IASIS HEALTHCARE CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2002

o 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)


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

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

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

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

Indicate by check þ whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

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

As of February 14, 2003, 31,956,113 shares of the Registrant’s Common Stock were outstanding.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATION
EXHIBIT INDEX
AMENDMENT NO. 2 TO CONTRACT
ODESSA REGIONAL HOSPITAL, LP FINANCIAL STATEMENTS

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION			1
	Item 1. Financial Statements		1
		Condensed and Consolidated Balance Sheets — December 31, 2002 (Unaudited) and September 30, 2002	1
		Condensed and Consolidated Statements of Operations (Unaudited) — Three Months Ended December 31, 2002 and 2001	2
		Condensed and Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended December 31, 2002 and 2001	3
		Notes to Unaudited Condensed and Consolidated Financial Statements	4
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
	Item 4. Controls and Procedures		22
PART II — OTHER INFORMATION			22
	Item 1. Legal Proceedings		22
	Item 6. Exhibits and Reports on Form 8-K		23

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

IASIS HEALTHCARE CORPORATION

CONDENSED AND CONSOLIDATED BALANCE SHEETS

(In thousands except share amounts)


				(Unaudited)
				December 31,			September 30,
				2002			2002

ASSETS
Current assets:
	Cash and cash equivalents			$	—		$	—
	Accounts receivable, net of allowance for doubtful accounts of $39,520 and $34,450, respectively				155,665			154,452
	Inventories				24,065			23,909
	Prepaid expenses and other current assets				15,448			15,697
	Assets held for sale				22,106			22,106

			Total current assets		217,284			216,164
Property and equipment, net					405,446			402,171
Goodwill					252,204			252,397
Other assets, net					27,737			27,751

			Total assets	$	902,671		$	898,483

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable			$	46,286		$	51,920
	Salaries and benefits payable				19,643			16,692
	Accrued interest payable				9,670			15,016
	Medical claims payable				30,333			30,262
	Accrued expenses and other current liabilities				16,172			19,023
	Current portion of long-term debt and capital lease obligations				5,108			26,252

			Total current liabilities		127,212			159,165
Long-term debt and capital lease obligations					585,908			556,691
Other long-term liabilities					23,337			22,347
Minority interest					3,178			4,736

			Total liabilities		739,635			742,939
Stockholders’ equity
	Preferred stock – $0.01 par value, authorized 5,000,000 shares; no shares issued and outstanding at December 31, 2002 and September 30, 2002				—			—
	Common stock – $0.01 par value, authorized 100,000,000 shares; 31,984,779 shares issued and 31,955,863 shares outstanding at December 31, 2002, and September 30, 2002				320			320
	Nonvoting common stock – $0.01 par value, authorized 10,000,000 shares; no shares issued and outstanding at December 31, 2002 and September 30, 2002				—			—
	Additional paid-in capital				450,718			450,718
	Treasury stock, at cost, 16,306,541 shares at December 31, 2002 and September 30, 2002				(155,300	)		(155,300	)
	Accumulated deficit				(132,702	)		(140,194	)

		Total stockholders’ equity			163,036			155,544

		Total liabilities and stockholders’ equity		$	902,671		$	898,483

See accompanying notes.

IASIS HEALTHCARE CORPORATION

CONDENSED AND CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(In thousands)


			Three Months Ended
			December 31,

			2002			2001

Net revenue			$	254,765		$	220,881
Costs and expenses:
	Salaries and benefits			88,799			77,727
	Supplies			35,683			31,293
	Other operating expenses			77,414			69,596
	Provision for bad debts			19,711			16,774
	Interest, net			13,317			14,503
	Depreciation and amortization			12,851			10,488
	Gain on sale of assets, net			(780	)		(12	)

		Total costs and expenses		246,995			220,369

Earnings before minority interests, income taxes and cumulative effect of a change in accounting principle				7,770			512
Minority interests				(278	)		(223	)

Earnings before income taxes and cumulative effect of a change in accounting principle				7,492			289
Income tax expense				—			—

Net earnings before cumulative effect of a change in accounting principle				7,492			289
Cumulative effect of a change in accounting principle				—			(39,497	)

Net earnings (loss)			$	7,492		$	(39,208	)

See accompanying notes.

IASIS HEALTHCARE CORPORATION

CONDENSED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)


				Three Months Ended
				December 31,

				2002			2001

Cash flows from operating activities:
	Net earnings (loss)			$	7,492		$	(39,208	)
	Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
		Depreciation and amortization			12,851			10,488
		Minority interests			278			223
		Cumulative effect of a change in accounting principle			—			39,497
		Gain on sale of assets			(780	)		(12	)
		Changes in operating assets and liabilities, net of disposals:
			Accounts receivable		(1,069	)		712
			Inventories, prepaid expenses and other current assets		(1,041	)		(4,522	)
			Accounts payable and other accrued liabilities		(9,471	)		(5,646	)

		Net cash provided by operating activities			8,260			1,532

Cash flows from investing activities:
	Purchases of property and equipment				(14,415	)		(6,945	)
	Purchase of real estate				—			(55,338	)
	Proceeds from sale of assets				2,463			12
	Change in other assets				(861	)		(1,900	)

		Net cash used in investing activities			(12,813	)		(64,171	)

Cash flows from financing activities:
	Proceeds from issuance of common stock				—			222
	Proceeds from senior bank debt borrowings				62,200			94,600
	Payment of debt and capital leases				(57,347	)		(35,914	)
	Debt financing costs incurred				—			(2,325	)
	Distribution of minority interests				(300	)		—

		Net cash provided by financing activities			4,553			56,583

Change in cash and cash equivalents					—			(6,056	)
Cash and cash equivalents at beginning of period					—			6,056

Cash and cash equivalents at end of period				$	—		$	—

Supplemental disclosure of cash flow information:
	Cash paid for interest			$	18,720		$	22,931

	Cash paid for income taxes			$	—		$	—

Supplemental schedule of noncash investing and financing activities:
	Capital lease obligations incurred to acquire equipment			$	3,318		$	—

See accompanying notes.

