<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
CHECK ONE:

         [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                 EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED MARCH 31, 1999
                                       OR
         [ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD
                 FROM ______ TO _____.

                        COMMISSION FILE NUMBER 001-14397

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

                    DELAWARE                                     62-1750169
         (State or other jurisdiction of                      (I.R.S. Employer
         incorporation or organization)                      Identification No.)

         109 WESTPARK DRIVE, SUITE 440
              BRENTWOOD, TENNESSEE                                  37027
    (Address of principal executive offices)                     (Zip Code)


       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 221-5070

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                                       NAME OF EACH EXCHANGE ON
           TITLE OF EACH CLASS                             WHICH REGISTERED
           -------------------                         ------------------------
      COMMON STOCK $0.01 PAR VALUE                     NEW YORK STOCK EXCHANGE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      NONE
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.

                             Yes    X          No
                                  -----            ------

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

         The aggregate market value of registrant's voting stock held by
non-affiliates of the registrant on June 17, 1999 (based upon the closing
price of $2.313 on such date) was $16,487,184.

         On June 17, 1999, 17,595,370 shares of the registrant's $0.01 par value
Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         The following documents are incorporated by reference into Part III,
Items 10, 11, 12 and 13 of this Form 10-K:  portions of the Registrant's
definitive proxy materials for its 1999 Annual Meeting of Stockholders.


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PART I

ITEM 1.  BUSINESS

OVERVIEW

         New American Healthcare Corporation (the "Company") operates acute care
hospitals throughout the United States. The Company was formed to capitalize on
opportunities to be the principal provider of health care services in the
communities in which it operates with a focus on non-urban communities. Since
acquiring its first hospital in August 1996, a non-urban facility in Wentzville,
Missouri, the Company has acquired ten additional hospitals, including four that
were purchased from a single party in January 1998. The Company's eleven acute
care hospitals are located in nine states and have a total of 1,347 licensed
beds.

         The Company's hospitals offer a wide range of inpatient and outpatient
medical and surgical services and also provide other health care services,
including general and geriatric psychiatry, rehabilitation and occupational
medicine. All, except one hospital acquired in the third quarter of fiscal year
1999, of the Company's hospitals are accredited by either the Joint Commission
on Accreditation of Health Care Organizations (JCAHO), the American Osteopathic
Association (AOA) or both.

         The Company has developed and implemented an action plan for each of
its hospitals. Key elements of the Company's action plan include: (i) improving
operating efficiencies; (ii) recruiting additional physicians; (iii) expanding
the number of services offered; (iv) joining health care networks; and (v)
installing a standardized management information system.

INDUSTRY BACKGROUND

         Hospital Management Industry. According to the Health Care Financing
Administration ("HCFA"), in 1996 health care expenditures comprised
approximately 13.6% of the United States Gross Domestic Product, or in excess of
$1 trillion. During 1996, health care expenditures at hospitals accounted for
approximately 34.6% or $358.5 billion, of total health care spending. In recent
years, the hospital industry has experienced (i) advances in medical treatments
and technologies that permit shorter inpatient stays, and (ii) cost containment
pressures by Medicare, Medicaid, HMOs, PPOs and insurers to reduce hospital
stays and provide services, where possible, on a less expensive outpatient
basis. As a result, the average length of stay in the acute care hospital has
dropped from approximately 7.6 days in 1981 to approximately 6.5 days in 1995.
At the same time, occupancy has decreased from 77.9% in 1981 to 65.7% in 1995.
In addition, cost containment pressures have led to the development of
alternative delivery sites, including skilled nursing facilities, home health
programs, outpatient surgery and emergency and diagnostic centers. To remain
competitive, many hospitals have become more vertically integrated through the
introduction of various ancillary and outpatient services. As a result, average
hospital outpatient visits have grown at an increasing rate. In 1981, hospital
outpatient visits increased over the prior year by 0.9% and in 1995 increased
over the prior year by 6.5%.


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         Non-Urban Health Care Market. According to the American Hospital
Association, in 1996 there were approximately 2,226 non-urban hospitals in the
United States, over 2,035 of which were controlled by not-for-profit or
governmental entities. The Company believes non-urban hospitals are attractive
for several reasons. Non-urban service areas have smaller populations and are
generally served by only one or two hospitals, resulting in less competition.
The relative dominance of acute care hospitals in these smaller markets may also
limit the entry of competitive alternate site providers such as outpatient
surgery, rehabilitation or diagnostic imaging. The Company believes, in general,
the demographic characteristics and the relative negotiating leverage of the
local hospital also make such markets less attractive to HMOs and other managed
care payors. In addition, the Company believes non-urban communities are often
characterized by high levels of patient, physician and community loyalty that
fosters cooperative relationships among the local hospital, physicians, patients
and employers. Although the Company focuses primarily on non-urban hospitals,
the Company has acquired and may in the future acquire hospitals that are not
located in non-urban communities, but which nevertheless provide purchase
opportunities that are attractive to the Company.

         Although the characteristics of the non-urban health care market
present a number of opportunities, hospitals in such markets have been under
considerable pressure. In recent years, hospitals have been required to operate
within the reimbursement limitations imposed by the Medicare and Medicaid
programs and private insurance companies, while the cost of health care has
increased significantly. Non-urban hospitals have often experienced this
pressure more intensely. Frequently, non-urban hospitals are owned and operated
by not-for-profit and governmental entities that may have limited access to the
capital required to keep pace with advances in medical technology and to make
needed capital improvements. Such hospitals also may lack certain specialized
management resources to enable the hospital to control its operating expenses,
recruit and retain physicians and expand health care services. Collectively,
these factors frequently lead to poor operating performance, a decline in the
number of services offered, dissatisfaction by the community and physicians and
concerns about quality of care. As a result, patients migrate to, or are
referred by local physicians to, hospitals in larger urban markets. Patient
out-migration further increases the financial pressure on physicians and
hospitals within these markets, thereby limiting their ability to address the
issues which have led to these pressures.

BUSINESS STRATEGY

         The Company's objective is to be a leading provider of quality,
cost-effective health care in the communities it serves through the following
strategies:

         Improve Operating Efficiencies. The local management team, with support
         from the corporate office, seeks to improve financial performance by:
         (i) implementing expense controls; (ii) proactively managing staffing
         levels based on patient volume and acuity; (iii) reducing supply costs
         by leveraging the Company's supply arrangements and renegotiating or
         terminating vendor contracts; and (iv) improving admissions, billing
         and collection procedures.


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         Recruit Additional Physicians. The Company believes recruiting
         physicians is a key to expanding services offered and improving quality
         of care. As the primary decision maker in the delivery of health care,
         the physician is an important resource in directing patients to the
         Company's hospitals, providing high quality health care and building
         relationships between the community and the Company's hospitals. The
         Company continually evaluates the needs of the community for additional
         primary care and specialty physicians. The Company then works with the
         local hospital board, management and medical staff to define further
         the physicians needed and assists the local management team in
         identifying and recruiting specific physicians to meet those needs.

         Expand Services Offered. By expanding its service capabilities, the
         Company seeks to limit out-migration, increase local market share and
         generally capture a greater proportion of health care expenditures made
         by the communities. In addition, by providing a broader range of
         services, the Company believes it can treat higher acuity patients,
         thereby further increasing hospital revenues and profitability. These
         services may include specialty inpatient services, outpatient services,
         occupational medicine and rehabilitation. As part of developing a
         community health care delivery system, the Company's hospitals also
         operate satellite clinics. The Company also utilizes various mobile
         technologies to provide, on a cost-effective basis, services otherwise
         available only at larger, urban facilities.

         Join Health Care Networks. In markets where appropriate, the Company
         seeks to join networks of providers with an emphasis on primary care
         physicians. Such networks are increasingly important for directing
         patients to particular health care providers. Further, these networks
         help to position the Company's hospitals as the focal points of their
         respective community's health care delivery system. Additionally, the
         Company seeks affiliations with regional tertiary care providers in
         order to access services not provided by the Company's hospitals.

         Implement Standardized Information System. The delivery of high quality
         and cost-effective health care depends to an increasing extent on an
         effective clinical, financial and administrative information system.
         The Company has recently installed an integrated management information
         system designed for small and mid-size hospitals. The conversion of
         each hospital provides the Company's corporate office and hospital
         management teams with standardized and integrated clinical, financial
         and administrative information. Management believes this new system
         allows the Company to manage better all aspects of its business. The
         Company has completed the conversion of nine of its hospitals to this
         system as of March 1999 and expects the remaining two conversions to be
         completed by October 1999.



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HOSPITAL OPERATIONS

         The Company completes a comprehensive analysis at each of its hospitals
to identify strategic opportunities. The Company works in concert with hospital
management to formulate a "strategic blueprint" designed to capitalize on these
opportunities. Hospital management is responsible for the implementation of the
blueprint. The Company's senior management meets with local managers monthly to
review the hospital's performance. Management meets annually to reassess
opportunities and reformulate strategic blueprints.

         Each hospital management team is comprised of a chief executive
officer, chief financial officer and chief nursing officer. The quality of the
local hospital management team is critical to the hospital's success. The
Company has implemented a hospital management compensation program based upon
the achievement of the financial and clinical goals set forth in the operating
plan. The Company also generally grants stock options to members of each local
management team as an additional incentive.

         While the hospital management team is responsible for the day-to-day
operations of the hospitals, the Company's corporate staff provides support
services to each hospital, including purchasing, corporate compliance,
reimbursement, standardized information systems, human resources, business
office, cash management, tax and insurance support. Financial controls are
maintained through utilization of standardized policies and procedures which are
supported by a company-wide management information system. The Company promotes
communication among its hospitals and with the corporate office through a wide
area network and video conferencing so that local expertise and improvements can
be readily shared, additional training can be performed, and new policies and
procedures can be implemented.

         As part of the Company's efforts to improve access to quality health
care, the Company evaluates the needs of the community and adds appropriate
services at its hospitals. Services added may include specialty inpatient
services, such as cardiology, geriatric psychiatry, rehabilitation and subacute
care, and outpatient services such as same-day surgery, imaging, occupational
medicine and physical therapy. Management believes quality emergency services
and OB/GYN services are particularly important because they are typically the
most visible services provided to the community. The Company also makes capital
investments in technology and facilities, where appropriate, in order to
increase the quality and breadth of services available to the community. These
capital investments are undertaken on a project-by-project basis and must meet
financial benchmarks. The Company believes these added services improve access
to health care and the hospitals' reputation in each community and will in turn
increase patient volume and revenue.

         In order to add new services which meet the needs of the community, the
Company's corporate staff assists the hospital management team in identifying
and recruiting physicians to the hospital's medical staff. The Company
supplements these efforts with independent recruiting firms. When recruiting a
physician who is new to the community, the Company generally enters into a
contract to guarantee the physician a minimum level of income during a limited
initial period and assists the physician with his or her transition to the
community. The Company generally requires the physician to repay some or all of
the amounts expended for such assistance


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in the event the physician leaves the community prior to the expiration of the
contract. The Company generally does not employ physicians.

         In markets where appropriate, the Company seeks to develop or join
networks of providers with an emphasis on primary care physicians in order to be
attractive to managed care payors, self insured employers and various government
sponsored programs. Further, these networks help to position the Company's
hospitals as the focal point of their respective community's health care
delivery system. Regardless of other network development activity, the Company
seeks affiliations with regional tertiary care providers to access services not
offered by the Company's hospitals. Further, these alliances help enhance the
image of the Company's hospitals. The Company currently has two affiliation
agreements with tertiary provider hospitals for the purposes of accessing
tertiary services, managed care, departmental consultants, physician
specialists, and continuing medical education and enhancing physician
recruitment. One agreement is with East Texas Medical Center Regional Healthcare
System in Tyler, Texas and has a term of five years from January 1998, but
either party can terminate upon ninety days written notice. The second agreement
is with BJC Health System in St. Louis, Missouri and has a term of three years
from July 1998, but either party can terminate at any time upon ninety days
written notice.

HOSPITALS

         General

         The Company currently operates eleven acute care hospitals with 1,347
licensed beds located in Georgia, Iowa, Mississippi, Missouri, Oregon,
Tennessee, Texas, Washington and Wyoming.

         The Company's hospitals offer a wide range of inpatient medical
services, such as surgical procedures, intensive care, laboratory, imaging and
emergency services, as well as outpatient services, such as same-day surgery,
laboratory, imaging, occupational medicine and physical therapy. Some of the
Company's hospitals provide, where cost effective, certain other services,
including adolescent and geriatric psychiatry, rehabilitation, OB/GYN,
orthopedics, chemical dependency, skilled nursing and home health services. The
Company's hospitals do not provide highly specialized surgical services, such as
organ transplants and open heart surgery, and are not engaged in extensive
medical research or educational programs, although two of the hospitals have
family practice residency programs. The Company's hospitals are generally
involved in the local community through various activities such as participation
in health fairs and sponsorship of educational programs.

         Hospital Descriptions

         Doctors Hospital is a 94-bed acute care hospital located in Wentzville,
Missouri, approximately 40 miles west of St. Louis, which serves a population
base of approximately


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<PAGE>   7

150,000. The hospital's 43-acre campus includes a medical office building and is
located approximately five miles from the nearest hospital. The hospital offers
a range of services that includes acute inpatient and outpatient care, surgery,
intensive care, emergency, OB/GYN, imaging, laboratory, geriatric psychiatry,
skilled nursing and occupational medicine. The medical staff of over 140
physicians provides primary care services and specialty services such as
cardiology, neurology, urology and orthopedics.

         Memorial Hospital of Center is a 54-bed acute care hospital located in
eastern Texas, 60 miles southwest of Shreveport, Louisiana, and is the only
hospital located in Shelby County and serves a population base of approximately
23,000. The hospital is situated on a 20-acre campus, approximately 20 miles
from the nearest hospital. Memorial Hospital offers a range of services, that
includes acute inpatient and outpatient care, surgery, emergency, OB/GYN,
imaging, cardiac and physical rehabilitation, laboratory and home health
services. The medical staff of over 30 physicians provides primary care services
and consulting services for oncology, urology, orthopedics, podiatry and
ophthalmology. The hospital was the first in an eight county area to be
trauma-level designated by the State of Texas.

         Delta Medical Center -- Memphis is a 243-bed acute care hospital
located in southeast Memphis, serves a population base of approximately 300,000,
and draws patients from rural Mississippi and Arkansas. The hospital is on a
20-acre campus that includes a 110,000 square foot medical office building and
is located approximately five miles from the nearest hospital. The hospital
offers a range of services that includes acute inpatient and outpatient care,
surgery, intensive care, emergency, imaging, laboratory, geriatric and
adolescent psychiatry, and chemical dependency. The medical staff of over 116
physicians provides primary care services and specialty services such as
cardiology, neurology, urology and orthopedics. Delta Medical Center -- Memphis
operates Total Care, a hospital-based PPO that enhances the ability of the
hospital to access managed care patients.

         Dolly Vinsant Memorial Hospital is an 81-bed acute care hospital in San
Benito, Texas serving a population base of approximately 50,000. The hospital is
located in the southernmost county of Texas on a seven-acre campus and is six
miles from the nearest hospital. Dolly Vinsant offers a range of services that
includes acute inpatient and outpatient care, surgery, emergency, imaging,
laboratory and progressive care services. The medical staff of over 160
physicians provides primary care services and specialty services such as
urology, orthopedics, ophthalmology, and general surgery.

         Davenport Medical Center is a 149-bed acute care facility located in
Davenport, Iowa, one of the Quad cities and serves a population base of
approximately 150,000. The hospital and its medical office building are located
on an 18-acre campus and is approximately two miles from the nearest hospital.
The hospital offers a range of services that includes acute inpatient and
outpatient care, surgery, intensive care, emergency, OB/GYN, imaging,
laboratory, and skilled nursing services. The medical staff of approximately 220
physicians provides primary care services and specialty services such as
urology, orthopedics and pulmonology. The hospital


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participates in a residency program for osteopathic physicians and opened an
eleven-bed skilled nursing unit in January 1998.

         Lander Valley Medical Center is a 102-bed acute care hospital located
in Lander, Wyoming, approximately 120 miles west of Casper and approximately 180
miles southeast of Jackson. The hospital serves a population base of
approximately 17,000 and is located on a 25-acre campus approximately 27 miles
from the nearest hospital. The hospital offers a range of services that includes
acute inpatient and outpatient care, surgery, intensive care, emergency, OB/GYN,
imaging, laboratory, geriatric and adolescent psychiatry, skilled nursing and
home health services. The medical staff of over 40 physicians provides primary
care services as well as specialty services such as orthopedics, urology,
ophthalmology, and general surgery.

         Woodland Park Hospital is a 209-bed acute care neighborhood hospital
located in the northeastern Portland, Oregon area, serving a population base of
approximately 150,000. The hospital and its attached medical office building are
located on a six-acre campus approximately three miles from the nearest
hospital. The hospital offers a range of services that includes acute inpatient
and outpatient care, surgery, intensive care, emergency services, OB/GYN,
imaging, laboratory, geriatric and adolescent psychiatry and occupational
medicine services. Home health services are provided in partnership with
Eastmoreland Hospital. The medical staff of over 190 physicians provides primary
care services and specialty services such as orthopedics, plastic surgery,
ophthalmology, and general surgery.

         Eastmoreland Hospital is a 100-bed acute care neighborhood hospital
located in the southeast Portland, Oregon area, serving a population base of
approximately 175,000. The hospital is located on a six-acre campus with five
medical office buildings on or adjacent to the campus and is approximately four
miles from the nearest hospital. The hospital offers a range of services that
includes acute inpatient and outpatient care, surgery, intensive care,
emergency, imaging, laboratory, rehabilitation, geriatric psychiatry and
occupational medicine services. The hospital also has a residency program for
osteopathic physicians. Home health services are provided in partnership with
Woodland Park Hospital. The medical staff of over 30 physicians provides primary
care services and specialty services such as orthopedic surgery, plastic
surgery, ophthalmology, otolaryngology, gynecology, and general surgery.

         Puget Sound Hospital is a 160-bed acute care hospital located in
Tacoma, Washington that serves a population base of approximately 360,000. The
hospital is located on a five-acre campus approximately three miles from the
nearest hospital. The hospital provides a range of services that includes acute
inpatient and outpatient care, surgery, intensive care, emergency, imaging,
laboratory, geriatric psychiatry and chemical dependency treatment. The medical
staff of over 200 physicians provides primary care services and specialty
services such as orthopedics, ophthalmology, urology, podiatry, bariatrics,
general surgery and a transfusion free medicine/surgery program.



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         Crosby Memorial Hospital is a 95-bed acute care hospital in Picayune,
Mississippi, approximately 50 miles north of New Orleans, Louisiana. The
hospital serves a population base of approximately 50,000 and is located on a
four-acre campus approximately 25 miles from the nearest hospital. The hospital
offers a range of services that includes emergency, inpatient and outpatient
services, OB/Nursery, cardiology, neurology, audiology, imaging, physical
therapy, respiratory, behavioral health, home health and community education.
The medical staff of over 80 physicians provides primary care services as well
as specialty services such as oncology, ophthalmology, neurology and cardiology.

         Memorial Hospital of Adel consists of a 60-bed acute care hospital and
a 95-bed Memorial Convalescent Center all located in Adel, Georgia,
approximately 20 miles north of Valdosta, Georgia. The hospital serves a
population base of approximately 25,000 and is located on a four-acre campus
approximately ten miles from the nearest hospital. Memorial Hospital of Adel
provides a range of services including an intensive care unit, OB/GYN services,
a convalescent center, emergency services and home health. The medical staff of
ten physicians provides primary care services and specialty services such as
general surgery, obstetrics, and gynecology.

