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

FORM 10-K

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

For the fiscal year ended September 30, 2001

OR

       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________ to _________________.

Commission File Number: 333-94521

IASIS HEALTHCARE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

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

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act: None

     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 such filing requirements for the past 90 days YES        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 the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 

     As of December 20, 2001, there were 31,932,529 shares of the Registrant’s Common Stock outstanding.

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IASIS HEALTHCARE CORPORATION

PART I

Item 1. Business.

Company Overview

     We are a leading owner and operator of acute care hospitals that develops and operates networks of medium-sized hospitals in high-growth urban and suburban markets. We operate our hospitals with a strong community focus by offering and developing healthcare services to meet the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. At September 30, 2001, we owned or leased 14 hospitals with a total of 2,063 beds in service. Our hospitals are located in four regions:

•		Salt Lake City, Utah;
•		Phoenix, Arizona;
•		Tampa-St. Petersburg, Florida; and
•		three cities in the State of Texas, including San Antonio.

     We also operate five ambulatory surgery centers and a Medicaid managed health plan in Phoenix called Health Choice, serving over 49,000 members at September 30, 2001.

     Our general, acute care hospitals offer a variety of inpatient medical and surgical services commonly available in hospitals, including cardiology, emergency services, general surgery, internal medicine, obstetrics, orthopedics and physical rehabilitation units. In addition, our facilities provide outpatient and ancillary services including outpatient surgery, physical therapy, radiation therapy, radiology and respiratory therapy. Our corporate staff provides a variety of management services to our healthcare facilities, including strategic planning, designing and operating information systems, ethics and compliance programs, contract negotiation and management, accounting, financial and clinical systems, legal support, personnel and employee benefits management, supply and equipment purchasing agreements and resource management.

     Our principal executive offices are located at 113 Seaboard Lane, Suite A-200, Franklin, Tennessee 37067 and our telephone number at that address is (615) 844-2747. Our corporate website address is www.iasishealthcare.com. Information contained on our website is not part of this annual report on Form 10-K.

Formation

     Our company was formed in October 1999 through a series of transactions that were arranged by Joseph Littlejohn & Levy, Inc. and members of our management team. Joseph Littlejohn & Levy is the private equity firm that controls JLL Healthcare, LLC, our largest stockholder. The first transaction was effective October 8, 1999, when Paracelsus Healthcare Corporation and unrelated third parties recapitalized five acute care hospitals in the Salt Lake City, Utah market owned by a subsidiary of Paracelsus. In connection with the recapitalization, JLL Healthcare, LLC and some of our stockholders purchased an aggregate of $125.0 million of the outstanding common stock of the subsidiary of Paracelsus. The subsidiary then repurchased $155.0 million of its common stock from Paracelsus. The recapitalization transaction resulted in Paracelsus retaining a minority interest in the preexisting Paracelsus subsidiary that owned the five acute care hospitals. After the recapitalization, the former Paracelsus subsidiary changed its name to IASIS Healthcare Corporation.

     The second transaction was effective October 15, 1999, when we acquired ten acute care hospitals and other related facilities and assets from Tenet Healthcare Corporation. Concurrent with the Tenet transaction, a company formed by members of our management to acquire and operate hospitals and related businesses was merged with and into a wholly owned subsidiary of our company.

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Business Strategy

     Our objective is to provide high-quality, cost-effective healthcare services in the select communities we serve. The key elements of our business strategy are:

     •     Increase Our Market Share in High-Growth Markets. Most of our hospitals are located in high-growth markets that are expected to experience population growth rates through 2005 in excess of the national average. We intend to increase our market share in our existing markets through organic growth and selective acquisitions.

     •     Recruit and Retain Quality Physicians. We intend to continue to recruit and retain quality physicians for our medical staffs and maintain their loyalty to our facilities by:

•		equipping our hospitals with technologically advanced equipment;
•		sponsoring training programs to educate physicians on advanced medical procedures;
•		providing physicians with remote access to clinical information through our new information systems; and
•		enhancing physician convenience and access.

We also use our existing physician relationships to recruit new primary care physicians and specialists. In addition, we are establishing local physician advisory committees to work closely with our local management teams and advise us on facility- and market-specific needs and strategies.

     •     Increase Revenue by Expanding Our Services. We analyze demographic and patient data and consult with key physicians and payors to identify and prioritize the healthcare needs of the communities we serve. Examples include:

•		expanding emergency room and surgical capacity;
•		increasing the number of beds in service at our hospitals;
•		upgrading and expanding specialty services, including cardiology, orthopedics and obstetrics;
•		updating our technology in imaging, diagnostic and other medical equipment; and
•		enhancing the convenience and quality of our outpatient services.

     •     Provide High Quality Services. We strive to provide high quality services at each of our facilities. We believe the high quality of our services differentiates our hospitals within their markets and provides us with a competitive advantage.

     •     Focus on Operational Excellence. Our management team has extensive multi-facility operating experience and focuses on operational excellence at our facilities. We believe we can improve our operations and profitability by:

•		implementing case and resource management with a focus on efficient staffing and supply utilization;
•		capitalizing on purchasing efficiencies and reducing operating costs through our relationship with our national group purchasing organizations;
•		using the more accurate, timely and cost-effective clinical and financial information produced by the standardized information systems recently installed at each of our facilities to enhance our management practices; and
•		improving our billing and collection processes to increase cash flow and reduce bad debt expenses.

     •     Continue to Develop Favorable Managed Care Relationships. We plan to increase net revenue derived from managed care payors at our facilities by negotiating more favorable terms with managed care plans and correlating payments with acuity of services. Additionally, enhanced systems implemented in fiscal year 2001 will improve our ability to administer managed care contracts to ensure that claims are adjudicated correctly. In certain

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markets, we organize our hospitals as networks to strengthen our market presence and more effectively deliver healthcare services, both of which increase our attractiveness to managed care plans.

     •     Continue to Strengthen Local Management Teams. We recruit experienced senior managers to give our hospitals their own dedicated management teams. We believe a strong local management team at each facility, including a chief executive officer, chief financial officer and chief nursing officer, enhances physician and community relations.

     •     Selectively Pursue Acquisitions and Strategic Alliances. We intend to selectively pursue hospital acquisitions in existing and new markets where we believe we can improve the financial and operational performance of the acquired hospital and enhance our regional presence. We intend to target hospitals with 100 to 400 beds. We will focus our new market development efforts in high-growth urban and suburban regions with stable or improving managed care environments. In addition, we will continue to identify opportunities to expand our presence through strategic alliances with other healthcare providers.

Hospital Operations

     Our senior management team has extensive multi-facility operating experience and focuses on maintaining operational excellence at our facilities. At each hospital we operate, we implement policies and procedures to improve the hospital’s operating and financial performance. A hospital’s local management team is generally comprised of a chief executive officer, chief financial officer and chief nursing officer. Local management teams, in consultation with our corporate staff, develop annual operating plans setting forth revenue growth strategies for the expansion of services offered by the hospital and the recruitment of physicians in each community and plans to reduce costs by improving operating efficiencies. We believe that the competence, skills and experience of the management team at each hospital is critical to the hospital’s success because of its role in executing the hospital’s operating plan. Our performance-based compensation program for each local management team is based upon the achievement of qualitative and quantitative goals set forth in the annual operating plan.

     Our hospital management teams are advised by boards of trustees that include members of hospital medical staffs as well as community leaders. The board of trustees establishes policies concerning medical, professional and ethical practices, monitors such practices and is responsible for ensuring that these practices conform to established standards. We maintain quality assurance programs to support and monitor quality of care standards and to meet accreditation and regulatory requirements. We monitor quality of care assessment activities to promote quality patient care on a continuing basis.

     We believe that the ability of our hospitals to meet the healthcare needs of their communities is determined by the quality, skills and compassion of our employees, breadth of our services, level of technology, emphasis on quality of care, level of physician support and convenience for patients and physicians. Factors that affect demand for our services include the size of and growth in local population, local economic conditions, the availability of reimbursement programs such as Medicare and Medicaid and market penetration of managed care programs. Improved treatment protocols as a result of advances in medical technology and pharmacology also affect the nature and demand for healthcare services across the industry, including at our hospitals.

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     The following table presents certain unaudited actual and pro forma combined operating statistics for our hospitals:

     Our hospitals continue to experience shifts from inpatient to outpatient care as well as reductions in average lengths of inpatient stay, primarily as a result of improvements in technology, pharmacology and clinical practices and hospital payment changes by Medicare and insurance carriers. In response to this shift toward outpatient care, we are reconfiguring some hospitals to more effectively accommodate outpatient services and restructuring existing surgical and diagnostic capacity to permit additional outpatient volume and a greater variety of outpatient services.

     Our facilities will continue to deliver those outpatient services that can be provided on a quality, cost-effective basis and that we believe will be in increased demand. The patient volumes and net operating revenue at our hospitals and outpatient surgery centers are subject to seasonal variations and generally are greater during the quarters ending December 31 and March 31 than other quarters. These seasonal variations are caused by a number of factors, including seasonal cycles of illness, climate and weather conditions, vacation patterns of both patients and physicians and other factors relating to the timing of elective procedures.

     In addition, inpatient care is shifting increasingly to sub-acute care when a less-intensive, lower cost level of care is appropriate. We have been proactive in the development of a variety of sub-acute inpatient services to utilize a portion of our available capacity. By offering cost-effective sub-acute services in appropriate circumstances, we are able to provide a continuum of care when the demand for such services exists. For example, some of our hospitals have developed physical rehabilitation units. These units utilize less intensive staffing levels with corresponding lower costs to provide a range of services sought by physicians, patients and payors.

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Sources of Revenue

     We receive payment for patient services from:

•		the federal government primarily under the Medicare program;
•		state governments under their respective Medicaid programs;
•		health maintenance organizations, preferred provider organizations and other private insurers; and
•		directly from patients.

     The table below presents the approximate percentages of net patient revenue from these sources:

     Most of our hospitals offer discounts from established charges to private managed care plans if they are large group purchasers of healthcare services. These discount programs limit our ability to increase charges in response to increasing costs. Patients generally are not responsible for any difference between established hospital charges and amounts reimbursed for such services under Medicare, Medicaid, some private insurance plans, health maintenance organizations or preferred provider organizations, but generally are responsible for services not covered by these plans, and exclusions, deductibles or co-insurance features of their coverage. The amount of these exclusions, deductibles and co-insurance generally has been increasing each year. Collecting amounts due from individual patients typically is more difficult than collecting from governmental or private managed care plans.

Competition

     Our facilities and related businesses operate in competitive environments. A number of factors affect our competitive position, including:

•		number, quality and specialties of physicians, nurses and other healthcare professionals;
•		the scope, breadth and quality of services;
•		reputation;
•		managed care contracting relationships;
•		physical condition of facilities and medical equipment;
•		location;
•		availability of parking or proximity to public transportation;
•		charges for services; and
•		ability to form local hospital networks.

     We currently face competition from established, not-for-profit healthcare corporations, investor-owned hospital corporations, large tertiary care centers, specialty hospitals and outpatient service providers such as surgery centers and imaging centers. In the future, we expect to encounter increased competition from companies, like ours,

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that consolidate hospitals and healthcare companies in specific geographic markets. Continued consolidation in the healthcare industry will be a leading contributing factor to increased competition in markets in which we already have a presence and in markets we may enter in the future.

     Another factor in the competitive position of a hospital is the ability of its management to negotiate contracts with purchasers of group healthcare services. The importance of obtaining managed care contracts has increased in recent years and is expected to continue to increase as private and government payors and others turn to managed care organizations to help control rising healthcare costs. Our markets have experienced significant managed care penetration. The revenue and operating results of our hospitals are significantly affected by our hospitals’ ability to negotiate favorable contracts with managed care plans. Health maintenance organizations and preferred provider organizations use managed care contracts to direct patients to, and manage the use of, hospital services in exchange for discounts from the hospitals’ established charges. Traditional health insurers also are interested in containing costs through similar contracts with hospitals.

