | | |||||||||
|
|
|
|
|
|||||||||||
$ | 141 | $ | 143 | $ | (89 | ) | $ | (60 | ) | $ | 135 | ||||
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|
|
|
|
|||||||||||
Year ended May 31, 2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease cancellations, exit costs and estimated costs to sell or close hospitals and other facilities | $ | 85 | $ | 18 | $ | (36 | ) | $ | (5 | ) | $ | 62 | |||
Impairment losses to value property, equipment, goodwill and other assets at estimated fair values | | 76 | | (76 | ) | | |||||||||
Severance costs in connection with the implementation of hospital cost-control programs, general overhead-reduction plans, closure of home health agencies and closure of hospitals and termination of physician
contracts |
12 | 5 | (8 | ) | | 9 | |||||||||
Accruals for unfavorable lease commitments at six medical office buildings | 10 | | (2 | ) | | 8 | |||||||||
Buyout of physician contracts | 28 | | (22 | ) | | 6 | |||||||||
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|
|
|
|
|||||||||||
$ | 135 | $ | 99 | $ | (68 | ) | $ | (81 | ) | $ | 85 | ||||
|
|
|
|
|
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|
Balances at Beginning of Period(1)
|
Charges
|
Cash Payments
|
Other Items(2)
|
Balances at End of Period(1)
|
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in Millions)
|
||||||||||||||
Seven months ended December 31, 2002 | |||||||||||||||
Lease cancellations, exit costs and estimated costs to sell or close hospitals and other facilities | $ | 62 | $ | | $ | (9 | ) | $ | (10 | ) | $ | 43 | |||
Impairment losses to value property and equipment at estimated fair values | | 383 | | (383 | ) | | |||||||||
Severance costs in connection with the implementation of hospital cost-control programs, general overhead-reduction plans, and cost-reduction consulting fees | 9 | 13 | (3 | ) | (10 | ) | 9 | ||||||||
Accruals for unfavorable lease commitments at six medical office buildings | 8 | | (1 | ) | | 7 | |||||||||
Buyout of physician contracts | 6 | | (2 | ) | | 4 | |||||||||
|
|
|
|
|
|||||||||||
$ | 85 | $ | 396 | $ | (15 | ) | $ | (403 | ) | $ | 63 | ||||
|
|
|
|
|
Cash payments to be applied against these accruals as of December 31, 2002 are expected to be approximately $26 million in 2003 and $37 million thereafter.
NOTE 5 ACQUISITIONS AND DISPOSALS OF FACILITIES
During the past three fiscal years ended May 31, 2002 and the seven months ended December 31, 2002, our subsidiaries acquired nine general hospitals and certain other health care entities, as shown in the table below:
|
Years ended May 31
|
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Seven months ended
December 31, 2002 |
|||||||||||||
|
2000
|
2001
|
2002
|
|||||||||||
|
(Dollars in Millions)
|
|||||||||||||
Number of hospitals | 1 | 2 | 5 | 1 | ||||||||||
Number of licensed beds | 230 | 417 | 1,528 | 125 | ||||||||||
Purchase price information: | ||||||||||||||
Fair value of assets acquired | $ | 55 | $ | 27 | $ | 370 | $ | 28 | ||||||
Liabilities assumed | (20 | ) | (7 | ) | (53 | ) | (1 | ) | ||||||
|
|
|
|
|||||||||||
Net assets acquired | 35 | 20 | 317 | 27 | ||||||||||
Other health care entities | 3 | 9 | 7 | | ||||||||||
|
|
|
|
|||||||||||
Net cash paid | $ | 38 | $ | 29 | $ | 324 | $ | 27 | ||||||
|
|
|
|
For the years ended May 31, 2000, 2001 and 2002, and the seven months ended December 31, 2002, goodwill from these acquisitions was $28 million, $8 million, $128 million and $9 million, respectively. On June 1, 2002, we adopted Statement of Financial Accounting Standards No. 142. Under this new accounting standard, goodwill is no longer amortized, but is subject to impairment tests performed at least annually. All of the goodwill related to those acquisitions is expected to be fully deductible for income tax purposes.
While we strive to continually improve our portfolio of general hospitals through acquisitions, we, at times, divest hospitals that are not essential to our strategic objectives. For the most part, these divested hospitals are not part of an integrated delivery system. Their sizes and performances vary, but
72
on average they are smaller and have lower margins. Such divestitures allow us to concentrate on, or strengthen, the integrated health care delivery systems in areas where we already have a strong presence.
During the year ended May 31, 2000, we sold 17 general hospitals, closed three, and terminated the lease on another. We also sold three long-term-care facilities. The net gain on the sales of these facilities in 2000 was $49 million. During the year ended May 31, 2001 we sold one general hospital and three long-term-care facilities, closed one long-term-care facility and combined the operations of one rehabilitation hospital with the operations of a general hospital. During the year ended May 31, 2002, we sold one general hospital and three long-term-care facilities. The results of operations of the sold or closed businesses were not significant.
In March 2003, we announced a plan to dispose of or consolidate 14 general hospitals that no longer fit our core operating strategy of building and maintaining competitive networks of quality hospitals in major markets. Four of the ten general hospitals for which we recorded impairment charges of $80 million during the seven months ended December 31, 2002 are part of that plan. We have recorded an impairment charge in the amount of approximately $61 million in March 2003 primarily for the write-down of long-lived assets and goodwill allocated to these disposed businesses using the relative fair-value method to arrive at estimated fair values, less costs to sell, of these facilities.
As previously announced, we anticipate selling 11 of the hospitals by the end of the calendar year and we plan to sell, consolidate or close two other hospitals. We will cease operations at one hospital when the long-term lease expires in August 2003. We intend to use the proceeds from the divestitures to repurchase common stock and repay indebtedness. These hospitals reported net operating revenues of $953 million for the 12-month period ended December 31, 2002. The income from operations of the asset group was $105 million for the same period.
NOTE 6 REPURCHASES OF COMMON STOCK
During the year ended May 31, 2002, our board of directors authorized the repurchase of up to 30 million shares of its common stock to offset the dilutive effect of employee stock option exercises. On July 24, 2002, the board of directors authorized the repurchase of up to an additional 20 million shares of stock, not only to offset the dilutive effect of anticipated employee stock option exercises, but also to enable us to take advantage of opportunistic market conditions. On December 11, 2002, the board of directors authorized the use of net cash flows from operating activities after August 31, 2002, less capital expenditures, plus proceeds from asset sales, to repurchase up to 30 million shares of our common stock, which includes 13,763,900 shares that remained under the previous authorizations. During the year ended May 31, 2002 and the seven months ended December 31, 2002, we repurchased an aggregate 36,263,100 shares for approximately $1.2 billion at an average cost of $33.53 per share, as shown in the following table:
The repurchased shares are held as treasury stock. We have not purchased, nor do we intend to purchase, any shares from our directors, officers or employees.
73
At times, we have entered into forward-purchase agreements to repurchase common stock owned by unaffiliated counterparties. Such forward-purchase agreements gave us the option of buying the stock through a full-physical, net-share or net-cash settlement. On October 29, 2002, we settled all of the then outstanding forward-purchase agreements for $225 million in cash5,164,150 shares at an average cost of $43.64 per shareand have not entered into any forward-purchase agreements since then. The closing market price of our common stock that day was $39.25. We accounted for these forward-purchase agreements as equity transactions within permanent equity.
Subsequent to December 31, 2002 and through April 30, 2003, we have repurchased 8,621,000 shares of common stock for approximately $148 million at an average cost of $17.16 per share.
NOTE 7 LONG-TERM DEBT AND LEASE OBLIGATIONS
The table below shows our long-term debt as of May 31, 2001 and 2002 and December 31, 2002:
|
May 31
|
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
December 31
2002 |
|||||||||
|
2001
|
2002
|
||||||||
|
(in millions)
|
|||||||||
Loans payable to banks, unsecured | $ | 60 | $ | 975 | $ | 830 | ||||
5 3 / 8 % Senior Notes due 2006 | | 550 | 550 | |||||||
5% Senior Notes due 2007 | | | 400 | |||||||
6 3 / 8 % Senior Notes due 2011 | | 1,000 | 1,000 | |||||||
6 1 / 2 % Senior Notes due 2012 | | 600 | 600 | |||||||
6 7 / 8 % Senior Notes due 2031 | | 450 | 450 | |||||||
8 1 / 8 % Senior Subordinated Notes due 2008 | 897 | 2 | 2 | |||||||
6% Exchangeable Subordinated Notes due 2005 | 320 | 282 | | |||||||
8 5 / 8 % Senior Notes due 2003 | 455 | 16 | 16 | |||||||
7 7 / 8 % Senior Notes due 2003 | 400 | 6 | 6 | |||||||
8% Senior Notes due 2005 | 811 | 22 | 22 | |||||||
7 5 / 8 % Senior Notes due 2008 | 313 | | | |||||||
9 1 / 4 Senior Notes due 2010 | 238 | | | |||||||
8 5 / 8 % Senior Notes due 2010 | 628 | | | |||||||
Zero-coupon guaranteed bonds due 2002 | 45 | 45 | | |||||||
Notes payable and capital lease obligations, secured by property and equipment, payable in installments to 2013 | 71 | 100 | 97 | |||||||
Other promissory notes, primarily unsecured | 53 | 37 | 14 | |||||||
Unamortized note discounts | (64 | ) | (67 | ) | (68 | ) | ||||
|
|
|
||||||||
Total long-term debt | 4,227 | 4,018 | 3,919 | |||||||
Less current portion | (25 | ) | (99 | ) | (47 | ) | ||||
|
|
|
||||||||
Long-term debt, net of current portion | $ | 4,202 | $ | 3,919 | $ | 3,872 | ||||
|
|
|
LOANS PAYABLE TO BANKS
On March 1, 2001, we entered into a new senior unsecured $500 million 364-day credit agreement and a new senior unsecured $1.5 billion five-year revolving credit agreement (together, the "credit agreement"). The credit agreement replaced our $2.8 billion five-year revolving bank credit agreement that would have expired on January 31, 2002. On February 28, 2002, we renewed the 364-day agreement for another 364 days. The 364-day agreement expired on February 28, 2003. It was undrawn and not renewed.
The 364-day agreement allowed us to borrow, repay and reborrow up to $500 million prior to March 1, 2003, and the five-year agreement allows us to borrow, repay and reborrow up to $1.5 billion
74
prior to March 1, 2006. The credit agreement extends our maturities, offers efficient pricing tied to quantifiable credit measures, and has more flexible covenants than the previous credit agreement. Our unused borrowing capacity under the credit agreement was $1.0 billion at December 31, 2002. At December 31, 2002 the interest rate on loans payable to banks under the credit agreement was 2.2%.
Loans under the credit agreement are unsecured and generally bear interest at a base rate equal to the prime rate or, if higher, the federal funds rate plus 0.5% or, at our option, an adjusted London Interbank Offered Rate ("LIBOR") plus an interest margin between 50 and 200 basis points. (On March 1, 2003, the interest margin was amended to 100 basis points.) We have agreed to pay the lenders an annual facility fee on the total loan commitment at rates between 20 and 57.5 basis points. The interest rate margins and the facility fee rates are based on the ratio of our consolidated total debt to consolidated operating income plus depreciation, amortization, impairment and certain restructuring charges.
SENIOR NOTES AND SENIOR SUBORDINATED NOTES
In May 2001, we repurchased an aggregate of $514 million of our senior and senior subordinated notes. In connection with the repurchase of debt and the refinancing of our bank credit agreement, we recorded a loss of $56 million from early extinguishment of debt in the fourth quarter of the year ended May 31, 2001.
During the seven-month period ended December 31, 2001, we repurchased approximately $1.1 billion of various issues of our senior notes. The transactions were funded with cash and borrowings under our credit agreement.
In November 2001, we sold $2.0 billion of the following new senior notes:
We used substantially all of the proceeds to repurchase approximately $1.6 billion of various issues of our senior and senior subordinated notes and to repay borrowings under the bank credit agreement. Those new senior notes are unsecured senior obligations; they rank equally with all of our other unsecured senior indebtedness; and they are redeemable at any time at our option.
During the year ended May 31, 2002, we repurchased the remaining $65 million of our 8 5 / 8 % Senior Subordinated Notes due 2007, $56 million of our 8 1 / 8 % Senior Subordinated Notes due 2008, and $24 million of our 6% Exchangeable Subordinated Notes due 2005. We also sold $600 million of new 6 1 / 2 % Senior Notes due 2012 and we used the majority of the proceeds to repurchase our 8 1 / 8 % Senior Subordinated Notes due 2008 and the remainder for general corporate purposes. In connection with the repurchases of debt during the year ended May 31, 2002, we recorded losses from early extinguishments of debt in the aggregate amount of $383 million.
In June 2002, we sold $400 million of new 5% Senior Notes due 2007. We used the proceeds from the sale to repay bank loans under our credit agreements and to repurchase, at par, the remaining $282 million balance of our 6% Exchangeable Subordinated Notes due 2005. As a result of that repurchase, we recorded a $4 million loss from early extinguishment of debt in the seven-month period ended December 31, 2002.
In April 2002, the FASB issued SFAS No. 145, which eliminates the requirement to report gains or losses from early extinguishments of debt as extraordinary items in the income statement, unless they meet the criteria for an extraordinary item under APB Opinion No. 30. The Company adopted SFAS No. 145 as of June 1, 2002. Under the new rule, such gains or losses are now generally reported as part
75
of income from continuing operations. Any gain or loss on early extinguishment of debt that was classified as an extraordinary item in prior periods presented has been reclassified.
In January 2003, we sold $1 billion of new 7 3 / 8 % Senior Notes due 2013. We used the majority of the proceeds to repay all of the then outstanding debt under our credit agreement and the remainder for general corporate purposes. Those new senior notes are unsecured; they rank equally with all of our other unsecured senior indebtedness; and they are redeemable at any time at our option with a redemption premium calculated at the time of redemption.
Prior to the sale of the new senior notes in November 2001, March 2002 and January 2003, we used a hedging strategy to lock in the risk-free component of the interest rate that was in effect on the offering dates of the notes. The interest-rate-lock agreement was settled on the date the notes were issued. Because the risk-free interest rate declined during the hedge period, we incurred a loss on this transaction when we unwound the hedge. However, based on our assessment using the dollar-offset method (which was performed at the inception of the hedge), we determined that the hedge was highly effective. Therefore, the loss on the hedge was charged to other comprehensive income and is being amortized into earnings over the terms of the new senior notes. The loss will be entirely offset by the effect of the lower interest rate on the notes.
All of our remaining senior subordinated notes are unsecured obligations and are subordinated in right of payment to all existing and future senior debt, including the senior notes and borrowings under the credit agreement.
LOAN COVENANTS
With the retirement or substantial retirement of eight issues of senior notes and senior subordinated notes since May 31, 2001, together with amendments to the loan covenants, we have eliminated substantially all of the restrictive covenants associated with debt issued when we were considered a "high yield" issuer. During the year ended May 31, 2002, our senior notes and senior subordinated notes were upgraded to investment grade.
Our existing credit agreement and the indentures governing our senior and senior subordinated notes contain affirmative, negative and financial covenants that have, among other requirements, limitations on (1) liens, (2) consolidations, merger or the sale of all or substantially all assets unless no default exists and, in the case of a consolidation or merger, the surviving entity assumes all of our obligations under the credit agreements, and (3) subsidiary debt. The covenants also allow us to declare and pay a dividend and purchase our common stock so long as no default exists and our leverage ratio is less than 3.0-to-1. The leverage ratio is defined in the credit agreement as the ratio of the Company's consolidated total debt to consolidated operating income plus the sum of depreciation, amortization, impairment and other unusual charges. This leverage ratio was 1.34 at December 31, 2002. The existing credit agreement covenants also require that our leverage ratio not exceed 2.5-to-1, and that we maintain specified levels of net worth ($3.7 billion at December 31, 2002) and a fixed-charge coverage greater than 2.0-to-1. At December 31, 2002, our fixed-charge coverage was 6.3-to-1. We are in compliance with all of our loan covenants. There are no compensating balance requirements for any credit line or borrowing.
Future long-term debt maturities and minimum operating lease payments as of December 31, 2002 are as follows:
76
Rental expense under operating leases, including short-term leases, was $286 million in the year ended May 31, 2000, $237 million in the year ended May 31, 2001, $241 million in the year ended May 31, 2002, and $141 million in the seven-month period ended December 31, 2002.
NOTE 8 INCOME TAXES
The following tables relate to continuing operations:
|
May 31
|
December 31
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000
|
2001
|
2002
|
2001
|
2002
|
||||||||||||
|
(Dollars in Millions)
|
||||||||||||||||
|
|
|
|
(unaudited)
|
|
||||||||||||
Currently Payable | |||||||||||||||||
Federal | $ | 232 | $ | 342 | $ | 440 | $ | 213 | $ | 490 | |||||||
State | 32 | 53 | 63 | 30 | 64 | ||||||||||||
|
|
|
|
|
|||||||||||||
$ | 264 | $ | 395 | $ | 503 | $ | 243 | $ | 554 | ||||||||
|
|
|
|
|
|||||||||||||
Deferred | |||||||||||||||||
Federal | $ | (4 | ) | $ | 32 | $ | 58 | $ | 14 | $ | (240 | ) | |||||
State | 18 | 16 | 32 | 5 | (15 | ) | |||||||||||
|
|
|
|
|
|||||||||||||
$ | 14 | $ | 48 | $ | 90 | $ | 19 | $ | (255 | ) | |||||||
|
|
|
|
|
|||||||||||||
$ | 278 | $ | 443 | $ | 593 | $ | 262 | $ | 299 | ||||||||
|
|
|
|
|
A reconciliation between the amount of reported income tax expense and the amount computed by multiplying income from continuing operations before income taxes by the statutory Federal income tax rate is shown below:
77
Deferred tax assets and liabilities as of May 31, 2001 and 2002 and December 31, 2002 relate to the following:
We believe that the realization of deferred tax assets is more likely than not to occur as the temporary differences reverse against future taxable income.
At December 31, 2002, our carryforwards from prior tax returns that were available to offset future federal net taxable income consisted of net operating loss carryforwards of approximately $21 million expiring in 2003 and $34 million expiring in 2014 through 2016. Allowable federal deductions relating to the $21 million in net operating losses expiring in 2003 are subject to annual limitations and as such we have established a valuation allowance included in other items to reserve a portion of this amount.
The Internal Revenue Service ("IRS") is currently examining our federal income tax returns for the years ended May 31, 1995, 1996 and 1997. We expect the examination to be concluded within the next several months. In connection with its examination, the IRS has issued a Notice of Proposed Adjustment ("NOPA") with respect to our treatment of a portion of the civil settlement paid to the federal government in June 1994 related to our discontinued psychiatric hospital business. The denial of this deduction could result in additional income taxes and interest of approximately $100 million. The IRS has also commented on a number of other matters, but has issued no proposed adjustment. At this time, no Revenue Agent's Report ("RAR") for the above fiscal years has been issued. In the event the final RAR contains adjustments with which we disagree (such as the issue covered by the NOPA discussed above), we will seek to resolve all disputed issues using the various means available to us. These would include, for example, filing a protest with the Appeals Division of the IRS or filing a petition for redetermination of a deficiency with the Tax Court. We are not currently able to predict the amounts that could eventually be paid upon the ultimate resolution of all the issues included in any final RAR.
NOTE 9 PROFESSIONAL AND GENERAL LIABILITY INSURANCE
Through May 31, 2002, we insured substantially all of our professional and comprehensive general liability risks in excess of self-insured retentions through a majority-owned insurance subsidiary (Hospital Underwriting Group) under a mature claims-made policy with a 10-year discovery period. These self-insured retentions were $1 million per occurrence for the three years ended May 31, 2002, and in prior years varied by hospital and by policy period from $500,000 to $5 million per occurrence. Hospital Underwriting Group's retentions covered the next $2 million per occurrence. Claims in excess
78
of $3 million per occurrence were, in turn, reinsured with major independent insurance companies. Effective June 1, 2002, we formed a new insurance subsidiary. This subsidiary insures these risks under a first-year only claims-made policy, and, in turn, reinsures its risks in excess of $5 million per occurrence with major independent insurance companies. Subsequent to May 31, 2002, our self-insured retention limit is $2 million. Our new subsidiary's retention covers the next $3 million. That program will expire on May 31, 2003. Effective June 1, 2003, we anticipate having a new insurance program in place.
Included in our other operating expenses in the accompanying consolidated income statements is malpractice insurance expense of $115 million for the seven months ended December 31, 2001 (unaudited) and $270 million for the current period. We continue to experience unfavorable trends in professional and general liability insurance risks, as well as increases in the size of claim settlements and awards in this area. We believe our future coverage will be more costly and may require us to assume more of these risks ourselves.
The $270 million expense consists of (1) a charge of approximately $36 million as a result of lowering the discount rate used from 7.5% to 4.61%, (2) a charge of $29 million due to an increase in Hospital Underwriting Group's reserves as a result of an increase in the average of claims being paid by them, and (3) a charge of $86 million to increase our self-insured self-retention reserves, also due to a significant increase in the severity of claims. The 7.5% rate was based on our average cost of borrowing. The 4.61% rate is based on a risk-free, Federal Reserve 10-year maturity composite rate as of December 31, 2002 for a period that approximates our estimated claims payout period.
In addition, the aggregate amount of claims reported to Hospital Underwriting Group for the fiscal year ended May 31, 2001 is approaching the $50 million aggregate policy limit for that year. Once the aggregate limit is exhausted for the policy year, we will bear the first $25 million of loss before any excess insurance coverage would apply.
NOTE 10 CLAIMS AND LAWSUITS
The Company is subject to claims and lawsuits in its normal course of business. We believe that our liability for damages resulting from such claims and lawsuits is adequately covered by insurance or is adequately provided for in our consolidated financial statements. Although the results of these claims and lawsuits cannot be predicted with certainty, we believe that the ultimate resolution of these claims and lawsuits will not have a material adverse effect on our business, financial position or results of operations.
The healthcare industry is also the subject of federal and state agencies heightened and coordinated civil and criminal enforcement efforts. Through the use of national initiatives, the government is scrutinizing, among other things, the terms of acquisitions of physician practices and the coding practices related to certain clinical laboratory procedures and inpatient procedures. Health care providers, including Tenet, continue to see increased use of the False Claims Act, particularly by individuals alleging that a hospital has defrauded the federal government. Companies in the health care industry in general, and Tenet in particular, have been and may continue to be subjected to these government investigations and other actions. At this time, we are unable to predict the impact of such actions on our business, financial condition or results of operations.
Finally, the Company and certain of its subsidiaries are currently involved in significant legal proceedings and investigations principally related to the following:
79
We believe the allegations in these cases are without merit and we intend to vigorously defend all the above actions.
We cannot presently determine the ultimate resolution of these investigations and lawsuits. Accordingly, the likelihood of a loss, if any, cannot be reasonably estimated and we have not recognized in the accompanying consolidated financial statements all of the liability arising from these matters. If adversely determined, the outcome of those matters could have a material adverse effect on our liquidity, financial position and results of operations.
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NOTE 11 SELECTED BALANCE SHEET DETAILS
The principal components of other current assets are shown in the table below:
|
May 31
|
|
|||||||
---|---|---|---|---|---|---|---|---|---|
|
December 31
2002 |
||||||||
|
2001
|
2002
|
|||||||
|
(Dollars in Millions)
|
||||||||
Other receivables | $ | 162 | $ | 252 | $ | 292 | |||
Prepaid expenses and other current items | 87 | 107 | 95 | ||||||
Assets held for sale or disposal, at the lower of carrying value or fair value less estimated costs to sell or dispose | 56 | 42 | 34 | ||||||
|
|
|
|||||||
Other current assets | $ | 305 | $ | 401 | $ | 421 | |||
|
|
|
The results of operations of the assets held for sale or for disposal and the impact of suspending depreciation and amortization were not significant.
The principal components of property and equipment are shown in the table below:
Property and equipment is stated at cost, less accumulated depreciation and amortization and impairment write-downs related to assets held and used.
NOTE 12 STOCK BENEFIT PLANS
We currently grant stock-based awards pursuant to our 2001 Stock Incentive Plan. Under that plan, 60,000,000 shares of common stock were approved for stock-based awards. At December 31, 2002, there were 38,311,805 shares of common stock available for stock option grants and other incentive awards to our key employees, advisors, consultants and directors. Options generally have an exercise price equal to the fair market value of the shares on the date of grant. Normally, these options are exercisable at the rate of one-third per year, beginning one year from the date of the grant. In December 2002, however, we granted options for 11.1 million shares of common stock at an exercise price of $17.56 per share and an estimated weighted average fair value of $8.78 per share. These options will be fully vested four years after the date of grant. Earlier vesting may occur for these options on or after the first, second and third anniversaries of the grant date if the market price of our common stock reaches and remains at, or higher than, $24, $27 and $30 per share, respectively, for 20 consecutive trading days at such time. Stock options generally expire 10 years from the date of grant.
Under the 2001 Stock Incentive Plan, nonemployee directors receive 18,000 options per year and 36,000 options upon joining the board of directors. Awards have an exercise price equal to the fair market value of the Company's shares on the date of the grant. At the recommendation of independent compensation consultants retained by the compensation committee of our board of directors, the options granted vest immediately upon issuance and expire 10 years after the date of the grant.
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The following table summarizes information about our outstanding stock options at December 31, 2002:
The reconciliation below shows the changes to our stock option plans for the years ended May 31, 2000, 2001 and 2002, and for the seven months ended December 31, 2002:
The estimated weighted-average fair values of options we granted in the years ended May 31, 2000, 2001 and 2002 and the seven-month period ended December 31, 2002 were $5.47, $14.01, $18.45 and $9.07, respectively. These were calculated, as of the date of each grant, using a Black-Scholes option-pricing model with the following weighted-average assumptions:
Expected volatility is derived using daily data drawn from the five years preceding the date of grant. The risk-free interest rate is the approximate yield on 7-year and 10-year United States Treasury Bonds on the date of grant. The expected life is an estimate of the number of years the option will be held before it is exercised. The valuation model was not adjusted for nontransferability, risk of forfeiture, or the vesting restrictions of the optionsall of which would reduce the value if factored into the calculation.
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Had compensation cost for stock options we granted to our employees and directors been determined based on these fair values, our net income and earnings per share would have been the amounts indicated below:
Prior to our shareholders approving the 2001 Stock Incentive Plan at their 2001 annual meeting, we granted stock-based awards to our directors and employees pursuant to other plans. Stock options remain outstanding under those other plans, but no additional stock-based awards will be granted under them. No performance-based incentive stock awards have been granted since fiscal 1994.
Pursuant to the terms of our stock-based compensation plans, awards granted under the plans vest and may be exercised as determined by the compensation committee of our board of directors. In the event of a change in control, the compensation committee may, at its sole discretion, without obtaining shareholder approval, accelerate the vesting or performance periods of the awards.
Through the end of the seven-month period ended December 31, 2002, we applied Accounting Principles Board Opinion No. 25 and its related interpretations in accounting for our plans. Accordingly, no compensation cost was recognized for stock options granted to employees or directors under the plans because the exercise prices for options granted were equal to the quoted market prices on the option grant dates.
In March 2003, our board of directors approved a change in accounting for stock options granted to employees and directors from the intrinsic-value method to the fair-value method recommended by SFAS No. 123, effective for the calendar year ending December 31, 2003. Beginning with our first quarterly report of that year, for the quarter ended March 31, 2003, compensation cost for stock options granted to our employees and directors will be reflected directly in our consolidated income statements instead of being presented as pro forma information. Based on options granted through March 1, 2003, we estimate that this charge will increase salaries and benefits expense by approximately $39 million per quarter throughout calendar year 2003. The transition method we have chosen to report this change in accounting is the retroactive-restatement method. As such, future presentations of periods ended prior to January 1, 2003 will be restated to reflect the fair-value method of accounting, as if the change had been effective throughout those prior periods.
NOTE 13 EMPLOYEE STOCK PURCHASE PLAN
We have an employee stock purchase plan under which we are authorized to issue up to 14,250,000 shares of common stock to eligible employees of the Company or its designated subsidiaries. Under the terms of the plan, eligible employees may elect to have between 1% and 10% of their base earnings withheld each calendar quarter to purchase shares of the our common stock. Shares are purchased on the last day of the quarter, at a purchase price equal to 85% of either the closing price
83
on the first day of the quarter or the closing price on the last day of the quarter, whichever is lower. Under the plan, no individual may purchase, in any year, shares with a fair market value in excess of $25,000.
Under the plan, we sold the following numbers of shares in each of the three years ended May 31, 2002, 2001 and 2002 and in the seven-month period ended December 31, 2002:
|
May 31
|
|
||||||
---|---|---|---|---|---|---|---|---|
|
December 31
2002 |
|||||||
|
2000
|
2001
|
2002
|
|||||
Number of shares | 1,647,831 | 839,982 | 691,704 | 378,431 | ||||
Weighted average price | $10.61 | $18.01 | $30.19 | $39.28 |
NOTE 14 EARNINGS PER COMMON SHARE
The table below is a reconciliation of the numerators and denominators of our basic and diluted earnings per common share calculations for income from continuing operations for each of the three years ended May 31, 2000 through 2002 and for the seven-month period ended December 31, 2002. We also present the reconciliations for the seven months ended December 31, 2001 for comparative purposes. Income is expressed in millions and weighted average shares are expressed in thousands.
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Seven Months ended December 31, 2001 (unaudited) | |||||||||
Income available to common shareholders for basic earnings per share | $ | 328 | 489,046 | $ | 0.67 | ||||
Effect of dilutive stock options, warrants and other contracts to issue common stock | | 13,913 | (0.02 | ) | |||||
|
|
|
|||||||
Income available to common shareholders for diluted earnings per share | $ | 328 | 502,959 | $ | 0.65 | ||||
|
|
|
|||||||
Seven Months ended December 31, 2002 | |||||||||
Income available to common shareholders for basic earnings per share | $ | 459 | 484,877 | $ | 0.95 | ||||
Effect of dilutive stock options, warrants and other contracts to issue common stock | | 8,653 | (0.02 | ) | |||||
|
|
|
|||||||
Income available to common shareholders for diluted earnings per share | $ | 459 | 493,530 | $ | 0.93 | ||||
|
|
|
Stock options with prices that exceeded the average market price for the above periods are excluded from the earnings-per-share computations. For the years ended May 31, 2000, 2001 and 2002, the number of shares excluded was 15,321,000, 1,037,000 and 171,000, respectively, and for the seven-month period ended December 31, 2002, the number was 9,946,206.
NOTE 15 EMPLOYEE RETIREMENT PLAN
Substantially all domestic employees of Tenet or one of its subsidiaries, upon qualification, are eligible to participate in a defined contribution 401(k) plan. Under the plan, employees may contribute 1% to 20% of their eligible compensation, and we match such contributions up to a maximum percentage. Our contributions to the plan were approximately $52 million for the year ended May 31, 2000, $54 million for the year ended May 31, 2001, $60 million for the year ended May 31, 2002, and $40 million for the seven-month period ended December 31, 2002.