         Operating Statistics

         The following table sets forth certain operating statistics for the
Company's hospitals for each of the periods presented. The data for the periods
presented are not strictly comparable due to the significant effect that
acquisitions have had on the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                                        Years Ended March 31,
                                                                 ------------------------------------
                                                                  1999           1998           1997
                                                                 -------        ------          -----
<S>                                                              <C>            <C>             <C>
Hospitals owned or leased (at end of period)                          11             8              1
Licensed beds (at end of period)                                   1,347         1,032             94
Beds in service (at end of period)                                   997           697             94
Occupancy rate (% of licensed beds)(1)                              30.4%         54.0%          31.9%
Admissions                                                        20,882         8,378          1,086
Average length of stay (days)(2)                                     5.4           6.1            4.5
Patient days                                                     112,833        50,961          4,854
Gross inpatient revenue                                          164,027        75,137          8,406
Gross outpatient revenue                                         116,059        47,102          9,631
</TABLE>

-------------------------------
(1) Percentages are calculated by dividing average daily census by average
    licensed beds.

(2) Average length of stay is calculated as the number of patient days divided
    by the number of admissions.


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<PAGE>   10

         Sources of Revenue

         The Company receives payments for patient care from private insurance
carriers, federal Medicare programs for elderly and disabled patients, state
Medicaid programs, Indian Health Services ("IHS"), HMOs, the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS"), employers and patients
directly.

         The following table sets forth the percentage of gross patient revenue
of the Company's hospitals from various payors for the periods indicated:

<TABLE>
<CAPTION>
                                                    YEAR ENDED MARCH 31,
                                           ------------------------------------
                                           1999(1)        1998(1)       1997(1)
                                           -------        -------       -------
<S>                                        <C>            <C>           <C>
Medicare...............................     39.8%          51.5%         49.0%
Medicaid...............................     16.7           18.4          20.0
Private and other sources..............     43.5           30.1          31.0
</TABLE>
---------------------------------
 (1)     The data for the periods presented are not strictly comparable due to
         the significant effect that acquisitions have had on the Company. See
         "Management's Discussion and Analysis of Financial Condition and
         Results of Operations."

         Quality Assurance

         The Company's hospitals implement quality assurance procedures to help
ensure quality care. Each hospital has clinical department review committees
comprised of medical staff members that supervise individuals and are
responsible for the quality of medical care provided in their respective
department. In addition, each hospital has a medical staff executive committee
comprised of physicians which review the professional credentials of physicians
applying for medical staff privileges at the hospital. The medical staff
executive committees also review and monitor surgical outcomes along with
procedures performed. Further, the board of trustees of the hospital reviews the
actions and patient outcomes of the medical staff. The Company periodically
surveys patients either during their stay at the hospital or subsequently by
mail or telephone to identify potential areas for improvement. All, except one
hospital acquired in the third quarter of fiscal year 1999, of the Company's
hospitals are accredited by either JCAHO, AOA or both.

         Regulatory Compliance Program

         With the help of a consulting firm, the Company has developed and
implemented a company-wide compliance program. The Company's compliance program
focuses on various areas of regulatory compliance, including physician
recruitment, reimbursement and cost reporting practices, overall billing
practices and laboratory and home health care operations. Dana C. McLendon, Jr.,
Senior Vice President and Chief Administrative Officer, currently serves as the
Corporate Compliance Officer and, together with an Executive Compliance
Committee, monitors adherence to the compliance program. The consulting firm has
conducted training


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programs on the Company's corporate compliance program at all of the Company's
hospitals and has been retained to provide ongoing training. The compliance
program includes a 24-hour reporting hotline to encourage employees and others
to report any potential compliance issues. The Company has a Board Committee
with specific responsibility for compliance matters and has compliance
committees at the hospital level.

         Management Information System

         The Company relies on the functionality, accuracy, reliability and
proper use of its management information system. Historically, each of the
Company's hospitals has operated under its own stand-alone systems. The Company
has entered into an agreement with HMS to license its HMS Monitor System, which
the Company believes, based on representations and warranties made by HMS, is a
Year 2000 compliant, fully-integrated financial, clinical and administrative
management information system. The Company believes this system will enable it
to monitor, on a cost-effective basis, the operations of its hospitals and allow
it to generate consistent data at each of its hospitals. The Company has
completed the conversion of nine of its hospitals to this management information
system as of March 1999 and expects the remaining two conversions to be
completed by October 1999.

         The new system provides a full platform of software, including patient
accounting, billing and collection, materials management, payroll/personnel
system, accounts payable, general ledger, DRG/case mix management and medical
records. The license agreement allows for additional hospitals to be added onto
the network and provides that in the event HMS discontinues the maintenance and
support of the software (and certain other events), the Company will be entitled
to a perpetual license to the source code for the software including all updates
and modifications.

         In addition, the Company has linked all of its hospitals, except the
two most recently acquired hospitals, to each other and to corporate
headquarters through a wide area network and video conferencing equipment. These
tools promote communication among its hospitals so that local expertise and
improvements can be readily shared, additional training can be performed and new
policies and procedures can be implemented.

GOVERNMENT REIMBURSEMENT

         Medicare payments for general hospital inpatient care are based on a
prospective payment system ("PPS"). Under the PPS, a hospital receives a fixed
amount for operating costs based on the established fixed payment amount per
discharge for categories of hospital treatment, commonly known as a diagnosis
related group ("DRG"), for each Medicare inpatient. DRG payments do not consider
a specific hospital's costs, but are adjusted for area wage differentials.

         For several years, the percentage increases to the DRG rates have been
lower than the percentage increases in the cost of goods and services purchased
by general acute care hospitals. The index used to adjust the DRG rates is based
on the cost of goods and services purchased by



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hospitals as well as those purchased by nonhospitals (the "Market Basket"). The
historical Market Basket rates of increase were 2.0% and 2.4% for federal fiscal
years 1997 and 1998, respectively, and the Market Basket may be subject to
further adjustment from year to year. The Company anticipates that future
legislation may decrease the future rate of increase for DRG payments, but is
unable to predict the amount of any such reduction.

         PPS and the Balanced Budget Act of 1997

         Psychiatric services, long-term care, rehabilitation, pediatric
services and certain designated research hospitals, and distinct parts of
rehabilitation and psychiatric units within hospitals, are currently exempt from
PPS and are reimbursed on a cost-based system, subject to specific reimbursement
caps. However, Congress recently enacted the Balanced Budget Act of 1997 (the
"Budget Act"), which establishes a plan to balance the federal budget by fiscal
year 2002, and which includes significant additional reductions in spending
levels for the Medicare and Medicaid programs. For example, while skilled
nursing facilities and units are currently exempt from PPS, for cost report
periods beginning on or after July 1, 1998, a new system of PPS will be
implemented for such facilities and units. For the year ended March 31, 1999,
the Company had only 18 units, four of which are skilled nursing units, that
were exempt from PPS.

         The Budget Act also requires Medicare to implement outpatient PPS
effective January 1, 1999, and to transition to PPS for hospital-based home
health agencies beginning October 1, 1999. As of the year ended March 31, 1999,
the Company owned eight facilities that operate hospital-based home health
agencies. However, the implementation of PPS for outpatient and home health
services has been delayed indefinitely, to allow the Health Care Financing
Administration ("HCFA") to focus on Year 2000 compliance efforts. The Company is
currently unable to predict the timing or effect of PPS on the Company's
business, financial condition and results of operations when the changes are
ultimately implemented.

         Medicaid

         Each state has its own Medicaid program that is funded jointly by the
state and federal government. Federal law governs how each state manages its
Medicaid program, but there is wide latitude for states to customize Medicaid
programs to fit the needs and resources of their citizens. As a result, each
state Medicaid plan has its own payment formula and recipient eligibility
criteria.

         Cost Reports

         The Medicare, Medicaid, CHAMPUS and other governmental programs are
subject to statutory and regulatory changes, administrative rulings,
interpretations and determinations, requirements for utilization review and new
governmental funding restrictions, all of which may materially increase or
decrease program payments as well as affect the cost of providing services and
the timing of payment to facilities. The final determination of amounts earned
under the


                                       11
<PAGE>   13
programs often requires many years, because of audits by the program
representatives, providers' rights of appeal and the application of numerous
technical reimbursement provisions. Management believes adequate provision has
been made for such adjustments. Until final adjustment, however, significant
issues remain unresolved and previously determined allowances could become
either inadequate or more than ultimately required.

         Billing Compliance

         As part of its ongoing compliance program, the Company performs
self-audits of billing and reimbursement. The Company's compliance policy is to
refund overpayments revealed by these audits, and the Company may elect to
participate in voluntary disclosure programs. The Company does not have any
assurance that disclosure or repayment to a third party payor in any particular
instance will not result in further investigation of the Company.

HEALTH CARE REFORM, REGULATION AND LICENSING

         Certain Background Information

         Health care, as one of the largest service sectors in the United
States, continues to attract much legislative interest and public attention.
Medicare, Medicaid, and other hospital cost-containment programs, proposals to
limit health care spending, proposals to limit prices, and industry competitive
factors are among the many factors which are highly significant to the health
care industry. In addition, the health care industry is governed by a framework
of federal and state laws, rules and regulations that are extremely complex and
for which the industry has the benefit of only limited regulatory guidance or
judicial interpretation. Although the Company believes it is in compliance in
all material respects with such laws, rules and regulations, if a determination
is made that the Company was in violation of such laws, rules or regulations,
its business, financial condition and results of operations could be materially
adversely affected.

         There continues to be federal and state proposals that would, and
actions that do, impose more limitations on government and private payments to
providers such as the Company and proposals to increase co-payments and
deductibles required to be paid by patients. The Company's facilities also are
affected by controls imposed by government and private payors designed to reduce
admissions and lengths of stay. Such controls, including what is commonly
referred to as "utilization review," have resulted in fewer of certain
treatments and procedures being performed. Utilization review entails the review
of the admission and course of treatment of a patient by a third party.
Utilization review by third-party peer review organizations ("PROs") is required
in connection with the provision of care paid for by Medicare and Medicaid.
Utilization review by third parties is also required under many managed care
arrangements.

         Many states have enacted, or are considering enacting, measures that
are designed to reduce their Medicaid expenditures and to make certain changes
to private health care insurance. Various states have applied, or are
considering applying, for a federal waiver from current Medicaid regulations to
allow them to serve some of their Medicaid participants through


                                       12
<PAGE>   14

managed care providers. These proposals also may attempt to include coverage for
some people who presently are uninsured, and generally could have the effect of
reducing payments to hospitals, physicians and other providers for the same
level of service provided under Medicaid.

         Certificate of Need Requirements

         Some states require approval under certificate of need laws for the
purchase, construction, renovation and expansion of health care facilities and
services. Certificates of Need ("CON"), which are issued by state governmental
agencies with jurisdiction over health care facilities, are at times required
for capital expenditures exceeding a prescribed amount, changes in bed capacity
for services, and certain other matters. A CON may also require a provider to
commit to provide a certain level of uncompensated care. However Texas, where
the Company operates two of its eleven hospitals, and Wyoming, where the Company
operates one hospital, do not currently require CONs for hospital construction
or changes in the mix of services. Georgia's law covers all types of health care
facilities, and requires a CON before a health care facility can proceed with a
construction or renovation project or any other capital expenditure exceeding
$900,000; purchase or lease of major medical equipment costing more
than $500,000; offer a health care service not previously provided; or add new
beds. In Mississippi, a CON is required for the construction, development or
establishment of a new health care facility; relocation of all or any part of a
healthcare facility, health service, or item of major medical equipment; or a
change in services or bed capacity. Tennessee requires a CON before the
construction, development or establishment of any type of health care
institution or where modifications require capital expenditure greater than $2.0
million, except in the case of a hospital. Tennessee also requires a CON when
redistributing or increasing the number of licensed beds. Missouri requires a
CON before offering or developing a new institutional health service within the
state. Oregon requires CONs for new hospital, skilled nursing facility, or
intermediate care service and substance abuse programs only. Iowa requires CON
review when offering a new institutional health service. The state of Washington
requires CON review for any construction, development or establishment of a new
healthcare facility; the sale, purchase or lease of a hospital; change or
redistribution in the bed capacity of a health care facility; and initiation of
certain tertiary care, home health or hospice services. Although to date the
Company has been successful in obtaining CONs for needed projects, the Company
is unable to predict whether it will be able to obtain any CON that may be
necessary to accomplish its business objectives in any jurisdiction where such
CONs are required.

         Anti-Kickback Regulations

         Sections of the Anti-Fraud and Abuse Amendments to the Social Security
Act, commonly known as the "anti-kickback" statute (the "Anti-Kickback
Amendments"), prohibit certain business practices and relationships that might
affect the provision and cost of health care services reimbursable under
Medicare and Medicaid, including the payment or receipt of remuneration for the
referral of patients whose care will be paid for by Medicare or other government
programs. Sanctions for violating the Anti-Kickback Amendments include criminal


                                       13
<PAGE>   15

penalties and civil sanctions, including fines and possible exclusion from
government programs such as the Medicare and Medicaid programs. Pursuant to the
Medicare and Medicaid Patient and Program Protection Act of 1987, the U.S.
Department of Health and Human Services has issued regulations that create Safe
Harbors under the Anti-Kickback Amendments. A given business arrangement which
does not fall within a Safe Harbor is not per se illegal; however, business
arrangements of health care service providers that fail to satisfy the
applicable Safe Harbor criteria risk increased scrutiny by enforcement
authorities. The "Health Insurance Portability and Accountability Act of 1996,"
which became effective January 1, 1997 broadened the scope of certain fraud and
abuse laws, such as the Anti-Kickback Amendments and certain related enforcement
activities.

         The Company provides financial assistance to recruit physicians into
the communities served by its hospitals. No Safe Harbor for physician
recruitment is currently in force. Although the Company is not subject to the
Internal Revenue Service Revenue Rulings and related authority addressing
recruitment activities by taxexempt facilities, management believes such IRS
authority tends to set the industry standard for acceptable recruitment
activities. The Company believes its recruitment policies are being conducted in
accordance with the IRS authority and industry practice, and otherwise comply
with the provisions of the Anti-Kickback Amendments. The Company also enters
into certain professional services agreements and leases with physicians, is a
party to certain joint ventures with physicians, and participates in a group
purchasing joint venture. The Company believes these arrangements do not violate
the Anti-Kickback Amendments. There can be no assurance the regulatory
authorities that enforce the Anti-Kickback Amendments will not determine that
the Company's physician recruiting activities, other physician compensation
arrangements, or group purchasing activities violate the Anti-Kickback
Amendments or other federal laws. Such a determination could subject the Company
to liabilities under the Social Security Act, including exclusion of the Company
from participation in Medicare and Medicaid.



                                       14
<PAGE>   16



         There is increasing scrutiny by law enforcement authorities, the
Office of Inspector General ("OIG") of the Department of Health and Human
Services ("HHS"), the courts, and Congress of arrangements between health care
providers and potential referral sources to ensure that the arrangements are not
designed as a mechanism to exchange remuneration for patient care referrals and
opportunities. Investigators have also demonstrated a willingness to look behind
the formalities of a business transaction to determine the underlying purpose of
payments between health care providers and potential referral sources.
Enforcement actions have increased, as evidenced by recent highly publicized
investigations of certain hospital activities.

         In addition to investigations and enforcement actions initiated by
governmental agencies, health care companies may also be the subject of qui tam
(or "whistleblower") actions brought under the False Claims Act by private
individuals on behalf of the government. Whistleblowers receive a portion of any
amounts collected by the government in such actions as a reward for bringing the
action to the government's attention. Actions under the False Claims Act are
generally filed under seal to allow the government adequate time to investigate
and determine whether it will intervene in the lawsuit, and defendant health
care providers are often without knowledge of such actions until the government
has completed its investigation and the seal is lifted. This process can take
several years.

         Although, to its knowledge, the Company is not currently the subject of
any investigation which is likely to have a material adverse effect on its
business, financial condition or results of operations, there can be no
assurance that the Company and its hospitals will not be the subject of
investigations or inquiries in the future.

         Limitations on Certain Physician Referrals

         In addition to the Anti-Kickback Amendments, other provisions of the
Social Security Act restrict referrals by physicians of Medicare and other
government-program patients to providers of a broad range of designated health
services with which they have ownership or certain other financial arrangements
(the "Stark Law"). A person making a referral, or seeking payment for services
referred, in violation of Stark would be subject to the following sanctions: (i)
civil money penalties of up to $15,000 for each service; (ii) assessments equal
to twice the dollar value for each service; and/or (iii) exclusion from
participation in the Medicare Program and any other government healthcare
reimbursement program. Further, if any physician or entity enters into an
arrangement or scheme that the physician or entity knows or should know has the
principal purpose of assuring referrals by the physician to a particular entity,
and the physician directly made referrals to such entity, then such physician or
entity could be subject to a civil monetary penalty of up to $100,000. Many
states have adopted or are considering similar legislative proposals, some of
which extend beyond government programs to prohibit the payment or receipt of
remuneration for the referral of patients and physician selfreferrals regardless
of the source of the payment for the care. The Company's contracts with
physicians on the medical staff of its hospitals and its participation in and
development of joint ventures and other financial relationships with physicians
could be adversely affected by these amendments and similar state enactments.


                                       15
<PAGE>   17

         The Company is unable to predict the future course of federal, state
and local regulation or legislation, including Medicare and Medicaid statutes
and regulations. Further changes in the regulatory framework or in the
interpretation of these laws, rules and regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.

ENVIRONMENTAL REGULATIONS

         The Company's health care operations generate medical waste that must
be disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations, as well as the Company's
purchases and sales of facilities, are also subject to various other
environmental laws, rules and regulations.

         The Company acquired Puget Sound Hospital in Tacoma, Washington in
September 1999. During its due diligence process, the Company discovered certain
environmental contamination involving underground storage tanks no longer in
use. Environmental consultants have developed a work plan to remediate such
existing contamination which must be approved by the Washington State Department
of Ecology. Once the work plan is approved, remediation may begin. The prior
owner has agreed to fund all costs of such remediation.

         Although the Company is not currently aware of any other material
environmental claims pending or threatened against it or any of its hospitals,
no assurances can be given that a material environmental claim will not be
asserted against the Company or against any of its hospitals. The costs of
defending against claims of liability, or of remediating a contaminated
property, could have a material adverse effect on the Company's business,
financial condition and results of operations.

HEALTH CARE FACILITY LICENSING AND CERTIFICATION REQUIREMENTS

         The Company's health care facilities are subject to extensive federal,
state and local legislation and regulation. In order to maintain their operating
licenses and continue to be eligible for participation in the Medicare, Medicaid
and other governmental programs, health care facilities must comply with strict
standards concerning a variety of areas, including, but not limited to, medical
care, written policies and procedures, record-keeping, equipment and hygiene.
Various licenses and permits also are required in order to dispense narcotics,
operate pharmacies, handle radioactive materials and operate certain equipment.
The Company believes its health care facilities hold all material governmental
approvals, licenses and permits. All licenses, provider numbers and other
permits, certifications or approvals required to perform the Company's business
operations are held by subsidiaries of the Company. All, except one hospital
acquired in the third quarter of fiscal year 1999, of the Company's hospitals
are accredited by either JCAHO, AOA or both.

UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE

         The Company's health care facilities are subject to and comply with
various forms of utilization review. In addition, under the Medicare prospective
payment system, each state must


                                       16
<PAGE>   18

have a PRO to carry out a federally mandated system of review of Medicare
patient admissions, treatments and discharges in hospitals. Medical and
surgical services and practices are extensively supervised by committees of
staff doctors at each health care facility, are overseen by each health care
facility's local governing board, the primary voting members of which are
physicians and community members, and are reviewed by the Company's quality
assurance personnel. The local governing boards also help maintain standards for
quality care, develop long-range plans, establish, review and enforce practices
and procedures and approve the credentials and disciplining of medical staff
members.