     An additional competitive factor is whether a hospital is part of a local hospital network and the scope and quality of services offered by the network and by competing networks. A hospital that is part of a network that offers a broad range of services in a wide geographic area is more likely to obtain more favorable managed care contracts than a hospital that is not. We intend to evaluate changing circumstances in each geographic area in which we operate on an ongoing basis and to position ourselves to compete in these managed care markets by forming our own, or joining with others to form, local hospital networks.

Employees And Medical Staff

     As of September 30, 2001, we had approximately 8,000 employees, including approximately 2,700 part-time employees. Our employees are not subject to collective bargaining agreements. We consider our employee relations to be good. In certain markets, there is currently a shortage of nurses and other medical support personnel. We recruit and retain nurses and medical support personnel by creating a desirable, professional work environment, providing competitive wages, benefits and long-term incentives, and providing career development and other training programs. In order to supplement our current employee base, we intend to expand our relationship with colleges, universities and other medical education institutions in our markets and recruit nurses and other medical support personnel from abroad.

     Our hospitals are staffed by licensed physicians who have been admitted to the medical staff of our individual hospitals. Any licensed physician may apply to be admitted to the medical staff of any of our hospitals, but admission to the staff must be approved by each hospital’s medical staff and the appropriate governing board of the hospital in accordance with established credentialing criteria.

Compliance Program

     Our compliance program is designed to ensure that we maintain high standards of conduct in the operation of our business and implement policies and procedures so that employees act in compliance with all applicable laws, regulations and company policies. The organizational structure of our compliance program includes a compliance committee of our board of directors, a corporate management compliance committee and local management compliance committees at each of our hospitals. These committees have the responsibility for the effective development and implementation of our program. Our Vice President of Ethics and Business Practices, who reports directly to our Chairman, President and Chief Executive Officer and to the compliance committee of our board of directors, serves as Chief Compliance Officer and is charged with direct responsibility for the development and implementation of our compliance program. We also have designated a Facility Compliance Officer for each of our hospitals. Other features of our compliance program include initial and periodic timing and effectiveness reviews, the development and implementation of policies and procedures and a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations.

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Reimbursement

Medicare

     Medicare is a federal program that provides hospital and medical insurance benefits to persons age 65 and over, some disabled persons and persons with end-stage renal disease. All of our hospitals are certified as providers of Medicare services. Under the Medicare program, acute care hospitals receive reimbursement under a prospective payment system for inpatient and outpatient hospital services. Currently, certain types of facilities are exempt from the prospective payment system methodology, including psychiatric hospitals and specially designated units, long-term care hospitals, children’s hospitals and cancer hospitals. Hospitals and units exempt from the prospective payment system are reimbursed on a reasonable cost-based system, subject to cost limits. The Centers for Medicare and Medicaid Services (formerly known as the Health Care Financing Administration) is in the process of developing rules to implement prospective payment systems for psychiatric hospitals and units and long term care hospitals, to be effective for cost reporting periods beginning on or after October 1, 2002. We currently operate one psychiatric hospital that will be subject to these rules, when implemented.

     Under the inpatient prospective payment system, a hospital receives a fixed payment based on the patient’s assigned diagnosis related group. The diagnosis related group classifies categories of illnesses according to the estimated intensity of hospital resources necessary to furnish care for each principal diagnosis. The diagnosis related group rates for acute care hospitals are based upon a statistically normal distribution of severity. When treatments for patients fall well outside the normal distribution, providers may request and receive additional payments. The diagnosis related group payments do not consider a specific hospital’s actual costs but are adjusted for geographic area wage differentials. The majority of inpatient capital costs for acute care hospitals are reimbursed on a prospective system based on diagnosis related group weights multiplied by a geographically adjusted federal weights.

     The diagnosis related group rates are adjusted each federal fiscal year and have been affected by federal legislation. The index used to adjust the diagnosis related group rates, known as the “market basket index,” gives consideration to the inflation experienced by hospitals and entities outside of the healthcare industry in purchasing goods and services. However, for several years the percentage increases to the diagnosis related group rates have been lower than the percentage increases in the costs of goods and services purchased by hospitals. The diagnosis related group rate was increased by market basket minus 1.8% for federal fiscal year 2000. The Medicare, Medicaid, and SCHIP Benefit Improvement and Protection Act of 2000 provides some relief to the low diagnosis related group increases mandated by the Balanced Budget Act of 1997. Under the Benefit Improvement and Protection Act, the diagnosis related group rate increased in the amount of the full market basket for federal fiscal year 2001 and will increase in an amount equal to the market basket minus 0.55% for federal fiscal years 2002 and 2003. We anticipate that future legislation may decrease the future rate of increase for diagnosis related group payments, but we are unable to predict the amount of the reduction.

     Outpatient services traditionally have been paid at the lower of established charges or on a reasonable cost basis. On August 1, 2000, the Centers for Medicare and Medicaid Services began reimbursing hospital outpatient services and certain Medicare Part B services furnished to hospital inpatients who have no Part A coverage on a prospective payment system basis. The Centers for Medicare and Medicaid Services will continue to use existing fee schedules to pay for physical, occupational and speech therapies, durable medical equipment, clinical diagnostic laboratory services and nonimplantable orthotics and prosthetics.

     All services paid under the new prospective payment system for hospital outpatient services are classified into groups called ambulatory payment classifications or “APC”s. Services in each APC are similar clinically and in terms of the resources they require. A payment rate is established for each APC. The fee schedule for the outpatient prospective payment system was updated by the market basket index for the calendar year 2001 and will be updated by the market basket index minus 1% for the calendar year 2002. The Centers for Medicare and Medicaid Services recently has announced that it will delay implementing the 2002 rates and reimburse hospitals under the 2001 rates until as late as April 1, 2002. We anticipate that future legislation may decrease the future rate of increase for APC payments, but we are unable to predict the amount of the reduction. Our operations could be adversely affected by any delays in processing claims for outpatient services.

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     Under the outpatient prospective payment system, hospitals may receive additional amounts known as “pass-through payments” for using new technology, but the total amount of pass-through payments in a calendar year are subject to a cap. In 2001, this cap on pass-through payments was not implemented. The Centers for Medicare and Medicaid Services has published a final regulation that would implement the payment cap for calendar year 2002 and, thereby, reduce pass-through payments by nearly 69%, or approximately $1 billion. However, the Centers for Medicare and Medicaid Services has recently announced that it will delay implementing the 2002 cap for up to three months. We anticipate that the Centers for Medicare and Medicaid Services will implement reductions in the pass through payments in future years, but we are unable to predict the amount of the reduction. Based upon our preliminary assessment of the recently released final regulations implementing the 2002 reduction to pass-through payments, we currently do not expect the reduction to have a material adverse effect on our future operating results.

     Medicare historically has reimbursed skilled nursing units within hospitals on the basis of actual costs, subject to limits. The Balanced Budget Act of 1997 requires the establishment of a prospective payment system for Medicare skilled nursing units, under which units will be paid a federal per diem rate for virtually all covered services. The new payment system is in the process of being phased in and will be completely phased in during 2002. The effect of the new payment system generally has been to significantly reduce reimbursement for skilled nursing services, which has led many hospitals to close such units. We will monitor closely and evaluate the few remaining skilled nursing units in our hospitals and related facilities to determine whether it is feasible to continue to offer such services under the new reimbursement regime.

Medicaid

     Medicaid programs are jointly funded by federal and state governments and are administered by states under an approved plan that provides hospital and other healthcare benefits to qualifying individuals who are unable to afford care. All of our hospitals are certified as providers of Medicaid services. State Medicaid programs may use a prospective payment system, cost-based or other payment methodology for hospital services. Medicaid programs are required to take into account and make additional payments to hospitals serving disproportionate numbers of low income patients with special needs. Some of our hospitals receive such additional payments. The federal government and many states from time to time consider altering the level of Medicaid funding or expanding Medicaid benefits in a manner that could adversely affect future levels of Medicaid reimbursements received by our hospitals. Enrollment in managed Medicaid plans increased in fiscal year 2001 and we expect this trend to continue.

Annual Cost Reports

     All hospitals participating in the Medicare and Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, are required to meet specific financial reporting requirements. Federal regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. These annual cost reports are subject to routine audits, which may result in adjustments to the amounts ultimately determined to be due to us under these reimbursement programs. The audit process, particularly in the case of Medicaid, takes several years to reach the final determination of allowable amounts under the programs. Providers also have the right of appeal, and it is common to contest issues raised in audits of prior years’ reports. Further, the Centers for Medicare and Medicaid Services has extended filing due dates for cost reports as a result of problems it has experienced with updating the Provider Statistical and Reimbursement System (data used to complete cost reports) and delays it has experienced in approving electronic vendors. Although the Centers for Medicare and Medicaid Services recently announced a revised schedule of filing deadlines for 2002, we cannot predict whether these dates will be further postponed. In the meantime, our hospitals continue to receive interim payments from the Centers for Medicare and Medicaid Services but these payments are not yet subject to any adjustment based upon actual costs.

     Many prior year cost reports of our facilities are still open. If any of our facilities are found to have been in violation of federal or state laws relating to preparing and filing of Medicare or Medicaid cost reports, whether prior to or after the recapitalization transactions and our ownership of these facilities, our facilities and we could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. If an allegation is lodged against one of our facilities for a violation occurring during the time period before the recapitalization transaction, or before our acquisition of the Tenet hospitals, we may have

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indemnification rights against Paracelsus or Tenet, as the case may be. In the recapitalization transaction with Paracelsus and in the Tenet transaction, we negotiated customary indemnification and hold harmless provisions for any damages we may incur.

Managed Care

     The percentage of admissions and net revenue attributable to managed care plans has increased as a result of pressures to control the cost of healthcare services. We expect that the trend toward increasing percentages related to managed care plans will continue in the future. Generally, we receive lower payments from managed care plans than from traditional commercial insurers.

     Enrollment in commercial health maintenance organizations has declined slightly as many employers moved to offer plans with greater choice of providers. Enrollment in managed Medicare plans increased in fiscal year 2001. However, we expect a decline in managed Medicare enrollment in fiscal year 2002 due to the benefit plan changes that Medicare plans are making in 2002.

Commercial Insurance

     Our hospitals provide services to some individuals covered by traditional private healthcare insurance. Private insurance carriers make direct payments to hospitals or, in some cases, reimburse their policy holders, based upon the particular hospital’s established charges and the particular coverage provided in the insurance policy.

     Commercial insurers are continuing efforts to limit the payments for hospital services by adopting discounted payment mechanisms, including prospective payment or diagnosis related group-based payment systems, for more inpatient and outpatient services. To the extent that these efforts are successful, hospitals may receive reduced levels of reimbursement, which would have a negative effect on operating results.

Government Regulation and Other Factors

Licensure, Certification and Accreditation

     Healthcare facility construction and operation is subject to federal, state and local regulations relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection laws. Our facilities also are subject to periodic inspection by governmental and other authorities to assure continued compliance with the various standards necessary for licensing and accreditation. We believe that all of our operating healthcare facilities are properly licensed under appropriate state laws. All of our operating hospitals are certified under the Medicare program and are accredited by the Joint Commission on Accreditation of Healthcare Organizations, the effect of which is to permit the facilities to participate in the Medicare and Medicaid programs. If any facility loses its accreditation by this Joint Commission, or otherwise loses its certification under the Medicare program, then the facility will be unable to receive reimbursement from the Medicare and Medicaid programs. We intend to conduct our operations in compliance with current applicable federal, state, local and independent review body regulations and standards. The requirements for licensure from time to time, certification and accreditation are subject to change and, in order to remain qualified, we may need to make changes in our facilities, equipment, personnel and services.

Certificates of Need

     In some states, the construction of new facilities, acquisition of existing facilities or addition of new beds or services may be subject to review by state regulatory agencies under a certificate of need program. Florida is the only state in which we currently operate that requires approval under a certificate of need program. These laws generally require appropriate state agency determination of public need and approval prior to the addition of beds or services or other capital expenditures. Failure to obtain necessary state approval can result in the inability to expand facilities, add services, complete an acquisition or change ownership. Further, violation may result in the imposition of civil sanctions or the revocation of a facility’s license.