NOTE 16 INVESTMENTS AND OTHER ASSETS
Our principal long-term investments in unconsolidated affiliates at May 31, 2002 consisted of 8,301,067 shares of Ventas and shares of various other investments, primarily in health care ventures. As previously announced, in December 2002, we sold our entire portfolio of Ventas, Inc. shares for $86 million. We had decided to sell the shares in late November 2002. Prior to that time, we had accounted for the shares as an available-for-sale security whose fair value was less than its cost basis. Because we did not expect the fair value of the shares to recover prior to the expected time of sale, we recorded a $64 million charge ($40 million, net of taxes) in November 2002 for the impairment of the carrying value of these securities. Because of a difference between the tax basis of the investment and our book basis, we will report a tax gain on the sale in our next income tax return. The estimated tax on the gain amounted to $32 million, and was paid on February 15, 2003.
Also included in long-term investments at May 31, 2002 was an investment portfolio of U.S. government securities aggregating $69 million. Those securities were held in an escrow account for the benefit of the holders of our 6% Exchangeable Notes. The securities were released from escrow when we repurchased the notes in August 2002 (see Note 6) and were sold for cash in the normal course of business over several succeeding weeks.
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Our policy has been to classify these investments as "available for sale." In doing so, the carrying values of the shares and debt instruments are adjusted at the end of each accounting period to their market values, net of income taxes. This is done through a credit or charge to other comprehensive income. Through May 31, 2001 and 2002, the accumulated unrealized loss on the Company's long-term investments was $71 million and $40 million, respectively, and through December 31, 2002, it was $15 million. At May 31, 2001 and 2002 the aggregate market value of these investments was $170 million and $200 million, respectively, and at December 31, 2002 it was $20 million.
In addition, during the year ended May 31, 2000, we recorded $61 million in gains from sales of investments in Internet-related health care ventures, which were offset by $62 million in net losses from sales of other investments. During the year ended May 31, 2001, we recorded $28 million in net gains from sales of investments in health care ventures. There were no such gains or losses in the year ended May 31, 2002 or the seven-month period ended December 31, 2002.
NOTE 17 DISCONTINUED OPERATIONSPSYCHIATRIC HOSPITAL BUSINESS
During the year ended May 31, 2000, the Company recorded a $30 million charge to discontinued operations ($19 million after taxes, or $0.04 per share) to reflect a July 19, 2000 agreement to settle substantially all of the remaining civil litigation related to certain of our former psychiatric hospitals. The settlements were paid during the year ended May 31, 2001.
NOTE 18 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, current portion of long-term debt, accounts payable, and accrued interest payable approximate fair value because of the short maturity of these instruments. The carrying values of investments, both short-term and long-term (excluding investments accounted for by the equity method), are reported at fair value. Long-term receivables are carried at cost and are not materially different from their estimated fair values. The fair value of our long-term debt is based on quoted market prices and approximates its carrying value. At May 31, 2001 and 2002 and December 31, 2002, the estimated fair value of our long-term debt was approximately 99%, 101% and 93%, respectively, of the carrying value of the debt.
NOTE 19 SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Years ended May 31
|
Seven months ended
December 31 |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2000
|
2001
|
2002
|
2001
|
2002
|
||||||||||
|
|
|
|
(unaudited)
|
|
||||||||||
|
(Dollars in Millions)
|
||||||||||||||
Interest paid | $ | 473 | $ | 462 | $ | 389 | $ | 308 | $ | 175 | |||||
Income taxes paid, net of refunds received | 226 | 257 | 268 | 93 | 307 |
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NOTE 20 OTHER COMPREHENSIVE INCOME
The following table shows our consolidated statements of comprehensive income for the years ended May 31, 2000, 2001 and 2002, and for the seven-month periods ended December 31, 2001 and 2002:
|
Years ended May 31
|
Seven Months ended December 31
|
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2000
|
2001
|
2002
|
2001
|
2002
|
|||||||||||||
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|
|
|
(unaudited)
|
|
|||||||||||||
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(Dollars in Millions)
|
|||||||||||||||||
Net income | $ | 302 | $ | 643 | $ | 785 | 328 | $ | 459 | |||||||||
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|
||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||
Unrealized gains (losses) on securities held as available for sale: | ||||||||||||||||||
Unrealized net holding gains (losses) during period | (142 | ) | 80 | 31 | 18 | (6 | ) | |||||||||||
Less: reclassification adjustments for (gains) losses included in net income | (92 | ) | (39 | ) | 1 | | 47 | |||||||||||
Foreign currency translation adjustments | (1 | ) | (3 | ) | (4 | ) | 2 | 5 | ||||||||||
Losses on derivative instruments designated and qualifying as cash-flow hedges | | | (28 | ) | (26 | ) | | |||||||||||
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|
|
|
|
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Other comprehensive income (loss) before income taxes | (235 | ) | 38 | | (6 | ) | 46 | |||||||||||
Income tax benefit (expense) related to items of other comprehensive income | 88 | (12 | ) | | 2 | (17 | ) | |||||||||||
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Other comprehensive income (loss) | (147 | ) | 26 | | (4 | ) | 29 | |||||||||||
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|
||||||||||||||
Comprehensive income | $ | 155 | $ | 669 | $ | 785 | $ | 324 | $ | 488 | ||||||||
|
|
|
|
|
The table below shows the tax effect allocated to each component of other comprehensive income for the years ended May 31, 2000, 2001 and 2002 and for the seven-month period ended December 31, 2002:
|
Before-Tax
Amount |
Tax (Expense)
Benefit |
Net-of-Tax
Amount |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
(Dollars in Millions)
|
||||||||||
Year ended May 31, 2000 | |||||||||||
Foreign currency translation adjustment | $ | (1 | ) | $ | 1 | $ | | ||||
Unrealized losses on securities held as available-for-sale | (142 | ) | 53 | (89 | ) | ||||||
Less: reclassification adjustment for realized gains included in net income | (92 | ) | 34 | (58 | ) | ||||||
|
|
|
|||||||||
$ | (235 | ) | $ | 88 | $ | (147 | ) | ||||
|
|
|
|||||||||
Year ended May 31, 2001 | |||||||||||
Foreign currency translation adjustment | $ | (3 | ) | $ | 1 | $ | (2 | ) | |||
Unrealized losses on securities held as available-for-sale | 80 | (28 | ) | 52 | |||||||
Less: reclassification adjustment for realized gains included in net income | (39 | ) | 15 | (24 | ) | ||||||
|
|
|
|||||||||
$ | 38 | $ | (12 | ) | $ | 26 | |||||
|
|
|
|||||||||
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Year ended May 31, 2002 | |||||||||||
Foreign currency translation adjustment | $ | (4 | ) | $ | 2 | $ | (2 | ) | |||
Losses on derivatives designated and qualifying as cash flow hedges | (28 | ) | 10 | (18 | ) | ||||||
Unrealized losses on securities held as available-for-sale | 31 | (12 | ) | 19 | |||||||
Less: reclassification adjustment for realized losses included in net income | 1 | | 1 | ||||||||
|
|
|
|||||||||
$ | | $ | | $ | | ||||||
|
|
|
|||||||||
Seven Months ended December 31, 2002 | |||||||||||
Foreign currency translation adjustment | $ | 5 | $ | (2 | ) | $ | 3 | ||||
Unrealized losses on securities held as available-for-sale | (6 | ) | 3 | (3 | ) | ||||||
Less: reclassification adjustment for realized losses included in net income | 47 | (18 | ) | 29 | |||||||
|
|
|
|||||||||
$ | 46 | $ | (17 | ) | $ | 29 | |||||
|
|
|
NOTE 21 RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146. The standard requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. (Under previous accounting standards, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan.) The provisions of the standard apply to exit or disposal activities initiated after December 31, 2002. In the event that we initiate exit or disposal activities after this date, such as our recently announced plan to divest or consolidate 14 of our general hospitals and our announced cost reduction program, the new accounting standard might have a material effect on the timing of the recognition of exit costs in our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45. The interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable, on a prospective basis, to guarantees issued or modified after December 31, 2002. This new interpretation did not have a material effect on our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148. This standard provides alternative methods for voluntarily transitioning to the fair-value method of accounting for stock-based employee compensation recommended by SFAS No. 123. It also requires prominent disclosures in both annual and quarterly financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. On March 12, 2003, our board of directors approved a change in accounting for stock options granted to our employees and directors from the intrinsic-value method to the fair-value method, effective for our new fiscal year ending December 31, 2003. We estimate that this change will increase salaries and benefits expense by approximately $38 million in each quarter of the 2003 calendar year.
The transition method we have chosen to report this change in accounting is the retroactive-restatement method. As such, future presentations of periods ended prior to January 1, 2003 will be restated to reflect the fair-value method of accounting, as if the change had been effective throughout those earlier periods. For example, the results of operations for the four quarters prior to the January change will be restated to reflect additional salaries and benefits expense ranging between $33 million and $37 million each quarter.
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In January 2003, the FASB issued FIN 46. This interpretation of Accounting Research Bulletin No. 51 is intended to achieve more consistent application of consolidation policies to variable-interest entities. We do not believe it will have a material impact on our financial condition or results of operations.
NOTE 22 RELATED PARTY TRANSACTIONS
One of our board members is the president of St. Louis University ("SLU"). As a result of our 1998 acquisition of the SLU Hospital, we entered into a 30-year Academic Affiliation Agreement with SLU and in connection therewith we have paid SLU $23.7 million, $24.5 million and $25.3 million in the years ended May 31, 2000, 2001 and 2002, respectively, and $16.4 million in the seven-month period ended December 31, 2002.
SUPPLEMENTAL FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
|
Year ended May 31, 2001
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
First
|
Second
|
Third
|
Fourth
|
|||||||||
|
(Dollars in Millions, except
Per-Share Amounts) |
||||||||||||
Net operating revenues | $ | 2,893 | $ | 2,915 | $ | 3,036 | $ | 3,209 | |||||
Net income | 154 | 175 | 198 | 116 | |||||||||
Earnings per share from continuing operations: | |||||||||||||
Basic | $ | 0.33 | $ | 0.37 | $ | 0.41 | $ | 0.24 | |||||
Diluted | $ | 0.32 | $ | 0.36 | $ | 0.40 | $ | 0.23 | |||||
|
|
Year ended May 31, 2002 |
|||||||||||
|
First
|
Second
|
Third
|
Fourth
|
|||||||||
|
(Dollars in Millions, except
Per-Share Amounts) |
||||||||||||
Net operating revenues | $ | 3,297 | $ | 3,394 | $ | 3,484 | $ | 3,738 | |||||
Net income | 155 | 89 | 280 | 261 | |||||||||
Earnings per share from continuing operations: | |||||||||||||
Basic | $ | 0.32 | $ | 0.18 | $ | 0.57 | $ | 0.53 | |||||
Diluted | $ | 0.31 | $ | 0.18 | $ | 0.56 | $ | 0.52 |
SELECTED SEVEN-MONTH FINANCIAL DATA (UNAUDITED)
|
Seven months ended December 31
|
||||||
---|---|---|---|---|---|---|---|
|
2001
|
2002
|
|||||
|
(Dollars in Millions, except Per-Share Amounts)
|
||||||
Net operating revenues | $ | 7,832 | $ | 8,743 | |||
Net income | 328 | 459 | |||||
Earnings per share from continuing operations: | |||||||
Basic | $ | 0.67 | $ | 0.95 | |||
Diluted | $ | 0.65 | $ | 0.93 |
All periods have been adjusted to reflect a 3-for-2 stock split declared in May 2002 and distributed on June 28, 2002.
89
Operating results for an interim period are not necessarily representative of operations for a full year for various reasons, including changes in Medicare regulations, levels of occupancy, interest rates, acquisitions, disposals, revenue allowance and discount fluctuations, the timing of price changes, gains and losses on sales of assets, impairment and restructuring charges and fluctuations in quarterly tax rates. For example, fiscal 2001 includes impairment of long-lived assets and restructuring charges of $143 million, loss from early extinguishment of debt of $56 million, and net gains on sales of facilities and long-term investments of $28 million recorded in the fourth quarter. Fiscal 2002 includes impairment of long-lived assets and restructuring charges of $99 million recorded in the second quarter and loss from early extinguishment of debt of $110 million, $165 million, $12 million and $96 million recorded in the first, second, third and fourth quarters, respectively. The seven months ended December 31, 2001 includes a $281 million charge for losses from early extinguishment of debt and a $99 million charge for impairment of long-lived assets and restructuring charges. The seven months ended December 31, 2002 includes a $396 million charge for impairment of long-lived assets and restructuring charges and a $64 million charge for impairment of investment securities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
COMPANY DIRECTORS AND NOMINEES
Jeffrey C. Barbakow
Chairman and Chief Executive Officer
Chair of Executive Committee
Age: 59
Mr. Barbakow has been our Chairman and Chief Executive Officer since June 1993. Prior to joining the Company, Mr. Barbakow served as a Managing Director of Donaldson, Lufkin & Jenrette Securities Corporation from September 1991 through May 1993. From 1988 until 1991, Mr. Barbakow served as Chairman, President and Chief Executive Officer of MGM/UA Communications, Inc. Prior to 1988, Mr. Barbakow served as a Managing Director of Merrill Lynch Capital Markets and an executive officer of several Merrill Lynch affiliates. In addition, Mr. Barbakow served as a director of MGM Grand, Inc. from November 1988 through May 1993. Mr. Barbakow is a director of H Group Holding, Inc., the U.S. Chamber of Commerce and Broadlane, Inc. He also serves as a member of the CEO Board of Advisors of the University of Southern California Marshall School of Business, The UCSB Foundation Board of Trustees, the Board of Trustees of the Thacher School and the Chancellor's Counsel at the University of California at Santa Barbara. Mr. Barbakow has been a director since 1990. His current term as a director expires at this year's Annual Meeting. Mr. Barbakow will retire from the Board effective immediately prior to the 2003 annual meeting of shareholders (the "Annual Meeting").
Lawrence Biondi, S.J.
Director
Chair of Ethics, Quality & Compliance Committee
Member of Executive Committee
Age: 64
Father Lawrence Biondi, a Jesuit priest, linguist and educator, has been President of Saint Louis University in Missouri since July 1987. From 1980 to 1987, Fr. Biondi was dean of the College of Arts & Sciences at Loyola University of Chicago, where he served on the faculty of modern languages since 1968. Fr. Biondi, who holds six degrees, is a widely published author in the field of sociolinguistics, in which he has analyzed issues in bilingual-bicultural education, patient-doctor communication and ethnicity. He is a former consultant on ethnicity for the City of Chicago. He sits on the boards of the Association of Jesuit Colleges and Universities; the Joint Commission on Accreditation of Healthcare Organizations; IberoAmericana University, Mexico City, Mexico; Civic Progress, St. Louis; Conference USA; Grand Center, St. Louis; Missouri Botanical Garden; Saint Louis University; St. Louis Art Museum; St. Louis Regional Chamber and Growth Association; St. Louis Symphony; and St. Louis Zoo. Fr. Biondi has been a director since 1998. His current term as a director expires at this year's Annual Meeting. Fr. Biondi will stand for election at this year's Annual Meeting.
Bernice B. Bratter
Director
Chair of Compensation Committee
Member of Executive and Nominating Committees
Age: 65
Ms. Bratter, a licensed Marriage and Family Therapist, served as the President of the Los Angeles Women's Foundation, a public foundation dedicated to reshaping the status of women and girls in Southern California, from October 1996 through May 2000. She provides free consulting services to a
91
number of non-profit and other entities, including Project Renewment, of which she is a co-founder and which explores the different challenges women executives face when leaving the workforce. Ms. Bratter served as Executive Director of the Center for Healthy Aging, formerly known as Senior Health and Peer Counseling, a nonprofit health care organization located in Santa Monica, California, from 1980 through her retirement from that position in March 1995. From March 1995 through September 1996, she lectured and served as a consultant in the fields of not-for-profit corporations and issues related to health care and aging. In 1981, Ms. Bratter was a gubernatorial appointee to the White House Conference on Aging as an observer. She is the recipient of numerous awards and commendations including the YWCA Woman of the Year Award, the Senior Health and Peer Counseling's Community Leader Award and other county, state and federal commendations. In 1991, Ms. Bratter was presented with an Honorary Doctor of Laws degree by Pepperdine University. Ms. Bratter has been a director since 1990. Ms. Bratter will retire from the Board effective upon the election of directors at this year's Annual Meeting.
Sanford Cloud, Jr.
Director
Chair of Corporate Governance Committee
Member of Executive, Ethics, Quality & Compliance and Audit Committees
Age: 58
Mr. Cloud has been President and Chief Executive Officer of The National Conference for Community and Justice since 1994. Prior to that time, Mr. Cloud was a partner in the law firm of Robinson & Cole in Hartford, Connecticut. Throughout most of the 1980s, Mr. Cloud worked for Aetna Inc. as Vice President of Corporate Public Involvement and Executive Director of the Aetna Foundation. Mr. Cloud is a former two-term Connecticut State Senator. Currently, Mr. Cloud serves on the board of directors of Northeast Utilities, Inc. and The Phoenix Companies, Inc. He also serves as Chairman of the Board of Ironbridge Mezzanine Fund, L.P. He is a graduate of Howard University and Howard University Law School and holds an M.A. in Religious Studies from the Hartford Seminary. Mr. Cloud has been a director since 1998. His current term as a director expires at the 2004 Annual Meeting.
Maurice J. DeWald
Director
Chair of Audit Committee
Member of Executive, Compensation and Corporate Governance Committees
Age: 63
Mr. DeWald is Chairman of Verity Financial Group, Inc., a private investment firm that he founded in 1992. From 1962 through 1991, Mr. DeWald was with KPMG LLP, where he served at various times as a Director and as the Managing Partner of the Chicago, Orange County and Los Angeles offices. Mr. DeWald also was a founder of the firm's High Technology Industry Group. Mr. DeWald is a director of Mizuho Corporate Bank of California, Advanced Materials Group, Inc., and ARV Assisted Living, Inc. He also sits on the Advisory Council of the University of Notre Dame Mendoza School of Business. Mr. DeWald is a past Chairman and Director of United Way of Greater Los Angeles. He is a graduate of the University of Notre Dame. Mr. DeWald has been a director since 1991. Mr. DeWald will retire from the Board effective upon the election of directors at this year's Annual Meeting.
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Van B. Honeycutt
Director
Member of Audit, Compensation and Corporate Governance Committees
Age: 58
Mr. Honeycutt is Chairman and Chief Executive Officer of Computer Sciences Corporation ("CSC"), a publicly-traded company that is a leading provider of consulting, system integration and outsourcing services to industries and governments worldwide. Mr. Honeycutt was appointed President of CSC in 1993 and Chief Executive Officer in 1995. Prior to his appointment as Chief Executive Officer of CSC, Mr. Honeycutt was Chief Operating Officer. Mr. Honeycutt sits on the board of directors of Beckman Coulter, Inc. Mr. Honeycutt is a graduate of Franklin University and Stanford University's Executive Graduate Program. Mr. Honeycutt has been a director since 1999. His current term as a director expires at this year's Annual Meeting. Mr. Honeycutt will stand for election at this year's Annual Meeting.
Edward A. Kangas
Director
Age: 58
Mr. Kangas served as chairman and chief executive officer of Deloitte Touche Tohmatsu International from 1989 to 2000, designing and leading the integration of a worldwide firm that today has over 100,000 people in 140 countries. From 1989 to 1994, he also served as the Managing Partner of Deloitte & Touche (USA). Mr. Kangas began his career as a staff accountant at Touche Ross in 1967, where he became a partner in 1975. He was elected managing partner and chief executive officer of Touche Ross in 1985, a position he held through 1989. He was one of the chief architects of the 1989 global combination of Deloitte Haskins & Sells and Touche Ross. Since his retirement from Deloitte in 2000, Mr. Kangas has served as a consultant to Deloitte and as chairman of the National Multiple Sclerosis Society. He is also a director of Hovnanian Enterprises Inc., a leading national homebuilder. In addition, he serves as a trustee of the Committee for Economic Development and is a member of Beta Gamma Sigma Directors' Table. Mr. Kangas is currently a member of the board of trustees of the University of Kansas Endowment Association and a member of the University of Kansas Business School of Advisors, and he has served as a member of the board of overseers of The Wharton School at the University of Pennsylvania. A certified public accountant, Mr. Kangas holds a bachelor's degree and a master's degree in business administration from the University of Kansas. Mr. Kangas has been a director since April 2003. His current term as a director expires at this year's Annual Meeting. Mr. Kangas will stand for election at this year's Annual Meeting.
J. Robert Kerrey
Director
Member of Ethics, Quality & Compliance and Nominating Committees
Age: 59
Mr. Kerrey has been President of New School University in New York City since January 2001. Prior to becoming President of New School University, Mr. Kerrey served as a U.S. Senator from the State of Nebraska from 1989 to 2000. Prior to his election to the U.S. Senate, Mr. Kerrey was Governor of the State of Nebraska from 1982 to 1987. Prior to his entering public service, Mr. Kerrey founded and operated a chain of restaurants and health clubs. Mr. Kerrey sits on the boards of directors of Jones Apparel Group, Inc. and the Concord Coalition. He also sits on the Board of Trustees of The Aerospace Corporation. Mr. Kerrey holds a degree in Pharmacy from the University of Nebraska. Mr. Kerrey has been a director since March 2001. His current term as a director expires at the 2004 Annual Meeting.
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Lester B. Korn
Director
Chair of Nominating Committee
Member of Executive Committee
Age: 67
Mr. Korn is Chairman and Chief Executive Officer of Korn Tuttle Capital Group, a diversified holding company based in Los Angeles, California. Mr. Korn served as the Chairman of Korn/Ferry International, an executive search firm that he founded, from 1969 until May 1991, when he retired and became Chairman Emeritus. From 1987 to 1988, he served as the United States Ambassador to the United Nations Economic and Social Council. During 1996, Mr. Korn was a member of the United States Presidential Delegation to observe the elections in Bosnia. He is a director of ConAm Properties, Ltd., the Performing Arts Center of Los Angeles County and the Council of American Ambassadors and a member of the Board of Trustees of the UCLA Foundation. He received a B.S. and an M.B.A. from UCLA. Mr. Korn has been a director since 1993. Mr. Korn will retire from the Board effective upon the election of directors at this year's Annual Meeting.
Floyd D. Loop, M.D.
Director
Member of Audit, Ethics, Quality & Compliance and Nominating Committees
Age: 67
Dr. Loop is the Chief Executive Officer and Chairman of The Board of Governors of The Cleveland Clinic Foundation. Before becoming Chief Executive Officer in 1989, Dr. Loop was an internationally recognized cardiac surgeon. A graduate of Purdue University, he received his medical degree from George Washington University. He practiced cardiothoracic surgery for 30 years and headed the Department of Thoracic and Cardiovascular Surgery at The Cleveland Clinic from 1975 to 1989. Dr. Loop has authored more than 350 clinical research papers, chaired the Residency Review Committee for Thoracic Surgery and was President of the American Association for Thoracic Surgery. In 1999, he was appointed to the Medicare Payment Advisory Commission. Dr. Loop has been a director since 1999. His current term as a director expires at the 2005 Annual Meeting.
Mónica C. Lozano
Director
Member of Corporate Governance and Ethics, Quality & Compliance Committees
Age: 47
Ms. Lozano is President and Chief Operating Officer of La Opinión, the largest Spanish-language newspaper in the United States, and Vice President of its parent company, Lozano Communications, Inc. Ms. Lozano is a director of The Walt Disney Company and Union Bank of California. She is a member of the Board of Directors of the California HealthCare Foundation, the National Council of La Raza and the Los Angeles County Museum of Art. In addition, Ms. Lozano is a member of the Board of Regents of the University of California and a Trustee of the University of Southern California. Ms. Lozano has been a director since July 24, 2002. Her current term as a director expires at the 2005 Annual Meeting.
Robert C. Nakasone
Director
Age: 55
Mr. Nakasone has been Chief Executive Officer of NAK Enterprises, L.L.C., an investment and consulting company, since January 2000. Prior to that, he served as Chief Executive Officer of Toys "R" Us, Inc., a retail store chain, from February 1998 to September 1999. Previously,
94
Mr. Nakasone served in other positions with Toys "R" Us, including President and Chief Operating Officer from January 1994 to February 1998 and Vice Chairman and President of Worldwide Toy Stores from January 1989 to January 1994. Mr. Nakasone also is a Director of eFunds Corporation and Staples, Inc. Mr. Nakasone has been a director since May 2003. His current term as a director expires at the 2004 Annual Meeting of Shareholders.
Information concerning executive officers of the Company who are not directors can be found on pages 16 to 17.
AUDIT COMMITTEE FINANCIAL EXPERTS
The board has determined that Maurice J. DeWald, who we expect will serve as chair of the audit committee until the Annual Meeting, is both independent and an audit committee financial expert, as defined by SEC rules. The board will select a replacement for Mr. DeWald as chair of the audit committee no later than its first meeting following the Annual Meeting, and the new chair will also meet these criteria.
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and holders of more than 10 percent of our common stock to file with the SEC reports regarding their ownership and changes in ownership of our securities. All of our directors, executive officers and 10 percent shareowners complied with all Section 16(a) filing requirements during the transition period of June 1, 2002 through December 31, 2002 (the "2002 Transition Period"). In making this statement, we have relied upon examination of the copies of Forms 3, 4 and 5 provided to us and the written representations of our directors, executive officers and 10 percent shareowners.
Information on the Company's code of ethics can be found under the heading Compliance and Ethics Programs on page 15.
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ITEM 11. EXECUTIVE COMPENSATION
As noted above, we changed our fiscal year end from May 31 to December 31, effective December 31, 2002. The following table summarizes the compensation paid by us for the 2002 Transition Period and the fiscal years ended May 31, 2002, 2001 and 2000 to (1) the person acting as Chief Executive Officer at December 31, 2002, (2) our four most highly compensated executive officers during the 2002 Transition Period, (3) our recently elected new President, and (4) two additional individuals who would have been included as two of the four most highly compensated individuals but for the fact that the two individuals were not serving as executive officers at December 31, 2002 (collectively, the "Named Executive Officers").
|
|
Annual Compensation
|
Long-Term Compensation
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Name and Principal Position
|
Year
|
Salary($)(1)
|
Bonus($)(1)
|
Other Annual
Compensation ($)(2) |
Securities
Underlying Options(#) |
All Other
Compensation ($)(3) |
||||||
Barbakow
CEO and Chairman |
2002 Transition
5/31/2002 5/31/2001 5/31/2000 |
727,592
1,204,275 1,158,000 1,124,000 |
-0-
4,178,834 3,359,000 1,802,115 |
(4) |
67,687
146,959 70,876 65,596 |
(5)
(5) (5) (5) |
-0-
1,500,000 1,500,000 -0- |
153,698
102,612 98,112 64,471 |
||||
Schochet(6) Vice Chairman |
|
2002 Transition 5/31/2002 5/31/2001 5/31/2000 |
|
328,750 544,000 523,000 508,000 |
|
-0- 1,203,280 917,551 552,740 |
|
-0- -0- -0- -0- |
|
275,000 195,000 135,000 180,000 |
|
50,070 48,034 39,208 30,974 |
Sulzbach Chief Corporate Officer & General Counsel |
|
2002 Transition 5/31/2002 5/31/2001 5/31/2000 |
|
270,938 426,500 410,000 380,000 |
|
-0- 951,700 791,404 432,325 |
(7) (7) |
-0- -0- -0- -0- |
|
275,000 187,500 172,500 97,500 |
|
38,693 37,827 29,907 8,511 |
Farber(8) Chief Financial Officer |
|
2002 Transition 5/31/2002 5/31/2001 5/31/2000 |
|
242,801 363,991 350,000 291,667 |
|
-0- 665,280 599,800 291,495 |
|
51,595 78,399 138,128 184,751 |
(9) (9) (9) (9) |
275,000 123,750 112,500 75,000 |
|
29,960 31,762 7,410 7,142 |
Mathiasen EVP & Chief Accounting Officer |
|
2002 Transition 5/31/2002 5/31/2001 5/31/2000 |
|
258,833 428,500 412,000 400,000 |
|
-0- 956,160 794,913 435,921 |
(10) (10) |
-0- 51,849 54,508 59,834 |
(11) (11) (11) |
150,000 165,000 150,000 210,000 |
|
39,066 38,447 30,841 24,612 |
Fetter(12) President |
|
2002 Transition |
|
332,500 |
(13) |
-0- |
|
-0- |
|
450,000 |
|
-0- |
Dennis(14) Former Chief Corporate Officer & CFO |
|
2002 Transition 5/31/2002 5/31/2001 5/31/2000(15) |
|
447,500 725,000 641,667 150,000 |
|
-0- 2,182,250 1,611,090 245,000 |
|
73,435 96,690 91,847 -0- |
(16) (16) (16) |
-0- 225,000 225,000 675,000 |
|
83,023 74,247 30,052 -0- |
Mackey(17) Former Chief Operating Officer |
|
2002 Transition 5/31/2002 5/31/2001 5/31/2000 |
|
447,500 725,000 650,000 633,000 |
|
-0- 2,182,250 1,611,090 879,531 |
|
113,641 219,114 325,553 315,581 |
(18) (18) (18) (18) |
-0- 675,000 225,000 225,000 |
|
83,043 74,262 52,434 11,543 |
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|
Barbakow
|
Schochet
|
Sulzbach
|
Farber
|
Mathiasen
|
Fetter
|
Dennis
|
Mackey
|
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Tenet Retirement Savings Plan | -0- | -0- | 517 | 821 | -0- | -0- | -0- | -0- | ||||||||
Deferred Compensation Plan | 146,893 | 45,825 | 34,516 | 26,134 | 34,911 | -0- | 78,708 | 78,708 | ||||||||
Life and Disability Insurance Under SERP | 6,805 | 4,245 | 3,660 | 3,005 | 4,155 | -0- | 4,315 | 4,335 |
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OPTION GRANTS DURING THE 2002 TRANSITION PERIOD
The following table sets forth information concerning options granted to the Named Executive Officers during the 2002 Transition Period.
|
Individual Grants
|
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
Name
|
Number of
Securities Underlying Options Granted(1) |
% of Total
Options Granted to Employees in the 2002 Transition Period(2) |
Exercise Price
($/Share)(3) |
Expiration Date(4)
|
Grant Date
Present Value($)(5) |
|||||
Barbakow | -0- | -0- | -0- | -0- | -0- | |||||
Schochet | 275,000 | 2.4 | 17.56 | 12/10/2012 | 3,066,250 | |||||
Sulzbach | 275,000 | 2.4 | 17.56 | 12/10/2012 | 3,066,250 | |||||
Farber | 275,000 | 2.4 | 17.56 | 12/10/2012 | 3,066,250 | |||||
Mathiasen | 150,000 | 1.3 | 17.56 | 12/10/2012 | 1,672,500 | |||||
Fetter(6) | 450,000 | 3.8 | 27.95 | 11/07/2012 | 6,637,500 | |||||
Dennis | -0- | -0- | -0- | -0- | -0- | |||||
Mackey | -0- | -0- | -0- | -0- | -0- |
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consecutive trading days. All previously unvested options will vest on the fourth anniversary of the grant date. The options granted to Mr. Fetter vest ratably over a three-year period.
The valuation data and assumptions used to calculate the values for the options granted to Mr. Fetter were as follows:
The Expected Volatility is derived using daily data drawn from the five years preceding the Date of Grant. The Risk Free Interest Rate is the approximate yield on seven- and ten-year United States Treasury Bonds on the date of grant. The Expected Life is an estimate of the number of years the option will be held before it is exercised. The valuation model was not adjusted for nontransferability, risk of forfeiture or the vesting restrictions of the options, all of which would reduce the value if factored into the calculation.