COMPETITION

         The primary bases of competition among hospitals are the quality and
scope of medical services, location, strength of referral network, appearance of
the facility and, to a lesser extent, price. The Company's hospitals compete
with other hospitals, some of which may be more established, better equipped,
offer a wider range of services or have financial resources greater than those
of the Company. In addition, certain of these competing hospitals are owned by
tax-supported government agencies or by tax-exempt, not-for-profit corporations
that may be supported by endowments and charitable contributions and can finance
capital expenditures on a tax-exempt basis. Those hospitals located in non-urban
areas generally face less competition in their immediate patient service areas
for the delivery of general acute care services than would be expected in larger
communities. However, even in areas where the Company's hospitals are the only
provider of health care services, such hospitals continue to face competition
from larger tertiary care centers that attract patients for certain services
either not offered or perceived to be inferior at the local hospital, thereby
contributing to out-migration.

EMPLOYEES AND MEDICAL STAFF

         As of May 31, 1999, the Company had 2,350 "full-time equivalent"
employees, 33 of whom were corporate headquarters personnel. The remaining
employees, most of whom are nurses, other clinical, dietary, housekeeping and
office personnel, work at the Company's hospitals. A total of 445 of the
employees of Davenport Medical Center and Puget Sound Hospital are covered by
collective bargaining agreements and approximately 65 registered nurses at
Eastmoreland voted to be represented by a union. The Company considers relations
with its employees to be good.

         The Company typically does not employ physicians and, as of May 31,
1999, the Company employed only 16 practicing physicians. Of these 16
physicians, ten were inherited pursuant to the Company's acquisitions and the
remaining were recruited by the Company. Certain of the Company's hospital
services, including emergency room coverage, radiology, pathology and
anesthesiology services, may be provided through independent contractor
arrangements with physicians or contracts with companies specializing in
providing such services.

                                       17
<PAGE>   19

PROFESSIONAL LIABILITY

         As part of its business, the Company is subject to claims of liability
for events occurring in the ordinary course of hospital operations. To cover
these claims, the Company maintains professional malpractice liability insurance
and general liability insurance in amounts which management believes to be
sufficient for its operations, although some claims may exceed the scope of the
coverage in effect. The Company also maintains umbrella coverage. At various
times in the past, the cost of malpractice and other liability insurance has
risen significantly. Therefore, there can be no assurance that adequate levels
of such insurance will continue to be available at a reasonable price.

RISK FACTORS

         This section summarizes certain risks, among others, that should be
considered by stockholders and prospective investors in the Company. Many of
these risks are discussed in other sections of this Report.

         Integration of Acquisitions. The Company acquired seven of its eleven
hospitals during the fiscal year ended March 31, 1998 and three during the
fiscal year ended March 31, 1999. These acquisitions have substantially
increased the number of persons employed by the Company, the number of
facilities operated by the Company and the geographic markets served by the
Company. Although the Company believes it can successfully integrate and operate
these hospitals, there can be no assurance that the newly acquired hospitals
will be integrated successfully into the Company's operations, that cost savings
or operating synergies will be realized to the extent anticipated by the Company
or that the hospital operations will achieve levels of profitability necessary
to justify the Company's investments therein. The operations of newly acquired
hospitals may result in adverse effects on the Company's reported operating
results, divert management's attention, create difficulties in attracting,
retaining and training key personnel, and introduce risks associated with
unanticipated problems or legal liabilities, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

         Assumption of Liabilities of Acquired Hospitals. The Company has
acquired hospitals with prior operating histories. The Company has from time to
time identified certain past practices of acquired hospitals that do not conform
to the Company's standards. Although the Company institutes certain policies and
procedures designed to conform such practices to its standards, there can be no
assurance that the Company will not become liable for the past operations,
including billing and reimbursement practices which may be later asserted to be
improper, of such hospitals. Although the Company has performed due diligence
investigations with respect to potential liabilities of its hospitals and
obtained indemnification with respect to certain liabilities from the sellers of
such hospitals, there can be no assurance that any liabilities for which the
Company becomes responsible will not be material or will not exceed either the
limitations of any applicable indemnification provisions or the financial
resources of the indemnifying parties.

         Limited Operating History. The Company was organized in 1995, and seven
of the Company's eleven hospitals were acquired during the fiscal year ended
March 31, 1998 and three hospitals were acquired during the fiscal year ended
March 31, 1999. The


                                       18
<PAGE>   20

largest single purchase, representing four of the Company's eleven hospitals,
was completed in January 1998. There is limited history of operation of the
hospitals by the Company. There can be no assurance that the Company will be
able to achieve satisfactory operating results.

         Health Care Industry Investigations. Significant media and public
attention has recently focused on the hospital industry due to ongoing federal
and state investigations reportedly related to certain referral, cost reporting
and billing practices, laboratory and home health care services, physician
recruitment practices, and physician ownership of health care providers and
joint ventures involving, skilled nursing, rehabilitation and psychiatric
hospitals. As part of its hospital operations, the Company operates
laboratories, provides home health, skilled nursing, rehabilitation and
psychiatric services and engages in a variety of physician recruitment
activities. The Company also has significant Medicare, Medicaid and other
governmental billings. The Company monitors these aspects of its business and
believes its business practices are consistent with current industry standards.
However, applicable laws are complex and constantly evolving, and there can be
no assurance that government investigations will not result in interpretations
that are inconsistent with industry practices, including the Company's
practices. In public statements surrounding current investigations, governmental
authorities have taken positions on a number of issues, including some for which
little official interpretation has previously been available. Certain of these
positions appear to be inconsistent with practices that have been common within
the industry and which have not previously been challenged in this manner.
Moreover, in certain instances, government investigations that have in the past
been conducted under the civil provisions of federal law are now being conducted
as criminal investigations.

         The Company provides financial incentives to recruit physicians into
the communities served by its hospitals, including loans and minimum revenue
guarantees. The Company also enters into certain leases with physicians and is a
party to certain joint ventures with physicians. There can be no assurance that
regulatory authorities who enforce the anti-kickback law, the Stark law and
similar state and federal laws will not determine that the Company's physician
recruiting activities, other physician arrangements or group purchasing
activities violate the anti-kickback law or other federal laws. Such a
determination could subject the Company to liability. DHHS has the authority to
exclude from participation in the Medicare and Medicaid programs those
individuals and entities that engage in defined prohibited activities,
including, but not limited to, violations of state or federal law. DHHS also has
the authority to impose substantial civil monetary penalties for certain
prohibited activities, including those activities prohibited by the
anti-kickback law and the Stark law.

           Health Care Regulation. The health care industry is subject to
extensive federal, state and local laws and regulations relating to issues such
as licensure, conduct of operations, ownership of facilities, additional
facilities and services, and prices for services. Such laws and regulations are
extremely complex, and in many instances the industry has the benefit of little
or no regulatory or judicial interpretation. The laws, rules and regulations
governing the health care industry are subject to considerable interpretation
and considerable discretion on the part of regulators and courts. If a
determination is made that the Company is in violation of such laws, rules or
regulations, or if further changes in the regulatory framework occur, any such


                                       19
<PAGE>   21

determination or changes could have a material adverse effect on the Company's
business, financial condition and results of operations.

         Both federal and state government agencies have announced heightened
and coordinated civil and criminal enforcement efforts against health care
providers and other health care businesses. One federal initiative, Operation
Restore Trust, focused on investigating health care providers in the home health
and nursing home industries as well as medical suppliers to these providers in
17 states, including six states (Georgia, Mississippi, Missouri, Texas,
Tennessee and Washington) in which the Company operates and a form of this
initiative is still in place. The OIG and DOJ from time to time establish
enforcement initiatives that focus on specific billing practices or other
suspected areas of abuse. Current initiatives include a focus on hospital
billing for outpatient charges associated with inpatient services, as well as
hospital laboratory billing practices. Three of the Company's hospitals have
been the subject of enforcement efforts as discussed in Item 3.

         Effect of Reimbursement and Payment Policies; Health Care Reform
Legislation. The Company's hospitals derive a substantial portion of their
revenue from governmental programs. Such programs are highly regulated and are
subject to frequent and substantial changes. In recent years, changes in
Medicare and Medicaid programs have resulted in limitations on, and reduced
levels of, payment and reimbursement for a substantial portion of hospital
procedures and costs. The Balanced Budget Act of 1997 includes significant
additional reductions in spending levels for the Medicare and Medicaid programs.
These include, among others, payment reductions directly affecting hospitals,
establishment of prospective payment systems under Medicare for skilled nursing
facilities, home health agencies and hospital outpatient procedures. This
legislation also repealed the federal payment standard (the "Boren Amendment")
for hospitals and nursing facilities under Medicaid, increasing states'
discretion over the administration of Medicaid programs.

         Federal and state proposals are pending that would impose further
limitations on governmental payments to health care providers such as the
Company and increase patient co-payments and deductibles. A number of states are
considering legislation designed to reduce their Medicaid expenditures and to
provide universal coverage and additional care for certain populations and/or to
impose additional taxes on hospitals to help finance or expand the states'
Medicaid programs. An increasing number of related legislative proposals have
been introduced or proposed in Congress and in some state legislatures that
would effect major structural reforms in the health care system, either
nationally or at the state level. While the Company anticipates that payments to
hospitals will be reduced as a result of future federal and state legislation,
it is uncertain at this time what health care reform legislation may ultimately
be enacted, if any, or whether other changes in the administration or
interpretation of governmental health care programs will occur. There can be no
assurance that future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have a material adverse effect on the Company's business, financial condition
and results of operations. Significant additional reductions in payment levels
could have a material adverse effect on the business, financial condition and
results of operations of the Company.


                                       20
<PAGE>   22

         Dependence on Physicians and Other Health Care Professionals. The
success of the Company's hospitals is largely dependent upon the number and
quality of the physicians representing various specialties on the hospitals'
medical staffs. The Company is also largely dependent on the maintenance of good
relations between the Company and such physicians. Hospital physicians are
generally not employees of the Company and most staff physicians have admitting
privileges at hospitals other than those of the Company. Only a limited number
of physicians are interested in practicing in the non-urban communities in which
some of the Company's hospitals are located, and the loss of physicians in these
communities, or the inability of the Company to recruit physicians to these
communities, could have a material adverse effect on the Company's business,
financial condition and results of operations. The operations of the Company's
hospitals may also be affected by difficulties in attracting and retaining
nurses and certain other health care professionals in these communities.

         Year 2000 Compliant Information Systems. Many currently installed
computer systems and software products are coded to accept only two-digit
entries in the date code field. By the year 2000, these date code fields will
need to accept four-digit entries to distinguish 21st century dates from 20th
century dates. Computer systems that do not accept four-digit entries could fail
or produce erroneous results and cause disruptions of operations. As a result,
many software and computer systems may need to be upgraded or replaced in order
to comply with such "Year 2000" requirements. The Company has completed the
conversion of nine of its hospitals to a new management information system in
March 1999 and expects the remaining two hospitals to be converted by October
1999. The provider of the management information system has represented to the
Company that the new system is Year 2000 compliant and the Company has done some
initial testing of the system to verify its compliance. The failure of the
Company's management information system to be Year 2000 compliant could have a
material adverse effect on the Company's business, financial conditions and
results of operations.

         Various clinical and non-clinical equipment currently in use at the
Company's hospitals are also subject to Year 2000 issues. The Company is
examining such equipment in conjunction with its suppliers. The failure of such
equipment to be Year 2000 compliant could have a material adverse effect on the
Company's business, financial condition and results of operations.

         In addition, the Company has ongoing relationships with third-party
payors, suppliers, vendors, and others that may have computer systems with Year
2000 problems that the Company does not control. There can be no assurance that
the fiscal intermediaries and governmental agencies with which the Company
transacts business and which are responsible for payment to the Company under
the Medicare and Medicaid programs, as well as other payors, will not experience
significant problems with Year 2000 compliance. According to testimony before a
U.S. House of Representatives subcommittee, the DHHS is far behind in remedying
Year 2000 problems, which could delay payment of claims to providers. The
failure of third parties to remedy Year 2000 problems could have a material
adverse effect on the Company's business, financial condition and results of
operations.

         Competition. Competition among hospitals and other health care
providers in the United States has intensified in recent years due to cost
containment pressures, changing technology,




                                       21
<PAGE>   23

changes in government regulation and reimbursement, changes in practice patterns
(such as shifting from inpatient to outpatient treatments), the impact of
managed care organizations and other factors. The Company's hospitals face
competition for patients from larger tertiary care centers, outpatient service
providers and other local non-urban hospitals that provide similar services to
those offered by the Company's hospitals. Some of the hospitals that compete
with the Company have greater financial resources and/or are owned by
governmental agencies or not-for-profit corporations supported by endowments and
charitable contributions, and can finance capital expenditures on tax-exempt
basis.

         Need for Additional Capital. The operations of the Company's hospitals
require ongoing capital expenditures for renovation, expansion and addition of
costly medical equipment and technology. The Company may incur indebtedness and
may issue, from time to time, debt or equity securities to fund any such
expenditures. There can be no assurance that sufficient financing will be
available on terms satisfactory to the Company, if at all.

         Risks Related to Intangible Assets. The Company's acquisitions have
resulted in the recording of a significant amount of goodwill. As of March 31,
1999, the Company had goodwill of approximately $41.9 million, which is being
amortized over 40 years. There can be no assurance that the value of goodwill or
other intangible assets will ever be realized by the Company. The Company
periodically reviews the recoverability of its intangible assets. Recoverability
of intangibles is determined based on the undiscounted future operating cash
flows from the related hospital. The amount of impairment, if any, that may
require an additional change to earnings, is measured based on discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds or based on the fair value of the related hospital. The write-off of a
significant portion of unamortized intangible assets could have a material
adverse effect on the Company's business, financial condition and results of
operations.

         Professional Liability. In recent years, physicians, hospitals and
other health care providers have become subject to an increasing number of
lawsuits alleging malpractice, product liability or related legal theories, many
of which involve large claims and significant defense costs. To cover certain
claims arising out of the operations of its hospitals, the Company maintains
professional malpractice liability insurance and general liability insurance in
amounts that management believes to be sufficient for its operations. However,
some claims may exceed, or may not be covered by the policy in effect. The cost
of malpractice and other liability insurance has risen significantly during the
past few years. While the Company's professional and other liability insurance
has been adequate in the past to provide for liability claims, there can be no
assurance that adequate levels of such insurance will continue to be available
at reasonable cost to the Company.

         Labor Unions; Potential Work Stoppage. Approximately 235 employees at
the Company's hospital located at Davenport, Iowa are represented by a labor
union. In addition, approximately 210 employees at Puget Sound Hospital are
represented by labor unions. In April 1999, approximately 65 registered nurses
at Eastmoreland voted to be represented by a union. The company and the union
have not entered into any negotiations. There can be no assurance that the
Company will be able to renew existing labor union contracts on acceptable
terms. In


                                       22
<PAGE>   24

addition, employees could exercise their rights under labor union
contracts, which could include a strike or walk-out. In such cases, there are no
assurances that the Company would be able to staff sufficient employees for its
short-term needs. Any such labor strike or the inability of the Company to
negotiate a satisfactory contract upon expiration of the current agreements
could have a material adverse effect on the Company's business, financial
condition or results of operations.



                                       23


<PAGE>   25


ITEM 2.  PROPERTIES

         The Company's corporate headquarters occupy approximately 13,940 square
feet leased at 109 Westpark Drive, Suite 440, Brentwood, Tennessee. The lease
has a remaining term of two years with base monthly rent of $20,227.

         The following table sets forth certain information with respect to each
of the Company's hospitals:

<TABLE>
<CAPTION>
                                                  Date of             Licensed            Hospital
                                                  Acquisition         Beds                Owned/leased
                                                  -----------         --------            ------------
<S>                                               <C>                 <C>                 <C>
Doctors Hospital                                  8/1/96              94                  owned
  Wentzville, MO
Memorial Hospital of Center                       5/1/97              54                  owned
  Center, TX
Delta Medical Center -- Memphis                   5/16/97             243                 owned
  Memphis, TN
Dolly Vinsant Memorial Hospital                   8/1/97              81                  owned
  San Benito, TX
Davenport Medical Center                          2/1/98              149                 owned
  Davenport, IA
Lander Valley Medical Center(1)                   2/1/98              102                 leased
  Lander, WY
Woodland Park Hospital(2)                         2/1/98              209                 leased
  Portland, OR
Eastmoreland Hospital                             2/1/98              100                 owned
  Portland, OR
Puget Sound Hospital                              9/1/98              160                 owned
  Tacoma, WA
Memorial Hospital of Adel                         11/1/98             60                  owned
   Adel,  GA
Crosby Memorial Hospital(3)                       11/1/98             95                  leased
   Picayune, MS
</TABLE>

-------------------------------
 (1)     The Lander Valley Medical Center is subject to a ground lease from the
         City of Lander, Wyoming, which expires December 31, 2073, with no
         option to renew. The current annual rent is $4,208. The Company is
         responsible for paying real estate taxes assessed against the
         buildings, personal property taxes and license taxes.
 (2)     Woodland Park Hospital is leased pursuant to a lease, which expires
         December 31, 2029 with no option to renew. The current rental is
         $28,114 per month with a 3% annual increase each January 1. The Company
         is responsible for paying all operating expenses including all real and
         personal property taxes and assessments, insurance utilities and repair
         costs.
 (3)     Crosby Memorial Hospital is leased pursuant to a long-term lease, which
         expires upon completion of a replacement hospital. At the time of
         purchase, a prepaid lease payment was made for the entire term of the
         lease.


                                       24
<PAGE>   26

ITEM 3.  LEGAL PROCEEDINGS

         The Company is, from time to time, subject to claims and suits arising
in the ordinary course of business, including claims for damages for personal
injuries, breach of contracts or for wrongful restriction of or interference
with physician's staff privileges. In certain of these actions, plaintiffs
request punitive or other damages that may not be covered by insurance. The
Company is currently not a party to any proceeding which, in management's
opinion, would have a material adverse effect on the Company's business,
financial condition or results of operations.

RECENT INVESTIGATIONS

         In April 1997, the DOJ, Eastern District of Texas, sent a demand letter
to the Company's hospital in Center, Texas, alleging improper laboratory billing
practices during periods prior to the Company's ownership of the hospital. The
Company settled this claim for approximately $18,000, and recovered its
settlement costs for this claim form the prior owner of the hospital pursuant to
an indemnification agreement.

         In September 1997, the DOJ, Southern District of Texas, sent a demand
letter to the Company's hospital in San Benito, Texas alleging improper
laboratory billing for periods prior to the Company's ownership. The DOJ has
offered to settle the claim for approximately $20,000. The Company will seek
indemnification from prior owners for any liabilities with respect to this
matter and such prior owners have acknowledged their responsibility. The prior
owners are in the process of appealing the proposed settlement.

         In November 1997, DOJ, Eastern District of Missouri, sent a demand
letter to the Company's hospital in Wentzville, Missouri alleging improper
laboratory billing practices from 1991 to 1997. On April 29, 1999, the Company
entered into a settlement agreement with the Department of Health and Human
Services whereby the Company paid $178,998, of which $158,580 was paid by the
previous owner pursuant to an indemnification agreement entered into as part of
its purchase of the hospital.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

         None.




                                       25
<PAGE>   27


PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
         STOCKHOLDER MATTERS

         The common stock of the Company is traded on the New York Stock
Exchange ("NYSE") under the designation "NAH." The following table sets forth
the high and low sales price of the common stock for each quarter since the
Company began trading on the NYSE in August 1998.

<TABLE>
<CAPTION>
                                                            SALES PRICE
                                                            -----------
              FISCAL PERIOD                              HIGH         LOW
              -------------                             -------      ------
<S>                                                     <C>          <C>
              Quarter ended September 30, 1998          $13.063      $9.813
              Quarter ended December 31, 1998           $11.625      $8.813
              Quarter ended March 31, 1999              $11.188      $1.813
</TABLE>

         On June 15, 1999, there were approximately 59 holders of record of the
common stock and the closing bid quotation for the common stock was $2.50 per
share, as reported by the NYSE.