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Utilization Review

     Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients be reviewed by peer review organizations that analyze the appropriateness of Medicare and Medicaid patient admissions and discharges, quality of care provided, validity of diagnosis, related group classifications and appropriateness of cases of extraordinary length of stay or cost. Peer review organizations may deny payment for services provided, assess fines and recommend to the Department of Health and Human Services that a provider not in substantial compliance with the standards of the peer review organization be excluded from participation in the Medicare program. Most non-governmental managed care organizations also require utilization review.

Federal and State Fraud and Abuse Provisions

     Participation in any federal healthcare program, like Medicare, is regulated heavily by statute and regulation. If a hospital provider fails to substantially comply with the numerous conditions of participation in the Medicare or Medicaid program or performs specific prohibited acts, the hospital’s participation in the Medicare program may be terminated or civil or criminal penalties may be imposed upon it under provisions of the Social Security Act.

     Among these statutes is a section of the Social Security Act known as the anti-kickback statute. This law prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent of generating referrals or orders for services or items covered by a federal healthcare program. Violation of this statute is a felony.

     As authorized by Congress, the Office of the Inspector General of the Department of Health and Human Services has published final safe harbor regulations that outline categories of activities that are deemed protected from prosecution under the anti-kickback statute. Currently there are safe harbors for various activities, including the following: investment interests, space rental, equipment rental, practitioner recruitment, personal services and management contracts, sale of practice, referral services, warranties, discounts, employees, group purchasing organizations, waiver of beneficiary coinsurance and deductible amounts, managed care arrangements, obstetrical malpractice insurance subsidies, investments in group practices, ambulatory surgery centers, and referral agreements for specialty services.

     The fact that conduct or a business arrangement does not fall within a safe harbor does not automatically render the conduct or business arrangement illegal under the anti-kickback statute. The conduct and business arrangement, however, do risk increased scrutiny by government enforcement authorities. We may be less willing than some of our competitors to enter into conduct or business arrangements that do not clearly satisfy the safe harbors. As a result, this unwillingness may put us at a competitive disadvantage.

     The Office of the Inspector General, among other regulatory agencies, is responsible for identifying and eliminating fraud, abuse and waste. The Office of the Inspector General carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to healthcare providers, the Office of the Inspector General has from time to time issued “fraud alerts” that, although they do not have the force of law, identify features of a transaction that may indicate that the transaction could violate the anti-kickback statute or other federal healthcare laws. The Office of the Inspector General has identified several incentive arrangements as potential violations, including:

•		payment of any incentive by the hospital when a physician refers a patient to the hospital;
•		use of free or significantly discounted office space or equipment for physicians in facilities usually located close to the hospital;
•		provision of free or significantly discounted billing, nursing, or other staff services;
•		free training for a physician’s office staff, including management and laboratory techniques;
•		guaranties that provide that if the physician’s income fails to reach a predetermined level, the hospital will pay any portion of the remainder;

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•		low-interest or interest-free loans, or loans which may be forgiven if a physician refers patients to the hospital;
•		payment of the costs of a physician’s travel and expenses for conferences or a physician’s continuing education courses;
•		coverage on the hospital’s group health insurance plans at an inappropriately low cost to the physician;
•		payment of services which require few, if any, substantive duties by the physician, or payment for services in excess of the fair market value of the services rendered;
•		purchasing goods or services from physicians at prices in excess of their fair market value; or
•		“gainsharing,” the practice of giving physicians a share of any reduction in a hospital’s costs for patient care attributable in part to the physician’s efforts.

     We have a variety of financial relationships with physicians who refer patients to our hospitals. Physicians own interests in three of our ambulatory surgery centers and one of our hospitals. We also have contracts with physicians providing for a variety of financial arrangements, including employment contracts, leases and professional service agreements. We provide financial incentives to recruit physicians to relocate to communities served by our hospitals, including minimum revenue guaranties and loans. Although we believe that our arrangements with physicians have been structured to comply with current law and available interpretations, some of our arrangements do not expressly meet requirements for safe harbor protection under the anti-kickback statute. We cannot assure you that regulatory authorities that enforce these laws will not determine that these financial arrangements violate the anti-kickback statute or other applicable laws. This determination could subject us to liabilities under the Social Security Act, including criminal penalties of imprisonment or fines, civil penalties up to $50,000, damages up to three times the total amount of remuneration and exclusion from participation in Medicare, Medicaid or other federal healthcare programs, any of which could have a material adverse effect on our business, financial condition or results of operations.

     The Social Security Act also imposes criminal and civil penalties for submitting false claims to Medicare and Medicaid. False claims include, but are not limited to, billing for services not rendered, misrepresenting actual services rendered in order to obtain higher reimbursement and cost report fraud. Like the anti-kickback statute, these provisions are very broad. Further, the Health Insurance Portability and Accountability Act of 1996 created civil penalties for conduct including improper coding and billing for unnecessary goods and services. Careful and accurate preparation and submission of claims for reimbursement must be performed in order to avoid liability.

     The Health Insurance Portability and Accountability Act of 1996 also broadened the scope of the fraud and abuse laws by adding several criminal provisions for healthcare fraud offenses that apply to all health benefit programs. This act also created new enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. In addition, federal enforcement officials now have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud. It also established a new violation for the payment of inducements to Medicare or Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner.

     The Social Security Act also includes a provision commonly known as the “Stark Law.” This law prohibits physicians from referring Medicare and Medicaid patients to entities with which they or any of their immediate family members have a financial relationship if these entities provide certain designated health services that are reimbursable by Medicare, including inpatient and outpatient hospital services. Sanctions for violating the Stark Law include civil money penalties up to $15,000 per prohibited service provided, assessments equal to twice the dollar value of each such service provided and exclusion from the federal healthcare programs. There are a number of exceptions to the self-referral prohibition, including an exception for a physician’s ownership interest in an entire hospital as opposed to an ownership interest in a hospital department. There are also exceptions for many of the customary financial arrangements between physicians and providers, including employment contracts, leases and recruitment agreements.

     We have structured our financial arrangements with physicians to comply with the statutory exceptions to the Stark Law. On January 4, 2001, the Centers for Medicare and Medicaid Services issued final regulations subject to comment intended to clarify parts of the Stark Law and some of the exceptions to it. These regulations are

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considered the first phase of a two-phase process, with the remaining regulations to be published at an unknown future date. Provisions of the phase one regulations relating to home health agencies became effective April 6, 2001, and the majority of the remainder of the phase one regulations are scheduled to become effective January 4, 2002. The Centers for Medicare and Medicaid Services has delayed until January 6, 2003, the effective date of a portion of the phase one regulations related to whether percentage-based compensation is deemed to be “set in advance” for purposes of exceptions to the Stark Law. We cannot predict the final form that these regulations will take or the effect that the final regulations will have on us.

     Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect many of the arrangements entered into by each of our hospitals. For example, Congress is currently considering legislation that would modify the hospital ownership exception to the Stark Law in a manner that could require us to restructure arrangements with any physicians who own an interest in our hospitals. Law enforcement authorities, including the Office of the Inspector General, the courts and Congress are increasing scrutiny of arrangements between healthcare 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 also have demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purpose of payments between healthcare providers and potential referral sources.

     Many of the states in which we operate also have adopted laws that prohibit payments to physicians in exchange for referrals similar to the anti-kickback statute or that otherwise prohibit fraud and abuse. Many states also have passed self-referral legislation similar to the Stark Law, prohibiting the referral of patients to entities with which the physician has a financial relationship. Often these state laws are broad in scope, because they apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties as well as loss of licensure. Little precedent exists for the interpretation or enforcement of these state laws.

     Our operations could be adversely affected by the failure of our arrangements to comply with the anti-kickback statute, the Stark Law, billing laws and regulations, current state laws or other legislation or regulations in these areas adopted in the future. We are unable to predict whether other legislation or regulations at the federal or state level in any of these areas will be adopted, what form such legislation or regulations may take or their impact on our operations. We are continuing to enter into new financial arrangements with physicians and other providers in a manner structured to comply in all material respects with these laws. We cannot assure you, however, that governmental officials charged with the responsibility for enforcing these laws will not assert that we are in violation of them or that such statutes ultimately will be interpreted by the courts in a manner consistent with our interpretation.

The Federal False Claims Act and Similar State Laws

     Another trend affecting the healthcare industry today is the increased use of the federal False Claims Act, and, in particular, actions being brought by individuals on the government’s behalf under the False Claims Act’s “qui tam” or whistleblower provisions. Whistleblower provisions allow private individuals to bring actions on behalf of the government alleging that the defendant has defrauded the federal government. If the government intervenes in the action and prevails, the party filing the initial complaint may share in any settlement or judgment. If the government does not intervene in the action, the whistleblower plaintiff may pursue the action independently. When a private party brings a qui tam action under the False Claims Act, the defendant generally will not be served with the lawsuit until the government makes a determination whether it will intervene.

     When a defendant is determined by a court of law to be liable under the False Claims Act, the defendant must pay three times the actual damages sustained by the government, plus mandatory civil penalties of between $5,500 to $11,000 for each separate false claim. Settlements entered into prior to litigation usually involve a less severe calculation of damages. There are many potential bases for liability under the False Claims Act. Although liability often arises when an entity knowingly submits a false claim for reimbursement to the federal government, the False Claims Act defines the term “knowingly” broadly. Thus, simple negligence will not give rise to liability under the False Claims Act, but submitting a claim with reckless disregard to its truth or falsity can constitute “knowingly” submitting a false claim and will qualify for liability. In some cases, whistleblowers or the federal government have taken the position that providers who allegedly have violated other statutes, such as the anti-kickback statute and the Stark Law, have thereby submitted false claims under the False Claims Act.

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     A number of states, including states in which we operate, have adopted their own false claims provisions as well as their own whistleblower provisions whereby a private party may file a civil lawsuit in state court. From time to time, companies in the healthcare industry, including ours, may be subject to actions under the False Claims Act or similar state laws. We currently are not aware of any actions against us under the False Claims Act or similar state laws.

Corporate Practice of Medicine/Fee Splitting

     The states in which we operate have laws that prohibit unlicensed persons or business entities, including corporations, from employing physicians or laws that prohibit certain direct or indirect payments or fee-splitting arrangements between physicians and unlicensed persons or business entities. Possible sanctions for violations of these restrictions include loss of a physician’s license, civil and criminal penalties and rescission of business arrangements that may violate these restrictions. These statutes vary from state to state, are often vague and seldom have been interpreted by the courts or regulatory agencies. Although we exercise care to structure our arrangements with healthcare providers to comply with the relevant state law, and believe these arrangements comply with applicable laws in all material respects, we cannot assure you that governmental officials charged with responsibility for enforcing these laws will not assert that we, or transactions in which we are involved, are in violation of such laws, or that such laws ultimately will be interpreted by the courts in a manner consistent with our interpretations.

Administrative Simplification

     The Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. These provisions are intended to encourage electronic commerce in the healthcare industry. On August 17, 2000, the Department of Health and Human Services published final regulations establishing electronic data transmission standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically. Compliance with these regulations is required by October 16, 2002. Congress recently passed legislation that would extend the compliance date until October 16, 2003 for entities that file a plan with the Department of Health and Human Services that demonstrates how they intend to comply with the regulations by the extended deadline. We cannot predict the impact that final regulations, when fully implemented, will have on us.

     The Administrative Simplification Provisions also require the Department of Health and Human Services to adopt standards to protect the security and privacy of health-related information. The Department of Health and Human Services proposed regulations containing security standards on August 12, 1998. These proposed security regulations have not been finalized, but as proposed, would require healthcare providers to implement organizational and technical practices to protect the security of electronically maintained or transmitted health-related information. In addition, the Department of Health and Human Services released final regulations containing privacy standards in December 2000. These privacy regulations became effective April 2001 but compliance with these regulations is not required until April 2003. Therefore, these privacy regulations could be further amended prior to the compliance date. As currently drafted, the privacy regulations will extensively regulate the use and disclosure of individually identifiable health-related information. The privacy regulations also provide patients with significant new rights related to understanding and controlling how their health information is used or disclosed. The security regulations, as proposed, and the privacy regulations could impose significant costs on our facilities in order to comply with these standards. We cannot predict the final form that these regulations will take or the impact that final regulations, when fully implemented, will have on us.