IASIS HEALTHCARE CORPORATION

NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED

FINANCIAL STATEMENTS

1. Basis of Presentation

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

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

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

IASIS operates networks of medium-sized hospitals in high-growth urban and suburban markets. At December 31, 2002, the Company owned or leased 14 hospitals with a total of 2,116 beds in service. The Company’s hospitals are located in four regions:

• Salt Lake City, Utah;

• Phoenix, Arizona;

• Tampa-St. Petersburg, Florida; and

• three markets in the State of Texas, including San Antonio.

The Company also operates three ambulatory surgery centers and a Medicaid managed health plan in Phoenix called Health Choice, serving over 60,000 members at December 31, 2002.

2. Long-Term Debt and Capital Lease Obligations

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


	December 31,		September 30,
	2002		2002

Bank facilities	$	353,020	$	347,846
Senior subordinated notes		230,000		230,000
Capital lease obligations		7,996		5,097

		591,016		582,943
Less current maturities		5,108		26,252

	$	585,908	$	556,691

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

Bank Facilities

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

On February 7, 2003, the Company completed the refinancing of its bank credit facility to provide for a new $475.0 million credit facility in the form of a $350.0 million, six year term B loan and $125.0 million, five year revolving credit facility. The loans under the new credit facility accrue interest at variable rates at specified margins above either the agent bank’s alternate base rate or its Eurodollar rate. Principal payments on the new term B loan are due in quarterly installments of $875,000 beginning March 31, 2003 until maturity. The new credit facility is also subject to mandatory prepayment under specific circumstances including a portion of excess cash flow and the net proceeds from an initial public offering, asset sales, debt issuances and specified casualty events, each subject to various exceptions. Proceeds from the new credit facility were used to refinance amounts outstanding under the previous credit facility and to fund closing and other transaction related costs incurred in connection with the refinancing. The new credit facility increases the Company’s annual capital expenditure limitation to $80.0 million per year. In addition, the new credit facility provides for revisions to certain financial covenants and replaces the fixed charge coverage covenant under the previous credit facility with a senior leverage test. The new $125.0 million revolving credit facility is available for working capital and other general corporate purposes. Consistent with the previous credit facility, the new bank credit facility requires that the Company comply with various financial ratios and tests and contains covenants limiting the Company’s ability to, among other things, incur debt, engage in acquisitions or mergers, sell assets, make investments or capital expenditures, make distributions or stock repurchases and pay dividends. The new bank credit facility is guaranteed by the Company’s subsidiaries and these guaranties are secured by a pledge of substantially all of the subsidiaries’ assets. Substantially all of the Company’s outstanding common stock is pledged for the benefit of the Company’s lenders as security for the Company’s obligations under the new credit facility.

At December 31, 2002, the amounts outstanding under the previous credit facility’s tranche A, tranche B and incremental term loans were $51.9 million, $241.8 million and $29.8 million, respectively, and the Company had $29.5 million outstanding under the revolving credit facility. The new revolving credit facility includes a $75.0 million sub-limit for letters of credit that may be issued. At December 31, 2002, the Company had issued $38.3 million in letters of credit. The loans under the previous bank credit facility accrued interest at variable rates at specified margins above either the agent bank’s alternate base rate or its reserve-adjusted Eurodollar rate. The weighted average interest rate of outstanding borrowings under the previous bank credit facility was approximately 5.9% for the three months ended December 31, 2002. The Company will also pay a commitment fee equal to 0.5% of the average daily amount available under the new revolving credit facility. During the three months ended March 31, 2003, the Company will write off approximately $3.9 million in deferred financing costs associated with the previous credit facility.

Senior Subordinated Notes

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

Except with respect to a change of control, the Company is not required to make mandatory redemption or sinking fund payments with respect to the Notes. The Notes are guaranteed, jointly and severally, by all of the

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

Company’s subsidiaries (“Subsidiary Guarantors”). The Company is a holding company with no independent assets or operations apart from its ownership of the Subsidiary Guarantors. At December 31, 2002, all of the Subsidiary Guarantors fully and unconditionally guaranteed the Notes and, with the exception of Odessa Regional Hospital, LP, all were 100% owned by the Company. The indenture for the Notes contains certain covenants, including but not limited to, restrictions on new indebtedness, asset sales, capital expenditures, dividends and the Company’s ability to merge or consolidate.

3. Contingencies

Net Revenue

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

Professional, General and Workers Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment and personal injuries. To cover these types of claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through a commercial insurance carrier in amounts that the Company believes to be sufficient for its operations, although, potentially, some claims may exceed the scope of coverage in effect. Plaintiffs may request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any such proceedings that, in the Company’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company expenses an actuarially determined estimate of the cost it expects to incur under the self-insured retention exposure for professional liability claims. As of December 31, 2002 and September 30, 2002, the Company’s professional and general liability accrual for asserted and unasserted claims was approximately $18.9 million and $17.6 million, respectively, which is included within other long-term liabilities in the accompanying condensed and consolidated balance sheets.

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

Health Choice

Health Choice has entered into a capitated contract whereby the plan provides healthcare services in exchange for fixed periodic and supplemental payments from Arizona Health Care Cost Containment System (“AHCCCS”). These services are provided regardless of the actual costs incurred to provide these services. The Company receives reinsurance and other supplemental payments from AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company believes the capitated payments, together with reinsurance and other supplemental payments, are sufficient to pay for the services Health Choice is obligated to deliver. As of December 31, 2002, the Company provided performance guaranties in the form of a letter of credit in the amount of

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

$20.6 million for the benefit of AHCCCS to support its obligations under the Health Choice contract to provide and pay for the healthcare services.

Tax Sharing Agreement

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

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

Other

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

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

4. Goodwill

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

5. Asset Revaluation and Closure Costs

In the third quarter of fiscal 2001, the Company recorded a pre-tax asset revaluation charge of approximately $2.8 million related to the closure of Rocky Mountain Medical Center and revaluation of net assets in conjunction with their classification as held for sale. At December 31, 2002, Rocky Mountain Medical Center net assets held for sale consisted of property and equipment and totaled approximately $22.1 million.

