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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from  to


Commission File Number 333-110117

Ardent Health Services LLC



Delaware
    
    62-1862223(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)One Burton Hills Blvd., Suite 250Nashville, TN
    
    37215(Address of Principal Executive Offices)
    
    (Zip Code)


Registrants telephone number, including area code: (615) 296-3000

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 x No o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x

As of May 12, 2004, there were 56,954,818 of the registrants common units
outstanding (all of which are privately owned and are not traded on any public
market).

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TABLE OF CONTENTS




PageNo.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2004 (Unaudited)
and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income (Unaudited) for the
Three-Month Periods ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three-Month Periods ended March 31, 2004 and 2003
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4.
    
    Controls and Procedures
    
    
    37PART II
    
    OTHER INFORMATIONItem 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
    
    
    38Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    38Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    38Signature
    
    
    
    
    40Exhibit Index
    
    
    
    
    41


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PART I
FINANCIAL INFORMATION




Item 1. Financial Statements




ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)March 31,
    
    December 31,2004
    
    2003(Amounts in thousands,except unit data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    53,769
    
    
    $
    89,762Accounts receivable, less allowance for doubtful accounts of
$55,134 at March 31, 2004 and $42,438 at December 31, 2003
    
    
    146,425
    
    
    
    116,515Premiums receivable
    
    
    14,774
    
    
    
    14,733Inventories
    
    
    17,025
    
    
    
    16,759Deferred income taxes
    
    
    30,193
    
    
    
    27,792Prepaid expenses and other current assets
    
    
    36,732
    
    
    
    31,514Assets held for sale
    
    
    3,338
    
    
    
    3,336Income tax receivable
    
    
    
    
    
    
    2,128Total current assets
    
    
    302,256
    
    
    
    302,539Property, plant and equipment, net
    
    
    365,036
    
    
    
    365,321Other assets:Goodwill
    
    
    75,529
    
    
    
    75,529Other intangible assets
    
    
    47,078
    
    
    
    48,289Deferred income taxes
    
    
    5,654
    
    
    
    5,682Other assets
    
    
    22,935
    
    
    
    20,644Total assets
    
    $
    818,488
    
    
    $
    818,004LIABILITIES AND MEMBERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    2,149
    
    
    $
    2,082Accounts payable
    
    
    56,403
    
    
    
    53,301Medical claims payable
    
    
    45,124
    
    
    
    45,751Accrued salaries and benefits
    
    
    49,806
    
    
    
    44,692Accrued interest
    
    
    3,330
    
    
    
    10,133Unearned premiums
    
    
    3,462
    
    
    
    15,399Other accrued expenses and liabilities
    
    
    27,869
    
    
    
    25,771Total current liabilities
    
    
    188,143
    
    
    
    197,129Long-term debt, less current installments
    
    
    258,901
    
    
    
    259,361Other long-term liabilities
    
    
    6,557
    
    
    
    6,573Self-insured liabilities
    
    
    25,758
    
    
    
    21,920Total liabilities
    
    
    479,359
    
    
    
    484,983Redeemable preferred units and accrued dividends, $3.43 unit price, $3.43 per
unit redemption value; authorized, issued, and outstanding: 28,141,807 units
    
    
    114,105
    
    
    
    Mandatorily redeemable preferred units and accrued dividends, $3.43 unit
price,
$3.43 per unit redemption value; authorized, issued, and outstanding:28,141,807 units
    
    
    
    
    
    
    111,931Commitments and contingenciesMembers equity:Authorized: 69,956,653 units at March 31, 2004 and 69,961,407 units at
December 31, 2003; issued and outstanding: 56,993,690 units at March
31, 2004 and 56,998,444 units at December 31, 2003
    
    
    224,310
    
    
    
    224,331Retained earnings (accumulated deficit)
    
    
    714
    
    
    
    (3,241
    )Total members equity
    
    
    225,024
    
    
    
    221,090Total liabilities and members equity
    
    $
    818,488
    
    
    $
    818,004


See accompanying notes to unaudited condensed consolidated financial statements.

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ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

Three-Month Period EndedMarch 31,2004
    
    2003(Amounts in thousands)Revenues:Net patient service revenue
    
    $
    190,614
    
    
    $
    149,341Premium revenue
    
    
    155,206
    
    
    
    142,753Other revenue
    
    
    20,676
    
    
    
    18,853Total net revenues
    
    
    366,496
    
    
    
    310,947Expenses:Salaries and benefits
    
    
    147,417
    
    
    
    125,056Professional fees
    
    
    30,258
    
    
    
    29,735Claims and capitation
    
    
    71,221
    
    
    
    67,492Supplies
    
    
    42,046
    
    
    
    36,955Provision for doubtful accounts
    
    
    17,175
    
    
    
    10,951Interest, net
    
    
    6,499
    
    
    
    3,701Change in fair value of interest rate swap agreements
    
    
    (1,235
    )
    
    
    Depreciation and amortization
    
    
    10,826
    
    
    
    7,351Gain on divestitures
    
    
    
    
    
    
    (928
    )Other
    
    
    32,559
    
    
    
    27,299Total expenses
    
    
    356,766
    
    
    
    307,612Income from continuing operations before income taxes
    
    
    9,730
    
    
    
    3,335Income tax expense
    
    
    3,716
    
    
    
    1,334Income from continuing operations, net
    
    
    6,014
    
    
    
    2,001Discontinued operations:Income from discontinued operations (including gain
on disposal of $699 for the three-month period
ended
March 31, 2003)
    
    
    193
    
    
    
    1,028Income tax expense
    
    
    78
    
    
    
    411Income from discontinued operations, net
    
    
    115
    
    
    
    617Net income
    
    
    6,129
    
    
    
    2,618Accrued preferred dividends
    
    
    2,174
    
    
    
    1,947Net income available for common members
    
    $
    3,955
    
    
    $
    671


See accompanying notes to unaudited condensed consolidated financial statements.