We do not believe that the Black-Scholes model or any other valuation model is a reliable method of computing the present value of the options granted to the Named Executive Officers. The value ultimately realized, if any, will depend on the amount by which the market price of our common stock on the date of exercise exceeds the exercise price.
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OPTION EXERCISES AND YEAR-END VALUE TABLE
DECEMBER 31, 2002
The following table sets forth information concerning options exercised by each of the Named Executive Officers during the 2002 Transition Period and unexercised options held by each of them as of December 31, 2002.
|
|
|
Number of Unexercised
Options at 12/31/2002(#) |
Value of Unexercised
In-the-Money Options at 12/31/2002($)(1) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Name
|
Shares Acquired
on Exercise(#) |
Value
Realized($) |
||||||||||
Exercisable
|
Unexercisable
|
Exercisable
|
Unexercisable
|
|||||||||
Barbakow | -0- | -0- | 5,497,000 | 2,000,000 | 9,311,505 | -0- | ||||||
Schochet | -0- | -0- | 590,000 | 405,000 | 1,414,125 | -0- | ||||||
Sulzbach | -0- | -0- | 312,501 | 457,500 | 489,130 | -0- | ||||||
Farber | 81,251 | 2,957,755 | 116,250 | 495,000 | -0- | 375,417 | ||||||
Mathiasen | -0- | -0- | 634,700 | 310,000 | 829,677 | -0- | ||||||
Fetter(2) | 50,000 | 1,943,750 | 100,000 | 450,000 | 131,875 | -0- | ||||||
Dennis | -0- | -0- | 675,000 | 450,000 | 1,773,765 | 886,882 | ||||||
Mackey | 277,500 | 9,920,625 | 855,000 | 525,000 | 395,625 | -0- |
Stock Ownership and Stock Option Exercise Retention Guidelines
In March 2003, the Board adopted stock ownership and stock option exercise retention guidelines for our directors and senior officers to help demonstrate the alignment of the personal interests of directors and senior officers with those of our shareholders. The stock ownership guidelines require each senior officer to own shares of our stock with a value equal to the following multiples of his or her salary and require each director to own shares of our stock with a value equal to three times the annual Board retainer. The ownership guidelines must be met by the later of March 12, 2008 or five years from the date on which an individual becomes a senior officer or a director joins the Board, as the case may be.
The stock retention guidelines require all officers with the title of senior vice president or above to hold for at least one year the "net shares" received upon the exercise of stock options. For this purpose, "net shares" means the number of shares obtained by exercising the option, less the number of shares sold to pay the exercise price of the option and any taxes or transaction costs due upon the exercise.
Supplemental Executive Retirement Plan ("SERP")
The SERP provides our Named Executive Officers with supplemental retirement benefits in the form of retirement payments for life. At retirement, the monthly benefit paid to a Named Executive
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Officer will be a product of four factors: (i) the officer's highest average monthly earnings for any consecutive 60-month period during the 10 years preceding retirement; (ii) the number of years of service with a maximum of 20 years; (iii) a vesting factor; and (iv) a percentage factor, not to exceed 2.7 percent, to reduce this benefit to reflect the projected benefit from our other retirement benefits available to the officer and from Social Security. The monthly benefit is reduced in the event of early retirement or termination of employment. Unreduced retirement benefits are available at age 62.
In the event of the death of an officer, before or after retirement, one-half of the benefit earned as of the date of death will be paid to the surviving spouse for life (or to the participant's children until the age of 21 if the participant dies without a spouse). Lump sum distributions are permitted in certain circumstances and subject to certain limitations.
For participants who were not actively at work as regular, full-time employees on or after February 1, 1997, "earnings" is defined in the SERP as the participant's base salary excluding bonuses and other cash and noncash compensation. In fiscal year 1997, the SERP was amended to provide that for all participants who are actively at work as regular, full-time employees on or after February 1, 1997, "Earnings" means the participant's base salary and annual cash bonus, but not automobile and other allowances and other cash and noncash compensation.
The SERP also was amended in fiscal 1997 to provide that for all participants who are actively at work as regular, full-time employees on or after February 1, 1997: (i) the reduction for early retirement (retirement before age 65) for benefits received prior to age 62 was reduced from 5.04 percent to 3.0 percent per year and the maximum of such yearly reductions was reduced from 35.28 percent to 21 percent; (ii) the offset factor for the projected benefits from other Company benefit plans will be applied only to the base salary component of Earnings; and (iii) the annual eight percent cap on increases in Earnings that had been in effect was eliminated.
In the event of a change of control, the Named Executive Officers will be deemed fully vested in the SERP for all years of service to the Company without regard to actual years of service and will be entitled to normal retirement benefits without reduction on or after age 60. In addition, if a participant is a regular, full-time employee actively at work on or after April 1, 1994, with the corporate office or a division or a subsidiary that has not been declared to be a discontinued operation, and who has not yet begun to receive benefit payments under the SERP and voluntarily terminates employment following the occurrence of certain events discussed below, or is terminated without cause, within two years of a change of control, then such participant will be (i) deemed fully vested in the SERP without regard to actual years of service, (ii) credited with three additional years of service, not to exceed a total of 20 years credited service, and (iii) entitled to the normal retirement benefits without reduction on or after age 60 or benefits at age 50 with reduction for each year of receipt of benefit prior to age 60. In addition, the "earnings" used in calculating the benefit will include the participant's base salary and the annual cash bonus paid to the participant, but exclude other cash and noncash compensation. Furthermore, the provision in the SERP prohibiting benefits from being paid to a participant if the participant becomes an employee or consultant of a competitor of the Company within three years of leaving the Company would be waived. The occurrence of any of the following events within two years of a change of control causes the additional payments discussed above to become payable if a participant voluntarily terminates his or her employment: (1) a material downward change in the participant's position, (2)(A) a reduction in the participant's annual base salary, (B) a material reduction in the participant's annual incentive plan award other than for financial performance as it broadly applies to all similarly situated executives in the same plan, or (C) a material reduction in the participant's retirement or supplemental retirement benefits that does not broadly apply to all executives in the same plan, or (3) the transfer of the participant's office to a location that is more than 50 miles from his or her current principal office. Finally, the SERP provides that in no event shall (x) the total present value of all payments under the SERP that are payable to a participant and are contingent upon a change of control in accordance with the rules set forth in Section 280G of the IRS
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Code when added to (y) the present value of all other payments (other than payments that are made pursuant to the SERP) that are payable to a participant and are contingent upon a change of control, exceed an amount equal to 299 percent of the participant's "base amount" as that term is defined in Section 280G of the IRS Code.
A change of control is deemed to have occurred if (i) any entity becomes the beneficial owner, directly or indirectly, of 20 percent or more of our common stock, or (ii) individuals who, as of April 1, 1994, constitute the Board (the "Incumbent Board") cease for any reason to constitute the majority of the Board; provided that individuals nominated by a majority of the directors then constituting the Incumbent Board and elected to the Board after April 1, 1994, will be deemed to be included in the Incumbent Board and individuals who initially are elected to the Board as a result of an actual or threatened election contest or proxy solicitation (other than on behalf of the Incumbent Board) will be deemed not to be included in the Incumbent Board.
We established a trust for the purpose of securing our obligation to make distributions under the SERP. The trust is a "rabbi trust" and is funded with 3,750,000 shares of our common stock. The trustee will make required payments to participants or their beneficiaries in the event that we fail to make such payments for any reason other than our insolvency. In the event of our insolvency, the assets of the SERP Trust will be subject to the claims of our general creditors. In the event of a change of control, we are required to fund the SERP Trust in an amount that is sufficient, together with all assets then held by the SERP Trust, to pay each participant or beneficiary, on a pretax basis, the benefits to which the participant or the beneficiary would be entitled as of the date of the change of control.
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The table below presents the estimated maximum annual retirement benefits payable to the Named Executive Officers under the SERP.
Pension Plan Table
(Supplemental Executive Retirement Plan)
(1)
|
Estimated Annual Retirement Benefit
For Years of Service Indicated($) |
|||||||
---|---|---|---|---|---|---|---|---|
Earnings($)(2)
|
||||||||
5 Years
|
10 Years
|
15 Years
|
20 Years(3)
|
|||||
700,000 | 94,500 | 189,000 | 283,500 | 378,000 | ||||
900,000 | 121,500 | 243,000 | 364,500 | 486,000 | ||||
1,100,000 | 148,500 | 297,000 | 445,500 | 594,000 | ||||
1,300,000 | 175,500 | 351,000 | 526,500 | 702,000 | ||||
1,500,000 | 202,500 | 405,000 | 607,500 | 810,000 | ||||
1,700,000 | 229,500 | 459,000 | 688,500 | 918,000 | ||||
1,900,000 | 256,500 | 513,000 | 769,500 | 1,026,000 | ||||
2,100,000 | 283,500 | 567,000 | 850,500 | 1,134,000 | ||||
2,300,000 | 310,500 | 621,000 | 931,500 | 1,242,000 | ||||
2,500,000 | 337,500 | 675,000 | 1,012,500 | 1,350,000 | ||||
2,700,000 | 364,500 | 729,000 | 1,093,500 | 1,458,000 | ||||
2,900,000 | 391,500 | 783,000 | 1,174,500 | 1,566,000 | ||||
3,100,000 | 418,500 | 837,000 | 1,255,500 | 1,674,000 | ||||
3,300,000 | 445,500 | 891,000 | 1,336,500 | 1,782,000 | ||||
3,500,000 | 472,500 | 945,000 | 1,417,500 | 1,890,000 | ||||
3,700,000 | 499,500 | 999,000 | 1,498,500 | 1,998,000 | ||||
3,900,000 | 526,500 | 1,053,000 | 1,579,500 | 2,106,000 | ||||
4,100,000 | 553,500 | 1,107,000 | 1,660,500 | 2,214,000 | ||||
4,300,000 | 580,500 | 1,161,000 | 1,741,500 | 2,322,000 | ||||
4,500,000 | 607,500 | 1,215,000 | 1,822,500 | 2,430,000 | ||||
4,700,000 | 634,500 | 1,269,000 | 1,903,500 | 2,538,000 | ||||
4,900,000 | 661,500 | 1,323,000 | 1,984,500 | 2,646,000 | ||||
5,100,000 | 688,500 | 1,377,000 | 2,065,500 | 2,754,000 | ||||
5,300,000 | 715,500 | 1,431,000 | 2,146,500 | 2,862,000 | ||||
5,500,000 | 742,500 | 1,485,000 | 2,227,500 | 2,970,000 | ||||
5,700,000 | 769,500 | 1,539,000 | 2,308,500 | 3,078,000 | ||||
5,900,000 | 795,500 | 1,593,000 | 2,389,500 | 3,186,000 | ||||
6,100,000 | 823,500 | 1,647,000 | 2,470,500 | 3,294,000 | ||||
6,300,000 | 850,500 | 1,701,000 | 2,551,500 | 3,402,000 | ||||
6,500,000 | 877,500 | 1,755,000 | 2,632,500 | 3,510,000 |
As of December 31, 2002, the estimated credited years of service for the Named Executive Officers were as follows: Mr. Barbakow, 13 years; Mr. Schochet, 20 years; Ms. Sulzbach, 19 years; Mr. Farber, 3 years; Mr. Mathiasen, 17 years; Mr. Fetter, 7 years; Mr. Dennis, 4 years; and Mr. Mackey, 17 years. In fiscal years 1999 through 2001, Mr. Barbakow's credited years of service
103
under the SERP were enhanced such that he received credit for two years of service for each year he served as Chief Executive Officer, totaling six additional years of service. In an April 2003 letter, Mr. Barbakow acknowledged that he would not receive an award with respect to the 2002 Transition period under the Company's 2001 Annual Incentive Plan and waived the previously approved enhancements to his years of service under the SERP for any period after May 31, 2002. At the time Mr. Barbakow waived his right to these previously approved enhancements, it also was determined that the positions of Chairman and Chief Executive Officer would be separated and he would not stand for re-election to the Board. In connection with these actions, the Compensation Committee added the Chief Executive Officer position to the TESPP, with Mr. Barbakow being eligible to receive the same level of severance benefits as the other Named Executive Officers.
We purchased insurance policies on the lives of certain current and past participants in the SERP to reimburse us, based on actuarial calculations, for amounts to be paid to the participants under the SERP over the course of the participants' retirement (assuming that our original estimates as to interest rates, mortality rates, tax rates and certain other factors are accurate). SERP participants also are provided a life insurance benefit for the designee of each participant and a disability insurance policy for the benefit of each participant. Both of these benefits are fully insured.
Director Compensation
During the 2002 Transition Period, our nonemployee directors each received a prorated portion of their $65,000 annual retainer. The nonemployee directors also received $1,500 per Board meeting and $1,200 per committee meeting attended. Each nonemployee director serving as the chair of a committee received an annual fee of $12,000. All directors are reimbursed for travel expenses and other out-of-pocket costs incurred while attending meetings.
2001 Stock Incentive Plan
We believe that our 2001 Stock Incentive Plan (the "2001 SIP"), which was approved by our shareholders at the 2001 Annual Meeting, promotes our interests and those of our shareholders by strengthening our ability to attract, motivate and retain directors of training, experience and ability, encouraging the highest level of director performance, and providing directors with a proprietary interest in our financial success and growth.
The 2001 SIP is administered by the Compensation Committee of the Board. All of our nonemployee directors are eligible to participate in the 2001 SIP. Under the terms of the 2001 SIP, the Board determines the number of options to be granted to each nonemployee director. The Board currently grants options to nonemployee directors pursuant to a formula under which each nonemployee director receives an automatic grant, on the last Thursday of October of each year, of options to purchase the greater of (x) 18,000 shares of common stock and (y) the number of shares of common stock determined by dividing (i) the product of four times the then-existing annual retainer fee, by (ii) the closing price of the common stock on the NYSE on the date of grant. On October 31, 2002, each nonemployee director was granted an option to purchase 18,000 shares of common stock. Each such option, which vested immediately upon grant and has a 10-year term, permits the holder to purchase shares at their fair market value on the date of grant, which was $28.75 on October 31, 2002. In addition, on the fourth Thursday of the month in which new nonemployee directors are elected to the Board they are granted options to acquire two times the greater of (x) 18,000 shares of common stock and (y) the number of shares of common stock determined by dividing (i) the product of four times the then-existing annual retainer fee, by (ii) the closing price of the common stock on the NYSE on the date of grant. Unless otherwise determined by the Board, each such option will be fully vested immediately upon its grant. On April 24, 2003, director Kangas received options to purchase 36,000 shares of our common stock, and on May 22, 2003, director Nakasone will receive options, according to the immediately foregoing formula.
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Under the terms of the 2001 SIP, a nonemployee director may make an election to convert all or a portion of her or his annual retainer into options, provided that at the time the nonemployee director makes such an election, she or he meets the Board's stock ownership guidelines. (See "Stock Ownership Guidelines" below.) A nonemployee director who makes such an election will receive a number of options equal to (x) four times the amount of the annual retainer to be converted into options divided by (y) the fair market value of our common stock on the day that the nonemployee director otherwise would have received payment of the annual retainer. None of our nonemployee directors has made such an election.
If a nonemployee director is removed from office by our shareholders, is not nominated for reelection by the Board or is nominated by the Board but is not reelected by our shareholders, then the options granted under the 2001 SIP will expire one year after the date of removal or failure to be elected unless during such one-year period the nonemployee director dies or becomes permanently and totally disabled, in which case the option will expire one year after the date of death or permanent and total disability. If the nonemployee director retires, the options granted under the 2001 SIP will continue to be exercisable and expire in accordance with their terms. If the nonemployee director dies or becomes permanently and totally disabled while serving as a nonemployee director, the options granted under the 2001 SIP will expire five years after the date of death or permanent and total disability unless by their terms they expire sooner. The maximum term of an option is 10 years from the date of grant.
In the event of any future change in our capitalization, such as a stock dividend or stock split, the Compensation Committee may make an appropriate and proportionate adjustment to the numbers of shares subject to then-outstanding awards, as well as to the maximum number of shares available for future awards.
The 2001 SIP also provides for all outstanding awards that are not vested fully to vest fully without restrictions in the event of certain conditions, including our dissolution or liquidation, a reorganization, merger or consolidation that results in our not being the surviving corporation, or upon the sale of all or substantially all of our assets, unless provisions are made in connection with such transaction for the continuance of the 2001 SIP with adjustments appropriate to the circumstances.
In addition, upon the occurrence of a change of control, any options held by nonemployee directors that have not already vested will be fully vested and any restrictions upon exercise will immediately cease. For purposes of the 2001 SIP, a change of control will have occurred if: (i) any entity is or becomes the beneficial owner directly or indirectly of 20 percent or more of our stock, or (ii) any entity makes a filing under Section 13(d) or 14(d) of the Securities Exchange Act of 1934 with respect to us which discloses an intent to acquire control of us in a transaction or series of transactions not approved by the Board.
Stock Ownership and Stock Option Exercise Retention Guidelines
In March 2003, the Board adopted stock ownership guidelines that require each director to own shares of our stock with a value equal to three times the annual retainer by the later of March 12, 2008 and five years after the date on which the director joins the Board. In March 2003, the Board adopted stock option exercise retention guidelines that require directors to hold for at least one year following an option exercise the "net shares" received upon the exercise of stock options. For this purpose, "net shares" means the number of shares obtained by exercising the option, less the number of shares sold to pay the exercise price of the option and any taxes and transaction costs due upon the exercise.
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Deferred Compensation Plan
Under our 2001 Deferred Compensation Plan ("DCP"), directors, officers and other employees may defer all or a portion of their compensation. Individuals who elect to defer all or a portion of their compensation may request that the following types of investment crediting rates be applied to their deferred compensation: an annual rate of interest equal to one percent below the prime rate of interest; a rate of return based on one or more benchmark mutual funds; and/or a rate of return based on the performance of the price of our common stock, designated as stock units that are payable in shares of our common stock. Deferred compensation invested in stock units may not be transferred out of stock units. Compensation deferred by directors, officers and other employees is distributed when service or employment terminates and is paid either in a lump sum or in equal monthly installments.
In order to facilitate ownership of our stock by our directors, we make a supplementary contribution to the deferred compensation accounts of directors who request that their deferred compensation be invested in stock units. On each date on which a director's deferred compensation is invested in stock units, we make a contribution, which also is invested in stock units, in an amount equal to 15 percent of the amount of the director's deferral. During the 2002 Transition Period, directors Biondi, Bratter, Cloud, Honeycutt, Kerrey, Loop and Lozano elected to defer a portion of their compensation and requested that all or a portion of their deferred compensation be invested in stock units. The dollar value of our supplementary contribution to each of their stock unit accounts during the 2002 Transition Period was: Fr. Biondi, $8,339; Ms. Bratter, $816; Mr. Cloud, $1,455; Mr. Honeycutt, $3,810; Mr. Kerrey, $6,720; Dr. Loop, $7,080; and Ms. Lozano $4,360. We do not make such supplementary contributions on behalf of officers or other employees.
We established a trust for the purpose of securing our obligations to make distributions under the DCP. The trust is a "rabbi trust" and is funded with 3,375,000 shares of our common stock. The trustee will make required payments to participants in the event that we fail to make such payments for any reason other than our insolvency. In the event of our insolvency, the assets of the trust will be subject to the claims of our general creditors. In the event of a change of control, we are required to fund the trust in an amount that is sufficient, together with all assets then held by the trust, to pay each participant the benefits to which the participant would be entitled as of the date of the change of control.
For purposes of the DCP, a change of control will have occurred if: (i) any entity is or becomes the beneficial owner directly or indirectly of 20 percent or more of our stock, or (ii) individuals who, as of August 1, 2000, constitute the Board (the "Incumbent Board") cease for any reason to constitute the majority of the Board; provided that individuals nominated by a majority of the directors then constituting the Incumbent Board and elected to the Board after August 1, 2000, will be deemed to be included in the Incumbent Board. Individuals who initially are elected to the Board as a result of an actual or threatened election contest or proxy solicitation (other than on behalf of the Incumbent Board) will be deemed not to be included in the Incumbent Board.
Directors Retirement Plan
Our Directors Retirement Plan (the "DRP") was discontinued as to all directors joining the Board after October 6, 1999. Thus, nonemployee directors Biondi, Bratter, Cloud, DeWald, Korn and Loop participate in the DRP and nonemployee directors Honeycutt, Kerrey, Lozano, Kangas and Nakasone are not eligible to participate because they joined the Board after October 6, 1999. Since Mr. Barbakow is an employee director he is not eligible to participate.
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Under the DRP, we are obligated to pay to a director an annual retirement benefit for a period of 10 years following retirement. The annual retirement benefit is based on years of service as a director and is equal to the lower of (x) the amount of the annual Board retainer (currently $65,000) at the time an eligible director retires and (y) $25,000, increased by a compounded rate of six percent per year from 1985 to the directors' termination of service. The retirement benefits are paid monthly. Each of nonemployee directors DeWald, Bratter and Korn, who have announced their intention to retire effective as of the conclusion of this year's Annual Meeting, will receive $65,000 annually under the DRP.
A director's interest in the retirement benefit becomes partially vested after five years of service as a director and fully vested after 10 years of service as a director. A director's interest also will become fully vested if the director stands for election and is not elected by our shareholders. Participants may elect to receive the retirement benefits in the form of a joint and survivor annuity, and the participant and her/his surviving spouse may designate a beneficiary as the recipient of the joint and survivor annuity in the event both should die before all payments have been made. The present value of the joint and survivor annuity will be actuarially equivalent to the present value of the payments that would be made over the 10-year period referred to above.
Retirement benefits under the DRP, with certain adjustments, are paid to directors whose services are terminated for any reason other than death prior to normal retirement, so long as the director has completed at least five years of service. In the event of the death of any director, before or after retirement, the retirement benefit will be paid to her/his surviving spouse, eligible children under the age of 21 or the designated beneficiary discussed above. In the event of a change of control followed by a director's termination of service or a director's failure to be reelected upon the expiration of her/his term in office, directors will be deemed fully vested in the DRP without regard to years of service and will be entitled to receive full retirement benefits.
For purposes of the DRP, a change of control will have occurred if: (i) any entity is or becomes the beneficial owner directly or indirectly of 30 percent or more of our stock, or (ii) during any two-year period after January 1, 1985, individuals who at the beginning of such period constitute the Board cease for any reason other than death or disability to constitute at least a majority of the Board.
Directors Life Insurance Program
Our Directors Life Insurance Program (the "Program") was discontinued as to all directors joining the Board after October 6, 1999. As of December 31, 2002, nonemployee directors Biondi, Bratter, Cloud, DeWald, Korn and Loop had elected to participate in the Program and life insurance policies had been purchased by policy owners on each of their lives and on the life of another person designated by each. Nonemployee directors Honeycutt, Kerrey, Lozano, Kangas and Nakasone are not eligible to participate in the Program because they joined the Board after October 6, 1999. Since Mr. Barbakow is an employee director he is not eligible to participate.
Under the Program, we may enter into a split dollar life insurance agreement with a policy owner designated by a director providing for the purchase of a joint life, second-to-die, life insurance policy insuring the lives of the director and another person designated by the director. The amount of insurance purchased will be sufficient to provide a death benefit of at least $1,000,000 to the beneficiaries designated by the policy owner, and to allow us to recover the premiums we have paid towards keeping the policies in force until the deaths of both the director and the designated other person.
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Each year the policy owner pays to the insurer the cost of the term portion of the policy and we pay a taxable bonus to each director in the amount that approximates the cost of a one-year $1,000,000 non-renewable term life insurance policy. A participating director may choose to reimburse the policy owner for the amount paid for the term portion of the policy. We pay the full cost of the policy, less the amount paid by the policy owner each year for the term portion of the policy, in annual installments over approximately seven years.
Employment Agreements
Mr. Barbakow
Mr. Barbakow was elected President and Chief Executive Officer of the Company on June 1, 1993. On July 28, 1993, Mr. Barbakow was elected Chairman of the Board and relinquished the position of President. Mr. Barbakow does not have a formal employment agreement, but the terms of his initial employment are set forth in letters dated May 26 and June 1, 1993, and a memorandum dated June 14, 1993 (the "1993 Correspondence"). The 1993 Correspondence set an initial base salary and provided that Mr. Barbakow would be entitled to participate in our incentive, pension and other benefit plans. In addition, he was guaranteed the same type of fringe benefits and perquisites that are provided to other executive officers. A special-purpose committee of the Board retained a nationally recognized compensation consulting firm to assist it in negotiating the terms of Mr. Barbakow's initial employment and received an opinion from that firm stating that the terms of his employment were fair and reasonable.
We entered into a Deferred Compensation Agreement with Mr. Barbakow, dated as of May 31, 1997, pursuant to which we agreed that the portion of Mr. Barbakow's salary in any year that would not be deductible by us under Section 162(m) of the Code will be deferred. Amounts deferred are unsecured and bear interest at one percent less than the prime rate.
In connection with the stock option grants made to him on May 29 and June 1, 2001, Mr. Barbakow sent us a Memorandum of Understanding, dated June 1, 2001, in which he confirmed his intention to remain in his current position for a period of at least three years.
In an April 2003 letter, Mr. Barbakow acknowledged that he would not receive an award with respect to the 2002 Transition period under the Company's 2001 Annual Incentive Plan and waived the previously approved enhancements to his years of service under the SERP for any period after May 31, 2002. At the time Mr. Barbakow waived his right to these previously approved enhancements, it also was determined that the positions of Chairman and Chief Executive Officer would be separated and he would not stand for re-election to the Board. In connection with these actions, the Compensation Committee added the Chief Executive Officer position to the TESPP, with Mr. Barbakow being eligible to receive the same level of severance benefits as the other Named Executive Officers.
Mr. Fetter
Mr. Fetter does not have a formal employment agreement, but the terms of his employment as our President are set forth in a letter dated November 7, 2002. The letter set an initial base salary, set his target award percentage for purposes of annual bonus awards, provided for an initial grant of 450,000 options to acquire our common stock and provided that Mr. Fetter would be entitled to participate in our retirement, health and welfare and other benefit plans.
Mr. Dennis
Mr. Dennis was Vice Chairman, Chief Corporate Officer and Chief Financial Officer in the Office of the President until November 7, 2002, when he resigned from his position. Under a letter of employment dated February 18, 2000, we agreed to provide Mr. Dennis with two years' salary and
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benefits continuation (excluding bonus). The salary and benefits continuation commenced upon Mr. Dennis' resignation. We also agreed to provide certain relocation benefits that are described below.
Mr. Mackey
Mr. Mackey was Chief Operating Officer in the Office of the President until November 7, 2002, when he retired from his position. Effective November 8, 2002, we entered into a Consulting and Non-Compete Agreement with Mr. Mackey. Under the agreement, which has a two-year term, we agreed to (1) pay him a consulting fee of $65,000 for three months, (2) reimburse him for any and all reasonable expenses incurred by him at our request, (3) treat him as a retiree for purposes of his outstanding stock options, (4) provide him with health and welfare benefits, (5) credit him with two additional years of service under the SERP for the term of the agreement and (6) provide him with office support as needed to perform consulting assignments. We also agreed to provide certain relocation benefits that are described below. In return, Mr. Mackey agreed to provide consulting services to us and not to compete with us (and our subsidiaries) during the course of his engagement.
Executive Severance Protection Plan
In January 2003 the Board adopted the Tenet Executive Severance Protection Plan ("TESPP"), which is a comprehensive severance policy for officers at or above the senior vice president level that replaced all then existing severance agreements and arrangements that these individuals may have had. Each of the Named Executive Officers participates in the TESPP and is entitled to certain severance payments and other benefits if his or her employment is terminated for certain reasons ("qualifying terminations") or if there is a change of control of the Company. The qualifying terminations covered by the plan include (1) involuntary termination without "cause" and (2) resignation as a result of: (a) a material reduction in job duties; (b) a 10 percent or more reduction in combined base salary and target bonus; (c) a material reduction in retirement or supplemental retirement benefits; or (d) an involuntary relocation more than 50 miles from the executive's current workplace. The term "cause" includes dishonesty, fraud, willful misconduct, breach of fiduciary duty, conflict of interest, commission of a felony, a material failure or refusal to perform one's job duties or other wrongful conduct of a similar nature and degree.
Upon a qualifying termination, a Named Executive Officer is entitled to receive, for a three-year period following termination, annual severance payments equal to her or his annual salary and target bonus as of the date of the termination. The three-year period is referred to as the "severance period." During the severance period, the Named Executive Officer will continue to receive health and welfare benefits, a car allowance, age and service credit for purposes of our SERP, and certain other benefits and perquisites (excluding club memberships and personal use of our corporate aircraft). Also, any options will immediately vest and be exercisable until the end of the severance period, unless by their terms they expire sooner. A Named Executive Officer who attains retirement age during the severance period will be treated as a retiree and any vested options held by the individual will continue to be exercisable for the term of the options.
In the event of a change of control, a Named Executive Officer who did not have a qualifying termination will be entitled to the immediate acceleration and vesting of all her or his unvested options if such options are not assumed and/or substituted with equivalent options in connection with the change of control. For purposes of the TESPP, a "change of control" will have occurred if: (i) any entity is or becomes the beneficial owner directly or indirectly of 20 percent or more of our stock, or (ii) individuals who, as of April 1, 1994, constitute the Board (the "Incumbent Board") cease for any reason to constitute the majority of the Board; provided that individuals nominated by a majority of the directors then constituting the Incumbent Board and elected to the Board after April 1, 1994, will be deemed to be included in the Incumbent Board. Individuals who initially are elected to the Board as a result of an actual or threatened election contest or proxy solicitation (other than on behalf of the
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Incumbent Board) will be deemed not to be included in the Incumbent Board. Pursuant to the requirements of the TESPP, each Named Executive Officer who is the subject of a qualifying termination is required to execute a severance agreement at the time of termination in a form acceptable to us. The severance agreement will obligate the executive to deliver a release of liability to us and agree to certain covenants, including covenants regarding non-competition, cooperation and confidentiality of company information, as a condition to receiving benefits under the TESPP.
Ms. Sulzbach and Messrs. Farber and Mathiasen are also entitled to the following relocation benefits under the TESPP following a qualifying termination: a "basic round trip" benefit that consists of (1) one house-hunting trip and related expenses to search for a home in the general area from which previously relocated, (2) home sale commissions and closing costs, (3) household goods moving expense, and (4) relevant tax gross up for reimbursed relocation costs.
Relocation Agreements
We entered into relocation agreements with Ms. Sulzbach and each of Messrs. Farber, Mathiasen and Mackey that entitled each of them to a housing differential, for a period not to exceed seven years, based on actual additional housing expenses incurred by them when they moved to Santa Barbara. The differential is paid at 100 percent for the first four years, 75 percent in year five, 50 percent in year six and 25 percent in year seven. Ms. Sulzbach's housing differential expired in December 2002. Currently, the amount of Mr. Farber's annual housing differential is $60,000 and will expire on May 23, 2007, and the amount of Mr. Mathiasen's annual housing differential is $8,925 and will expire on September 12, 2003. As discussed further below, Mr. Mackey's housing differential is continued under his Consulting and Non-Compete Agreement and is $111,670 for the period from January 1, 2003 to December 31, 2003 and $62,979 from the period from January 1, 2004, to November 7, 2004.
