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SECURITIES AND EXCHANGE COMMISSION



WASHINGTON, D.C. 20549


FORM 10-Q

(Mark One)

[X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
     
               
               
               EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2003OR[  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
     
               
               
               EXCHANGE ACT OF 1934For the transition period from _______________ to _______________.


COMMISSION FILE NUMBER: 333-94521

IASIS HEALTHCARE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


DELAWARE
    
    76-0450619(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    (Identification No.)


113 SEABOARD LANE, SUITE A-200
FRANKLIN, TENNESSEE 37067
(Address of Principal Executive Offices)

(615) 844-2747
(Registrants Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)

Indicate
by check mark ü 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 (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES þ    NO o

Indicate
by check mark ü whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o    NO þ

As
of August 11, 2003, 31,956,113 shares of the Registrants
Common Stock were outstanding.





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TABLE OF CONTENTS



|                                                 |                                                                                                  |                                                                    |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                   
|                                                 | Item 1.   Financial Statements                                                                  
|                                                 |                                                                                                  | CONDENSED AND CONSOLIDATED BALANCE SHEETS                         
|                                                 |                                                                                                  | CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)   
|                                                 |                                                                                                  | CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)   
|                                                 |                                                                                                  | NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
|                                                 | Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                 | Item 3.     Quantitative and Qualitative Disclosures About Market Risk                          
|                                                 | Item 4.     Controls and Procedures                                                             
|PART II. OTHER INFORMATION                      
|                                                 | Item 6.     Exhibits and Reports on Form 8-K                                                    
|SIGNATURES                                      
|EX-10.2 ARIZONA HEALTHCARE CONTRACT             
|EX-10.3 AMENDMENT TO MESA GENERAL HOSPITAL LEASE
|EX-31.1 CEO SECTION 302 CERTIFICATION           
|EX-31.2 CFO SECTION 302 CERTIFICATION           
|EX-99.1 ODESSA REGIONAL HOSPITAL FINANCIALS     
|EX-99.2 JORDAN VALLEY HOSPITAL FINANCIALS       



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##### Table of Contents



TABLE OF CONTENTS

PART I.
    
    FINANCIAL INFORMATION
    
    
    1Item 1.
    
    Financial Statements:Condensed and Consolidated Balance Sheets at June 30, 2003
(Unaudited) and September 30, 2002
    
    
    1Condensed and Consolidated Statements of Operations
(Unaudited)  Three Months Ended June 30, 2003 and 2002 and
Nine Months Ended June 30, 2003 and 2002
    
    
    2Condensed and Consolidated Statements of Cash Flows
(Unaudited)  Nine Months Ended June 30, 2003 and 2002
    
    
    3Notes to Unaudited Condensed and Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    28PART II.
    
    OTHER INFORMATION
    
    
    29Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    29


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PART I.

FINANCIAL INFORMATION




Item 1.   Financial Statements

IASIS HEALTHCARE CORPORATION




CONDENSED AND CONSOLIDATED BALANCE SHEETS(In thousands except share amounts)


June 30,
    
    September 30,2003
    
    2002(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    74,491
    
    
    $
    Accounts receivable, net of allowance for doubtful accounts of
$42,590 and $34,450, respectively
    
    
    151,927
    
    
    
    154,452Inventories
    
    
    23,833
    
    
    
    23,909Prepaid expenses and other current assets
    
    
    17,010
    
    
    
    15,697Assets held for sale
    
    
    10,000
    
    
    
    22,106Total current assets
    
    
    277,261
    
    
    
    216,164Property and equipment, net
    
    
    429,177
    
    
    
    402,171Goodwill
    
    
    252,204
    
    
    
    252,397Other assets, net
    
    
    37,023
    
    
    
    27,751Total assets
    
    $
    995,665
    
    
    $
    898,483LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    46,377
    
    
    $
    47,061Salaries and benefits payable
    
    
    22,043
    
    
    
    21,551Accrued interest payable
    
    
    10,996
    
    
    
    15,016Medical claims payable
    
    
    30,168
    
    
    
    30,262Other accrued expenses and other current liabilities
    
    
    17,962
    
    
    
    19,023Current portion of long-term debt and capital lease obligations
    
    
    5,382
    
    
    
    26,252Total current liabilities
    
    
    132,928
    
    
    
    159,165Long-term debt and capital lease obligations
    
    
    658,870
    
    
    
    556,691Other long-term liabilities
    
    
    24,766
    
    
    
    22,347Minority interest
    
    
    5,043
    
    
    
    4,736Total liabilities
    
    
    821,607
    
    
    
    742,939Stockholders equity:Preferred stock  $0.01 par value, authorized 5,000,000 shares; no
shares issued and outstanding at June 30, 2003 and September 30,
2002
    
    
    
    
    
    
    Common stock  $0.01 par value, authorized 100,000,000 shares;
31,985,029 and 31,984,779 shares issued at June 30, 2003 and
September 30, 2002, respectively, and 31,956,113 and
31,955,863 shares outstanding at June 30, 2003 and September
30, 2002, respectively
    
    
    320
    
    
    
    320Nonvoting common stock  $0.01 par value, authorized 10,000,000
shares; no shares issued and outstanding at June 30, 2003 and
September 30, 2002
    
    
    
    
    
    
    Additional paid-in capital
    
    
    450,720
    
    
    
    450,718Treasury stock, at cost, 16,306,541 shares at June 30, 2003 and
September 30, 2002
    
    
    (155,300
    )
    
    
    (155,300
    )Accumulated deficit
    
    
    (121,682
    )
    
    
    (140,194
    )Total stockholders equity
    
    
    174,058
    
    
    
    155,544Total liabilities and stockholders equity
    
    $
    995,665
    
    
    $
    898,483


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IASIS HEALTHCARE CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(In thousands)

Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2003
    
    2002
    
    2003
    
    2002Net revenue
    
    $
    278,799
    
    
    $
    239,898
    
    
    $
    805,000
    
    
    $
    705,203Costs and expenses:Salaries and benefits
    
    
    94,430
    
    
    
    81,057
    
    
    
    277,382
    
    
    
    239,102Supplies
    
    
    38,824
    
    
    
    32,617
    
    
    
    112,275
    
    
    
    98,615Other operating expenses
    
    
    84,427
    
    
    
    74,093
    
    
    
    240,130
    
    
    
    217,248Provision for bad debts
    
    
    22,225
    
    
    
    18,503
    
    
    
    62,090
    
    
    
    52,868Interest, net
    
    
    13,161
    
    
    
    13,356
    
    
    
    39,609
    
    
    
    41,895Depreciation and amortization
    
    
    13,284
    
    
    
    11,283
    
    
    
    38,817
    
    
    
    32,951Loss on debt extinguishment
    
    
    
    
    
    
    
    
    
    
    3,900
    
    
    
    Impairment of assets held for sale
    
    
    11,741
    
    
    
    
    
    
    
    11,741
    
    
    
    Total costs and expenses
    
    
    278,092
    
    
    
    230,909
    
    
    
    785,944
    
    
    
    682,679Earnings before loss (gain) on sale
of assets, minority interests, income
taxes and cumulative effect of a
change in accounting principle
    
    
    707
    
    
    
    8,989
    
    
    
    19,056
    
    
    
    22,524Loss (gain) on sale of assets, net
    
    
    192
    
    
    
    
    
    
    
    (588
    )
    
    
    7Minority interests
    
    
    433
    
    
    
    235
    
    
    
    1,132
    
    
    
    759Earnings before income taxes and
cumulative effect of a change in
accounting principle
    
    
    82
    
    
    
    8,754
    
    
    
    18,512
    
    
    
    21,758Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings before cumulative effect
of a change in accounting principle
    
    
    82
    
    
    
    8,754
    
    
    
    18,512
    
    
    
    21,758Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,497
    )Net earnings (loss)
    
    $
    82
    
    
    $
    8,754
    
    
    $
    18,512
    
    
    $
    (17,739
    )


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IASIS HEALTHCARE CORPORATION
CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(In thousands)

Nine Months EndedJune 30,2003
    
    2002Cash flows from operating activities:Net earnings (loss)
    
    $
    18,512
    
    
    $
    (17,739
    )Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    38,817
    
    
    
    32,951Minority interests
    
    
    1,132
    
    
    
    759Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    39,497Impairment of assets held for sale
    
    
    11,741
    
    
    
    (Gain) loss on sale of assets
    
    
    (588
    )
    
    
    7Loss on debt extinguishment
    
    
    3,900
    
    
    
    Changes in operating assets and liabilities,
net of disposals:Accounts receivable
    
    
    2,668
    
    
    
    (7,439
    )Inventories, prepaid expenses and other current assets
    
    
    (3,041
    )
    
    
    (4,166
    )Accounts payable and other accrued liabilities
    
    
    (2,261
    )
    
    
    (1,652
    )Net cash provided by operating activities
    
    
    70,880
    
    
    
    42,218Cash flows from investing activities:Purchases of property and equipment
    
    
    (59,201
    )
    
    
    (29,349
    )Purchase of real estate
    
    
    
    
    
    
    (55,338
    )Proceeds from sales of assets
    
    
    3,205
    
    
    
    149Change in other assets
    
    
    (1,352
    )
    
    
    (3,862
    )Net cash used in investing activities
    
    
    (57,348
    )
    
    
    (88,400
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    2
    
    
    
    222Proceeds from debt borrowings
    
    
    589,600
    
    
    
    160,600Payment of debt and capital leases
    
    
    (514,976
    )
    
    
    (117,916
    )Debt financing costs incurred
    
    
    (14,377
    )
    
    
    (2,347
    )Distribution of minority interests
    
    
    (578
    )
    
    
    (433
    )Proceeds from hospital syndication
    
    
    1,288
    
    
    
    Net cash provided by financing activities
    
    
    60,959
    
    
    
    40,126Increase (decrease) in cash and cash equivalents
    
    
    74,491
    
    
    
    (6,056
    )Cash and cash equivalents at beginning of the period
    
    
    
    
    
    
    6,056Cash and cash equivalents at end of the period
    
    $
    74,491
    
    
    $
    Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    44,151
    
    
    $
    49,986Cash paid (refunded) for income taxes, net
    
    $
    11
    
    
    $
    (1,835
    )Supplemental schedule of noncash investing and financing activities:Capital lease obligations incurred to acquire equipment
    
    $
    6,576
    
    
    $
    1,714


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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS



|1. |  | Basis of Presentation
|-- |  | ---------------------

The unaudited condensed and consolidated financial statements include the
accounts of IASIS Healthcare Corporation (IASIS or the Company) and all
subsidiaries and entities under common control of the Company and have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial reporting and in accordance with Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
notes required by accounting principles generally accepted in the United States
for complete financial statements. The balance sheet at September 30, 2002 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended September 30, 2002.

In the opinion of management, the accompanying unaudited condensed and
consolidated financial statements contain all material adjustments (consisting
of normal recurring items) necessary for a fair presentation of results for the
interim periods presented. The results of operations for any interim period are
not necessarily indicative of results for the full year.

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
unaudited condensed and consolidated financial statements and notes. Actual
results could differ from those estimates.

IASIS operates networks of medium-sized hospitals in high-growth urban and
suburban markets. At June 30, 2003, the Company owned or leased 14 hospitals
with a total of 2,128 beds in service. The Companys hospitals are located in
four regions:



| |  |  | Salt Lake City, Utah;
| | - |  | ---------------------



| |  |  | Phoenix, Arizona;
| | - |  | -----------------



| |  |  | Tampa-St. Petersburg, Florida; and
| | - |  | ----------------------------------



| |  |  | four cities in Texas, including San Antonio.
| | - |  | --------------------------------------------

The Company also operates three ambulatory surgery centers and a Medicaid
managed health plan in Phoenix called Health Choice, serving over 63,000
members at June 30, 2003.



|2. |  | Recently Issued Accounting Pronouncements
|-- |  | -----------------------------------------

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities (VIEs), an
Interpretation of Accounting Research Bulletin No. 51 (FIN 46). FIN 46
requires certain VIEs to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new VIEs created or
acquired after January 31, 2003. For VIEs created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company does not
expect this interpretation to have a material effect on its future results of
operations or financial position.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees(FIN 45). FIN 45
requires a guarantor to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation it has undertaken in issuing the
guarantee. The Company will apply FIN 45 to guarantees, if any, issued or
modified after December 31, 2002. The adoption of FIN 45 did not have a
material effect on the Companys consolidated financial position or results of
operations.

