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TENET HEALTHCARE CORP
10-Q, 2001-01-12
GENERAL MEDICAL & SURGICAL HOSPITALS, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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Form 10-Q

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 2000.

OR

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from                 to

Commission file number 1-7293

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TENET HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)

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3820 State Street
Santa Barbara, CA 93105
(Address of principal executive offices)

(805) 563-7000
(Registrant's telephone number, including area code)

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    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days: Yes   X           No      

    As of December 29, 2000 there were 320,887,295 shares of $0.075 par value common stock outstanding.

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TABLE OF CONTENTS

						Page
Part I. Financial Information
		Item 1.		Financial Statements:
				Condensed Consolidated Balance Sheets as of May 31, 2000 and November 30, 2000		2
				Condensed Consolidated Statements of Income for the Three Months and Six Months ended November 30, 1999 and 2000		3
				Condensed Consolidated Statements of Comprehensive Income for the Six Months ended November 30, 1999 and 2000		4
				Condensed Consolidated Statements of Cash Flows for the Six Months ended November 30, 1999 and 2000		4
				Notes to Condensed Consolidated Financial Statements		5
		Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		9
Part II. Other Information
		Item 1.		Legal Proceedings		16
		Item 4.		Submission of Matters to a Vote of Security Holders		16
		Item 6.		Exhibits and Reports on Form 8-K		16
		Signature				17

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Note: Item 3 of Part I and Items 2, 3 and 5 of Part II are omitted because they are not applicable.

Tenet Healthcare Corporation and Subsidiaries 1

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CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dollars in Millions

Condensed Consolidated Balance Sheets

				May 31, 2000			November 30, 2000
ASSETS
Current assets:
	Cash and cash equivalents			$	135		$	82
	Short-term investments in debt securities				110			105
	Accounts receivable, less allowance for doubtful accounts ($358 at May 31 and $354 at November 30)				2,506			2,545
	Inventories of supplies, at cost				223			219
	Deferred income taxes				176			113
	Other current assets				444			465
		Total current assets			3,594			3,529
Investments and other assets					344			369
Property and equipment, at cost					8,141			8,310
	Less accumulated depreciation and amortization				2,247			2,447
	Net property and equipment				5,894			5,863
Intangible assets, at cost less accumulated amortization ($501 at May 31 and $559 at November 30)					3,329			3,360
				$	13,161		$	13,121
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt			$	9		$	9
	Accounts payable				671			696
	Employee compensation and benefits				383			363
	Accrued interest payable				155			154
	Other current liabilities				694			710
		Total current liabilities			1,912			1,932
Long-term debt, net of current portion					5,668			5,047
Other long-term liabilities and minority interests					1,024			1,061
Deferred income taxes					491			497
Shareholders' equity:
	Common stock, $0.075 par value; authorized 700,000,000 shares; 317,214,748 shares issued at May 31 and 320,249,985 shares issued at November 30				24			24
	Other shareholders' equity				4,112			4,630
	Less common stock in treasury, at cost, 3,754,708 shares				(70	)		(70	)
		Total shareholders' equity			4,066			4,584
				$	13,161		$	13,121

See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of Operations.

2 Tenet Healthcare Corporation and Subsidiaries

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CONDENSED CONSOLIDATION FINANCIAL STATEMENTS

Dollars in Millions, Except Per Share Amounts

Condensed Consolidated Statements of Income
Three and Six Months ended November 30, 1999 and 2000

				Three Months						Six Months
				1999			2000			1999			2000
Net operating revenues				$	2,780		$	2,915		$	5,653		$	5,808
Operating expenses:
	Salaries and benefits				1,110			1,130			2,271			2,253
	Supplies				387			405			794			809
	Provision for doubtful accounts				210			206			433			419
	Other operating expenses				604			637			1,229			1,273
	Depreciation				102			105			204			212
	Amortization				30			31			62			61
Operating income					337			401			660			781
Interest expense					(120	)		(118	)		(244	)		(241	)
Investment earnings					6			13			11			19
Minority interests in income of consolidated subsidiaries					(5	)		(4	)		(10	)		(10	)
Net gains on sales of facilities and long-term investments					58			—			68			—
Income before income taxes					276			292			485			549
Income taxes					(141	)		(117	)		(222	)		(220	)
Income before cumulative effect of accounting change					135			175			263			329
Cumulative effect of accounting change, net of taxes					—			—			(19	)		—
Net income				$	135		$	175		$	244		$	329
Basic earnings (loss) per share:
	Income before cumulative effect of accounting change			$	0.43		$	0.55		$	0.84		$	1.04
	Cumulative effect of accounting change				—			—			(0.06	)		—
	Net income				0.43			0.55			0.78			1.04
Diluted earnings (loss) per share:
	Income before cumulative effect of accounting change			$	0.43		$	0.54		$	0.84		$	1.02
	Cumulative effect of accounting change				—			—			(0.06	)		—
	Net income				0.43			0.54			0.78			1.02
Weighted average shares and dilutive securities outstanding (in thousands):
	Basic				311,512			318,035			311,331			314,958
	Diluted				313,745			325,726			313,483			321,497

See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of Operations.