Mr. Dennis
Under our relocation agreement with Mr. Dennis, Mr. Dennis' relocation agreement entitled him to relocation benefits if he terminated his employment. As a result of Mr. Dennis' resignation, we will pay the costs of his relocation from Santa Barbara to Los Angeles, guarantee the resale of his Santa Barbara home at cost plus documented capital improvements, and reimburse him for any loss-on-sale and furnishings acquired for his Santa Barbara home.
Mr. Mackey
Under the Consulting and Non-Compete Agreement described above, we agreed to continue Mr. Mackey's housing differential until November 8, 2004, provided he remains in his Santa Barbara home. If Mr. Mackey relocates from Santa Barbara prior to November 8, 2004, we will pay the costs of his relocation to a destination as far away as San Diego, and will guarantee the resale of his Santa Barbara home at cost plus any documented capital improvements so long as the original purchase price of his Santa Barbara home was within five percent of the appraised value of the property at the time of purchase.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF MANAGEMENT
The table below indicates the shares, options and other securities of Tenet and Broadlane, Inc. that are owned by our directors and each of the Named Executive Officers (as defined on page 96) as of April 30, 2003.
|
Shares Beneficially Owned(1)
|
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
Options Exercisable Prior to
June 30, 2003 |
Percent of
Class(2) |
|||||||||
|
Shares of Common Stock
|
||||||||||||
Name
|
|||||||||||||
Tenet
|
Broadlane(3)
|
Tenet
|
Broadlane
|
Tenet
|
Broadlane
|
||||||||
Jeffrey C. Barbakow | 1,805,995 | (4) | 854,595 | 6,497,000 | -0- | 1.8 | % | 2.5 | % | ||||
Lawrence Biondi, S.J. | 8,002 | (5) | -0- | 94,581 | -0- | ||||||||
Bernice B. Bratter | 16,855 | (6) | -0- | 83,331 | -0- | ||||||||
Sanford Cloud, Jr. | 4,320 | (7) | -0- | 74,750 | -0- | ||||||||
Maurice J. DeWald | 14,355 | -0- | 102,081 | -0- | |||||||||
Van B. Honeycutt | 3,617 | (8) | -0- | 36,000 | -0- | ||||||||
Edward A. Kangas(9) | -0- | -0- | 36,000 | -0- | |||||||||
J. Robert Kerrey | 6,015 | (10) | -0- | 18,000 | -0- | ||||||||
Lester B. Korn | 34,050 | -0- | 36,000 | -0- | |||||||||
Floyd D. Loop, M.D. | 6,864 | (11) | -0- | 94,581 | -0- | ||||||||
Mónica C. Lozano | 3,784 | (12) | -0- | 54,000 | -0- | ||||||||
Robert C. Nakasone(13) | -0- | -0- | -0- | -0- | |||||||||
Barry P. Schochet | 63,661 | 260,950 | 590,000 | 90,000 | (14) | ||||||||
Christi R. Sulzbach | 12,797 | (15) | 61,400 | 312,501 | 29,310 | (16) | |||||||
Stephen D. Farber | 15,508 | (17) | 65,600 | 216,250 | 22,500 | (18) | |||||||
Raymond L. Mathiasen | 57,819 | (19) | 100,000 | 634,700 | (19) | -0- | |||||||
Trevor Fetter(20) | 338,998 | 267,806 | 100,000 | 1,499,130 | 5.0 | % | |||||||
David L. Dennis(21) | 62,015 | 50,000 | 900,000 | -0- | |||||||||
Thomas B. Mackey(22) | 15,446 | 226,194 | 855,000 | -0- | |||||||||
Executive officers and directors as a group (19 persons) | 2,470,101 | 1,886,545 | 10,734,775 | 1,640,940 | 2.8 | % | 10.0 | % |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Based on reports filed with the SEC, each of the following entities owns more than five percent of our outstanding common stock. We know of no other entity or person that beneficially owns more than five percent of our outstanding common stock.
Name and Address
|
Number of Shares
Beneficially Owned |
Percent of Class
as of April 30, 2003 |
|||
---|---|---|---|---|---|
AXA Financial, Inc. and affiliates
1290 Avenue of the Americas, 11th Floor New York, NY 10104 |
24,644,822 | (1) | 5.3 | % | |
FMR Corp.
82 Devonshire Street Boston, MA 02109 |
24,828,623 | (2) | 5.3 | % | |
Pacific Financial Research, Inc.
9601 Wilshire Boulevard, Suite 800 Beverly Hills, CA 90210 |
23,626,100 | (3) | 5.1 | % |
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
In fiscal years 2000 and 2001, the Company granted options to its employees under its 1999 Broad-Based Stock Incentive Plan (the "Broad-Based Plan"), which was adopted by the Company's board of directors (the "board") on July 28, 1999 and amended and restated by the board on May 24, 2000. The Broad-Based Plan was not submitted to the Company's shareholders for approval. With the approval by the Company's shareholders of its 2001 Stock Incentive Plan (the "2001 Plan") at the 2001 annual meeting of shareholders, the Company discontinued the grant of any additional options under the Broad-Based Plan. The Company currently grants stock options only under the 2001 Plan. Awards granted under the Broad-Based Plan vest and may be exercised as determined by the compensation committee of the board. In the event of a change of control, the compensation committee may, in its sole discretion, without obtaining shareholder approval, accelerate the vesting or performance periods of the awards. Although the Broad-Based Plan authorized, in addition to options, the grant of
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appreciation rights, performance units, restricted units and cash bonus awards, only nonqualified stock options were granted under the Broad-Based Plan. All options were granted with an exercise price equal to the closing price of the Company's common stock on the date of grant. Options normally are exercisable at the rate of one-third per year beginning one year from the date of grant and generally expire 10 years from the date of grant.
The following table summarizes certain information with respect to the Company's equity compensation plans pursuant to which options remain outstanding as of December 31, 2002. The share amounts have been adjusted to reflect the 3-for-2 split of Tenet's common stock that became effective after the close of trading on June 28, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lawrence Biondi, S.J.
Fr. Biondi has been the President of the Saint Louis University ("SLU") since 1987. As a result of our 1998 acquisition of the SLU Hospital (the "Hospital") and related health care operations, we entered into several agreements with SLU, including a 30-year Academic Affiliation Agreement. For the 2002 Transition Period, we paid SLU approximately $16.4 million under the Academic Affiliation Agreement. The other agreements relate to certain services that SLU provides to the Hospital for which SLU receives a contracted service fee, and certain supplies and services that we and the Hospital provide to SLU, for which we and the Hospital receive contracted fees. We also entered into a master lease agreement with SLU for space leased by SLU to us and by us to SLU. For its fiscal year ended June 30, 2002, SLU had total revenues of $452 million, of which $146.5 was derived from health care operations. Approximately $31.1 million of SLU's health care operations' revenues came from the Hospital or from us pursuant to the foregoing agreements.
Pursuant to a Corporate Sponsorship Agreement between us and the SLU Athletic Department, we pay the Athletic Department $50,000 a year to be the exclusive health care provider for sponsorship of all Billiken Athletic events. Such sponsorship provides us with certain marketing rights and season tickets to certain athletic events.
Sanford Cloud, Jr.
Mr. Cloud has been President and Chief Executive Officer of the National Conference for Community and Justice ("NCCJ") since 1994. In fiscal year 2000, The Tenet Healthcare Foundation committed to donate $500,000 over five years to NCCJ to fund programs and activities to advance the mission of NCCJ. Eighty percent of Tenet's annual contribution goes to fund programs in NCCJ regional offices in locations where Tenet has hospitals. We have been informed that NCCJ received a total of $28.5 million of grants and contributions in its fiscal year ended August 31, 2002, only $100,000 of which came from Tenet, and Tenet made no other payments to NCCJ during the 2002 Transition Period.
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Dr. Loop has been the Chief Executive Officer and Chairman of The Board of Governors of The Cleveland Clinic Foundation (the "Foundation") since 1990. On July 2, 2001, a partnership formed between a subsidiary of the Company and the Foundation opened the Cleveland Clinic Florida Hospital (the "Hospital") in Weston, Florida. The Company's subsidiary provides operational and management expertise for the Hospital. Under a medical services agreement between The Cleveland Clinic Florida (the "Clinic")a subsidiary of the Foundationand the partnership, the Clinic provides clinical and medical administration and is the exclusive provider of all specialty medical staff for which it received fees of approximately $1.841 million for the 2002 Transition Period. For the 2002 Transition Period, the Hospital recorded net revenues of approximately $55 million, of which $4.0 million and $5.3 million, respectively, was received as partnership distributions by the Company's subsidiary and the Foundation. We have been informed by the Foundation that for the fiscal year ended December 31, 2002, the Foundation had net patient and other revenues of $2.877 billion.
At the end of the 2002 Transition Period, the Foundation owned 1.5 percent of Broadlane. The Foundation acquired 500,000 shares from Broadlane at a purchase price of $5.71 per share, which Broadlane believes was the fair market value of such shares on the date of purchase.
Mónica C. Lozano
Ms. Lozano has been President and Chief Operating Officer of La Opinión since 2000. La Opinión is the largest Spanish-language newspaper in the United States. In the 2002 Transition Period, several of the Company's Los Angeles area hospitals spent approximately $81,000 on advertisements in La Opinión. The Company's Los Angeles area hospitals have advertised in La Opinión for several years. We have been advised that the $81,000 in advertising revenues received from the Company's hospitals is a de minimis portion of La Opinión's total revenues.
Trevor Fetter
Trevor Fetter was appointed President of the Company on November 7, 2002. Mr. Fetter previously served as our Chief Financial Officer and Chief Corporate Officer in the Office of the President from 1996 to 2000, when he left to become chairman and chief executive officer of Broadlane, Inc. The terms of his current employment are memorialized in a letter dated November 7, 2002, that sets out Mr. Fetter's initial base salary, his target award percentage for purposes of annual bonus awards, his grant of stock options and his participation in our retirement, health and welfare and other benefit plans. Pursuant to the letter, we agreed to pay the selling costs of Mr. Fetter's San Francisco apartment and will make up (on an after-tax basis) any loss on the sale of that apartment based on the difference between the sale price and what Mr. Fetter paid for it plus documented capital improvements and other expenses. We also agreed to nominate Mr. Fetter to the board of directors of Broadlane. A copy of this letter was included as an exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2002.
We entered into a restricted stock agreement with Mr. Fetter, dated January 21, 2003, pursuant to which we agreed to grant him two shares of restricted stock under our 2001 SIP for each share of our common stock purchased by Mr. Fetter in the open market, up to a maximum of 200,000 shares of restricted stock. On January 21, 2003, Mr. Fetter purchased 100,000 shares of our common stock and was granted 200,000 shares of restricted stock. Subject to Mr. Fetter retaining all of the 100,000 shares he purchased until all of the restricted stock has vested and his remaining continuously employed by us, one-third of the 200,000 shares of restricted stock will vest two years after the grant date, an additional one-third will vest three years after the grant date and the remaining one-third will vest four years after the grant date. A Form 4 reporting Mr. Fetter's purchase of shares and the grant of restricted stock
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was filed on January 22, 2003. A copy of the January 21, 2003 restricted stock agreement was included as an exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2003.
ITEM 14. CONTROLS AND PROCEDURES
CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rules 13a-14(c) and 15d-14(c). The evaluation was performed under the supervision and with the participation of management, including our chief executive officer and chief financial officer. Based upon that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material information related to the Company (including its consolidated subsidiaries) required to be included in our periodic SEC filings. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
There have been no significant changes in internal controls, or in other factors that could significantly affect internal controls, subsequent to the date of our most recent evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees Billed By Independent Auditors
|
2002 Transition Period
|
Fiscal Year Ended
May 31, 2002 |
||||
---|---|---|---|---|---|---|
Audit fees related to the Consolidated financial statements and quarterly reviews(1) | $ | 1,790,000 | $ | 2,583,000 | ||
Audit related fees(2) | 430,814 | 280,000 | ||||
Tax services(3) | 251,730 | 681,000 | ||||
All other(4) | 573,263 | 1,027,000 |
On May 1, 2003, the Audit Committee adopted a revised Audit Committee Charter which requires either the Audit Committee or a member of the Audit Committee to pre-approve in writing all audit and non-audit services provided to the Company by the Company's independent auditors, in accordance with any applicable law, rules or regulations. This pre-approval process was not in effect and pre-approval of all non-audit services was not required by any applicable law, rule or regulation at the time our independent auditors were engaged to provide non-audit services with respect to the 2002 Transition Period.
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ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The consolidated financial statements to be included in Part II, Item 8, can be found on pages 56 through 61.
FINANCIAL STATEMENT SCHEDULES
Schedule IIValuation and Qualifying Accounts (included on page 124).
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 consolidated financial statements or notes thereto.
EXHIBITS AND REPORTS ON FORM 8-K
117
118
119
All reports on Form 8-K during the reporting period are listed in the Company's forms 10-Q filed October 11, 2002, January 13, 2003 and April 14, 2003.
120
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 15, 2003.
TENET HEALTHCARE CORPORATION
/s/
STEPHEN D. FARBER
Stephen D. Farber Chief Financial Officer (Principal Financial Officer) |
/s/
RAYMOND L. MATHIASEN
Raymond L. Mathiasen Executive 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 May 15, 2003 by the following persons on behalf of the registrant and in the capacities indicated:
Signature
|
Title
|
|
---|---|---|
|
|
|
/s/
JEFFREY C. BARBAKOW
Jeffrey C. Barbakow |
Chairman, Chief Executive Officer and Director (Principal Executive Officer) | |
/s/ LAWRENCE BIONDI, S.J. Lawrence Biondi, S.J. |
|
Director |
/s/ BERNICE B. BRATTER Bernice B. Bratter |
|
Director |
/s/ SANFORD CLOUD, JR. Sanford Cloud, Jr. |
|
Director |
/s/ MAURICE J. DEWALD Maurice J. Dewald |
|
Director |
/s/ VAN B. HONEYCUTT Van B. Honeycutt |
|
Director |
/s/ EDWARD A. KANGAS Edward A. Kangas |
|
Director |
/s/ J. ROBERT KERREY J. Robert Kerrey |
|
Director |
/s/ LESTER B. KORN Lester B. Korn |
|
Director |
/s/ FLOYD D. LOOP, M.D. Floyd D. Loop, M.D. |
|
Director |
/s/ MÓNICA C. LOZANO Mónica C. Lozano |
|
Director |
/s/ ROBERT C. NAKASONE Robert C. Nakasone |
|
Director |
121
CEO CERTIFICATION
I, Jeffrey C. Barbakow, Chairman and Chief Executive Officer of Tenet Healthcare Corporation ("Tenet"), certify that:
Date: May 15, 2003 |
/s/
JEFFREY C. BARBAKOW
Jeffrey C. Barbakow Chairman and Chief Executive Officer |
122
CFO CERTIFICATION
I, Stephen D. Farber, Chief Financial Officer of Tenet Healthcare Corporation ("Tenet"), certify that:
Date: May 15, 2003 |
/s/
STEPHEN D. FARBER
Stephen D. Farber Chief Financial Officer |
123
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Dollars in Millions
|
|
Additions charged to:
|
|
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance at
Beginning of Period |
Costs and
Expenses(1) |
Other
accounts |
Deductions(2)
|
Other
Items(3) |
Balance at
End of Period |
||||||||||||
Year ended May 31, 2000 | $ | 287 | $ | 851 | $ | | $ | (784 | ) | $ | 4 | $ | 358 | |||||
Year ended May 31, 2001 | $ | 358 | 849 | | (875 | ) | 1 | $ | 333 | |||||||||
Year ended May 31, 2002 | $ | 333 | 986 | | (1,004 | ) | | $ | 315 | |||||||||
Seven months ended December 31, 2002 | $ | 315 | 676 | | (641 | ) | | $ | 350 |
124
COMMON STOCK LISTING
Tenet Healthcare Corporation's common stock is listed under the symbol THC on the New York and Pacific stock exchanges.
Transfer
Agent and Registrar
The Bank of New York
(800) 524-4458
shareowner-svcs@bankofny.com
Holders of National Medical Enterprises, Inc. (NME) stock certificates who would like to exchange them for Tenet certificates may do so by contacting the transfer agent. Former shareholders of American Medical Holdings, Inc. (AMI) and OrNda HealthCorp who have not yet redeemed their AMI or OrNda stock for cash and Tenet stock also should contact the transfer agent.
Please send certificates for transfer and address changes to:
Receive
and Deliver
Department - 11W
P.O. Box 11002
Church Street Station
New York, NY 10286
Please address other inquiries for the transfer agent to:
Shareholder
Relations
Department - 11E
P.O. Box 11258
Church Street Station
New York, NY 10286
COMPANY INFORMATION
The Company reports annually and periodically to the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K. You may obtain a copy of these and other documents as explained below.
The Company's web site, www.tenethealth.com, offers, free of charge, extensive information about the Company's operations and financial performance, including a comprehensive series of investor pages. These pages include real-time access to the Company's annual and periodic filings with the Securities and Exchange Commission.
To request any financial literature be mailed to you, please call the Company's literature request hotline at (805) 563-6969 or write to Tenet Investor Relations.
125
INVESTOR RELATIONS
For all other shareholder inquiries, please contact:
Paul
J. Russell
Senior Vice President, Investor Relations
P.O. Box 31907
Santa Barbara, CA 93130
Phone: (805) 563-7188
Fax: (805) 563-6877
E-mail: paul.russell@tenethealth.com
Diana
L. Takvam
Vice President, Investor Relations
P.O. Box 31907
Santa Barbara, CA 93130
Phone: (805) 563-6883
Fax: (805) 563-6877
E-mail: diana.takvam@tenethealth.com
CORPORATE HEADQUARTERS
Tenet
Healthcare Corporation
3820 State Street
Santa Barbara, CA 93105
(805) 563-7000
www.tenethealth.com
126
April 14, 2003
Jeffrey
C. Barbakow
Chief Executive Officer
Dear Jeff,
This is to confirm certain arrangements regarding your compensation and benefits:
On behalf of the Compensation Committee | Accepted: | |||
|
|
|
||
Alan R. Ewalt | Jeffrey C. Barbakow | Date |
November 7, 2002
PERSONAL & CONFIDENTIAL
Trevor
Fetter
Corporate Offices
Broadlane
Dear Trevor,
I am pleased to confirm our offer to you to become President of Tenet Healthcare Corporation effective November 7, 2002. You will report to the Chairman and Chief Executive Officer Jeffrey Barbakow and your primary office will be Santa Barbara. Accordingly, you will be eligible for the following compensation and benefits package:
a. Base Compensation: Your base salary will be at $780,000 per year, payable bi-weekly. Your next salary review will be September 1, 2003.
b. Annual Incentive Plan: Your target award percentage in Tenet's Annual Incentive Plan (AIP) will be at 78% of salary. You will also be eligible for the growth award.
c. Car Allowance: Your automobile allowance will be $20,600 per year, paid bi-weekly.
d. ExecuPlan Medical: You will participate in Tenet's ExecuPlan which provides reimbursement for out of pocket health and dental expenses at the $7,500 annual level.
e. Supplemental Executive Retirement Plan (SERP): You will be reinstated in the SERP with full credit for all of your years of service with Tenet and affiliates from October 23, 1995.
f. Stock Options: You will receive an initial grant of 450,000 non-qualified stock options with a strike price set on the date of grant by the company's Compensation Committee on or about November 7, 2002. You will continue to be eligible for stock option grants. The Company practice generally has been to recommend option grants on an annual basis. Options vest over three years with one-third of the options vesting at the end of each year.
g. Benefits: You will receive all standard employee benefits in accordance with the TenetSelect benefits plan as well as reimbursement for club dues.
h. Severance Protection Agreement: You will participate in the Tenet Severance Protection Plan at the same level provided to our current Chairman and CEO which provides severance equal to two times base salary plus target bonus, benefits continuation and legal fees reimbursement for a qualifying termination following a change of control of Tenet. No severance is due in the event of a termination for "cause" described below or voluntary termination except as provided under the Plan for "good reason".
Absent a change of control, should your employment with Tenet be terminated by the company without cause within three years from this date, you shall receive severance benefits of two years' salary and benefits continuation (excluding AIP). You may not receive benefits both under this severance arrangement and any other severance program, plan or arrangement with Tenet. You will be paid under the plan, program or arrangement for which you are eligible which provides the greatest benefit.
i. Relocation: Tenet will pay selling costs of your San Francisco apartment and will make up (on an after tax basis) any loss on sale based on the difference between the original cost plus documented capital improvements and final selling price.
With respect to Broadlane, we understand that you have agreed with Broadlane that your Broadlane options will cease vesting but you will have the right to continue to exercise those vested options according to terms of the Broadlane stock option plan so long as you continue as a member of the Broadlane Board of Directors. Tenet will nominate you to the Broadlane board.
Further, the terms of your March 1, 2000 Separation and Consulting Agreement with Tenet will cease effective with your commencement of employment with Tenet.
Finally, your employment with the company will be on an at-will basis which means that either you or the company may terminate the employment relationship with or without notice or with or without cause at any time. The term "cause" as used above shall include, but not be limited to, dishonesty, fraud, willful misconduct, self dealing or violation of the company's Standards of Conduct, breach of fiduciary duty (whether or not involving personal profit), failure, neglect or refusal to perform your duties in any material respect, violation of law (except traffic violations or similar minor infractions), violation of the company's Human Resources Operations or other Policies, or any material breach of this agreement; provided, however, that a failure to achieve or meet business objectives as defined by the company shall not be considered "cause" so long as you have devoted your best and good faith efforts and full attention to the achievement of those business objectives.
This letter contains the entire agreement between you and Tenet regarding the terms and conditions of your employment, and fully supersedes any and all prior agreements that may have existed between you and Tenet regarding the terms and conditions of your employment.
Congratulations, this is an important recognition in your career growth with Tenet.
Sincerely, | ACCEPTED AND AGREED TO: | |||
Alan R. Ewalt |
|
|
||
Trevor Fetter | Date |
Exhibit 10(m)
CONSULTING AND NON-COMPETE AGREEMENT
This Consulting and Non-Compete Agreement (hereinafter the "Agreement") is made and entered into by and between Thomas B. Mackey (hereinafter referred to as "Mr. Mackey") and Tenet Healthcare Corporation on behalf of itself and its affiliates (collectively hereinafter referred to as "Tenet").
WHEREAS, Mr. Mackey has served as the Chief Operating Officer of Tenet Healthcare Corporation; and
WHEREAS, Mr. Mackey and Tenet have mutually agreed to Mr. Mackey's retirement from employment as of November 7, 2002 on the terms set forth herein; and
WHEREAS, Tenet desires to retain Mr. Mackey as a consultant for a period of time to perform certain consulting services to Tenet in conjunction with matters with which he has had experience with Tenet, and Mr. Mackey desires to provide such consulting services to Tenet;
NOW, THEREFORE, the parties hereto agree as follows:
1. Retirement: The parties agree that as of Mr. Mackey's last day worked, Tenet will pay Mr. Mackey all compensation due him through November 7, 2002, and Mr. Mackey will be eligible for a prorated payment, if any, under the Tenet Healthcare Corporation Annual Incentive Plan for the period ending November 7, 2002, on the same terms as payments, if any, are generally provided to the reporting executive officers of Tenet employed during such period, excluding any discretionary award. Furthermore, Mr. Mackey shall receive any distributions to which he is entitled from Tenet's Executive Deferred Compensation and Supplemental Savings Plan, a nonqualified benefits plan, in accordance with the terms of such plan. Mr. Mackey acknowledges and agrees that the next day following his retirement from the company, November 8, 2002 ("the Effective Date"), the consulting arrangement will commence and that certain letter agreement between Tenet and Mr. Mackey dated as of January 13, 1999 (as the same may have existed on the Effective Date, the "Employment Letter") shall terminate and be of no further force and effect, except as set for in Section 3f below. As of the Effective Date, Mr. Mackey will not be authorized to bind or make any commitments on behalf of Tenet. Tenet agrees that as of Mr. Mackey's retirement date, his employment will be formally terminated and, except as expressly set forth herein, Mr. Mackey will have no further obligation to provide services to Tenet and shall be deemed to have resigned from all officerships and directorships of any and all affiliates or investees of Tenet. From and after the Effective Date, except as set forth herein and for the reimbursement of business expenses incurred by Mr. Mackey prior to the Effective Date, Mr. Mackey shall not be entitled to any compensation, benefits and/or perquisites from Tenet except such as may arise under law, Tenet's bylaws or compensatory plans in which he is a continuing participant.
2. Consulting Services: Mr. Mackey agrees that during the period commencing with the Effective Date and terminating on November 7, 2004 ("the Consulting Period"), he will provide consulting services to Tenet and/or its representatives, during normal business hours and upon reasonable notice, in connection with any matter with which he previously had experience at Tenet or which is otherwise within his area of expertise or experience. Mr. Mackey acknowledges and agrees that with reasonable notice he shall make himself available for such consulting assignments. When requested to provide consulting services, Mr. Mackey shall endeavor to do so in a professional, diligent and workmanlike manner, providing Tenet, its affiliates and management with the benefits of his best, informed and professional judgment. Tenet agrees that during the Consulting Period and thereafter, it will provide to Mr. Mackey the fees and benefits specified herein as compensation for Mr. Mackey's consulting
1
services and other agreements set forth herein. If consultancy services are sought by Tenet after the end of the Consulting Period, Mr. Mackey agrees that he will provide those services at a fee of Five Thousand Dollars ($5,000) a day.
3. Compensation: Mr. Mackey acknowledges and agrees that he shall not be an employee of Tenet during the Consulting Period, and that he shall perform all such consulting services as an independent contractor. Tenet will, as an accommodation, deduct standard withholding authorized by law from Mr. Mackey's cash compensation, and said cash compensation will be paid on a bi-weekly basis pursuant to Tenet's customary payroll schedule.
a. Fees. For the first three (3) months from the Effective Date, Tenet will pay Mr. Mackey a monthly fee commensurate with his monthly salary at Tenet immediately prior to the Effective Date (i. e., Sixty-Five Thousand Dollars ($65,000) ("Initial Fees") and any matching contributions for which Mr. Mackey may be eligible with respect to the Initial Fees pursuant to the terms of the Tenet 401k plan.
b. Reimbursement: Tenet further agrees to reimburse Mr. Mackey for any and all reasonable expenses incurred at Tenet's request and with Tenet's consent in connection with his providing consulting services, in accordance with Tenet's customary reimbursement policies, including, but not limited to, such expenses as (i) local automobile mileage at the rate established by the United States Internal Revenue Service; (ii) first class airline tickets purchased for domestic travel; and (iii) all authorized reasonable hotel, meal, telephone, fax and other out-of-pocket expenses incurred in connection with Mr. Mackey's approved travel and consulting services, so long as Mr. Mackey provides to Tenet acceptable documentation of or receipts for such expenses. During the Consulting Period, when Mr. Mackey is traveling at Tenet's request, Tenet will use its "best efforts" to provide travel for Mr. Mackey on the same basis as was done while he was a Tenet employee; if Tenet is unable to provide that travel, Mr. Mackey will be reimbursed for first class travel, as discussed above.
c. Options: Mr. Mackey is currently the holder of options to acquire [1,380,000] shares of Tenet Healthcare Corporation common stock. Tenet hereby agrees that with respect to such options, Mr. Mackey will have the rights of a holder who has retired with the consent of Tenet Healthcare Corporation for purposes of the applicable stock incentive or option plan under which such options were originally granted and that, in accordance therewith, such options shall vest and be exercisable over the full term provided in their original grant. In the event of a change of control while such options remain outstanding, such options will be accorded the same treatment as is provided to the most senior level executives of Tenet under any applicable change of control severance protection plans then in existence. No additional options will be granted during the Consulting Period.
d. Health and Welfare Benefits and Perquisites: Tenet agrees that during the Consulting Period, it will provide Mr. Mackey with an automobile allowance at a rate equal to the rate at which such allowance was provided immediately prior to the Effective Date, as well as health, life, dental and vision insurance and Execuplan benefits at a level commensurate with that which Tenet provides to its most senior executives. If Tenet adopts retiree health and welfare benefits, Mr. Mackey and his dependents will be eligible for such benefits, subject to the terms of the plan for retirees. At the end of the Consulting Period Mr. Mackey will be offered COBRA conversions to applicable plans. Long Term Disability coverage will not be provided under this Agreement. Additionally, club membership dues and other related fees will not be provided by Tenet under this Agreement.
e. SERP: Tenet further agrees that the entire Consulting Period commencing with the Effective Date and continuing for twenty-four months shall be included for purposes of determining Mr. Mackey's final benefit under the Tenet Supplemental Executive Retirement Plan ("SERP"). Tenet will provide written confirmation to Mr. Mackey of the length of credited service he will have in the SERP at the end of the Consulting Period. If he so elects, Mr. Mackey will be eligible to receive the early retirement benefit from that plan at the end of the Consulting Period. The parties agree that
2
Mr. Mackey's SERP benefit will not be diminished as a result of including the Consulting Period years to the credited years of service. If Tenet enhances the financial security of the SERP, such additional financial security shall be applied to Mr. Mackey to the extent applied to retirees under the plan.
f. Relocation: Tenet agrees for the time of the Consulting Period that Mr. Mackey remains in his Santa Barbara home as his primary residence, Mr. Mackey will continue to receive the mortgage differential for Mr. Mackey's residence in accordance with the terms of the Employment Letter. Tenet further agrees that if at any time during the Consulting Period Mr. Mackey decides to relocate from Santa Barbara, Tenet will provide relocation assistance to him on the terms set forth in the Employment Letter.
g. Office Support: Tenet agrees that during the Consulting Period, Mr. Mackey will be provided secretarial support if necessary on any consulting matters for Tenet. During the Consulting Period, Tenet will also provide Mr. Mackey with Perot IT support to maintain a home office and upon expiration of the Consulting Period, Mr. Mackey may retain his home office equipment, including but not limited to his computer, fax machine and related equipment.
4. Litigation Support: Mr. Mackey agrees that during the Consulting Period and thereafter he will cooperate fully with Tenet in relation to the defense, prosecution or other involvement in any continuing or future claims, lawsuits, charges, and internal or external investigations which arise out of events or business matters which occurred in any operations under Mr. Mackey's supervision. Such continuing duty of cooperation shall include making himself available to Tenet, upon reasonable notice, for depositions, interviews, and appearance as a witness, furnishing information to Tenet and its legal counsel upon request and otherwise complying with Tenet's reasonable requests and instructions with respect to such matters. Mr. Mackey shall be reimbursed for reasonable business expenses related to litigation assistance he provides. Reasonable business expenses include, but are not limited to, such documented expenses as (i) first-class airline tickets purchased for domestic travel and (ii) all authorized reasonable hotel, meal, telephone, fax and other out-of-pocket expenses incurred in connection with Mr. Mackey's travel on behalf of Tenet.