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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)



|3. |  | Long-Term Debt and Capital Lease Obligations
|-- |  | --------------------------------------------

Long-term debt and capital lease obligations consist of the following (in
thousands):

June 30,
    
    September 30,2003
    
    2002Bank facilities
    
    $
    323,750
    
    
    $
    347,84613% Senior subordinated notes
    
    
    230,000
    
    
    
    230,00081⁄2% Senior subordinated notes
    
    
    100,000
    
    
    
    Capital lease obligations and other
    
    
    10,502
    
    
    
    5,097664,252
    
    
    
    582,943Less current maturities
    
    
    5,382
    
    
    
    26,252$
    658,870
    
    
    $
    556,691


Bank Facilities

On October 15, 1999, the Company entered into a bank credit facility
through which a syndicate of lenders made a total of $455.0 million available
in the form of an $80.0 million tranche A term loan, a $250.0 million tranche B
term loan and a $125.0 million revolving credit facility (the 1999 credit
facility). Effective October 5, 2001, the Company amended the 1999 credit
facility to provide for an additional $30.0 million incremental senior secured
term loan on substantially the same terms and conditions as the existing bank
credit facility. The new incremental term loan was used solely to fund the
purchase on October 15, 2001 of the land and buildings at two facilities in
Arizona previously operated under long-term leases.

On February 7, 2003, the Company completed the refinancing of its bank
credit facility to provide for a new $475.0 million credit facility in the form
of a $350.0 million, six year term B loan and a $125.0 million, five year
revolving credit facility (the 2003 credit facility). Effective June 6,
2003, the 2003 credit facility was amended to allow for the issuance of the
Companys 81⁄2% senior subordinated notes, as discussed below. Proceeds from
the 2003 credit facility were used to refinance amounts outstanding under the
1999 credit facility and to fund closing and other transaction related costs of
$10.6 million incurred in connection with the refinancing. The new $125.0
million revolving credit facility is available for working capital and other
general corporate purposes. Loans under the 2003 credit facility accrue
interest at variable rates at specified margins above either the agent banks
alternate base rate or its Eurodollar rate. Principal payments on the new term
B loan are due in quarterly installments of $875,000 beginning March 31, 2003
until maturity. The 2003 credit facility includes a 1% prepayment penalty on
voluntary prepayments made during the first year on amounts outstanding under
the term loan. From the net proceeds of the 81⁄2% senior subordinated notes,
the Company made a voluntary prepayment on the term B loan of $24.5 million on
June 11, 2003, incurring a prepayment penalty of $245,000. The 2003 credit
facility is also subject to mandatory prepayment under specific circumstances
including a portion of excess cash flow and the net proceeds from an initial
public offering, asset sales, debt issuances and specified casualty events,
each subject to various exceptions.

As amended, the 2003 credit facility provides for annual capital
expenditure limitations of $80.0 million for the year ended September 30, 2003,
$165.0 million for the year ended September 30, 2004 and $70.0 million per year
through September 30, 2009. In addition, the 2003 credit facility replaced the
fixed charge coverage covenant under the 1999 credit facility with a senior
leverage test and provided for revisions to certain other financial covenants.
The 2003 credit facility requires that the Company comply with various other
financial ratios and tests and contains covenants limiting the Companys
ability to, among other things, incur debt, engage in acquisitions or mergers,
sell assets, make investments or capital expenditures, make distributions or
stock repurchases and pay dividends.

The 2003 credit facility is guaranteed by all of the Companys material
subsidiaries (the Subsidiary Guarantors) and these guaranties are secured by
a pledge of substantially all of the Subsidiary Guarantors assets.
Substantially all of the Companys outstanding common stock is pledged for
the benefit of the Companys lenders as security for the Companys obligations
under the 2003 credit facility.

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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

At June 30, 2003, there was $323.8 million outstanding under the six-year
term B loan and no amounts outstanding under the revolving credit facility.
The new revolving credit facility includes a $75.0 million sub-limit for
letters of credit that may be issued. At June 30, 2003, the Company had issued
$39.6 million in letters of credit. The loans under the credit facilities
accrued interest at variable rates at specified margins above either the agent
banks alternate base rate or its reserve-adjusted Eurodollar rate. The
weighted average interest rate of outstanding borrowings under the credit
facilities was approximately 5.8% for the nine months ended June 30, 2003. The
Company pays a commitment fee equal to 0.5% of the average daily amount
available under the revolving credit facility. In connection with the
refinancing, the Company expensed approximately $3.9 million in unamortized
deferred financing costs associated with the 1999 credit facility.

13% Senior Subordinated Notes

On October 13, 1999, the Company issued $230.0 million of 13% senior
subordinated notes due 2009. On May 25, 2000, the Company exchanged all of its
outstanding 13% senior subordinated notes due 2009 for 13% senior subordinated
exchange notes due 2009 that have been registered under the Securities Act of
1933, as amended (the 1999 notes). Terms and conditions of the exchange
offer were as set forth in the registration statement on Form S-4 filed with
the Securities and Exchange Commission that became effective on April 17, 2000.
The 1999 Notes are unsecured obligations and are subordinated in right of
payment to all existing and future senior indebtedness of the Company.
Interest on the 1999 notes is payable semi-annually on April 15 and October 15.

Except with respect to a change of control, the Company is not required to
make mandatory redemption or sinking fund payments with respect to the 1999
notes. The Company may redeem the 1999 notes, in whole or in part, at
any time from October 15, 2004 to October 14, 2008 at redemption
prices ranging from 106.500% to 101.625%, plus accrued and unpaid
interest. Thereafter, the Company may redeem the 1999 notes at a 100% redemption price plus accrued and unpaid interest. The 1999 notes are guaranteed, jointly and severally, by the Subsidiary
Guarantors. The Company is a holding company with no independent assets or
operations apart from its ownership of the Subsidiary Guarantors. At June 30,
2003, all of the Subsidiary Guarantors fully and unconditionally guaranteed the
1999 notes and, with the exception of Odessa Regional Hospital, LP and Jordan
Valley Hospital, LP, all were 100% owned by the Company. The indenture for the
1999 Notes contains certain covenants, including but not limited to,
restrictions on new indebtedness, asset sales, capital expenditures, dividends
and the Companys ability to merge or consolidate.

81⁄2% Senior Subordinated Notes

On June 6, 2003, the Company issued $100.0 million of 81⁄2% senior
subordinated notes due 2009 (the 2003 notes). After deducting for the
underwriters discounts of $2.3 million, the net proceeds from the 2003 notes
were used to prepay $24.5 million of the Companys term B loan and pay
approximately $1.5 million in costs associated with the offering. The
remaining net proceeds will be used for working capital and general corporate
purposes, including capital expenditures. The 2003 notes are unsecured
obligations and are subordinated in right of payment to all existing and future
senior indebtedness of the Company. Interest on the 2003 notes is payable
semi-annually on April 15 and October 15.

Except with respect to a change of control, the Company is not required to
make mandatory redemption or sinking fund payments with respect to the 2003
notes. Subject to certain conditions, at any time prior to June 15, 2006, the
Company may on any one or more occasions redeem up to 35.0% of the aggregate
principal amount of 2003 notes at a redemption price of 108.5% of the principal
amount thereof, plus accrued and unpaid interest to the redemption date, with
the net cash proceeds of one or more equity offerings. The Company
may redeem the 2003 notes, in whole or in part, at any time from June
15, 2006 to June 14, 2008 at redemption prices ranging from 104.250%
to 102.125%, plus accrued and unpaid interest. Thereafter, the Company may redeem
the 2003 notes at a 100% redemption price
plus accrued and unpaid interest. The 2003 notes are
guaranteed, jointly and severally, by the Subsidiary Guarantors, except Health
Choice Arizona, Inc. The indenture for the 2003 notes contains certain
covenants, including but not limited to, restrictions on new indebtedness,
asset sales, capital expenditures, dividends and the Companys ability to merge
or consolidate.

On July 16, 2003, pursuant to an effective registration statement on Form
S-4 filed with the Securities and Exchange Commission, the Company commenced an
offer to exchange all of the outstanding 2003 notes for an equal principal
amount of 81⁄2% senior subordinated notes due 2009 (the exchange notes)
that are registered under

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IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

the Securities Act of 1933, as amended. The terms of the exchange notes
are identical to those of the outstanding 2003 notes except that the exchange
notes are registered under the Securities Act and will not be subject to
restrictions on transfer. The Company is undertaking the exchange offer to
satisfy certain obligations under a registration rights agreement entered into
by the Company and the initial purchasers of the outstanding 2003 notes.
Outstanding 2003 notes that are not tendered in the exchange offer will remain
outstanding and retain their rights under the indenture, but they will not
retain any rights under the registration rights agreement. The exchange offer
and the right to withdraw any outstanding 2003 notes that have been tendered in
the exchange offer are scheduled to expire on August 13, 2003, unless extended
by the Company. The Company will not receive any additional proceeds from the
exchange offer.



|4. |  | Stock Benefit Plans
|-- |  | -------------------

The Company, from time to time, grants stock options for a fixed number of
common shares to employees. Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
employee stock option grants in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees,and, accordingly,
uses the intrinsic method to value options and recognizes no compensation
expense for the stock option grants when the exercise price of the options
equals, or is greater than, the market value of the underlying stock on the
date of grant.

Pro forma information regarding interim net earnings is required by SFAS No.
148, Accounting for Stock-Based Compensation  Transition and Disclosure,and
has been determined as if the Company had accounted for its employee stock
options under the fair value method. If the Company had measured compensation
cost for the stock options granted under the fair value based method prescribed
by SFAS No. 123, the Companys net earnings (loss) would have been changed to
the pro forma amounts set forth below (in thousands):

Three months ended,
    
    Nine months ended,June 30,
    
    June 30,
    
    June 30,
    
    June 30,2003
    
    2002
    
    2003
    
    2002Net earnings (loss), as
reported
    
    $
    82
    
    
    $
    8,754
    
    
    $
    18,512
    
    
    $
    (17,739
    )Less: stock-based
compensation expense
determined under fair value
based method
    
    
    (235
    )
    
    
    (230
    )
    
    
    (671
    )
    
    
    (591
    )Pro forma net earnings (loss)
    
    $
    (153
    )
    
    $
    8,524
    
    
    $
    17,841
    
    
    $
    (18,330
    )


The effect of applying SFAS No. 123 for providing pro forma disclosure is not
likely to be representative of the effect on reported net earnings for future
years.



|5. |  | Contingencies
|-- |  | -------------

Net Revenue

The calculation of appropriate payments from the Medicare and Medicaid
programs as well as terms governing agreements with other third party payors
are complex and subject to interpretation. Final determination of amounts
earned under the Medicare and Medicaid programs often occurs subsequent to the
year in which services are rendered because of audits by the programs, rights
of appeal and the application of numerous technical provisions. As a result,
there is at least a reasonable possibility that recorded estimates will change
by a material amount in the near term. In the opinion of management, adequate
provision has been made for adjustments that may result from such routine
audits and appeals.

7



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##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

Professional, General and Workers Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course
of business, including claims relating to patient treatment and personal
injuries. To cover these types of claims, the Company maintains general
liability and professional liability insurance in excess of self-insured
retentions through a commercial insurance carrier in amounts that the Company
believes to be sufficient for its operations, although, potentially, some
claims may exceed the scope of coverage in effect. Plaintiffs may request
punitive or other damages that may not be covered by insurance. The Company
currently is not a party to any such proceedings that, in the Companys
opinion, would have a material adverse effect on the Companys business,
financial condition or results of operations. The Company expenses an
actuarially determined estimate of the costs it expects to incur under the
self-insured retention exposure for professional liability claims. As of June
30, 2003 and September 30, 2002, the Companys professional and general
liability accrual for asserted and unasserted claims was approximately $21.0
million and $17.6 million, respectively, which is included within other
long-term liabilities in the accompanying condensed and consolidated balance
sheets.

The Company is subject to claims and legal actions in the ordinary course
of business relative to workers compensation and other labor and employment
matters. To cover these types of claims, the Company maintains workers
compensation insurance coverage with a deductible. The Company accrues costs
of workers compensation claims based upon estimates derived from its claims
experience.

Health Choice

Health Choice has entered into a capitated contract whereby the plan
provides healthcare services in exchange for fixed periodic and supplemental
payments from the Arizona Health Care Cost Containment System (AHCCCS).
These services are provided regardless of the actual costs incurred to provide
these services. The Company receives reinsurance and other supplemental
payments from AHCCCS to cover certain costs of healthcare services that exceed
certain thresholds. The Company believes the capitated payments, together with
reinsurance and other supplemental payments, are sufficient to pay for the
services Health Choice is obligated to deliver. As of June 30, 2003, the
Company provided performance guaranties in the form of a letter of credit in
the amount of $20.6 million for the benefit of AHCCCS to support its
obligations under the Health Choice contract to provide and pay for the
healthcare services.