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

The Company adopted and implemented an exit plan and recorded pre-tax closure charges of approximately $9.1 million in the third quarter of fiscal 2001 with respect to the closure of Rocky Mountain Medical Center. These closure plans included the involuntary termination of approximately 200 hospital and business office personnel, which were completed by September 20, 2001. At December 31, 2002, accrued closure costs totaled approximately $1.7 million. The following table summarizes the closure costs accrual and payment activity for the three months ended December 31, 2002 (in thousands):


				Facility and
				Lease			Contract
		Severance and		Termination			Termination		Other
		Related Costs		Costs			Costs		Exit Costs			Total

Balances at September 30, 2002		$	—	$	1,334		$	—	$	825		$	2,159
	Payments		—		(188	)		—		(255	)		(443	)

Balances at December 31, 2002		$	—	$	1,146		$	—	$	570		$	1,716

6. Segment and Geographic Information

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


		Three Months
		Ended December 31,

		2002			2001

		(In thousands)
Acute Care Service:
Net patient revenue		$	219,725		$	189,148
Revenue between segments			(1,908	)		(1,437	)

	Net revenue		217,817			187,711
Salaries and benefits			87,243			76,488
Supplies			35,561			31,193
Other operating expenses			43,975			38,909
Provision for bad debts			19,711			16,774

	EBITDA⁽¹⁾		31,327			24,347
Interest expense, net			13,317			14,551
Depreciation and amortization			12,818			10,459
Gain on sale of assets, net			(780	)		(12	)

	Earnings (loss) before minority interests, income taxes and cumulative effect of a change in accounting principle		5,972			(651	)
Minority interests			(278	)		(223	)

	Earnings (loss) before income taxes and cumulative effect of a change in accounting principle	$	5,694		$	(874	)

Segment assets		$	900,221		$	904,763

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS


		Three Months Ended
		December 31,

		2002		2001

		(In thousands)
Health Choice:
Capitation premiums and other payments		$	36,948	$	33,170
Revenue between segments			—		—

	Net revenue		36,948		33,170
Salaries and benefits			1,556		1,239
Supplies			122		100
Other operating expenses			33,439		30,687
Provision for bad debts			—		—

	EBITDA⁽¹⁾		1,831		1,144
Interest income			—		(48	)
Depreciation and amortization			33		29

	Earnings before minority interests, income taxes and cumulative effect of a change in accounting principle		1,798		1,163
Minority interests			—		—

	Earnings before income taxes and cumulative effect of a change in accounting principle	$	1,798	$	1,163

Segment assets		$	2,450	$	15,760

(1) EBITDA represents earnings before interest expense, gain on sale of assets, minority interests, income taxes and depreciation and amortization.

7. Supplemental Condensed Consolidating Financial Information

The Notes described in Note 2 are fully and unconditionally guaranteed on a joint and several basis by all of the Company’s Subsidiary Guarantors.

A summarized condensed consolidating balance sheet at December 31, 2002 and September 30, 2002 and condensed consolidating statement of operations and statement of cash flows for the three months ended December 31, 2002 and 2001 for the Company, segregating the parent company issuer, the combined 100% owned Subsidiary Guarantors, the non-100% owned Subsidiary Guarantor and eliminations, are found below. Separate unaudited financial statements of the non-100% owned Subsidiary Guarantor, Odessa Regional Hospital, LP (“Odessa”), are included as Exhibit 99.1 to this report. On February 1, 2001, Odessa sold 11.2% of its limited partner units, which reduced the Company’s ownership accordingly. However, Odessa’s guaranty continues to be full and unconditional with respect to the Notes.

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Balance Sheet (unaudited)
December 31, 2002
(in thousands)


					Subsidiary Guarantors

								Non-					Condensed
			Parent Issuer		100% Owned			100% Owned		Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	—	$	—		$	—	$	—		$	—
	Accounts receivable, net			—		144,944			10,721		—			155,665
	Inventories			—		22,254			1,811		—			24,065
	Prepaid expenses and other current assets			—		15,094			354		—			15,448
	Assets held for sale			—		22,106			—		—			22,106

		Total current assets		—		204,398			12,886		—			217,284
Property and equipment, net				—		381,279			24,167		—			405,446
Net investment in and advances to subsidiaries				871,533		(834,241	)		3,733		(41,025	)		—
Goodwill				—		223,377			28,827		—			252,204
Other assets				16,893		10,057			787		—			27,737

		Total assets	$	888,426	$	(15,130	)	$	70,400		(41,025	)	$	902,671

Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable		$	—	$	43,552		$	2,734	$	—		$	46,286
	Salaries and benefits payable			—		18,674			969		—			19,643
	Accrued interest payable			9,670		—			—		—			9,670
	Medical claims payable			—		30,333			—		—			30,333
	Other accrued expenses and other current liabilities			—		15,773			399		—			16,172
	Current portion of long-term debt and capital lease obligations			3,500		718			890		—			5,108

		Total current liabilities		13,170		109,050			4,992		—			127,212
Long-term debt and capital lease obligations				579,519		6,440			40,974		(41,025	)		585,908
Other long-term liabilities				—		23,337			—		—			23,337
Minority interest				—		3,178			—		—			3,178

		Total liabilities		592,689		142,005			45,966		(41,025	)		739,635
Stockholders’ equity				295,737		(157,135	)		24,434		—			163,036

		Total liabilities and stockholders’ equity	$	888,426	$	(15,130	)	$	70,400	$	(41,025	)	$	902,671

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Balance Sheet
September 30, 2002
(in thousands)


					Subsidiary Guarantors

								Non-						Condensed
			Parent Issuer		100% Owned			100% Owned			Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	—	$	—		$	—		$	—		$	—
	Accounts receivable, net			—		145,704			8,748			—			154,452
	Inventories			—		22,218			1,691			—			23,909
	Prepaid expenses and other current assets			—		14,792			905			—			15,697
	Assets held for sale			—		22,106			—			—			22,106

		Total current assets		—		204,820			11,344			—			216,164
Property and equipment, net				—		378,715			23,456			—			402,171
Net investment in and advances to subsidiaries				870,372		(833,886	)		(3,426	)		(33,060	)		—
Goodwill				—		223,570			28,827			—			252,397
Other assets, net				18,006		9,081			664			—			27,751

		Total assets	$	888,378	$	(17,700	)	$	60,865			(33,060	)	$	898,483

Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable		$	—	$	49,986		$	1,934		$	—		$	51,920
	Salaries and benefits payable			—		15,645			1,047			—			16,692
	Accrued interest payable			15,016		—			—			—			15,016
	Medical claims payable			—		30,262			—			—			30,262
	Accrued expenses and other current liabilities			—		18,824			199			—			19,023
	Current portion of long-term debt and capital lease obligations			25,307		945			470			(470	)		26,252