     Violations of the Administrative Simplification Provisions could result in civil penalties of up to $25,000 per type of violation in each calendar year and criminal penalties of up to $250,000 per violation. In addition, our facilities will continue to remain subject to any privacy-related state laws that are more restrictive than the privacy regulations issued under the Administrative Simplification Provisions. These statutes vary by state and could impose additional penalties.

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The Emergency Medical Treatment and Active Labor Act

     The federal Emergency Medical Treatment and Active Labor Act was adopted by Congress in response to reports of a widespread hospital emergency room practice of “patient dumping.” At the time of the enactment, patient dumping was considered to have occurred when a hospital capable of providing the needed care sent a patient to another facility or simply turned the patient away based on such patient’s inability to pay for his or her care. The law imposes requirements upon physicians, hospitals and other facilities that provide emergency medical services. Such requirements pertain to what care must be provided to anyone who comes to such facilities seeking care before they may be transferred to another facility or otherwise denied care. The government broadly interprets the law to cover situations in which patients do not actually present to a hospital’s emergency room, but present to a hospital-based clinic or are transported in a hospital-owned ambulance. Sanctions for violations of this statute include termination of a hospital’s Medicare provider agreement, exclusion of a physician from participation in Medicare and Medicaid programs and civil money penalties. In addition, the law creates private civil remedies that enable an individual who suffers personal harm as a direct result of a violation of the law, and a medical facility that suffers a financial loss as a direct result of another participating hospital’s violation of the law, to sue the offending hospital for damages and equitable relief. Although we believe that our practices are in material compliance with the law, we can give no assurance that governmental officials responsible for enforcing the law will not assert from time to time that our facilities are in violation of this statute.

Healthcare Reform

     The healthcare industry attracts much legislative interest and public attention. Changes in the Medicare, Medicaid and other programs, hospital cost-containment initiatives by public and private payors, proposals to limit payments and healthcare spending and industry-wide competitive factors are highly significant to the healthcare industry. In addition, a framework of extremely complex federal and state laws, rules and regulations governs the healthcare industry and, for many provisions, there is little history of regulatory or judicial interpretation upon which to rely.

     Many states have enacted or are considering enacting measures designed to reduce their Medicaid expenditures and change private healthcare insurance. Most states, including the states in which we operate, have applied for and been granted federal waivers from current Medicaid regulations to allow them to serve some or all of their Medicaid participants through managed care providers. We are unable to predict the future course of federal, state or local healthcare legislation. Further changes in the law or regulatory framework that reduce our revenue or increase our costs could have a material adverse effect on our business, financial condition or results of operations.

Conversion Legislation

     Many states have enacted or are considering enacting laws affecting the conversion or sale of not-for-profit hospitals. These laws generally include provisions relating to attorney general approval, advance notification and community involvement. In addition, state attorneys general in states without specific conversion legislation may exercise authority over these transactions based upon existing law. In many states, there has been an increased interest in the oversight of not-for-profit conversions. The adoption of conversion legislation and the increased review of not-for-profit hospital conversions may increase the cost and difficulty or prevent the completion of transactions with or acquisitions of not-for-profit organizations in various states.

Healthcare Industry Investigations

     Significant media and public attention has focused in recent years on the hospital industry. There are numerous ongoing federal and state investigations regarding multiple issues including cost reporting and billing practices, especially those relating to clinical laboratory test claims and home health agency costs and physician ownership of healthcare providers and joint ventures with hospitals. These investigations have targeted hospital companies as well as their executives and managers. We have substantial Medicare, Medicaid and other governmental billings, which could result in heightened scrutiny of our operations. We continue to monitor these and all other aspects of our business and have developed a compliance program to assist us in gaining comfort that our business practices are consistent with both legal principles and current industry standards. However, because the

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law in this area is complex and constantly evolving, we cannot assure you that government investigations will not result in interpretations that are inconsistent with industry practices, including ours. In public statements surrounding current investigations, governmental authorities have taken positions on a number of issues, including some for which little official interpretation previously has been available, that appear to be inconsistent with practices that have been common within the industry and that previously have not been challenged in this manner. In some instances, government investigations that have in the past been conducted under the civil provisions of federal law may now be conducted as criminal investigations.

     Many current healthcare investigations are national initiatives in which federal agencies target an entire segment of the healthcare industry. One example is the federal government’s initiative regarding hospital providers’ improper requests for separate payments for services rendered to a patient on an outpatient basis within three days prior to the patient’s admission to the hospital, where reimbursement for such services is included as part of the reimbursement for services furnished during an inpatient stay. In particular, the government has targeted all hospital providers to ensure conformity with this reimbursement rule. Another example involves the federal government’s initiative regarding healthcare providers “unbundling” and separately billing for laboratory tests that should have been billed as a “bundled unit.” The federal government also has launched a national investigative initiative targeting the billing of claims for inpatient services related to bacterial pneumonia, as the government has found that many hospital providers have attempted to bill for pneumonia cases under more complex and expensive reimbursement codes, such as diagnosis related groups codes. Further, the federal government continues to investigate Medicare overpayments to prospective payment hospitals that incorrectly report transfers of patients to other prospective payment system hospitals as discharges. We are aware that prior to our acquisition of them, several of our hospitals were contacted in relation to certain government investigations that were targeted at an entire segment of the healthcare industry. Although we take the position that, under the terms of the acquisition agreements, the prior owners of these hospitals retained any liability resulting from these government investigations, we cannot assure you that the prior owners’ resolution of these matters or failure to resolve these matters, in the event that any resolution was deemed necessary, will not have a material adverse effect on our operations.

     It is possible that governmental entities could initiate investigations in the future at facilities operated by us and that such investigations could result in significant penalties to us, as well as adverse publicity. It is also possible that our executives and managers, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. We are not aware of any material governmental investigations involving any of our facilities, our executives or managers. The positions taken by authorities in any future investigations of us, our executives or managers or other healthcare providers and the liabilities or penalties that may be imposed could have a material adverse effect on our business, financial condition and results of operations.

Health Choice

     Health Choice is a prepaid Medicaid managed health plan in the Phoenix, Arizona area that was acquired in connection with the acquisition of the Tenet hospitals. For the fiscal years ended September 30, 2001 and 2000, Health Choice net revenue comprised approximately 12% and 11%, respectively, of our total net revenue. Health Choice derives substantially all of its revenue through a contract with the Arizona Health Care Cost Containment System to provide specified health services to qualified Medicaid enrollees through contracts with providers. The contract requires us to provide healthcare services in exchange for fixed periodic payments and supplemental payments from the Arizona Health Care Cost Containment System. These services are provided regardless of the actual costs incurred to provide these services. We receive reinsurance and other supplemental payments from the Arizona Health Care Cost Containment System to cover certain costs of healthcare services that exceed certain thresholds. Health Choice is reimbursed for healthcare costs that exceed stated amounts at a rate of 75% (85% for catastrophic cases) of qualified healthcare costs in excess of stated levels of $5,000 to $35,000 depending on the rate code assigned to the member. Qualified costs are the lesser of the amount paid by Health Choice or the Arizona Health Care Cost Containment System fee schedule. As of September 30, 2001, we provided performance guaranties in the form of a surety bond in the amount of $9.4 million and a letter of credit in the amount of $6.6 million for the benefit of the Arizona Health Care Cost Containment System to support our obligations under the contract to provide and pay for the healthcare services. The amount of the performance guaranty that the Arizona Health Care Cost Containment System requires is based upon the membership in the plan and the related capitation

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paid to us. The contract with the Arizona Health Care Cost Containment System commenced on October 1, 1997 for an initial term of one year and reserves to the Arizona Health Care Containment System the option to extend the term of the contract from time to time through September 30, 2002. Legislation recently enacted in Arizona permits the Arizona Health Care Cost Containment System to extend contracts through October 1, 2004. Under the current amendment, the contract has been extended through September 30, 2002. In the event the contract with the Arizona Health Care Cost Containment System were to be discontinued, our revenue would be reduced and our profitability would be adversely affected.

     Health Choice is subject to state and federal laws and regulations, and the Centers for Medicare and Medicaid Services and the Arizona Health Care Cost Containment System have the right to audit Health Choice to determine the plan’s compliance with such standards. Health Choice is required to file periodic reports with the Arizona Health Care Cost Containment System and to meet certain financial viability standards. Health Choice also must provide its enrollees with certain mandated benefits and must meet certain quality assurance and improvement requirements. As of October 16, 2002, Health Choice must comply with the standardized formats for electronic transactions set forth in the Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act. Congress recently passed legislation that would extend the compliance date until October 16, 2003, provided that Health Choice files a plan with the Department of Health and Human Services that demonstrates how it intends to comply with the regulations by the extended deadline. When compliance with final regulations becomes mandatory, Health Choice will be required to comply with federal security and privacy standards for health-related information. We cannot predict the final form that these regulations will take or the impact that the final regulations, when fully implemented, will have on us.

     The federal anti-kickback statute has been interpreted to prohibit the payment, solicitation, offering or receipt of any form of remuneration in return for the referral of federal healthcare program patients or any item or service that is reimbursed, in whole or in part, by any federal healthcare program. Similar anti-kickback statutes have been adopted in Arizona, which apply regardless of the source of reimbursement. The Department of Health and Human Services has adopted safe harbor regulations specifying certain relationships and activities that are deemed not to violate the federal anti-kickback statute that specifically relate to managed care:

•		waivers by health maintenance organizations of Medicare and Medicaid beneficiaries’ obligation to pay cost-sharing amounts or to provide other incentives in order to attract Medicare and Medicaid enrollees;
•		certain discounts offered to prepaid health plans by contracting providers;
•		certain price reductions offered to eligible managed care organizations; and
•		certain price reductions offered by contractors with substantial financial risk to managed care organizations.

     We believe that the incentives offered by Health Choice to its Medicaid enrollees and the discounts it receives from contracting healthcare providers should satisfy the requirements of the safe harbor regulations. However, failure to satisfy each criterion of the applicable safe harbor does not mean that the arrangement constitutes a violation of the law; rather the safe harbor regulations provide that the arrangement must be analyzed on the basis of its specific facts and circumstances. We believe that Health Choice’s arrangements comply in all material respects with the federal anti-kickback statute and similar Arizona statutes.

Environmental Matters

     We are subject to various federal, state and local laws and regulations relating to environmental protection. Our hospitals are not highly regulated under environmental laws because we do not engage in any industrial activities at those locations. The principal environmental requirements and concerns applicable to our operations relate to:

•		the proper handling and disposal of hazardous and low level medical radioactive waste;
•		ownership or historical use of underground and above-ground storage tanks;
•		management of impacts from leaks of hydraulic fluid or oil associated with elevators, chiller units or incinerators;
•		appropriate management of asbestos-containing materials present or likely to be present at some locations; and

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•

the potential acquisition of or maintenance of air emission permits for boilers or other equipment.

     We do not expect our compliance with environmental laws and regulations to have a material effect on us. We also may be subject to requirements related to the remediation of substances that have been released to the environment at properties owned or operated by us or at properties where substances were sent for off-site treatment or disposal. These remediation requirements may be imposed without regard to fault, and liability for environmental remediation can be substantial.

Insurance

     As is typical in the healthcare industry, we are subject to claims and legal actions by patients in the ordinary course of business. To cover these claims, we maintain professional malpractice liability insurance and general liability insurance in amounts that we believe to be sufficient for our operations, although some claims may exceed the scope of the coverage in effect. We also maintain umbrella coverage. Losses up to our self-insured retentions and any losses incurred in excess of amounts maintained under such insurance will be funded from working capital. The cost of malpractice and other liability insurance has risen significantly. Therefore, we cannot assure you that this insurance will continue to be available at reasonable prices that will allow us to maintain adequate levels of coverage. We also cannot assure you that our cash flow will be adequate to provide for professional and general liability claims in the future.