Tax Sharing Agreement

The Company and some of its subsidiaries are included in JLL Healthcare,
LLCs consolidated group for U.S. federal income tax purposes as well as in
some consolidated, combined or unitary groups that include JLL Healthcare, LLC
for state, local and foreign income tax purposes. The Company and JLL
Healthcare, LLC have entered into a tax sharing agreement that requires the
Company to make payments to JLL Healthcare, LLC such that, with respect to tax
returns for any taxable period in which the Company or any of its subsidiaries
is included in JLL Healthcare, LLCs consolidated group or any combined group,
including JLL Healthcare, LLC, the amount of taxes to be paid by the Company
will be determined, subject to some adjustments, as if the Company and each of
its subsidiaries included in JLL Healthcare, LLCs consolidated group or a
combined group including JLL Healthcare, LLC filed their own consolidated,
combined or unitary tax return.

Each member of a consolidated group for U.S. federal income tax purposes
is jointly and severally liable for the federal income tax liability of each
other member of the consolidated group. Accordingly, although the tax sharing
agreement allocates tax liabilities between the Company and JLL Healthcare,
LLC, for any period in which the Company is included in JLL Healthcare, LLCs
consolidated group, the Company could be liable in the event that any federal
tax liability was incurred, but not discharged, by any other member of JLL
Healthcare, LLCs consolidated group.

8



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##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

Other

The Company has been advised that its hospital in San Antonio, Texas,
Southwest General Hospital, is a subject of an investigation relating to the
provision of hyperbaric oxygen therapy services. In a letter dated February
11, 2003, the U.S. Attorney for the Western District of Texas stated that the
investigation relates to certain billing practices for these services since
1998. The Company is cooperating with the U.S. Attorneys office with respect
to this investigation. Based on information currently available, the Company
believes the investigation relates primarily to the period when Tenet
Healthcare Corporation (Tenet) owned the hospital. Although the Company is
unable to predict the outcome of this investigation, management does not
currently believe it will have a material adverse effect on the Companys
business, financial condition or results of operations.

Tenet and its affiliates are defendants in a civil action brought on
January 9, 2003 in the U.S. District Court for the Central District of
California by the United States for the improper assignment of diagnostic codes
and submitting false claims to Medicare. The litigation stems from an
investigation by the U.S. Department of Justice, in conjunction with the Office
of Inspector General, of certain hospital billings to Medicare for inpatient
stays reimbursed pursuant to diagnosis related groups 79 (pneumonia), 415
(operating room procedure for infectious and parasitic diseases), 416
(septicemia) and 475 (respiratory system diagnosis with mechanical ventilator).
Although hospitals that the Company acquired from Tenet are referenced in the
complaint, all of the actions complained of occurred prior to December 31, l998
and thus before the hospitals acquisition by the Company. The Company has
informed Tenet that the Company has no obligation or liability for any of the
matters described in the complaint and that the
Company is entitled to indemnification if any damages or relief were to be
sought against IASIS in connection with the proceeding. Tenet has accepted
service of process on behalf of these hospitals and has agreed to indemnify the
Company.

The Company believes it is in material compliance with all applicable laws
and regulations and is not aware of any pending or threatened investigations
involving allegations of potential wrongdoing that it believes would have a
material effect on its financial statements. Compliance with such laws and
regulations can be subject to future government review and interpretation as
well as significant regulatory action, including fines, penalties and exclusion
from the Medicare and Medicaid programs.



|6. |  | Goodwill
|-- |  | --------

The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets,
effective October 1, 2001. As a result of the transitional impairment test
required by SFAS No. 142, the Company recorded an impairment charge to goodwill
of $39.5 million as of October 1, 2001. The impairment charge to goodwill is
reflected as a cumulative effect of a change in accounting principle in the
accompanying condensed and consolidated statements of operations. The
impairment relates to goodwill associated with the Arizona market included in
the acute care service segment and was based on a discounted cash flow
analysis. Pursuant to the provisions of SFAS No. 142, goodwill is no longer
amortized but is subject to annual impairment reviews.



|7. |  | Asset Revaluation and Closure Costs
|-- |  | -----------------------------------

In the third quarter of fiscal 2001, the Company recorded a pre-tax asset
revaluation charge of approximately $2.8 million related to the closure of
Rocky Mountain Medical Center and revaluation of net assets in conjunction with
their classification as held for sale. During the three months ended June 30,
2003, the Company recorded an impairment charge of $11.7 million on such assets
held for sale. The charge was based on the current estimated net proceeds
anticipated from the eventual sale of the Rocky Mountain Medical Center real
property, assuming the potential purchasers would convert its use to retail. At
June 30, 2003, Rocky Mountain Medical Center net assets held for sale consisted
of property and equipment and totaled approximately $10.0 million.

The Company adopted and implemented an exit plan and recorded pre-tax
closure charges of approximately $9.1 million in the third quarter of fiscal
2001 with respect to the closure of Rocky Mountain Medical Center. During the
nine months ended June 30, 2003, the Company paid a total of $1.6 million in
closure costs, which consisted of $800,000 in facility and lease termination
costs and $800,000 in other exit costs. At June 30, 2003, accrued closure costs
totaled approximately $619,000.

9



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##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)



|8. |  | Segment Information
|-- |  | -------------------

The Companys acute care hospitals and related healthcare businesses are
similar in their activities and the economic environments in which they operate
(i.e., urban and suburban markets). Accordingly, the Companys reportable
operating segments consist of (1) acute care hospitals and related healthcare
businesses, collectively, and (2) its Medicaid managed health plan, Health
Choice, and a related entity (collectively referred to as Health Choice).The
following is a financial summary by business segment for the periods indicated
(in thousands):

Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2003
    
    2002
    
    2003
    
    2002Acute Care Service:Net revenue before eliminations
    
    $
    241,874
    
    
    $
    206,763
    
    
    $
    697,401
    
    
    $
    606,054Revenue between segments
    
    
    (1,939
    )
    
    
    (1,550
    )
    
    
    (5,472
    )
    
    
    (4,394
    )Net Revenue
    
    
    239,935
    
    
    
    205,213
    
    
    
    691,929
    
    
    
    601,660Salaries and benefits
    
    
    92,734
    
    
    
    79,678
    
    
    
    272,472
    
    
    
    235,213Supplies
    
    
    38,795
    
    
    
    32,529
    
    
    
    112,019
    
    
    
    98,330Other operating expenses
    
    
    49,571
    
    
    
    43,092
    
    
    
    138,451
    
    
    
    122,991Provision for bad debts
    
    
    22,225
    
    
    
    18,503
    
    
    
    62,090
    
    
    
    52,868Adjusted EBITDA
    
    
    36,610
    
    
    
    31,411
    
    
    
    106,897
    
    
    
    92,258Loss on debt extinguishment
    
    
    
    
    
    
    
    
    
    
    3,900
    
    
    
    Impairment of assets held for sale
    
    
    11,741
    
    
    
    
    
    
    
    11,741
    
    
    
    Interest expense, net
    
    
    13,161
    
    
    
    13,356
    
    
    
    39,609
    
    
    
    41,943Depreciation and amortization
    
    
    13,259
    
    
    
    11,253
    
    
    
    38,730
    
    
    
    32,865Loss (gain) on sale of assets, net
    
    
    192
    
    
    
    
    
    
    
    (588
    )
    
    
    Earnings (loss) before minority
interests, income taxes and
cumulative effect of a change in
accounting principle
    
    
    (1,743
    )
    
    
    6,802
    
    
    
    13,505
    
    
    
    17,450Minority interests
    
    
    433
    
    
    
    235
    
    
    
    1,132
    
    
    
    759Earnings (loss) before income taxes
and cumulative effect of a change in
accounting principle
    
    $
    (2,176
    )
    
    $
    6,567
    
    
    $
    12,373
    
    
    $
    16,691Segment assets
    
    $
    992,039
    
    
    $
    906,972
    
    
    $
    992,039
    
    
    $
    906,972Health Choice:Capitation premiums and other payments
    
    $
    38,864
    
    
    $
    34,685
    
    
    $
    113,071
    
    
    $
    103,543Revenue between segments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net revenue
    
    
    38,864
    
    
    
    34,685
    
    
    
    113,071
    
    
    
    103,543Salaries and benefits
    
    
    1,696
    
    
    
    1,379
    
    
    
    4,910
    
    
    
    3,889Supplies
    
    
    29
    
    
    
    88
    
    
    
    256
    
    
    
    285Other operating expenses
    
    
    34,856
    
    
    
    31,001
    
    
    
    101,679
    
    
    
    94,264Provision for bad debts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjusted EBITDA
    
    
    2,283
    
    
    
    2,217
    
    
    
    6,226
    
    
    
    5,105Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )Depreciation and amortization
    
    
    25
    
    
    
    30
    
    
    
    87
    
    
    
    86Earnings before minority interests,
income taxes and cumulative effect of
a change in accounting principle
    
    
    2,258
    
    
    
    2,187
    
    
    
    6,139
    
    
    
    5,067Minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings before income taxes and
cumulative effect of change in
accounting principle
    
    $
    2,258
    
    
    $
    2,187
    
    
    $
    6,139
    
    
    $
    5,067Segment assets
    
    $
    3,626
    
    
    $
    22,602
    
    
    $
    3,626
    
    
    $
    22,602


10



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##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)



|9. |  | Supplemental Condensed Consolidating Financial Information
|-- |  | ----------------------------------------------------------

The 13% senior subordinated notes described in Note 3 are fully and
unconditionally guaranteed on a joint and several basis by all of the Companys
material subsidiaries.

A summarized condensed consolidating balance sheet at June 30, 2003,
condensed consolidating statements of operations for the three months and nine
months ended June 30, 2003 and 2002 and condensed consolidating statements of
cash flows for the nine months ended June 30, 2003 and 2002 for the Company,
segregating the parent company issuer, the combined 100% owned subsidiary
guarantors, the non-100% owned subsidiary guarantors and eliminations, are
found below. Separate unaudited financial statements of the non-100% owned
subsidiary guarantors, Odessa Regional Hospital, LP (Odessa) and Jordan
Valley Hospital, LP (Jordan Valley), are included as Exhibits 99.1 and 99.2,
respectively, to the Companys filing on Form 10-Q. On February 1, 2001, the
Company sold 11.2% of its limited partner units in Odessa, which reduced the
Companys ownership of Odessa accordingly. On April 1, 2003, the Company sold
2.6% of its limited partner units in Jordan Valley, which reduced the Companys
ownership of Jordan Valley accordingly. However, each of Odessa and Jordan
Valleys guaranty continues to be full and unconditional with respect to the
notes.

IASIS Healthcare Corporation
Condensed Consolidating Balance Sheet (unaudited)
June 30, 2003(in thousands)

Subsidiary GuarantorsOdessa
    
    Jordan ValleyParent
    
    100%
    
    Non-100%
    
    Non-100%
    
    
    
    
    
    CondensedIssuer
    
    Owned
    
    Owned
    
    Owned
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    74,491
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    74,491Accounts receivable, net
    
    
    
    
    
    
    135,683
    
    
    
    9,238
    
    
    
    7,006
    
    
    
    
    
    
    
    151,927Inventories
    
    
    
    
    
    
    21,266
    
    
    
    1,448
    
    
    
    1,119
    
    
    
    
    
    
    
    23,833Prepaid expenses and other current assets
    
    
    
    
    
    
    16,027
    
    
    
    625
    
    
    
    358
    
    
    
    
    
    
    
    17,010Assets held for sale
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Total current assets
    
    
    
    
    
    
    257,467
    
    
    
    11,311
    
    
    
    8,483
    
    
    
    
    
    
    
    277,261Property and equipment, net
    
    
    
    
    
    
    372,010
    
    
    
    23,782
    
    
    
    33,385
    
    
    
    
    
    
    
    429,177Net investment in and advances to subsidiaries
    
    
    934,776
    
    
    
    (877,453
    )
    
    
    8,930
    
    
    
    7,076
    
    
    
    (73,329
    )
    
    
    Goodwill
    
    
    
    
    
    
    214,452
    
    
    
    28,827
    
    
    
    8,925
    
    
    
    
    
    
    
    252,204Other assets, net
    
    
    25,710
    
    
    
    9,175
    
    
    
    988
    
    
    
    1,150
    
    
    
    
    
    
    
    37,023Total assets
    
    $
    960,486
    
    
    $
    (24,349
    )
    
    $
    73,838
    
    
    $
    59,019
    
    
    $
    (73,329
    )
    
    $
    995,665Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    42,257
    
    
    $
    1,955
    
    
    $
    2,165
    
    
    $
    
    
    
    $
    46,377Salaries and benefits payable
    
    
    
    
    
    
    19,862
    
    
    
    1,082
    
    
    
    1,099
    
    
    
    
    
    
    