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ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

Three-Month Period EndedMarch 31,2004
    
    2003(Amounts in thousands)Cash flows from operating activities:Income from continuing operations, net
    
    $
    6,014
    
    
    $
    2,001Adjustments to reconcile income from continuing operations, net, to net
cash (used in) provided by operating activities, net of acquisitions and
divestitures:Provision for doubtful accounts
    
    
    17,175
    
    
    
    10,951Change in fair value of interest rate swap agreements
    
    
    (1,235
    )
    
    
    Depreciation and amortization
    
    
    10,826
    
    
    
    7,351Gain on divestitures
    
    
    -
    
    
    
    (928
    )Amortization of loan costs
    
    
    397
    
    
    
    1,011Amortization of discount on subordinated debt
    
    
    119
    
    
    
    138Deferred income taxes
    
    
    (2,374
    )
    
    
    (4,257
    )Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures:Accounts receivable
    
    
    (47,303
    )
    
    
    (15,726
    )Premiums receivable
    
    
    (41
    )
    
    
    5,909Prepaid expenses and other current assets
    
    
    (5,475
    )
    
    
    5,461Income tax receivable (payable)
    
    
    3,047
    
    
    
    2,841Medical claims payable
    
    
    (627
    )
    
    
    (1,474
    )Accounts payable
    
    
    2,946
    
    
    
    1,518Accrued salaries and benefits
    
    
    5,125
    
    
    
    685Accrued interest
    
    
    (6,803
    )
    
    
    1,712Unearned premiums
    
    
    (11,937
    )
    
    
    (3,199
    )Other accrued expenses and liabilities
    
    
    1,019
    
    
    
    (6,786
    )Self-insured liabilities
    
    
    4,390
    
    
    
    4,243Net cash (used in) provided by operating activities
    
    
    (24,737
    )
    
    
    11,451Cash flows from investing activities:Investments in acquisitions, less cash acquired
    
    
    
    
    
    
    (192,602
    )Purchases of property, plant and equipment
    
    
    (9,345
    )
    
    
    (7,928
    )Proceeds from divestitures
    
    
    
    
    
    
    1,728Other
    
    
    (902
    )
    
    
    2,074Net cash used in investing activities
    
    
    (10,247
    )
    
    
    (196,728
    )Cash flows from financing activities:Proceeds from revolving line of credit, net
    
    
    
    
    
    
    379Proceeds from long-term debt
    
    
    
    
    
    
    148,589Payments on long-term debt
    
    
    (511
    )
    
    
    (29,170
    )Debt financing costs paid
    
    
    (551
    )
    
    
    (4,046
    )Proceeds from issuance of common units
    
    
    1
    
    
    
    6,667Redemption of preferred units
    
    
    
    
    
    
    (112
    )Redemption of common units
    
    
    (23
    )
    
    
    (131
    )Common unit issuance costs
    
    
    
    
    
    
    (1,886
    )Net cash (used in) provided by financing activities
    
    
    (1,084
    )
    
    
    120,290Net cash provided by discontinued operations
    
    
    75
    
    
    
    155Net decrease in cash and cash equivalents
    
    
    (35,993
    )
    
    
    (64,832
    )Cash and cash equivalents, beginning of period
    
    
    89,762
    
    
    
    113,859Cash and cash equivalents, end of period
    
    $
    53,769
    
    
    $
    49,027


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ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)

Three-Month Period EndedMarch 31,2004
    
    2003(Amounts in thousands)Supplemental cash flow information:Cash paid for interest
    
    $
    13,302
    
    
    $
    2,038Cash paid for income taxes
    
    
    3,195
    
    
    
    361Non-cash common units issued
    
    
    
    
    
    
    4,639Preferred unit and preferred stock dividends accrued
    
    
    2,174
    
    
    
    1,947Non-cash changes due to acquisitions and divestitures:Current assets
    
    
    
    
    
    
    70,599Non-current assets
    
    
    
    
    
    
    220,927Current liabilities
    
    
    
    
    
    
    78,371Non-current liabilities
    
    
    
    
    
    
    576


See accompanying notes to unaudited condensed consolidated financial statements.

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ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2004

1. Basis of Presentation and Organization

Ardent Health Services LLC is a holding company whose affiliates own and
operate hospitals and related health care entities. The term affiliates
includes direct and indirect subsidiaries of Ardent Health Services LLC and
partnerships and joint ventures in which such subsidiaries are partners. At
March 31, 2004, these affiliates owned and operated seven acute care hospitals
(including one inpatient rehabilitation hospital), 20 behavioral hospitals, and
other related health care businesses. The fully integrated health care delivery
system in Albuquerque, New Mexico (the Lovelace Sandia Health System)
comprises five of the seven acute care hospitals, and includes an approximately
164,000 member health plan (the Lovelace Health Plan or the Health Plan),
approximately 330 employed physicians, 15 primary care clinics and a full
service reference laboratory in Albuquerque. The terms Ardent or the
Company, as used in this Quarterly Report on Form 10-Q, refer to Ardent
Health Services LLC and its affiliates unless stated otherwise or indicated by
context.

The unaudited condensed consolidated financial statements have been
prepared in conformity 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.

In the opinion of management, the unaudited condensed consolidated
financial statements reflect all material adjustments (consisting of normal
recurring items) necessary for a fair presentation of the financial position
and the results of operations for the periods presented. The results of
operations for the periods presented are not necessarily indicative of the
expected results for the year ending December 31, 2004. The interim unaudited
condensed consolidated financial statements should be read in connection with
the audited consolidated financial statements as of and for the year ended
December 31, 2003, included in the Companys Annual Report on Form 10-K filed
with the Securities and Exchange Commission.

The preparation of 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 consolidated financial statements and notes. Actual
results could differ from those estimates.

Certain prior year amounts have been reclassified to conform to the
current year presentation. Additionally, certain prior year amounts have been
reclassified due to accounting for divestitures and discontinued operations in
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment and Disposal of Long-Lived Assets.

As none of the Companys common units are publicly held, no earnings per
share information is presented in the accompanying unaudited condensed
consolidated financial statements. The majority of the Companys expenses are
cost of revenue items.

2. Recently Issued Accounting Standards

In May 2003, the Financial Accounting Standards Board (the FASB) issued
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equities(SFAS No. 150). SFAS No. 150 requires
issuers to classify as liabilities, or assets in some circumstances, three
classes of freestanding financial instruments that embody obligations of the
issuer. Generally, SFAS No. 150 was effective for financial instruments entered
into or modified after May 31, 2003 and was otherwise effective for interim
periods beginning after June 15, 2003. For mandatorily redeemable financial
instruments, as defined by SFAS No. 150, the statement is effective for fiscal
periods beginning after December 15, 2003. Prior to its amendment, the
Companys mandatorily redeemable preferred units would have been reflected as a
liability in the accompanying condensed consolidated balance sheets

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effective January 1, 2004. However, in January 2004, the holders of the
Companys common units and mandatorily redeemable preferred units voted to
delete the mandatory redemption feature of the preferred units. Therefore, the
application of SFAS No. 150 did not have a material effect on the Companys
financial position or results of operations.