Tenet Healthcare Corporation and Subsidiaries 3

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CONDENSED CONSOLIDATION FINANCIAL STATEMENTS

Dollars in Millions

Condensed Consolidated Statements of Comprehensive Income
Six Months ended November 30, 1999 and 2000

				1999			2000
Net income				$	244		$	329
Other comprehensive income (loss):
	Foreign currency translation adjustments				(6	)		(2	)
	Unrealized net holding gains (losses) arising during period				(49	)		22
	Less: reclassification adjustment for gains included in net income				(4	)		(2	)
	Other comprehensive income (loss) before income taxes				(59	)		18
	Income tax benefit (expense) related to items of other comprehensive income				22			(6	)
	Other comprehensive income (loss)				(37	)		12
Comprehensive income				$	207		$	341

See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of Operations.

Dollars in Millions

Condensed Consolidated Statements of Cash Flows
Six Months ended November 30, 1999 and 2000

				1999			2000
Net cash provided by operating activities				$	325		$	725
Cash flows from investing activities:
	Proceeds from sales of facilities, long-term investments and other assets				643			29
	Purchases of property and equipment				(264	)		(239	)
	Purchases of businesses, net of cash acquired				—			(13	)
	Other items				(72	)		(47	)
		Net cash provided by (used in) investing activities			307			(270	)
Cash flows from financing activities:
	Proceeds from borrowings				802			605
	Repayments of borrowings				(1,430	)		(1,234	)
	Other items, primarily stock option exercises in 2000				(2	)		121
		Net cash used in financing activities			(630	)		(508	)
Net increase (decrease) in cash and cash equivalents					2			(53	)
Cash and cash equivalents at beginning of period					29			135
Cash and cash equivalents at end of period				$	31		$	82
Supplemental disclosures:
	Interest paid			$	246		$	234
	Income taxes paid, net of refunds received				41			111

See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.

4 Tenet Healthcare Corporation and Subsidiaries

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NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

Note 1

    The financial information furnished herein is unaudited; however, in the opinion of management, the information reflects all adjustments that are necessary to fairly state the consolidated financial position of Tenet Healthcare Corporation (together with its subsidiaries, "Tenet" or the "Company"), the results of its operations and cash flows for the interim periods indicated. All the adjustments are of a normal recurring nature.

    The Company presumes that users of this interim financial information have read or have access to the Company's audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for the preceding fiscal year, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnotes and other disclosures that would substantially duplicate the disclosures contained in the Company's most recent annual report to security holders have been omitted.

    Patient volumes and net operating revenues of the Company's hospitals are subject to seasonal variations caused by a number of factors, including, but not necessarily limited to, seasonal cycles of illness, climate and weather conditions, vacation patterns of both hospital patients and admitting physicians and other factors relating to the timing of elective hospital procedures. Quarterly operating results are not necessarily representative of operations for a full year for various reasons, including levels of occupancy, interest rates, acquisitions, disposals, revenue allowance and discount fluctuations, the timing of price changes, unusual or non-recurring items and fluctuations in quarterly tax rates. These same considerations apply to all year-to-year comparisons.

Note 2

    On June 1, 1999, the Company changed its method of accounting for start-up costs to expense such costs as incurred in accordance with Statement of Position 98-5, published by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. The adoption of the Statement resulted in the write-off of previously capitalized start-up costs as of May 31, 1999 in the amount of $19 million, net of tax benefit, which amount is shown in the accompanying consolidated statement of income as a cumulative effect of an accounting change in the six months ended November 30, 1999.

Note 3

    In June 2000, the Company issued $400 million of 9¹/4% Senior Notes due 2010. The proceeds were used to retire existing bank debt under the Company's unsecured revolving bank credit agreement.

Note 4

    There have been no material changes to the description of professional and general liability insurance set forth in Note 8A or significant legal proceedings set forth in Note 8B of Notes to Consolidated Financial Statements for the fiscal year ended May 31, 2000.