    22,043Accrued interest payable
    
    
    10,996
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,996Medical claims payable
    
    
    
    
    
    
    30,168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,168Other accrued expenses and other current liabilities
    
    
    
    
    
    
    17,380
    
    
    
    331
    
    
    
    251
    
    
    
    
    
    
    
    17,962Current portion of long-term debt and capital lease obligations
    
    
    3,500
    
    
    
    116
    
    
    
    831
    
    
    
    935
    
    
    
    
    
    
    
    5,382Total current liabilities
    
    
    14,496
    
    
    
    109,783
    
    
    
    4,199
    
    
    
    4,450
    
    
    
    
    
    
    
    132,928Long-term debt and capital lease obligations, net of current portion
    
    
    650,250
    
    
    
    8,620
    
    
    
    40,646
    
    
    
    32,683
    
    
    
    (73,329
    )
    
    
    658,870Other long-term liabilities
    
    
    
    
    
    
    24,766
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,766Minority interest
    
    
    
    
    
    
    5,043
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,043Total liabilities
    
    
    664,746
    
    
    
    148,212
    
    
    
    44,845
    
    
    
    37,133
    
    
    
    (73,329
    )
    
    
    821,607Stockholders equity
    
    
    295,740
    
    
    
    (172,561
    )
    
    
    28,993
    
    
    
    21,886
    
    
    
    
    
    
    
    174,058Total liabilities and stockholders equity
    
    $
    960,486
    
    
    $
    (24,349
    )
    
    $
    73,838
    
    
    $
    59,019
    
    
    $
    (73,329
    )
    
    $
    995,665


11



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##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

IASIS Healthcare Corporation
Condensed Consolidating Statement of Operations
for the Three Months Ended June 30, 2003 (unaudited)(in thousands)

Subsidiary GuarantorsOdessa
    
    Jordan ValleyParent
    
    100%
    
    Non-100%
    
    Non-100%
    
    
    
    
    
    CondensedIssuer
    
    Owned
    
    Owned
    
    Owned
    
    Eliminations
    
    ConsolidatedNet revenue
    
    $
    
    
    
    $
    248,027
    
    
    $
    17,209
    
    
    $
    13,563
    
    
    $
    
    
    
    $
    278,799Costs and expenses:Salaries and benefits
    
    
    
    
    
    
    84,789
    
    
    
    5,282
    
    
    
    4,359
    
    
    
    
    
    
    
    94,430Supplies
    
    
    
    
    
    
    34,874
    
    
    
    2,327
    
    
    
    1,623
    
    
    
    
    
    
    
    38,824Other operating expenses
    
    
    
    
    
    
    79,640
    
    
    
    2,431
    
    
    
    2,356
    
    
    
    
    
    
    
    84,427Provision for bad debts
    
    
    
    
    
    
    19,468
    
    
    
    1,754
    
    
    
    1,003
    
    
    
    
    
    
    
    22,225Interest, net
    
    
    13,172
    
    
    
    (11
    )
    
    
    1,259
    
    
    
    1,490
    
    
    
    (2,749
    )
    
    
    13,161Depreciation and amortization
    
    
    822
    
    
    
    11,123
    
    
    
    535
    
    
    
    804
    
    
    
    
    
    
    
    13,284Impairment of assets held for sale
    
    
    
    
    
    
    11,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,741Management fees
    
    
    
    
    
    
    
    
    
    
    357
    
    
    
    618
    
    
    
    (975
    )
    
    
    Equity in earnings of affiliates
    
    
    (10,352
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,352
    
    
    
    Total costs and expenses
    
    
    3,642
    
    
    
    241,624
    
    
    
    13,945
    
    
    
    12,253
    
    
    
    6,628
    
    
    
    278,092Earnings (loss) before minority
interests and income taxes
    
    
    (3,642
    )
    
    
    6,403
    
    
    
    3,264
    
    
    
    1,310
    
    
    
    (6,628
    )
    
    
    707Loss (gain) on sale of assets, net
    
    
    
    
    
    
    192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192Minority interests
    
    
    
    
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    433Earnings (loss) before income taxes
    
    
    (3,642
    )
    
    
    5,778
    
    
    
    3,264
    
    
    
    1,310
    
    
    
    (6,628
    )
    
    
    82Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    (3,642
    )
    
    $
    5,778
    
    
    $
    3,264
    
    
    $
    1,310
    
    
    $
    (6,628
    )
    
    $
    82


12



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

IASIS Healthcare Corporation
Condensed Consolidating Statement of Operations
for the Three Months Ended June 30, 2002 (unaudited)(in thousands)

Subsidiary GuarantorsOdessaParent
    
    100%
    
    Non-100%
    
    
    
    
    
    CondensedIssuer
    
    Owned
    
    Owned
    
    Eliminations
    
    ConsolidatedNet revenue
    
    $
    
    
    
    $
    227,693
    
    
    $
    12,448
    
    
    $
    (243
    )
    
    $
    239,898Costs and expenses:Salaries and benefits
    
    
    
    
    
    
    76,534
    
    
    
    4,523
    
    
    
    
    
    
    
    81,057Supplies
    
    
    
    
    
    
    31,289
    
    
    
    1,328
    
    
    
    
    
    
    
    32,617Other operating expenses
    
    
    
    
    
    
    71,979
    
    
    
    2,114
    
    
    
    
    
    
    
    74,093Provision for bad debts
    
    
    
    
    
    
    17,323
    
    
    
    1,180
    
    
    
    
    
    
    
    18,503Interest, net
    
    
    13,680
    
    
    
    159
    
    
    
    598
    
    
    
    (1,081
    )
    
    
    13,356Depreciation and amortization
    
    
    1,083
    
    
    
    9,848
    
    
    
    352
    
    
    
    
    
    
    
    11,283Management fees
    
    
    
    
    
    
    
    
    
    
    243
    
    
    
    (243
    )
    
    
    Equity in earnings of affiliates
    
    
    (22,436
    )
    
    
    
    
    
    
    
    
    
    
    22,436
    
    
    
    Total costs and expenses
    
    
    (7,673
    )
    
    
    207,132
    
    
    
    10,338
    
    
    
    21,112
    
    
    
    230,909Earnings (loss) from operations before minority
interests and income taxes
    
    
    7,673
    
    
    
    20,561
    
    
    
    2,110
    
    
    
    (21,355
    )
    
    
    8,989Minority interests
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    235Earnings (loss) from operations before income taxes
    
    
    7,673
    
    
    
    20,326
    
    
    
    2,110
    
    
    
    (21,355
    )
    
    
    8,754Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    7,673
    
    
    $
    20,326
    
    
    $
    2,110
    
    
    $
    (21,355
    )
    
    $
    8,754


13



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

IASIS Healthcare Corporation
Condensed Consolidating Statement of Operations
for the Nine Months Ended June 30, 2003 (unaudited)(in thousands)

Subsidiary GuarantorsOdessa
    
    Jordan ValleyParent
    
    100%
    
    Non-100%
    
    Non-100%
    
    
    
    
    
    CondensedIssuer
    
    Owned
    
    Owned
    
    Owned
    
    Eliminations
    
    ConsolidatedNet revenue
    
    $
    
    
    
    $
    740,238
    
    
    $
    51,199
    
    
    $
    13,563
    
    
    $
    
    
    
    $
    805,000Costs and expenses:Salaries and benefits
    
    
    
    
    
    
    256,902
    
    
    
    16,121
    
    
    
    4,359
    
    
    
    
    
    
    
    277,382Supplies
    
    
    
    
    
    
    103,530
    
    
    
    7,122
    
    
    
    1,623
    
    
    
    
    
    
    
    112,275Other operating expenses
    
    
    
    
    
    
    230,167
    
    
    
    7,607
    
    
    
    2,356
    
    
    
    
    
    
    
    240,130Provision for bad debts
    
    
    
    
    
    
    56,553
    
    
    
    4,534
    
    
    
    1,003
    
    
    
    
    
    
    
    62,090Interest, net
    
    
    39,627
    
    
    
    (18
    )
    
    
    3,775
    
    
    
    1,490
    
    
    
    (5,265
    )
    
    
    39,609Depreciation and amortization
    
    
    2,775
    
    
    
    33,671
    
    
    
    1,567
    
    
    
    804
    
    
    
    
    
    
    
    38,817Loss on debt extinguishment
    
    
    3,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,900Impairment of assets held for sale
    
    
    
    
    
    
    11,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,741Management fees
    
    
    
    
    
    
    
    
    
    
    1,019
    
    
    
    618
    
    
    
    (1,637
    )
    
    
    Equity in earnings of affiliates
    
    
    (57,912
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,912
    
    
    
    Total costs and expenses
    
    
    (11,610
    )
    
    
    692,546
    
    
    
    41,745
    
    
    
    12,253
    
    
    
    51,010
    
    
    
    785,944Earnings (loss) before minority
interests and income taxes
    
    
    11,610
    
    
    
    47,692
    
    
    
    9,454
    
    
    
    1,310
    
    
    
    (51,010
    )
    
    
    19,056Loss (gain) on sale of assets, net
    
    
    
    
    
    
    (588
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (588
    )Minority interests
    
    
    
    
    
    
    1,132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,132Earnings (loss) before income taxes
    
    
    11,610
    
    
    
    47,148
    
    
    
    9,454
    
    
    
    1,310
    
    
    
    (51,010
    )
    
    
    18,512Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    11,610
    
    
    $
    47,148
    
    
    $
    9,454
    
    
    $
    1,310
    
    
    $
    (51,010
    )
    
    $
    18,512


14



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

IASIS Healthcare Corporation
Condensed Consolidating Statement of Operations
for the Nine Months Ended June 30, 2002 (unaudited)(in thousands)

Subsidiary GuarantorsOdessaParent
    
    100%
    
    Non-100%
    
    
    
    
    
    CondensedIssuer
    
    Owned
    
    Owned
    
    Eliminations
    
    ConsolidatedNet revenue
    
    $
    
    
    
    $
    670,435
    
    
    $
    35,461
    
    
    $
    (693
    )
    
    $
    705,203Costs and expenses:Salaries and benefits
    
    
    
    
    
    
    226,848
    
    
    
    12,254
    
    
    
    
    
    
    
    239,102Supplies
    
    
    
    
    
    
    94,985
    
    
    
    3,630
    
    
    
    
    
    
    
    98,615Other operating expenses
    
    
    
    
    
    
    211,268
    
    
    
    5,980
    
    
    
    
    
    
    
    217,248Provision for bad debts
    
    
    
    
    
    
    49,712
    
    
    
    3,156
    
    
    
    
    
    
    
    52,868Interest, net
    
    
    41,919
    
    
    
    459
    
    
    
    2,768
    
    
    
    (3,251
    )
    
    
    41,895Depreciation and amortization
    
    
    3,213
    
    
    
    28,691
    
    
    
    1,047
    
    
    
    
    
    
    
    32,951Management fees
    
    
    
    
    
    
    
    
    
    
    693
    
    
    
    (693
    )
    
    
    Equity in earnings of affiliates
    
    
    (24,142
    )
    
    
    
    
    
    
    
    
    
    
    24,142
    
    
    
    Total costs and expenses
    
    
    20,990
    
    
    
    611,963
    
    
    
    29,528
    
    
    
    20,198
    
    
    
    682,679Earnings (loss) from operations before minority
interests, income taxes and cumulative effect of a change in
accounting principle
    
    
    (20,990
    )
    
    
    58,472
    
    
    
    5,933
    
    
    
    (20,891
    )
    
    
    22,524Loss on sale of assets, net
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Minority interests
    
    
    
    
    
    
    759
    
    
    
    
    
    
    
    
    
    
    
    759Earnings
(loss) from operations before income taxes and cumulative
effect of a change in accounting principle
    
    
    (20,990
    )
    
    
    57,706
    
    
    
    5,933
    
    
    
    (20,891
    )
    
    
    21,758Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss)
    
    
    (20,990
    )
    
    
    57,706
    
    
    
    5,933
    
    
    
    (20,891
    )
    
    
    21,758Cumulative
effect of a change in accounting principle
    
    
    
    
    
    
    (39,497
    )
    
    
    
    
    
    
    
    
    
    
    (39,497
    )Net earnings (loss)
    
    
    (20,990
    )
    
    
    18,209
    
    
    
    5,933
    
    
    
    (20,891
    )
    
    
    (17,739
    )


15



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

IASIS Healthcare Corporation
Condensed Consolidating Statement of Cash Flows
for the Nine Months Ended June 30, 2003 (unaudited)(in thousands)

Subsidiary GuarantorsOdessa
    
    Jordan ValleyParent
    
    100%
    
    Non-100%
    
    Non-100%
    
    
    
    
    