         The Company has not paid cash dividends on its common stock and
anticipates that, for the foreseeable future, any earnings will be retained for
use in its business and no cash dividends will be paid. The Company is
prohibited from issuing dividends under its Bank Credit Facility. See -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

ITEM 6.  SELECTED FINANCIAL DATA

         The following selected consolidated financial data have been derived
from the audited consolidated financial statements of the Company and its
subsidiaries as of March 31, 1996 and the period from August 16, 1995
(inception) through March 31, 1996 and as of and for the years ended March 31,
1997, 1998 and 1999. The data set forth below should be read in conjunction with
the Consolidated Financial Statements and related Notes and "Management's
Discussion and Analysis of Financial condition and Results of Operations"
included herein.


                                       26
<PAGE>   28
<TABLE>
<CAPTION>
                                                                   YEARS ENDED                         PERIOD
                                                                     MARCH 31,                    AUGUST 16, 1995
                                                       ------------------------------------       (INCEPTION) TO
                                                          1999          1998         1997          MARCH 31, 1996
                                                       ----------     ---------     -------     -------------------

                                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
  <S>                                                  <C>            <C>          <C>            <C>
  Revenues:
    Net patient service revenue                         $ 167,509     $ 73,725     $ 10,737         $       --
    Other revenue                                           4,331        1,924          350                 17
                                                        ---------     --------     --------         ----------

      Net operating revenues                              171,840       75,649       11,087                 17

  Expenses:
    Salaries and benefits                                  78,020       31,276        4,117                 --
    Professional fees                                      23,375        8,608          620                 --
    Supplies                                               19,536        8,314        1,439                 --
    Provision for doubtful accounts                        13,878        7,837          534                 --
    General and administrative                              4,132        3,484        1,871                385
    Transition and other related costs                        906           --           --                 --
    Other                                                  17,475        9,286        2,377                 --
    Depreciation and amortization                           6,677        2,836          783                  5
    Interest                                                6,716        2,637          363                  1
                                                        ---------     --------     --------         ----------

                                                          170,715       74,278       12,104                391
                                                        ---------     --------     --------         ----------

      Income (loss) before income taxes
        and extraordinary item                              1,125        1,371       (1,017)              (374)

  Income taxes                                                463          579           67                 --
                                                        ---------     --------     --------         ----------

      Income (loss) before extraordinary item                 662          792       (1,084)              (374)

  Extraordinary item - loss on early extinguishment
    of debt (net of tax of $89,000)                           134           --           --                 --
                                                        ---------     --------     --------         ----------

      Net income (loss)                                       528          792       (1,084)              (374)

  Cumulative preferred dividend                               710          617           --                 --
                                                        ---------     --------     --------         ----------
      Net income (loss) attributable to common
        stockholders                                    $    (182)    $    175     $ (1,084)        $     (374)
                                                        =========     ========     ========         ==========

  Net income (loss) per share:
    Basic:
        Continuing operations                           $   (0.00)    $   0.02     $  (0.13)        $    (0.08)
        Extraordinary item                                  (0.01)          --           --                 --
                                                        ---------     --------     --------         ----------
                                                        $   (0.01)    $   0.02     $  (0.13)        $    (0.08)
                                                        =========     ========     ========         ==========

  Diluted:
      Continuing operations                             $   (0.00)    $   0.01     $  (0.13)        $    (0.08)
      Extraordinary item                                    (0.01)          --           --                 --
                                                        ---------     --------     --------         ----------
                                                        $   (0.01)    $   0.01     $  (0.13)        $    (0.08)
                                                        =========     ========     ========         ==========

  Weighted average number of shares and
    dilutive share equivalents outstanding:
      Basic                                                14,026        8,406        8,406              4,983
      Diluted                                              14,026       13,212        8,406              4,983


</TABLE>






                                       27

<PAGE>   29



<TABLE>
<CAPTION>
                                                         AS OF MARCH 31,
                                            1999        1998      1997       1996
                                          --------    --------   -------    -------
                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                        <C>         <C>       <C>         <C>
Balance Sheet Data:
  Working capital                           26,638      15,306      522      1,043
  Total assets                             219,764     134,193   19,220      1,164
  Long-term obligations, excluding
   current portion                         108,799      67,184      975         24
  Redeemable preferred stock                    --      25,617       --         --
  Total stockholders' equity                81,843      23,915   15,005      1,088

</TABLE>




                                       28
<PAGE>   30

         Quarterly financial information for the years ended March 31, 1999 and
1998 is summarized below:

<TABLE>
<CAPTION>
                                                                 Quarters
                                               ----------------------------------------------
                                                 1st            2nd         3rd        4th
                                               -------        -------     -------    --------
                                                   (In thousands except per share data)
<S>                                            <C>            <C>         <C>        <C>
1999
  Net operating revenue                         35,898         37,962      48,155      49,825
  Income (loss) before income taxes and
    extraordinary item                             523          1,481       1,988      (2,867)
  Net income (loss) attributable to common
    stockholders                                  (123)           481       1,193      (1,733)

  Net income (loss) per share:
    Basic:
      Continuing operations                    $ (0.02)       $  0.05     $  0.07    $  (0.10)
       Extraordinary item                           --          (0.01)         --          --
                                               -------        -------     -------    --------
                                               $ (0.02)       $  0.04     $  0.07    $  (0.10)
                                               =======        =======     =======    ========
    Diluted:
      Continuing operations                    $ (0.02)       $  0.04     $  0.07    $  (0.10)
      Extraordinary item                            --          (0.01)         --          --
                                               -------        -------     -------    --------
                                               $ (0.02)       $  0.03     $  0.07    $  (0.10)
                                               =======        =======     =======    ========


1998
  Net operating revenue                          9,862         16,775      18,859      30,153
  Income (loss) before income taxes               (221)           540         661         391
  Net income (loss) attributable to common
    stockholders                                  (263)           355         334        (251)

  Net income (loss) per share:
    Basic                                        (0.03)          0.04        0.04       (0.03)
    Diluted                                      (0.03)          0.03        0.03       (0.03)
</TABLE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS.

FORWARD-LOOKING STATEMENTS

         Certain statements in this Report constitute forward-looking
statements. Such forward-looking statements (which may be identified by words
such as "anticipate," "believe," "estimate," "expect," "intend" and similar
expressions) involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others: general economic and business conditions, both
nationally and in regions where the Company operates; demographic changes; the
effect of existing or future governmental regulation and federal and state
legislative and enforcement initiatives affecting the Company's business,



                                       29
<PAGE>   31

including the Balanced Budget Act of 1997; changes in Medicare and Medicaid
reimbursement levels; the Company's ability to implement successfully its
business strategy and changes in such strategy; the availability and terms of
financing to fund the operation of the Company's business; the Company's ability
to attract and retain qualified management personnel and to recruit and retain
physicians and other health care personnel to the non-urban markets it serves;
the effect of managed care initiatives on the non-urban markets served by the
Company's hospitals and the Company's ability to enter into managed care
provider arrangements on acceptable terms; the effect of liability and other
claims asserted against the Company; the effect of competition in the markets
served by the Company's hospitals; and other factors referenced in this Report.
Certain of these factors are discussed in more detail elsewhere in this Report.
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 herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives and plans of the Company will be achieved.

OVERVIEW

         New American acquires and operates acute care hospitals throughout the
United States. The Company was formed to capitalize on opportunities to be the
principal provider of health care services in those non-urban communities which
it targets.

         The Company acquired its first hospital in August 1996 and through
March 1999 has acquired ten additional hospitals. These eleven acute care
hospitals are located in nine states and have a total of 1,347 licensed beds.

IMPACT OF ACQUISITIONS

         Because of the financial impact of the Company's recent acquisitions,
it is difficult to make meaningful comparisons between the Company's financial
statements for the fiscal periods presented. In addition, due to the relatively
small number of hospitals currently operated, each hospital can materially
affect the overall operating margins of the Company. Upon the acquisition of a
hospital, the Company typically takes a number of steps intended to lower
operating costs. The impact of such actions may be offset by the cost of revenue
enhancing initiatives such as expanding services, strengthening medical staff,
and improving market position. The benefits of these investments and of other
activities to improve operating margins generally do not occur immediately.
Consequently, the financial performance of a newly acquired hospital may
initially have an adverse effect on the Company's overall operating margins.

         In August 1996, the Company acquired Doctors Hospital in Wentzville,
Missouri in an asset purchase transaction for $14.0 million. In May 1997, the
Company acquired Memorial Hospital of Center, Center, Texas in a stock purchase
transaction for $11.5 million. Also in May 1997, the Company purchased Eastwood
Hospital, Memphis, Tennessee (later renamed Delta Medical Center - Memphis) in
an asset purchase transaction for $13.3 million. In August 1997, the Company
acquired Dolly Vinsant Memorial Hospital, San Benito, Texas in an asset purchase



                                       30
<PAGE>   32

for $8.1 million. In January 1998, the Company acquired in a single transaction
the assets of Lander Valley Medical Center, Lander, Wyoming; Davenport Medical
Center, Davenport, Iowa; Woodland Park Hospital, Portland, Oregon; and
Eastmoreland Hospital, Portland, Oregon for an aggregate purchase price of
approximately $57.0 million. Lander Valley Medical Center is built on property
subject to a ground lease from the City of Lander, which expires December 31,
2073. Woodland Park Hospital is leased pursuant to a long-term lease, which
expires December 31, 2029.

         Effective September 1, 1998, the Company acquired Puget Sound Hospital,
Tacoma, Washington, for approximately $27.9 million. The acquisition of Puget
Sound Hospital was accounted for as a purchase business combination and included
the acquisition of certain net assets and the assumption of certain liabilities.
To finance the Puget Sound Hospital acquisition, the Company borrowed $28.5
million under its revolving credit facility.

         Effective November 1, 1998, the Company acquired the assets of Crosby
Memorial Hospital, in Picayune, Mississippi, for approximately $18.5 million.
Crosby Memorial Hospital is leased pursuant to a long-term lease, which expires
upon completion of a replacement hospital. To finance the Crosby Memorial
Hospital acquisition, the Company borrowed $18.8 million under its revolving
credit facility.

         Effective November 1, 1998, the Company acquired Memorial Hospital of
Adel, in Adel, Georgia, for approximately $16.5 million. The acquisition of
Memorial Hospital of Adel was accounted for as a purchase business combination.
To finance the Memorial Hospital of Adel acquisition, the Company borrowed $18.0
million under its revolving credit facility.

         The operating results of each of the above acquisitions are included in
the Company's results of operations from the respective dates of purchase.

RESULTS OF OPERATIONS

         Net operating revenue is comprised of net patient service revenue and
other revenue. Net patient service revenue is reported net of contractual
adjustments and policy discounts. The adjustments principally result from
differences between the hospitals' customary charges and payment rates under the
Medicare and Medicaid programs and other third-party payors. Customary charges
have generally increased at a faster rate than the rate of increase for Medicare
and Medicaid payments. Other revenue includes cafeteria sales, medical office
building rental income and other miscellaneous revenue. Operating expenses
primarily consist of hospital related costs of operation and include salaries
and benefits, professional fees (includes medical professionals and consulting
services), supplies, provision for doubtful accounts, and other operating
expenses (principally consisting of utilities, insurance, property taxes,
travel, freight, postage, telephone, advertising, repairs and maintenance).
General and administrative expenses primarily relate to corporate overhead.


                                       31
<PAGE>   33

         The following table presents, for the periods indicated, information
expressed as a percentage of net operating revenue. Such information has been
derived from the Consolidated Statements of Operations of the Company included
elsewhere in the report.

<TABLE>
<CAPTION>
                                                   Year Ended March 31,
                                              -----------------------------
                                               1999       1998        1997
                                              ------     ------      ------
<S>                                           <C>        <C>         <C>
Net operating revenue                         100.0%     100.0%      100.0%
Operating expenses before depreciation
  and amortization and interest                91.6%      91.0%       98.2%
                                              ------------------------------

EBITDA(1)                                       8.4%       9.0%        1.8%
Depreciation and amortization                   3.9%       3.7%        7.2%
Interest                                        3.9%       3.4%        3.6%
                                              ------------------------------

Income (loss) before income taxes and
  extraordinary item                            0.6%       1.9%       (9.0%)
Income taxes                                    0.2%       0.8%        0.9%
                                              ------------------------------

Income (loss) before extraordinary item         0.4%       1.1%       (9.9%)
Extraordinary item                              0.1%       0.0%        0.0%
                                              ------------------------------

Net income (loss)                               0.3%       1.1%       (9.9%)
Cumulative preferred dividend                   0.4%       0.8%        0.0%
                                              ------------------------------
Net income (loss) attributable to common
  stockholders                                 (0.1%)      0.3%       (9.9%)
                                              ==============================
</TABLE>
------------

(1)      EBITDA represents the sum of income before income tax expense,
         interest, and depreciation and amortization. Management understands
         that industry analysts generally consider EBITDA to be one measure of
         the financial performance of a company that is presented to assist
         investors in analyzing the operating performance of the company and its
         ability to service debt. Management believes that an increase in EBITDA
         level is an indicator of the Company's improved ability to service
         existing debt, to sustain potential future increases in debt and to
         satisfy capital requirements. However, EBITDA is not a measure of
         financial performance under generally accepted accounting principles
         and should not be considered an alternative (i) to net income as a
         measure of operating performance or (ii) to cash flows from operating,
         investing, or financing activities as a measure of liquidity. Given
         that EBITDA is not a measurement determined in accordance with
         generally accepted accounting principles and is thus susceptible to
         varying calculation, EBITDA, as presented, may not be comparable to
         other similarly titled measures of other companies.




                                       32
<PAGE>   34

       Year ended March 31, 1999 compared to year ended March 31, 1998

         Net operating revenue was $171.8 million for the year ended March 31,
1999, compared to $75.6 million for the comparable period of 1998, an increase
of $96.2 million or 127.2%. Net operating revenue for the hospitals owned during
both years ended March 31, 1999 and 1998, for the same months owned in each
period, was $71.9 and $75.6 million, respectively. This decrease is primarily
due to managed care pricing pressures in three markets, lower-than-expected
volume growth and a slow down in physician recruitment.

         Operating expenses less depreciation and amortization and interest were
$157.3 million, or 91.6% of net operating revenue, for the year ended March 31,
1999 compared to $68.8 million, or 91.0% of net operating revenue, for the
comparable period of 1998. Operating expenses less depreciation and amortization
and interest for the hospitals owned during both years ended March 31, 1999 and
1998, for the same months owned in each period, was $70.0 and $68.8 million,
respectively. This increase is primarily due to $0.9 million of transition and
other related costs during the year ended March 31, 1999 relating to one-time
charges for transitioning a new Chief Executive Officer. The Company expects to
incur approximately $0.5 of severance and other related costs during the quarter
ended June 30, 1999 related primarily to personnel changes in connection with
restructuring the corporate office.


         Depreciation and amortization expense was $6.7 million for the year
ended March 31, 1999, compared to $2.8 million for the comparable period of
1998, an increase of $3.9 million or 139.3%. The increase is primarily due to an
increase in depreciation expense relating to acquisitions and a $10.1 million
increase in capital expenditures, excluding acquisitions, for the year ended
March 31, 1999.

         Interest expense was $6.7 million for the year ended December 31, 1999,
compared to $2.6 million for the comparable period of 1998, an increase of $4.1
million or 157.7%. The increase was due to the increase in average outstanding
indebtedness associated with the eight hospitals owned during the entire year
ended March 31, 1999 versus only one of the Company's hospitals having been
owned for the entire comparable period of 1998. The average debt outstanding for
the year ended March 31, 1999 and 1998 was $54.9 and $20.7 million,
respectively, bearing interest at a rate of 7.1% and 6.9% at the end of each
respective period.

         The $0.1 million extraordinary item for the year ended March 31, 1999
related to the early retirement of the subordinated debt in August 1998.

         Year ended March 31, 1998 compared to year ended March 31, 1997

         Net operating revenue was $75.6 million for the year ended March 31,
1998 compared to $11.1 million for the comparable period of 1997, an increase of
$64.5 million or 581.1%. The majority of the increase was due to an increase in
net patient service revenue to $73.7 million for the year ended March 31, 1998,
compared to $10.7 million for the year ended March 31, 1997, an increase of
$63.0 million. Other revenue was $1.9 million for the year ended March 31, 1997,



                                       33
<PAGE>   35

compared to $0.4 million for the comparable period of 1997, an increase of $1.5
million. The increase primarily reflects the acquisition of seven hospitals
during the year ended March 31, 1998 and the fact that Doctors Hospital was
owned for the entire year ended March 31, 1998 versus eight months for the
comparable period of 1997.

         Operating expenses less depreciation and amortization and interest were
$68.8 million, or 91.0% of net operating revenue, for the year ended March 31,
1998 compared to $11.0 million or 98.2% of net operating revenue for the
comparable period of 1997. The increase primarily reflects the acquisition of
seven hospitals during the year ended March 31, 1998 and the fact that Doctors
Hospital was owned for the entire year ended March 31, 1998 versus eight months
for the comparable period of 1997.

         Depreciation and amortization expense was $2.8 million for the year
ended March 31, 1998 compared to $0.8 million for the comparable period of 1997,
an increase of $2.0 million or 250.0%. The increase is due to the additional
depreciation and amortization expense associated with the seven hospitals
acquired during the year ended March 31, 1998.

         Interest expense was $2.6 million for the year ended March 31, 1998,
compared to $0.4 million for the comparable period of 1997, an increase of $2.2
million or 550.0%. The increase was due to the increase in average outstanding
indebtedness associated with the acquisition of seven hospitals during the year
ended March 31, 1998.

         Income taxes were $0.6 million for the year ended March 31, 1998,
compared to $0.1 for the comparable period of 1997, an increase of $0.5 million
or 500.0%. Income tax expense in 1997 related to state taxes for the one owned
hospital. For 1998, taxes relate to both federal and state taxes at a combined
rate of 42%.

       During the year ended March 31, 1998, the company issued the Series A
Preferred Stock and accrued a cumulative preferred dividend of $0.6 million.

LIQUIDITY AND CAPITAL RESOURCES

          At March 31, 1999, the Company had working capital of $26.6 million
including cash and cash equivalents of $6.0 million. The ratio of current assets
to current liabilities was 2.0 to 1.0 at March 31, 1999 and 1.9 to 1.0 for the
comparable period of 1998.

         On August 20, 1998, the Company completed its initial public offering
("IPO") of common stock, selling five million shares at $13.00 per share netting
the Company approximately $58.0 million. Net proceeds of the offering were used
to pay dividends on and to redeem all of the Series A preferred stock ($26.3
million), to pay interest on and prepay all of the subordinated debt ($26.4
million) and to reduce indebtedness under the Company's revolving credit
facility ($5.0 million). Concurrent with the IPO, the then outstanding Series B
convertible preferred stock was converted into 1.4 million and 2.8 million
shares of non-voting and voting common stock, respectively.




                                       34
<PAGE>   36

         On May 14, 1999, the Company amended and restated its revolving credit
agreement. The credit agreement has a revolving credit limit of $116.0 million.
Borrowings under the facility bear interest of (i) a base rate equal to the
greater of the Prime Rate or the Federal Funds rate, plus in either case, a
margin of up to 2.75% or (ii) London Interbank Offered Rate as of the date of
borrowing plus a margin of up to 4%. The applicable margin is determined by a
ratio of indebtedness to EBITDAR, as defined in the Credit Agreement, calculated
on a monthly basis. The facility is due and payable November 30, 2002, with a
required permanent reduction of $12.0 and $8.0 million by October 31, 1999 and
2000, respectively. Additionally, the Company is required to pay down
outstanding indebtedness upon the sale of any facilities and beginning with the
year ended March 31, 2000, by the amount of any excess cash flow for the year,
as defined within the agreement, less $4.0 million of cash and cash equivalents
to be maintained by the Company. At March 31, 1999, $103.3 million of the Credit
Facility was drawn, an increase of $65.7 million from March 31, 1998. The
increase was related to the acquisition of Puget Sound Hospital, Crosby Memorial
Hospital, and Memorial Hospital of Adel, offset in part by a reduction in debt
from the application of IPO proceeds. At March 31, 1999, the average borrowing
rate on the Credit Facility was 7.1%.