		Total current liabilities		40,323		115,662			3,650			(470	)		159,165
Long-term debt and capital lease obligations				552,539		4,152			32,590			(32,590	)		556,691
Other long-term liabilities				—		22,347			—			—			22,347
Minority interest				—		4,736			—			—			4,736
Stockholders’ equity				295,516		(164,597	)		24,625			—			155,544

	Total liabilities and stockholders’ equity		$	888,378	$	(17,700	)	$	60,865		$	(33,060	)	$	898,483

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Statement of Operations
for the Three Months Ended December 31, 2002 (unaudited)
(in thousands)


					Subsidiary Guarantors

								Non-					Condensed
		Parent Issuer			100% Owned			100% Owned		Eliminations			Consolidated

Net revenue		$	—		$	238,860		$	16,220	$	(315	)	$	254,765
Costs and expenses:
Salaries and benefits			—			83,484			5,315		—			88,799
Supplies			—			33,254			2,429		—			35,683
Other operating expenses			—			74,867			2,547		—			77,414
Provision for bad debts			—			18,286			1,425		—			19,711
Interest, net			13,246			71			1,255		(1,255	)		13,317
Depreciation and amortization			1,114			11,230			507		—			12,851
Gain on sale of assets, net			—			(780	)		—					(780	)
Management fees			—			—			315		(315	)		—
Equity in earnings of affiliates			(20,597	)		—			—		20,597			—

	Total costs and expenses		(6,237	)		220,412			13,793		19,027			246,995
Earnings before minority interests and income taxes			6,237			18,448			2,427		(19,342	)		7,770
Minority interests			—			(278	)		—		—			(278	)

Earnings before income taxes			6,237			18,170			2,427		(19,342	)		7,492
Income tax expense			—			—			—		—			—

Net earnings (loss)		$	6,237		$	18,170		$	2,427	$	(19,342	)	$	7,492

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Statement of Operations
for the Three Months Ended December 31, 2001 (unaudited)
(in thousands)


						Subsidiary Guarantors

									Non-					Condensed
			Parent Issuer			100% Owned			100% Owned		Eliminations			Consolidated

Net revenue			$	—		$	210,160		$	10,935	$	(214	)	$	220,881
Costs and expenses:
	Salaries and benefits			—			73,953			3,774		—			77,727
	Supplies			—			30,196			1,097		—			31,293
	Other operating expenses			—			67,695			1,901		—			69,596
	Provision for bad debts			—			15,828			946		—			16,774
	Interest, net			14,408			95			1,087		(1,087	)		14,503
	Depreciation and amortization			1,059			9,083			346		—			10,488
	Gain on sale of assets			—			(12	)		—		—			(12	)
	Management fees			—			—			214		(214	)		—
	Equity in earnings of affiliates			(14,669	)		—			—		14,669			—

		Total costs and expenses		798			196,838			9,365		13,368			220,369
Earnings (loss) before minority interests, income taxes and cumulative effect of a change in accounting principle				(798	)		13,322			1,570		(13,582	)		512
Minority interests				—			(223	)		—		—			(223	)

Earnings (loss) before income taxes and cumulative effect of a change in accounting principle				(798	)		13,099			1,570		(13,582	)		289
Income tax expense				—			—			—		—			—

Net earnings (loss) before cumulative effect of a change in accounting principle				(798	)		13,099			1,570		(13,582	)		289
Cumulative effect of a change in accounting principle				—			(39,497	)		—		—			(39,497	)

Net earnings (loss)			$	(798	)	$	(26,398	)	$	1,570	$	(13,582	)	$	(39,208	)

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Statement of Cash Flows
for the Three Months Ended December 31, 2002 (unaudited)
(in thousands)


							Subsidiary Guarantors

										Non-						Condensed
				Parent Issuer			100% Owned			100% Owned			Eliminations			Consolidated

Cash flows from operating activities
	Net earnings (loss)			$	6,237		$	18,170		$	2,427		$	(19,342	)	$	7,492
	Adjustments to reconcile net earnings(loss) to net cash provided by operating activities:
		Depreciation and amortization			1,114			11,230			507			—			12,851
		Minority interests			—			278			—			—			278
		Gain on sale of property and equipment			—			(780	)		—			—			(780	)
		Equity in earnings of affiliates			(20,597	)		—			—			20,597			—
		Changes in operating assets and liabilities, net of the effect of dispositions:
			Accounts receivable		—			903			(1,972	)		—			(1,069	)
			Inventories, prepaid expenses and other current assets		—			(1,472	)		431			—			(1,041	)
			Accounts payable and other accrued liabilities		(5,346	)		(5,047	)		922			—			(9,471	)

		Net cash provided by (used in) operating activities			(18,592	)		23,282			2,315			1,255			8,260

Cash flows from investing activities
	Purchase of property and equipment				—			(14,038	)		(377	)		—			(14,415	)
	Proceeds from sale of property and equipment				—			2,463			—			—			2,463
	Change in other assets				—			(735	)		(126	)		—			(861	)

		Net cash used in investing activities			—			(12,310	)		(503	)		—			(12,813	)

Cash flows from financing activities
	Proceeds from senior bank debt borrowings				62,200			—			—			—			62,200
	Payment of debt and capital leases				(57,027	)		(320	)		—			—			(57,347	)
	Change in intercompany balances with affiliates, net				13,419			(10,642	)		(1,522	)		(1,255	)		—
	Distribution of minority interests				—			(10	)		(290	)		—			(300	)

		Net cash provided by (used in) financing activities			18,592			(10,972	)		(1,812	)		(1,255	)		4,553

	Change in cash and cash equivalents				—			—			—			—			—
	Cash and cash equivalents at beginning of period				—			—			—			—			—

	Cash and cash equivalents at end of period			$	—		$	—		$	—		$	—		$	—

IASIS HEALTHCARE CORPORATION
NOTES TO UNAUDITED CONDENSED AND CONSOLIDATED
FINANCIAL STATEMENTS

IASIS Healthcare Corporation

Condensed Consolidating Statement of Cash Flows
for the Three Months Ended December 31, 2001 (unaudited)
(in thousands)


							Subsidiary Guarantors

										Non-						Condensed
				Parent Issuer			100% Owned			100% Owned			Eliminations			Consolidated