    CondensedIssuer
    
    Owned
    
    Owned
    
    Owned
    
    Eliminations
    
    ConsolidatedCash flows from operating activitiesNet earnings (loss)
    
    $
    11,610
    
    
    $
    47,148
    
    
    $
    9,454
    
    
    $
    1,310
    
    
    $
    (51,010
    )
    
    $
    18,512Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    2,775
    
    
    
    33,671
    
    
    
    1,567
    
    
    
    804
    
    
    
    
    
    
    
    38,817Minority interests
    
    
    
    
    
    
    1,132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,132Impairment of assets held for sale
    
    
    
    
    
    
    11,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,741Gain on sale of property and equipment
    
    
    
    
    
    
    (588
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (588
    )Loss on debt extinguishment
    
    
    
    
    
    
    3,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,900Equity in earnings of affiliates
    
    
    (57,912
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,912
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    2,847
    
    
    
    (489
    )
    
    
    310
    
    
    
    
    
    
    
    2,668Inventories, prepaid expenses and other current
assets
    
    
    
    
    
    
    (3,547
    )
    
    
    522
    
    
    
    (16
    )
    
    
    
    
    
    
    (3,041
    )Accounts payable and other accrued liabilities
    
    
    (4,021
    )
    
    
    1,051
    
    
    
    188
    
    
    
    521
    
    
    
    
    
    
    
    (2,261
    )Net cash provided by (used in) operating activities
    
    
    (47,548
    )
    
    
    97,355
    
    
    
    11,242
    
    
    
    2,929
    
    
    
    6,902
    
    
    
    70,880Cash flows from investing activitiesPurchases of property and equipment
    
    
    
    
    
    
    (56,643
    )
    
    
    (1,053
    )
    
    
    (1,505
    )
    
    
    
    
    
    
    (59,201
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    3,205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,205Change in other assets
    
    
    
    
    
    
    (1,194
    )
    
    
    (276
    )
    
    
    118
    
    
    
    
    
    
    
    (1,352
    )Net cash used in investing activities
    
    
    
    
    
    
    (54,632
    )
    
    
    (1,329
    )
    
    
    (1,387
    )
    
    
    
    
    
    
    (57,348
    )Cash flows from financing activitiesProceeds from issuance of common stock
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Proceeds from debt borrowings
    
    
    589,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589,600Payment of debt and capital leases
    
    
    (513,696
    )
    
    
    (1,126
    )
    
    
    (73
    )
    
    
    (81
    )
    
    
    
    
    
    
    (514,976
    )Debt financing costs incurred
    
    
    (14,377
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,377
    )Distribution of minority interests
    
    
    
    
    
    
    (10
    )
    
    
    (568
    )
    
    
    
    
    
    
    
    
    
    
    (578
    )Proceeds from hospital syndication
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,288
    
    
    
    
    
    
    
    1,288Change in intercompany balances with affiliates, net
    
    
    60,512
    
    
    
    (41,589
    )
    
    
    (9,272
    )
    
    
    (2,749
    )
    
    
    (6,902
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    122,039
    
    
    
    (42,723
    )
    
    
    (9,913
    )
    
    
    (1,542
    )
    
    
    (6,902
    )
    
    
    60,959Increase in cash and cash equivalents
    
    
    74,491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,491Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash and cash equivalents at end of period
    
    $
    74,491
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    74,491


16



---



##### Table of Contents



IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS
(Continued)

IASIS Healthcare Corporation
Condensed Consolidating Statement of Cash Flows
for the Nine Months Ended June 30, 2002 (unaudited)(in thousands)

Subsidiary GuarantorsParent
    
    100%
    
    Non-100%
    
    
    
    
    
    CondensedIssuer
    
    Owned
    
    Owned
    
    Eliminations
    
    ConsolidatedCash flows from operating activitiesNet earnings (loss)
    
    $
    (20,990
    )
    
    $
    18,209
    
    
    $
    5,933
    
    
    $
    (20,891
    )
    
    $
    (17,739
    )Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    3,213
    
    
    
    28,691
    
    
    
    1,047
    
    
    
    
    
    
    
    32,951Minority interests
    
    
    
    
    
    
    759
    
    
    
    
    
    
    
    
    
    
    
    759Loss on sale of property and equipment
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    7Cumulative
effect of a change in accounting principle
    
    
    
    
    
    
    39,497
    
    
    
    
    
    
    
    
    
    
    
    39,497Equity in earnings of affiliates
    
    
    (24,142
    )
    
    
    
    
    
    
    
    
    
    
    24,142
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (6,607
    )
    
    
    (832
    )
    
    
    
    
    
    
    (7,439
    )Inventories, prepaid expenses and other current assets
    
    
    
    
    
    
    (3,355
    )
    
    
    (811
    )
    
    
    
    
    
    
    (4,166
    )Accounts payable and other accrued liabilities
    
    
    (7,989
    )
    
    
    6,932
    
    
    
    (595
    )
    
    
    
    
    
    
    (1,652
    )Net cash provided by (used in) operating activities
    
    
    (49,908
    )
    
    
    84,133
    
    
    
    4,742
    
    
    
    3,251
    
    
    
    42,218Cash flows from investing activitiesPurchases of property and equipment
    
    
    
    
    
    
    (76,787
    )
    
    
    (7,900
    )
    
    
    
    
    
    
    (84,687
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    149Change in other assets
    
    
    
    
    
    
    (3,833
    )
    
    
    (29
    )
    
    
    
    
    
    
    (3,862
    )Net cash used in investing activities
    
    
    
    
    
    
    (80,471
    )
    
    
    (7,929
    )
    
    
    
    
    
    
    (88,400
    )Cash flows from financing activitiesProceeds from issuance of common stock
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222Proceeds from debt borrowings
    
    
    160,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160,600Payment of debt and capital leases
    
    
    (117,725
    )
    
    
    (191
    )
    
    
    
    
    
    
    
    
    
    
    (117,916
    )Change in intercompany balances with affiliates, net
    
    
    9,158
    
    
    
    (9,346
    )
    
    
    3,439
    
    
    
    (3,251
    )
    
    
    Debt financing costs incurred
    
    
    (2,347
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,347
    )Other
    
    
    
    
    
    
    (181
    )
    
    
    (252
    )
    
    
    
    
    
    
    (433
    )Net cash provided by (used in) financing activities
    
    
    49,908
    
    
    
    (9,718
    )
    
    
    3,187
    
    
    
    (3,251
    )
    
    
    40,126Decrease in cash and cash equivalents
    
    
    
    
    
    
    (6,056
    )
    
    
    
    
    
    
    
    
    
    
    (6,056
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    6,056
    
    
    
    
    
    
    
    
    
    
    
    6,056Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    




|10. |  | Subsequent Event
|--- |  | ----------------

On
August 1, 2003, the Company sold limited partnership units in
Southeast Texas Hospital, LP, the
Companys subsidiary that owns Park Place Medical Center and Mid Jefferson
Hospital to third party investors, including physicians, for net proceeds of
approximately $5.0 million. The net proceeds of this equity sale will be used
to fund a portion of the construction of a new hospital in Port Arthur, Texas
which is expected to open in the first half of 2005. After giving effect to
this sale, the Company owns approximately 89% of the equity of this
subsidiary.

17



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##### Table of Contents






Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results
of operations should be read in conjunction with our unaudited condensed and
consolidated financial statements, the notes to our unaudited condensed and
consolidated financial statements and the other financial information appearing
elsewhere in this report. Data for the three months and nine months ended June
30, 2003 and 2002 has been derived from our unaudited condensed and
consolidated financial statements.

Forward Looking Statements

Some of the statements we make in this report are forward-looking within
the meaning of the federal securities laws, which are intended to be covered by
the safe harbors created thereby. Those forward-looking statements include all
statements that are not historical statements of fact and those regarding our
intent, belief or expectations including, but not limited to, the discussions
of our operating and growth strategy (including possible acquisitions and
dispositions), financing needs, projections of revenue, income or loss, capital
expenditures and future operations. Forward-looking statements involve known
and unknown risks and uncertainties that may cause actual results in future
periods to differ materially from those anticipated in the forward-looking
statements. Those risks and uncertainties include, among others, the risks and
uncertainties discussed under the caption Risk Factors in our Annual Report
on Form 10-K for the fiscal year ended September 30, 2002. Although we believe
that the assumptions underlying the forward-looking statements contained in
this report are reasonable, any of these assumptions could prove to be
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
in this report, you should not regard the inclusion of such information as a
representation by us or any other person that our objectives and plans will be
achieved. We undertake no obligation to publicly release any revisions to any
forward-looking statements contained herein to reflect events and circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated
events.

General

We are a leading owner and operator of acute care hospitals that develops
and operates networks of medium-sized hospitals in high-growth urban and
suburban markets. We operate our hospitals with a strong community focus by
offering and developing healthcare services to meet the needs of the markets we
serve, promoting strong relationships with physicians and working with local
managed care plans. At June 30, 2003, we owned or leased 14 hospitals with a
total of 2,128 beds in service. Our hospitals are located in four regions:



| |  |  | Salt Lake City, Utah;
| | - |  | ---------------------



| |  |  | Phoenix, Arizona;
| | - |  | -----------------



| |  |  | Tampa-St. Petersburg, Florida; and
| | - |  | ----------------------------------



| |  |  | four cities in Texas, including San Antonio.
| | - |  | --------------------------------------------

We also operate three ambulatory surgery centers and a Medicaid managed
health plan called Health Choice, serving over 63,000 members in Arizona at
June 30, 2003.

Net revenue is comprised of net patient service revenue and other revenue.
Net patient service revenue is reported net of contractual adjustments. The
adjustments principally result from differences between the hospitals
established charges and payment rates under Medicare, Medicaid and various
managed care plans. Established hospital charges generally have increased at a
faster rate than the rate of increase for Medicare and Medicaid payments. The
calculation of appropriate payments from the Medicare and Medicaid programs as
well as terms governing agreements with other third party payors are complex
and subject to interpretation. As a result, there is at least a reasonable
possibility that recorded estimates will change by a material amount. Other
revenue includes revenue from Health Choice, medical office building rental
income and other miscellaneous revenue. Operating expenses consist of salaries
and benefits, supplies, other operating expenses and provision for bad debts.

18



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##### Table of Contents



Our hospitals net patient service revenue continues to be affected by an
increasing proportion of revenue being derived from fixed payment, higher
discount sources including Medicare, Medicaid, managed care organizations and
others. Fixed payment amounts are often based upon a diagnosis regardless of
the cost incurred or the level of services provided. Our net revenue, cash
flows and results of operations have been negatively impacted by this
reimbursement methodology. We expect patient volumes from Medicare to continue
to increase due to the general aging of the population. The percentage of our
net patient service revenue related to Medicare and Medicaid was approximately
40.3% and 38.9% for the nine months ended June 30, 2003 and 2002, respectively.

In addition, inpatient care is expanding to include sub-acute care when a
less-intensive, lower cost level of care is appropriate. We have been proactive
in the development of a variety of sub-acute inpatient services to utilize a
portion of our available capacity. By offering cost-effective sub-acute
services in appropriate circumstances, we are able to provide a continuum of
care when the demand for such services exists. We have identified opportunities
to expand existing physical rehabilitation units and develop other post-acute
services such as long term acute care arrangements within our facilities.

Certain states in which we operate have reported budget deficits as a
result of increased costs and lower than expected tax collections. Health and
human service programs, including Medicaid and similar programs, represent a
significant portion of state spending. As a response to these budgetary
concerns, certain states have proposed and others may propose decreased funding
for these programs. If such funding decreases are approved by the states in
which we operate, our operating results and cash flows could be materially
reduced.

Upon renewal of our insurance policies effective October 2002, we
experienced a significant increase in premiums paid to insurance carriers,
especially for professional and general liability coverage. For 2003, our per
claim self-insured retention increased from $2.0 million in 2002 to $5.0
million and the maximum coverage under our insurance has decreased from $100
million to $75 million. The cost of insurance has negatively affected
operating results and cash flows throughout the healthcare industry due to
pricing pressures on insurers and fewer carriers willing to underwrite
professional and general liability insurance. We currently have no information
that would lead us to believe that this current trend is temporary in nature,
and thus there is no assurance that continued increases in insurance costs will
not have a material adverse effect on our future operating results and cash
flows.

The hospital industry continues to experience a shortage of nurses. We
have experienced particular difficulty in retaining and recruiting nurses in
our Phoenix, Arizona market and certain hospitals in our Texas markets. This
shortage is forecasted to continue into the near future. We have begun a
comprehensive recruiting and retention plan for nurses that focuses on
competitive salaries and benefits as well as employee satisfaction, best
practices, tuition assistance, effective training programs and workplace
environment. Additionally, we are actively developing programs to recruit
qualified nurses from countries outside of the United States. However, should
we be unsuccessful in our attempts to maintain nursing coverage adequate for
our present and future needs, our future operating results could be adversely
affected.