Tenet Healthcare Corporation and Subsidiaries 5

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Note 5

    The table below provides a reconciliation between net income and net cash provided by operating activities for the six months ended November 30, 1999 and 2000:

				1999			2000
				(in millions)
Net income				$	244		$	329
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization				266			273
	Provision for doubtful accounts				433			419
	Deferred income taxes				20			28
	Gains on sales of facilities and long-term investments				(68	)		—
	Other items				35			13
	Increases (decreases) in cash from changes in operating assets and liabilities, net of effects from purchases and sales of businesses:
		Accounts receivable			(588	)		(453	)
		Inventories and other current assets			(27	)		(28	)
		Income taxes payable			161			88
		Accounts payable, accrued expenses and other current liabilities			(94	)		107
		Other long-term liabilities			(12	)		(8	)
	Net expenditures for discontinued operations, impairment and other unusual charges				(45	)		(43	)
	Net cash provided by operating activities			$	325		$	725

Note 6

    The following table presents a reconciliation of beginning and ending liability balances in connection with impairment and other unusual charges recorded in prior fiscal years as of May 31, 2000 and November 30, 2000:

Reserves related to:			Balances at May 31, 2000			Cash Payments			Balances at November 30, 2000
			(in millions)
Lease cancellations, exit costs and estimated costs to sell or close hospitals and other facilities			$	106		$	(25	)	$	81
Severance costs in connection with the implementation of hospital cost-control programs, general overhead-reduction plans, closure of home health agencies and hospitals and termination of physician contracts				17			(5	)		12
Accruals for unfavorable lease commitments at six medical offices buildings				12			(1	)		11
Termination of physician contracts				4			(4	)		—
Other				2			(2	)		—
	Total		$	141		$	(37	)	$	104

    The above liability balances are included in other current liabilities and other long-term liabilities in the accompanying condensed consolidated balance sheets. Cash payments to be applied against these accruals are expected to approximate $45 million in the remainder of fiscal 2001 and $59 million thereafter. There were no impairment or other unusual charges in the six months ended November 30, 2000.

6 Tenet Healthcare Corporation and Subsidiaries

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Note 7

    The following is a reconciliation of the numerators and the denominators of the Company's basic and diluted earnings per share computations before the cumulative effect of an accounting change for the three months and six months ended November 30, 1999 and 2000. Income is expressed in millions and weighted average shares are expressed in thousands:

				1999								2000
				Income (Numerator)			Weighted Average Shares (Denominator)		Per-Share Amount			Income (Numerator)			Weighted Average Shares (Denominator)		Per-Share Amount
Three Months
Basic earnings per share:
	Income available to common shareholders			$	135		311,512		$	0.43		$	175		318,035		$	0.55
Effect of dilutive stock options and warrants					—		2,233						—		7,691
Diluted earnings per share:
	Income available to common shareholders			$	135		313,745		$	0.43		$	175		325,726		$	0.54
Six Months
Basic earnings per share:
	Income available to common shareholders			$	263		311,331		$	0.84		$	329		314,958		$	1.04
Effect of dilutive stock options and warrants					—		2,152						—		6,539
Diluted earnings per share:
	Income available to common shareholders			$	263		313,483		$	0.84		$	329		321,497		$	1.02

    Outstanding options to purchase 21,337,951 and 80,000 shares of common stock were not included in the computation of earnings per share for the three-month periods ended November 30, 1999 and 2000, respectively, because the options' exercise prices were greater than the average market price of the common stock during the quarters.

    Outstanding options to purchase 22,229,724 and 5,788,281 shares of common stock were not included in the computation of earnings per share for the six-month periods ended November 30, 1999 and 2000, respectively, because the options' exercise prices were greater than the average market price of the common stock during the periods.

Tenet Healthcare Corporation and Subsidiaries 7

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Note 8

    The following table sets forth the tax effects allocated to each component of other comprehensive income for the six months ended November 30, 1999 and 2000:

			Foreign Currency Translation Adjustments			Unrealized Holding Gains (Losses) on Securities			Reclassification Adjustment for Gains Included in Net Income			Other Comprehensive Income (Loss)
			(in millions)
1999
Before-tax amount			$	(6	)	$	(49	)	$	(4	)	$	(59	)
Tax benefit				2			19			1			22
Net-of-tax amount			$	(4	)	$	(30	)	$	(3	)	$	(37	)
2000
Before-tax amount			$	(2	)	$	22		$	(2	)	$	18
Tax benefit (expense)				1			(7	)		1			(5	)
Net-of-tax amount			$	(1	)	$	15		$	(1	)	$	13