         Cash flows provided by operating activities were $0.4 million for the
year ended March 31, 1999 compared to cash flows provided by operating
activities of $3.8 million for the comparable period of 1998. Cash used by
investing activities was $72.0 million for the year ended March 31, 1999,
primarily related to the acquisition of Puget Sound Hospital, Crosby Memorial
Hospital, and Memorial Hospital of Adel. Cash used by investing activities was
$92.5 million for the year ended March 31, 1998, primarily related to the
acquisitions of Memorial Hospital of Center, Delta Medical Center - Memphis,
Dolly Vinsant Memorial Hospital, Lander Valley Medical Center, Davenport Medical
Center, Woodland Park Hospital and Eastmoreland Hospital. Net cash provided by
financing activities was $71.4 million for the year ended March 31, 1999,
primarily from the IPO and borrowings related to the acquisition of Puget Sound
Hospital, Crosby Memorial Hospital, and Memorial Hospital of Adel, net of
repayment of subordinated debt and redemption of preferred stock. Net cash
provided by financing activities was $94.2 million for the year ended March 31,
1998, primarily from bank borrowings related to the acquisitions of Memorial
Hospital of Center, Delta Medical Center - Memphis, Dolly Vinsant Memorial
Hospital, Lander Valley Medical Center, Davenport Medical Center, Woodland Park
Hospital and Eastmoreland Hospital as well as the issuance of preferred stock.

         The Company continually reviews its capital needs and financing
opportunities and may seek additional equity or debt financing for these or
other needs. There can be no assurance that the Company will not require
additional debt or equity financing or that such financing will be available on
acceptable terms for any particular acquisition. The Company is exploring the
sale of up to three hospitals during fiscal year 2000 and may incur losses on
the sale of the hospitals. The funds provided by any dispositions will be used
to pay down outstanding indebtedness on the revolving credit facility.

         Capital expenditures, excluding acquisitions, for the year ended March
31, 1999 and 1998 were $13.0 million and $2.9 million, respectively. Capital
expenditures related to management information systems ("MIS") (both financial
and clinical) were approximately $4.8 million for



                                       35
<PAGE>   37

the year ended March 31, 1999. Capital expenditures for the Company's hospitals
will vary from year to year depending on facility improvements and service
enhancements undertaken. The Company expects to fund fiscal year 2000 capital
needs with excess operating cash flows and borrowings from the revolving credit
facility.

         The Company is obligated to build a new, replacement facility for
Crosby Memorial Hospital within 36 months of the November 1, 1998 acquisition
date. If the Company fails to meet this commitment, the Company must purchase
the existing facility for $15.0 million.

YEAR 2000 ISSUES

         Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field. By the year 2000,
these date code fields will need to accept four-digit entries to distinguish
21st century dates from 20th century dates. These products include software
applications running on desktop computers and network servers as well as in
microchips and microcontrollers incorporated into equipment. Certain of the
Company's computer hardware and software, building infrastructure components
(e.g. alarm systems and HVAC systems) and medical devices that are date
sensitive, may contain programs with the Year 2000 problem. Computer systems,
which do not include four-digit entries, could fail or produce erroneous results
causing disruptions of operations or affect patient diagnosis and treatment. As
a result, many software and computer systems may need to be upgraded or replaced
in order to comply with such Year 2000 requirements.

         Status of the Company's Year 2000 Compliance

         MIS. The Company is in the process of converting all of its hospitals
to a new management information system (MIS), which it believes is Year 2000
compliant. As of March 31, 1999, nine of the Company's eleven hospitals had been
converted to the new system. The Company expects the remaining two hospitals to
be converted by October 1999. The provider of the MIS has represented to the
Company that the new system is Year 2000 compliant and the Company's testing of
the system has not indicated any material Year 2000 noncompliance.

         Non-MIS Equipment. Various clinical and nonclinical equipment currently
in use at the Company's hospitals incorporate time/date elements. The Company
has substantially completed an itemized inventory of all of its hospitals and
identified substantially all equipment with potential Year 2000 problems. The
Company believes it will have completed this process and established a time
frame for repairing or replacing any non-compliant equipment by September 30,
1999. The Company is also in the process of contracting its group purchasing
agent to determine any Year 2000 compliance problems with respect to its sources
of supplies. The Company has not received sufficient information from its group
purchasing agent to determine any Year 2000 compliance problems with respect to
its sources of supplies or to establish an estimated date for completing
subsequent phases with respect to its supplies. In addition, the Company has
established a plan to inventory the infrastructure in each of its hospitals to


                                       36
<PAGE>   38

determine any Year 2000 compliance problems. The Company expects to complete its
Year 2000 compliance plan with respect to the hospital's infrastructure by
December 31, 1999.

         Third Party Relationships. In addition, the Company has ongoing
relationships with thirdparty suppliers, vendors, payors and others, which may
have computer systems with Year 2000 compliance problems that the Company does
not control. Medicare is a significant source of revenues to the Company.
According to the Health Care Financing Administration ("HCFA") web page, the
Medicare program will be ready to process acceptable claims in the Year 2000.
However, there can be no assurance that the fiscal intermediaries and
governmental agencies with which the Company transacts business and which are
responsible for payment to the Company under Medicare and Medicaid programs, as
well as other payors, will not experience problems with Year 2000 compliance. In
addition, the Company depends upon other vendors such as utilities, which
provide electricity, water, natural gas and telephone services and vendors of
medical supplies and pharmaceuticals used in patient care. As a part of its Year
2000 strategy, the Company intends to seek assurances from these parties that
their services and products will not be interrupted or malfunction due to the
Year 2000 problem and expects to complete the initial contacting of these
parties by September 30, 1999. The failure of such third parties to remedy Year
2000 problems could have a material adverse effect on the Company's business,
financial condition and results of operations and ability to provide health care
services.

         Costs of Year 2000 Compliance

         The Company expects to make capital expenditures of approximately $7.5
million which includes (i) approximately $6.3 million for the new MIS software
and hardware, of which $4.8 million was expended in fiscal year 1999, and (ii)
certain non-MIS costs associated with Year 2000 compliance. The Company does not
expect to incur any other additional material Year 2000 compliance costs. The
failure of the Company's MIS to be Year 2000 compliant could have a material
adverse effect on the Company's business, financial conditions and results of
operations.

         Risks Related to Year 2000 Issues

         The Company believes that it will be able to resolve its Year 2000
compliance problems before December 31, 1999; however, the Company has not yet
completed all of the phases of its Year 2000 compliance program. The failure of
the new MIS program, the non-MIS equipment or the hospital infrastructure to be
Year 2000 compliant could have a material adverse effect on the Company's
business, financial condition and results of operations. The failure of any of
the foregoing could result in the Company's inability to diagnose or treat
patients, bill for patient services, or collect payment from patients or
third-party payors. Finally, if there are such disruptions generally in the
economy as a result of Year 2000 compliance problems, such disruptions could
have a material adverse effect on the Company. The Company is unable to estimate
the amount of the potential liability or lost revenue at this time.



                                       37
<PAGE>   39

         The Company believes that the most likely worst case scenario of Year
2000 compliance problems is that some third-party payors will not be Year 2000
compliant. The failure of such third-party payors to be Year 2000 compliant
could result in delays and difficulties in receiving payments from such payors
for services provided by the Company. These problems could result from the
inability to file claims with certain payors by electronic filings as well as
such payors inability to process either electronic or paper filings. These
problems could seriously impact the Company's cash flows. The Company intends to
develop a contingency plan to address this scenario. It is expected that such a
plan would involve establishing procedures whereby the Company would revert to
manual billing processes and ensuring access to additional capital in case of
cash flow problems.

         Contingency Plans for Year 2000 Issues

         The Company intends to complete an initial contingency plan by August
31, 1999. However, in some instances (e.g. loss of water supply), the Company
may not be able to develop contingency plans which allow the affected hospital
to continue to operate. Each of the Company's hospitals has a disaster plan,
which will be reviewed as a part of the Company's contingency planning process.

         The foregoing is based on information currently available to the
Company. The Company will revise its strategy as it completes its assessment of
Year 2000 issues. The Company can provide no assurances that applications and
equipment the Company believes to be Year 2000 compliant will not experience
difficulties or that the Company will not experience difficulties obtaining
resources needed to make modifications to or replace the Company's affected
systems and equipment. Failure by the Company or third parties on which it
relies to resolve Year 2000 issues could have a material adverse effect on the
Company's results of operations and its ability to provide health care services.
Consequently, the Company can give no assurances that issues related to Year
2000 will not have a material adverse effect on the Company's financial
condition or results of operations.


ENVIRONMENTAL MATTERS

         The Company acquired Puget Sound Hospital in Tacoma, Washington in
September 1999. During its due diligence process, the Company discovered certain
environmental contamination involving underground storage tanks no longer in
use. Environmental consultants have developed a work plan to remediate such
existing contamination which must be approved by the Washington State Department
of Ecology. Once the work plan is approved, remediation may begin. The prior
owner has agreed to fund all costs of such remediation.

         Although the Company is not currently aware of any other material
environmental claims pending or threatened against it or any of its hospitals,
no assurances can be given that a material environmental claim will not be
asserted against the Company or against any of its hospitals. The costs of
defending against claims of liability, or of remediating a contaminated
property, could



                                       38
<PAGE>   40

have a material adverse effect on the Company's business, financial condition
and results of operations.


INFLATION

         The health care industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along rising costs to the Company in the form of higher
prices. The Company has generally been able to offset such increases in
operating costs by its cost containment activities and expanding services. In
light of reimbursement measures imposed by government agencies and private
insurance companies, the Company is unable to predict its ability to offset or
control future cost increases, or its ability to pass on the increased costs
associated with providing health care services to patients with government or
managed care payors, unless such payors correspondingly increase reimbursement
rates.

GENERAL

         Hospital revenue is received primarily from Medicare, Medicaid and
commercial insurance. The federal Medicare program accounted for approximately
52.4% and 65.7% of hospital patient days for the year ended March 31, 1999 and
1998, respectively. The state Medicaid programs accounted for approximately
16.7% and 16.1% of hospital patient days for the year ended December 31, 1999
and 1998, respectively. The Company's percentage of revenue received from the
Medicare program is expected to increase due to the general aging of the
population. The payment rates under the Medicare program for inpatients are
prospective, based upon the diagnosis of a patient. The Medicare payment rate
increases have historically been less than actual inflation. In addition,
numerous states, insurance companies and employers are actively negotiating
discounts to the Company's standard rates. The trend towards increased managed
care, including a shift in payor mix toward health maintenance organizations,
preferred provider organizations and other managed care payors, may also
adversely affect payment rates for the Company's services and the Company's
ability to achieve targeted growth rates in net patient service revenue.

         Both federal and state legislators are continuing to scrutinize the
health care industry for the purpose of reducing health care costs. While the
Company is unable to predict what, if any, future health reform legislation may
be enacted at the federal or state level, the Company expects continuing
pressure to limit expenditures by governmental health care programs. Payments
for Medicare outpatient services provided at acute care hospitals and home
health services historically have been paid based on costs, subject to certain
limits. The Balanced Budget Act of 1997 requires that the payment for those
services be converted to a prospective payment system, which will be phased in
over time. The 1997 Act also includes a managed care option, which could direct
Medicare patients to managed care organizations. Further changes in the Medicare
or Medicaid programs and other proposals to limit health care spending could
have a material adverse impact upon the health care industry and the Company.


                                       39
<PAGE>   41

         The Company's acute care hospitals, like most acute care hospitals in
the United States, have significant unused capacity. The result is substantial
competition for patients and physicians. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. The Company expects increased competition and
admission constraints to continue in the future. The ability to respond
successfully to these trends, as well as spending reductions in governmental
health care programs, will play a significant role in determining the hospitals'
ability to maintain their current rate of net revenue growth and operating
margins.

         The Company expects the industry trend from inpatient to outpatient
services to continue due to the increased focus on managed care and advances in
technology. Outpatient revenue of the Company's hospitals was approximately
41.4% and 38.5% of gross patient service revenue for the year ended March 31,
1999 and 1998, respectively.

         The complexity of the Medicare and Medicaid regulations, increases in
managed care, hospital personnel turnover, the dependence of hospitals on
physician documentation of medical records and the subjective judgment involved
complicates the billing and collections of accounts receivable by hospitals.
There can be no assurance that this complexity will not negatively impact the
Company's future cash flow or results of operations.

         The federal government and a number of states are rapidly increasing
the resources devoted to investigating allegations of fraud and abuse in the
Medicare and Medicaid programs. At the same time, regulatory and law enforcement
authorities are taking an increasingly strict view of the requirements imposed
on providers by the Social Security Act and Medicare and Medicaid regulations.
Although the Company believes that it is in material compliance with such laws,
a determination that the Company has violated such laws, or even the public
announcement that the Company was being investigated concerning possible
violations, could have a material adverse effect on the Company.

ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued Statement
133, Accounting for Derivative Instruments and Hedging Activities, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments imbedded in other contracts and
for hedging activities. It requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company does not presently have any
derivative financial instruments and does not believe that this statement will
have a material impact on its financial position or results of operations.


                                       40


<PAGE>   42

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to market risk related to changes in interest rates.
At March 31, 1999, the Company has $103.3 million of long-term debt subject to
variable rates of interest. Based on a hypothetical 1% increase in interest
rates, the potential annualized losses in future pretax earnings would be
approximately $1.0 million.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Information with respect to this item is submitted in a separate section
beginning with page F-1.



                                       41

<PAGE>   43


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE

         None.


PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information concerning directors and executive officers of the Company
is incorporated by reference to the Company's definitive proxy statement ("Proxy
Statement") for the annual meeting of stockholders to be held on August 19,
1999.


ITEM 11. EXECUTIVE COMPENSATION

         Executive compensation information is incorporated by reference to the
Proxy Statement.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

         Security ownership of certain beneficial owners and management
information is incorporated by reference to the Proxy Statement.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information concerning certain relationships and related transactions
of the Company is incorporated by reference to the Proxy Statement.




                                       42
<PAGE>   44


PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         Financial statements and schedules of the Company and its subsidiaries
required to be included in Part II, Item 8 are listed below.

<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
                                                                       FORM 10-K PAGES
                                                                       ---------------
<S>                                                                    <C>
         Report of Independent Public Accountants                          [F-1]
         Consolidated Balance Sheets, March 31, 1999 and 1998              [F-2]
         Consolidated Statements of Operations for the Years               [F-3]
                 Ended March 31, 1999, 1998 and 1997
         Consolidated Statements of Stockholders' Equity for the           [F-4]
                 Years Ended March 31, 1999, 1998 and 1997
         Consolidated Statements of Cash Flows for the Years Ended         [F-5]
                 March 31, 1999, 1998 and 1997
         Notes to Consolidated Financial Statements, March 31, 1999        [F-6]
</TABLE>

         The following financial statement schedule is included as a
separate section of this report.

         Schedule II - Valuation and Qualifying Accounts                   [S-1]


EXHIBITS

         The Exhibits filed as part of the Report on Form 10-K are listed in the
Index to Exhibits immediately following the financial statement schedules.

REPORTS ON FORM 8-K DURING THE LAST QUARTER OF THE YEAR ENDED MARCH 31, 1999.

         The Company filed an 8-K on March 2, 1999, to report two press releases
issued by the Company. One press release issued on February 22, 1999 announced
Robert M. Martin's resignation as Chief Executive Officer and Tom Singleton's
joining the Company as Chief Executive Officer. The second press release issued
on February 23, 1999 announced a reduction in earnings projections for the
fourth quarter and year ended March 31, 1999.

         On January 19, 1999, the Company filed Amendment No. 1 to its Current
Report on Form 8-K/A, containing the financial statements of Memorial Hospital
of Adel and certain pro forma financial information with respect to the Form 8-K
dated November 18, 1998, in connection with the Company's acquisition on October
31, 1998 of the stock of Memorial Hospital of Adel in Adel, Georgia.

         On January 14, 1999, the Company filed an Amendment No. 1 to its
Current Report on Form 8-K/A, containing the financial statements of Crosby
Memorial Hospital and certain pro forma financial information with respect to
the Form 8-K dated November 16, 1998, in connection with the Company's agreement
on October 29, 1998 to lease and purchase Crosby Memorial Hospital in Picayune,
Mississippi.


                                       43




<PAGE>   45

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
New American Healthcare Corporation:

We have audited the accompanying consolidated balance sheets of New American
Healthcare Corporation and subsidiaries (the Company), as of March 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended March
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New American
Healthcare Corporation and subsidiaries as of March 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended March 31, 1999 in conformity with generally accepted
accounting principles.


                                         KPMG Peat Marwick LLP

                                         /s/ KPMG Peat Marwick LLP



Nashville, TN
May 14, 1999

                                      F-1

<PAGE>   46

                    NEW AMERICAN HEALTHCARE CORPORATION
                              AND SUBSIDIARIES

                        Consolidated Balance Sheets

                          March 31, 1999 and 1998

                (In thousands, except per share information)

<TABLE>
<CAPTION>
                                                                                1999          1998
                                                                             ---------      --------
<S>                                                                          <C>               <C>
                ASSETS

Current assets:
    Cash and cash equivalents                                                $   5,971         6,119
    Patient accounts receivable, net of allowance for doubtful accounts
      of $10,005 and $9,172                                                     39,986        21,496
    Other receivables                                                            2,113         1,290
    Inventory                                                                    3,824         2,720
    Prepaid expenses and other current assets                                    2,393         1,409
                                                                             ---------      --------
                Total current assets                                            54,287        33,034

Property and equipment, net                                                    122,199        84,404
Goodwill, net of accumulated amortization of $927 and $298                      41,919        16,672
Other assets                                                                     1,359         1,673
                                                                             ---------      --------
                Total assets                                                 $ 219,764       135,783
                                                                             =========      ========

    LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable and accrued expenses                                       20,014        14,522
    Estimated third party payor settlements                                      7,188         2,681
    Current portion of capital lease obligations                                   447           525
                                                                             ---------      --------
                Total current liabilities                                       27,649        17,728

Capital lease obligations, excluding current portion                             5,499         4,865
Long-term debt                                                                 103,300        37,550
Subordinated notes payable to affiliates                                            --        24,769
Deferred income taxes                                                            1,473         1,339

Redeemable preferred stock - Series A, $.01 par value,
    250 shares authorized and outstanding at March 31, 1998                         --        25,617

Stockholders' equity:
    Preferred stock, Series B, $.01 par value, 235 shares authorized
      and outstanding at March 31, 1998                                             --             2
    Common stock, $.01 par value, 50,000 shares authorized;
      16,172 and 8,406 shares issued and outstanding                               162            84
    Non-voting common stock, $.01 par value:  1,500 shares authorized at
      March 31, 1999, 1,423 and no shares issued and outstanding                    14            --
    Treasury stock, 92 shares of common stock at cost                               (5)           --
    Additional paid-in capital                                                  82,082        24,260
    Common stock warrants                                                          235           235
    Deferred compensation                                                         (507)           --
    Accumulated deficit                                                           (138)         (666)
                                                                             ---------      --------
                Total stockholders' equity                                      81,843        23,915
                                                                             ---------      --------
Commitments, contingencies and subsequent events
                Total liabilities, redeemable preferred stock and
                   stockholders' equity                                      $ 219,764       135,783
                                                                             =========      ========
</TABLE>


See accompanying notes to consolidated financial statements.