Critical Accounting Policies

A summary of our significant accounting policies is disclosed in Note 1 to
the consolidated financial statements included in our Annual Report on Form
10-K for the year ended September 30, 2002. Our critical accounting policies
are further described under the caption Critical Accounting Policies in
Managements Discussion and Analysis of Financial Condition and Results of
Operations in our Annual Report on Form 10-K for the year ended September 30,
2002. There have been no changes in the nature of our critical accounting
policies or the application of those policies since September 30, 2002.

19



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##### Table of Contents



Selected Operating Data

The following table sets forth certain unaudited operating data for each
of the periods presented.

Three Months
    
    Nine MonthsEnded June 30,
    
    Ended June 30,2003
    
    2002
    
    2003
    
    2002Number of hospitals at end of period
    
    
    14
    
    
    
    14
    
    
    
    14
    
    
    
    14Licensed beds at end of period
    
    
    2,502
    
    
    
    2,520
    
    
    
    2,502
    
    
    
    2,520Beds in service at end of period
    
    
    2,128
    
    
    
    2,096
    
    
    
    2,128
    
    
    
    2,096Average length of stay (days) (1)
    
    
    4.48
    
    
    
    4.29
    
    
    
    4.48
    
    
    
    4.29Occupancy rates (average beds in service)
    
    
    48.0
    %
    
    
    43.4
    %
    
    
    48.3
    %
    
    
    43.7
    %Admissions(2)
    
    
    20,749
    
    
    
    19,271
    
    
    
    62,433
    
    
    
    58,450Adjusted admissions(3)
    
    
    34,538
    
    
    
    33,625
    
    
    
    103,935
    
    
    
    98,156Patient days(4)
    
    
    92,955
    
    
    
    82,686
    
    
    
    279,780
    
    
    
    250,808Adjusted patient days(3)
    
    
    147,967
    
    
    
    138,513
    
    
    
    445,728
    
    
    
    407,295Outpatient revenue as a percentage of
gross patient revenue
    
    
    36.8
    %
    
    
    40.0
    %
    
    
    36.8
    %
    
    
    38.4
    %




---

|(1) |  | Represents the average number of days that a patient stayed in our
hospitals.                                                                                                                                                                                                        
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Represents the total number of patients admitted to our hospitals
inpatient units. Management and investors use this number as a general
measure of inpatient volume.                                                                                                               
|   
|(3) |  | Adjusted admissions and adjusted patient days are general measures of
combined inpatient and outpatient volume. We compute adjusted
admissions/patient days by multiplying admissions/patient days by gross
patient revenue and then dividing that number by gross inpatient
revenue.
|   
|(4) |  | Represents the number of days our beds were occupied by inpatients over
the period.                                                                                                                                                                                                  

Results of Operations

The following table presents, for the periods indicated, information
expressed as a percentage of net revenue. Such information has been derived
from our unaudited condensed and consolidated statements of operations.

Three Months Ended June 30,
    
    Nine Months Ended June 30,2003
    
    2002
    
    2003
    
    2002Net revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Salaries and benefits
    
    
    33.9
    
    
    
    33.8
    
    
    
    34.5
    
    
    
    33.9Supplies
    
    
    13.9
    
    
    
    13.6
    
    
    
    13.9
    
    
    
    14.0Other operating expenses
    
    
    30.3
    
    
    
    30.9
    
    
    
    29.8
    
    
    
    30.8Provision for bad debts
    
    
    8.0
    
    
    
    7.7
    
    
    
    7.7
    
    
    
    7.5Depreciation and amortization
    
    
    4.7
    
    
    
    4.7
    
    
    
    4.8
    
    
    
    4.7Interest, net
    
    
    4.7
    
    
    
    5.6
    
    
    
    4.9
    
    
    
    5.9Loss on debt extinguishment
    
    
    
    
    
    
    
    
    
    
    0.5
    
    
    
    Impairment of assets held for sale
    
    
    4.2
    
    
    
    
    
    
    
    1.5
    
    
    
    Loss (gain) on sale of assets, net
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )
    
    
    Minority interests
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Net earnings before income taxes
and cumulative effect of a change
in accounting principle
    
    
    
    
    
    
    3.6
    
    
    
    2.3
    
    
    
    3.1Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings before cumulative
effect of a change in accounting
principle
    
    
    
    
    
    
    3.6
    
    
    
    2.3
    
    
    
    3.1Cumulative effect of a change in
accounting principle (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5.6
    )Net earnings (loss)
    
    
    
    %
    
    
    3.6
    %
    
    
    2.3
    %
    
    
    (2.5
    )%


(1)       Cumulative effect of a change in accounting principle consists of a
$39.5 million non-cash transitional impairment charge, related to the
adoption of Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, on October 1, 2001.

20



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##### Table of Contents



Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

Net revenue for the three months ended June 30, 2003 was $278.8 million,
an increase of $38.9 million, or 16.2%, from $239.9 million for the same period
in 2002. The increase in net revenue was due to an increase of $34.7 million in
net revenue from hospital operations, which we refer to as our acute care
service segment in our financial statements, and an increase of $4.2 million in
net revenue from Health Choice.

Net revenue from our hospital operations for the three months ended June
30, 2003 was $239.9 million, up $34.7 million, or 16.9%, from $205.2 million
for the same period in 2002. Our net patient revenue per adjusted admission
increased 13.6% for the three months ended June 30, 2003, compared to the same
period in 2002. The increase in net revenue per adjusted admission was due
primarily to price increases in our hospital operations, along with increased
acuity from growth in cardiac and inpatient surgical cases. During the three
months ended June 30, 2003, we experienced a higher rate of growth in inpatient
volume and revenue as compared to outpatient volume and revenue.

Admissions increased 7.7% from 19,271 for the three months ended June 30,
2002, to 20,749 for the same period in 2003, and patient days increased 12.4%
from 82,686 for the three months ended June 30, 2002 to 92,955 for the same
period in 2003. Adjusted admissions increased 2.7% from 33,625 for the three
months ended June 30, 2002 to 34,538 for the same period in 2003, and adjusted
patient days increased 6.8% from 138,513 for the three months ended June 30,
2002 to 147,967 for the same period in 2003. The average length of stay
resulting from admissions and patient days increased 4.4% from 4.29 days for
the three months ended June 30, 2002 to 4.48 days for the same period in 2003.
This increase in length of stay was attributable in part to greater acuity, an
increase in sub-acute care services with expected longer lengths of stay and an
increased emphasis on product lines requiring longer lengths of stay.

Net
revenue from Health Choice, our Medicaid managed health plan in
Phoenix, Arizona, was
$38.9 million for the three months ended June 30, 2003, an increase of $4.2
million, or 12.1%, from $34.7 million for the same period in 2002. Covered
lives under this prepaid Medicaid plan have increased 11.7% from 56,558 at June
30, 2002 to 63,180 at June 30, 2003. The increase in covered lives has
positively impacted Health Choices net revenue for the three months ended June
30, 2003 compared to the same period in 2002.

Operating expenses increased $33.6 million from $206.3 million for the
three months ended June 30, 2002 to $239.9 million for the same period in 2003.
Operating expenses as a percentage of net revenue were unchanged at 86.0% for
the three months ended June 30, 2003, compared to the same period in 2002.

Operating expenses from our hospital operations for the three months ended
June 30, 2003 were $203.3 million, an increase of $29.5 million from $173.8
million for the same period in 2002. This increase was comprised of an $11.9
million increase in operating expenses due to volume growth in our markets
along with increases in insurance costs, rent expense, physician recruiting
costs, corporate infrastructure and general inflation. Operating expenses from
our hospital operations as a percentage of net revenue were unchanged at 84.7%
for the three months ended June 30, 2003 compared to the same period in 2002.
Salaries and benefits expense as a percentage of net revenue decreased 0.2%
from period to period. Salaries and benefits expense increased by
approximately $13.0 million for the three months ended June 30, 2003 compared
to the same period in 2002 due primarily to volume growth, general wage
inflation and an increase in employee benefits and contract labor. Contract
labor, a component of salaries and benefits expense, increased by $2.4 million
for the three months ended June 30, 2003 compared to the same period in 2002
due primarily to significant volume growth in certain markets requiring greater
utilization of agency nurses and technicians coupled with increases in the
rates charged by the staffing agencies. Benefits expense increased by
approximately $3.2 million for the three months ended June 30, 2003 compared to
the same period in 2002 due primarily to increased cost and utilization of
healthcare benefits for employees. Supplies expense as a percentage of net
revenue increased 0.4% from period to period primarily as a result of an
overall increase in acuity levels which resulted in an increased utilization of
higher cost medical supplies such as cardiac implants and certain drugs. Other
operating expenses as a percentage of net revenue decreased 0.3% from period to
period due primarily to the leveraging of fixed costs through the growth in net revenue, offset to an extent by an
increase in insurance costs, rent expense and physician recruiting costs. We
expect our other operating expenses to continue to be negatively affected for
the remainder of fiscal year 2003 by increases in insurance expense and
physician recruiting costs. On an annual basis, insurance costs are currently
estimated to increase by approximately $4.0 million, or 25.0%, over the prior
year. Provision for bad debts as a percentage of net revenue increased 0.2%
from period to period due to growth in
emergency room visits and an overall increase in self pay revenue
reflecting the continuing trend of increased co-pay and deductibles passed on
by employers to employees during 2003.

21



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##### Table of Contents



Operating expenses for Health Choice increased $4.1 million to $36.6
million for the three months ended June 30, 2003 compared to $32.5 million for
the same period in 2002. Operating expenses as a percentage of net revenue for
Health Choice were 94.1% for the three months ended June 30, 2003 and 93.6% for
the same period in 2002. The increase in operating expenses was due to the
incremental cost of increased enrollment. Operating expenses as a percentage
of net revenue increased 0.5% from period to period as a result of an increase
in administrative expenses, including costs associated with efforts to submit a
bid for renewal of our contract with the Arizona Health Care Cost Containment
System, or AHCCCS. Health Choice obtained a new three-year contract with AHCCCS
effective October 1, 2003.

Adjusted EBITDA for hospital operations was $36.6 million, or 15.3% of net
revenue, for the three months ended June 30, 2003, compared to $31.4 million,
or 15.3% of net revenue, for the same period in 2002. Adjusted EBITDA margin
for hospital operations was diluted somewhat by increases in costs for contract
labor, insurance, physician recruitment and corporate infrastructure, as noted
above. Health Choice has a significantly lower adjusted EBITDA margin than
hospital operations. Adjusted EBITDA for Health Choice was $2.3 million, or
5.9% of net revenue, for the three months ended June 30, 2003, compared to $2.2
million, or 6.3% of net revenue, for the same period in 2002. The decrease in
adjusted EBITDA margin was due to the increase in certain administrative costs,
as discussed above. See Note 8 to our unaudited condensed and consolidated
financial statements included elsewhere in this report for a reconciliation of
adjusted EBITDA to net earnings (loss).

Depreciation and amortization expense increased $2.0 million from $11.3
million for the three months ended June 30, 2002 to $13.3 million for the same
period in 2003. This increase was the result of additional depreciation expense
on property and equipment additions during 2002 and 2003.

Interest expense decreased approximately $200,000 from $13.4 million for
the three months ended June 30, 2002 to $13.2 million for the same period in
2003 due to declines in interest rates during fiscal years 2002 and 2003.
Borrowings under our bank credit facility bear interest at variable rates, and
the weighted average interest rate of outstanding borrowings under the bank
credit facility was approximately 5.6% for the three months ended June 30, 2003
compared to 6.3% for the same period in 2002.

During the three months ended June 30, 2003, we recorded an impairment
charge of $11.7 million on assets held for sale. This charge is based on the
current estimated net proceeds anticipated from the eventual sale of the Rocky
Mountain Medical Center real property. The charge was taken to reflect the
fact that we are now considering the sale of the property to potential
purchasers who would convert its use to retail.

We recorded no provision for income taxes for the three months ended June
30, 2003 and 2002 due to the use of deferred tax assets that were previously
reserved with a valuation allowance.

Nine Months Ended June 30, 2003 Compared to Nine Months Ended June 30, 2002

Net revenue for the nine months ended June 30, 2003 was $805.0 million, an
increase of $99.8 million, or 14.2%, from $705.2 million for the same period in
2002. The increase in net revenue was a combination of an increase of $90.3
million in net revenue from hospital operations and an increase of $9.5 million
in net revenue from Health Choice.