    The following table sets forth the accumulated other comprehensive income balances, by component, as of November 30, 1999 and 2000:

			Foreign Currency Translation Adjustments			Unrealized Holding Gains (Losses) on Securities			Reclassification Adjustment for Gains Included in Net Income			Accumulated Other Comprehensive Income (Loss)
			(in millions)
1999
Beginning balance			$	(3	)	$	120		$	(40	)	$	77
Current-period change				(4	)		(30	)		(3	)		(37	)
Ending balance			$	(7	)	$	90		$	(43	)	$	40
2000
Beginning balance			$	(3	)	$	31		$	(98	)	$	(70	)
Current-period change				(1	)		15			(1	)		13
Ending balance			$	(4	)	$	46		$	(99	)	$	(57	)

8 Tenet Healthcare Corporation and Subsidiaries

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MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

Results of Operations

    Operating results for the three and six months ended November 30, 2000 compared to the prior-year periods included the following highlights:

•

Growth in patient volumes and revenues



•

Improvements in operating margins



•

Decrease in bad debts



•

Improvements in cash flows from operations



•

Reductions of debt

    On a same-facility basis, admissions improved 4.2% over the prior-year quarter, patient revenues were up 10.8% and net inpatient revenues per admission were up 6.2%. Total-company EBITDA margins (the ratio of earnings before interest, taxes, depreciation and amortization to net operating revenues) increased from 16.9% to 18.4%. Bad debt expense as a percentage of net operating revenues decreased by 0.5 percentage points over the prior-year quarter. Net cash provided by operating activities increased by $141 million over the prior-year quarter and by $400 million over the prior year six-month period. The Company paid down its debt by $381 million in the quarter and by $629 million since the beginning of the fiscal year.

    The Company reported income before income taxes of $276 million in the quarter ended November 30, 1999 and $292 million in the quarter ended November 30, 2000. For the six-month periods ended November 30, 1999 and 2000, income before income taxes and cumulative effect of accounting change was $485 million and $549 million, respectively. The November 30, 1999 three- and six-month periods include pretax gains on sales of facilities and long-term investments of $58 million and $68 million, respectively.

    Results of operations for the three- and six months ended November 30, 2000 include the operations of one general hospital acquired in December 1999 and one general hospital acquired in October 2000 and exclude, from the dates of sale or closure, the operations of 17 general hospitals sold or closed during the November 1999 quarter, two hospitals sold or closed in December 1999 and two hospitals sold or closed in March 2000.

Tenet Healthcare Corporation and Subsidiaries 9

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    The following is a summary of consolidated operations for the three months and six months ended November 30, 1999 and 2000:

				1999			2000			1999		2000
				(Dollars in millions)						(% of net operating revenues)
Three Months Ended November 30,
Net operating revenues:
	Domestic general hospitals			$	2,580		$	2,788		92.8	%	95.6	%
	Other operations				200			127		7.2	%	4.4	%
Net operating revenues					2,780			2,915		100.0	%	100.0	%
Operating expenses:
	Salaries and benefits				(1,110	)		(1,130	)	39.9	%	38.8	%
	Supplies				(387	)		(405	)	13.9	%	13.9	%
	Provision for doubtful accounts				(210	)		(206	)	7.6	%	7.1	%
	Other operating expenses				(604	)		(637	)	21.7	%	21.9	%
	Depreciation				(102	)		(105	)	3.7	%	3.6	%
	Amortization				(30	)		(31	)	1.1	%	1.1	%
Operating income				$	337		$	401		12.1	%	13.8	%
Six Months Ended November 30,
Net operating revenues:
	Domestic general hospitals			$	5,247		$	5,532		92.8	%	95.2	%
	Other operations				406			276		7.2	%	4.8	%
Net operating revenues					5,653			5,808		100.0	%	100.0	%
Operating expenses:
	Salaries and benefits				(2,271	)		(2,253	)	40.2	%	38.8	%
	Supplies				(794	)		(809	)	14.0	%	13.9	%
	Provision for doubtful accounts				(433	)		(419	)	7.7	%	7.2	%
	Other operating expenses				(1,229	)		(1,273	)	21.7	%	21.9	%
	Depreciation				(204	)		(212	)	3.6	%	3.7	%
	Amortization				(62	)		(61	)	1.1	%	1.1	%
Operating income				$	660		$	781		11.7	%	13.4	%

    Net operating revenues of domestic general hospitals in the table above include inpatient and outpatient revenues, as well as nonpatient revenues, primarily rental income and services such as cafeteria, gift shops, parking and other miscellaneous revenue. Net operating revenues of other operations consist primarily of revenues from: (i) physician practices, (ii) rehabilitation hospitals, long-term care facilities, psychiatric and specialty hospitals that are located on or near the same campuses as the Company's general hospitals; (iii) the Company's hospital in Barcelona, Spain; (iv) health care joint ventures operated by the Company; (v) subsidiaries of the Company offering managed care and indemnity products; and (vi) equity in the earnings of unconsolidated affiliates.