Cash flows from operating activities
	Net earnings (loss)			$	(798	)	$	(26,398	)	$	1,570		$	(13,582	)	$	(39,208	)
	Adjustments to reconcile net earnings(loss) to net cash provided by (used in) operating activities:
		Depreciation and amortization			1,059			9,083			346			—			10,488
		Minority interests			—			223			—			—			223
		Cumulative effect of a change in accounting principle			—			39,497			—			—			39,497
		Gain on sale of assets			—			(12	)		—			—			(12	)
		Equity in earnings of affiliates			(14,669	)		—			—			14,669			—
		Changes in operating assets and liabilities:
			Accounts receivable		—			483			229			—			712
			Inventories, prepaid expenses and other current assets		—			(4,266	)		(256	)		—			(4,522	)
			Accounts payable and other accrued liabilities		8,496			(14,077	)		(65	)		—			(5,646	)

		Net cash provided by (used in) operating activities			(5,912	)		4,533			1,824			1,087			1,532

Cash flows from investing activities
	Purchases of property and equipment				—			(3,840	)		(3,105	)		—			(6,945	)
	Purchase of real estate				—			(55,338	)		—			—			(55,338	)
	Proceeds from sale of assets				—			12			—			—			12
	Change in other assets				—			(1,900	)		—			—			(1,900	)

		Net cash used in investing activities			—			(61,066	)		(3,105	)		—			(64,171	)

Cash flows from financing activities
	Proceeds from issuance of common stock				222			—			—			—			222
	Proceeds from senior bank debt borrowings				94,600			—			—			—			94,600
	Payment of debt and capital leases				(35,850	)		(64	)		—			—			(35,914	)
	Change in intercompany balances with affiliates, net				(50,735	)		50,541			1,281			(1,087	)		—
	Debt financing costs incurred				(2,325	)		—			—			—			(2,325	)

		Net cash provided by (used in) financing activities			5,912			50,477			1,281			(1,087	)		56,583

	Change in cash and cash equivalents				—			(6,056	)		—			—			(6,056	)
	Cash and cash equivalents at beginning of period				—			6,056			—			—			6,056

	Cash and cash equivalents at end of period			$	—		$	—		$	—		$	—		$	—

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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our unaudited condensed and consolidated financial statements, the notes to our unaudited condensed and consolidated financial statements and the other financial information appearing elsewhere in this report. Data for the three months ended December 31, 2002 and 2001 has been derived from our unaudited condensed and consolidated financial statements.

Forward Looking Statements

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

General

We are a leading owner and operator of acute care hospitals that develops and operates networks of medium-sized hospitals in high-growth urban and suburban markets. We operate our hospitals with a strong community focus by offering and developing healthcare services to meet the needs of the markets we serve, promoting strong relationships with physicians and working with local managed care plans. At December 31, 2002 we owned or leased 14 hospitals with a total of 2,116 beds in service. Our hospitals are located in four regions:

• Salt Lake City, Utah;

• Phoenix, Arizona;

• Tampa-St. Petersburg, Florida; and

• three markets in the State of Texas, including San Antonio.

We also operate three ambulatory surgery centers and a Medicaid managed health plan called Health Choice, serving over 60,000 members in Arizona at December 31, 2002.

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

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 for Medicare and Medicaid are often based upon a diagnosis regardless of the cost incurred or the level of services provided. Our net revenue, cash flows and results of

operations have been negatively impacted by this reimbursement methodology. We expect patient volumes from Medicare and Medicaid to continue to increase due to the general aging of the population and expansion of state Medicaid programs. The percentage of our net patient revenue related to Medicare and Medicaid was approximately 39.8% and 37.9% for the three months ended December 31, 2002 and 2001, respectively.

Our hospitals continue to experience growth in outpatient volume at a faster rate than the growth in inpatient volume primarily as a result of improvements in technology, pharmacology and clinical practices and hospital payment changes by Medicare and managed care organizations. In response to this shift toward outpatient care, we have reconfigured some of our hospitals to more effectively accommodate outpatient services and restructured existing surgical and diagnostic capacity to permit additional outpatient volume and a greater variety of outpatient services.

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

Critical Accounting Policies

A summary of significant accounting policies is disclosed in Note 1 to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended September 30, 2002. The Company’s critical accounting policies are further described under the caption “Critical Accounting Policies” in Management’s Discussion and Analysis in the Annual Report on Form 10-K for the year ended September 30, 2002. There have been no changes in the nature of the Company’s critical accounting policies or the application of those policies since September 30, 2002.

Selected Operating Data

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


	Three Months Ended			Three Months Ended
	December 31, 2002			December 31, 2001

Number of hospitals at end of period		14			14
Licensed beds at end of period		2,590			2,520
Beds in service at end of period		2,116			2,092
Average length of stay (days)⁽¹⁾		4.40			4.18
Occupancy rates (average beds in service)		45.3	%		40.3	%
Admissions⁽²⁾		20,034			18,558
Adjusted admissions⁽³⁾		34,098			31,065
Patient days⁽⁴⁾		88,148			77,492
Adjusted patient days⁽³⁾		143,302			126,415
Outpatient revenue as a percentage of gross patient revenue		38.1	%		39.1	%

(1)		Represents the average number of days that a patient stayed in our hospitals.

(2)		Represents the total number of patients admitted to our hospitals for stays in excess of 23 hours. Management and investors use this number as a general measure of inpatient volume.

(3)		Adjusted admissions and adjusted patient days are general measures of combined inpatient and outpatient volume. We compute adjusted admissions/patient days by multiplying admissions/patient days by gross patient revenue and then dividing that number by gross inpatient revenue.

(4)		Represents the number of days our beds were occupied over the period.