5. Confidential Information: Mr. Mackey acknowledges that he has held sensitive executive positions with Tenet and its subsidiaries and that, by virtue of having held such positions, he has had access to and has received or developed confidential information and trade secrets pertaining to Tenet's operations which are proprietary to Tenet and which have not been disclosed to the public. Mr. Mackey agrees that he shall keep all such information confidential and that he shall not disclose any such information to any other person, except as may be required by law or with the consent of Tenet. Without limiting the generality of the foregoing, Mr. Mackey agrees that he will not respond to or in any way participate in or contribute to any public discussion, notice or other publicity concerning or in any way related to confidential information concerning Tenet, its operations, officers or directors which is confidential and/or proprietary to Tenet and which has not been disclosed to the public. Mr. Mackey further agrees that he will not respond to or in any way participate in or contribute to any public discussion or other publicity concerning or related to the circumstances surrounding his retirement, the issues leading up to his retirement, Tenet senior management, or any other matters concerning his employment with Tenet or Tenet's business or affairs which are confidential and/or proprietary to Tenet and which has not been disclosed to the public. Mr. Mackey agrees that if any public statements or press releases are issued by him or with his assistance which fall within the scope of this paragraph, he will obtain Tenet's consent prior to their release. Mr. Mackey further agrees that he will notify Tenet of any subpoena or Demand for Production of documents with which he is served and that he will not otherwise provide any confidential and/or proprietary Tenet information or documents to any non-governmental third party concerning the business of Tenet or his conduct as an employee of Tenet without the prior written consent of Tenet's General Counsel, Christi Sulzbach, or her successor. Mr. Mackey further agrees that any disclosure by him of any of Tenet's confidential or proprietary information referred to herein, which disclosure is materially adverse to Tenet, its subsidiaries or
3
related companies or entities, or its and/or their operations, officers or directors, or any other non-compliance with the terms of this paragraph shall constitute a material breach of this Agreement. Disclosure to Mr. Mackey's attorneys and advisors to inform their advice and counsel to him shall be excluded from the foregoing prohibitions. Except as expressly set forth in paragraph 3 above and the parties' joint defense agreement, all files, forms, brochures, books, materials, correspondence, memoranda, documents, manuals, computer disks, software products and lists, and other property of Tenet that have in the past or may in the future come into the possession or control of Mr. Mackey as a result of his being an employee of or consultant to Tenet shall at all times remain the property of Tenet and not of Mr. Mackey and shall be returned to Tenet promptly upon request and in any event upon conclusion of the Consulting Period or joint defense arrangement.
6. Non-Compete: Mr. Mackey agrees not to accept any employment or independent contracting arrangement during the Consulting Period that would interfere or conflict with his provision of the Consulting Services. Mr. Mackey agrees that during the Consulting Period, unless express written approval is granted by the President or Chief Executive Officer of Tenet, he shall not, directly or indirectly, for his own benefit or for the benefit of another, carry on or participate in the ownership, financing, management or control of, or be employed by, or serve as a director of, or consult for, or license or provide know how to, or otherwise render services to, or allow his name or reputation to be used in or by, any other present or future business enterprise that competes with Tenet or its subsidiaries or affiliates in any of the lines of business in geographic areas in which Tenet or such subsidiaries or affiliates are now engaged anywhere in the world. During the Consulting Period, Mr. Mackey also agrees that, unless express written approval is granted by the President or Chief Executive Officer of Tenet, he will not (i) directly or indirectly solicit or encourage in any manner the resignation or reaffiliation of any employee, physician, contractor, or professional health care provider or provider organization that is employed by, affiliated or associated with Tenet; (ii) directly or indirectly solicit or divert customers, patients, or business of Tenet; or (iii) attempt to influence, directly or indirectly, any person or entity to cease, reduce, alter or rearrange any business relationship with Tenet. Mr. Mackey agrees that any violation of the provisions of this paragraph will constitute a material breach of this Agreement, and without limiting any of its other remedies, at Tenet's election the Consulting Period will thereupon cease, payments and other benefits provided during the Consulting Period will terminate and Mr. Mackey shall refund any payments and other benefits received during any period of non-compliance with this paragraph. Nothing contained herein shall limit the right of Mr. Mackey, as an investor, to beneficially own and make investments in publicly traded securities of any corporation or other entity that competes in the lines of business in which Tenet or its subsidiaries or its affiliates are engaged, provided that Mr. Mackey does not beneficially own more than 1% of any outstanding class of securities of such corporation.
7. Termination: Without limiting any other remedy Tenet may have, Tenet may terminate the Consulting Period and this Agreement if, (i) in his capacity as Chief Operating Officer of Tenet Healthcare Corporation or in his capacity as a consultant under this Consulting Agreement, Mr. Mackey was or is guilty of dishonesty, fraud, willful misconduct, self dealing, breach of fiduciary duty (whether or not involving personal profit), a material violation of Tenet's Standards of Conduct, a material failure, neglect or refusal to perform his duties in accordance with Tenet policies, or a material violation of law, or (ii) Mr. Mackey materially breaches this Agreement and fails to cure any curable breach after reasonable notice. In the event of Mr. Mackey's death during the Consulting Period, the Consulting Period will terminate, and (x) Mr. Mackey's spouse or estate may exercise options according to the applicable Tenet option plan terms, (y) SERP benefits will be calculated as of the day before Mr. Mackey's death, and (z) survivor benefits will be paid to Mr. Mackey's eligible spouse in accordance with the terms of the SERP. In the event of Mr. Mackey's total disability during the Consulting Period, Tenet may elect, to the extent not otherwise prohibited by law, to terminate the Consulting Period.
4
8. Releases:
a. Mr. Mackey covenants that he has no claim, grievance or complaint against Tenet currently pending before any state or federal court, agency, or tribunal; and in exchange for the good and valuable consideration herein, he further covenants not to sue and hereby releases and discharges Tenet, and all of its predecessor, successor, parent, subsidiary, affiliated and/or related entities and its and their directors, officers, supervisors, executives, representatives and agents (hereinafter, "Tenet Releasees") from all statutory and common law claims that Mr. Mackey has or may have against the Tenet Releasees arising prior to Mr. Mackey's execution of this Agreement and/or arising out of or relating to his employment with Tenet or the termination thereof, (herein, "Released Claims"). Without limitation, the Released Claims herein include claims arising under Title VII of the Civil Rights Act of 1964, as amended, the Americans with Disabilities Act, the Civil Rights Act of 1991, the Age Discrimination in Employment Act and any analogous local or state law or statute, including without limitation the California Fair Employment and Housing Act, the Texas Commission on Human Rights Act, the Employee Retirement Income Security Act, Worker Adjustment and Retraining Notification Act, and any other claim based upon any act or omission of the Tenet Releasees occurring prior to Mr. Mackey's execution of this Agreement.
b. Section 1542 of the Civil Code of the State of California ("Section 1542") provides:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.
Mr. Mackey waives all rights under Section 1542 or any other law or statute of similar effect in any jurisdiction with respect to the Released Claims. Mr. Mackey acknowledges that he understands the significance and specifically assumes the risk regarding the consequences of such release and such specific waiver of Section 1542. Mr. Mackey acknowledges and agrees that this Consulting Agreement releases all claims existing or arising prior to Mr. Mackey's execution of this Agreement which Mr. Mackey has or may have against the Tenet Releasees whether such claims are known or unknown and suspected or unsuspected by Mr. Mackey and he forever waives all inquiries and investigations into any and all such claims.
c. This Consulting Agreement constitutes a voluntary waiver and release of Mr. Mackey's rights and claims under the Age Discrimination in Employment Act and pursuant to the Older Workers Benefit Protection Act ("OWBPA"), Mr. Mackey acknowledges: he has been advised and is aware of his right to consult with legal counsel of his choice prior to signing this Agreement; he further acknowledges that he is aware that he has twenty-one (21) days during which to consider the provisions of this Agreement, although Mr. Mackey may sign and return it sooner; and he has the right to revoke this Agreement for a period of seven (7) days after his execution. Accordingly, this Agreement shall not become effective or enforceable until the eighth day following Mr. Mackey's execution of this Agreement.
9. Cooperation and Indemnification: The parties agree that no provision in this Consulting Agreement shall be construed or interpreted in any way to limit, restrict or preclude either party hereto from cooperating or settling with any governmental agency in the performance of its investigatory or other lawful duties. Tenet further agrees that nothing in this Consulting Agreement or any act required hereunder shall be deemed a waiver or release by Mr. Mackey of any right he may have to indemnification or legal representation, including without limitation any right Mr. Mackey has to indemnification and legal representation under Tenet's articles of incorporation, bylaws and existing law or of any attorney client or other legal privilege that he may hold.
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10. Confidentiality: The parties represent and agree that they will keep the terms, amounts and facts of this Consulting Agreement completely confidential, and that they will not hereafter disclose any information concerning this Consulting Agreement to anyone except their respective attorneys or accountants, including, but not limited to, any past, present, or prospective employees of Tenet or any of its parent, subsidiary or related companies or entities, except as may be required by law. Tenet acknowledges that Mr. Mackey and Mr. David L. Dennis have shared information and insights concerning this Consulting Agreement, and such sharing shall not be deemed a violation of this Consulting Agreement.
11. Arbitration: The parties agree that any dispute, controversy or claim arising from the employment relationship, and any dispute or controversy arising under, out of or in connection with this Agreement, and any dispute regarding unreleased claims or future claims between the parties, if any, arising under any federal, state, or other governmental unit's statutes, regulations or codes (including but not limited to any anti-discrimination laws), shall be submitted to final and binding arbitration in accordance with the Federal Arbitration Act (FAA), Title 9 of the U.S. Code, or if the FAA is deemed inapplicable as a matter of law, then, and only then, in accordance with the arbitration laws of the state in which Mr. Mackey last performed services for Tenet. The parties agree that such arbitration shall be governed by the Employment Dispute Resolution Rules of the American Arbitration Association ("AAA"). The arbitrator shall have the authority to award any remedy that would have been available to Mr. Mackey in court under applicable law. A judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Tenet agrees that Mr. Mackey maximum out-of-pocket expense for the arbitrator and the administrative costs of the AAA will be an amount equal to the local civil filing fee. Notwithstanding the foregoing and without waiving any agreement to arbitrate any of the provisions of Sections 2, 4, 5, 6 or 10, Tenet, in addition to any other right or relief to which it may be entitled, shall be entitled to an order enjoining such breach or threatened breach and specifically enforcing Mr. Mackey's compliance with the provisions thereof. Mr. Mackey hereby agrees that he is hereby estopped and prohibited from arguing that damages are an adequate remedy for any such breach or threatened breach or that such equitable relief is inappropriate under the circumstances.
12. Choice of Law: This Consulting Agreement shall be interpreted, enforced and governed under the laws of the State of California without regard to conflicts of laws principles, The language of all parts of this Consulting Agreement shall be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties.
13. Severability: Should any provision of this Agreement be declared and/or be determined by any court to be illegal or invalid, the validity of the remaining parts, terms or provisions shall not be affected thereby, and said illegal or invalid part, term or provision shall be deemed not to be a part of this Agreement. Neither this Agreement nor anything contained herein shall be admissible in any proceeding as evidence of or an admission by either party of any violation of any law or regulation or of any liability whatsoever to the other. Notwithstanding the foregoing, this Agreement may be introduced into a proceeding solely for purpose of enforcing this Agreement.
14. Integration Clause: The parties agree that this Agreement is contains the entire agreement between the parties regarding the subject matter hereof, and fully supersedes any and all prior agreements or understandings between the parties pertaining thereto and shall be interpreted according to its terms without regard to prior drafts. Any waiver of any term or condition of this Agreement shall not be construed as a waiver of any subsequent breach or a subsequent waiver of the same term or condition of this Agreement. The failure of a party to assert any of its rights hereunder shall not constitute a waiver of any such right. Subject to paragraph 11, all remedies are cumulative. This Agreement cannot be modified or amended except in writing, signed by Tenet and Mr. Mackey. This Agreement may be executed in counterparts, each of which shall be an original.
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15. Successorship: Tenet further agrees that all of its obligations under this Agreement shall be binding and enforceable against any and all of its successor companies and entities. Tenet hereby represents that it has the authority to so bind such successor(s).
16. Attorneys' Fees. The parties agree that they each shall bear their own costs and attorneys' fees incurred in connection with the negotiation and preparation of this Agreement.
IN WITNESS WHEREOF, the parties hereto, having first read the same, have executed this Agreement on the dates hereinafter set forth and hereby warrant and represent that they have the authority to enter into this agreement.
DATED: , 2003 | DATED: , 2003 | |||
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Thomas B. Mackey |
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April 16, 2003
PERSONAL & CONFIDENTIAL
Reynold
Jennings
Southeast Division Office
Kennesaw, Georgia
Dear Reynold,
I am pleased to confirm your promotion to President, Eastern Division, effective March 10, 2003. Accordingly, you will be eligible for the following compensation and benefits package:
a. Base Compensation: Your base salary will increase to the rate of $580,000 per year effective March 10, 2003, payable bi-weekly.
b. Annual Incentive Plan: Your target award percentage in Tenet's Annual Incentive Plan (AIP) will be increased to 60% of salary. You will also be eligible for the growth award.
c. Car Allowance: Your automobile allowance will continue at $18,100 per year, paid bi-weekly.
d. ExecuPlan Medical: You will continue to participate in Tenet's ExecuPlan which provides reimbursement for out of pocket health and dental expenses at the $5,000 annual level.
e. Stock Options: In recognition of your expanded responsibilities, at the March 11, 2003 meeting of the Compensation Committee you were granted 75,000 non qualified stock options at an exercise price of $16.65, the closing price on that date. The options will vest one-third per year. Details of the grant will be communicated under separate cover.
f. Benefits: You will continue to receive all standard employee benefits in accordance with the TenetSelect benefits plan and will continue to participate in the Supplemental Executive Retirement Program (SERP).
g. Tenet Executive Severance Protection Plan (TESPP): You have been named a participant in the Tenet Executive Severance Protection Plan which was approved by the Compensation Committee in January 2003. Details of that plan have been provided to you under separate cover.
Finally, your employment with the company will continue to be on an at-will basis which means that either you or the company may terminate the employment relationship with or without notice or with or without cause at any time. The term "cause" as used above shall include, but not be limited to, dishonesty, fraud, willful misconduct, self dealing or violation of the company's Standards of Conduct, breach of fiduciary duty (whether or not involving personal profit), failure, neglect or refusal to perform your duties in any material respect, violation of law (except traffic violations or similar minor infractions), violation of the company's Human Resources Operations or other Policies, or any material breach of this agreement; provided, however, that a failure to achieve or meet business objectives as defined by the company shall not be considered "cause" so long as you have devoted your best and good faith efforts and full attention to the achievement of those business objectives.
Congratulations, this is an important recognition in your career growth with Tenet.
Sincerely,
Alan R. Ewalt
April 16, 2003
PERSONAL & CONFIDENTIAL
Randy
Smith
Tenet Service Center
Dallas
Dear Randy,
I am pleased to confirm your promotion to President, Western Division, effective March 10, 2003. Accordingly, you will be eligible for the following compensation and benefits package:
a. Base Compensation: Your base salary will increase to the rate of $621,000 per year effective March 10, 2003, payable bi-weekly.
b. Annual Incentive Plan: Your target award percentage in Tenet's Annual Incentive Plan (AIP) will be increased to 60% of salary. You will also be eligible for the growth award.
c. Car Allowance: Your automobile allowance will continue at $18,100 per year, paid bi-weekly.
d. ExecuPlan Medical: You will continue to participate in Tenet's ExecuPlan which provides reimbursement for out of pocket health and dental expenses at the $5,000 annual level.
e. Stock Options: In recognition of your expanded responsibilities, at the March 11, 2003 meeting of the Compensation Committee you were granted 75,000 non qualified stock options at an exercise price of $16.65, the closing price on that date. The options will vest one-third per year. Details of the grant will be communicated under separate cover.
f. Benefits: You will continue to receive all standard employee benefits in accordance with the TenetSelect benefits plan and will continue to participate in the Supplemental Executive Retirement Program (SERP).
g. Tenet Executive Severance Protection Plan (TESPP): You have been named a participant in the Tenet Executive Severance Protection Plan which was approved by the Compensation Committee in January 2003. Details of that plan have been provided to you under separate cover.
Finally, your employment with the company will continue to be on an at-will basis which means that either you or the company may terminate the employment relationship with or without notice or with or without cause at any time. The term "cause" as used above shall include, but not be limited to, dishonesty, fraud, willful misconduct, self dealing or violation of the company's Standards of Conduct, breach of fiduciary duty (whether or not involving personal profit), failure, neglect or refusal to perform your duties in any material respect, violation of law (except traffic violations or similar minor infractions), violation of the company's Human Resources Operations or other Policies, or any material breach of this agreement; provided, however, that a failure to achieve or meet business objectives as defined by the company shall not be considered "cause" so long as you have devoted your best and good faith efforts and full attention to the achievement of those business objectives.
Congratulations, this is an important recognition in your career growth with Tenet.
Sincerely,
Alan R. Ewalt
Exhibit 10(p)
TENET EXECUTIVE SEVERANCE PROTECTION PLAN (TESPP)
The Tenet Executive Severance Protection Plan (the "Plan") will provide Covered Executives (as defined herein) of the Company with certain cash severance payments and/or other benefits in the event of a termination of the Executive's employment as a result of a Qualifying Termination (as defined herein) or under certain other circumstances following a Change of Control (as defined herein). The Plan will become effective upon the execution and delivery of an Acknowledgement and Agreement by the Covered Executive agreeing to be bound by the terms of the Plan. Once accepted, the Plan will supercede and replace any and all prior and existing plans, arrangements, and agreements between the Covered Executive and the Company regarding benefits following a Qualifying Termination and/or a Change of Control except for any benefits which are set forth in the Company's SERP but not clearly delineated in the Plan itself.
1. Covered Executive(s).
The benefits of the Plan will be provided to eligible executives who have a Qualifying Termination and execute Tenet's standard Severance Agreement and General Release at the time of the termination, and to eligible executives under defined circumstances following a Change of Control. Eligibility to participate in the Plan will be offered to all executives holding the positions of Senior Vice President, Executive Vice President, and the five Reporting Officers holding the positions of Chief Executive Officer, President, Chief Corporate Officer, Chief Financial Officer, and Vice Chairman. The newly-created position of Executive Vice Chairman is expressly excluded from the Plan.
Executives described in this paragraph are "Covered Executive(s)".
2. Qualifying Terminations.
A Covered Executive is entitled to severance benefits under the Plan if:
a) The Executive is terminated involuntarily by the Company without cause. The term "cause" shall include the following: dishonesty, fraud, willful misconduct, breach of fiduciary duty, conflict of interest, commission of a felony, a material failure or refusal to perform one's job duties in accordance with Company policies, or other wrongful conduct of a similar nature and degree. Notwithstanding, a failure to meet or achieve business objectives, as defined by the Company, shall not be considered cause so long as the Executive has devoted his/her best efforts and attention to the achievement of those objectives.
b) The Executive resigns following a "good reason," meaning: (i) a material reduction in the Executive's job duties; (ii) a reduction of ten percent (10%) or more in the Executive's combined base salary and target annual bonus, (iii) a material reduction in the Executive's retirement or supplemental retirement plan benefits, or (iv) an involuntary relocation of the Executive's primary workplace fifty (50) miles or more from its location at the time of the Qualifying Termination. In the case of (ii) and (iii) above, such reduction shall not constitute good reason if it results from a general across-the-board reduction for executives at a similar job level within the Company.
Terminations described in this paragraph are "Qualifying Termination(s)".
3. Cash Severance Payments.
Following a Qualifying Termination, a Covered Executive will be entitled to receive severance payments at an annual rate equivalent to the Executive's annual salary and target bonus at the time of the Qualifying Termination for (a) 3 years in the case of a Covered Executive who is also one of the four Reporting officers listed above, and (b) 2 years in the case of all other Covered Executives. The 3-year and 2-year periods are referred to as the "Severance Period." Cash payments will be made on
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the Company's ordinary payroll schedule, subject to the Executive's continued compliance with the restrictive covenants described below (the "Restrictive Covenants").
4. Benefit Continuation.
Following a Qualifying Termination, a Covered Executive will continue to receive during the Severance Period (a) health and welfare benefits, (but excluding Long Term Disability Insurance) on the same terms as such benefits are provided to executives at the same level employed by the Company during the Severance Period, (b) car allowance in the same amount as was provided the Executive at the time of the Qualifying Termination, and (c) such other benefits and perquisites, including ExecuPlan and mortgage differential benefits, if applicable, (but excluding club memberships and personal use of Company aircrafts) as were provided the Executive at the time of the Qualifying Termination. If a Covered Executive obtains employment during the Severance Period, his/her receipt of the benefits provided in (a) above will be mitigated to the extent equivalent coverage is provided by the Executive's new employer.
5. Age and Service Credit for Retirement Plans.
Covered Executives who are participants in the Company's Supplemental Executive Retirement Plan (SERP) at the time of a Qualifying Termination will receive age and service credit for purposes of SERP for the Severance Period. Any actual payment of retirement benefits under SERP will be made in accordance with the terms of the SERP, but not before the end of the Severance Period.
6. Option Acceleration.
a) Qualifying Termination. In the event of a Qualifying Termination, any options granted a Covered Executive after January 8, 2003 and any options granted the Executive prior to January 8, 2003 with an option price greater than $16.90 will accelerate and become fully vested. All of an Executive's vested options will then be exercisable until the end of the Severance Period unless by their terms they expire sooner or unless the Covered Executive has attained, or would have attained "Normal Retirement Age" under the Tenet Healthcare Corporation Stock Incentive Plan had he/she remained employed during the Severance Period, in which case the Executive will be treated as a retiree under the Stock Incentive Plan and any vested options will continue to be exercisable for the remainder of their term. Any options that are not subject to acceleration under this paragraph will continue to vest according to their terms and will continue to be exercisable according to the terms of their original grant. No Covered Executive will be entitled to any new stock option grant during the Severance Period.
b) Following a Change Of Control. In the event of a Change of Control, as defined herein at Paragraph 13, those executives who are eligible to participate in the Plan but have not had a Qualifying Termination will be entitled to the immediate acceleration and vesting of all their unvested options if such options are not assumed and/or substituted with equivalent options in connection with the Change of Control. In such case, the vested options shall then be exercisable according to the terms of the option plan.
7. IRC Section 280G Gross-Up.
Notwithstanding any term to the contrary in any existing Company plan or agreement, the Company will provide Covered Executives with gross-up payments for any excise taxes resulting from Internal Revenue Code Section 280G incurred as a result of severance benefits provided under this Severance Plan or any other Company benefit plan.
8. Relocation Benefits.
This paragraph shall apply only to Covered Executives who are currently entitled to receive relocation benefits following a Qualifying Termination under an existing agreement with the Company.
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This Plan, once accepted by the Executive, will supercede and replace any prior agreement regarding such benefits. Under this Plan, the Covered Executive who has a Qualifying Termination shall be entitled to a "Basic Round Trip" which consists of the following relocation benefits: (a) one house-hunting trip and related expenses to search for real property in the general area (i.e. within fifty (50) miles) from which the Executive previously relocated, (b) home sale commissions and closing costs in connection with the sale of the Executive's home in the area from which the Executive is relocating, (c) household goods moving expense and (d) relevant tax gross up for costs reimbursed under clauses (a), (b) and (c) above. The relocation benefits provided by this paragraph will expire January 8, 2006 and thus be inapplicable to any Qualifying Termination after that date.
Any future agreement for relocation benefits between the Company and one of its executives shall be granted only at the time of hire or transfer and shall be limited to the same benefits as provided in (a) through (d) above and for a term of no more than three years.
9. Restrictive Covenants.
A Covered Executive's right to receive any severance benefits under this Plan following a Qualifying Termination is expressly conditioned upon the Covered Executive's executing a severance agreement at the time of termination in a form acceptable to the Company. The severance agreement will contain certain restrictive covenants concerning confidentiality, non-disparagement, and cooperation as well as a general release of the Company. In addition, the severance agreement will impose restrictions on the Executive with respect to the solicitation of customers, employees and suppliers for a period of 2 years in the case of Covered Executives who are among the four Reporting Officers listed above, and one (1) year in the case of other Covered Executives.
The agreements and covenants of the Covered Executive in such severance agreement are referred to herein as the "Restrictive Covenants".
10. Deferred Compensation.
Any deferred compensation to which a Covered Executive is entitled under the Company's executive deferred compensation plan or any other similar plan or agreement will be distributed at the time of a Qualifying Termination based on the participant's then current distribution election.
11. Integration with Existing Agreements.
In order to achieve one uniform severance plan for senior executives of the Company, this Executive Severance Protection Plan, once accepted by a Covered Executive, will replace and supersede any and all existing arrangements, agreements, contracts and/or plans, whether oral or in writing, which the Executive might have with the Company, as they relate either to severance benefits to which the Executive is entitled following an event constituting a Qualifying termination, or as they relate to any benefits to which the executive may be entitled following a Change of Control. This includes, but is not limited to, any benefits set forth in the existing 1996 Santa Barbara Relocation Plan and the October 1995 Change of Control Severance Plan. It does not include, however, any benefits which are set forth in the Company's SERP (described in paragraph 5 above), but which are not clearly delineated in this Severance Protection Plan.
12. Expiration of Severance Protection Coverage.
To the extent permitted by law, eligibility for participation in this program by a Covered Executive shall cease upon the first day of the Tenet fiscal year in which the participant will reach age 65.
13. Change of Control Legal Payments.
The Company agrees to reimburse any Executive for any legal fees and expenses the Executive reasonably incurs in seeking to obtain benefits under this Plan in the event there is a Change of
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Control and the Company fails to provide the benefits prescribed herein to which the Executive is entitled.
14. Change of Control.
a) A "Change of Control" of the Company shall be deemed to have occurred if: (i) any Person is or becomes the beneficial owner directly or indirectly of securities of the Company representing 20% or more of the combined Voting Stock of the Company or; (ii) individuals who, as of April 1, 1994, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that (a) any individual who becomes a director of the Company subsequent to April 1, 1994, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board and (b) no individual who was elected initially (after April 1, 1994) as a director as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, or any other actual or threatened solicitations of proxies or consents by or on behalf of any person other than the Incumbent Board shall be deemed to have been a member of the Incumbent Board.
b) "Person" shall mean an individual, firm, corporation or other entity or any successor to such entity, together with all Affiliates and Associates of such Person, but "Person" shall not include the Company, any subsidiary of the Company, any employee benefit plan or employee stock plan of the Company or any subsidiary of the Company, or any Person organized, appointed, established or holding Voting Stock by, for or pursuant to the terms of such a plan.
c) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended.
d) "Voting Stock" with respect to corporation shall mean shares of that corporation's capital stock having general voting power, with "voting power" meaning the power under ordinary circumstances (and not merely upon the happening of a contingency) to vote in the election of directors.
15. Successors and Assigns.
The Tenet Executive Severance Protection Plan is intended to be a binding agreement and thus shall be binding on the Company's successors and assigns as it relates to the rights of any eligible executive who has executed a written Acknowledgement and Agreement signed by the Company agreeing to be covered by this Plan. The Company, in its sole discretion, retains the right to alter or terminate the Plan with respect to the future participation in the Plan of any new or yet to be covered executive.
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Exhibit 10(s)
FOURTH AMENDED AND RESTATED
TENET 2001
DEFERRED COMPENSATION PLAN
FOURTH AMENDED AND RESTATED
TENET 2001 DEFERRED COMPENSATION PLAN
ARTICLE I
PREAMBLE AND PURPOSE
1.1 Preamble. This Fourth Amended and Restated Tenet 2001 Deferred Compensation Plan (the "Plan") of Tenet Healthcare Corporation (the "Company"), adopted on October 8, 2002, by the Compensation Committee (the "Committee"), amends and restates the Tenet 2001 Deferred Compensation Plan adopted by the Committee on October 10, 2000, as amended and restated by the Committee on December 4, 2001, July 24, 2001 and May 22, 2001. The Plan is intended to permit the Company to attract and retain a select group of management or highly compensated employees and Directors of the Company.
Effective as of December 5, 1995, the Company adopted the Tenet Executive Deferred Compensation and Supplemental Savings Plan (as the same has been amended from time to time, the "Supplemental Plan"). Effective as of January 31, 2001, the Company transferred to this Plan amounts held for the benefit of certain participants in the Supplemental Plan, other than those balances held for the benefit of physician-employees who participate in the Supplemental Plan and participants who are in pay-out status as of December 31, 2000, under the Supplemental Plan. Effective as of December 31, 2002, the Committee authorized the merger of the Supplemental Plan into this Plan.
The Company may adopt one or more trusts to serve as a possible source of funds for the payment of benefits under this Plan.
1.2 Purpose. Through this Plan, the Company intends to permit the deferral of compensation and to provide additional benefits to Directors and a select group of management or highly compensated employees of the Company. Accordingly, it is intended that this Plan shall not constitute a "qualified plan" subject to the limitations of Section 401 (a) of the Code, nor shall it constitute a "funded plan", for purposes of such requirements. It also is intended that this Plan shall be exempt from the participation and vesting requirements of Part 2 of Title I of the Act, the funding requirements of Part 3 of Title I of the Act, and the fiduciary requirements of Part 4 of Title I of the Act by reason of the exclusions afforded plans that are unfunded and maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.
ARTICLE II
DEFINITIONS AND CONSTRUCTION
2.1 Definitions. When a word or phrase appears in this Plan with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase shall generally be a term defined in this Section 2.1. The following words and phrases with the initial letter capitalized shall have the meaning set forth in this Section 2.1, unless a different meaning is required by the context in which the word or phrase is used.
(a) " Account " means one or more of the bookkeeping accounts maintained by the Company or its agent on behalf of a Participant, as described in more detail in Section 4.3.
(b) " Act " means the Employee Retirement Income Security Act of 1974, as amended from time to time.
(c) " Affiliate " means a corporation that is a member of a controlled group of corporations (as defined in Section 414(b) of the Code) that includes the Company, any trade or business (whether or not incorporated) that is in common control (as defined in Section 414(c) of the
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Code) with the Company, or any entity that is a member of the same affiliated service group (as defined in Section 414(m) of the Code) as the Company.
(d) "Alternate Payee" means any spouse, former spouse, child, or other dependent of a Participant who is recognized by a DRO as having a right to receive all, or a portion of, the benefits payable under the Plan with respect to such Participant.
(e) " Annual Incentive Plan Award " means the amount payable to an Employee each year, if any, under the Company's 1997 Annual Incentive Plan, as the same may be amended, restated, modified, renewed or replaced from time to time.
(f) " Basic Deferral " means the Compensation deferral made by a Participant pursuant to Section 4.1(a).
(g) " Beneficiary " means the person designated by the Participant to receive a distribution of his/her benefits under the Plan upon the death of the Participant. If the Participant is married, his/her spouse shall be his/her Beneficiary, unless his/her spouse consents in writing to the designation of an alternate Beneficiary. In the event that a Participant fails to designate a Beneficiary, or if the Participant's Beneficiary does not survive the Participant, the Participant's Beneficiary shall be his/her surviving spouse, if any, or if the Participant does not have a surviving spouse, his/her estate. The term "Beneficiary" also shall mean a Participant's spouse or former spouse who is entitled to all or a portion of a Participant's benefit pursuant to Section 6.1.
(h) " Board " means the Board of Directors of the Company.
(i) " Bonus " means (i) a bonus paid to a Participant in the form of an Annual Incentive Plan Award, or (ii) any other bonus payment designated by the PAC as an eligible bonus under the Plan.
(j) " Bonus Deferral " means the Bonus deferral made by a Participant pursuant to Section 4.1(b).
(k) " Change of Control " of the Company shall be deemed to have occurred if either (i) any person, as such term is used in Section 13(c) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities, or (ii) individuals who, as of August 1, 2000, constitute the Board of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board at any time; provided, however, that (a) any individual who becomes a director of the Company subsequent to August 1, 2000, whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of directors then comprising the Incumbent Board shall be deemed to have been a member of the Incumbent Board, and (b) no individual who is elected initially (after August 1, 2000) as a director as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any other actual or threatened solicitations of proxies or consent by or on behalf of any person other than the Incumbent Board shall be deemed to have been a member of the Incumbent Board.