10 Tenet Healthcare Corporation and Subsidiaries

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    The table below sets forth certain selected historical operating statistics for the Company's domestic general hospitals:

		Three Months ended November 30,								Six Months ended November 30,
		1999			2000			Increase (Decrease)		1999			2000			Increase (Decrease)
Number of hospitals (at end of period)			113			111		(2)	(1)		113			111		(2)	(1)
Licensed beds (at end of period)			27,625			27,008		(2.2)	%		27,625			27,008		(2.2)	%
Net inpatient revenues (in millions)		$	1,704		$	1,842		8.1	%	$	3,411		$	3,619		6.1	%
Net outpatient revenues (in millions)		$	819		$	879		7.3	%	$	1,717		$	1,791		4.3	%
Admissions			227,419			229,281		0.8	%		466,495			457,961		(1.8)	%
Equivalent admissions			329,667			329,224		(0.1)	%		683,378			661,278		(3.2)	%
Average length of stay (days)			5.2			5.2		—			5.2			5.2		—
Patient days			1,184,765			1,192,364		0.6	%		2,408,203			2,375,785		(1.3)	%
Equivalent patient days			1,695,214			1,690,618		(0.3)	%		3,482,930			3,384,326		(2.8)	%
Net inpatient revenue per patient day		$	1,438		$	1,545		7.4	%	$	1,416		$	1,523		7.6	%
Net inpatient revenue per admission		$	7,493		$	8,034		7.2	%	$	7,312		$	7,902		8.1	%
Utilization of licensed beds			44.7	%		48.6	%	3.9	%(1)		43.9	%		48.1	%	4.2	%(1)
Outpatient visits			2,289,819			2,240,966		(2.1)	%		4,758,646			4,517,485		(5.1)	%

(1)

The change is the difference between 1999 and 2000 amounts shown.

    The table below sets forth certain selected operating statistics for the Company's domestic general hospitals on a same-facility basis:

		Three Months ended November 30,								Six Months ended November 30,
		1999			2000			Increase (Decrease)		1999			2000			Increase (Decrease)
Average licensed beds			26,802			26,756		(0.2)	%		26,818			26,792		(0.1)	%
Patient days			1,133,835			1,185,546		4.6	%		2,248,715			2,362,592		5.1	%
Net inpatient revenue per patient day		$	1,461		$	1,547		5.9	%	$	1,450		$	1,527		5.3	%
Admissions			218,441			227,718		4.2	%		436,358			455,006		4.3	%
Net inpatient revenue per admission		$	7,586		$	8,054		6.2	%	$	7,471		$	7,930		6.1	%
Outpatient visits			2,186,853			2,212,472		1.2	%		4,402,322			4,461,566		1.3	%
Average length of stay (days)			5.2			5.2		—			5.2			5.2		—

The table below sets forth the sources of net patient revenues for the Company's domestic general hospitals for the three- and six-month periods ended November 30, 1999 and 2000, expressed as percentages of net patient revenues from all sources:

		Three Months ended November 30,						Six Months ended November 30,
		1999		2000		Increase (Decrease)(1)		1999		2000		Increase (Decrease)(1)
Medicare		31.6	%	29.7	%	(1.9)	%	32.1	%	30.5	%	(1.6)	%
Medicaid		8.5	%	8.7	%	0.2	%	8.3	%	8.3	%	0.0	%
Managed care		41.9	%	43.9	%	2.0	%	40.9	%	42.5	%	1.6	%
Indemnity and other		18.0	%	17.7	%	(0.3)	%	18.7	%	18.7	%	0.0	%

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(1)

The change is the difference between the 1999 and 2000 amounts shown.