In December 2003, the FASB issued Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities(FIN46R). FIN46R replaces
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51, which was issued in January 2003. FIN46R
addresses the consolidation by business enterprises of variable interest
entities as defined within FIN46R. The Company must immediately apply the
provisions of FIN46R to variable interests in variable interest entities
created after December 31, 2003. The Company must apply the provisions of
FIN46R to all other variable interests in variable interest entities by January
1, 2005. The application of FIN46R did not have and is not expected to have a
material effect on the Companys financial position or results of operations.

3. Acquisitions and Divestitures

Acquisition

Acquisitions are accounted for using the purchase method of accounting as
prescribed by SFAS No. 141, Business Combinations,and the results of
operations are included in the accompanying condensed consolidated statements
of income from the respective dates of acquisition.

Effective January 1, 2003, the Company acquired Lovelace Health Systems,
Inc. (Lovelace) in Albuquerque, New Mexico from CIGNA Health Plan (Cigna).
The aggregate purchase price of $209.4 million plus acquisition costs was paid
in cash and was financed with debt issued in 2003 and equity issued
in 2002. In conjunction with the acquisition, certain post-closing items have
resulted in a dispute with Cigna related to a net worth settlement provision.
The dispute, when resolved, could result in a reduction to the purchase price.
The Company expects the dispute to be resolved during 2004.

Divestitures

During the three-month period ended March 31, 2003, the Company recognized
pretax gains of $928,000 and $699,000 from the respective sales of two
behavioral hospitals. One hospital was previously identified for sale under
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The results of operations and the related
gain on sale of the other hospital are included in income from discontinued
operations in the accompanying condensed consolidated statements of operations
in accordance with SFAS No. 144.

Pro Forma Results of Operations

The pro forma effect of the Companys acquisitions and divestitures on the
Companys results of operations for the periods prior to the respective
transaction dates was not significant for the periods presented.

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4. Long-Term Debt and Financing Arrangements

Long-term debt includes the following (in thousands):

March 31,
    
    December 31,2004
    
    2003Senior subordinated notes (interest at 10.0%)
    
    $
    225,000
    
    
    $
    225,000Subordinated debt (interest at 10.2%), net of unamortized
discount of $3.9 million at March 31, 2004
    
    
    32,114
    
    
    
    31,996Bank facilities (interest on revolving line of credit at
LIBOR plus 3.75%)
    
    
    
    
    
    
    Notes payable
    
    
    2,743
    
    
    
    3,157Other
    
    
    1,193
    
    
    
    1,290Total long-term debt
    
    
    261,050
    
    
    
    261,443Less current installments
    
    
    (2,149
    )
    
    
    (2,082
    )Long-term debt, less current installments
    
    $
    258,901
    
    
    $
    259,361


Interest Rate Swap Agreements

In September 2003, the Company entered into four interest rate swap
agreements with financial institutions to convert a notional amount of $80.0
million of the $225.0 million fixed-rate borrowings under the 10.0% senior
subordinated notes into floating-rate borrowings. The swap agreements mature in
$40.0 million increments on August 15, 2006 and August 15, 2008. The floating
interest rate is based on six-month LIBOR plus a margin and is determined for
the six-month period in arrears on semi-annual settlement dates of February 15
and August 15. At March 31, 2004, the weighted average floating rate was 7.61%.

As the interest rate swap agreements do not qualify for hedge accounting
under the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities,changes in the fair value of the Companys interest rate
hedging arrangements are recognized each period in earnings. The fair value of
the swap obligations was an asset of $1.8 million at March 31, 2004.

5. Stock-Based Compensation

The Company, from time to time, grants options for a fixed number of
common units to employees. SFAS No. 123, Accounting for Stock-Based
Compensation(SFAS No. 123),encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for employee
unit/stock-based compensation using the intrinsic value method as prescribed in
APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations.

If the Company had determined compensation cost based on the fair value at
the grant date for its unit options under SFAS No. 123, the Companys net
income would have been changed to the pro forma amounts indicated below (in
thousands):

Three-Month Period EndedMarch 31,2004
    
    2003Net income, as reported
    
    $
    6,129
    
    
    $
    2,618Less total unit/stock-based employee compensation
expense determined under fair-value based
method
for all rewards, net of tax
    
    
    (351
    )
    
    
    (228
    )Pro forma net income
    
    $
    5,778
    
    
    $
    2,390


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

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The weighted average fair values of the Companys options granted during
the three-month periods ended March 31, 2004 and 2003 were $1.50 and $1.47,
respectively. The fair value of each option grant is estimated on the date of
grant using a minimum value option pricing model. The weighted average
assumptions used for grants are as follows:

Three-Month Period EndedMarch 31,2004
    
    2003Risk-free investment interest rate
    
    
    4.1
    %
    
    
    4.0
    %Expected life in years
    
    
    10
    
    
    
    10Expected dividend yield
    
    
    
    
    
    
    


6. Segment Information

The Companys acute care hospitals and related health care 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 health care
businesses, (2) the Lovelace Health Plan and (3) behavioral hospitals. The
Other segment column below consists of centralized services including
information services, reimbursement, accounting, taxation, legal, advertising,
design and construction as well as the Companys wholly-owned insurance
subsidiary.

Patient service revenue within the consolidated acute care services
segment prior to January 1, 2004 excludes revenue for services provided to the
Lovelace Health Plan members. During 2003, the Health Plan did not qualify as
a separate operating segment in accordance with the criteria set forth by SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information.
However, beginning on January 1, 2004, the Company managed the Health Plan as a
separate operating segment and the acute care services segment excluded the
operations of the Health Plan and included patient service revenue related to
services rendered at the Companys acute care hospitals to its Health Plan
members. The Companys management believes this allows them to better manage
the businesses within the Company and make better financial and operational
decisions. As a result of this change in the Companys management of these
operations, the Health Plan business is a separate reportable segment in 2004.
However, due to system limitations, it is impractical to restate the Companys
segment information for the three-month period ended March 31, 2003 to
correspond with this change in reportable segments. For purposes of
comparability, the Companys segment information for the three-month period
ended March 31, 2004 includes the consolidated acute care services segment
consistent with the basis of segmentation in effect prior to January 1, 2004.