Our Information Systems

     During 2000 and 2001, we converted and upgraded our clinical and financial information systems in all of our hospitals. We selected McKesson HBOC’s clinical and patient accounting software and Lawson’s financial application and enterprise resource planning software. These sophisticated systems are essential to the following areas of our business operations, among others:

•		patient accounting, including billing and collection of net revenue;
•		financial, accounting, reporting and payroll;
•		coding and compliance;
•		laboratory, radiology and pharmacy systems;
•		medical records and document storage;
•		materials and asset management; and
•		negotiating, pricing and administering our managed care contracts.

     We will continue to standardize and integrate our information systems, which will allow us to:

•		optimize staffing levels according to patient volumes and seasonal needs at each facility;
•		reduce bad debt expense by effectively managing each hospital’s billing and collection processes; and
•		reduce supply costs by concentrating our purchasing power and eliminating waste and over-utilization.

     We currently expect that our information systems will be in compliance with the uniform electronic data transmission standards of the Administrative Simplification Provisions of the Health Insurance Portability and Accountability Act of 1996 by the mandatory compliance date.

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Risk Factors

     If We Are Unable To Negotiate Favorable Contracts With Managed Care Plans, Our Operating Revenue May Be Reduced.

     Our ability to negotiate favorable contracts with health maintenance organizations, preferred provider organizations and other managed care plans significantly affects the revenue and operating results of most of our hospitals. Revenue derived from health maintenance organizations, preferred provider organizations and other managed care plans accounted for approximately 42% of our net patient revenue for the fiscal year ended September 30, 2001. Our future success will depend, in part, on our ability to renew existing managed care contracts and enter into new managed care contracts on terms favorable to us. Other healthcare companies, including some with greater financial resources, greater geographic coverage or a wider range of services, may compete with us for these opportunities.

     Changes In Governmental Programs May Significantly Reduce Our Revenue.

     Government healthcare programs, principally Medicare and Medicaid, accounted for approximately 32% of our net revenue for the fiscal year ended September 30, 2001, exclusive of revenue from Health Choice. Recent legislative changes, including those enacted as part of the Balanced Budget Act of 1997, have resulted in limitations on and, in some cases, reductions in levels of, payments to healthcare providers for certain services under many of these government programs. Many changes imposed by the Balanced Budget Act of 1997 are being phased in over a period of years. Certain rate reductions resulting from the Balanced Budget Act of 1997 are being mitigated by the Balanced Budget Refinement Act of 1999 and the Benefits Improvement Protection Act of 2000. Nonetheless, the Balanced Budget Act of 1997 significantly changed the method of payment under the Medicare and Medicaid programs. This change has resulted, and we expect will continue to result, in significant reductions in payments for our inpatient, outpatient, home health and skilled nursing services. In 2000, the Centers for Medicare and Medicaid Services began reimbursing hospital outpatient services on a prospective payment system basis.

     Our Hospitals Face Competition For Patients From Other Hospitals And Healthcare Providers.

     The hospital industry is highly competitive. Our hospitals face competition for patients from other hospitals in our markets, large tertiary care centers and outpatient service providers that provide similar services to those provided by our hospitals. Some of the hospitals that compete with ours are owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions and can finance capital expenditures and operations on a tax-exempt basis. Some of our competitors are larger, are more established, have greater geographic coverage, offer a wider range of services or have more capital or other resources than we do. If our competitors are able to finance capital improvements, recruit physicians, expand services or obtain favorable managed care contracts at their facilities, we may experience a decline in patient volume.

     Our Performance Depends On Our Ability To Recruit Quality Physicians.

     The success of our hospitals depends on the following factors, among others:

•		the number and quality of the physicians on the medical staffs of our hospitals;
•		the admitting practices of those physicians; and
•		our maintenance of good relations with those physicians.

     We generally do not employ physicians. If we are unable to provide adequate support personnel or technologically advanced equipment and facilities at our hospitals that meet the needs of physicians, they may be discouraged from referring patients to our facilities, which could adversely affect our profitability.

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     Our Hospitals Face Competition For Staffing, Which May Increase Our Labor Costs And Reduce Profitability.

     We compete with other healthcare providers in recruiting and retaining qualified management and staff personnel responsible for the day-to-day operations of each of our hospitals, including nurses and other non-physician healthcare professionals. In some markets, the scarce availability of nurses and other medical support personnel has become a significant operating issue to healthcare providers. This shortage may require us to enhance wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary personnel. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate. If our labor costs increase, we may not be able to raise rates to offset these increased costs. Because a significant percentage of our revenue consists of fixed, prospective payments, our ability to pass along increased labor costs is constrained. Our failure to recruit and retain qualified management, nurses and other medical support personnel, or to control our labor costs could have a material adverse effect on our profitability.

     Our Significant Indebtedness May Limit Our Ability To Grow And Compete With Other Hospital Companies.

     As of September 30, 2001, we had total long-term debt of $530.6 million excluding current maturities. This represented approximately 76% of our total capitalization as of September 30, 2001. The amount of our outstanding indebtedness is large compared to the net book value of our assets, and we have significant repayment obligations under our outstanding indebtedness. In addition, the outstanding indebtedness under our bank credit facility bears interest at floating rates. Therefore, increases in prevailing interest rates will increase our interest payment obligations.

     Our significant debt repayment obligations:

•		limit our ability to use operating cash flow in other areas of our business because we must use a substantial portion of these funds to make principal and interest payments;
•		increase our vulnerability to general adverse economic and industry conditions because we must still meet our debt service obligations, notwithstanding the fact that our revenue may have decreased; and
•		limit our ability to obtain additional financing to fund future working capital requirements, capital expenditures, acquisitions and other general corporate requirements.

     Our debt agreements contain financial covenants that restrict our ability to incur additional indebtedness, make capital expenditures and engage in mergers, acquisitions and asset sales. If we breach any of the restrictions in our debt agreements, we may have to immediately repay a significant portion of our indebtedness. In addition, substantially all of our current stockholders have pledged their common stock for the benefit of our lenders as security for our obligations under our bank credit facility. In the event of a default under our bank credit facility, our lenders would have the right to foreclose on the common stock of our current stockholders, which would result in a change of control of our company.

     If We Fail To Comply With Extensive Laws And Government Regulations, We Could Suffer Penalties Or Be Required To Make Significant Changes To Our Operations.

     The healthcare industry, including our company, is required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to, among other things:

•		billing for services;
•		relationships with physicians and other referral sources;
•		adequacy of medical care;
•		quality of medical equipment and services;
•		qualifications of medical and support personnel;
•		confidentiality, maintenance and security issues associated with health-related information and medical records;
•		the screening, stabilization and transfer of patients who have emergency medical conditions;

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•		licensure;
•		operating policies and procedures; and
•		addition of facilities and services.

     Because many of these laws and regulations are relatively new, we do not always have the benefit of significant regulatory or judicial interpretation of these laws and regulations. In the future, different interpretations or enforcement of these laws and regulations could subject our current or past practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses.

     If we fail to comply with applicable laws and regulations, we could be subjected to liabilities, including:

•		criminal penalties;
•		civil penalties, including the loss of our licenses to operate one or more of our facilities; and
•		exclusion of one or more of our facilities from participation in the Medicare, Medicaid and other federal and state healthcare programs.

     State Efforts To Regulate The Construction Or Expansion Of Hospitals Could Impair Our Ability To Operate And Expand Our Operations.

     Some states require healthcare providers to obtain prior approval, known as certificates of need, for:

•		the purchase, construction or expansion of healthcare facilities;
•		capital expenditures exceeding a prescribed amount; or
•		changes in services or bed capacity.

     In giving approval, these states consider the need for additional or expanded healthcare facilities or services. Florida is the only state in which we currently own hospitals that has certificate of need laws. The failure to obtain any required certificate of need could impair our ability to operate or expand operations.

     Providers In The Healthcare Industry Have Been The Subject Of Federal And State Investigations, And We May Become Subject To Investigations In The Future.

     Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of hospital companies, as well as their executives and managers. These investigations relate to a wide variety of topics, including:

•		referral, cost reporting and billing practices;
•		laboratory and home healthcare services; and
•		physician ownership and joint ventures involving hospitals.

     Amendments in 1986 to the federal False Claims Act have made it easier for private parties to bring “qui tam” whistleblower lawsuits against companies. Some states have adopted similar state whistleblower and false claims provisions.

     The Office of the Inspector General of the U.S. Department of Health and Human Services and the Department of Justice have, from time to time, established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Initiatives include a focus on hospital billing for outpatient charges associated with inpatient services, as well as hospital laboratory billing practices.

     Some of our activities could become the subject of governmental investigations or inquiries. For example, we have significant Medicare and Medicaid billings, we provide some durable medical equipment and home healthcare services, we have joint venture arrangements involving physician investors and we have one hospital that has physician investors. In addition, our executives and managers, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. We are not aware of any

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material governmental investigations involving any of our facilities, executives or managers. Any future investigations of us, our executives or managers could result in significant liabilities or penalties to us, as well as adverse publicity.

     We Have A Limited Operating History.

     We began operating our hospitals in October 1999 and have undergone recent changes in our senior management. Most of our senior management team, including our Chairman, President and Chief Executive Officer and our Chief Operating Officer, have been in their current positions for less than a full fiscal year. As a result, although the individual members of our management team have experience managing large groups of hospitals, they have limited experience managing our hospitals and working together as a single management team. Therefore, you should evaluate our business operations in view of the risks, uncertainties, delays and difficulties associated with a new company.

     In addition, our lack of operating history may make it difficult for investors to evaluate our business and financial condition. We have been operating all of our facilities together for less than two full fiscal years, and therefore we do not have complete comparative historical financial information with which to evaluate our performance.

     If We Fail To Successfully Employ Our Information Systems At Our Hospitals, Our Expenses Could Increase, And Our Cash Flows Could Be Negatively Affected.

     Our success is dependent in part on our access to sophisticated information systems and our ability to successfully employ these systems in our operations. We have converted and upgraded our information systems in all of our hospitals. These systems are essential to the following areas of our business operations, among others:

•		patient accounting, including billing and collection of net revenue;
•		financial, accounting, reporting and payroll;
•		coding and compliance;
•		laboratory, radiology and pharmacy systems;
•		medical records and document storage;
•		inventory management; and
•		negotiating, pricing and administering managed care contracts.

     If we are unable to successfully employ these systems, we may experience delays in collection of net revenue and may not be able to realize anticipated cost savings.

     Significant Competition From Other Healthcare Companies And State Efforts To Regulate The Sale Of Not-For-Profit Hospitals May Affect Our Ability To Acquire Hospitals.

     One element of our business strategy is to expand through selective acquisitions of hospitals in our existing markets and in new high-growth markets. We compete for acquisitions with other healthcare companies, some of which have greater competitive advantages or financial resources than us. Therefore, we may not be able to acquire hospitals on terms favorable to us or at all. Additionally, many states, including some where we have hospitals and others where we may in the future acquire hospitals, have adopted legislation regarding the sale or other disposition of hospitals operated by not-for-profit entities. In other states that do not have specific legislation, the attorneys general have demonstrated an interest in these transactions under their general obligations to protect charitable assets from waste. These legislative and administrative efforts focus primarily on the appropriate valuation of the assets divested and the use of the proceeds of the sale by the not-for-profit seller. These review and approval processes can add time to the closing of an acquisition of a not-for-profit hospital and future actions on the state level could seriously delay or even prevent our ability to acquire not-for-profit hospitals in the future.

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     Difficulties With The Integration Of Acquisitions May Disrupt Our Ongoing Operations.

     If we are able to make acquisitions, we cannot guarantee that we will be able to effectively integrate the acquired facilities with our existing operations. The process of integrating acquired hospitals may require a disproportionate amount of management’s time and attention, potentially distracting management from its day-to-day responsibilities. In addition, poor integration of acquired facilities could cause interruptions to our business activities, including those of the acquired facilities. As a result, we may not realize all or any of the anticipated benefits of an acquisition and we may incur significant costs related to the acquisitions or integration of these facilities. In addition, we may acquire hospitals that have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations.