    The Company continues to experience increases in inpatient acuity and intensity of services as less intensive services shift from an inpatient to an outpatient basis or to alternative health care delivery services because of technological and pharmaceutical improvements, regulatory changes and continued pressures by payers to reduce admissions and lengths of stay. The Company experienced a 1.2% increase in the number of same-facility outpatient visits during the quarter ended November 30, 2000

Tenet Healthcare Corporation and Subsidiaries 11

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compared to the year-ago quarter. This is the second consecutive quarterly increase in same-facility outpatient visits since the consolidation or closure of the majority of the Company's home health agencies, in response to the changes in Medicare payments to home health agencies mandated by the Balanced Budget Act of 1997 (BBA).

    Pressures to control health care costs and a shift from traditional Medicare to Medicare managed care plans after the BBA was enacted have resulted in an increase in the number of patients whose health care coverage is provided under managed care plans. Driven by reductions in Medicare payments under the BBA and by the continuing shift from traditional Medicare to Medicare managed care plans, the Company's Medicare revenues declined steadily through the end of September 2000. On October 1, 2000, as a result of the Balanced Budget Relief Act of 2000, the Company began to receive improved Medicare payments. The trend continues and will improve further with the implementation of the new Benefits Improvement and Protection Act of 2000.

    The pricing environment for managed care and other nongovernment payers has improved and the Company expects continuing benefits as it renegotiates and renews contracts with improved terms and continues to terminate capitated arrangements with managed care payers and employers. In most of the markets served by the Company, profitability of capitation arrangements generally has been disappointing to both physicians and hospitals. One of the most significant trends in recent quarters has been the improvement in net revenue per admission. For the quarter ended November 30, 2000, on a total-facility basis, this statistic increased 7.2% over the prior-year quarter and, on a same-facility basis, it increased by 6.2%. Some of the improvement is attributable to benefits from contract changes that are essentially one-time events, that effectively raise overall pricing beyond the actual contract rate increases. Because of these one-time events, growth in revenue per admission may moderate going forward.

    To address all the changes impacting the health care industry, while continuing to provide quality care to patients, the Company has implemented strategies to reduce inefficiencies, create synergies, obtain additional business and control costs. In the past two years, such strategies have included hospital cost-control programs and overhead-reduction plans and the enhancement of integrated health care delivery systems. The Company has positioned itself for additional cost savings in the years to come, for example, by outsourcing housekeeping and dietary services in most of its hospitals. Further consolidations and implementation of additional cost-control programs and other operating efficiencies may be undertaken in the future.

    Salaries and benefits expense as a percentage of net operating revenues was 39.9% in the quarter ended November 30, 1999 and 38.8% in the current quarter. The decrease is primarily the result of cost-control measures, improved labor productivity and the outsourcing of housekeeping and dietary services in most of the hospitals.

    Supplies expense as a percentage of net operating revenues was 13.9% in both the current and prior year quarters ended November 30. The Company controls supplies expense through improved utilization, improving the supply chain process and by developing and expanding programs designed to improve the purchasing of supplies through its group-purchasing organization.

    The provision for doubtful accounts as a percentage of net operating revenues was 7.6% in the quarter ended November 30, 1999 and 7.1% in the current quarter. The Company continues to take actions which have reduced bad debt expense, including improving the process for collecting receivables, pursuing timely payments from managed care payers, standardizing and improving billing systems and developing best practices in the patient admissions and registration process.

    Other operating expenses as a percentage of net operating revenues were 21.7% for the quarter ended November 30, 1999 and 21.9% for the quarter ended November 30, 2000. The change is

12 Tenet Healthcare Corporation and Subsidiaries

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primarily due to increases resulting from outsourcing certain hospital services described above, offset by continuing cost control measures.

    Interest expense, net of capitalized interest of $7 million and $2 million, respectively, was $120 million in the quarter ended November 30, 1999 and $118 million in the current quarter. The decrease is primarily due to lower borrowings, offset by the effect of interest rate increases and the amounts of interest capitalized during the periods.

    Taxes on income as a percentage of income before income taxes were 40.1% in the current quarter, which is in line with the Company's expectations for fiscal 2001. Taxes on income as a percentage of income before income taxes were 38.4% for the prior year quarter, excluding the effect of gains on sales of facilities and investments. Income taxes related to the $58 million gain on sales of facilities and investments in the prior year quarter were $57 million due to the effect of nondeductible goodwill for tax purposes included in the book basis of the assets sold. The increase in the tax rate over the prior year quarter is due primarily to the effect of nondeductible goodwill amortization, partially offset by reduced exposure to tax contingencies.