                                      F-2

<PAGE>   47

                       NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                      Consolidated Statements of Operations

                    Years ended March 31, 1999, 1998 and 1997

                  (In thousands, except per share information)

<TABLE>
<CAPTION>
                                                                    1999         1998         1997
                                                                  ---------      -------      -------
<S>                                                               <C>             <C>          <C>
Revenues:
   Net patient service revenue                                    $ 167,509       73,725       10,737
   Other revenue                                                      4,331        1,924          350
                                                                  ---------      -------      -------
     Net operating revenues                                         171,840       75,649       11,087

Expenses:
   Salaries and benefits                                             78,020       31,276        4,117
   Professional fees                                                 23,375        8,608          620
   Supplies                                                          19,536        8,314        1,439
   Provision for doubtful accounts                                   13,878        7,837          534
   General and administrative                                         4,132        3,484        1,871
   Transition and other related costs                                   906           --           --
   Other                                                             17,475        9,286        2,377
   Depreciation and amortization                                      6,677        2,836          783
   Interest                                                           6,716        2,637          363
                                                                  ---------      -------      -------
                                                                    170,715       74,278       12,104
                                                                  ---------      -------      -------
     Income (loss) before income taxes and extraordinary item         1,125        1,371       (1,017)

Income taxes                                                            463          579           67
                                                                  ---------      -------      -------
     Income (loss)  before extraordinary item                           662          792       (1,084)

Extraordinary item - loss on early extinguishment of debt
   (net of tax of $89,000)                                              134           --           --
                                                                  ---------      -------      -------
     Net income (loss)                                                  528          792       (1,084)

Cumulative preferred dividend                                           710          617           --
                                                                  ---------      -------      -------
     Net income (loss) attributable to common stockholders        $    (182)         175       (1,084)
                                                                  =========      =======      =======
Net income (loss) per share:
   Basic:
     Continuing operations                                        $   (0.00      $  0.02      $ (0.13)
     Extraordinary item                                               (0.01)          --           --
                                                                  ---------      -------      -------
                                                                  $   (0.01)     $  0.02      $ (0.13)
                                                                  =========      =======      =======
   Diluted:
     Continuing operations                                        $   (0.00)     $  0.01      $ (0.13)
     Extraordinary item                                               (0.01)          --           --
                                                                  ---------      -------      -------
                                                                  $   (0.01)     $  0.01      $ (0.13)
                                                                  =========      =======      =======
Weighted average number of shares and dilutive share
   equivalents outstanding:
     Basic                                                           14,026        8,406        8,406
     Diluted                                                         14,026       13,210        8,406
</TABLE>




See accompanying notes to consolidated financial statements.

                                      F-3

<PAGE>   48
                       NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity

                    Years ended March 31, 1999, 1998 and 1997

                                 (In thousands)
<TABLE>
<CAPTION>
                                                   Preferred              Non-Voting                     Additional
                                                    Stock        Common     Common       Treasury          Paid-in
                                                   Series B       Stock      Stock        Stock            Capital
                                                   --------       -----      -----        -----            -------
<S>                                                <C>            <C>       <C>          <C>               <C>
Balances as of March 31, 1996                        $ --           84         --              --            1,379

   Issuance of 150 shares of
     preferred stock, Series B                          1           --         --              --           14,999

   Net loss                                            --           --         --              --               --
                                                     ----         ----       ----         -------          -------
Balance as of March 31, 1997                            1           84         --              --           16,378

   Issuance of 85 shares of
     preferred stock, Series B                          1           --         --              --            8,499

   Cumulative dividends on
     Series A preferred stock                          --           --         --              --             (617)

   Issuance of common
     stock warrants                                    --           --         --              --               --

   Net income                                          --           --         --              --               --
                                                     ----         ----       ----         -------          -------
Balances as of March 31, 1998                           2           84         --              --           24,260

   Conversion of preferred stock, Series B,
     to common stock                                   (2)          42         --              --              (40)

   Conversion of common stock
     to non-voting common stock                        --          (14)        14              --               --

   Initial public offering of common stock             --           50         --              --           57,963

   Treasury stock                                      --           --         --              (5)              --

   Cumulative dividends on
     Series A preferred stock                          --           --         --              --             (710)

   Deferred compensation associated
     with issuance of stock options, net               --           --         --              --              609

   Amortization of deferred compensation               --           --         --              --               --

   Net income                                          --           --         --              --               --
                                                     ----         ----       ----         -------          -------
Balances as of March 31, 1999                        $ --          162         14              (5)          82,082
                                                     ====         ====       ====         =======          =======
</TABLE>

<TABLE>
<CAPTION>
                                                      Common                                         Total
                                                       Stock       Deferred      Accumulated      Stockholders'
                                                      Warrant     Compensation     Deficit           Equity
                                                      -------     ------------     -------           ------
<S>                                                <C>            <C>       <C>          <C>               <C>
Balances as of March 31, 1996                             --            --             (374)           1,089

   Issuance of 150 shares of
     preferred stock, Series B                            --            --               --           15,000

   Net loss                                               --            --           (1,084)          (1,084)
                                                        ----          ----          -------          -------

Balance as of March 31, 1997                              --            --           (1,458)          15,005

   Issuance of 85 shares of
     preferred stock, Series B                            --            --               --            8,500

   Cumulative dividends on
     Series A preferred stock                             --            --               --             (617)

   Issuance of common
     stock warrants                                      235            --               --              235

   Net income                                             --            --              792              792
                                                        ----          ----          -------          -------

Balances as of March 31, 1998                            235            --             (666)           23,915

   Conversion of preferred stock, Series B,
     to common stock                                      --            --               --               --

   Conversion of common stock
     to non-voting common stock                           --            --               --               --

   Initial public offering of common stock                --            --               --           58,013

   Treasury stock                                         --            --               --               (5)

   Cumulative dividends on
     Series A preferred stock                             --            --               --             (710)

   Deferred compensation associated
     with issuance of stock options, net                  --          (609)              --               --

   Amortization of deferred compensation                  --           102               --              102

   Net income                                             --            --              528              528
                                                        ----          ----          -------          -------
Balances as of March 31, 1999                            235          (507)            (138)          81,843
                                                        ====          ====          =======          =======
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>   49

                       NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                    Years ended March 31, 1999, 1998 and 1997

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                 1999         1998         1997
                                                               --------      -------      -------
<S>                                                            <C>               <C>       <C>
Cash flows from operating activities:
   Net income (loss)                                           $    528          792       (1,084)
   Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
       Depreciation and amortization                              6,677        2,836          783
       Amortization of deferred financing costs                     207          164           75
       Amortization of deferred compensation                        102           --           --
       Provision for doubtful accounts                           13,878        7,837          534
       Deferred tax expense                                         253          241           --
       Amortization of debt discount                                  8            4           --
       Extraordinary loss on early extinguishment of debt           223           --           --
     Changes in operating assets and liabilities, net
         of acquisitions:
         Patient accounts receivable                            (24,956)     (13,715)      (1,593)
         Other receivables                                         (309)        (626)        (234)
         Inventory                                                 (480)        (185)          96
         Prepaid expenses and other current assets                  (74)           2         (102)
         Other assets                                                91         (303)         (62)
         Accounts payable and accrued expenses                     (377)       5,159         (513)
         Estimated third party payor settlements                  4,640        1,544        1,351
                                                               --------      -------      -------
               Net cash provided by (used in) operating
                 activities                                         411        3,750         (749)
                                                               --------      -------      -------
Cash flows from investing activities:
   Purchase of property and equipment                           (13,010)      (2,945)        (261)
   Sale of property                                                 273          167           --
   Cash paid for acquisitions                                   (59,204)     (89,744)     (14,004)
   Deferred acquisition costs                                       (57)          --         (242)
                                                               --------      -------      -------
               Net cash used in investing activities            (71,998)     (92,522)     (14,507)
                                                               --------      -------      -------

Cash flows from financing activities:
   Proceeds from the issuance of long-term debt                  80,250       64,069          750
   Repayment of long-term debt                                  (14,500)      (2,500)          --
   Repayment of notes payable to affiliates                     (25,000)          --           --
   Repayment of capital lease obligations                          (605)        (680)        (197)
   Issuance of common stock warrant                                  --          235           --
   Issuance of common stock                                      58,013           --           --
   Issuance (repayment) of redeemable preferred stock           (26,327)      25,000           --
   Issuance of preferred stock                                       --        8,500       15,000
   Purchase of treasury stock                                        (5)          --           --
   Deferred financing costs                                        (387)        (430)        (686)
                                                               --------      -------      -------
               Net cash provided by financing activities         71,439       94,194       14,867
                                                               --------      -------      -------
               Net increase (decrease) in cash                     (148)       5,422         (389)

Cash and cash equivalents at beginning of period                  6,119          697        1,086
                                                               --------      -------      -------
Cash and cash equivalents at end of period                     $  5,971        6,119          697
                                                               ========      =======      =======

Supplemental disclosure of cash flow information:
   Cash paid during the period for interest                    $  5,693        1,891           79
   Cash paid during the period for income taxes                     408          204           --
                                                               ========      =======      =======
Noncash investing and financing activities:
   Assets and liabilities assumed in hospital acquisitions:
     Receivables                                               $ 11,715       13,788        1,200
     Inventory                                                      566        2,186          443
     Prepaid expense and other assets                               964        1,137          114
     Accounts payable and accrued expenses                       (4,568)      (8,067)      (2,080)
     Estimated third-party payor settlements                       (108)         213           --
     Capital lease obligations                                   (1,161)      (5,275)        (669)
   Capital lease obligations incurred to acquire equipment           --          275           --
</TABLE>


See accompanying notes to consolidated financial statements.





                                      F-5
<PAGE>   50

                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)

(1)      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (A)      DESCRIPTION OF BUSINESS

              New American Healthcare Corporation (the Company) acquires and
              operates acute care hospitals throughout the United States. The
              Company was formed to capitalize on opportunities to be the
              principal provider of quality, cost-effective health care services
              in the non-urban communities in which it operates. The Company
              operates eleven acute care hospitals located in nine states. The
              Company's hospitals offer a wide range of inpatient and outpatient
              medical and surgical services and also provide other health care
              services, including general and geriatric psychiatry,
              rehabilitation, and occupational medicine. As part of developing a
              community health care delivery system, the Company's hospitals
              also operate satellite clinics. All of the Company's hospitals are
              accredited by either the Joint Commission on Accreditation of
              Healthcare Organizations (JCAHO), the American Osteopathic
              Association (AOA) or both.

         (B)      PRINCIPLES OF CONSOLIDATION

              The consolidated financial statements include the financial
              statements of New American Healthcare Corporation and all
              wholly-owned subsidiaries. All significant intercompany
              transactions and balances have been eliminated in the
              consolidation.

         (C)      USE OF ESTIMATES

              Management of the Company has made a number of estimates and
              assumptions relating to the reporting of assets and liabilities
              and the disclosure of contingent assets and liabilities and the
              reported amounts of revenues and expenses to prepare these
              consolidated financial statements in conformity with generally
              accepted accounting principles. Actual results could differ from
              those estimates.

         (D)      CASH AND CASH EQUIVALENTS

              The Company considers all highly liquid investments with
              maturities of three months or less when purchased to be cash
              equivalents. The Company generally invests its excess cash in U.S.
              Government securities and U.S. Government agency instruments.

         (E)      PATIENT ACCOUNTS RECEIVABLE

              Patient accounts receivable consists of amounts owed by various
              governmental agencies, insurance companies and patients. The
              Company regularly reviews its accounts receivable to provide an
              appropriate allowance for uncollectable accounts.


                                                                     (Continued)




                                      F-6
<PAGE>   51
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


         (F)      INVENTORY

              Inventory is composed primarily of drugs and medical supplies and
              is stated at the lower of cost, determined on a first-in,
              first-out basis, or market.

         (G)      PROPERTY AND EQUIPMENT

              Property and equipment are recorded at cost. Routine maintenance
              and repairs are charged to expense as incurred. Expenditures for
              major improvements that extend useful lives or increase values are
              capitalized. Equipment under capital leases is stated at the
              present value of the minimum lease payments. Depreciation is
              computed on a straight-line basis over the estimated useful life
              of each class of depreciable assets as follows: land improvements
              - 10 years; buildings and improvements - 20 to 40 years; equipment
              and fixtures - 4 to 20 years. Equipment under capital leases is
              amortized using the straight-line method over the shorter of the
              lease term or the estimated useful life of the equipment. Such
              amortization is included in depreciation and amortization in the
              accompanying consolidated financial statements.

         (H)      GOODWILL AND OTHER ASSETS

              Goodwill represents the excess of purchase price over the fair
              value of net assets acquired. Amortization is provided on a
              straight-line basis over the estimated useful life of 40 years.
              Other assets consist primarily of deferred financing costs and
              non-compete agreements. Deferred financing costs incurred in
              conjunction with the revolving credit agreement are being
              amortized on a straight-line basis over the life of the agreement.
              The non-compete agreements are amortized over the two-year life of
              the related contracts.

              The Company periodically reviews the recoverability of its
              intangible assets. Recoverability of intangibles is determined
              based on the undiscounted future operating cash flows from the
              related hospital. The amount of impairment, if any, is measured
              based on discounted future operating cash flows using a discount
              rate reflecting the Company's average cost of funds or based on
              the fair value of the related hospital.

         (I)      IMPAIRMENT OF LONG-LIVED ASSETS

              Long-lived assets are reviewed for impairment whenever events or
              changes in circumstances indicate that the carrying amount of an
              asset may not be recoverable. Recoverability of assets to be held
              and used is measured by comparison of the carrying amount of an
              asset to future net cash flows expected to be generated by the
              asset. If such assets are considered to be impaired, the



                                                                     (Continued)



                                      F-7
<PAGE>   52
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


              impairment to be recognized is measured as the amount by which the
              carrying amount of the assets exceeds the fair value of the
              assets.

         (J)      NET PATIENT SERVICE REVENUE

              Net patient service revenue is reported at the estimated net
              realizable amounts from patients, third-party payors and others
              for services rendered, including estimated retroactive adjustments
              under reimbursement agreements with third-party payors.
              Retroactive adjustments are accrued on an estimated basis in the
              period the related services are rendered and adjusted in future
              periods as final settlements are determined.

         (K)      INCOME TAXES

              Income taxes are accounted for under the asset and liability
              method. Deferred tax assets and liabilities are recognized for the
              future tax consequences attributable to differences between the
              financial statement carrying amounts of existing assets and
              liabilities and their respective tax bases. Deferred tax assets
              and liabilities are measured using enacted tax rates expected to
              apply to taxable income in the years in which those temporary
              differences are expected to be recovered or settled. The effect on
              deferred tax assets and liabilities of a change in tax rates is
              recognized as income in the period that includes the enactment
              date.

         (L)      STOCK OPTION PLAN

              The Company accounts for its compensation and stock option plan in
              accordance with the provisions of Statement of Financial
              Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
              Compensation. For options issued to employees, SFAS No. 123 allows
              entities to apply the provision of Accounting Principles Board
              ("APB") Opinion No. 25, Accounting for Stock Issued to Employees.
              As such, compensation expense would be recorded on the date of
              grant only if the fair value of the underlying stock exceeded the
              exercise price. The Company provides pro forma net income (loss)
              and pro forma earnings (loss) per share disclosures for employee
              stock option grants made in 1996 and future years as if the
              fair-value-based method defined in SFAS No. 123 had been applied.

         (M)      EARNINGS PER SHARE

              Basic earnings per share is computed based on the weighted average
              shares outstanding and excludes any potential dilution. Diluted
              earnings per share reflects the potential dilution from the
              exercise or conversion of all dilutive securities into common
              stock based on the average market price of common stock
              outstanding during the period.



                                                                     (Continued)


                                      F-8
<PAGE>   53
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


         (N)      ACCOUNTING PRONOUNCEMENTS

              Effective April 1, 1998, the Company adopted SFAS No. 130,
              Reporting Comprehensive Income. Comprehensive income generally
              includes all changes to equity during a period excluding those
              resulting from investments by stockholders and distributions to
              stockholders. Net income was the same as comprehensive income for
              all periods presented.

         (O)      FINANCIAL INSTRUMENTS

              The Company has financial instruments consisting of cash and cash
              equivalents, patient accounts receivable, accounts payable, and
              long-term debt. The fair value of the Company's financial
              instruments based on current market indicators approximates their
              carrying amount.

         (P)      RECLASSIFICATIONS

              Certain prior year amounts have been reclassified to conform to
              the current year presentation.


(2)      NET PATIENT SERVICE REVENUE

         The Company has agreements with third-party payors that provide for
         payments to the Company at amounts different from its established
         rates. A summary of the payment arrangements with major third-party
         payors follows:

         (A)      MEDICARE

              Inpatient acute care services rendered to Medicare program
              beneficiaries are paid at prospectively determined rates per
              discharge. These rates vary according to a patient classification
              system that is based on clinical, diagnostic, and other factors.
              Inpatient nonacute services and certain outpatient services
              related to Medicare beneficiaries are paid based on a cost
              reimbursement methodology. The Company is reimbursed for cost
              reimbursable items at a tentative rate with final settlement
              determined after submission of an annual cost report by the
              Company and audit thereof by the Medicare fiscal intermediary. The
              Company's classification of patients under the Medicare program
              and the appropriateness of their admission are subject to an
              independent review by a peer review organization under contract
              with the Company.



                                                                     (Continued)


                                      F-9
<PAGE>   54
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


         (B)      MEDICAID

              The Company operates under Medicaid programs in nine states which
              generally provide that inpatient services rendered to Medicaid
              beneficiaries are paid at prospectively determined rates per day
              for a covered period of days. Certain outpatient services are
              reimbursed based upon a cost reimbursement methodology. Final
              reimbursement rates and amounts for these services will be
              determined after submission of annual cost reports by the Company
              and audits by third-party intermediaries. Other outpatient
              services are reimbursed based on a fee schedule.

         (C)      OTHER

              The Company has also entered into payment agreements with certain
              insurance carriers, health maintenance organizations, and
              preferred provider organizations. The basis for payment to the
              Company under these agreements includes prospectively determined
              rates per discharge, discounts from established charges, and
              prospectively determined daily rates.

              Final determination of amounts earned under the Medicare and
              Medicaid programs often occur in subsequent years because of
              audits by the programs, rights of appeal and the application of
              numerous technical provisions.

         (D)      BUSINESS AND CREDIT CONCENTRATIONS

              In the course of providing health care services through its
              inpatient and outpatient care facilities, the Company grants
              credit to patients and generally does not require collateral or
              other security in extending credit; however, it routinely obtains
              assignment of (or is otherwise entitled to receive) patients'
              benefits payable under their health insurance programs, plans or
              policies (e.g., Medicare, Medicaid, Blue Cross, health maintenance
              organizations, preferred provider organizations and commercial
              insurance policies).

              As of March 31, 1999 and 1998, the Company had net receivables
              from Medicare of $13,102 and $8,641 and from Medicaid of $5,162
              and $6,563, respectively. Approximately 52%, 63% and 47% of net
              patient service revenues are from participation in the Medicare
              and state sponsored Medicaid programs for the years ended March
              31, 1999, 1998 and 1997, respectively.



                                                                     (Continued)



                                      F-10
<PAGE>   55
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


(3)      ACQUISITIONS

         During the years ended March 31, 1999 and 1998, the Company acquired
         the following hospitals:

<TABLE>
<CAPTION>
              Hospital                          Effective Date             Location
       -----------------------------------------------------------------------------------------
<S>                                             <C>                        <C>
       1999:
          Puget Sound Hospital                  September 1, 1998          Tacoma, Washington
          Crosby Memorial Hospital              November 1, 1998           Picayune, Mississippi
          Memorial Hospital of Adel             November 1, 1998           Adel, Georgia

       1998:
          Memorial Hospital of Center           May 1, 1997                Center, Texas
          Delta Medical Center                  May 16, 1997               Memphis, Tennessee
          Dolly Vinsant Hospital                August 1, 1997             San Benito, Texas
          Woodland Park Hospital(a)             February 1, 1998           Portland, Oregon
          Eastmoreland Hospital(a)              February 1, 1998           Portland, Oregon
          Lander Valley Medical Center(a)       February 1, 1998           Lander, Wyoming
          Davenport Medical Center(a)           February 1, 1998           Davenport, Iowa
</TABLE>
         ------------

         (a) Hospitals were acquired in a single transaction for a total
         purchase price of $57,000.