Adjusted EBITDA represents income from continuing operations, net, before
interest, change in fair value of interest rate swap agreements, depreciation
and amortization and income tax expense. Adjusted EDITDA for the
Companys segment information is presented because
the Companys management uses it as a measure of segment
performance and as a useful
indicator with which to allocate resources among segments. Additionally, the Companys
management believes it is a useful measure of its liquidity. Adjusted
EBITDA for the Company on a consolidated basis,
subject to certain adjustments, is also used as a measure in certain of the
covenants in the Companys senior secured credit facility and the indenture
governing its subsidiarys 10.0% Senior Subordinated Notes due 2013. Adjusted
EBITDA should not be considered in
isolation from, and is not intended as an alternative measure of, net income or
cash flow from operations, each as determined in accordance with accounting
principles generally accepted in the United States. Adjusted EBITDA is not
necessarily comparable to similarly titled measures used by other companies.

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The following is a financial summary by business segment for the periods
indicated (in thousands):

For the Three-Month Period Ended March 31, 2004Consolidated
    
    BehavioralAcute Care
    
    Lovelace
    
    
    
    
    
    Acute Care
    
    CareServices
    
    Health Plan
    
    Eliminations
    
    Services
    
    Services
    
    Other
    
    Eliminations
    
    TotalTotal net revenues
    
    $
    197,427
    
    
    $
    158,578
    
    
    $
    (62,118
    )
    
    $
    293,887
    
    
    $
    73,927
    
    
    $
    
    
    
    $
    (1,318
    )
    
    $
    366,496Adjusted EBITDA
    
    
    17,458
    
    
    
    6,885
    
    
    
    
    
    
    
    24,343
    
    
    
    11,582
    
    
    
    (10,105
    )
    
    
    
    
    
    
    25,820Income (loss) from
continuing operations before
income taxes
    
    
    9,928
    
    
    
    6,753
    
    
    
    
    
    
    
    16,681
    
    
    
    10,414
    
    
    
    (17,365
    )
    
    
    
    
    
    
    9,730Segment assets
    
    
    398,088
    
    
    
    150,941
    
    
    
    
    
    
    
    549,029
    
    
    
    146,777
    
    
    
    122,682
    
    
    
    
    
    
    
    818,488Goodwill
    
    
    64,169
    
    
    
    
    
    
    
    
    
    
    
    64,169
    
    
    
    11,360
    
    
    
    
    
    
    
    
    
    
    
    75,529Other identifiable intangible
assets
    
    
    
    
    
    
    47,078
    
    
    
    
    
    
    
    47,078
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,078Capital expenditures
    
    
    1,752
    
    
    
    1,712
    
    
    
    
    
    
    
    3,464
    
    
    
    2,554
    
    
    
    3,327
    
    
    
    
    
    
    
    9,345For the Three-Month Period Ended March 31, 2003Consolidated
    
    BehavioralAcute Care
    
    CareServices
    
    Services
    
    Other
    
    Eliminations
    
    TotalTotal net revenues
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    245,225
    
    
    $
    66,675
    
    
    $
    
    
    
    $
    (953
    )
    
    $
    310,947Adjusted EBITDA
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,888
    
    
    
    13,138
    
    
    
    (7,639
    )
    
    
    
    
    
    
    14,387Income (loss) from continuing
operations before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,300
    
    
    
    12,291
    
    
    
    (10,256
    )
    
    
    -
    
    
    
    3,335Segment assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    484,244
    
    
    
    130,801
    
    
    
    65,910
    
    
    
    -
    
    
    
    680,955Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,925
    
    
    
    11,360
    
    
    
    
    
    
    
    
    
    
    
    74,285Other identifiable intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,175Capital expenditures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,536
    
    
    
    1,126
    
    
    
    266
    
    
    
    -
    
    
    
    7,928


The following is a reconciliation of Adjusted EBITDA to cash flows from
operating activities (in thousands):

For the Three-Month Period EndedMarch 31,2004
    
    2003Net cash (used in) provided by operating activities
    
    $
    (24,737
    )
    
    $
    11,451Changes in working capital items and other
    
    
    30,636
    
    
    
    (10,067
    )Income from discontinued operations
    
    
    115
    
    
    
    617Income from continuing operations, net
    
    
    6,014
    
    
    
    2,001Interest, net
    
    
    6,499
    
    
    
    3,701Change in fair value of interest rate swap
agreements
    
    
    (1,235
    )
    
    
    Depreciation and amortization
    
    
    10,826
    
    
    
    7,351Income tax expense
    
    
    3,716
    
    
    
    1,334Adjusted EBITDA
    
    $
    25,820
    
    
    $
    14,387


7. Commitments and Contingencies

Capital Expenditure Commitments

In conjunction with the acquisitions in the Albuquerque market, the
Company has committed to the previous owners to invest $80.0 million in capital
expenditures in the Albuquerque market through 2008. The Company had invested
$54.7 million through March 31, 2004.

Net Revenue

The Medicare and Medicaid regulations and various managed care contracts
under which the discounts from the Companys standard charges must be
calculated are complex and are subject to interpretation and adjustment. The
Company estimates the allowance for contractual discounts on a payor-specific
basis given its interpretation of the applicable regulations or contract terms.
However, the services authorized and provided and resulting reimbursements are
often subject to interpretation. These interpretations sometimes result in
payments that differ from the Companys estimates. Additionally, updated
regulations and contract renegotiations occur frequently necessitating
continual review and assessment of the estimation process by management.

11



---



##### 



The final determination of amounts earned under Medicare and Medicaid
programs often does not occur until the fiscal year subsequent to submission of
claims due to audits by the administering agency, rights of appeal and the
application of numerous technical provisions. Differences between original
estimates and subsequent revisions, including final settlements, are included
in the results of operations of the period in which the revisions are
made. Adjustments to estimated settlements resulted in increases to net patient
service revenue of $377,000 and $417,000 for the three-month periods ended
March 31, 2004 and 2003, respectively.

Litigation and Regulatory Matters

From time to time, claims and suits arise in the ordinary course of the
Companys business. In certain of these actions, plaintiffs request punitive or
other damages against the Company that may not be covered by insurance. The
Company does not believe that it is a party to any proceeding that, in
managements opinion, would have a material adverse effect on the Companys
business, financial condition or results of operations.

Acquisitions

The Company has acquired and plans to continue to acquire businesses with
prior operating histories. Acquired companies may have unknown or contingent
liabilities, including liabilities for failure to comply with health care laws
and regulations, such as billing and reimbursement, fraud and abuse and
anti-kickback laws. The Company has from time to time identified certain past
practices of acquired companies that do not conform to its standards. Although
the Company institutes policies designed to conform such practices to its
standards following completion of acquisitions, there can be no assurance that
the Company will not become liable for the past activities of these acquired
facilities that may later be asserted to be improper by private plaintiffs or
government agencies. Although the Company generally seeks to obtain
indemnification from prospective sellers covering such matters, there can be no
assurance that any such matter will be covered by indemnification, or if
covered, that such indemnification will be adequate to cover potential losses
and fines.