    Net operating revenues from the Company's other domestic operations were $200 million for the quarter ended November 30, 1999, compared to $127 million for the current quarter. The decrease is primarily the result of terminations and contract expirations of physician practices. The Company has exited more than 60% of these contracts during the past four fiscal quarters and plans to exit another 10% by the end of the current fiscal year. The Company has incurred significant charges in prior periods in connection with its plans to exit these contracts and may incur some additional charges by May 31, 2001 as it evaluates the balance of its physician contracts for possible termination.

Liquidity and Capital Resources

    The Company's liquidity for the six-month periods ended November 30, 1999 and 2000 was derived primarily from the activities shown in the following table:

			1999			2000
			(in millions)
Net cash provided by operating activities			$	325		$	725
Proceeds from sales of facilities, long-term investments and other assets				643			29
Proceeds from sale of 91/4% Senior Notes, due 2010				—			395
Proceeds from stock option exercises				3			132
Borrowings under bank credit agreement				802			210
Repayment of bank credit agreement borrowings				(1,413	)		(1,212	)
Other loan repayments				(17	)		(22	)
Purchases of property and equipment				(264	)		(239	)
Purchases of new businesses, net of cash acquired				—			(13	)
Other net investing and financing activities				(77	)		(58	)
Net increase (decrease) in cash and cash equivalents			$	2		$	(53	)

    Net cash provided by operating activities for the six months ended November 30, 2000 was $768 million before net expenditures of $43 million for discontinued operations, impairment and other unusual charges. Net cash provided by operating activities for the six months ended November 30, 1999 was $370 million before $45 million in expenditures for such charges.

    Management believes that future cash provided by recurring operating activities, the availability of credit under the bank credit agreement and, depending on capital market conditions and to the extent permitted by the restrictive covenants of the credit agreement and the indentures governing the Company's senior and senior subordinated notes, other borrowings or the sale of equity securities

Tenet Healthcare Corporation and Subsidiaries 13

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should be adequate to meet known debt service requirements and to finance planned capital expenditures, acquisitions and other presently known operating needs over the next three years. The Company expects to refinance the bank credit agreement before its January 31, 2002 maturity date.

    During the six months ended November 30, 2000, the Company reduced the balance of its bank loans under the bank credit agreement by $1.0 billion. Payments of other long-term debt were $22 million in the November 30, 2000 period.

    Cash payments for property and equipment were $239 million in the six months ended November 30, 2000, compared to $264 million in the corresponding prior-year six-month period. The Company expects to spend approximately $500 million in fiscal 2001 on capital expenditures, before any significant acquisitions of facilities and other health care operations. Such capital expenditures primarily relate to the development of integrated health care systems in selected geographic areas, design and construction of new buildings, expansion and renovation of existing facilities, equipment and systems additions and replacements, introduction of new medical technologies and various other capital improvements.

    The Company's strategy continues to include the prudent development of integrated health care delivery systems, including the possible acquisition of general hospitals and related ancillary health care businesses or joining with others to develop integrated health care delivery networks. All or portions of these activities may be financed by net cash provided by operating activities, the availability of credit under the credit agreement, the sale of assets and, depending on capital market conditions and to the extent permitted by the restrictive covenants of the credit agreement and the indentures governing the Company's senior and senior subordinated notes, other borrowings or the sale of equity securities. The Company's unused borrowing capacity under the $2.8 billion bank credit agreement was $2.3 billion as of December 29, 2000.

    The Company's bank credit agreement and the indentures governing the Company's Senior and Senior Subordinated notes have, among other requirements, affirmative, negative and financial covenants with which the Company must comply. These covenants include, among other requirements, limitations on other borrowings, liens, investments, the sale of all or substantially all assets and prepayment of subordinated debt, a prohibition against the Company declaring or paying a dividend or purchasing its common stock, unless its senior long-term unsecured debt securities are rated BBB- or higher by Standard and Poors' Rating Services and Baa3 or higher by Moody's Investors Service, Inc., and covenants regarding maintenance of specified levels of net worth, debt ratios and fixed charge coverages. Current debt ratings on the Company's senior debt securities are BB+ by Standard and Poors and Ba1 by Moody's. The Company is in compliance with its loan covenants.

Business Outlook

    The general hospital industry in the United States and the Company's general hospitals continue to have significant unused capacity, and thus there is substantial competition for patients. Inpatient utilization continues to be negatively affected by payer-required pre-admission authorization and by payer pressure to maximize outpatient and alternative health care delivery services for less acutely ill patients. Increased competition, admission constraints and payer pressure, as well as the shift in patient mix to managed care, are expected to continue.