         The Company has acquired hospitals primarily in exchange for cash and
         assumption of associated liabilities for the years ended March 31, as
         follows:

<TABLE>
<CAPTION>
                                                             1999           1998
                                                            -------         ------

<S>                                                         <C>             <C>
             Purchase price                                 $59,204         90,000
             Add:  liabilities assumed                        5,837         13,342
             Less:  assets acquired                          43,886         87,916
                                                            -------         ------
             Costs in excess of net assets acquired         $21,155         15,426
                                                            =======         ======
</TABLE>

       The acquisitions were accounted for as purchases and the accompanying
       consolidated financial statements include the results of their operations
       from the respective dates of the acquisitions.

       The following unaudited pro forma results of operations for the years
       ended March 31, 1999 and 1998 give effect to the acquisitions as if the
       respective transactions had occurred as of April 1, 1997. The unaudited
       pro forma results are not necessarily indicative of what actually might
       have occurred if the acquisitions had been completed as of April 1, 1997.
       In addition, they are not intended to be a projection of future results
       of operations and do not reflect any of the synergies that might be
       achieved in hospital operations.



                                                                     (Continued)


                                      F-11
<PAGE>   56
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


<TABLE>
<CAPTION>
                                                                       1999              1998
                                                                    ---------          --------

<S>                                                                 <C>                 <C>
             Net revenues                                           $ 205,686           209,211
             Net loss attributable to common stockholders                (421)             (505)
             Pro forma net loss per share-basic and diluted              (.03)             (.06)
                                                                    =========          ========
</TABLE>

(4)      PROPERTY AND EQUIPMENT

         A summary of property and equipment as of March 31, is as follows:

<TABLE>
<CAPTION>
                                                                      1999           1998
                                                                    --------         ------
<S>                                                                 <C>               <C>
             Land                                                   $  8,868          7,249
             Land improvements                                           697            545
             Buildings and improvements                               81,970         60,919
             Equipment and fixtures                                   33,866         18,314
             Leasehold improvements                                    2,841            144
             Construction in process                                   2,134             --
                                                                    --------         ------
                                                                     130,376         87,171
             Less accumulated depreciation and amortization            8,177          2,767
                                                                    --------         ------
                                                                    $122,199         84,404
                                                                    ========         ======
</TABLE>

         Included in buildings and improvements and equipment and fixtures are
         buildings and equipment held under capital leases of $7,204 and $5,698
         as of March 31, 1999 and 1998, respectively. Related accumulated
         amortization was $1,654 and $630 as of March 31, 1999 and 1998,
         respectively.

(5)      LEASE OBLIGATIONS

         The Company leases various equipment and one hospital under lease
         agreements that have been capitalized and office space under a
         noncancellable operating lease. A summary of future minimum lease
         payments and the present value of future minimum lease payments for the
         capitalized leases and payments due under the operating leases as of
         March 31, 1999, is as follows:



                                                                     (Continued)



                                      F-12
<PAGE>   57
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


<TABLE>
<CAPTION>
                                                                          CAPITAL        OPERATING
                                                                          -------        ---------
<S>                                                                       <C>            <C>
                Year ending March 31,
                           2000                                           $   890          2,884
                           2001                                               737          2,107
                           2002                                               602          1,814
                           2003                                               573          1,576
                           2004                                               573          1,271
                           Thereafter                                      14,990            787
                                                                          -------         ------
                                                                           18,365         10,439
                                                                                          ======
             Less:  Interest at rates ranging from 4.4% to 15.0%           12,419
                                                                           ------
             Capital lease obligations                                      5,946
             Less:  Current portion                                           447
                                                                           ------
             Capital lease obligations, excluding current portion         $ 5,499
                                                                           ======
</TABLE>


         Rent expense was approximately $3,133, $1,202 and $161 for the years
         ended March 31, 1999, 1998 and 1997, respectively.

(6)      LONG-TERM DEBT

         On January 30, 1998, the Company amended and restated its revolving
         credit agreement originally entered into on September 30, 1996 with a
         consortium of banks to provide funding for acquisitions of health care
         facility businesses and for general corporate purposes including
         working capital. The credit agreement had a revolving credit limit of
         $132,500. Borrowings under the facility bore interest of (i) a base
         rate equal to the greater of the Prime Rate or the Federal Funds rate,
         plus in either case, a margin of up to 1% or (ii) London Interbank
         Offered Rate as of the date of borrowing plus a margin of up to 2.5%.
         The applicable margin was determined by a ratio of indebtedness to
         EBITDA, as defined in the Credit Agreement, calculated on a monthly
         basis. On October 27, 1998, the Company amended and restated its
         revolving credit agreement such that borrowings bear interest of (i) a
         base rate equal to the greater of the Prime Rate or the Federal Funds
         rate, plus in either case, a margin of up to .75% or (ii) London
         Interbank Offered Rates as of the date of borrowing plus a margin of up
         to 2%. The credit agreement requires interest only payments until
         December 31, 2001, at which time the initial commitment is gradually
         reduced until September 30, 2003 when the commitment is zero. As of
         March 31, 1999 and 1998, the Company had outstanding borrowings under
         the Credit Agreement totaling $103,300 and $37,550, bearing interest at
         a rate of 7.07% at March 31, 1999. The revolving credit facility is
         secured by substantially all of the Company's assets. The credit
         agreement contains



                                                                     (Continued)



                                      F-13
<PAGE>   58
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


         limitations on the Company's ability to incur additional indebtedness,
         sell material assets, retire, redeem or otherwise reacquire its capital
         stock, and pay dividends. The credit agreement also requires the
         Company to maintain specified levels of net worth and meet certain
         covenants and ratios.

         Commitment fees between 0.25% and 0.38% were charged on the unused
         portion of the revolving credit facility. Total commitment fees during
         the years ended March 31, 1999, 1998 and 1997 were $264, $349 and $209,
         respectively, and are included in interest expense in the accompanying
         consolidated statements of operations.

         On January 30, 1998, WCAS Capital Partners III, L.P., an affiliate of a
         principal shareholder of the Company, issued subordinated debt to the
         Company in the amount of $25,000. The subordinated debt bore interest
         at a rate of 10.0% and was paid off in August 1998 in conjunction with
         the Company's initial public offering. The debt was issued at a
         discount of $235 related to the fair value of the associated common
         stock warrant. Such discount was written off and is reflected as an
         extraordinary loss on the early extinguishment of debt in the
         accompanying consolidated statements of operations.

         The aggregate maturities of long-term debt as of March 31, 1999 are as
         follows:

<TABLE>
<S>                                        <C>
             2000                          $     --
             2001                                --
             2002                                --
             2003                            45,800
             2004                            57,500
             Thereafter                          --
                                           --------
                                           $103,300
                                           ========
</TABLE>

       On May 14, 1999, the Company amended and restated its revolving credit
       agreement. The credit agreement has a revolving credit limit of $116,000.
       Borrowings under the facility bear interest of (i) a base rate equal to
       the greater of the Prime Rate or the Federal Funds rate, plus in either
       case, a margin of up to 2.75% or (ii) London Interbank Offered Rate as of
       the date of borrowing plus a margin of up to 4%. The applicable margin is
       determined by a ratio of indebtedness to EBITDAR, as defined in the
       Credit Agreement, calculated on a monthly basis. The facility is due and
       payable November 30, 2002, with a required permanent reduction of $12,000
       and $8,000 by October 31, 1999 and 2000, respectively. Additionally, the
       Company is required to pay down outstanding indebtedness upon the sale of
       any facilities and beginning with the year ended March 31, 2000, by the
       amount of any excess cash flow for the year, as defined within the
       agreement, less $4,000 of cash and cash equivalents to be maintained by
       the Company.



                                                                     (Continued)



                                      F-14
<PAGE>   59
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


(7)      REDEEMABLE PREFERRED STOCK

         Redeemable preferred stock consisted of 250 authorized shares of Series
         A non-convertible cumulative preferred, $.01 par value (Series A
         preferred stock). The Company issued the 250 shares of Series A
         preferred stock in 1998 for $25,000. The proceeds were used to finance
         hospital acquisitions. The Series A preferred stock was entitled to
         dividends equaling $7.00 per share per annum. The Company redeemed for
         cash the Series A preferred stock at its face value of $100 per share
         plus unpaid dividends in August 1998 in conjunction with the Company's
         initial public offering.

(8)      STOCKHOLDERS' EQUITY

         (A)      REINCORPORATION

              On August 20, 1998, the Company reincorporated as a Delaware
              corporation pursuant to a merger of New American Healthcare
              Corporation, a Tennessee corporation, with and into a newly
              created Delaware corporation. The name of the surviving entity is
              New American Healthcare Corporation. As a result of the merger,
              the Company increased the authorized number of shares of Common
              Stock from 20,000 to 50,000 and created a class of Non-Voting
              Common Stock with 1,500 authorized shares, caused all outstanding
              Series B Preferred Stock to be exchanged for Common Stock and
              Non-Voting Common Stock, and caused all outstanding shares of
              Series A Preferred Stock and accrued dividends to be redeemed for
              cash. As a result of the Reincorporation, each share of common
              stock in the Tennessee corporation was converted into 1.0473
              shares of common stock. All prior periods have been restated.

         (B)      INITIAL PUBLIC OFFERING OF COMMON STOCK

              On August 20, 1998, the Company completed its initial public
              offering of common stock. In connection with the offering, the
              Series B preferred stock was converted into 1,423 and 2,766 shares
              of non-voting and voting common stock, respectively. The net
              proceeds from the offering were used to redeem the outstanding
              balance of the Series A redeemable preferred stock plus accrued
              dividends, repay the Subordinated notes payable to affiliates, and
              reduce the balance of the revolving credit agreement.

         (C)      PREFERRED STOCK

              Preferred stock consisted of Series B convertible preferred
              (Series B preferred stock). The Series B preferred stock was not
              entitled to a dividend unless a dividend was declared for the
              common stock. The Series B preferred stock was converted to common
              stock in connection with the Company's initial public offering as
              discussed above.



                                                                     (Continued)



                                      F-15
<PAGE>   60
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


              The Company issued 85 and 150 shares of Series B Preferred stock
              for $8,500 and $15,000 in 1998 and 1997, respectively. The
              proceeds were used to finance hospital acquisitions.

         (D)      STOCK OPTIONS

              In 1996, the Company adopted a stock option plan (the Plan)
              pursuant to which the Company has reserved 2,199 shares of common
              stock for stock option grants to directors, key employees and
              shareholders with exercise prices equal to the estimated fair
              market value of the Company's common stock on the date of grant.
              Stock options generally vest ratably over a period of five years
              and are exercisable for ten years from grant date. As of March 31,
              1999, there were approximately 706 shares available for grant
              under the Plan.

              The per share weighted-average fair value of stock options granted
              during the years ended March 31, 1999, 1998 and 1997 was $2.35,
              $0.82 and $0.86, respectively, for options issued with an exercise
              price equal to fair market value on the date of grant using the
              Black Scholes option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
                                                            1999             1998            1997
                                                            ----             ----            ----
<S>                                                    <C>               <C>                 <C>
                 Expected volatility                      0% to 30%                0%           0%
                 Risk-free interest rates              5.0% to 5.6%      5.5% to 6.0%         5.5%
                 Expected lives, in years                        4                 4            4
                 Expected dividend yield                         0%                0%           0%
</TABLE>


              The per share weighted average fair market value for stock options
              granted during the year ended March 31, 1999 for options issued
              with exercise prices below fair market value using the same
              assumptions noted above was $4.61.

              The Company applies the intrinsic value method as defined by APB
              Opinion No. 25 in accounting for its Plan and, accordingly, other
              than deferred compensation discussed below, no compensation cost
              has been recognized for its stock options in the accompanying
              consolidated financial statements. Had the Company determined
              compensation cost based on the fair value at the grant date for
              its stock options under SFAS No. 123, the Company's net income
              (loss) and earnings per share would have been as follows:



                                                                     (Continued)



                                      F-16
<PAGE>   61
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


<TABLE>
<CAPTION>
                                  NET INCOME (LOSS)    BASIC EPS    DILUTED EPS
                                  -----------------    ---------    -----------

<S>                               <C>                  <C>          <C>
             1999   As reported         (182)           (0.01)        (0.01)
                    Pro forma           (436)           (0.03)        (0.03)

             1998   As reported          175             0.02          0.01
                    Pro forma            152             0.02          0.01

             1997   As reported       (1,084)           (0.13)        (0.13)
                    Pro forma         (1,112)           (0.13)        (0.13)
</TABLE>



              Stock option activity is as follows:

<TABLE>
<CAPTION>
                                                                  WEIGHTED-
                                                                   AVERAGE
                                                   NUMBER OF      EXERCISE
                                                    SHARES          PRICE
                                                    ------          -----
<S>                                               <C>             <C>
             Balance as of March 31, 1996             --              --
                   Granted                            52            4.13
                   Forfeited                          --              --

             Balance as of March 31, 1997             52            4.13
                  Granted                            138            4.13
                  Forfeited                          (12)           4.13
                                                  ------          ------

             Balance as of March 31, 1998            178            4.13
                  Granted                          1,801            8.40
                  Forfeited                         (164)          10.52
                   Canceled                         (322)           6.73
                                                  ------          ------
             Balance as of March 31, 1999          1,493          $ 8.02
                                                  ======          ======
</TABLE>

              As of March 31, 1999, the number of options exercisable was 282
              and the weighted-average exercise price was $6.87. As of March 31,
              1999, the weighted-average exercise price and the weighted-average
              remaining contractual life of outstanding options was $8.02 and
              9.4 years, respectively.



                                                                     (Continued)


                                      F-17
<PAGE>   62
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


         (E)      DEFERRED COMPENSATION

              In April and May 1998, the Company issued options to purchase 389
              shares of common stock that had exercise prices below the fair
              market value of the common stock at the time of issuance. This
              resulted in the Company recording $2,417 of deferred compensation
              that is being amortized over the five-year vesting period. In
              August 1998, the Company cancelled 322 of such options, which
              resulted in the reversal of $1,808 of deferred compensation
              related to such options.

         (F)      RECONCILIATION OF PRO FORMA INCOME PER SHARE CALCULATION

              The following is a reconciliation of the numerators and
              denominators of the basic and diluted earnings per share
              computations for net earnings for the years ended March 31, as
              follows:

<TABLE>
<CAPTION>
                                                                                   1999              1998
                                                                                 --------          --------
<S>                                                                              <C>               <C>
             Numerator:
                Income from operations before extraordinary item                 $    662          $    792
                Cumulative preferred dividends                                       (710)             (617)
                                                                                 --------          --------
                   Continuing operations                                              (48)              175

                Extraordinary item                                                   (134)               --
                                                                                 ========          ========
                   Net income (loss) attributable to common shareholders             (182)              175
                                                                                 ========          ========

             Denominator:
                Denominator for basic earnings per share -
                   Weighted-average shares outstanding                             14,026             8,406
                                                                                 --------          --------
                Effect of dilutive securities
                   Stock options                                                       --               166
                   Warrants                                                            --               449
                   Series B preferred stock                                            --             4,189
                                                                                 ========          ========
             Denominator for diluted earnings per share                            14,026            13,210
                                                                                 ========          ========
</TABLE>


              For the year ended March 31, 1999, all options and warrants to
              purchase common stock and convertible preferred stock have been
              excluded from the computation of diluted EPS because they are
              antidilutive.



                                                                     (Continued)



                                      F-18
<PAGE>   63
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


         (G)      WARRANT

              In connection with the subordinated debt discussed in note 6, the
              Company issued a warrant to purchase up to 592 shares of common
              stock at $4.13 per share. The warrant expires January 30, 2008.

(9)      RETIREMENT PLAN

         The Company sponsors a 401(k) plan for its employees. All employees who
         have been employed at least six months and are at least 20 1/2 years of
         age are eligible for the plan. The Company may match employee
         contributions at the discretion of the Board of Directors. Total 401(k)
         plan expense for the years ended March 31, 1999, 1998, and 1997 was
         $59, $115 and $30, respectively.

(10)     INCOME TAXES

         The components of income tax expense for the years ended March 31,
         1999, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                           1999
                                          --------------------------------------
                                          CURRENT        DEFERRED          TOTAL
                                          -------        --------          -----
<S>                                       <C>            <C>               <C>
             Federal                       $ --             414             414
             State                          210            (161)             49
                                           ----            ----             ---
                                           $210             253             463
                                           ====            ====             ===
</TABLE>

<TABLE>
<CAPTION>
                                                           1998
                                          --------------------------------------
                                          CURRENT        DEFERRED          TOTAL
                                          -------        --------          -----
<S>                                       <C>            <C>               <C>
             Federal                       $248             239             486
             State                           90               2              93
                                           ----            ----             ---
                                           $338             241             579
                                           ====            ====             ===
</TABLE>



                                                                     (Continued)


                                      F-19
<PAGE>   64
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)




<TABLE>
<CAPTION>
                                                           1997
                                          --------------------------------------
                                          CURRENT        DEFERRED          TOTAL
                                          -------        --------          -----
<S>                                       <C>            <C>               <C>
             Federal                       $ --              --              --
             State                           67              --              67
                                           ----            ----             ---
                                           $ 67              --              67
                                           ====            ====             ===
</TABLE>


       The actual income tax expense differs from the "expected" tax expense
       (computed by applying the U.S. federal corporate income tax rate of 34%
       to earnings before income taxes) as a result of the following:

<TABLE>
<CAPTION>
                                                            1999    1998     1997
                                                            ----     ---     ----
<S>                                                         <C>      <C>     <C>
             Computed "expected" tax expense                $383     466     (346)
             Increase (reduction) in income taxes
                 resulting from:
                    State income taxes, net of federal
                        income tax benefit                    32      61        4
                    Nondeductible goodwill amortization       40      47       --
                    Change in valuation allowance             --      --      436
                    Other                                      8       5      (27)
                                                            ----     ---     ----
                                                            $463     579       67
                                                            ====     ===     ====
</TABLE>

       The tax effects of temporary differences that give rise to significant
       portions of the deferred tax asset as of March 31, 1999 and 1998, are
       presented below:



                                                                     (Continued)



                                      F-20
<PAGE>   65
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


<TABLE>
<CAPTION>
                                                                                        1999               1998
                                                                                       -------             -----
<S>                                                                                    <C>                <C>
             Deferred tax assets:
                 Allowance for doubtful accounts                                           132               390
                 Accrued vacation                                                          286               275
                 AMT credit carryover                                                      263               248
                 Operating loss carryforward                                             3,239               123
                 Deferred costs due to differences in amortization and
                    write-off for tax purposes                                              --                74
                 Other                                                                      --               163
                                                                                       -------             -----
                      Deferred tax assets                                                3,920             1,273

                 Less valuation allowance                                                 (576)               --
                                                                                       -------             -----
                      Net deferred tax assets                                            3,344             1,273
                                                                                       -------             -----

             Deferred tax liability:
                  Property and equipment, principally due to differences in
                    depreciation                                                         4,050             1,813

                   Other                                                                    86                --
                                                                                       -------             -----
                  Deferred tax liabilities                                               4,136             1,813
                                                                                       -------             -----
                      Net deferred tax liability                                       $   792               540
                                                                                       =======             =====
</TABLE>

       There was a change in the valuation allowance of $576 and ($578) for the
       years ended March 31, 1999 and 1998, respectively. The valuation
       allowance as of March 31, 1997 was charged to goodwill in connection with
       the acquisition of one of the Company's hospitals. The ultimate
       realization of the deferred tax assets related to the loss carryforwards
       is dependent upon the generation of future taxable income during the
       periods in which those deductible carryovers may be utilized. Management
       considers the scheduled reversal of deferred tax liabilities, projected
       future taxable income, and tax planning strategies in making this
       assessment. In order to fully realize the deferred tax asset related to
       the net operating loss carryforwards, the Company will need to generate
       future taxable income of approximately $6,400 prior to the expiration of
       the net operating loss carryforwards in 2012.