     Although we seek indemnification from prospective sellers covering these matters, we may nevertheless have material liabilities for past activities of acquired hospitals.

     If Any One Of The Regions In Which We Operate Experiences An Economic Downturn Or Other Material Change, Our Overall Business Results May Suffer.

     Of our 14 acute care hospitals, four are located in Salt Lake City, three are located in Phoenix, three are located in
Tampa-St. Petersburg, and four are located in the State of Texas. For the year ended September 30, 2001, our net revenue was
generated as follows:

     Any material change in the current demographic, economic, competitive or regulatory conditions in any of these regions could adversely affect our overall business results because of the significance of our operations in each of these regions to our overall operating performance. Moreover, due to the concentration of our revenue in only four regions, our business is not diversified and, therefore, is subject to greater market risks than some competing multi-facility healthcare companies.

     We May Be Subject To Liabilities Because Of Claims Brought Against Our Facilities.

     Plaintiffs frequently bring actions against hospitals and other healthcare providers, alleging malpractice, product liability or other legal theories. Many of these actions involve large claims and significant defense costs. We maintain professional malpractice liability insurance and general liability insurance in amounts we believe are sufficient to cover claims arising out of the operations of our facilities. Some of the claims, however, could exceed the scope of the coverage in effect or coverage of particular claims or damages could be denied. In addition, our insurance coverage may not continue to be available on acceptable terms at reasonable prices that will allow us to maintain adequate levels of insurance coverage.

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     Should We Be Unable To Control Healthcare Costs At Health Choice, Our Profitability May Be Adversely Affected.

     During the year ended September 30, 2001, our Health Choice health plan generated approximately 12% of our net revenue and 4% of our EBITDA. Health Choice derives substantially all of its net revenue through a contract with the Arizona Health Care Cost Containment System, which is the state agency that administers Arizona’s Medicaid program. The Arizona Health Care Cost Containment System sets the capitated rates we receive at Health Choice and Health Choice subcontracts with physicians, hospitals and other healthcare providers to provide services to its enrollees. If we fail to effectively manage healthcare costs, these costs may exceed the payments we receive. Many factors can cause actual healthcare costs to exceed the capitated rates set by the Arizona Health Care Cost Containment System, including:

•		our ability to contract with cost-effective healthcare providers;
•		the increased cost of individual healthcare services;
•		the type and number of individual healthcare services delivered; and
•		the occurrence of catastrophes, epidemics or other unforeseen occurrences.

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Item 2.    Properties.

     We operate 14 general, acute care hospitals and five ambulatory surgery centers. Of the 14 hospitals we operate, we currently own 12 and lease two. One of the hospitals we own has third party investors that together own an 11.2% ownership interest. Three of the surgery centers we operate are owned by joint ventures in which we own varying interests. The following table contains information concerning our hospitals and ambulatory surgery centers.

     We also operate medical office buildings in conjunction with our hospitals. These office buildings are occupied primarily by physicians who practice at our hospitals.

     In addition, we own the land and buildings at Rocky Mountain Medical Center, which we opened on April 10, 2000 and closed on June 2, 2001. We have classified the assets at Rocky Mountain Medical Center as held for sale and currently expect to sell these assets within the next 12 months.

     Our principal executive offices in Franklin, Tennessee are located in approximately 22,500 square feet of office space. Of our office space, 18,500 square feet of space is leased pursuant to a lease that expires in 2003 with respect to approximately 2,000 square feet and in 2005 with respect to 16,500 square feet. We have an option to extend the term of this lease for two additional five-year periods. The remaining 4,000 square feet of our office

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space is leased pursuant to a sublease that expires in 2004. Our principal executive offices, hospitals and other facilities are suitable for their respective uses and generally are adequate for our present needs.

Item 3.    Legal Proceedings.

     On August 18, 2000, our subsidiary, Rocky Mountain Medical Center, filed a Complaint and Motion for Preliminary Injunction in the Third Judicial District Court for Salt Lake County, State of Utah against St. Mark’s Hospital. St. Mark’s Hospital is owned by HCA Inc. The complaint alleges certain state law violations by St. Mark’s Hospital, including exclusionary contracting practices constituting, among other things, a group boycott under the Utah Antitrust Act, and seeks unspecified monetary and punitive damages. Both parties filed Motions for Summary Judgment in this case and consolidated oral arguments regarding both parties’ motions were held on October 29, 2001. On December 14, 2001, the court denied both parties’ motions. The case is still pending and we intend to continue to vigorously pursue this litigation.

     We are involved in other litigation and proceedings in the ordinary course of our business. We do not believe the outcome of any such litigation will have a material adverse effect upon our business, financial condition or results of operations.

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

     No matters were submitted to a vote of stockholders during the fourth quarter ended September 30, 2001.

PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters.

     There is no established public trading market for our common stock. At December 20, 2001, there were 61 holders of record of our common stock.

     We have not declared or paid a cash dividend on our common stock. It is the present policy of our board of directors to retain all earnings to support operations and finance expansion. Our senior credit facilities restrict our ability to pay cash dividends on our common stock, and the indenture governing our senior subordinated notes currently prohibits the payment of cash dividends on our common stock.

Item 6.    Selected Financial Data.

     The following tables present selected financial data for our company for the years ended September 30, 2001 and 2000 derived from our audited consolidated and combined financial statements and include financial data for the Tenet hospitals from October 15, 1999, their date of acquisition. The consolidated and combined financial statements and the related notes to our consolidated and combined financial statements for the years ended September 30, 2001 and 2000 and the nine months ended September 30, 1999, together with the related report of independent auditors are included elsewhere in this annual report on Form 10-K.

     The following tables also present selected historical financial data for the Paracelsus hospitals for each of the fiscal years in the two years ended December 31, 1998 and 1997, and for the nine months ended September 30, 1999 and 1998. We have derived the selected financial data for each of the two years ended December 31, 1998 and 1997 and for the nine months ended September 30, 1999 from the audited combined financial statements of the Paracelsus hospitals. We have derived the selected financial data for the nine months ended September 30, 1998 from the unaudited combined financial statements of the Paracelsus hospitals.

     The following data should be read in conjunction with the consolidated and combined financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that appear elsewhere in this annual report on Form 10-K.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated and combined financial statements, the notes to our consolidated and combined financial statements, and the other financial information appearing elsewhere in this report. Data for the years ended September 30, 2001 and 2000 has been derived from our audited consolidated and combined financial statements. Data for the year ended September 30, 1999 is unaudited and has been derived from the unaudited condensed combined financial statements of the Paracelsus hospitals. Data for the nine months ended September 30, 1999 has been derived from the audited combined financial statements of Paracelsus and may not be indicative of operating results for the full year. Data for periods prior to the 2000 fiscal year may not be indicative of the results of operations that we would have experienced had we been an independent, stand-alone entity during all of the periods presented.

Forward Looking Statements

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

General

     We are a leading owner and operator of acute care hospitals that develops and operates networks of medium-sized hospitals in high-growth urban and suburban markets. We operate our hospitals with a strong community focus by offering and developing healthcare services to meet the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. At September 30, 2001, we owned or leased 14 hospitals with a total of 2,063 beds in service. Our hospitals are located in four regions:

	•		Salt Lake City, Utah;
	•		Phoenix, Arizona;
	•		Tampa-St. Petersburg, Florida; and
	•		three cities in the State of Texas, including San Antonio.

We also operate five ambulatory surgery centers and a Medicaid managed health plan called Health Choice, serving over 49,000 members in Arizona at September 30, 2001.

     Net revenue is comprised of net patient service revenue and other revenue. Net patient service revenue is reported net of contractual adjustments. The adjustments principally result from differences between the hospitals’ established charges and payment rates under Medicare, Medicaid and various managed care organizations. Established hospital charges generally have increased at a faster rate than the rate of increase for Medicare and Medicaid payments. The calculation of appropriate payments from the Medicare and Medicaid programs as well as terms governing agreements with other third party payors are complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. We believe that we are in compliance with all applicable laws and regulations and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on our

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financial statements. Other revenue includes revenue from Health Choice, medical office building rental income and other miscellaneous revenue. Operating expenses consist of salaries and benefits, supplies, other operating expenses, provision for bad debts, allocation of management fees and reversal of excess loss accruals.

     Our hospitals’ net patient service revenue continues to be affected by an increasing proportion of revenue being derived from fixed payment, higher discount sources including Medicare, Medicaid, managed care organizations and others. Fixed payment amounts are often based upon a diagnosis regardless of the cost incurred or the level of services provided. Our net revenue, cash flows and earnings have been reduced by this reimbursement methodology. We expect patient volumes from Medicare and Medicaid to continue to increase due to the general aging of the population and expansion of state Medicaid programs. Under the Balanced Budget Act of 1997, reimbursement from Medicare and Medicaid was reduced during 1998, 1999, 2000 and 2001 and will continue to be reduced as certain changes are phased in during 2002. Certain of the rate reductions resulting from the Balanced Budget Act of 1997 are being mitigated by the Balanced Budget Refinement Act of 1999 and the Benefits Improvement Protection Act of 2000. It is estimated that the Benefits Improvement Protection Act of 2000 will provide approximately $35.0 billion in funding restorations to Medicare healthcare providers over a period of five years, approximately one-third of which will go to hospitals. Exclusive of Health Choice, the percentage of our net revenue related to Medicare and Medicaid was approximately 32% for the year ended September 30, 2001.

     Our net revenue also is affected by the trend toward performing more services on an outpatient basis due to advances in medical technology and pharmacology as well as cost containment pressures from Medicare, Medicaid, managed care organizations and other sources of revenue. Approximately 36% of our gross patient revenue during the year ended September 30, 2001 was generated from outpatient procedures.

Recapitalization and Acquisition Transactions

     Our company was formed in October 1999 through a series of transactions that were arranged by Joseph Littlejohn & Levy, Inc. and members of our management team. Joseph Littlejohn & Levy is the private equity firm that controls JLL Healthcare, LLC, our largest stockholder. The first transaction was effective October 8, 1999, when Paracelsus Healthcare Corporation and unrelated third parties recapitalized five acute care hospitals in the Salt Lake City, Utah market owned by a subsidiary of Paracelsus. In connection with the recapitalization, JLL Healthcare, LLC and some of our stockholders purchased an aggregate of $125.0 million of the outstanding common stock of the subsidiary of Paracelsus. The subsidiary then repurchased $155.0 million of its common stock from Paracelsus. The recapitalization transaction resulted in Paracelsus retaining an approximately 6% minority interest in the preexisting Paracelsus subsidiary that owned the five acute care hospitals. After the recapitalization, the former Paracelsus subsidiary changed its name to IASIS Healthcare Corporation and changed its fiscal year end to September 30.

     The second transaction was effective October 15, 1999, when we acquired ten acute care hospitals and other related facilities and assets from Tenet Healthcare Corporation. Concurrent with the Tenet transaction, a company formed by members of our management to acquire and operate hospitals and related businesses was merged with and into a wholly owned subsidiary of our company.

     The Tenet transaction and merger with a company formed by members of our management were accounted for using the purchase method of accounting. The operating results of these acquired companies have been included in our accompanying consolidated and combined statements of operations from the October 15, 1999 date of acquisition.

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Discontinued Operations

     Our financial results from continuing operations exclude the results of Clinicare, our physician practice operations that consisted of 31 physicians in 13 offices. We have substantially completed exiting this business by selling the assets of our physician practices and closing our practice support offices. Net revenue and expenses associated with these operations have been reclassified to discontinued operations. We incurred losses from our discontinued physician practice operations in the year ended September 30, 2000 of $10.6 million, compared to losses of $600,000 in the year ended September 30, 1999. The loss from discontinued operations for the year ended September 30, 2000, included a charge of $7.4 million to provide for costs associated with the discontinuation and disposal of the physician practice operations. During the year ended September 30, 2001, $1.0 million of previously recorded loss accruals were reversed due to discontinuing these operations to date at costs that were less than previously estimated.