(l) " Code " means the Internal Revenue Code of 1986, as amended from time to time.
(m) " Company " means Tenet Healthcare Corporation.
(n) " Compensation " means base salaries, commissions, and certain other amounts of cash compensation payable to the Participant during the Plan Year. Compensation shall exclude cash bonuses, foreign service pay, hardship withdrawal allowances and any other pay intended to reimburse the Employee for the higher cost of living outside the United States, Annual Incentive
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Plan Awards, automobile allowances, ExecuPlan payments, housing allowances, relocation payments, deemed income, income payable under stock incentive plans, Christmas gifts, insurance premiums, and other imputed income, pensions, retirement benefits, and contributions to and payments from the 401 (k) Plan and this Plan. The term "Compensation" for Directors shall mean any cash compensation from retainers, meeting fees and committee fees paid during the Plan Year.
(o) " Compensation Committee " means the Compensation Committee of the Board, which has the authority to amend and terminate the Plan as provided in Article X. The Compensation Committee also will be responsible for determining the amount of the Discretionary Contribution and Supplemental Director Contribution, if any, to be made by the Company.
(p) " Compensation Deferrals " means the Basic Deferrals, Supplemental Deferrals and Discretionary Deferrals made pursuant to Section 4.1 of the Plan.
(q) " Covered Person " means a covered employee within the meaning of Code Section 162(m)(3) or an Employee designated as a Covered Person by the Compensation Committee.
(r) "Director" means a member of the Board who is not an Employee of the Company.
(s) " Disability " means the total and permanent incapacity of a Participant, due to physical impairment or mental incompetence, to perform the usual duties of his/her employment with the Company or an Affiliate. Disability shall be determined by the Plan Administrator on the basis of (i) evidence that the Participant has become entitled to receive benefits from a Company sponsored long-term disability plan or (ii) evidence that the Participant has become entitled to receive primary benefits as a disabled employee under the Social Security Act in effect on such date of Disability or (iii) in the case of Directors, such evidence that the Plan Administrator deems appropriate.
(t) " Discretionary Contribution " means the contribution made by the Company on behalf of a Participant as described in Section 4.2(b).
(u) " Discretionary Deferral " means the Compensation deferral described in Section 4.1 (d) made by a Participant.
(v) "DRO" means a Domestic Relations Order that is a judgment, decree, or order (including one that approves a property settlement agreement) that relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of a Participant and is rendered under a state (within the meaning of Section 7701(a)(10) of the Code) domestic relations law (including a community property law) and that:
(i) Creates or recognizes the existence of an Alternate Payee's right to, or assigns to an Alternate Payee the right to receive all or a portion of the benefits payable with respect to a Participant under the Plan;
(ii) Does not require the Plan to provide any type or form of benefit, or any option, not otherwise provided under the Plan;
(iii) Does not require the Plan to provide increased benefits (determined on the basis of actuarial value);
(iv) Does not require the payment of benefits to an Alternate Payee that are required to be paid to another Alternate Payee under another order previously determined to be a DRO; and
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(v) Clearly specifies: the name and last known mailing address of the Participant and of each Alternate Payee covered by the DRO; the amount or percentage of the Participant's benefits to be paid by the Plan to each such Alternate Payee, or the manner in which such amount or percentage is to be determined; the number of payments or payment periods to which such order applies; and that it is applicable with respect to this Plan.
(w) " Effective Date " means January 1, 2001.
(x) " Election Form " means the written form(s) provided by the PAC or the Plan Administrator pursuant to which the Participant consents to participation in the Plan and makes elections with respect to deferrals, requested investment crediting rates and distributions hereunder.
(y) " Eligible Employee " means (i) each Employee who is eligible for the Company's Annual Incentive Plan Award for the applicable Plan Year, (ii) each Director and (iii) all aviation personnel who are designated as captains. In addition, the term "Eligible Employee" shall include any Employee designated as an Eligible Employee by the PAC. The PAC may, in its sole and absolute discretion, limit the classification of Employees who are eligible to participate in the Plan for a Plan Year without the need for an amendment to the Plan. Any such limitation shall be set forth in a resolution by the PAC and attached hereto as an Exhibit to the Plan.
(z) " Emergency " means a Foreseeable Emergency or Unforeseeable Emergency that makes a Participant eligible for a Financial Necessity Distribution under Section 5.5.
(aa) " Employee " means each select member of management or highly compensated employee receiving remuneration, or who is entitled to remuneration, for services rendered to the Company or to an Affiliate who has adopted this Plan, in the legal relationship of employer and employee.
(bb) "Fair Market Value" means the closing price of a share of Stock on the New York Stock Exchange on the date as of which fair market value is to be determined.
(cc) " Foreseeable Emergency " means a severe financial hardship to the Participant resulting from an event that, although foreseeable, is outside the Participant's control, as determined by the Plan Administrator in its sole and absolute discretion. Such potentially foreseeable but uncontrollable events include the following: (i) expenses for medical care described in Section 213(d) of the Code incurred by the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Section 152 of the Code) or necessary for those persons to obtain medical care described in Section 213(d) of the Code; (ii) such other events deemed by the Plan Administrator, in its sole and absolute discretion, to constitute a Foreseeable Emergency.
(dd) " 401 (k) Plan " means the Tenet Healthcare Corporation Retirement Savings Plan or the Tenet 401 (k) Retirement Savings Plan, as such plans may be amended, restated, modified, renewed or replaced from time to time.
(ee) " Matching Contribution " means the contribution made by the Company pursuant to Section 4.2(a) on behalf of a Participant who either makes Supplemental Deferrals to the Plan as described in Section 4.1 (c), or is not eligible for an employer matching contribution under the 401 (k) Plan.
(ff) " Non-Scheduled Withdrawal " means an election by a Participant in accordance with Section 5.4 to receive a withdrawal of amounts from his/her Account prior to the time at which such Participant otherwise would be entitled to such amounts.
(gg) " Open Enrollment Period " means the period prior to the beginning of the Plan Year during which an Eligible Employee may make his/her elections concerning Compensation Deferrals pursuant to Article IV, and distribution elections in accordance with Article V.
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(hh) " PAC " means the Pension Administration Committee of the Company established by the Compensation Committee of the Board, and whose members have been appointed by such Compensation Committee. The PAC shall have the responsibility to administer the Plan and make final determinations regarding claims for benefits, as described in Article VIII.
(ii) " Participant " means each Eligible Employee who has been designated for participation in this Plan and each Employee or former Employee whose participation in this Plan has not terminated.
(jj) " Plan " shall have the meaning set forth in Section 1.1 above.
(kk) " Plan Administrator " means the individual or entity appointed by the PAC to handle the day-to-day administration of the Plan, including but not limited to determining a Participant's eligibility for benefits and the amount of such benefits and complying with all applicable reporting and disclosure obligations imposed on the Plan. If the PAC does not appoint an individual or entity as Plan Administrator, the PAC shall serve as the Plan Administrator.
(ll) " Plan Year " means the fiscal year of this Plan, which shall commence on January 1 each year and end on December 31 of such year.
(mm) " Scheduled Withdrawal Date " means the distribution date elected by the Participant for an in-service withdrawal of amounts of Basic Deferrals and Bonus Deferrals deferred in a given Plan Year, and earnings or losses attributable thereto, as set forth on the Election Form for such Plan Year.
(nn) "Stock" means the common stock, par value $0.075 per share, of the Company.
(oo) " Stock Unit " means a non-voting, non-transferable unit of measurement that is deemed for bookkeeping and distribution purposes only to represent one outstanding share of Stock.
(pp) " Supplemental Deferral " means the Compensation Deferral described in Section 4.1(c).
(qq) "Supplemental Director Contribution" means the contribution made by the Company on behalf of a Director as described in Section 4.2(c).
(rr) " Supplemental Plan " shall have the meaning set forth in Section 1.1 of this Plan.
(ss) " Unforeseeable Emergency " means a severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or one of the Participant's dependents (as defined under Section 152(a) of the Code); (ii) loss of the Participant's property due to casualty; or (iii) such other similar extraordinary and unforeseeable circumstances arising as a result of an unforeseeable event or events beyond the control of the Participant, as determined by the Plan Administrator in its sole and absolute discretion.
2.2 Construction. If any provision of this Plan is determined to be for any reason invalid or unenforceable, the remaining provisions of this Plan shall continue in full force and effect. All of the provisions of this Plan shall be construed and enforced in accordance with the laws of the State of California and shall be administered according to the laws of such state, except as otherwise required by the Act, the Code or other applicable federal law. The term "delivered to the PAC or Plan Administrator," as used in this Plan, shall include delivery to a person or persons designated by the PAC or Plan Administrator, as applicable, for the disbursement and the receipt of administrative forms. Delivery shall be deemed to have occurred only when the form or other communication is actually received. Headings and subheadings are for the purpose of reference only and are not to be considered in the construction of this Plan.
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ARTICLE III
PARTICIPATION AND FORFEITABILITY OF BENEFITS
3.1 Eligibility and Participation. It is intended that eligibility to participate in the Plan shall be limited to Eligible Employees, as determined by the PAC, in its sole and absolute discretion. Prior to the beginning of each Plan year, each Eligible Employee will be contacted and informed that he/she may elect to defer portions of his/her Compensation and/or Bonus and shall be provided with an Election Form, investment crediting rate preference designation and such other forms as the PAC or the Plan Administrator shall determine. An Eligible Employee shall become a Participant by completing all required forms and making a deferral election pursuant to Section 4.1. Eligibility to become a Participant for any Plan Year shall not entitle an Eligible Employee to continue as an active Participant for any subsequent Plan Year.
If an Eligible Employee is hired/retained during the Plan Year and designated by the PAC to be a Participant for such year, such Eligible Employee may elect to participate within 30 days from the date he/she is notified that he/she is eligible to participate in the Plan, for the remainder of such Plan Year, by completing all required forms and making a deferral election pursuant to Section 4.1. Designation as a Participant for the Plan Year in which he/she is hired/retained shall not entitle the Eligible Employee to continue as an active Participant for any subsequent Plan Year.
A Participant under this Plan who separates from employment with the Company, or who ceases to be a Director, will continue as an inactive Participant under this Plan until the Participant has received payment of all amounts payable to him/her under this Plan. In the event that an Eligible Employee shall cease active participation in the Plan because the Eligible Employee is no longer described as a Participant pursuant to this Section 3.1, or because he/she shall cease making deferrals of Compensation and/or Bonuses, the Eligible Employee shall continue as an inactive Participant under this Plan until he/she has received payment of all amounts payable to him/her under this Plan.
3.2 Forfeitability of Benefits. Except as provided in Section 5.4 and Section 6.1, a Participant shall at all times have a nonforfeitable right to amounts credited to his/her Account pursuant to Section 4.3, subject to the distribution provisions of Article V. As provided in Section 7.2, however, each Participant shall be only a general creditor of the Company or the Participant's employing Affiliate with respect to the payment of any benefit under this Plan.
ARTICLE IV
DEFERRAL, COMPANY CONTRIBUTIONS, ACCOUNTING
AND INVESTMENT CREDITING RATES
4.1 Deferral. An Eligible Employee who is designated by the PAC to be an Eligible Employee for a Plan Year may become a Participant for such Plan Year by electing to defer Compensation and/or his/her Bonus pursuant to an Election Form. Such Election Form shall be submitted to the Company not later than a date to be set by the Plan Administrator and shall be effective with respect to deferral elections with the first paycheck dated on or after the next following January 1. In the case of an Eligible Employee who is hired/retained during the Plan Year, the Election Form shall be entered into within 30 days after the Eligible Employee is provided with notice of his/her eligibility to participate in the Plan and shall only be effective with respect to deferral elections with respect to Compensation and/or Bonuses earned after the date such Election Form is received by the Plan Administrator. A Participant's Election Form shall only be effective with respect to a single Plan Year and shall be irrevocable for the duration of such Plan Year. Deferral elections for each subsequent Plan Year of participation shall be made pursuant to a new Election Form.
Compensation deferred by a Participant may be distributed, at the Participant's election, either in a lump sum or, in certain instances as described herein, in equal monthly installments over a period of not less than one year nor more than 15 years. On each Election Form, the Participant shall specify the
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method in which Compensation and/or Bonuses deferred under the Plan shall be paid. If the Participant, during the Open Enrollment Period, elects a different method of payment on a subsequent Election Form, such form of payment election shall supersede any prior payment elections made on an earlier Election Form, provided such election has been in effect for 12 months.
Four types of deferrals may be made under the Plan:
(a) Basic Deferral. Each Eligible Employee may elect to defer a stated dollar amount, or designated full percentage, of Compensation to the Plan up to a maximum percentage of 75% (100% for Directors) of the Eligible Employee's Compensation for such Plan Year. The Company shall not make any Matching Contributions with respect to any Basic Deferrals made to the Plan.
(b) Bonus Deferral. Each Eligible Employee may elect to defer a stated dollar amount, or designated full percentage, of his/her Bonus to the Plan up to a maximum percentage of 100% (97% if a Supplemental Deferral is elected pursuant to Section 4.1(c)) of the Employee's Bonus for such Plan Year. The Company shall not make any Matching Contributions with respect to any Bonus Deferrals made to the Plan.
(c) Supplemental Deferral. Each Eligible Employee may elect to make Supplemental Deferrals to the Plan in accordance with the following provisions of this Section 4.1(c).
(i) Statutory Limits. Each Eligible Employee who is also a participant in the 401 (k) Plan may elect to automatically have 3% of his/her Compensation deferred under the Plan when he/she reaches any of the following statutory limitations under the 401 (k) Plan: (A) the limitation on Compensation under Section 401(a)(17) of the Code, as such limit is adjusted for cost of living increases; (B) the limitation imposed on elective deferrals under Section 402(g) of the Code, as such limit is adjusted for cost of living increases; (C) the limitations on contributions and benefits under Section 415 of the Code; or (D) the limitations on contributions imposed by the 401(k) Plan administrator in order to satisfy the limitations on contributions under sections 401 (k) and 401 (m) of the Code.
(ii) Bonus. Each Eligible Employee who is also a participant in the 401 (k) Plan may elect to automatically have 3% of his/her Bonus deferred under the Plan as a Supplemental Deferral whether or not the Eligible Employee has reached the statutory limitations under the 401 (k) Plan described in Section 4.1(c)(i). This Supplemental Deferral shall be applied to that portion of the Eligible Employee's Bonus in excess of that deferred as a Bonus Deferral under Section 4.1(b). For example, if the Eligible Employee elects to defer 50% of his/her Bonus under Section 4.1(b) and also elects to make a Supplemental Deferral under this Section 4.1(c), 50% of the Eligible Employee's Bonus will be deferred under Section 4.1(b) and 3% of the Eligible Employee's Bonus will be deferred under this Section 4.1(c).
(iii) 401(k) Plan Before-Tax Savings Contribution Eligibility. Each Eligible Employee who elects to participate in this Plan prior to the date on which he/she becomes eligible to make before-tax savings contributions to the 401(k) Plan, may elect, until such 401(k) Plan before-tax contribution eligibility date, to defer 3% of his/her Compensation under the Plan as a Supplemental Deferral for such Plan Year. Upon the Eligible Employee's 401 (k) Plan before-tax contribution eligibility date, his/her Supplemental Deferrals under this Section 4.1(c)(iii) shall cease and any subsequent Supplemental Deferrals shall only be made by the Employee pursuant to Section 4.1(c)(i) or Section 4.1(c)(ii), as applicable.
(d) Discretionary Deferral. The PAC may authorize an Eligible Employee to defer a stated dollar amount, or designated full percentage, of Compensation to the Plan as a Discretionary Deferral. The PAC, in its sole and absolute discretion, may limit the amount or percentage of Compensation an Eligible Employee may defer to the Plan as a Discretionary Deferral. The Company shall not make any Matching Contributions pursuant to Section 4.2(a) with respect to
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any Discretionary Deferrals, but may elect to make a Discretionary Contribution to the Plan with respect to such Discretionary Deferrals in the form of a discretionary matching contribution as described in Section 4.2(b).
4.2 Company Contributions.
(a) Matching Contribution. The Company shall make a Matching Contribution to the Plan each Plan Year on behalf of each Participant who makes a Supplemental Deferral to the Plan. Such Matching Contribution shall equal 100% of the Participant's Supplemental Deferrals for such Plan Year. In addition, the Company shall make a Matching Contribution to the Plan for the Plan Year on behalf of each Participant who is eligible to participate in the 401 (k) Plan but is not eligible to receive an employer matching contribution under the 401 (k) Plan by reason of the one year eligibility service requirement. Such Matching Contribution shall equal 3% of the Participant's Compensation earned during the period beginning on the date on which such Participant elects to make Supplemental Deferrals to the Plan in accordance with Section 4.1(c)(iii).
(b) Discretionary Contribution. The Company may elect to make a Discretionary Contribution to a Participant's Account in such amount, and at such time, as shall be determined by the Compensation Committee. If a Participant who is a Covered Person receives a Discretionary Contribution, that Participant shall not be permitted to receive that Discretionary Contribution until such Participant's employment with the Company is terminated; provided, however, that if such Participant has elected to receive a distribution upon the occurrence of a Change of Control and a Change of Control occurs, such Participant shall be entitled to receive such Change of Control distribution in accordance with Section 5.9 of this Plan.
(c) Supplemental Director Contribution. The Company shall make a Supplemental Director Contribution to the Plan on behalf of each Director who makes a Basic Deferral and makes a request for amounts deferred to be invested in Stock Units pursuant to Section 4.4(b). On each date on which a Director's Basic Deferral is invested in Stock Units, the Company will make a Supplemental Director Contribution in an amount equal to 15% of the amount of the Director's Basic Deferral invested in Stock Units on such date. Such Supplemental Director Contribution shall be invested in Stock Units for the account of such Director.
4.3 Accounting for Deferred Compensation.
(a) Cash Account. If a Participant has made an election to defer his/her Compensation and/or Bonus and has made a request for amounts deferred to be invested pursuant to Section 4.4(a), the Company may, in its sole and absolute discretion, establish and maintain a cash Account for the Participant under this Plan. Each cash Account shall be adjusted at least quarterly to reflect the Basic Deferrals, Bonus Deferrals, Supplemental Deferrals, Discretionary Deferrals, Matching Contributions and Discretionary Contributions credited thereto, earnings or losses credited on such Basic Deferrals, Bonus Deferrals, Supplemental Deferrals, Discretionary Deferrals, Matching Contributions and Discretionary Contributions, and any payment or withdrawal of such Basic Deferrals, Bonus Deferrals, Supplemental Deferrals, Discretionary Deferrals and, Matching Contributions and Discretionary Contributions. The amounts of Basic Deferrals, Bonus Deferrals, Supplemental Deferrals, Discretionary Deferrals and Matching Contributions shall be credited to the Participant's cash Account within five business days of the date on which such Compensation and/or Bonus would have been paid to the Participant had the Participant not elected to defer such amount pursuant to the terms and provisions of the Plan. Any Discretionary Contributions shall be credited to each Participant's cash Account at such times as determined by the Compensation Committee. In the sole and absolute discretion of the Plan Administrator, more than one cash Account may be established for each Participant to facilitate record-keeping convenience and accuracy. Each such cash Account shall be credited and adjusted as provided in this Plan.
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(b) Stock Unit Account. If a Participant has made an election to defer his/her Compensation and/or Bonus and has made a request for amounts deferred to be invested in Stock Units pursuant to Section 4.4(b), the Company may, in its sole and absolute discretion, establish and maintain a Stock Unit Account and credit the Participant's Stock Unit Account, within five business days of the date on which such Compensation and/or Bonus otherwise would have been payable, with a number of Stock Units determined by dividing an amount equal to the Basic Deferrals, Bonus Deferrals, Supplemental Deferrals, Discretionary Deferrals, Matching Contributions and Discretionary Contributions made as of such date by the Fair Market Value of a share of Stock on the fifth day following the date such Compensation and/or Bonus otherwise would have been payable. In the sole and absolute discretion of the Plan Administrator, more than one Stock Unit Account may be established for each Participant to facilitate record-keeping convenience and accuracy.
(i) The Stock Units credited to a Participant's Stock Unit Account shall be used solely as a device for determining the number of shares of Stock eventually to be distributed to the Participant in accordance with this Plan. The Stock Units shall not be treated as property of the Participant or as a trust fund of any kind. No Participant shall be entitled to any voting or other stockholder rights with respect to Stock Units credited under this Plan.
(ii) If the outstanding shares of Stock are increased, decreased, or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to such shares of Stock or other securities, through merger, consolidation, spin-off, sale of all or substantially all the assets of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other distribution with respect to such shares of Stock or other securities, an appropriate and proportionate adjustment shall be made by the Compensation Committee in the number and kind of Stock Units credited to a Participant's Stock Unit Account.
(c) Accounts Held in Trust. Amounts credited to Participants' Accounts may be secured by one or more trusts, as provided in Section 7.1, but shall be subject to the claims of the Company's general creditors. Although the principal of such trust and any earnings or losses thereon shall be separate and apart from other funds of the Company and shall be used for the purposes set forth therein, neither the Participants nor their Beneficiaries shall have any preferred claim on, or any beneficial ownership in, any assets of the trust prior to the time such assets are paid to the Participant or Beneficiaries as benefits and all rights created under this Plan shall be unsecured contractual rights of Plan Participants and Beneficiaries against the Company. Any assets held in the trust shall be subject to the claims of the Company's general creditors under federal and state law in the event of insolvency. The assets of any trust established pursuant to this Plan shall never inure to the benefit of the Company and the same shall be held for the exclusive purpose of providing benefits to Participants and their beneficiaries.
4.4 Investment Crediting Rates. At the time of making a deferral election described in Section 4.1, the Participant shall request on an Election Form the type of investment crediting rate option with which the Participant would like the Company, in its sole and absolute discretion, to credit the Participant: one of several investment crediting rate options payable in cash or an investment crediting rate option based on the performance of the price of the Company's Stock and payable in the Company's Stock.
(a) Cash Investment Crediting Rate Options. A Participant may request on an Election Form the type of investment in which the Participant would like amounts deferred by the Participant to be deemed invested for purposes of determining the amount of earnings or losses to
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be credited or losses to be debited to his/her cash Account. The Participant shall specify his/her preference from among the following possible investment crediting rate options:
(i) An annual rate of interest equal to 1% below the prime rate of interest as quoted by Bloomberg, compounded daily; or
(ii) One or more benchmark mutual funds.
A Participant may change, on a daily basis, the investment crediting rate preference under this Section 4.4(a) by filing an election in such manner as shall be determined by the PAC. Notwithstanding any request made by a Participant, the Company, in its sole and absolute discretion, shall determine the investment rate with which to credit amounts deferred by Participants under this Plan, provided, however, that if the Company chooses an investment crediting rate other than the investment crediting rate requested by the Participant, such investment crediting rate cannot be less than (i) above.
(b) Stock Units. A Participant may request on an Election Form to have amounts deferred by him/her invested in Stock Units. Deferrals invested in Stock Units are irrevocable and shall be distributed in an equivalent whole number of shares of Stock. Any fractional share interests shall be paid in cash with the last distribution.
(c) Deemed Election. In his/her request(s) pursuant to this Section 4.4, the Participant may request that all or any multiple of his/her Account (in whole percentage increments) be deemed invested in one or more of the investment crediting rate preferences provided under the Plan as communicated from time to time by the PAC. Although a Participant may express an investment crediting rate preference, the Company shall not be bound by such request. If a Participant fails to set forth his/her investment crediting rate preference under this Section 4.4, he/she shall be deemed to have elected an annual rate of interest equal to 1% below the prime rate of interest as quoted by Bloomberg, compounded daily. The PAC shall select from time to time, in its sole and absolute discretion, the possible investment crediting rate options to be offered on a Participant's deferrals and contributions for any Plan Year.
(d) Transferred Accounts. The Company retains the right in its sole and absolute discretion to transfer a Participant's Supplemental Plan account balance, as the Company deems appropriate, from the Supplemental Plan to this Plan. In the event that the Company determines that a transfer of a Participant's Supplemental Plan account balance to this Plan is appropriate, a Participant shall be permitted to express an investment crediting rate preference with respect to such transferred amounts. In the event a Participant's Supplemental Plan account balance is transferred from the Supplemental Plan to this Plan, such transferred amount shall be treated in all other respects as if such amount were initially deferred pursuant to the terms of this Plan.
(e) Company Contributions. Contributions to the Plan made by the Company and allocated to a Participant's Account pursuant to Section 4.2 shall be invested in accordance with the investment crediting rate requested by such Participant on his/her Election Form for the relevant Plan Year.
ARTICLE V
DISTRIBUTION OF BENEFITS
5.1 General Rules. A Participant may elect to receive payment on Basic Deferrals and Bonus Deferrals, and earnings or losses thereon, at any of the following times:
(a) As soon as practicable after termination of a Participant's employment, retirement, Disability or death;
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(b) In the first January following, or in the second January following, but not later than the second January following, the Participant's termination of employment, retirement, Disability or death; or
(c) At a specified future date while still in the employ of the Company.
Supplemental Deferral Balances and earnings or losses thereon, are distributable only upon a Participant's termination of employment, retirement, Disability or death.
All distributions from the Plan shall be taxable as ordinary income when received and subject to appropriate withholding of income taxes.
5.2 Distributions Resulting from Termination. In the case of a Participant who terminates employment with the Company for any reason and has an Account balance of $100,000 or less, such Participant shall be paid the balance in his/her Account in a lump sum in accordance with Section 5.1.
A Participant who has an Account balance in excess of $100,000 may elect either a lump sum distribution or monthly installments over a period of not less than one nor more than 15 years. Such Participant's Election Form that has been in effect for at least 12 months and made during an Open Enrollment Period shall govern the form of distribution. In the event a Participant elects monthly installments, such installment payments will begin in accordance with Section 5.1(a) or 5.1(b). All amounts held for a Participant's or Beneficiary's benefit shall be revalued annually if paid in installments.
5.3 Scheduled In-Service Withdrawals. In the case of a Participant who, while still in the employ of the Company, has elected a Scheduled Withdrawal Date for distribution of his/her Basic Deferrals and Bonus Deferrals, and earnings or losses thereon, such Participant shall receive a lump sum payment that must occur at least two calendar years after the end of the Plan Year in which the Basic and Bonus Deferrals occurred. A Participant may extend the Scheduled Withdrawal Date with respect to Basic Deferrals and Bonus Deferrals for any Plan Year, provided (i) such extension occurs at least one year before the Scheduled Withdrawal Date, (ii) such extension is for a period of not less than two years from the Scheduled Withdrawal Date, (iii) the Participant may not extend the Scheduled Withdrawal Date more than two times and (iv) any such extension shall be effective only if consented to by the PAC. All such lump sum distributions will be paid in the January of the year specified on the election form.
If a Participant retires, terminates employment, incurs a Disability or dies prior to any Scheduled Withdrawal Date, the Scheduled In-Service Withdrawal will be disregarded and waived and the Participant's Account balance will be distributed after the Participant's retirement, death, Disability or termination of employment in the same form of distribution elected with respect to retirement, death, Disability or termination.
5.4 Non-Scheduled Withdrawals. A Participant shall be permitted to elect a Non-Scheduled Withdrawal, subject to the following restrictions:
(a) The election to take a Non-Scheduled Withdrawal shall be made by filing a form provided by and filed with the PAC prior to the end of any calendar month.
(b) The amount of the Non-Scheduled Withdrawal shall in all cases not exceed 90% of the gross amount of a Participant's Account balance.
(c) The amount described in subsection (b) above shall be paid in a lump sum as soon as practicable after the end of the month in which the Non-Scheduled Withdrawal election is made.
(d) If a Participant receives a Non-Scheduled Withdrawal from his/her Account, the Participant shall permanently forfeit an amount equal to 10% of the gross amount of the
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Non-Scheduled Withdrawal and the Company shall have no obligation to the Participant or his/her Beneficiary with respect to such forfeited amount.
(e) If a Participant receives a Non-Scheduled Withdrawal of any part of his/her Account, the Participant will be ineligible to participate in the Plan for the balance of the Plan Year and the next following Plan Year.
5.5 Financial Necessity Distributions.
(a) Unforeseeable Emergency. Upon application by the Participant, the Plan Administrator, in its sole and absolute discretion, may direct payment of all or a portion of the Basic Deferrals, Bonus Deferrals and/or Discretionary Deferrals credited to the Account of a Participant prior to his/her separation from employment or termination as a Director in the event of an Unforeseeable Emergency. Any such application shall set forth the circumstances constituting such Unforeseeable Emergency.
In addition to the deferrals specified in this Section 5.5(a), upon application by the Participant, the Plan Administrator, in its sole and absolute discretion, may direct payment of all or a portion of the Supplemental Deferrals credited to the Account of the Participant prior to his/her separation from employment or termination as a Director in the event of an Unforeseeable Emergency. Such application and payment shall be subject to the same conditions and limitations as a request for any other payment of deferrals under this Section 5.5.
(b) Foreseeable Emergency. Upon application by the Participant, the Plan Administrator, in its sole and absolute discretion, may direct payment of all or a portion of the Basic Deferrals, Bonus Deferrals and/or Discretionary Deferrals credited to the Account of a Participant prior to his/her separation from employment or termination as a Director in the event of an Foreseeable Emergency. Any such application shall set forth the circumstances constituting such Foreseeable Emergency.
(c) General Rules Regarding Financial Necessity Distributions. The Plan Administrator may not direct payment of any Basic Deferrals, Bonus Deferrals, Supplemental Deferrals, and/or Discretionary Deferrals credited to the Account of a Participant to the extent that such an Emergency is or may be relieved (i) by reimbursement or compensation by insurance or otherwise or (ii) by cessation of Basic Deferrals, Bonus Deferrals and/or Discretionary Deferrals under this Plan. In the event that the Plan Administrator, in its sole and absolute discretion, shall determine that such Emergency may be alleviated by such cessation of deferrals under the Plan, the Plan Administrator shall deny such financial necessity distribution and require the cancellation of the Participant's Basic Deferral, Bonus Deferral and/or Discretionary Deferral elections for the Plan Year in which an Emergency shall occur. Conversely, if the Plan Administrator, in its sole and absolute discretion, shall determine that such Emergency may not be alleviated by such cessation of Basic Deferrals, Bonus Deferrals and/or Discretionary Deferrals, it may approve such financial necessity distribution. Any distribution from the Plan due to Emergency shall be permitted only to the extent necessary to satisfy such Emergency, in the sole and absolute discretion of the Plan Administrator, both with respect to the determination as to whether an Emergency exists and also with respect to determination of the amount distributable. The Plan Administrator may permit a financial necessity distribution under this Section 5.5, but as a result the Participant will be ineligible to participate in the Plan for the balance of the Plan Year and the next following Plan Year.
5.6 Elective Distributions. A Participant may elect to receive a distribution of amounts credited to his/her Account upon a determination by the Internal Revenue Service or a state taxing authority of competent jurisdiction that amounts credited to such Account are subject to inclusion in the gross income of such Participant or Beneficiary for federal or state income tax purposes. Neither the PAC
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nor the Plan Administrator shall have any obligation to determine whether any such determination is or has been made with respect to any Participant and shall assume that no such determination has been made until advised by the Participant, in writing, that such determination has been made and that either such determination is final and binding, or that obtaining judicial review of such determination is not reasonably likely to result in a reversal of such determination or is economically prohibitive.