Results of Operations

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


	Three Months Ended			Three Months Ended
	December 31, 2002			December 31, 2001

Net revenue		100.0	%		100.0	%
Salaries and benefits		34.9			35.2
Supplies		14.0			14.2
Other operating expenses		30.4			31.5
Provision for bad debts		7.7			7.6

Total operating expenses		87.0			88.5

EBITDA⁽¹⁾		13.0			11.5
Depreciation and amortization		5.1			4.7
Interest, net		5.2			6.6
Gain on sale of assets, net		(0.3	)		—
Minority interests		0.1			0.1

Earnings before income taxes and cumulative effect of a change in accounting principle		2.9			0.1
Income tax expense		—			—

Earnings before cumulative effect of a change in accounting principle		2.9			0.1
Cumulative effect of a change in accounting principle⁽²⁾		—			(17.9	)

Net earnings (loss)		2.9	%		(17.8	)%

(1)		EBITDA represents earnings before interest expense, gain on sale of assets, minority interests, income taxes, and depreciation and amortization. Although EBITDA should not be considered in isolation or as a substitute for net earnings, operation cash flows or other cash flow statement data determined in accordance with accounting principles generally accepted in the United States, management understands that EBITDA is commonly used to evaluate a company’s financial performance, especially in evaluating healthcare companies. EBITDA, as presented, may not be comparable to similarly titled measures of other companies.

(2)		Cumulative effect of a change in accounting principle consists of a $39.5 million non-cash transitional impairment charge, related to the adoption of SFAS 142, Goodwill and Other Intangible Assets, during the three months ended December 31, 2001.

Three Months Ended December 31, 2002 Compared to Three Months Ended December 31, 2001

Net revenue for the three months ended December 31, 2002 was $254.8 million, an increase of $33.9 million, or 15.3%, from $220.9 million for same period in 2001. The increase in net revenue was due to a combination of an increase of $30.1 million in net revenue from hospital operations, which we refer to as our acute care service segment in our financial statements, and an increase of $3.8 million in net revenue from Health Choice.

Net revenue from our hospital operations for the three months ended December 31, 2002 was $217.8 million, up $30.1 million, or 16.0%, from $187.7 million for the same period in 2001. Net patient revenue per adjusted admission and patient day increased 6.9% and 3.6%, respectively, for the three months ended December 31,

2002, compared to the same period in 2001, and was due to a combination of increased acuity and price increases in our hospital operations.

Admissions increased 8.0% to 20,034 for the three months ended December 31, 2002 from 18,558 for the same period in 2001, and patient days increased 13.8% to 88,148 for the three months ended December 31, 2002 from 77,492 for the same period in 2001. Adjusted admissions increased 9.8% to 34,098 for the three months ended December 31, 2002 from 31,065 for the same period in 2001, and adjusted patient days increased 13.4% to 143,302 for the three months ended December 31, 2002, from 126,415 for the same period in 2001. The increase in volume was due in part to a combination of population growth in our markets, introduction of new and expanded services at our hospitals, results of our physician recruiting efforts and weak volume in the prior year quarter, particularly in our Arizona market, which we have previously discussed. The average length of stay resulting from admissions and patient days increased 5.3% from 4.18 days for the three months ended December 31, 2001, to 4.40 days for the same period in 2002. This increase in the average length of stay was attributable to greater acuity and an increased emphasis on product lines requiring longer lengths of stay.

Net revenue from Health Choice was $36.9 million for the three months ended December 31, 2002, an increase of $3.7 million, or 11.1%, from $33.2 million for the same period in 2001. Covered lives under this prepaid Medicaid plan have increased 11.9% to 60,242 at December 31, 2002 from 53,833 at December 31, 2001. The increase in covered lives has positively impacted Health Choice’s net revenue for the three months ended December 31, 2002 compared to the same period in 2001. Our growth in covered lives is due primarily to a change in the eligibility standards in Arizona that increased the Medicaid-eligible population during 2001.

Operating expenses increased $26.2 million from $195.4 million for the three months ended December 31, 2001 to $221.6 million for the same period in 2002. Operating expenses as a percentage of net revenue were 87.0% for the three months ended December 31, 2002, compared to 88.5% for the same period in 2001.

Operating expenses from our hospital operations for the three months ended December 31, 2002 were $186.5 million, an increase of $23.1 million, or 14.1%, from $163.4 million for the same period in 2001. This increase was comprised of a $15.9 million increase in operating expenses due to volume growth in our markets, along with increases in insurance costs, rent expense, physician and employee recruiting costs and general inflation.

Operating expenses from our hospital operations as a percentage of net revenue were 85.6% for the three months ended December 31, 2002 compared to 87.1% for the same period in 2001. This decrease was due to a reduction in salaries and benefits expense, supplies expense and other operating expenses as a percentage of net revenue. Salaries and benefits expense as a percentage of net revenue decreased 0.7% from period to period due primarily to the growth in net revenue, achieving and maintaining a more efficient skill mix and greater emphasis on profitable product lines. Salaries and benefits expense increased by approximately $10.8 million for the three months ended December 31, 2002 compared to the same period in 2001 due primarily to volume growth, general wage inflation and an increase in employee benefits and contract labor. Contract labor, a component of salaries and benefits expense, increased by $3.0 million for the three months ended December 31, 2002 compared to the same period in 2001 due primarily to significant volume growth in certain markets requiring greater utilization of agency nurses and technicians, coupled with increases in the rates charged by the staffing agencies. Benefits expense increased by approximately $1.8 million for the three months ended December 31, 2002 compared to the same period in 2001 due primarily to the increased cost and utilization of healthcare benefits for employees. Provision for bad debts as a percentage of net revenue was generally unchanged from period to period. Supplies expense as a percentage of net revenue decreased 0.3% from period to period due in part to our new group purchasing contract which we entered into in the third quarter of fiscal 2002, which has resulted in better pricing generally and discounts on implants and cardiac devices. The supplies expense improvement was also due to better compliance with the group purchasing contract compared to the prior year, as well as having better inventory systems and processes in place. Other operating expenses as a percentage of net revenue decreased 0.5% from period to period due primarily to the growth in net revenue, offset to an extent by an increase in insurance costs. We expect our other operating expenses to continue to be negatively impacted for the remainder of fiscal year 2003 by these insurance expense increases. On an annual basis, insurance costs are currently estimated to increase in the range of $3.6 million to $4.0 million, or 19.9% to 22.1%, over the prior year.

Operating expenses for Health Choice increased $3.1 million to $35.1 million for the three months ended December 31, 2002 compared to $32.0 million for the same period in 2001. Operating expenses as a percentage of net revenue for Health Choice were 95.1% for the three months ended December 31, 2002 and 96.4% for the same

period in 2001. The increase in operating expenses was due primarily to the incremental cost of increased enrollment. Operating expenses as a percentage of net revenue declined, reflecting an improvement in the medical loss and administrative expense ratios.