       As of March 31, 1999, the Company had approximately $6,400 of net
       operating loss carryforwards that begin to expire in 2011. The Company
       also generated an alternative minimum tax



                                                                     (Continued)



                                      F-21
<PAGE>   66
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


         net operating loss of approximately $2,700 in the fiscal year ended
         March 31, 1999. Approximately $1,200 of the alternative
         minimum tax net operating loss was carried back to prior years, which
         resulting in a refund of approximately $230 of alternative minimum tax
         paid in 1998. Included in prepaid expenses and other current assets at
         March 31, 1999 and 1998, respectively is $681 and $799 of current
         deferred tax assets.


(11)     TRANSITION AND OTHER RELATED COSTS

         Transition and other related costs include $906 of one-time charges
         relating to the transition of the Company's new chief executive
         officer.




                                                                     (Continued)





                                      F-22
<PAGE>   67
                      NEW AMERICAN HEALTHCARE CORPORATION
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                    Years ended March 31, 1999, 1998 and 1997

        (Dollars and shares in thousands, except per share information)


(12)     CONTINGENCIES

         (A)      LIABILITY INSURANCE

              The Company is insured for professional liability based on a
              claims-made policy. Management is aware of no professional
              liability claims whose settlement would have a material adverse
              effect on the Company's financial position, results of operations
              or liquidity.

         (B)      LITIGATION

              The Company is subject to various claims, legal actions and
              regulatory investigations which arise in the ordinary course of
              business, certain of which could be material. In the opinion of
              management, the ultimate resolution of such matters will be
              adequately covered by insurance and will not have a material
              adverse effect on the Company's financial position, results of
              operations or liquidity.




                                      F-23
<PAGE>   68
                          INDEPENDENT AUDITORS REPORT


The Board of Directors and Shareholders
New American Healthcare Corporation

Under date of May 14, 1999, we reported on the consolidated balance sheets of
New American Healthcare Corporation and subsidiaries as of March 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
March 31, 1999, as contained in the year ended March 31, 1999 annual report to
shareholders. These consolidated financial statements and our report thereon
are included in the annual report on Form 10-K for the year ended March 31,
1999. In connection with our audits of the aforementioned consolidated
financial statements, we also audited the related financial statement schedule.
The financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statement schedule based on our audits.

In our opinion, the financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.


                                    KPMG Peat Marwick LLP

                                    /s/ KPMG Peat Marwick LLP


Nashville, Tennessee
May 14, 1999




                                      S-1
<PAGE>   69
Schedule II -- Valuation and Qualifying Accounts

<TABLE>
<CAPTION>
                                                                         ADDITIONS
                                                               -----------------------------
                                              BALANCE AT       CHARGED TO       CHARGED TO                     BALANCE AT
                                              BEGINNING        COSTS AND      OTHER ACCOUNTS    DEDUCTIONS       END OF
                                              OF PERIOD         EXPENSES        DESCRIBE(1)     DESCRIBE(2)      PERIOD
                                              ---------------------------------------------------------------------------
                                                                              (IN THOUSANDS)

<S>                                           <C>              <C>            <C>               <C>            <C>
Year ended March 31, 1997:
   Allowance for doubtful accounts                 --              534            3,032           (2,984)          582

Year ended March 31, 1998:
   Allowance for doubtful accounts                582            7,837            4,761           (4,008)        9,172

Year ended March 31, 1999:
   Allowance for doubtful accounts              9,172           13,878            5,102          (13,045)       10,005
</TABLE>

---------------------------------

(1) Allowances as a result of acquisitions.

(2) Accounts written off, net of recoveries.



                                      S-2
<PAGE>   70


SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                             NEW AMERICAN HEALTHCARE CORPORATION

                             /s/ Thomas W. Singleton
                             ----------------------------------------------
                             By:  Thomas W. Singleton
                                  Chief Executive Officer, President

                             /s/ Timothy S. Hill
                             ----------------------------------------------
                             By:  Timothy S. Hill
                                  Chief Financial Officer, Senior Vice President


Date:    June 28, 1999

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.



<TABLE>
<CAPTION>
Signature                         Title                                                  Date
---------                         -----                                                  ----
<S>                               <C>                                                    <C>
/s/ Paul B. Queally
-----------------------------
Paul B. Queally                   Chairman of the Board, Director                        June 28, 1999

/s/ Thomas W. Singleton
-----------------------------
Thomas W. Singleton               Chief Executive Officer, President,                    June 28, 1999
                                  (Principal Executive Officer), Director
/s/ Dana C. McLendon, Jr.
-----------------------------
Dana C. McLendon, Jr.             Senior Vice President, Chief Administrative            June 28, 1999
                                  Officer, Director
/s/ Richard H. Stowe
-----------------------------
Richard H. Stowe                  Director                                               June 28, 1999

/s/ James B. Hoover
-----------------------------
James B. Hoover                   Director                                               June 28, 1999

/s/ David A. Jensen
-----------------------------
David A. Jensen                   Director                                               June 28, 1999

/s/ Jeptha W. Dalston
-----------------------------
Jeptha W. Dalston                 Director                                               June 28, 1999
</TABLE>






<PAGE>   71

INDEX TO EXHIBITS

     (a)  Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                      DESCRIPTION OF EXHIBITS
-------                     -----------------------
<S>                    <C>  <C>
3.1                    --   Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 3.1
                            to the Registrant's Quarterly Report on form 10-Q for the quarter ended September
                            30,1998).
3.2                    --   Form of Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 to the
                            Registrant's Quarterly Report on form 10-Q for the quarter ended September 30,1998).
4.1                    --   Provisions of Articles of Incorporation defining the rights of security holders. See
                            Exhibit 3.1.
10.1                   --   Form of Executive Non-Compete and Severance Agreements (Incorporated by reference to
                            Exhibit 10.1 to the Registrant's Registration Statement No. 333-57913 on form S-1).
10.2                   --   Lease Agreement dated May 22, 1996 between New American Healthcare Corporation, as
                            Tenant, and James W. Ayers, as Landlord, as amended by First Amendment to Lease dated
                            October 10, 1996 between Highwoods/Forsyth Ltd. Partnership (as successor to James W.
                            Ayers) and New American Healthcare Corporation and further amended by Second Amendment
                            to Lease dated June 10, 1998 between Highwoods/Forsyth Ltd. Partnership (as successor to
                            James W. Ayers) and New American Healthcare Corporation for the office space located in
                            Brentwood, Tennessee (Incorporated by reference to Exhibit 10.2 to the Registrant's
                            Registration Statement No. 333-57913 on form S-1).
10.3                   --   Securities Purchase Agreement dated as of January 30, 1998  among the Registrant and
                            WCAS Capital Partners III, L.P. (Incorporated by reference to Exhibit 10.3 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.4                   --   10% Senior Subordinated Note due January 30, 2008 made by the Registrant in favor of
                            WCAS Capital Partners III, L.P. in the principal amount of $25 million (Incorporated by
                            reference to Exhibit 10.4 to the Registrant's Registration Statement No. 333-57913 on
                            form S-1).
10.6                   --   Stock Subscription Warrant dated January 30, 1998 from the Registrant to WCAS Capital
                            Partners III, L.P. (Incorporated by reference to Exhibit 10.6 to the Registrant's
                            Registration Statement No. 333-57913 on form S-1).
</TABLE>



<PAGE>   72
<TABLE>
<S>                    <C>  <C>
10.7                   --   Securities Purchase Agreement dated as of December 19, 1995 among the Registrant, Welsh,
                            Carson, Anderson & Stowe VII, L.P. and the several other purchasers named in Annex I, as
                            amended (Incorporated by reference to Exhibit 10.7 to the Registrant's Registration
                            Statement No. 333-57913 on form S-1).
10.8                   --   Registration Rights Agreement dated December 19, 1995 by and among the Registrant,
                            Welsh, Carson, Anderson & Stowe VII, L.P. and the several purchasers named in Annex I,
                            as amended (Incorporated by reference to Exhibit 10.8 to the Registrant's Registration
                            Statement No. 333-57913 on form S-1).
10.9                   --   Stockholders Agreement dated December 19, 1995 by and among the Registrant, Welsh,
                            Carson, Anderson & Stowe VII, L.P. and several parties named in Schedule I, as amended
                            (Incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement
                            No. 333-57913 on form S-1).
10.10                  --   Restricted Stock Agreement dated December 19, 1995 by and among the Registrant, Welsh,
                            Carson, Anderson & Stowe VII, L.P., the several other investors named in Annex I and the
                            several individuals named in Annex II (Incorporated by reference to Exhibit 10.10 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.11                  --   Asset Purchase Agreement effective August 1, 1996, between Doctors Hospital -
                            Wentzville, L.P., as Seller, and NAHC of Missouri, Inc., as Buyer (Incorporated by
                            reference to Exhibit 10.11 to the Registrant's Registration Statement No. 333-57913 on
                            form S-1).
10.12                  --   Consulting Agreement dated August 1, 1996 between Jack B. Bailey and New American
                            Healthcare Corporation (Incorporated by reference to Exhibit 10.12 to the Registrant's
                            Registration Statement No. 333-57913 on form S-1).
10.13                  --   Amended and Restated Credit Agreement dated as of January 30, 1998 between New American
                            Healthcare Corporation, Toronto Dominion (Texas), Inc. for itself and as Agent on behalf
                            of the Banks and the Issuing Bank (Incorporated by reference to Exhibit 10.13 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.14                  --   Promissory Note dated January 30, 1998 in the amount of $30,000,000 made by the Company
                            in favor of Toronto Dominion (Texas), Inc (Incorporated by reference to Exhibit 10.14 to
                            the Registrant's Registration Statement No. 333-57913 on form S-1).
10.15                  --   Promissory Note dated January 30, 1998 in the amount of $25,000,000 made by the Company
                            in favor of NationsBank, N.A. (Incorporated by reference to Exhibit 10.15 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.16                  --   Promissory Note dated January 30, 1998 in the amount of $10,000,000 made by the Company
                            in favor of AmSouth Bank of Tennessee (Incorporated by reference to Exhibit 10.16 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
</TABLE>




<PAGE>   73
<TABLE>
<S>                    <C>  <C>
10.17                  --   Promissory Note dated January 30, 1998 in the amount of $15,000,000 made by the Company
                            in favor of Corestates Bank, N.A. (Incorporated by reference to Exhibit 10.17 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.18                  --   Promissory Note dated January 30, 1998 in the amount of $10,000,000 made by the Company
                            in favor of Banque Paribas (Incorporated by reference to Exhibit 10.18 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.19                  --   Promissory Note dated January 30, 1998 in the amount of $12,500,000 made by the Company
                            in favor of First American National Bank (Incorporated by reference to Exhibit 10.19 to
                            the Registrant's Registration Statement No. 333-57913 on form S-1).
10.20                  --   Promissory Note dated January 30, 1998 in the amount of $15,000,000 made by the Company
                            in favor of National City Bank, Kentucky (Incorporated by reference to Exhibit 10.20 to
                            the Registrant's Registration Statement No. 333-57913 on form S-1).
10.21                  --   Promissory Note dated January 30, 1998 in the amount of $15,000,000 made by the Company
                            in favor of BankOne, N.A. (Incorporated by reference to Exhibit 10.21 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.22                  --   Amended and Restated Security Agreement dated January 30, 1998 by and between the
                            Company and Toronto Dominion (Texas), Inc. as Agent (Incorporated by reference to
                            Exhibit 10.22 to the Registrant's Registration Statement No. 333-57913 on form S-1).
10.23                  --   Amended and Restated Stock Pledge Agreement dated as of January 30, 1998 between New
                            American Healthcare Corporation and Toronto Dominion (Texas), Inc. for itself and as
                            Agent on behalf of the Banks and the Issuing Bank (Incorporated by reference to Exhibit
                            10.23 to the Registrant's Registration Statement No. 333-57913 on form S-1).
10.24                  --   Form of Subsidiary Security Agreement dated as of January 30, 1998 between each of the
                            Company's subsidiaries and Toronto Dominion (Texas), Inc. for itself and as Agent on
                            behalf of the Banks and the Issuing Bank (Incorporated by reference to Exhibit 10.24 to
                            the Registrant's Registration Statement No. 333-57913 on form S-1).
10.25                  --   Form of Subsidiary Guaranty dated as of January 30, 1998 between each of the Company's
                            subsidiaries and Toronto Dominion (Texas), Inc. for itself and as Agent on behalf of the
                            Banks and the Issuing Bank (Incorporated by reference to Exhibit 10.25 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.26                  --   Stock Purchase Agreement effective May 1, 1997 among Larry F. McFall, Phil Sanderson,
                            D.L. Patterson, Charles F. Daniel, Sam C. Yeager, Mack R. Choplin, David R. Carver and
                            Timothy L. Yeager, as Shareholders, Southeastern Hospital Corporation, Park Healthcare
                            Company
</TABLE>



<PAGE>   74
<TABLE>
<S>                    <C>  <C>
                            (Southeastern and Park, as Sellers) and New American Healthcare Corporation with
                            respect to the stock of Center Hospital, Inc. d/b/a Memorial Hospital of Center
                            (Incorporated by reference to Exhibit 10.26 to the Registrant's Registration Statement
                            No. 333-57913 on form S-1).
10.27                  --   Asset Purchase Agreement dated May 1, 1997 among Eastwood Hospital, Inc., as Seller, the
                            Shareholder of Seller, and NAHC of Tennessee, Inc., as Buyer, and New American
                            Healthcare Corporation, as Parent (Incorporated by reference to Exhibit 10.27 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.28                  --   Interim Management Agreement dated May 16, 1997 between Eastwood Hospital, Inc. and NAHC
                            of Tennessee, Inc. with respect to the mental health outpatient facility located at 3960
                            Knight Arnold Road, Suite 303, Memphis, Tennessee 38118 (Incorporated by reference to
                            Exhibit 10.28 to the Registrant's Registration Statement No. 333-57913 on form S-1).
10.29                  --   Asset Purchase Agreement effective August 1, 1997 by and among The Dolly V L.C., as
                            Seller, the Members of Seller, and NAHC II of Texas, Inc., as Buyer (Dolly Vinsant
                            Memorial Hospital) (Incorporated by reference to Exhibit 10.29 to the Registrant's
                            Registration Statement No. 333-57913 on form S-1).
10.30                  --   Asset Sale Agreement dated as of December 22, 1997 among New American Healthcare
                            Corporation, as Buyer, and Davenport Medical Center, Inc., EGH, Inc., Qualicare of
                            Wyoming, Inc. and Woodland Park Hospital, Inc. (collectively, Seller), as assigned to
                            the respective subsidiaries of NAHC by that certain Assignment of Asset Sale Agreement
                            dated January 30, 1998 (Incorporated by reference to Exhibit 10.30 to the Registrant's
                            Registration Statement No. 333-57913 on form S-1).
10.31                  --   Assignment and Assumption of Lease (Lander Valley Medical Center) effective February 1,
                            1998 between Qualicare of Wyoming, Inc. and NAHC of Wyoming, Inc. with respect to that
                            certain Lease dated July 10, 1982 between the City of Lander, as lessor, and Lander
                            Valley Regional Medical Center, as lessee, as modified by Amendment No. One to Lease
                            dated April 24, 1985 and the First Amendment to Lease dated July 1, 1991 (Incorporated
                            by reference to Exhibit 10.31 to the Registrant's Registration Statement No. 333-57913
                            on form S-1).
10.32                  --   Assignment and Assumption of Lease (Woodland Park Hospital) effective February 1, 1998
                            between Woodland Park Hospital, Inc. (Assignor) and NAHC of Oregon, Inc. (Assignee) with
                            respect to that certain Lease dated December 27, 1968 between Woodland Park Corporation
                            (predecessor-in-interest to The Les Ashbar Trust; Ernest B. Martin, The Connie L.
                            McNight Trust dated April 6, 1993; David L. Harris as Successor Trustee FBO Joan K.
                            Bailey (nka Joan K. Ayala), Marti Ridout and Jan L. Schilded; A.E. Brim; Milton Zusman,
                            Melvin Weinstein; Melvin Weinstein and Anne Weinstein, Trustees U/T/A dated April 7,
                            1992, Michael Zusman, Steven Zusman, Bruce Weinstein and Lisa Marie
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                            Weinstein) and W.P.H., Inc. (Assignor's predecessor-in-interest), as amended by Amendment to
                            Lease dated March 4, 1971, as assigned by Notice of Assignment of Lease and Authorization for
                            Payment of Lease Rentals dated April 1, 1972 and as further amended by Second Amendment
                            to Lease dated January 30, 1998 (Incorporated by reference to Exhibit 10.32 to the
                            Registrant's Registration Statement No. 333-57913 on form S-1).
10.33                  --   License Agreement (Pulse Health Services) dated as of January 31, 1998 among Tenet
                            HealthSystem HealthCorp, NAHC of Oregon, Inc. and New American Healthcare Corporation
                            (Incorporated by reference to Exhibit 10.33 to the Registrant's Registration Statement
                            No. 333-57913 on form S-1).
10.34                  --   License Agreement (Pulse Home Health) dated as of January 31, 1998 among Tenet
                            HealthSystem HealthCorp, NAHC of Iowa, Inc. and New American Healthcare Corporation
                            (Incorporated by reference to Exhibit 10.34 to the Registrant's Registration Statement
                            No. 333-57913 on form S-1).
10.35                  --   Asset Sale Agreement dated as of December 22, 1997 between New American Healthcare
                            Corporation, as Buyer, and PSH, Inc., as Seller (Incorporated by reference to Exhibit
                            10.35 to the Registrant's Registration Statement No. 333-57913 on form S-1).
10.36                  --   Agreement dated March 23, 1998 between Healthcare Management Systems, Inc. and New
                            American Healthcare Corporation (management information systems) (Incorporated by
                            reference to Exhibit 10.36 to the Registrant's Registration Statement No. 333-57913 on
                            form S-1).
10.37                  --   New American Healthcare Corporation Stock Option Plan (Incorporated by reference to
                            Exhibit 10.37 to the Registrant's Registration Statement No. 333-57913 on form S-1).
10.38                  --   New American Healthcare Corporation Employee Stock Purchase Plan (Incorporated by
                            reference to Exhibit 10.38 to the Registrant's Registration Statement No. 333-57913 on
                            form S-1).
10.39                  --   Agreement to Lease and Purchase dated October 29, 1998 among Lucius O. Crosby Memorial
                            Hospital ("Seller") and NAHC of Mississippi, Inc. and New American Healthcare
                            Corporation (incorporated by reference to Exhibit 2.1 of the Company's Current Report
                            on Form 8-K filed November 16, 1998).
10.40                  --   Stock Purchase Agreement dated as of October 31, 1998 among NAHC Georgia Holdings, Inc. (as "Buyer"),
                            the shareholders of Memorial Hospital of Adel, Inc. (the "Shareholders") and New American Healthcare
                            Corporation (incorporated by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K
                            filed November 18, 1998).
10.41                  --   Third Amendment to Amended and Restated Credit Agreement, dated as of October 27, 1998, by and
                            among New American Healthcare Corporation, as Borrower, Toronto Dominion (Texas), Inc., as Agent,
                            The Toronto-Dominion Bank, as Issuing Bank, and various lenders thereto
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                            (incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on
                            Form 10-Q for the quarter ended December 31, 1998).
10.42                  --   Severance Agreement and Release, dated as of February 22, 1999, between
                            Robert M. Martin and New American Healthcare Corporation.
10.43                  --   Executive Employment Agreement, dated as of March 4, 1999, by and between
                            New American Healthcare Corporation and Thomas W. Singleton.
10.44                  --   The Second Amended and Restated Credit Agreement, dated as of May 14, 1999, by
                            and among New American Healthcare Corporation, as Borrower, Toronto Dominion
                            (Texas), Inc., as Agent, The Toronto-Dominion Bank, as Issuing Bank, and
                            various lenders thereto.
21                     --   Subsidiaries of the Registrant.
23                     --   Consent of KPMG LLP.
27.1                   --   Financial Data Schedule (for SEC use only).
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