5.7 Death of a Participant. If a Participant dies while employed by the Company, the Participant's Account balance will be paid to the Participant's Beneficiary in the manner elected by the Participant.
In the event a terminated Participant dies while receiving installment payments, the remaining installments shall be paid to the Participant's Beneficiary as such payments become due.
In the event a terminated Participant dies before receiving his/her lump sum payment or before he/she begins receiving installment payments, the lump sum payment or installment payments shall be paid to the Participant's Beneficiary as such payments become due.
5.8 Disability of a Participant. In the event of the Disability of the Participant, the Participant shall be entitled to a distribution of the Participant's Account balance in the manner elected in advance by the Participant and, if applicable, in accordance with Section 6.2.
5.9 Change of Control. A Participant may, during an Open Enrollment Period, file an Election Form in which the Participant elects to receive a lump sum distribution of his/her Account balance in the event that a Change of Control, as defined in Section 2.1(j), occurs. The Participant's election with respect to a distribution of his/her Account in the event of a Change of Control must have been in effect for 12 months prior to the time of the Change of Control. If elected, payment will be made as soon as practicable, but in any event not more than six months, after the occurrence of a Change of Control.
Notwithstanding any provision in this Plan to the contrary, to the extent that any portion of the lump sum distribution is characterized as a parachute payment within the meaning of Proposed Regulations Section 1.280G-1 Q/A-24, or any similar Regulations, then in no event shall the present value of such parachute payment, when added to the present value of all other parachute payments received as a result of a Change of Control, exceed 299% of the Participant's "base amount" as that term is defined in Section 280G of the Code.
If a Participant has elected to receive a lump sum distribution of his/her Account balance in the event of a Change of Control, a portion of which distribution is characterized as a parachute payment, and such portion, when added to the present value of all other parachute payments to be received as a result of a Change of Control, exceeds an amount equal to 299% of the Participant's base amount, then the Participant may elect (a) to revoke the election made pursuant to this Section 5.9, or (b) to receive in a lump sum distribution that portion of his/her Account balance which does not result in a parachute payment with the remainder being distributed in accordance with the Participant's election under Section 5.1.
5.10 Withholding. Any taxes or other legally required withholdings from Compensation and Bonus deferrals and/or payments to Participants or Beneficiaries hereunder shall be deducted and withheld by the Company, benefit provider or funding agent as required pursuant to applicable law. A Participant or Beneficiary shall be provided with a tax withholding election form for purposes of federal and state tax withholding, if applicable.
5.11 Suspension of Benefits. If a Participant terminates service and begins receiving installment distributions and such Participant is reemployed by the Company, then such Participant's installment distributions shall be suspended during the period of his/her reemployment. Upon the Participant's subsequent termination of service, such installment distributions shall recommence in the same form as
14
they were being paid before the reemployment, unless during the period of the Participant's reemployment he/she is eligible to participate in the Plan and elects a different form of payment on his/her Election Form in accordance with this Article V.
ARTICLE VI
PAYMENT LIMITATIONS
6.1 Spousal Claims.
(a) In the event that an Alternate Payee is entitled to all or a portion of a Participant's Account(s) pursuant to the terms of a DRO, such Alternate Payee shall have the following distribution rights with respect to such Participant's Account(s):
(i) payment of benefit in a lump sum as soon as practicable following the acceptance of the DRO by the Plan Administrator;
(ii) payment of benefit in a lump sum in the first January following, or in the second January following, but not later than the second January following, the acceptance of the DRO by the Plan Administrator;
(iii) payment of benefit in equal monthly installments over a period of not less than one nor more than 15 years from the date the DRO is accepted by the Plan Administrator, but only if the Alternate Payee has an Account balance in excess of $100,000;
(iv) payment of benefit in equal monthly installments over a period of not less than one nor more than 15 years beginning the first January following, or the second January following, the date the DRO is accepted by the Plan Administrator, but only if the Alternate Payee has an Account balance in excess of $100,000.
An Alternate Payee who desires to elect either of the distributions described in subsections (ii) or (iii) above, must complete and deliver to the Plan Administrator all required forms and make such election within 30 days from the date she/he is notified that she/he is eligible to participate in the Plan. Any Alternate Payee who does not complete and deliver to the Plan Administrator all required forms and/or does not elect either of the distributions described in subsections (ii) or (iii) above shall receive his/her distributions in a lump sum according to subsection (i) above.
(b) Any taxes or other legally required withholdings from payments to such Alternate Payee shall be deducted and withheld by the Company, benefit provider or funding agent. The Alternate Payee shall be provided with a tax withholding election form for purposes of federal and state tax withholding, if applicable.
(c) The Plan Administrator shall have sole and absolute discretion to determine whether a judgment, decree or order is a DRO, to determine whether a DRO shall be accepted for purposes of this Section 6.1 and to make interpretations under this Section 6.1, including determining who is to receive benefits, all calculations of benefits, and the amount of taxes to be withheld. The decisions of the Plan Administrator shall be binding on all parties with an interest.
(d) Any benefits payable to an Alternate Payee pursuant to the terms of a DRO shall be subject to all provisions and restrictions of the Plan and any dispute regarding such benefits shall be resolved pursuant to the Plan claims procedure in Article VIII.
6.2 Legal Disability. If a person entitled to any payment under this Plan shall, in the sole judgment of the Plan Administrator, be under a legal disability, or otherwise shall be unable to apply such payment to his/her own interest and advantage, the Plan Administrator, in the exercise of its
15
discretion, may direct the Company or payor of the benefit to make any such payment in any one or more of the following ways:
(a) Directly to such person;
(b) To his/her legal guardian or conservator; or
(c) To his/her spouse or to any person charged with the duty of his/her support, to be expended for his/her benefit and/or that of his/her dependents.
The decision of the Plan Administrator shall in each case be final and binding upon all persons in interest, unless the Plan Administrator shall reverse its decision due to changed circumstances.
6.3 Assignment. Except as provided in Section 6.1, no Participant or Beneficiary shall have any right to assign, pledge, transfer, convey, hypothecate, anticipate or in any way create a lien on any amounts payable hereunder. No amounts payable hereunder shall be subject to assignment or transfer or otherwise be alienable, either by voluntary or involuntary act, or by operation of law, or subject to attachment, execution, garnishment, sequestration or other seizure under any legal, equitable or other process, or be liable in any way for the debts or defaults of Participants and their Beneficiaries.
ARTICLE VII
FUNDING
7.1 Funding. Benefits under this Plan shall be funded solely by the Company and its Affiliates. Benefits under this Plan shall constitute an unfunded general obligation of the Company, but the Company may create reserves, funds and/or provide for amounts to be held in trust to fund such benefits on the Company's or its Affiliates' behalf. Payment of benefits may be made by the Company, any trust established by the Company or through a service or benefit provider to the Company or such trust.
7.2 Creditor Status. Participants and their Beneficiaries shall be general unsecured creditors of the Company or the Participants' employing Affiliate(s) with respect to the payment of any benefit under this Plan, unless such benefits are provided under a contract of insurance or an annuity contract that has been delivered to Participants, in which case Participants and their Beneficiaries shall look to the insurance carrier or annuity provider for payment, and not to the Company or Affiliate. The Company's or Affiliate's obligation for such benefit shall be discharged by the purchase and delivery of such annuity or insurance contract.
ARTICLE VIII
ADMINISTRATION
8.1 The PAC. The overall administration of the Plan will be the responsibility of the PAC.
8.2 Powers of PAC. In order to effectuate the purposes of the Plan, the PAC will have the following powers:
(a) To appoint the Plan Administrator;
(b) To review and render decisions respecting a denial of a claim for benefits under the Plan;
(c) To construe the Plan and to make equitable adjustments for any mistakes or errors made in the administration of the Plan; and
(d) To determine and resolve, in its sole and absolute discretion, all questions relating to the administration of the Plan and the trust established to secure the assets of the Plan (i) when differences of opinion arise between the Employer, the Plan Administrator, the Trustee, a Participant, or any of them and (ii) whenever it is deemed advisable to determine such questions
16
in order to promote the uniform and nondiscriminatory administration of the Plan for the greatest benefit of all parties concerned.
The foregoing list of express powers is not intended to be either complete or conclusive, and the PAC will, in addition, have such powers as it may reasonably determine to be necessary or appropriate in the performance of its powers and duties under the Plan.
8.3 Appointment of Plan Administrator. The PAC will appoint the Plan Administrator, who will have the responsibility and duty to administer the Plan on a daily basis. The PAC may remove the Plan Administrator with or without cause at any time. The Plan Administrator may resign upon written notice to the PAC.
8.4 Duties of Plan Administrator. The Plan Administrator will have the following duties:
(a) To direct the administration of the Plan in accordance with the provisions herein set forth;
(b) To adopt rules of procedure and regulations necessary for the administration of the Plan, provided such rules are not inconsistent with the terms of the Plan;
(c) To determine all questions with regard to rights of Employees, Participants, and Beneficiaries under the Plan including, but not limited to, questions involving eligibility of an Employee to participate in the Plan and the value of a Participant's Accounts;
(d) To enforce the terms of the Plan and any rules and regulations adopted by the PAC;
(e) To review and render decisions respecting a claim for a benefit under the Plan;
(f) To furnish the Company with information that the Company may require for tax or other purposes;
g) To engage the service of counsel (who may, if appropriate, be counsel for the Company), actuaries, and agents whom it may deem advisable to assist it with the performance of its duties;
(h) To prescribe procedures to be followed by distributees in obtaining benefits;
(i) To receive from the Company and from Participants such information as is necessary for the proper administration of the Plan;
(j) To establish and maintain, or cause to be maintained, the individual Accounts described in Section 4.3;
(k) To create and maintain such records and forms as are required for the efficient administration of the Plan;
(l) To make all determinations and computations concerning the benefits, credits and debits to which any Participant, or other Beneficiary, is entitled under the Plan;
(m) To give the Trustee of the trust established to serve as a source of funds under the Plan specific directions in writing with respect to:
(i) the making of distribution payments, giving the names of the payees, the amounts to be paid and the time or times when payments will be made; and
(ii) the making of any other payments which the Trustee is not by the terms of the trust agreement authorized to make without a direction in writing by the Plan Administrator;
(n) To comply with all applicable lawful reporting and disclosure requirements of the Act;
(o) To comply (or transfer responsibility for compliance to the Trustee) with all applicable federal income tax withholding requirements for benefit distributions; and
17
(p) To construe the Plan, in its sole and absolute discretion, and make equitable adjustments for any mistakes and errors made in the administration of the Plan.
The foregoing list of express duties is not intended to be either complete or conclusive, and the Plan Administrator will, in addition, exercise such other powers and perform such other duties as it may deem necessary, desirable, advisable or proper for the supervision and administration of the Plan.
8.5 Indemnification of PAC and Plan Administrator. To the extent not covered by insurance, or if there is a failure to provide full insurance coverage for any reason, and to the extent permissible under corporate by-laws and other applicable laws and regulations, the Company agrees to hold harmless and indemnify the PAC and Plan Administrator against any and all claims and causes of action by or on behalf of any and all parties whomsoever, and all losses therefrom, including, without limitation, costs of defense and reasonable attorneys' fees, based upon or arising out of any act or omission relating to or in connection with the Plan other than losses resulting from the PAC's, or any such person's, fraud or willful misconduct.
8.6 Claims for Benefits.
(a) Initial Claim. In the event that an Employee, Eligible Employee, Participant or his/her Beneficiary claims to be eligible for benefits, or claims any rights under this Plan, he/she must complete and submit such claim forms and supporting documentation as shall be required by the Plan Administrator, in its sole and absolute discretion. Likewise, any Participant or Beneficiary who feels unfairly treated as a result of the administration of the Plan, must file a written claim, setting forth the basis of the claim, with the Plan Administrator. In connection with the determination of a claim, or in connection with review of a denied claim, the claimant may examine this Plan, and any other pertinent documents generally available to Participants that are specifically related to the claim.
A written notice of the disposition of any such claim shall be furnished to the claimant within 90 days after the claim is filed with the Plan Administrator. Such notice shall refer, if appropriate, to pertinent provisions of this Plan, shall set forth in writing the reasons for denial of the claim if a claim is denied (including references to any pertinent provisions of this Plan) and, where appropriate, shall explain how the claimant may perfect the claim. If the claim is denied, in whole or in part, the claimant shall also be notified in writing that a review procedure is available. All benefits provided in this Plan as a result of the disposition of a claim will be paid as soon as practicable following receipt of proof of entitlement, if requested.
(b) Request for Review. Within 90 days after receiving the written notice of the Plan Administrator's disposition of the claim, the claimant may file with the PAC a written request for review of his/her claim. In connection with the request for review, the claimant shall be entitled to be represented by counsel. If the claimant does not file a written request for review within 90 days after receiving written notice of the Plan Administrator's disposition of the claim, the claimant shall be deemed to have accepted the Plan Administrator's written disposition, unless the claimant shall have been physically or mentally incapacitated so as to be unable to request review within the 90 day period.
(c) Decision on Review. A decision on review of the claim shall be made by the PAC at its next meeting following receipt of the written request for review. If no meeting of the PAC is scheduled within 45 days of receipt of the written request for review, then the PAC shall hold a special meeting to review such written request for review within such 45-day period. If special circumstances require an extension of the 45-day period, the PAC shall so notify the claimant and a decision shall be rendered within 90 days of the receipt of the request for review. In any event, if a claim is not determined by the PAC within 90 days of receipt of written submission for review, it shall be deemed to be denied.
18
The PAC shall have the right to request of, and receive from, a claimant such additional information, documents or other evidence as the PAC may reasonably require. The decision of the PAC shall be in writing and shall reference the provisions of the Plan on which the decision is based. To the extent permitted by law, a decision on review by the PAC shall be binding and conclusive upon all persons whomsoever.
8.7 Arbitration. In the event the claims review procedure described in Section 8.6 of the Plan does not result in an outcome thought by the claimant to be in accordance with the Plan document, he/she may appeal to a third party neutral arbitrator. The claimant must appeal to an arbitrator within 60 days after receiving the PAC's denial or deemed denial of his/her request for review and before bringing suit in court.
The arbitrator shall be mutually selected by the Participant and the PAC from a list of arbitrators provided by the American Arbitration Association ("AAA"). If the parties are unable to agree on the selection of an arbitrator within 10 days of receiving the list from the AAA, the AAA shall appoint an arbitrator. The arbitrator's review shall be limited to interpretation of the Plan document in the context of the particular facts involved. The claimant, the PAC and the Company agree to accept the award of the arbitrator as binding, and all exercises of power by the arbitrator hereunder shall be final, conclusive and binding on all interested parties, unless found by a court of competent jurisdiction, in a final judgment that is no longer subject to review or appeal, to be arbitrary and capricious. The costs of arbitration shall be shared by the Company and the claimant; the costs of legal representation for the claimant or witness costs for the claimant shall be borne by the claimant.
The arbitrator shall have no power to add to, subtract from, or modify any of the terms of the Plan, or to change or add to any benefits provided by the Plan, or to waive or fail to apply any requirements of eligibility for a benefit under the Plan. Nonetheless, the arbitrator shall have absolute discretion in the exercise of its powers in this Plan. Arbitration decisions will not establish binding precedent with respect to the administration or operation of the Plan.
8.8 Receipt and Release of Necessary Information. In implementing the terms of this Plan, the PAC and Plan Administrator, as applicable, may, without the consent of or notice to any person, release to or obtain from any other insuring entity or other organization or person any information, with respect to any person, which the PAC or Plan Administrator deems to be necessary for such purposes. Any Participant or Beneficiary claiming benefits under this Plan shall furnish to the PAC or Plan Administrator, as applicable, such information as may be necessary to determine eligibility for and amount of benefit, as a condition of claiming and receiving such benefit.
8.9 Overpayment and Underpayment of Benefits. The Plan Administrator may adopt, in its sole and absolute discretion, whatever rules, procedures and accounting practices are appropriate in providing for the collection of any overpayment of benefits. If a Participant or Beneficiary receives an underpayment of benefits, the Plan Administrator shall direct that payment be made as soon as practicable to make up for the underpayment. If an overpayment is made to a Participant or Beneficiary, for whatever reason, the Plan Administrator may, in its sole and absolute discretion, withhold payment of any further benefits under the Plan until the overpayment has been collected or may require repayment of benefits paid under this Plan without regard to further benefits to which the Participant or Beneficiary may be entitled.
ARTICLE IX
OTHER BENEFIT PLANS OF THE COMPANY
9.1 Other Plans. Nothing contained in this Plan shall prevent a Participant prior to his/her death, or a Participant's spouse or other Beneficiary after such Participant's death, from receiving, in addition to any payments provided for under this Plan, any payments provided for under any other plan or benefit program of the Company or an Affiliate, or which would otherwise be payable or distributable
19
to him/her, his/her surviving spouse or Beneficiary under any plan or policy of the Company or otherwise. Nothing in this Plan shall be construed as preventing the Company or any of its Affiliates from establishing any other or different plans providing for current or deferred compensation for employees and/or Directors. Unless otherwise specifically provided in any plan of the Company intended to "qualify" under Section 401 of the Code, Compensation Deferrals made under this Plan shall constitute earnings or compensation for purposes of determining contributions or benefits under such qualified plan.
ARTICLE X
AMENDMENT AND TERMINATION OF THE PLAN
10.1 Amendment. The Compensation Committee may amend this Plan by duly authorized written amendment; provided that no amendment or modification shall deprive a Participant, or person claiming benefits under this Plan through a Participant, of any benefit accrued under this Plan up to the date of amendment or modification, except as may be required by applicable law.
10.2 Termination. The Compensation Committee may terminate or suspend this Plan in whole or in Part at any time, provided that no such termination or suspension shall deprive a Participant, or person claiming benefits under this Plan through a Participant, of any benefit accrued under this Plan up to the date of suspension or termination, except as required by applicable law. Upon the complete termination of the Plan, the Compensation Committee, in its sole and absolute discretion, may direct the Plan Administrator to distribute each Participant's account to him/her or his/her Beneficiary, as applicable, in a lump sum and regardless of whether benefit payments have previously commenced to be made to such Participant.
10.3. Continuation. The Company intends to continue this Plan indefinitely, but nevertheless assumes no contractual obligation beyond the promise to pay the benefits described in this Plan.
ARTICLE XI
MISCELLANEOUS
11.1 No Reduction of Employer Rights. Nothing contained in this Plan shall be construed as a contract of employment between the Company or an Affiliate and an Employee, or as a right of any Employee to continue in the employment of the Company or an Affiliate, or as a limitation of the right of the Company or an Affiliate to discharge any of its Employees, with or without cause or as a right of any Director to be renominated to serve as a Director.
11.2 Provisions Binding. All of the provisions of this Plan shall be binding upon all persons who shall be entitled to any benefit hereunder, their heirs and personal representatives.
20
Exhibit 21
Subsidiaries of Tenet Healthcare Corporation
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Assured Investors Life Company | ||||||||||||||
H.F.I.C. Management Company, Inc. |
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Tenet HealthSystem International, Inc. |
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(a) | Bumrungrad Medical Center Limited (Thailand) | |||||||||||||
(a) | Burleigh House Properties Limited (Bermuda) | |||||||||||||
(a) | Centro Medico Teknon, S.L. (Spain) | |||||||||||||
(a) | N.M.E. International (Cayman) Limited (Cayman Islands, B.W.I.) | |||||||||||||
(b) | B.V. Hospital Management (Netherlands) | |||||||||||||
(b) | Hyacinth Sdn. Bhd. (Malaysia) | |||||||||||||
(b) | Medical Staff Services Sdn Bhd (Malaysia) | |||||||||||||
(a) | NME Spain, S.A. (Spain) | |||||||||||||
(a) | New Teknon, S.A. (Spain) | |||||||||||||
(a) | Medicalia International, B.V. (Netherlands) | |||||||||||||
(a) | Tenet UK Properties Limited | |||||||||||||
NME Headquarters, Inc. |
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NME Properties Corp. |
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(a) | NME Properties, Inc. | |||||||||||||
(b) | Lake Health Care Facilities, Inc. | |||||||||||||
(b) | NME Properties West, Inc. | |||||||||||||
(a) | NME Property Holding Co., Inc. | |||||||||||||
(a) | Tenet HealthSystem SNF-LA, Inc. | |||||||||||||
NME Psychiatric Properties, Inc. |
||||||||||||||
(a) | Alvarado Parkway Institute, Inc. | |||||||||||||
(a) | Baywood Hospital, Inc. | |||||||||||||
(a) | Brawner Hospital, Inc. | |||||||||||||
(a) | Contemporary Psychiatric Hospitals, Inc. | |||||||||||||
(a) | Elmcrest Manor Psychiatric Institute, Inc. | |||||||||||||
(a) | Gwinnett Psychiatric Institute, Inc. | |||||||||||||
(a) | Jefferson Hospital, Inc. | |||||||||||||
(a) |
Lake Hospital and Clinic, Inc.
ownershipNME Psychiatric Properties, Inc. (97.875%)
Ralph Mollycheck, M.D. (2.125%) |
|||||||||||||
(a) | Lakewood Psychiatric Hospital, Inc. | |||||||||||||
(a) | Leesburg Institute, Inc. | |||||||||||||
(a) | Manatee Palms Residential Treatment Center, Inc. | |||||||||||||
(a) | Manatee Palms Therapeutic Group Home, Inc. | |||||||||||||
(a) | Medfield Residential Treatment Center, Inc. | |||||||||||||
(a) | Modesto Psychiatric Hospital, Inc. | |||||||||||||
(a) | Nashua Brookside Hospital, Inc. | |||||||||||||
(a) | North Houston Healthcare Campus, Inc. | |||||||||||||
(a) | Northeast Behavioral Health, Inc. | |||||||||||||
(a) | Northeast Psychiatric Associates2, Inc. | |||||||||||||
(a) | Outpatient Recovery Centers, Inc. | |||||||||||||
(a) | P.D. at New Baltimore, Inc. | |||||||||||||
(a) | P.I.A. Alexandria, Inc. | |||||||||||||
(a) | P.I.A. Canoga Park, Inc. | |||||||||||||
(a) | P.I.A. Cape Girardeau, Inc. | |||||||||||||
(a) | P.I.A. Capital City, Inc. | |||||||||||||
(a) | P.I.A. Central Jersey, Inc. | |||||||||||||
(a) | P.I.A. Colorado, Inc. | |||||||||||||
(a) | P.I.A. Connecticut Development Company, Inc. | |||||||||||||
(a) | P.I.A. Cook County, Inc. | |||||||||||||
(a) | P.I.A. Denton, Inc. | |||||||||||||
(a) | P.I.A. Detroit, Inc. | |||||||||||||
(b) | Psychiatric Facility at Michigan Limited Partnership | |||||||||||||
(a) | P.I.A. Educationsl Institute, Inc. | |||||||||||||
(a) | P.I.A. Green Bay, Inc. | |||||||||||||
(a) | P.I.A. Highland, Inc. | |||||||||||||
(b) |
Highland Psychiatric Associates, Inc.
ownershipP.I.A. Highland, Inc. (50%)
Psychiatric Facility at Asheville, Inc. (50%) |
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(a) | P.I.A. Highland Realty, Inc. | |||||||||||||
(b) |
Highland Realty Associates, Ltd.
ownershipP.I.A. Highland Realty, Inc. LP (49%); GP (1%)
Psychiatric Facility at Asheville, Inc.LP (49%); GP (1%) |
|||||||||||||
(a) | P.I.A. Indianapolis, Inc. | |||||||||||||
(a) | P.I.A. Kansas City, Inc. | |||||||||||||
(a) | P.I.A. Lincoln, Inc. | |||||||||||||
(a) | P.I.A. Long Beach, Inc. | |||||||||||||
(a) P.I.A. Maryland, Inc. | ||||||||||||||
(a) | P.I.A. Michigan City, Inc. | |||||||||||||
(a) | P.I.A. Milwaukee, Inc. | |||||||||||||
(a) | P.I.A. Modesto, Inc. | |||||||||||||
(a) | P.I.A. Naperville, Inc. | |||||||||||||
(a) | P.I.A. New Jersey, Inc. | |||||||||||||
(a) | P.I.A. North Jersey, Inc. | |||||||||||||
(a) | P.I.A. Northern New Mexico, Inc. | |||||||||||||
(a) | P.I.A. of Fort Worth, Inc. | |||||||||||||
(a) | P.I.A. of Rocky Mount, Inc. | |||||||||||||
(a) | P.I.A. Panama City, Inc. | |||||||||||||
(a) | P.I.A. Randolph, Inc. | |||||||||||||
(a) | P.I.A. Rockford, Inc. | |||||||||||||
(a) | P.I.A. Salt Lake City, Inc. | |||||||||||||
(a) | P.I.A. San Antonio, Inc. | |||||||||||||
(a) | P.I.A. San Ramon, Inc. | |||||||||||||
(a) | P.I.A. Sarasota Palms, Inc. | |||||||||||||
(a) | P.I.A. Seattle, Inc. | |||||||||||||
(a) | P.I.A. Slidell, Inc. | |||||||||||||
(a) | P.I.A. Solano, Inc. | |||||||||||||
(a) | P.I.A. Specialty Press, Inc. | |||||||||||||
(a) | P.I.A. Stafford, Inc. | |||||||||||||
(a) | P.I.A. Stockton, Inc. | |||||||||||||
(a) | P.I.A. Tacoma, Inc. | |||||||||||||
(a) | P.I.A. Tidewater Realty, Inc. | |||||||||||||
(b) | I.P.T. Associates | |||||||||||||
(a) | P.I.A. Topeka, Inc. | |||||||||||||
(a) | P.I.A. Visalia, Inc. | |||||||||||||
(a) | P.I.A. Waxahachie, Inc. | |||||||||||||
(a) | P.I.A. Westbank, Inc. | |||||||||||||
(a) | P.I.A.C. Realty Company, Inc. | |||||||||||||
(a) | PIAFCO, Inc. | |||||||||||||
(a) | Pinewood Hospital, Inc. | |||||||||||||
(a) | Potomac Ridge Treatment Center, Inc. | |||||||||||||
(a) | Psychiatric Facility at Amarillo, Inc. | |||||||||||||
(a) | Psychiatric Facility at Asheville, Inc. | |||||||||||||
(a) | Psychiatric Facility at Azusa, Inc. | |||||||||||||
(a) | Psychiatric Facility at Evansville, Inc. | |||||||||||||
(a) | Psychiatric Facility at Lafayette, Inc. | |||||||||||||
(a) | Psychiatric Facility at Lawton, Inc. | |||||||||||||
(a) | Psychiatric Facility at Medfield, Inc. | |||||||||||||
(a) | Psychiatric Facility at Memphis, Inc. | |||||||||||||
(a) | Psychiatric Facility at Palm Springs, Inc. | |||||||||||||
(a) | Psychiatric Facility at Yorba Linda, Inc. | |||||||||||||
(a) | Psychiatric Institute of Alabama, Inc. | |||||||||||||
(a) | Psychiatric Institute of Atlanta, Inc. | |||||||||||||
(a) | Psychiatric Institute of Bedford, Inc. | |||||||||||||
(a) | Psychiatric Institute of Bucks County, Inc. | |||||||||||||
(a) | Psychiatric Institute of Chester County, Inc. | |||||||||||||
(a) | Psychiatric Institute of Columbus, Inc. | |||||||||||||
(a) | Psychiatric Institute of Delray, Inc. | |||||||||||||
(a) | Psychiatric Institute of Northern Kentucky, Inc. | |||||||||||||
(a) | Psychiatric Institute of Northern New Jersey, Inc. | |||||||||||||
(a) | Psychiatric Institute of Orlando, Inc. | |||||||||||||
(a) | Psychiatric Institute of Richmond, Inc. | |||||||||||||
(a) | Psychiatric Institute of San Jose, Inc. | |||||||||||||
(a) | Psychiatric Institute of Sherman, Inc. | |||||||||||||
(a) | Psychiatric Institute of Washington, D.C., Inc. | |||||||||||||
(a) | Regent Hospital, Inc. | |||||||||||||
(a) | Residential Treatment Center of Memphis, Inc. | |||||||||||||
(a) | Residential Treatment Center of Mongtomery County, Inc. | |||||||||||||
(a) | Residential Treatment Center of the Palm Beaches, Inc. | |||||||||||||
(a) | Riverwood Center, Inc. | |||||||||||||
(a) | Sandpiper Company, Inc. | |||||||||||||
(a) | Southern Crescent Psychiatric Institute, Inc. | |||||||||||||
(a) | Southwood Psychiatric Centers, Inc. | |||||||||||||
(a) | Springwood Residential Treatment Centers, Inc. | |||||||||||||
(a) | The Psychiatric Institutes of America Foundation, Inc. | |||||||||||||
(a) | The Tidewater Psychiatric Institute, Inc. | |||||||||||||
(a) | Treatment Center at Bedford, Inc. | |||||||||||||
(a) | Tucson Psychiatric Institute, Inc. | |||||||||||||
NME Rehabilitation Properties, Inc. |
||||||||||||||
(a) | Pinecrest Rehabilitation Hospital, Inc. | |||||||||||||
(a) | R.H.S.C. El Paso, Inc. | |||||||||||||
(a) | R.H.S.C. Modesto, Inc. | |||||||||||||
(a) | R.H.S.C. Prosthetics, Inc. | |||||||||||||
(a) | Rehabilitation Facility at San Ramon, Inc. | |||||||||||||
(a) | Tenet HealthSystem Pinecrest Rehab, Inc. | |||||||||||||
NME Specialty Hospitals, Inc. |
||||||||||||||
(a) | NME Management Services, Inc. | |||||||||||||
(a) | NME New Beginnings, Inc. | |||||||||||||
(b) | Addiction Treatment Centers of Maryland, Inc. | |||||||||||||
(b) | Alcoholism Treatment Centers of New Jersey, Inc. | |||||||||||||
(b) | Health Institutes,Inc. | |||||||||||||
(c) | Fenwick Hall, Inc. | |||||||||||||
(c) | Health Insitutes Investments, Inc. | |||||||||||||
(b) | NME New Beginnings-Western, Inc. | |||||||||||||
(a) | NME Partial Hospital Services Corporation | |||||||||||||
(a) | NME Psychiatric Hospitals, Inc. | |||||||||||||
(b) | The Huron Corporation | |||||||||||||
(a) | NME Rehabilitation Hospitals, Inc. | |||||||||||||
(a) | National Medical Specialty Hospital of Redding | |||||||||||||
(a) | Psychiatric Management Services Company | |||||||||||||
NorthShore Hospital Management Corporation |
||||||||||||||
Syndicated Office Systems |
||||||||||||||
TH AR, Inc. | ||||||||||||||
TenetCare, Inc. | ||||||||||||||
(a) | TenetCare California, Inc. | |||||||||||||
(b) | TenetCare La Quinta, Inc. | |||||||||||||
(b) | TenetCare La Quinta ASC, L.P. | |||||||||||||
(b) | TenetCare Red Bluff, Inc. | |||||||||||||
(b) | Red Bluff ASC, L.P. | |||||||||||||
(a) | TenetCare Frisco, Inc. | |||||||||||||
(b) | Centennial ASC, L.P. | |||||||||||||
(a) | TenetCare Missouri, Inc. | |||||||||||||
(b) | Sunset Hills ASC, L.P. | |||||||||||||
(b) | TenetCare Sunset Hills, Inc. | |||||||||||||
(a) | TenetCare Tennessee, Inc. | |||||||||||||
(a) | TenetCare Texas, Inc. | |||||||||||||
Tenet Healthcare Foundation |
||||||||||||||
Tenet HealthSystem Holdings, Inc. | ||||||||||||||
(a) | Tenet HealthSystem Medical, Inc. | |||||||||||||
(b) | Alabama Medical Group, Inc. | |||||||||||||
(c) | Alabama Medical Group-Gadsden Family Medicine, Inc. | |||||||||||||
(c) | Alabama Medical Group-Obstetrics and Gynecology, Inc. | |||||||||||||
(c) | Alabama Medical Group-Primary Care I, Inc. | |||||||||||||
(c) | Alabama Medical Group-Primary Care II, Inc. | |||||||||||||
(c) | Brookwood OB-GYN Clinic, Inc. | |||||||||||||
(b) | American Medical (Central), Inc. | |||||||||||||
(c) | Amisub (Twelve Oaks), Inc. | |||||||||||||
(c) |
Amisub of Texas, Inc.