    The ongoing challenge facing the Company and the health care industry as a whole is to continue to provide quality patient care in an environment of rising costs, strong competition for patients and downward pressures on payment rates by government and other payers. Because of national, state and private industry efforts to reform health care delivery and payment systems, the health care industry as a whole faces increased uncertainty. The Company is unable to predict whether any other health care legislation at the federal and/or state level will be passed in the future and what action it may take in

14 Tenet Healthcare Corporation and Subsidiaries

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response to such legislation, but it continues to monitor all proposed legislation and analyze its potential impact in order to formulate its future business strategies.

Forward-Looking Statements

    Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words believes, anticipates, expects, will, may, might, should, surmises, estimates, intends, appears and words of similar import, and statements regarding the Company's business strategy and plans, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management's current expectations and involve known and unknown risks, uncertainties and other factors, many of which the Company is unable to predict or control, that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and regionally; industry capacity; demographic changes; existing laws and government regulations and changes in, or the failure to comply with, laws and governmental regulations; legislative proposals for health care reform; the ability to enter into managed care provider arrangements on acceptable terms; a shift to or from fee-for-service payment from or to capitated and other risk-based payment systems; a shift from traditional Medicare and Medicaid reimbursement to Medicare and Medicaid managed care plans; changes in Medicare and Medicaid payment or reimbursement levels; liability and other claims asserted against the Company; competition; the loss of any significant customers; technological and pharmaceutical improvements that increase the cost of providing, or reduce the demand for, health care; changes in business strategy or development plans; the ability to attract and retain qualified personnel, including physicians, nurses and other health care professionals; the significant indebtedness of the Company; the availability of suitable acquisition opportunities and the length of time it takes to accomplish acquisitions; the Company's ability to integrate new business with its existing operations; and the availability and terms of capital to fund the expansion of the Company's business, including the acquisition of additional facilities and other factors referenced in this Quarterly Report on Form 10-Q. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Tenet Healthcare Corporation and Subsidiaries 15

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OTHER INFORMATION

Item 1. Legal Proceedings

    Material Developments in Previously Reported Legal Proceedings:

    There have been no material developments in the legal proceedings previously described in the Company's Annual Report on Form 10-K for its fiscal year ended May 31, 2000.

Items 2, 3 and 5 are not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

    The Company's annual meeting of shareholders was held on October 11, 2000. The shareholders elected all of the Company's nominees for director. The shareholders voted in favor of a proposal to approve the Company's Second Amended and Restated 1994 Directors Stock Option Plan. The shareholders also ratified the selection of KPMG LLP as the Company's independent auditors for the fiscal year ended May 31, 2001. The votes were as follows:

1.		Election of Directors		For		Withheld
		Management Nominees
		Jeffrey C. Barbakow		197,960,148		4,434,204
		Lawrence Biondi, S.J.		198,353,197		4,041,155
		Van B. Honeycutt		198,407,792		3,986,560
		Opposition Nominees
		M. Lee Pearce, M.D.		42,145,615		1,010,896
		Michael E. Gallagher		42,019,216		1,137,295
		Joseph M. Rodgers		42,014,048		1,142,463
		Claire S. Farley		42,014,214		1,142,297
2.		Proposal to approve the Company's Second Amended and Restated 1994 Directors Stock Option Plan:
		For:		218,676,102
		Against:		20,456,137
		Abstain:		6,417,624
3.		Ratification of selection of KPMG LLP:
		For:		239,751,993
		Against:		317,316
		Abstain:		5,481,524

Item 6. Exhibits and Reports on Form 8-K

		(a)		Exhibits.
				(i) None.
		(b)		Reports on Form 8-K
				(i) None.

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SIGNATURE

    Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		TENET HEALTHCARE CORPORATION (Registrant)
Date: January 12, 2001		By:		/s/ DAVID L. DENNIS    David L. Dennis Office of the President, Chief Corporate Officer and Chief Financial Officer (Principal Financial Officer)
		By:		/s/ RAYMOND L. MATHIASEN    Raymond L. Mathiasen Executive Vice President, Chief Accounting Officer (Principal Accounting Officer)

Tenet Healthcare Corporation and Subsidiaries 17

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TABLE OF CONTENTS
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Income Three and Six Months ended November 30, 1999 and 2000

CONDENSED CONSOLIDATION FINANCIAL STATEMENTS

Condensed Consolidated Statements of Comprehensive Income Six Months ended November 30, 1999 and 2000
Condensed Consolidated Statements of Cash Flows Six Months ended November 30, 1999 and 2000

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
OTHER INFORMATION

Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K

SIGNATURE