EBITDA was $33.2 million, or 13.0% of net revenue, for the three months ended December 31, 2002, compared to $25.5 million, or 11.5% of net revenue, for the same period in 2001. EBITDA for hospital operations was $31.3 million, or 14.4% of net revenue, for the three months ended December 31, 2002, compared to $24.3 million, or 12.9% of net revenue, for the same period in 2001. The improvement in the EBITDA margin for hospital operations was due primarily to increases in volume and net revenue coupled with decreases in salaries and benefits, supplies and other operating expenses as a percentage of net revenue as noted above.

Health Choice, our Medicaid managed health plan, has a significantly lower EBITDA margin than our hospital operations. EBITDA for Health Choice was $1.8 million, or 4.9% of net revenue, for the three months ended December 31, 2002, compared to $1.1 million for the same period in 2001, representing 3.3% of net revenue. The increases in EBITDA and EBITDA margin were due to increased enrollment and an improvement in the medical loss and administrative expense ratios, as noted above.

Depreciation and amortization expense increased $2.4 million from $10.5 million for the three months ended December 31, 2001 to $12.9 million for the same period in 2002. The increase in depreciation and amortization was the result of additions to property and equipment during 2002.

Interest expense decreased $1.2 million from $14.5 million for the three months ended December 31, 2001 to $13.3 million for the same period in 2002 due to declines in interest rates during fiscal year 2002. Borrowings under our bank credit facility bear interest at variable rates, and the weighted average interest rate of outstanding borrowings under the bank credit facility was approximately 5.9% for the three months ended December 31, 2002 compared to 6.9% for the same period in 2001.

We recorded no provision for income taxes for the three months ended December 31, 2002 and 2001 due to the use of deferred tax assets that were previously reserved with a valuation allowance.

Liquidity and Capital Resources

At December 31, 2002, we had $90.1 million in working capital, after the effect of the refinancing on February 7, 2003 (see discussion below), compared to $57.0 million at September 30, 2002. We generated cash of $8.3 million from operating activities during the three months ended December 31, 2002, compared to $1.5 million during the three months ended December 31, 2001. Net accounts receivable increased from $154.5 million at September 30, 2002 to $155.7 million at December 31, 2002. Excluding third-party settlement receivables, our days of net revenue outstanding at December 31, 2002 were 59 compared to 60 at September 30, 2002.

Investing activities used $12.8 million during the three months ended December 31, 2002. Capital expenditures for the three months ended December 31, 2002 were approximately $14.4 million. Our growth strategy requires significant capital expenditures during the year ending September 30, 2003 and future years. We have budgeted capital expenditures for the remainder of fiscal 2003 to be approximately $55.0 million to $66.0 million, including $29.3 million of construction costs for the renovation and expansion of certain of our existing facilities and $18.7 million to $26.3 million for new equipment at our facilities. On November 20, 2002, we announced plans to build a new hospital in Jefferson County, Texas to replace our Mid-Jefferson Hospital in Nederland, Texas and Park Place Medical Center in Port Arthur, Texas. We plan to commence construction in the summer of 2003 and open the new facility in early 2005. The total cost to build the new hospital is currently estimated to be approximately $80.0 million. Included in our budgeted capital expenditures are construction and other project related costs for the new hospital of approximately $8.0 to $10.0 million that we expect to incur during 2003. We plan to finance our proposed capital expenditures, including the construction of the new hospital, with borrowings under our revolving credit facility, cash generated from operations, real estate financing and other capital sources that become available.

Financing activities during the three months ended December 31, 2002 provided net cash of $4.6 million. During the three months ended December 31, 2002, we borrowed $62.2 million pursuant to the terms of our bank credit facility, repaid $6.6 million in outstanding borrowings pursuant to the terms of our bank credit facility and

capital lease obligations and made voluntary prepayments of $50.7 million pursuant to the terms of our revolving credit facility. During the next twelve months, we are required to repay $3.5 million under our new bank credit facility, as discussed below.

On October 15, 1999, we entered into a bank credit facility through which a syndicate of lenders made a total of $455.0 million available to us in the form of an $80.0 million tranche A term loan, a $250.0 million tranche B term loan and a $125.0 million revolving credit facility. Proceeds from the tranche A and tranche B term loans were used in conjunction with the recapitalization and acquisition transactions. Effective October 5, 2001, we amended our bank credit facility to provide for an additional $30.0 million incremental senior secured term loan on substantially the same terms and conditions as our current existing bank credit facility. The new incremental term loan was used solely to fund the purchase on October 15, 2001, of the land and buildings at two of our facilities in Arizona previously operated under long-term leases and related costs and expenses. The amended bank credit facility also provided for revisions to certain financial covenants.

On February 7, 2003, we completed the refinancing of our bank credit facility to provide for a new $475.0 million credit facility in the form of a $350.0 million, six year term B loan and $125.0 million, five year revolving credit facility. The loans under the new credit facility accrue interest at variable rates at specified margins above either the agent bank’s alternate base rate or its Eurodollar rate. Principal payments on the new term B loan are due in quarterly installments of $875,000 beginning March 31, 2003 until maturity. Proceeds from the new credit facility were used to refinance amounts outstanding under our previous credit facility and to fund closing and other transaction related costs incurred in conjunction with the refinancing. The new credit facility increases our annual capital expenditure limitation to $80.0 million per year. In addition, the new credit facility provides for revisions to certain financial covenants and replaces the fixed charge coverage covenant under our previous credit facility with a senior leverage test. The new $125.0 million revolving credit facility is available for working capital and other general corporate purposes. Consistent with the previous credit facility, the new bank credit facility requires that we comply with various financial ratios and tests and contains covenants limiting our ability to, among other things, incur debt, engage in acquisitions or mergers, sell assets, make investments or capital expenditures, make distributions or stock repurchases and pay dividends. The new bank credit facility is guaranteed by our subsidiaries and these guaranties are secured by a pledge of substantially all of the subsidiaries’ assets. Substantially all of the Company’s outstanding common stock is pledged for the benefit of the Company’s lenders as security for the Company’s obligations under the new credit facility.