Net revenue from our hospital operations for the nine months ended June
30, 2003 was $691.9 million, an increase of $90.2 million, or 15.0%, from
$601.7 million for the same period in 2002. Our net patient revenue per
adjusted admission increased 9.5% for the nine months ended June 30, 2003,
compared to the same period in 2002. The increase in net patient revenue per
adjusted admission was due primarily to price increases in our hospital
operations, along with increased acuity from growth in cardiac and inpatient
surgical cases.

Admissions increased 6.8% from 58,450 for the nine months ended June 30,
2002 to 62,433 for the same period in 2003, and patient days increased 11.6%
from 250,808 for the nine months ended June 30, 2002 to 279,780 for the same
period in 2003. Adjusted admissions increased 5.9% from 98,156 for the nine
months ended June 30, 2002 to 103,935 for the same period in 2003, and adjusted
patient days increased 9.4% from 407,295 for the nine

22



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##### Table of Contents



months ended June 30, 2002 to 445,728 for the same period in 2003. The
average length of stay resulting from admissions and patient days increased
4.4% from 4.29 days for the nine months ended June 30, 2002 to 4.48 days for
the same period in 2003. This increase in length of stay was attributable in
part to greater acuity, an increase in sub-acute services and other
product lines with expected longer
lengths of stay.

Net revenue from Health Choice was $113.1 million for the nine months
ended June 30, 2003, an increase of $9.6 million, or 9.3%, from $103.5 million
for the same period in 2002. The increase in covered lives, as noted above, has
positively impacted Health Choices net revenue for the nine months ended June
30, 2003 compared to the same period in 2002.

Operating expenses increased $84.1 million from $607.8 million for the
nine months ended June 30, 2002 to $691.9 million for the same period in 2003.
Operating expenses as a percentage of net revenue were 86.0% for the nine
months ended June 30, 2003, compared to 86.2% for the same period in 2002.

Operating expenses from our hospital operations for the nine months ended
June 30, 2003 were $585.0 million, an increase of $75.6 million from $509.4
million for the same period in 2002. This increase was comprised of a $48.1
million increase in operating expenses as a result of volume growth in our
markets, including increased contract labor utilization, along with increases
in insurance costs, rent expense, physician recruiting costs, corporate
infrastructure and general inflation. Operating expenses from our hospital
operations as a percentage of net revenue were 84.5% for the nine months ended
June 30, 2003 compared to 84.7% for the same period in 2002. This decrease was
due to a combination of decreased supplies expense and other operating expenses
as a percentage of net revenue, offset partially by an increase in salaries and
benefits expense and the provision for bad debts as a percentage of net
revenue. Salaries and benefits expense increased by approximately $37.3
million, or 0.3% of net revenue, for the nine months ended June 30, 2003
compared to the same period in 2002 due primarily to volume growth, general
wage inflation and an increase in employee benefits and contract labor.
Contract labor, a component of salaries and benefit expense, increased by $8.6
million for the nine months ended June 30, 2003 compared to the same period in
2002 due primarily to significant volume growth in certain markets requiring
greater utilization of agency nurses and technicians, coupled with increases in
the rates charged by the staffing agencies. Benefits expense increased by
approximately $7.1 million for the nine months ended June 30, 2003 compared to
the same period in 2002 due primarily to the increased cost and utilization of
healthcare benefits for employees. Supplies expense as a percentage of net
revenue decreased 0.1% from period to period due in part to our group
purchasing contract which we entered into in the third quarter of fiscal 2002,
which has resulted in better pricing generally and discounts on implants and
cardiac devices, offset by an overall increase in acuity levels which resulted
in an increased utilization of higher cost medical supplies such as cardiac
implants and certain drugs. Other operating expenses as a percentage of net
revenue decreased 0.4% from period to period due primarily to the
leveraging of fixed costs through the growth in net
revenue, offset to an extent by an increase in insurance costs, rent expense
and physician recruiting costs. We expect our other operating expenses to
continue to be negatively impacted for the remainder of fiscal year 2003 by
increases in insurance expense. On an annual basis, insurance costs are
currently estimated to increase by approximately $4.0 million,
or 25.0%, over the prior year. Provision for bad debts as a percentage
of net revenue increased 0.2% from period to period due to growth in emergency
room visits and an increase in self pay revenue as a result of increased co-pay
and deductibles passed on by employers to employees during 2003.

Operating expenses for Health Choice increased $8.4 million to $106.8
million for the nine months ended June 30, 2003 compared to $98.4 million for
the same period in 2002. Operating expenses as a percentage of net revenue for
Health Choice were 94.5% for the nine months ended June 30, 2003 and 95.1% for
the same period in 2002. The increase in operating expenses was due to the
incremental cost of increased enrollment. Operating expenses as a percentage
of net revenue improved, reflecting the benefit of spreading fixed
administrative costs over a larger enrollment base and an improvement in the
medical loss ratio.

Adjusted EBITDA for hospital operations was $106.9 million, or 15.5% of
net revenue, for the nine months ended June 30, 2003, compared to $92.3
million, or 15.3% of net revenue, for the same period in 2002. The increase in
the adjusted EBITDA margin for hospital operations was due primarily to
increases in volume and net revenue coupled with decreases in supplies and
other operating expenses as a percentage of net revenue as noted above, offset
by increases in salaries and benefits expense and the provision for bad debts.
Health Choice has a significantly lower adjusted EBITDA margin than hospital
operations. Adjusted EBITDA for Health Choice was $6.2 million, or 5.5% of net
revenue, for the nine months ended June 30, 2003, compared to $5.1 million, or
4.9% of

23



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##### Table of Contents



net revenue, for the same period in 2002. The 21.6% increase in adjusted
EBITDA and the increase in adjusted EBITDA margin were due to increased
enrollment and an improvement in the medical loss ratio, as noted above. See
Note 8 to our unaudited condensed and consolidated financial statements
included elsewhere in this report for a reconciliation of adjusted EBITDA to
net earnings (loss).

Depreciation and amortization expense increased $5.8 million from $33.0
million for the nine months ended June 30, 2002 to $38.8 million for the same
period in 2003. This increase was the result of additional depreciation expense
on property and equipment additions during 2002 and 2003.

Interest expense decreased $2.3 million from $41.9 million for the nine
months ended June 30, 2002 to $39.6 million for the same period in 2003 due to
declines in interest rates during fiscal years 2002 and 2003. Borrowings under
our bank credit facility bear interest at variable rates, and the weighted
average interest rate of outstanding borrowings under the bank credit facility
was approximately 5.8% for the nine months ended June 30, 2003 compared to 6.5%
for the same period in 2002.

During the nine months ended June 30, 2003, we recorded a loss on debt
extinguishment of $3.9 million related to the expensing of unamortized deferred
financing costs associated with the refinancing of our bank credit facility, as
discussed below. In addition, during the nine months ended June 30, 2003, we
recorded an impairment charge of $11.7 million on assets held for sale. This
charge is based on the current estimated net proceeds anticipated from the
eventual sale of the Rocky Mountain Medical Center real property. The charge
was taken to reflect the fact that we are now considering the sale of
the property to potential purchasers who would convert its use to retail.

We recorded no provision for income taxes for the nine months ended June
30, 2003 and 2002 due to the use of deferred tax assets that were previously
reserved with a valuation allowance.

During the nine months ended June 30, 2002, we recorded a $39.5 million
cumulative effect of a change in accounting principle, consisting of a non-cash
transitional impairment charge, related to the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

Liquidity and Capital Resources

Our primary sources of liquidity are cash flow provided by our operations
and our revolving credit facility. We generated cash of $70.9 million from
operating activities during the nine months ended June 30, 2003, compared to
$42.2 million during the nine months ended June 30, 2002. Net accounts
receivable decreased from $154.5 million at September 30, 2002 to $151.9
million at June 30, 2003. Excluding third-party settlement receivables, our
days of net revenue outstanding at June 30, 2003 declined to 55 from 60 at
September 30, 2002.

Investing activities used $57.3 million during the nine months ended June
30, 2003. Capital expenditures for the nine months ended June 30, 2003 were
approximately $65.8 million, including $6.6 million in equipment acquired
through capital lease obligations. Our growth strategy requires significant
capital expenditures during the year ending September 30, 2003 and future
years. We have budgeted capital expenditures for the remainder of fiscal 2003
to be approximately $14.0 million, including $11.0 million of construction
costs for the renovation and expansion of certain of our existing facilities
and $3.0 million for new equipment at our facilities. On November 20, 2002, we
announced plans to build a new hospital in Jefferson County, Texas to replace
our Mid-Jefferson Hospital in Nederland, Texas and Park Place Medical Center in
Port Arthur, Texas. We purchased the land for the new hospital in July 2003 and
plan to commence construction in the fall of 2003. We plan to open the new
facility in the first half of 2005. The total cost to build the new hospital is
currently estimated to be approximately $90.0 million. Included in our budgeted
capital expenditures are construction and other project related costs for the
new hospital of approximately $5.5 million that we expect to incur during 2003.
At June 30, 2003, we had projects under construction with an estimated cost
to complete and equip of approximately $95.3 million. We anticipate that
these projects will be completed over the next two years. We plan to finance
our proposed capital expenditures, including the construction of the new
hospital, with net proceeds from the issuance of our 81⁄2% senior
subordinated notes, as discussed below, borrowings under our revolving credit
facility, cash generated from operations, real estate financing and other
capital sources that become available.

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Financing activities provided net cash of $61.0 million during the nine
months ended June 30, 2003. During the nine months ended June 30, 2003, we
borrowed $126.6 million pursuant to the terms of our revolving credit facility
and voluntarily repaid $128.2 million pursuant to the terms of our
revolving credit facility. We voluntarily repaid $24.5 million on
outstanding term loans under our bank
credit facility borrowings and repaid $9.3 million on
outstanding term loans
pursuant to the terms of our bank credit facility and capital lease
obligations. In addition, we paid $353.0 million on our previous credit
facility and received proceeds of $363.0 million from our new bank credit
facility, as discussed below. We also received gross proceeds of $100.0 million
from the issuance of our 81⁄2% senior subordinated notes, as discussed below.
We paid $14.4 million in debt financing costs consisting of $10.6 million
related to our new bank credit facility and $3.8 million related to the
issuance of the 81⁄2% senior subordinated notes. During the next twelve
months, we are required to repay $3.5 million under our new bank credit
facility.

On October 15, 1999, we entered into a bank credit facility through which
a syndicate of lenders made a total of $455.0 million available in the form of
an $80.0 million tranche A term loan, a $250.0 million tranche B term loan and
a $125.0 million revolving credit facility. Effective October 5, 2001, we
amended the credit facility to provide for an additional $30.0 million
incremental senior secured term loan on substantially the same terms and
conditions as the existing bank credit facility. The new incremental term loan
was used solely to fund the purchase on October 15, 2001 of the land and
buildings at two facilities in Arizona previously operated under long-term
leases.

On February 7, 2003, we completed the refinancing of our bank credit
facility to provide for a new $475.0 million credit facility in the form of a
$350.0 million, six year term B loan and $125.0 million, five year revolving
credit facility. Effective June 6, 2003, the new credit facility was amended
to allow for the issuance of our 81⁄2% senior subordinated notes, as
discussed below. Proceeds from the new credit facility were used to refinance
amounts outstanding under the previous credit facility and to fund closing and
other transaction related costs of $10.6 million incurred in connection with
the refinancing. The new $125.0 million revolving credit facility is available
for working capital and other general corporate purposes. Loans under the new
credit facility accrue interest at variable rates at specified margins above
either the agent banks alternate base rate or its Eurodollar rate. Principal
payments on the new term B loan are due in quarterly installments of $875,000
beginning March 31, 2003 until maturity. The new credit facility includes a 1%
prepayment penalty on voluntary prepayments made during the first year on
amounts outstanding under the term loan. From the net proceeds of our 81⁄2%
senior subordinated notes, we made a voluntary prepayment on the term B loan of
$24.5 million on June 11, 2003, incurring a prepayment penalty of $245,000. In
connection with the refinancing of our bank credit facility, we expensed
approximately $3.9 million in unamortized deferred financing costs associated
with the previous credit facility during the quarter ended March 31, 2003. The
new credit facility is also subject to mandatory prepayment under specific
circumstances including a portion of excess cash flow and the net proceeds from
an initial public offering, asset sales, debt issuances and specified casualty
events, each subject to various exceptions.