8. Subsequent Events

Acquisitions

On May 11, 2004, the Company entered into a definitive agreement to
acquire Hillcrest HealthCare System (Hillcrest) of Tulsa, Oklahoma for $281.2
million plus working capital that the Company expects to range from $40.0
million to $60.0 million. Hillcrest is comprised of 39 entities, including six
metropolitan Tulsa hospitals, ten regional hospitals operated through
management agreements and two long-term care facilities. As part of the
acquisition, the Company has committed to invest approximately $100.0 million
in capital expenditures over the next five years. The Company expects to close
the transaction during the third quarter of 2004, subject to regulatory
approvals and other customary conditions.

On May 12, 2004, the Company entered into a definitive agreement with
Molina Healthcare, Inc. (Molina) to transfer the approximately 38,000
commercial members of Cimarron Health Plan to the Lovelace Health
Plan, which is part of Lovelace Sandia Health System,
Inc., for approximately $22.0
million, subject to adjustments. The transfer is intended to occur immediately
following the completion of Molinas previously announced acquisition of
Cimarron Health Plans parent company, Health Care Horizons, Inc. The Company
expects to close the transaction during the third quarter of 2004, subject to
regulatory approvals and other customary conditions.

The Company intends to fund these transactions with borrowings under the
August 2003 Credit Agreement, which the Company is seeking to amend to accommodate additional
borrowing capacity, and proceeds from the $58.3 million remaining under the
subscription agreement with Welsh, Carson, Anderson and Stowe IX,
L.P. (WCAS), FFC
Partners II, L.P. and BancAmerica Capital Investors I, L.P. However, it is at
WCASs discretion whether any such investment will be made under the
subscription agreement. There can be no assurance that the Company will be able
to obtain the financing required by these acquisitions. The closings
of these transactions are not conditioned on the Companys
obtaining any necessary financing.

12



---



##### 



Divestitures

Effective April 1, 2004, the Company sold Northern Indiana Hospital, a
behavioral hospital, for consideration of approximately $6.1 million. The
hospitals results of operations and net assets are included in income from
discontinued operations and assets held for sale, respectively, for all periods
presented in the accompanying unaudited condensed consolidated financial
statements, in accordance with SFAS No. 144. The sale is expected to result in
a gain of approximately $3.5 million, subject to working capital adjustments.

9. Financial Information for the Company and Its Subsidiaries

The Companys $225.0 million senior subordinated notes are fully and
unconditionally guaranteed on a joint and several basis by all of the Companys
material subsidiaries except for entities comprising Lovelace Sandia Health
System, Inc. and RIVID Insurance Company Ltd., the Companys wholly-owned
captive insurance subsidiary.

The Company conducts substantially all of its business through its
subsidiaries. Presented below is a condensed consolidating balance sheet as of
March 31, 2004 and December 31, 2003 and condensed consolidating statements of
operations and cash flows for the three-month periods ended March 31, 2004 and
March 31, 2003 for the Company and its subsidiaries. The information segregates
the parent company (Ardent Health Services LLC), the issuer of the senior
subordinated notes (Ardent Health Services, Inc.), the combined Subsidiary
Guarantors, the combined Non-Guarantors (the entities comprising Lovelace
Sandia Health System, Inc. and RIVID Insurance Company Ltd.), and eliminations.
The issuer and each of the Subsidiary Guarantors and Non-Guarantors are 100%
owned, directly or indirectly, by Ardent Health Services LLC.

13



---



##### 



ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
March 31, 2004

Subsidiary
    
    Non-
    
    
    
    
    
    CondensedParent
    
    Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    Consolidated(Amounts in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    30,268
    
    
    $
    23,501
    
    
    $
    
    
    
    $
    53,769Accounts receivable, less
allowance for doubtful
accounts of $55,134
    
    
    
    
    
    
    
    
    
    
    68,605
    
    
    
    77,820
    
    
    
    
    
    
    
    146,425Premiums receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,774
    
    
    
    
    
    
    
    14,774Inventories
    
    
    
    
    
    
    
    
    
    
    6,630
    
    
    
    10,395
    
    
    
    
    
    
    
    17,025Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    25,618
    
    
    
    4,575
    
    
    
    
    
    
    
    30,193Prepaid expenses and other
current assets
    
    
    
    
    
    
    
    
    
    
    16,709
    
    
    
    20,023
    
    
    
    
    
    
    
    36,732Assets held for sale
    
    
    
    
    
    
    
    
    
    
    3,338
    
    
    
    
    
    
    
    
    
    
    
    3,338Total current assets
    
    
    
    
    
    
    
    
    
    
    151,168
    
    
    
    151,088
    
    
    
    
    
    
    
    302,256Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    155,554
    
    
    
    209,482
    
    
    
    
    
    
    
    365,036Other assets:Goodwill
    
    
    
    
    
    
    
    
    
    
    13,073
    
    
    
    62,456
    
    
    
    
    
    
    
    75,529Other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,078
    
    
    
    
    
    
    
    47,078Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    5,654
    
    
    
    
    
    
    
    
    
    
    
    5,654Other assets
    
    
    339,129
    
    
    
    598,926
    
    
    
    267,444
    
    
    
    6,895
    
    
    
    (1,189,459
    )
    
    
    22,935Total assets
    
    $
    339,129
    
    
    $
    598,926
    
    
    $
    592,893
    
    
    $
    476,999
    
    
    $
    (1,189,459
    )
    
    $
    818,488LIABILITIES AND MEMBERS AND
STOCKHOLDERS EQUITYCurrent liabilities:Current installments of long-term
debt
    
    $
    
    
    
    $
    
    
    
    $
    1,995
    
    
    $
    154
    
    
    $
    
    
    
    $
    2,149Accounts payable
    
    
    
    
    
    
    
    
    
    
    24,380
    
    
    
    32,023
    
    
    
    
    
    
    
    56,403Medical claims payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,124
    
    
    
    
    
    
    
    45,124Accrued salaries and benefits
    
    
    
    
    
    
    
    
    
    
    21,412
    
    
    
    28,394
    
    
    
    
    
    
    
    49,806Accrued interest
    
    
    
    
    