At December 31, 2002, amounts outstanding under the previous credit facility’s tranche A, tranche B and incremental term loans were $51.9 million, $241.8 million and $29.8 million, respectively, and we had $29.5 million outstanding under our revolving credit facility. The new revolving credit facility includes a $75.0 million sub-limit for letters of credit that may be issued by us and, at December 31, 2002, we had issued $38.3 million in letters of credit. The loans under the previous bank credit facility accrued interest at variable rates at specified margins above either the agent bank’s alternate base rate or its reserve-adjusted Eurodollar rate. The weighted average interest rate of outstanding borrowings under the previous bank credit facility was approximately 5.9% for the three months ended December 31, 2002. The Company will also pay a commitment fee equal to 0.5% of the average daily amount available under the new revolving credit facility. At February 14, 2003, we had drawn $6.0 million under our new revolving credit facility and had issued $38.3 million in letters of credit, resulting in remaining availability under the revolving credit facility of $80.7 million. During the second quarter of fiscal year 2003, we expect to write off approximately $3.9 million in deferred financing costs associated with the previous credit facility.

On October 13, 1999, we issued $230.0 million of 13% senior subordinated notes due 2009. On May 25, 2000, we exchanged all of our outstanding 13% senior subordinated notes due 2009 for 13% senior subordinated exchange notes due 2009 that have been registered under the Securities Act of 1933, as amended. The notes are unsecured obligations and are subordinated in right of payment to all of our existing and future senior indebtedness. If a change in control occurs, as defined in the indenture, each holder of the notes will have the right to require us to repurchase all or any part of that holder’s notes in cash at 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest to the date of purchase. Except with respect to a change of control, we are not required to make mandatory redemption or sinking fund payments with respect to the notes. At December 31, 2002, all of the subsidiaries fully and unconditionally guaranteed the notes on a joint and several basis. The indenture for the notes contains certain covenants, including but not limited to, restrictions on new indebtedness, asset sales, capital expenditures, dividends and our ability to merge or consolidate.

As of December 31, 2002, we provided a performance guaranty in the form of a letter of credit in the amount of $20.6 million for the benefit of the Arizona Health Care Cost Containment System to support our obligations under the Health Choice contract to provide and pay for 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 revenue paid to us.

Based upon our current level of operations and anticipated growth, we believe that cash generated from operations and amounts available under the revolving credit facility will be adequate to meet our anticipated debt service requirements, capital expenditures and working capital needs for the next 12 months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under our bank credit facility, or otherwise, to enable us to grow our business, service our indebtedness, including the bank credit facility and our senior subordinated exchange notes, or make anticipated capital expenditures. One element of our business strategy is expansion through the acquisition of hospitals in existing and new markets. The completion of acquisitions may result in the incurrence, or assumption by us, of additional indebtedness. Our future operating performance, ability to service or refinance the senior subordinated exchange notes and ability to service and extend or refinance the bank credit facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the three months ended December 31, 2002, there were no material changes to our quantitative and qualitative disclosures about the market risk associated with financial instruments as described in our Annual Report on Form 10-K for the year ended September 30, 2002. At December 31, 2002, the fair market value of our outstanding senior subordinated exchange notes was $246.1 million, based upon quoted market prices as of that date.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management team, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended, within 90 days of the filing date of this report. Based on this evaluation, the principal executive officer and principal accounting officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic reports.

There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in the paragraph above.

PART II
OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 6. Exhibits and Reports on Form 8-K


(a)		List of Exhibits:

10.1		Amendment No. 20 to Contract between Arizona Health Care Cost Containment System and HealthChoice Arizona, dated December 13, 2002, effective as of January 1, 2003

10.2		Amended and Restated Credit Agreement dated as of February 7, 2003, among IASIS Healthcare Corporation, as Borrower, Certain Subsidiaries of the Borrower, as Guarantors, Various Lenders, CitiCorp North America, Inc. and UBS AG, Stamford Branch, as Co-Syndication Agents, General Electric Capital Corporation and Residential Funding Corporation dba GMAC-RFC Health Capital, as Co-Documentation Agents, Bank of America, N.A., as Administrative Agent and Banc of America Securities, LLC and Salomon Smith Barney Inc., as Joint Lead Arrangers and Joint Book Managers*

99.1		Odessa Regional Hospital, LP Financial Statements

Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 11, 2003.

(b) Reports on Form 8-K:

On November 8, 2002, the Company filed a Current Report on Form 8-K to report that it had issued a press release announcing the date of the online web simulcast of its fiscal year 2002 earnings conference call.

On November 22, 2002, the Company filed a Current Report on Form 8-K to report that it had issued a press release announcing its earnings for the fourth quarter and fiscal year ended September 30, 2002.

SIGNATURES

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


	IASIS HEALTHCARE CORPORATION

Date: February 14, 2003	By:	/s/ W. Carl Whitmer

		W. Carl Whitmer, Chief Financial Officer

CERTIFICATION

I, David R. White, certify that:

1. I have reviewed this quarterly report on Form 10-Q of IASIS Healthcare Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: February 14, 2003

/s/ David R. White

David R. White
Chairman of the Board, President and Chief Executive Officer

CERTIFICATION

I, W. Carl Whitmer, certify that:


Date: February 14, 2003

/s/ W. Carl Whitmer

W. Carl Whitmer
Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description

10.1		Amendment No. 20 to Contract between Arizona Health Care Cost Containment System and HealthChoice Arizona, dated December 13, 2002, effective as of January 1, 2003

10.2		Amended and Restated Credit Agreement dated as of February 7, 2003, among IASIS Healthcare Corporation, as Borrower, Certain Subsidiaries of the Borrower, as Guarantors, Various Lenders, CitiCorp North America, Inc. and UBS AG, Stamford Branch, as Co-Syndication Agents, General Electric Capital Corporation and Residential Funding Corporation dba GMAC-RFC Health Capital, as Co-Documentation Agents, Bank of America, N.A., as Administrative Agent and Banc of America Securities, LLC and Salomon Smith Barney Inc., as Joint Lead Arrangers and Joint Book Managers*

99.1		Odessa Regional Hospital, LP Financial Statements

Incorporated by reference to the Company’s Current Report on Form 8-K filed on February 11, 2003.

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	•		Salt Lake City, Utah;

	•		Phoenix, Arizona;

	•		Tampa-St. Petersburg, Florida; and

	•		three markets in the State of Texas, including San Antonio.

1.		I have reviewed this quarterly report on Form 10-Q of IASIS Healthcare Corporation;

2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)		designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)		evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and