Selected Operating Data

     The following table sets forth certain unaudited operating data for each of the periods presented. The operating data include the Tenet hospitals from October 15, 1999, their date of acquisition.

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Results of Operations

     The following table presents, for the periods indicated, information expressed as a percentage of net revenue. Such information has been derived from our consolidated and combined statements of operations. The results of operations include the Tenet hospitals, Health Choice and the company formed by members of our management from October 15, 1999, their acquisition date.

Year Ended September 30, 2001 Compared to Year Ended September 30, 2000

     Net revenue for the year ended September 30, 2001 was $889.5 million, an increase of $74.3 million, or 9.1%, from $815.2 million for the year ended September 30, 2000. Approximately $22.8 million of the increase in net revenue was due to the inclusion of a full year of operations for the Tenet facilities and Health Choice compared to the prior year period, which included the results of these operations from their acquisition date, October 15, 1999. The remaining increase in net revenue consisted of $36.7 million from hospital operations, which we refer to as our acute care service segment in our financial statements, and $21.2 million from Health Choice. Offsetting a portion of this increase was a reduction to net revenue of $6.35 million in our hospital operations to provide for managed care valuation allowances during the year ended September 30, 2001. Of this amount, a provision of $4.5 million was made for healthcare service claims disputed with managed care organizations and other third-party payors. These claims resulted from services rendered to patients in previous periods and were considered valid claims for reimbursement at the time the services were rendered. We substantially completed an information systems conversion in calendar year 2000. Certain managed care and other claims submitted during the conversion period were denied, in whole or in part, by third-party payors as being improperly submitted. The allowance was provided to report the claims at their estimated net realizable value. Also, we terminated a capitated contract with a managed

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care organization at two of our Phoenix hospitals in March 2001. The remainder of the managed care valuation allowances related to a provision of $1.85 million due to disputes that arose with respect to costs associated with patients covered under that capitated contract.

     Net revenue from our hospital operations for the year ended September 30, 2001 was $779.0 million, an increase of $53.3 million, or 7.3%, from $725.7 million for the same period in 2000. Approximately $19.5 million of the increase was due to the inclusion of a full year of operations for the Tenet hospital facilities. Net revenue from Rocky Mountain Medical Center increased $8.4 million from $4.5 million for the year ended September 30, 2000 to $12.9 million for the year ended September 30, 2001. Rocky Mountain Medical Center was closed on June 2, 2001, as discussed below. The remaining increase in net revenue was due to volume growth and price increases in our hospital operations. The increase in volume was attributable largely to our increased focus on improving physician relations and communications, physician recruitment, new services, facility improvements and population growth in our primary service areas. As discussed above, our net revenue was reduced by $6.35 million during the year ended September 30, 2001 for managed care valuation allowances. Our net revenue per adjusted patient day, excluding Rocky Mountain Medical Center, increased 2.5% for the year ended September 30, 2001, or 3.4% excluding the effect of the managed care valuation allowances. The overall increase in net revenue from our hospital operations also was negatively affected by a decline in the net revenue and volume in the hospital operations in our Arizona market.

     In our Arizona market, admissions and patient days each declined by approximately 3.0% during the year ended September 30, 2001 compared to the prior year. The decline in volume in that market was due primarily to the closure of two sub-acute units, turnover in management at certain of the hospitals and the termination of the capitated contract. During the three months ended September 30, 2001, we hired new management for our hospital operations in that market. Prior to March of 2001, we had a significant capitated Medicare contract in our Arizona market under which we experienced an increase in utilization and other costs without corresponding increases in net revenue. In an effort to improve operating results, effective March 1, 2001, we terminated the capitated contract and renegotiated this contract to a per-diem arrangement under which we generally are paid a fixed payment for each day a patient receives care in our hospitals.

     Admissions, excluding Rocky Mountain Medical Center, increased 7.7% from 73,887 for the year ended September 30, 2000 to 79,594 for the same period in 2001, and patient days, excluding Rocky Mountain Medical Center, increased 4.6% from 329,121 in 2000 to 344,394 in 2001. Adjusted admissions, excluding Rocky Mountain Medical Center, increased 7.2% from 120,259 for the year ended September 30, 2000 to 128,923 for the same period in 2001 and adjusted patient days, excluding Rocky Mountain Medical Center, increased 3.8% from 520,435 in 2000 to 540,108 in 2001. Assuming that the acquisition of the Tenet hospital facilities on October 15, 1999 was effective as of October 1, 1999, admissions, patient days, adjusted admissions and adjusted patient days, excluding Rocky Mountain Medical Center, would have increased 4.8%, 1.6%, 4.4% and 0.9%, respectively. These changes in volume were negatively impacted during the year ended September 30, 2001 by the results from our Arizona market, as discussed above. Excluding Rocky Mountain Medical Center, the average length of stay resulting from admissions and patient days decreased 2.7% from 4.45 days for the year ended September 30, 2000 to 4.33 days for the same period in 2001. This decrease in length of stay was attributable in part to improved case management, growth in services requiring shorter length of stays, closure of the sub-acute units in the Arizona market and changes in technology, pharmacology and clinical practices.

     Net revenue from Health Choice was $110.6 million for the year ended September 30, 2001, an increase of $21.2 million, or 23.7%, from $89.4 million for the year ended September 30, 2000. Approximately $3.3 million of the increase is due to the inclusion of a full year of operations for Health Choice. Additionally, covered lives under this prepaid Medicaid plan have increased 21.4% from 40,746 at September 30, 2000 to 49,455 at September 30, 2001. The increase in covered lives has positively impacted Health Choice net revenue for the year ended September 30, 2001 compared to the prior year period.

     Operating expenses increased $82.3 million from $703.6 million for the year ended September 30, 2000 to $785.9 million for the year ended September 30, 2001. Operating expenses as a percentage of net revenue were 88.3% for the year ended September 30, 2001, compared to 86.3% for the year ended September 30, 2000. Excluding Rocky Mountain Medical Center and the effect of the $6.35 million managed care valuation allowances,

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operating expenses as a percentage of net revenue were 86.4% for the year ended September 30, 2001 and 85.1% for the year ended September 30, 2000.

     Operating expenses from our hospital operations for the year ended September 30, 2001 were $679.4 million, an increase of $61.9 million, or 10.0%, from $617.5 million for the year ended September 30, 2000. Approximately $18.6 million of the increase, consisting of $8.7 million in salaries and benefits, $1.8 million in supplies, $400,000 in provision for bad debts and $7.7 million in other operating expenses, was due to the inclusion of a full year of operations for the Tenet hospital facilities. Of the remaining $43.3 million increase in operating expenses, $9.5 million was due to an increase in the operating expenses of Rocky Mountain Medical Center and $33.8 million was due primarily to the volume growth in our hospital operations, increases in labor and benefits costs, including increased use of contract labor, and increases in the provision of bad debts.

     Excluding Rocky Mountain Medical Center and the managed care valuation allowances, operating expenses from our hospital operations as a percentage of net revenue were 85.0% for the year ended September 30, 2001 compared to 83.7% for the year ended September 30, 2000. This increase was due primarily to a combination of increased salaries and benefits expense and provision for bad debts as a percentage of net revenue for the year ended September 30, 2001 compared to the prior year, offset partially by a decrease in supplies and other operating expenses as a percentage of net revenue for the same period. Salaries and benefits expense as a percentage of net revenue increased 1.3% from year to year due primarily to an increased level of temporary staffing in certain of our markets where volume has been growing, general wage inflation, increased cost and utilization of healthcare benefits for employees and increased staffing at our corporate office. Contract labor increased by $5.8 million during the year ended September 30, 2001 compared to the prior year primarily due to labor shortages in nursing and technicians. Corporate salaries and wages increased by approximately $1.6 million for the year ended September 30, 2001 compared to the prior year as a result of building our corporate support infrastructure. Provision for bad debts as a percentage of net revenue increased 0.8% from year to year primarily due to self-pay inpatient volume principally through our emergency room services and an increase in self-pay accounts receivable resulting from balances due after insurance payments, such as deductibles and co-insurance. Supplies expense as a percentage of net revenue decreased 0.1% due to increasing compliance with our group purchasing contract and decreased supplies utilization beginning in the three months ended September 30, 2001. Other operating expenses as a percentage of net revenue decreased 0.7% from year to year primarily due to lower professional fees and purchased services expenses, partially as a result of substantially completing our information system conversions. We expect our other operating expenses to be negatively impacted for fiscal year 2002 by an overall increase in insurance premiums generally and a significant increase in our self-insured retention for professional liability insurance.

     We opened Rocky Mountain Medical Center in Salt Lake City, Utah on April 10, 2000 with 118 licensed beds and 71 beds in service. Our census levels and net revenue were slow to grow and significantly lower than we expected prior to opening the hospital primarily as a result of what we believe to be exclusionary contracting practices pursued in the Salt Lake City market by a competitor. As a result, we closed Rocky Mountain Medical Center on June 2, 2001 and recorded asset revaluation and closure costs of $11.9 million during the year ended September 30, 2001, as discussed below. We have classified the assets at Rocky Mountain Medical Center as held for sale and currently expect to sell these assets within the next 12 months. In addition, as a result of the exclusionary contracting practices that we believe had a material adverse effect on the business and operations of Rocky Mountain Medical Center, we filed a lawsuit against the competitor seeking damages and other remedies. The lawsuit is currently pending.

     During the year ended September 30, 2001, Rocky Mountain Medical Center generated net revenue of $12.9 million and incurred operating expenses of $23.0 million, resulting in an EBITDA loss of $10.1 million. During the year ended September 30, 2000, Rocky Mountain Medical Center generated net revenue of $4.5 million and incurred operating expenses of $13.5 million, resulting in an EBITDA loss of $9.0 million. We incurred operating expenses of $23.0 million for the year ended September 30, 2001, at Rocky Mountain Medical Center, consisting of $7.7 million in salaries and benefits, $2.6 million in supplies, $3.3 million in provision for bad debts and $9.4 million in other operating expenses. For the year ended September 30, 2000, we incurred operating expenses of $13.5 million at Rocky Mountain Medical Center, consisting of $5.5 million in salaries and benefits, $1.3 million in supplies, $900,000 in provision for bad debts and $5.8 million in other operating expenses. Other operating expenses included costs for purchased services, rents and leases, utilities, marketing, insurance and other

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expenses, including professional fees associated with the lawsuit noted above of approximately $900,000 and $335,000 for the years ended September 30, 2001 and 2000, respectively.

     Operating expenses for Health Choice increased $20.3 million to $106.4 million for the year ended September 30, 2001 compared to $86.1 million for the year ended September 30, 2000, due to the incremental cost of increased enrollment and the fact Health Choice was acquired effective October 15, 1999 and therefore did not have a full twelve months of expenses in the prior period. Operating expenses as a percentage of net revenue for Health Choice were comparable at 96.3% for each of the years ended September 30, 2001 and 2000.

     EBITDA was $103.7 million, or 11.7% of net revenue, for the year ended September 30, 2001, compared to $111.6 million, or 13.7% of net revenue, for the year ended September 30, 2000. Excluding results from Rocky Mountain Medical Center and the managed care valuation allowances, net revenue and EBITDA were $883.0 million and $120.2 million, respectively, for the year ended September 30, 2001, compared to net revenue and EBITDA of $810.7 million and $120.6 million, respectively, for the year ended September 30, 2000. This resulted in an EBITDA margin of 13.6% for the year ended September 30, 2001, compared to an EBITDA margin of 14.9% for the year ended September 30, 2000.

     EBITDA for hospital operations, excluding Rocky Mountain Medical Center and the managed care valuation allowances, was $116.1 million, or 15.0% of net revenue, for the year ended September 30, 2001, compared to $117.3 million, or 16.3% of net revenue, for the year ended September 30, 2000. Assuming that the acquisition of the Tenet hospital facilities on October 15, 1999 was effective as of October 1, 1999, EBITDA for hospital operations, excluding Rocky Mountain Medical Center, for the year ended September 30, 2000 would have been $116.1 million, or 15.7% of net revenue. The decline in the EBITDA margin for hospital operations, excluding the effect of Rocky Mountain Medical Center and the managed care valuation allowances, was due primarily to increases in salaries and benefits expense and provision for bad debts as noted above.