    
    3,312
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    3,330Unearned premiums
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,462
    
    
    
    
    
    
    
    3,462Other accrued expenses and
liabilities
    
    
    
    
    
    
    
    
    
    
    11,031
    
    
    
    16,838
    
    
    
    
    
    
    
    27,869Total current liabilities
    
    
    
    
    
    
    3,312
    
    
    
    58,836
    
    
    
    125,995
    
    
    
    
    
    
    
    188,143Long-term debt, less current
installments
    
    
    
    
    
    
    257,114
    
    
    
    1,370
    
    
    
    417
    
    
    
    
    
    
    
    258,901Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    6,557
    
    
    
    
    
    
    
    
    
    
    
    6,557Self-insured liabilities
    
    
    
    
    
    
    
    
    
    
    22,857
    
    
    
    2,901
    
    
    
    
    
    
    
    25,758Note payable to Parent
    
    
    
    
    
    
    
    
    
    
    (72,812
    )
    
    
    72,812
    
    
    
    
    
    
    
    Due to/from Parent
    
    
    
    
    
    
    
    
    
    
    (7,289
    )
    
    
    7,289
    
    
    
    
    
    
    
    Total liabilities
    
    
    
    
    
    
    260,426
    
    
    
    9,519
    
    
    
    209,414
    
    
    
    
    
    
    
    479,359Redeemable preferred
units and accrued dividends
    
    
    114,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,105Commitments and contingenciesMembers and stockholders equity:Capital stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    (150
    )
    
    
    Common units
    
    
    224,310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224,310Additional paid in capital
    
    
    
    
    
    
    320,311
    
    
    
    543,419
    
    
    
    262,254
    
    
    
    (1,125,984
    )
    
    
    Retained earnings (accumulated
deficit)
    
    
    714
    
    
    
    18,189
    
    
    
    39,955
    
    
    
    5,181
    
    
    
    (63,325
    )
    
    
    714Total members and
stockholders equity
    
    
    225,024
    
    
    
    338,500
    
    
    
    583,374
    
    
    
    267,585
    
    
    
    (1,189,459
    )
    
    
    225,024Total liabilities and members
equity
    
    $
    339,129
    
    
    $
    598,926
    
    
    $
    592,893
    
    
    $
    476,999
    
    
    $
    (1,189,459
    )
    
    $
    818,488


14



---



##### 



ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2003

Subsidiary
    
    Non-
    
    
    
    
    
    CondensedParent
    
    Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    Consolidated(Amounts in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    
    
    
    $
    49,919
    
    
    $
    39,843
    
    
    $
    
    
    
    $
    89,762Accounts receivable, less allowance for
doubtful accounts of $42,438
    
    
    
    
    
    
    
    
    
    
    59,743
    
    
    
    56,772
    
    
    
    
    
    
    
    116,515Premiums receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,733
    
    
    
    
    
    
    
    14,733Inventories
    
    
    
    
    
    
    
    
    
    
    6,523
    
    
    
    10,236
    
    
    
    
    
    
    
    16,759Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    23,217
    
    
    
    4,575
    
    
    
    
    
    
    
    27,792Prepaid expenses and other current assets
    
    
    
    
    
    
    
    
    
    
    16,966
    
    
    
    14,548
    
    
    
    
    
    
    
    31,514Assets held for sale
    
    
    
    
    
    
    
    
    
    
    3,336
    
    
    
    
    
    
    
    
    
    
    
    3,336Income tax receivable
    
    
    
    
    
    
    
    
    
    
    2,128
    
    
    
    
    
    
    
    
    
    
    
    2,128Total current assets
    
    
    
    
    
    
    
    
    
    
    161,832
    
    
    
    140,707
    
    
    
    
    
    
    
    302,539Property, plant and equipment, net
    
    
    
    
    
    
    
    
    
    
    154,095
    
    
    
    211,226
    
    
    
    
    
    
    
    365,321Other assets:Goodwill
    
    
    
    
    
    
    
    
    
    
    13,072
    
    
    
    62,457
    
    
    
    
    
    
    
    75,529Other intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,289
    
    
    
    
    
    
    
    48,289Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    5,682
    
    
    
    
    
    
    
    
    
    
    
    5,682Other assets
    
    
    333,021
    
    
    
    528,109
    
    
    
    261,617
    
    
    
    6,174
    
    
    
    (1,108,277
    )
    
    
    20,644Total assets
    
    $
    333,021
    
    
    $
    528,109
    
    
    $
    596,298
    
    
    $
    468,853
    
    
    $
    (1,108,277
    )
    
    $
    818,004LIABILITIES AND MEMBERS AND STOCKHOLDERS EQUITYCurrent liabilities:Current installments of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    1,931
    
    
    $
    151
    
    
    $
    
    
    
    $
    2,082Accounts payable
    
    
    
    
    
    
    
    
    
    
    26,175
    
    
    
    27,126
    
    
    
    
    
    
    
    53,301Medical claims payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,751
    
    
    
    
    
    
    
    45,751Accrued salaries and benefits
    
    
    
    
    
    
    
    
    
    
    23,429
    
    
    
    21,263
    
    
    
    
    
    
    
    44,692Accrued interest
    
    
    
    
    
    
    10,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,133Unearned premiums
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,399
    
    
    
    
    
    
    
    15,399Other accrued expenses and liabilities
    
    
    
    
    
    
    
    
    
    
    9,423
    
    
    
    16,348
    
    
    
    
    
    
    
    25,771Total current liabilities
    
    
    
    
    
    
    10,133
    
    
    
    60,958
    
    
    
    126,038
    
    
    
    
    
    
    
    197,129Long-term debt, less current installments
    
    
    
    
    
    
    256,996
    
    
    
    1,908
    
    
    
    457
    
    
    
    
    
    
    
    259,361Other long-term liabilities
    
    
    
    
    
    
    
    
    
    
    6,573
    
    
    
    
    
    
    
    
    
    
    
    6,573Self-insured liabilities
    
    
    
    
    
    
    
    
    
    
    10,255
    
    
    
    11,665
    
    
    
    
    
    
    
    21,920Note payable to Parent
    
    
    
    
    
    
    (71,412
    )
    
    
    
    
    
    
    71,412
    
    
    
    
    
    
    
    Due to/from Parent
    
    
    
    
    
    
    
    
    
    
    2,108
    
    
    
    (2,108
    )
    
    
    
    
    
    
    Total liabilities
    
    
    
    
    
    
    195,717
    
    
    
    81,802
    
    
    