ownershipLifemark Hospital, Inc. (63.68%)
Tenet HealthSystem Medical, Inc. (19.75%) Brookwood Health Services, Inc. (5.10%) AMI Information Systems Group, Inc. (.42%) American Medical (Central), Inc. (11.05%) |
|||||||||||||
(c) | Lifemark Hospitals, Inc. | |||||||||||||
(d) |
6103 Webb Road Ltd.
ownershipLifemark Hospitals, Inc.,GP (10%), LP (78%)
Physicians Development, Inc.(6%) Easterm Professions Properties, Inc. (3%), Dr. Robert Sherrill (3%) |
|||||||||||||
(d) | Houston Network, Inc. | |||||||||||||
(d) | Houston Specialty Hospital, Inc. | |||||||||||||
(d) | Lifemark Hospitals of Florida, Inc. | |||||||||||||
(e) | Florida Care Connect, Inc. | |||||||||||||
(e) | Palmetto Medical Plan, Inc. | |||||||||||||
(e) |
Hospital Constructors, Ltd.
ownershipLifemark Hospitals of Florida, Inc., GP (97%)
Eastern Professional Properties, Inc., LP (3%) |
|||||||||||||
(d) | Lifemark Hospitals of Louisiana, Inc. | |||||||||||||
(e) | Kenner Regional Clinical Services, Inc. | |||||||||||||
(e) |
Concentra New Orleans, L.L.C.
ownershipLifemark Hospitals of Louisiana, Inc. (49%)
Concentra Health Services, Inc. (51%) |
|||||||||||||
(d) | Lifemark Hospitals of Missouri, Inc. | |||||||||||||
(e) |
Lifemark RMP Joint Venture
ownershipLifemark Hospitals of Missouri, Inc. (50%),
RMP, L.L.C. (50%) |
|||||||||||||
(e) | Procare Network II, Inc. | |||||||||||||
(d) | Permian Premier Health Services, Inc. | |||||||||||||
(d) | Regional Alternative Health Services, Inc. | |||||||||||||
(e) |
Mid-Missouri Lithotripter Center
ownershipPhysicians (68.33%)
Regional Alternative Health Services, Inc. (31.67%) |
|||||||||||||
(d) | Tenet Investments-Kenner, Inc. | |||||||||||||
(d) |
Tenet Healthcare, Ltd.
ownershipLifemark Hospitals, GP (1%);
Amisub of Texas, Inc., LP (70.1%) Amisub (Heights), Inc., LP (10.3%) Amisub (Twelve Oaks), Inc., LP (18.6%) |
|||||||||||||
(d) | Tenet HealthSystem RMA, Inc. | |||||||||||||
(c) | Park Plaza Professional Building, Ltd. (GP American Medical (Central), Inc.,100%) | |||||||||||||
(c) | Tenet Texas Employment, Inc. | |||||||||||||
(c) | Texas Southwest Healthservices, Inc. | |||||||||||||
(b) | American Medical Home Care, Inc. | |||||||||||||
(b) | AMI Ambulatory Centres, Inc. | |||||||||||||
(d) | Ambulatory CareBroward Development Corp. | |||||||||||||
(b) | AMI Arkansas, Inc. | |||||||||||||
(c) |
Healthstar Properties Limited Partnership
ownership-AMI Arkansas, Inc.,
G.P (1%), LP (49%) St. Vincent TotalHealth Corporation, G.P (1%), L.P. (49%) |
|||||||||||||
(d) |
NovaSys Health Network, L.L.C.
ownershipHealthstar Properties Limited Partnership (70 units)
Arkansas Children's Hospital (1 unit) Quorum Health Resources, Inc. (1 unit) Northwest Medical Center (1 unit) Rebsam Regional Medical Center (1 unit) |
|||||||||||||
(b) | AMI Diagnostic Services, Inc. | |||||||||||||
(b) | AMI Information Systems Group, Inc. | |||||||||||||
(c) | American Medical International B.V. | |||||||||||||
(d) | American Medical International N.V. | |||||||||||||
(c) |
Medplex Outpatient Surgery Center, Ltd.
ownershipOthers (15%)
Brookwood Center Development Corporation (85%) |
|||||||||||||
(c) | R & H Transition, Inc. | |||||||||||||
(b) | Brookwood Development, Inc. | |||||||||||||
(c) |
Alabama Health Services (St. Clair), L.L.C.
ownershipBrookwood Development, Inc. (50%)
Health Services East, Inc. (50%) |
|||||||||||||
(b) | Brookwood Health Services, Inc. | |||||||||||||
(c) | Estes Health Care Centers, Inc. | |||||||||||||
(c) |
Tenet Florida, Ltd.
ownership Brookwood Health Services, Inc. (76%)
Eastern Professional Properties, Inc. (24%) |
|||||||||||||
(b) |
Brookwood Parking Associates, Ltd.
ownershipTenet HealthSystem Medical, Inc. (99%)
Brookwood Parking, Inc. (1%) |
|||||||||||||
(b) | Central Arkansas Hospital, Inc. | |||||||||||||
(c) |
Central Arkansas Physican Hospital Organization
ownershipPhysicians (50%)
Amisub of North Carolina, Inc. (50%) |
|||||||||||||
(b) | Central Care, Inc. | |||||||||||||
(b) | Central Carolina Management Services Organization, Inc. | |||||||||||||
(b) | Columbia Land Development, Inc. | |||||||||||||
(b) | Culver Health Network, Inc. | |||||||||||||
(b) | Cumming Medical Ventures, Inc. | |||||||||||||
(b) | East Cooper Community Hospital, Inc. | |||||||||||||
(b) | Eastern Professional Properties, Inc. | |||||||||||||
(b) | Florida Health Network, Inc. | |||||||||||||
(b) | Frye Regional Medical Center, Inc. | |||||||||||||
(c) | Frye Home Infusion, Inc. | |||||||||||||
(c) |
Piedmont Health Alliance, Inc.
ownershipFrye Regional Medical Center, Inc. (50%)
Physicians (50%) |
|||||||||||||
(c) |
Shared Medical Ventures, L.L.C.
ownershipFrye Regional Medical Center, Inc. (33
1
/
3
%)
Grace Hospital Inc. (33 1 / 3 %) Caldwell Memorial Hospital Incorporated (33 1 / 3 %) |
|||||||||||||
(d) | Mobile Imaging Services, L.L.C. ownershipShared Medical Ventures, L.L.C. | |||||||||||||
(c) | Tenet Claims Processing, Inc. | |||||||||||||
(b) | Heartland Corporation | |||||||||||||
(c) | Heartland Physicians, Inc. | |||||||||||||
(c) | Prairie Medical Clinic, Inc. | |||||||||||||
(b) | Kenner Regional Medical Center, Inc. | |||||||||||||
(b) | Medical Center of Garden Grove, Inc. | |||||||||||||
(c) |
Orange County Kidney Stone Center, L.P.
ownershipMedical Center of Garden Grove, Inc. (42.5805%)
OCKSC Assoc.,Inc. + 11 others (57.4195%) |
|||||||||||||
(c) |
Orange County Kidney Stone Center Assoc., G. P.
ownershipPhysicians (67.9%)
Medical Center of Garden Grove, Inc. (32.1%) |
|||||||||||||
(b) | Medical Collections, Inc. | |||||||||||||
(b) | Mid-Continent Medical Practices, Inc. | |||||||||||||
(b) | National Medical Services III, Inc. | |||||||||||||
(b) | National Medical Services IV, Inc. | |||||||||||||
(b) | National Park Medical Center, Inc. | |||||||||||||
(c) | Garland Managed Care Organization, Inc. | |||||||||||||
(c) |
Hot Springs Outpatient Surgery, G.P.
ownershipNational Park Medical Center, Inc. (50%)
Hot Springs Outpatient Surgery (50%) |
|||||||||||||
(c) | NPMC HealthcenterCardiology Services, Inc. | |||||||||||||
(c) | NPMC HealthcenterFamily Healthcare Clinic, Inc. | |||||||||||||
(c) | NPMC HealthcenterGastroenterology Center of Hot Springs, Inc. | |||||||||||||
(c) | NPMC HealthcenterHot Springs Village, Inc. | |||||||||||||
(c) | NPMC HealthcenterMalvern, Inc. | |||||||||||||
(c) | NPMC HealthcenterNational Park Surgery Clinic, Inc. | |||||||||||||
(c) | NPMC HealthcenterPhysician Services, Inc. | |||||||||||||
(c) | NPMC HealthcenterPhysicians for Women, Inc. | |||||||||||||
(c) | NPMC HealthcenterThe Heart Clinic, Inc. | |||||||||||||
(c) | Tenet HealthSystem NPMC Hamilton West, Inc. | |||||||||||||
(b) |
New H Holdings Corp.
ownershipTenet HealthSystem Medical, Inc. (99%)
Amisub of California, Inc. (.5%); Brookwood Health Services, Inc. (.5%) |
|||||||||||||
(c) | New H Acute, Inc. | |||||||||||||
(d) | New H South Bay, Inc. | |||||||||||||
(b) | North Fulton Imaging Ventures, Inc. | |||||||||||||
(c) | Tenet Health Integrated Services, Inc. | |||||||||||||
(b) | Tenet Nurse Services | |||||||||||||
(b) | Tenet Physician ServicesEast Cooper, Inc. | |||||||||||||
(b) | Tenet Physician ServicesFort Mill, Inc. | |||||||||||||
(b) | Tenet Physician ServicesGeorgia Baptist, Inc. | |||||||||||||
(b) | Tenet Physician ServicesHilton Head, Inc. | |||||||||||||
(c) | Hilton Head Clinics, Inc. | |||||||||||||
(c) | Hilton Head Medical GroupCardiology, L.L.C. | |||||||||||||
(c) | Hilton Head Medical GroupENT, L.L.C. | |||||||||||||
(c) | Hilton Head Medical GroupOncology, L.L.C. | |||||||||||||
(c) | Hilton Head Medical GroupUrologyHH, L.L.C. | |||||||||||||
(c) | Hilton Head Medical GroupUrologyBeaufort, L.L.C. | |||||||||||||
(b) | Tenet Physician ServicesNorth Fulton, Inc. | |||||||||||||
(b) | Tenet Physician ServicesPiedmont, Inc. | |||||||||||||
(c) | Piedmont West Urgent Care Center LLC | |||||||||||||
(c) | Tenet Physician ServicesDelaine, L.L.C. | |||||||||||||
(c) | Tenet Physician ServicesLewisville, L.L.C | |||||||||||||
(c) | Tenet Physician ServicesHerlong, L.L.C. | |||||||||||||
(c) | Tenet Physician ServicesVillage Oaks, L.L.C. | |||||||||||||
(c) | Tenet Physician ServicesRock Hill Psych, L.L.C. | |||||||||||||
(c) | Walker Medical Center, L.L.C. | |||||||||||||
(b) | Tenet Physician ServicesYork, Inc. | |||||||||||||
(b) | Tenet Physician Services of Mississippi, L.L.C. | |||||||||||||
(b) | Tenet Physician Services of the Southeast, Inc. | |||||||||||||
(b) | Tenet Riverbend Family Medicine, Inc. | |||||||||||||
(b) | Tenet San Antonio, Inc. | |||||||||||||
(b) | Tenet St. Mary's, Inc. | |||||||||||||
(b) | Tenet South Atlanta Diagnostic Cardiology, Inc. | |||||||||||||
(b) | Tenet South Fulton, Inc. | |||||||||||||
(c) | Tenet South Fulton Health Care Center, Inc. | |||||||||||||
(b) | Tenet System Services, Inc. | |||||||||||||
(b) | Tenet West Palm Outreach Services, Inc. | |||||||||||||
(b) | Tenet West Palm Real Estate, Inc. | |||||||||||||
(b) | Texas Healthcare Services, Inc. | |||||||||||||
(b) | Texas Professional Properties, Inc. | |||||||||||||
(b) | Three Rivers Healthcare, Inc. | |||||||||||||
(c) | Three Rivers Health Ventures, LLC | |||||||||||||
Tenet HealthSystem Hospitals, Inc. |
||||||||||||||
(a) | Airmed II | |||||||||||||
(a) | Alvarado Hospital Medical Center, Inc. | |||||||||||||
(a) | Brookhaven Hospital, Inc. | |||||||||||||
(b) | Brookhaven Pavilion, Inc. | |||||||||||||
(a) | Century City Hospital, Inc. | |||||||||||||
(a) | Community Hospital of Los Gatos, Inc. | |||||||||||||
(a) | Delray Medical Center, Inc. | |||||||||||||
(a) | Diagnostic Imaging Services, Inc. | |||||||||||||
(a) | Doctors Hospital of Manteca, Inc. | |||||||||||||
(a) | Doctors Medical CenterSan Pablo/Pinole, Inc. | |||||||||||||
(a) | Doctors Medical Center of Modesto, Inc. | |||||||||||||
(a) | Jefferson County Surgery, Inc. | |||||||||||||
(a) | Garfield Medical Center, Inc. | |||||||||||||
(a) | Greater El Paso Healthcare Enterprises | |||||||||||||
(a) | Hollywood Medical Center, Inc. | |||||||||||||
(a) | John Douglas French Center For Alzheimer?s Disease, Inc. | |||||||||||||
(a) | JFK Memorial Hospital, Inc. | |||||||||||||
(a) | Lakewood Regional Medical Center, Inc. | |||||||||||||
(a) | Laughlin Pavilion, Inc. | |||||||||||||
(a) | Los Alamitos Medical Center, Inc. | |||||||||||||
(a) | MHJ, Inc. | |||||||||||||
(b) |
Jonesboro Health Services, L.L.C.
ownershipMHJ, Inc. (95%)
St. Vincent Total Health Corporation (5%) |
|||||||||||||
(c) | Starcare of Jonesboro, Inc. | |||||||||||||
(a) | Manteca Medical Management, Inc. | |||||||||||||
(a) | Meadowcrest Hospital, Inc. | |||||||||||||
(a) | Mid-America Equipment Co. | |||||||||||||
(a) |
Mid-Tennessee Health Partners, L.L.C.
ownershipTenet HealthSystem Hospitals, Inc. (50%)
Smithville Healthcare Ventures, L.P. (50%) |
|||||||||||||
(a) | NM Ventures of North County, Inc. | |||||||||||||
(b) |
North County Outpatient Surgery Center, Ltd.
ownershipPhysicians (35.47%)
NM Ventures of North County, Inc. (64.53%) |
|||||||||||||
(a) | NME Medical de Mexico, S.A. de C.V. | |||||||||||||
(a) | NMV- II, Inc. | |||||||||||||
(b) |
Delray Outpatient Surgery & Laser Center, Ltd.
ownershipNMV-II, Inc. (10%);
Others (90%) |
|||||||||||||
(a) | National Managed Med, Inc. | |||||||||||||
(a) | National Med, Inc. | |||||||||||||
(a) | National Medical Hospital of Tullahoma, Inc. | |||||||||||||
(b) | Harton Medical Group, Inc. | |||||||||||||
(b) | Health Point Physician Hospital Organization, Inc. | |||||||||||||
(b) | Tullahoma Ambulatory Surgery Center, L.L.C. | |||||||||||||
(a) | National Medical Hospital of Wilson County, Inc. | |||||||||||||
(b) | Middle Tennessee Therapy Services, Inc. | |||||||||||||
(b) | Tenet Lebanon Surgery Center, LLC | |||||||||||||
(b) | Wilson County Management Services, Inc. | |||||||||||||
(a) | National Medical Services, Inc. | |||||||||||||
(b) | Barron, Barron & Roth, Inc. | |||||||||||||
(a) | National Medical Services II, Inc. | |||||||||||||
(a) | National Medical Ventures, Inc. | |||||||||||||
(b) |
Litho I, Ltd.
ownershipNational Medical Ventures, Inc. (63.75%);
Physicians (36.75%) |
|||||||||||||
(b) |
McHenry Surgery Center Partners, L.P.
(National Medical Ventures, Inc. 99%,
Tenet HealthSystem Hospitals, Inc., Inc. 1%) |
|||||||||||||
(a) | New Orleans Regional Physician Hospital Organization, Inc. | |||||||||||||
(a) | Northeast Texas Healthcare Enterprises | |||||||||||||
(a) | NorthShore Regional Medical Center, Inc. | |||||||||||||
(a) | Physician Network Corporation of Louisiana | |||||||||||||
(b) | Family Health Network, Inc. | |||||||||||||
(a) | Placentia-Linda Hospital, Inc. | |||||||||||||
(a) | Practice Partners, Inc. | |||||||||||||
(a) | Redding Medical Center, Inc. | |||||||||||||
(a) | Redding Medical Center Cardiac Cath Lab | |||||||||||||
(a) | San Ramon Regional Medical Center, Inc. | |||||||||||||
(a) | San Ramon ASC, L.P. ownershipTHV 1 (100%) | |||||||||||||
(a) | Seven Rivers Community Hospital, Inc. | |||||||||||||
(a) | Sierra Providence Healthcare Enterprises | |||||||||||||
(a) | Sierra Providence Health Network, Inc. | |||||||||||||
(a) | South Bay Practice Administrators, Inc. | |||||||||||||
(a) |
South Florida Managed Care Delivery System, L.L.P.
ownershipIntracoastal Health Systems, Inc. (50%)
Collectively (50%): Tenet HealthSystem Hospitals, Inc., Lifemark Hospitals of Florida, Inc., Amisub (North Ridge Hospital), Inc., Palm Beach Gardens Community Hospital, Inc. |
|||||||||||||
(a) | SouthPointe Hospital, Inc. | |||||||||||||
(a) | St. Charles General Hospital, Inc. | |||||||||||||
(a) | THV I, Inc. | |||||||||||||
(a) | Tenet Beaumont Healthsystem, Inc. | |||||||||||||
(a) | Tenet California Nurse Resouces, Inc. | |||||||||||||
(a) | Tenet California Medical Ventures I, Inc. | |||||||||||||
(a) | Tenet D.C., Inc. | |||||||||||||
(a) | Tenet Dimension Holding Company, Inc. | |||||||||||||
(a) | Tenet El Mirador Surgical Center, Inc. | |||||||||||||
(a) | Tenet HealthSystem Desert, Inc. | |||||||||||||
(a) | Tenet HealthSystem DFH, Inc. | |||||||||||||
(a) | Tenet HealthSystem DI, Inc. | |||||||||||||
(b) | Tenet DI, LLC | |||||||||||||
(a) | Tenet HealthSystem DI-SNF, Inc. | |||||||||||||
(a) | Tenet HealthSystem DI-TPS, Inc. | |||||||||||||
(a) | Tenet HealthSystem Hospitals Dallas, Inc. | |||||||||||||
(a) | Tenet HealthSystem Memorial Medical Center, Inc. | |||||||||||||
(a) | Tenet HealthSystem Metroplex Hospitals, Inc. | |||||||||||||
(a) | Tenet HealthSystem Surgical, L.L.C. | |||||||||||||
(a) | Tenet Hialeah HealthSystem, Inc. | |||||||||||||
(b) | Edgewater Provider Insurance Company, Ltd. | |||||||||||||
(b) | Hialeah Real Properties, Inc. | |||||||||||||
(b) | Tenet Hialeah (H.H.A.) HealthSystem, Inc. | |||||||||||||
(b) | Tenet Hialeah (ASC) HealthSystem, Inc. | |||||||||||||
(a) |
Tenet Hospitals Limited
ownershipTenet HealthSystem Hospitals, Inc., G.P. (1%)
Tenetsub Texas, Inc., L.P. (99%) |
|||||||||||||
(a) | Tenet Jefferson, Inc. | |||||||||||||
(a) | Tenet Louisiana Medical Ventures I, Inc. | |||||||||||||
(a) | Tenet Network Management, Inc. | |||||||||||||
(a) |
Tenet Regional Infusion North, Inc.
ownershipTenet HealthSystem, SL, Inc. (50%);
Tenet HealthSystem DI, Inc. (40%); Tenet HealthSystem Hospitals, Inc. (5%) Lifemark Hospitals of Missouri, Inc.(5%) |
|||||||||||||
(a) | Tenet St. Alexius Hospital, Inc. | |||||||||||||
(a) | Tenet St. Alexius Hospital Physicians, Inc. | |||||||||||||
(a) | Tenet West Valley, Inc. | |||||||||||||
(b) |
Alpine Surgery Centers, L.P.
ownershpTenet West Valley (47.7%);
Alpine Healthcare (10.6%); Doctors own 41.7% |
|||||||||||||
(a) | Tenetsub Texas, Inc. | |||||||||||||
(a) |
Total Rehab, LLC
ownershipTenet HealthSystem Hospitals, Inc. (51%);
Total Rehab Associates (49%) |
|||||||||||||
(a) | Twin Cities Community Hospital, Inc. | |||||||||||||
(a) | USC University Hospital, Inc. | |||||||||||||
(a) | West Boca Medical Center, Inc. | |||||||||||||
(a) | West Coast PT Clinic, Inc. | |||||||||||||
Tenet HealthSystem HealthCorp |
||||||||||||||
(a) | OrNda Hospital Corporation | |||||||||||||
(b) | AHM Acquisition Co., Inc. | |||||||||||||
(c) | OrNda Investments, Inc. | |||||||||||||
(d) | AHM CGH, Inc. | |||||||||||||
(d) | AHM GEMCH, Inc. | |||||||||||||
(d) | AHM Minden Hospital, Inc. | |||||||||||||
(d) | AHM SMC, Inc. | |||||||||||||
(d) | CHHP, Inc. | |||||||||||||
(d) | HCW, Inc. | |||||||||||||
(d) | LBPG, Inc. | |||||||||||||
(d) | Monterey Park Hospital | |||||||||||||
(d) | NLVH, Inc. | |||||||||||||
(e) |
Pollamead Partnership
ownershipNLVH, Inc., GP (50%);
Doctors Group, LP (50%) |
|||||||||||||
(e) |
Pollamead Partnership II
ownershipNLVH, Inc., GP (50%);
Doctors Group, LP (50%) |
|||||||||||||
(d) | OrNda Management Services, Inc. | |||||||||||||
(d) | Sharpstown General Hospital Professional Building, Ltd. ownershipOrNda Investments, Inc., LP (80%) | |||||||||||||
(d) | Tenet HealthSystem Heritage, Inc. | |||||||||||||
(e) |
Foot and Ankle Specialty Institute of Tacoma
ownershipTenet HealthSystem Heritage,Inc., GP (50%)
Integrated Healthcare Alliance, LP (50%) |
|||||||||||||
(d) | USDHC, Inc. | |||||||||||||
(d) | WPH Management Services, Inc. | |||||||||||||
(b) | Commonwealth Continental Health Care, Inc. | |||||||||||||
(b) | Commonwealth Continental Health Care III, Inc. | |||||||||||||
(b) | Coral Gables Hospital, Inc. | |||||||||||||
(c) |
CGH Hospital, Ltd.
ownershipCoral Gables Hospital, Inc., GP (94.25%)
Greater Miami Medical Group, Ltd., LP (5.75%) |
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(b) | MHA IPA, Inc. | |||||||||||||
(b) | Midway Hospital Medical Center, Inc. | |||||||||||||
(b) | NAI Community Hospital of Phoenix, Inc. | |||||||||||||
(b) |
North Miami Medical Center, Ltd.
ownershipRHC Parkway, Inc. (85.91%)
Commonwealth Continental Health Care, Inc. (14.09%) |
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(c) | Medi-Health of Florida, Inc. | |||||||||||||
(c) | Parkway Professional Plaza Condominum Association, Inc. | |||||||||||||
(c) | Parkway Regional Medical Centr Physician Hospital Organization, Inc. | |||||||||||||
(b) | OrNda Access, Inc. | |||||||||||||
(b) | OrNda Health Initiatives, Inc. | |||||||||||||
(b) | OrNda HealthChoice, Inc. | |||||||||||||
(c) | Health Choice HMO | |||||||||||||
(b) | OrNda HealthCorp of Florida, Inc. | |||||||||||||
(b) | OrNda Healthcorp of Phoenix, Inc. | |||||||||||||
(c) | Biltmore Surgery Center, Inc. | |||||||||||||
(d) | Biltmore Surgery Center Limited Partnership - ownershipBiltmore Surgery Center, Inc., GP | |||||||||||||
(b) | OrNda HomeCare, Inc. | |||||||||||||
(b) | OrNda Metro Surgery, Inc. | |||||||||||||
(b) | OrNda of South Florida, Inc. | |||||||||||||
(c) | OrNda FMC, Inc. | |||||||||||||
(c) | TriLink Provider Services Organization, Inc. | |||||||||||||
(b) | OrNda of South Florida Holdings, Inc. | |||||||||||||
(b) | OrNda Physicians Services, Inc. | |||||||||||||
(b) | Republic Health Corporation of Arizona | |||||||||||||
(c) | CCC Mesa Medical Plaza MOB ownershipRepublic Health Corporation of Arizona, LP (25%) | |||||||||||||
(b) | Republic Health Corporation of Indianapolis | |||||||||||||
(c) | Indianapolis Physician Services, Inc. | |||||||||||||
(c) |
Winona Memorial Hospital Limited Partnership
ownershipRepublic Health Corporation ofIndianapolis (99.9%)
OrNda Hospital Corporation, LP (.01%) |
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(b) | Republic Health Corporation of Mesquite | |||||||||||||
(b) | Republic Health Corporation of Rockwall County | |||||||||||||
(c) | Lake Pointe GP, Inc. | |||||||||||||
(d) |
Lake Pointe Partners, Ltd.
ownership- Lake Pointe GP, Inc., GP- 1.31%
Lake Pointe Investments, Inc., LP- 97.82% Individual Physicians, LP 0.87% |
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(c) | Lake Pointe Holdings, Inc. | |||||||||||||
(c) | Lake Pointe Investments, Inc. | |||||||||||||
(b) | Republic Health Corporation of San Bernardino | |||||||||||||
(b) | Republic Health Corporation of Texas | |||||||||||||
(b) | Republic Health of North Texas | |||||||||||||
(b) | Republic Health Partners, Inc. | |||||||||||||
(b) | RHC Parkway, Inc. | |||||||||||||
(b) | RHCMS, Inc. | |||||||||||||
(b) | Rio Hondo Health System Inc. | |||||||||||||
(b) | Ross General Hospital | |||||||||||||
(b) | Ross Hospital, Inc. | |||||||||||||
(b) | S.C. Management, Inc. | |||||||||||||
(b) | Saint Vincent Healthcare System, Inc. | |||||||||||||
(c) | Clini-Tech Laboratories, Inc. | |||||||||||||
(c) | OHM Health Initiatives, Inc. | |||||||||||||
(c) | OHM Services, Inc. | |||||||||||||
(c) | Provident Nursing Homes, Inc. | |||||||||||||
(c) | Saint Vincent Hospital, Inc. | |||||||||||||
(d) | Saint Vincent Hospital, L.L.C. ownershipManaging member Saint Vincent Hospital,Inc.,(90%). | |||||||||||||
(b) | Santa Ana Hospital Medical Center, Inc. | |||||||||||||
(b) | SHL/O Corp. | |||||||||||||
(b) | Southwest Physician Management Services, Inc. | |||||||||||||
(b) | St. Luke Medical Center | |||||||||||||
(b) | Tenet HC, Inc. | |||||||||||||
(b) | Tenet HealthSystem Biltmore, Inc. | |||||||||||||
(b) | Tenet HealthSystem CFMC, Inc. | |||||||||||||
(b) | Tenet HealthSystem CM, Inc. | |||||||||||||
(b) | Tenet HealthSystem QA, Inc. | |||||||||||||
(c) | Commercial Healthcare of California, Inc. | |||||||||||||
Exhibit 23
The
Board of Directors
Tenet Healthcare Corporation:
We consent to the incorporation by reference in the Company's Registration Statements on Form S-3 (Nos. 33-57801, 33-57057, 33-55285, 33-62591, 33-63451, 333-17907, 333-24955, 333-21867, 333-26621, 333-41907 and 333-74640), Registration Statements on Form S-4 (Nos. 33-57485, 333-18185, 333-64157, 333-45700 and 333-74158) and Registration Statements on Form S-8 (Nos. 2-87611, 33-11478, 33-50182, 33-57375, 333-00709, 333-01183, 333-38299, 333-41903, 333-41476, 333-41478, 333-48482 and 333-74216) our report dated May 14, 2003 with respect to the balance sheets of Tenet Healthcare Corporation and subsidiaries as of May 31, 2001 and 2002 and December 31, 2002, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended May 31, 2002 and for the seven-month transition period ended December 31, 2002, and related consolidated financial statement schedule, which report appears in the December 31, 2002 transition report on Form 10-K for the transition period from June 1, 2002 to December 31, 2002 of Tenet Healthcare Corporation.
Our report refers to a change in the Company's accounting for goodwill and intangible assets effective June 1, 2002.
/s/ KPMG LLP | |
Los Angeles, California May 14, 2003 |
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Exhibit 99(a)
CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63
OF TITLE 18 OF THE UNITED STATES CODE
I, Jeffrey C. Barbakow, in my capacity as the Chairman and Chief Executive Officer of Tenet Healthcare Corporation, certify that (i) the Transition Report on Form 10-K for the seven-month transition period ended December 31, 2002 (the "Transition Form 10-K"), filed with the Securities and Exchange Commission on May 15, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Transition Form 10-K fairly presents, in all material respects, the consolidated financial condition and results of operations of Tenet Healthcare Corporation and its subsidiaries.
/s/
JEFFREY C. BARBAKOW
Jeffrey C. Barbakow |
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|
|
May 15, 2003 |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Transition Form 10-K or as a separate disclosure document.
Exhibit 99(b)
CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63
OF TITLE 18 OF THE UNITED STATES CODE
I, Stephen D. Farber, in my capacity as the Chief Financial Officer of Tenet Healthcare Corporation, certify that (i) the Transition Report on Form 10-K for the seven-month transition period ended December 31, 2002 (the "Transition Form 10-K"), filed with the Securities and Exchange Commission on May 15, 2003, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in the Transition Form 10-K fairly presents, in all material respects, the consolidated financial condition and results of operations of Tenet Healthcare Corporation and its subsidiaries.
/s/
STEPHEN D. FARBER
Stephen D. Farber |
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|
|
May 15, 2003 |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Transition Form 10-K or as a separate disclosure document.