     Health Choice, our Medicaid managed health plan, has a significantly lower EBITDA margin than hospital operations. EBITDA for Health Choice was $4.1 million for the year ended September 30, 2001 and $3.3 million for the year ended September 30, 2000, each representing 3.7% of net revenue. Assuming that the acquisition of Health Choice on October 15, 1999 was effective as of October 1, 1999, the EBITDA margin for Health Choice for the year ended September 30, 2000 would have represented 3.6% of net revenue.

     Depreciation and amortization expense increased $5.6 million from $47.6 million for the year ended September 30, 2000 to $53.2 million for the year ended September 30, 2001 due to the timing of the Tenet transaction on October 15, 1999, the depreciation of assets associated with Rocky Mountain Medical Center and the depreciation of information systems equipment that was acquired subsequent to March 31, 2000.

     Interest expense increased $2.0 million from $62.4 million for the year ended September 30, 2000 to $64.4 million for the year ended September 30, 2001 due to the timing of borrowings of $560.0 million associated with the Tenet transaction and the recapitalization of the Paracelsus hospitals in October 1999, offset partially by interest rate decreases during 2001.

     We recorded no benefit for income taxes for the year ended September 30, 2001 due to the uncertainty of realizing a tax benefit related to the losses incurred. We recorded a provision for income taxes for the year ended September 30, 2000 of $2.2 million. Our provision for income taxes for the year ended September 30, 2000 resulted from differences between earnings recognized for financial reporting purposes and taxable income and the corresponding change in valuation allowance on our deferred tax assets. See Note 7 of the notes to the consolidated and combined financial statements for information regarding differences between effective tax rates and statutory rates.

     We recorded no accretion and a reversal of preferred stock dividends of $25.3 million during the year ended September 30, 2001, compared to preferred stock dividends and accretion of $25.4 million recorded during the year ended September 30, 2000. The preferred stock, which was exchanged for shares of our common stock on the basis of ten common shares for each preferred share in October 2000, was mandatorily redeemable and dividends were payable in shares of our common stock. The preferred stock was exchanged for common stock without benefit to the preferred stockholders of the accrued dividends, therefore, the accrual of dividends was

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reversed in the first quarter of fiscal 2001. Net loss attributable to common stockholders after the effect of the preferred stock dividends and accretion for the year ended September 30, 2001 was $4.5 million compared to a net loss of $40.1 million for the year ended September 30, 2000.

Year Ended September 30, 2000 Compared to Year Ended September 30, 1999

     Net revenue for the year ended September 30, 2000 was $815.2 million, an increase of $633.5 million, or 348.7%, from $181.7 million for the year ended September 30, 1999. The increase in net revenue was due largely to the addition of the Tenet hospitals and Health Choice. The Tenet hospitals and Health Choice contributed approximately $607.5 million in net revenue for the year ended September 30, 2000, or 95.9% of the total increase in net revenue for the year ended September 30, 2000, compared to the same period in 1999. During the year ended September 30, 2000, total admissions and patient days were 74,243 and 330,510, respectively, of which 54,572 admissions and 262,734 patient days resulted from the addition of the Tenet hospitals. Same facilities, which represent the Paracelsus operations other than Rocky Mountain Medical Center, provided $203.2 million in net revenue in 2000 versus $181.7 million in 1999, or $21.5 million of the increase in net revenue for the year ended September 30, 2000 compared to 1999. The remaining increase in net revenue related to the opening of Rocky Mountain Medical Center in April 2000, which contributed $4.5 million in net revenue during the year ended September 30, 2000. As discussed above, we closed Rocky Mountain Medical Center on June 2, 2001.

     As noted above, same facilities net revenue increased by $21.5 million, an 11.8% increase over the 1999 period. The increase in net revenue of same facilities was attributable primarily to an increase in volume. Same facility admissions increased 7.6% from 17,946 for the year ended September 30, 1999 to 19,315 for the same period in 2000 and same facility patient days increased 4.7% from 63,398 in 1999 to 66,387 in 2000. Same facility adjusted admissions increased 17.6% from 33,969 for the year ended September 30, 1999 to 39,934 for the same period in 2000 and same facility adjusted patient days increased 12.3% from 122,691 in 1999 to 137,744 in 2000. The increase in volume for same facilities was attributable largely to our increased focus on improving physician relations and communications, physician recruitment, new services, facility improvements and population growth in our primary service areas.

     Operating expenses increased by $547.2 million from $156.4 million for the year ended September 30, 1999 to $703.6 million for the year ended September 30, 2000 largely due to the addition of the Tenet hospitals and Health Choice. The Tenet hospitals and Health Choice contributed $511.6 million in operating expenses for the year ended September 30, 2000, or 93.5% of the total increase in operating expenses for the year ended September 30, 2000 compared to the year ended September 30, 1999. Components of this increase were $204.1 million in salaries and benefits, $92.9 million in supplies, $45.8 million in provision for bad debts and $168.8 million in other operating expenses.

     Operating expenses for same facilities increased $18.6 million during the year ended September 30, 2000, due primarily to the incremental cost of increased patient volume, higher supply costs, and increased salary, benefit and temporary staffing costs. We experienced increased competition for personnel in Utah, which required us to use a higher level of temporary staffing to meet patient needs. The increased level of temporary staffing and general wage inflation resulted in an increase in salaries and benefits expense per paid full time equivalent employee over the prior year period. Personnel were shared among hospitals in the Utah market where possible to increase staffing efficiency and reduce the need for temporary staffing. Effective April 1, 2000, we converted information systems at three of our Utah facilities. These conversions required extensive staff training, both formal and informal on the job training, which created additional temporary and overtime costs. Our benefit expense was higher than in the prior year period due to higher costs, use of a different benefit plan in fiscal 2000 and differences in the way we record benefits compared to the allocation methodologies used by the former owner. The increase in supply costs was due to rising costs of pharmaceuticals and other supplies, including high cost medical devices, and increasing volume in existing services.

     Of the remaining $17.0 million increase in operating expenses, $13.5 million related to Rocky Mountain Medical Center and $3.5 million related to corporate and miscellaneous other operating expenses that increased as a result of the growth of our company. During the year ended September 30, 2000, we added personnel to our corporate staff in the areas of operations management, operations finance, clinical operations, information systems and corporate finance.

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     During the year ended September 30, 2000, at Rocky Mountain Medical Center we recorded net revenue of $4.5 million and incurred operating expenses of $13.5 million, resulting in an EBITDA loss of $9.0 million. The operating expenses of $13.5 million incurred during the year ended September 30, 2000 consisted of $5.5 million in salaries and benefits, $1.3 million in supplies, $900,000 in provision for bad debts and $5.8 million in other operating expenses. Other operating expenses included costs for purchased services, rents and leases, utilities, marketing, insurance and other expenses, including approximately $335,000 of professional fees associated with the lawsuit we have filed with respect to Rocky Mountain Medical Center.

     Operating expenses as a percentage of net revenue were 86.3% for the year ended September 30, 2000 and 86.1% for the year ended September 30, 1999. EBITDA was $111.6 million, or 13.7% of net revenue, for the year ended September 30, 2000, compared to $25.3 million, or 13.9% of net revenue, for the year ended September 30, 1999. This decline in the EBITDA margin was due primarily to the addition of Health Choice and the operating losses at Rocky Mountain Medical Center. As noted above, Health Choice has a significantly lower EBITDA margin than hospital operations. Excluding results from Rocky Mountain Medical Center and Health Choice, net revenue and EBITDA were $721.3 million and $117.3 million, respectively, for the year ended September 30, 2000, resulting in an EBITDA margin of 16.3%.

     Depreciation and amortization expense increased $34.8 million from $12.8 million for the year ended September 30, 1999 to $47.6 million for the year ended September 30, 2000 due to the Tenet transaction and the merger with a company formed by members of our management.

     Interest expense increased $51.4 million from $11.0 million for the year ended September 30, 1999 to $62.4 million for the year ended September 30, 2000, primarily due to borrowings of $560.0 million associated with the Tenet transaction and the recapitalization of the Paracelsus hospitals. Interest expense of $11.0 million for the year ended September 30, 1999 primarily represented interest costs that Paracelsus allocated to us in proportion to amounts due to Paracelsus.

     We incurred legal, accounting and other related costs of approximately $3.5 million during the year ended September 30, 2000 related to the recapitalization transaction.

     We recorded a provision for income taxes for the year ended September 30, 2000 of $2.2 million. We recorded no provision or benefit for income taxes in 1999. Our provision for income taxes results from differences between earnings recognized for financial reporting purposes and taxable income and the corresponding change in valuation allowance on our deferred tax assets. See Note 7 of the notes to the consolidated and combined financial statements for information regarding differences between effective tax rates and statutory rates.

     We recorded preferred stock dividends and accretion of $25.4 million during the year ended September 30, 2000. The preferred stock, which was exchanged to shares of common stock in October 2000, was mandatorily redeemable and dividends were payable in shares of our capital stock. Therefore, the accrual of dividends did not result in a cash payment. Net loss attributable to common stockholders after the effect of the preferred stock dividends and accretion for the year ended September 30, 2000 was $40.1 million compared to net earnings of $1.0 million for the same period in 1999.

Asset Revaluation, Closure and Other Costs

Asset Revaluation

     During the year ended September 30, 2001, we closed Rocky Mountain Medical Center and recorded a pre-tax asset revaluation charge of approximately $2.8 million related to the closure and revaluation of net assets in conjunction with their classification as held for sale. At September 30, 2001, Rocky Mountain Medical Center net assets held for sale and expected to be sold within the next 12 months totaled approximately $24.6 million, net of the asset revaluation allowance. There can be no assurance, however, that we will recover the entire amount. Net revenue and pre-tax losses from Rocky Mountain Medical Center were $12.9 million and $16.1 million, respectively, for the year ended September 30, 2001, excluding the asset revaluation and closure charge, and $4.5 million and $15.7 million, respectively, for the year ended September 30, 2000.

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Closure Costs

     During the year ended September 30, 2001, we adopted and implemented an exit plan and recorded pre-tax closure charges of approximately $9.1 million with respect to the closure of Rocky Mountain Medical Center. These charges were comprised of approximately $1.5 million in severance and related costs, $3.5 million in facility and lease termination costs, $2.4 million in contract termination costs and $1.7 million in other exit costs. These closure plans included the involuntary termination of approximately 200 hospital and business office personnel, which were completed by September 30, 2001. During the year ended September 30, 2001, we paid a total of $3.4 million in closure costs, including approximately $1.7 million in severance and related costs, $700,000 in facility and lease termination costs, $400,000 in contract termination costs and $600,000 in other exit costs related to the closure of Rocky Mountain Medical Center. At September 30, 2001, accrued closure costs totaled approximately $5.6 million and consisted of approximately $300,000 in severance and related costs, $2.7 million in facility and lease termination costs, $2.0 million in contract termination costs and $600,000 in other exit costs.

Other Costs

     We recorded employee severance costs of $2.5 million during the year ended September 30, 2001 related to management severance and the termination of employees in one of our markets.

     During the year ended September 30, 2001, we recorded costs of $2.2 million to write-off deferred initial public offering costs. On January 22, 2001, we filed a Registration Statement on Form S-1 with the Securities and Exchange Commission, which was amended on February 13, 2001 and March 6, 2001, to register the sale of our common stock through an underwritten public offering. We subsequently decided not to pursue the public offering and it was terminated.

Summary of Operations by Quarter

     The following table presents unaudited quarterly operating results for the fiscal years ending September 30, 2001 and 2000. We believe that all necessary adjustments have been included in the amounts stated below to present fairly the quarterly results when read in conjunction with the consolidated and combined financial statements. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or predictive of future periods.