    207,464
    
    
    
    
    
    
    
    484,983Mandatorily redeemable preferred units and
accrued dividends
    
    
    111,931
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111,931Commitments and contingenciesMembers and stockholders equity:Capital stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    (150
    )
    
    
    Common units
    
    
    224,331
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    224,331Additional paid in capital
    
    
    
    
    
    
    320,332
    
    
    
    484,587
    
    
    
    262,254
    
    
    
    (1,067,173
    )
    
    
    (Accumulated deficit) retained earnings
    
    
    (3,241
    )
    
    
    12,060
    
    
    
    29,909
    
    
    
    (1,015
    )
    
    
    (40,954
    )
    
    
    (3,241
    )Total members and stockholders equity
    
    
    221,090
    
    
    
    332,392
    
    
    
    514,496
    
    
    
    261,389
    
    
    
    (1,108,277
    )
    
    
    221,090Total liabilities and members equity
    
    $
    333,021
    
    
    $
    528,109
    
    
    $
    596,298
    
    
    $
    468,853
    
    
    $
    (1,108,277
    )
    
    $
    818,004


15



---



##### 



ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three-Month Period Ended March 31, 2004

Subsidiary
    
    Non-
    
    
    
    
    
    CondensedParent
    
    Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    Consolidated(Amounts in thousands)Revenues:Net patient service revenue
    
    $
    
    
    
    $
    
    
    
    $
    92,094
    
    
    $
    98,520
    
    
    $
    
    
    
    $
    190,614Premium revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    155,240
    
    
    
    (34
    )
    
    
    155,206Other revenue
    
    
    6,129
    
    
    
    10,037
    
    
    
    21,900
    
    
    
    14,523
    
    
    
    (31,913
    )
    
    
    20,676Total net revenues
    
    
    6,129
    
    
    
    10,037
    
    
    
    113,994
    
    
    
    268,283
    
    
    
    (31,947
    )
    
    
    366,496Expenses:Salaries and benefits
    
    
    
    
    
    
    
    
    
    
    64,237
    
    
    
    83,214
    
    
    
    (34
    )
    
    
    147,417Professional fees
    
    
    
    
    
    
    
    
    
    
    11,060
    
    
    
    26,175
    
    
    
    (6,977
    )
    
    
    30,258Claims and capitation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72,193
    
    
    
    (972
    )
    
    
    71,221Supplies
    
    
    
    
    
    
    
    
    
    
    11,926
    
    
    
    30,120
    
    
    
    
    
    
    
    42,046Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    5,606
    
    
    
    11,569
    
    
    
    
    
    
    
    17,175Interest, net
    
    
    
    
    
    
    5,143
    
    
    
    
    
    
    
    1,356
    
    
    
    
    
    
    
    6,499Change in fair value of interest rate swap agreements
    
    
    
    
    
    
    (1,235
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,235
    )Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    4,652
    
    
    
    6,174
    
    
    
    
    
    
    
    10,826Other
    
    
    
    
    
    
    
    
    
    
    2,865
    
    
    
    31,285
    
    
    
    (1,591
    )
    
    
    32,559Total expenses
    
    
    
    
    
    
    3,908
    
    
    
    100,346
    
    
    
    262,086
    
    
    
    (9,574
    )
    
    
    356,766Income (loss) from continuing operations before
income taxes
    
    
    6,129
    
    
    
    6,129
    
    
    
    13,648
    
    
    
    6,197
    
    
    
    (22,373
    )
    
    
    9,730Income tax expense
    
    
    
    
    
    
    
    
    
    
    3,716
    
    
    
    
    
    
    
    
    
    
    
    3,716Income (loss) from continuing operations, net
    
    
    6,129
    
    
    
    6,129
    
    
    
    9,932
    
    
    
    6,197
    
    
    
    (22,373
    )
    
    
    6,014Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    193Income tax expense
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    78Income from discontinued operations, net
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    115Net income (loss)
    
    
    6,129
    
    
    
    6,129
    
    
    
    10,047
    
    
    
    6,197
    
    
    
    (22,373
    )
    
    
    6,129Accrued preferred dividends
    
    
    2,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,174Net income available for
(loss attributable to) common members
    
    $
    3,955
    
    
    $
    6,129
    
    
    $
    10,047
    
    
    $
    6,197
    
    
    $
    (22,373
    )
    
    $
    3,955


16



---



##### 



ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three-Month Period Ended March 31, 2003

Subsidiary
    
    Non-
    
    
    
    
    
    CondensedParent
    
    Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    Consolidated(Amounts in thousands)Revenues:Net patient service revenue
    
    $
    
    
    
    $
    
    
    
    $
    81,808
    
    
    $
    67,533
    
    
    $
    
    
    
    $
    149,341Premium revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,753
    
    
    
    
    
    
    
    142,753Other revenue
    
    
    2,618
    
    
    
    5,788
    
    
    
    10,190
    
    
    
    8,833
    
    
    
    (8,576
    )
    
    
    18,853Total net revenues
    
    
    2,618
    
    
    
    5,788
    
    
    
    91,998
    
    
    
    219,119
    
    
    
    (8,576
    )
    
    
    310,947Expenses:Salaries and benefits
    
    
    
    
    
    
    
    
    
    
    52,425
    
    
    
    72,631
    
    
    
    
    
    
    
    125,056Professional fees
    
    
    
    
    
    
    
    
    
    
    11,671
    
    
    
    20,294
    
    
    
    (2,230
    )
    
    
    29,735Claims and capitation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,492
    
    
    
    
    
    
    
    67,492Supplies
    
    
    
    
    
    
    
    
    
    
    9,840
    
    
    
    27,115
    
    
    
    
    
    
    
    36,955Provision for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    4,400
    
    
    
    6,551
    
    
    
    
    
    
    
    10,951Interest, net
    
    
    
    
    
    
    3,170
    
    
    
    419
    
    
    
    112
    
    
    
    
    
    
    
    3,701Depreciation and amortization
    
    
    
    
    
    
    
    
    
    
    2,307
    
    
    
    5,044
    
    
    
    
    
    
    
    7,351Gain on divestitures
    
    
    
    
    
    
    
    
    
    
    (928
    )
    
    
    
    
    
    
    
    
    
    
    (928
    )Other
    
    
    
    
    
    
    
    
    
    
    5,359
    
    
    
    21,993
    
    
    
    (53
    )
    
    
    27,299Total expenses
    
    
    
    
    
    
    3,170
    
    
    
    85,493
    
    
    
    221,232
    
    
    