As
amended, the new credit facility generally provides for annual capital
expenditure limitations of $80.0 million for the year ended September 30, 2003,
$165.0 million for the year ended September 30, 2004 and $70.0 million per year
thereafter through September 30, 2009. In addition, the new credit facility
replaced the fixed charge coverage covenant under the previous credit facility
with a senior leverage test and provided for revisions to other financial
covenants. The new credit facility requires that we comply with various other
financial ratios and tests and contains covenants limiting our ability to,
among other things, incur debt, engage in acquisitions or mergers, sell assets,
make investments or capital expenditures, make distributions or stock
repurchases and pay dividends. Covenants under the new credit facility include
the following maximum ratios:

June 30,2003Actual Total Leverage Ratio
    
    
    4.05Maximum Total Leverage Ratio
    
    
    5.00Actual Senior Leverage Ratio
    
    
    1.78Maximum Senior Leverage Ratio
    
    
    3.40Actual Interest Coverage Ratio
    
    
    2.75Minimum Interest Coverage Ratio
    
    
    2.00


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Failure to comply with these ratios would constitute an event of default
under the new credit facility, thereby accelerating all amounts outstanding
under the term B loan and revolving credit facility, including all accrued
interest thereon, as due and payable upon demand by the lenders. In addition,
the occurrence of an event of default under the new credit facility would
constitute an event of default under the indentures governing our 13% and
81⁄2% senior subordinated notes. Such an event would have material adverse
effect on our liquidity and financial condition.

On January 15, 2003, Standard and Poors (1) affirmed our corporate credit
rating of B; (2) affirmed the credit rating on our 13% senior subordinated
notes of CCC+; and (3) assigned a B credit rating to our new $475.0 million
credit facility. Additionally, Standard and Poors revised our outlook to
stable from negative. On January 22, 2003, Moodys assigned a rating of B1
to the $125.0 million revolving credit facility under the new credit facility,
affirmed its existing rating of B3 on our 13% senior subordinated notes and
assigned a B1 rating to the $350.0 million term loan under the new credit
facility. Additionally, Moodys revised our outlook to stable from negative.
The ratings assigned to the new credit facility are consistent with the ratings
assigned to the previous credit facility. On May 22, 2003, Standard and Poors
and Moodys affirmed the ratings discussed above and assigned ratings of CCC+
and B3, respectively, to the 81⁄2% senior subordinated
notes. On August 7, 2003 Standard and Poors raised its rating
of CCC+ to B- on our 13% and 81⁄2%
senior subordinated notes, raised its rating of B to
B+ on our $475.0 million credit facility, raised our
corporate credit rating from B to B+,
and affirmed our assigned outlook of stable. Our credit
facility does not contain provisions that would accelerate the maturity dates
of our debt in the event of a downgrade in our credit rating. However, a
downgrade in our credit rating could adversely affect our ability to renew our
credit facility or obtain access to credit facilities in the future and could
increase the cost of those credit facilities.

At June 30, 2003, $323.8 million was outstanding under our term B loan and
no amounts were outstanding under our revolving credit facility. The new
revolving credit facility includes a $75.0 million sub-limit for letters of
credit that may be issued by us and, at June 30, 2003, we had issued $39.6
million in letters of credit. We also pay a commitment fee equal to 0.5% of the
average daily amount available under the new revolving credit facility. At
August 11, 2003, we had no amounts under our new revolving credit facility and
had issued $39.6 million in letters of credit, resulting in remaining
availability under the revolving credit facility of $85.4 million.

On October 13, 1999, we issued $230.0 million of 13% senior subordinated
notes due 2009. On May 25, 2000, we exchanged all of our outstanding 13% senior
subordinated notes due 2009 for 13% senior subordinated exchange notes due 2009
that have been registered under the Securities Act of 1933, as amended.

On June 6, 2003, we issued $100.0 million of 81⁄2% senior subordinated
notes due 2009. After deducting underwriters discounts of $2.3 million, the
net proceeds from the 81⁄2% senior subordinated notes were used to prepay
$24.5 million of our term B loan and pay approximately $1.5 million in costs
associated with the offering. The remaining net proceeds will be used for
working capital and general corporate purposes, including capital expenditures.
On July 16, 2003, pursuant to an effective registration statement on Form S-4
filed with the Securities and Exchange Commission, we commenced an offer to
exchange all of the outstanding notes for an equal principal amount of 81⁄2%
senior subordinated notes due 2009 that are registered under the Securities
Act. The terms of the new notes are identical to those of the outstanding
notes except that the new notes are registered under the Securities Act and
will not be subject to restrictions on transfer. We are undertaking the
exchange offer to satisfy our obligations under the registration rights
agreement with the initial purchasers of the outstanding notes. Outstanding
notes that are not tendered in the exchange offer will remain outstanding and
retain their rights under the indenture, but they will not retain any rights
under the registration rights agreement. The exchange offer and the right to
withdraw any outstanding notes that have been tendered in the exchange offer
are scheduled to expire on August 13, 2003, unless extended by us. We will not
receive any additional proceeds from the exchange offer.

Interest on the 13% and 81⁄2% senior subordinated notes is payable
semi-annually on April 15 and October 15. The 13% and 81⁄2% senior
subordinated notes are unsecured obligations and are subordinated in right of
payment to all of our existing and future senior indebtedness. If a change in
control occurs, as defined in the indentures, each holder of the 13% and
81⁄2% senior subordinated notes will have the right to require us to
repurchase all or any part of that holders notes in cash at 101% of the
aggregate principal amount of notes repurchased plus accrued and unpaid
interest to the date of purchase. Except with respect to a change of control,
we are not required to make mandatory redemption or sinking fund payments with
respect to the notes. All of our material subsidiaries have fully and
unconditionally guaranteed the notes on a joint and several basis, with the
exception that Health Choice Arizona, Inc. is not a guarantor of the 81⁄2%
senior subordinated notes. The indentures for the notes contain certain
covenants, including but not limited to, restrictions on new indebtedness,
asset sales, capital expenditures, dividends and our ability to merge or
consolidate.

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On August 18, 2000, our subsidiary, Rocky Mountain Medical Center, Inc.,
filed a Complaint and Motion for Preliminary Injunction in the Third Judicial
District Court for Salt Lake County, State of Utah against St. Marks Hospital.
St. Marks Hospital is owned by HCA Inc. The complaint alleges certain state
law violations by St. Marks Hospital, including exclusionary contracting
practices and other conduct constituting, among other things, a group boycott
under the Utah Antitrust Act, and seeks unspecified monetary and punitive
damages. Both parties filed Motions for Summary Judgment in this case and
consolidated oral arguments regarding both parties motions were held on
October 29, 2001. On December 14, 2001, the court denied both parties motions.
On June 25, 2002, the court granted our motion to add HCA Inc. and one of its
subsidiaries as defendants. On July 22, 2002, Rocky Mountain Medical Center
filed an amended complaint. The amended complaint alleges the same causes of
actions as the original complaint and names HCA Inc. and Ogden Regional Medical
Center, Inc. as defendants. On February 3, 2003, the action was reassigned to a
new judge and, on March 11, 2003, he held a status conference in which he
ordered Rocky Mountain Medical Center to certify the case ready for trial no
later than September 15, 2003. Discovery is ongoing and we continue to
vigorously pursue this litigation. We expect to incur additional fees and costs
related to this civil action during the next several fiscal quarters.

As of June 30, 2003, we provided a performance guaranty in the form of a
letter of credit in the amount of $20.6 million for the benefit of AHCCCS to
support our obligations under the Health Choice contract to provide and pay for
healthcare services. The amount of the performance guaranty that the AHCCCS
requires is based upon the membership in the plan and the related capitation
revenue paid to us. Health Choice has entered into a new three year contract
with the AHCCCS effective October 1, 2003. The contract provides the AHCCCS
with two one-year renewal options following the initial term.

We are a party to certain rent shortfall or master lease agreements with
certain non-affiliated entities and an unconsolidated entity, including
parent-subsidiary guarantees, in the ordinary course of business. We have not
engaged in any transaction or arrangement with an unconsolidated entity that is
reasonably likely to materially affect liquidity.

We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. Accordingly, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.

Based upon our current level of operations and anticipated growth, we
believe that cash generated from operations and amounts available under the
revolving credit facility will be adequate to meet our anticipated debt service
requirements, capital expenditures and working capital needs for the next 12
months. We cannot assure you, however, that our business will generate
sufficient cash flow from operations or that future borrowings will be
available under our bank credit facility, or otherwise, to enable us to grow
our business, service our indebtedness, including the bank credit facility, our
senior subordinated exchange notes and the notes, or make anticipated capital
expenditures. We do not consider the sale of any assets to be necessary to
repay our indebtedness or to provide working capital. However, for other
reasons, we may sell facilities in the future from time to time. One element of
our business strategy is expansion through the acquisition of hospitals in
existing and new markets. The completion of acquisitions may result in the
incurrence, or assumption by us, of additional indebtedness. We continually
assess our capital needs and may seek additional financing, including debt or
equity, as considered necessary to fund capital expenditures and potential
acquisitions or for other corporate purposes. Our future operating performance,
ability to service or refinance the 13% and 81⁄2% senior subordinated exchange notes and ability to service and extend or refinance the bank credit facility
will be subject to future economic conditions and to financial, business and
other factors, many of which are beyond our control.

Recently Issued Accounting Pronouncements

Please refer to Note 2 of our unaudited condensed and consolidated
financial statements included elsewhere in this report for a discussion of the
impact of recently issued accounting pronouncements.

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Item 3.     Quantitative and Qualitative Disclosures About Market Risk

During the nine months ended June 30, 2003, there were no material changes
to our quantitative and qualitative disclosures about the market risk
associated with financial instruments as described in our Annual Report on Form
10-K for the year ended September 30, 2002. At June 30, 2003, the fair market
value of our outstanding 13% senior subordinated notes and 81⁄2% senior
subordinated notes was approximately $255.3 and $101.0 million, respectively,
based upon quoted market prices as of that date.




Item 4.     Controls and Procedures

Under the supervision and with the participation of our management team,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended, as of June 30, 2003. Based on this
evaluation, the principal executive officer and principal accounting officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
reports.

There were no changes in our internal control over financial reporting
that occurred during the period covered by this report that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

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PART II.

OTHER INFORMATION




Item 6.     Exhibits and Reports on Form 8-K



| | (a) |  | List of Exhibits:
| | --- |  | -----------------

10.1
    
    First Amendment to Credit Agreement dated as of
May 21, 2003, by and among IASIS Healthcare Corporation, the
Subsidiary Guarantors, the Lenders party thereto and Bank of
America, N.A., as Administrative Agent (Incorporated by
reference to the Companys Registration Statement on Form S-4
(Registration No. 333-106612))10.2
    
    Contract between Arizona Health Care Cost
Containment System Administration and Health Choice Arizona,
effective as of October 1, 200310.3
    
    Amendment to Lease dated April 30, 2003, by and
between Sierra Equities, Inc. and Mesa General Hospital, L.P.31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200299.1
    
    Odessa Regional Hospital, LP Financial Statements99.2
    
    Jordan Valley Hospital, LP Financial Statements




| | (b) |  | Reports on Form 8-K:
| | --- |  | --------------------

On April 17, 2003, the Company filed a Current Report on Form 8-K to
report that it had issued a press release announcing the date of the
online web simulcast of its fiscal second quarter 2003 earnings
conference call.

On May 2, 2003, the Company filed a Current Report on Form 8-K to report
that it had issued a press release announcing its earnings for the fiscal
second quarter ended March 31, 2003.

On May 22, 2003, the Company filed a Current Report on Form 8-K to report
that it had issued a press release announcing that it intended to offer,
through a private placement, subject to market and other conditions, up
to $100.0 million aggregate principal amount of new senior subordinated
notes due 2009.

On June 4, 2003, the Company filed a Current Report on Form 8-K to
furnish certain summary consolidated financial and other data provided to
potential financing sources in connection with a proposed financing to be
undertaken by the Company.

On June 6, 2003, the Company issued a press release announcing that it
had closed a private placement of $100 million aggregate principal amount
of 81⁄2% senior subordinated notes due 2009.

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SIGNATURES

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.

IASIS HEALTHCARE CORPORATIONDate: August 11, 2003
    
    By:
    
    /s/ W. Carl WhitmerW. Carl Whitmer, Chief Financial Officer


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EXHIBIT INDEX

10.1
    
    First Amendment to Credit Agreement dated as of
May 21, 2003, by and among IASIS Healthcare Corporation, the
Subsidiary Guarantors, the Lenders party thereto and Bank of
America, N.A., as Administrative Agent (Incorporated by
reference to the Companys Registration Statement on Form S-4
(Registration No. 333-106612))10.2
    
    Contract between Arizona Health Care Cost
Containment System Administration and Health Choice Arizona,
effective as of October 1, 200310.3
    
    Amendment to Lease dated April 30, 2003, by and
between Sierra Equities, Inc. and Mesa General Hospital, L.P.31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 200299.1
    
    Odessa Regional Hospital, LP Financial Statements99.2
    
    Jordan Valley Hospital, LP Financial Statements


31