    (2,283
    )
    
    
    307,612Income (loss) from continuing operations before
income taxes
    
    
    2,618
    
    
    
    2,618
    
    
    
    6,505
    
    
    
    (2,113
    )
    
    
    (6,293
    )
    
    
    3,335Income tax expense
    
    
    
    
    
    
    
    
    
    
    1,334
    
    
    
    
    
    
    
    
    
    
    
    1,334Income (loss) from continuing operations, net
    
    
    2,618
    
    
    
    2,618
    
    
    
    5,171
    
    
    
    (2,113
    )
    
    
    (6,293
    )
    
    
    2,001Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    1,028
    
    
    
    
    
    
    
    
    
    
    
    1,028Income tax expense
    
    
    
    
    
    
    
    
    
    
    411
    
    
    
    
    
    
    
    
    
    
    
    411Income from discontinued operations, net
    
    
    
    
    
    
    
    
    
    
    617
    
    
    
    
    
    
    
    
    
    
    
    617Net income (loss)
    
    
    2,618
    
    
    
    2,618
    
    
    
    5,788
    
    
    
    (2,113
    )
    
    
    (6,293
    )
    
    
    2,618Accrued preferred dividends
    
    
    1,947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,947Net income available for
(loss attributable to) common members
    
    $
    671
    
    
    $
    2,618
    
    
    $
    5,788
    
    
    $
    (2,113
    )
    
    $
    (6,293
    )
    
    $
    671


17



---



##### 



ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three-Month Period Ended March 31, 2004

Subsidiary
    
    Non-
    
    
    
    
    
    CondensedParent
    
    Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    Consolidated(Amounts in thousands)Net cash (used in) provided by operating activities
    
    $
    
    
    
    $
    (11,430
    )
    
    $
    9,855
    
    
    $
    (23,162
    )
    
    $
    
    
    
    $
    (24,737
    )Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (6,126
    )
    
    
    (3,219
    )
    
    
    
    
    
    
    (9,345
    )Other
    
    
    
    
    
    
    
    
    
    
    (181
    )
    
    
    (721
    )
    
    
    
    
    
    
    (902
    )Net cash used in investing activities
    
    
    
    
    
    
    
    
    
    
    (6,307
    )
    
    
    (3,940
    )
    
    
    
    
    
    
    (10,247
    )Cash flows from financing activities:Payments on long-term debt
    
    
    
    
    
    
    
    
    
    
    (474
    )
    
    
    (37
    )
    
    
    
    
    
    
    (511
    )Debt financing costs paid
    
    
    
    
    
    
    (551
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (551
    )Intercompany advances, net
    
    
    
    
    
    
    
    
    
    
    (10,797
    )
    
    
    10,797
    
    
    
    
    
    
    
    Contributions from (Distributions to) Parent, net
    
    
    22
    
    
    
    (58,019
    )
    
    
    57,997
    
    
    
    
    
    
    
    
    
    
    
    Note payable to Issuer
    
    
    
    
    
    
    70,000
    
    
    
    (70,000
    )
    
    
    
    
    
    
    
    
    
    
    Proceeds from issuance of common units
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Redemption of common units
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )Net cash provided (used in) by financing
activities
    
    
    
    
    
    
    11,430
    
    
    
    (23,274
    )
    
    
    10,760
    
    
    
    
    
    
    
    (1,084
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    75Net decrease in cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (19,651
    )
    
    
    (16,342
    )
    
    
    
    
    
    
    (35,993
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    
    
    
    
    49,919
    
    
    
    39,843
    
    
    
    
    
    
    
    89,762Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    30,268
    
    
    $
    23,501
    
    
    $
    
    
    
    $
    53,769Supplemental cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    11,946
    
    
    $
    
    
    
    $
    1,356
    
    
    $
    
    
    
    $
    13,302Cash paid for income taxes
    
    
    
    
    
    
    
    
    
    
    3,195
    
    
    
    
    
    
    
    
    
    
    
    3,195Preferred unit dividends accrued
    
    
    2,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,174


18



---



##### 



ARDENT HEALTH SERVICES LLC AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Three-Month Period Ended March 31, 2003

Subsidiary
    
    Non-
    
    
    
    
    
    CondensedParent
    
    Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    Consolidated(Amounts in thousands)Net cash (used in) provided by operating activities
    
    $
    
    
    
    $
    (339
    )
    
    $
    3,869
    
    
    $
    7,921
    
    
    $
    
    
    
    $
    11,451Cash flows from investing activities:Investments in acquisitions, less cash acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (192,602
    )
    
    
    
    
    
    
    (192,602
    )Purchases of property, plant and equipment
    
    
    
    
    
    
    
    
    
    
    (4,826
    )
    
    
    (3,102
    )
    
    
    
    
    
    
    (7,928
    )Transfer of assets
    
    
    
    
    
    
    
    
    
    
    6,570
    
    
    
    (6,570
    )
    
    
    
    
    
    
    Proceeds from divestitures
    
    
    
    
    
    
    
    
    
    
    1,728
    
    
    
    
    
    
    
    
    
    
    
    1,728Other
    
    
    
    
    
    
    
    
    
    
    2,142
    
    
    
    (68
    )
    
    
    
    
    
    
    2,074Net cash provided by (used in) investing
activities
    
    
    
    
    
    
    
    
    
    
    5,614
    
    
    
    (202,342
    )
    
    
    
    
    
    
    (196,728
    )Cash flows from financing activities:Proceeds from revolving line of credit, net
    
    
    
    
    
    
    
    
    
    
    379
    
    
    
    
    
    
    
    
    
    
    
    379Proceeds from long-term debt
    
    
    
    
    
    
    143,861
    
    
    
    4,728
    
    
    
    
    
    
    
    
    
    
    
    148,589Payments on long-term debt
    
    
    
    
    
    
    
    
    
    
    (29,154
    )
    
    
    (16
    )
    
    
    
    
    
    
    (29,170
    )Debt financing costs paid
    
    
    
    
    
    
    (4,046
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,046
    )Intercompany advances, net
    
    
    
    
    
    
    
    
    
    
    (55,829
    )
    
    
    55,829
    
    
    
    
    
    
    
    Contributions from (distributions to) Parent, net
    
    
    (4,538
    )
    
    
    (139,476
    )
    
    
    (28,656
    )
    
    
    172,670
    
    
    
    
    
    
    
    Proceeds from issuance of common units
    
    
    6,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,667Redemption of preferred units
    
    
    (112
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (112
    )Redemption of common units
    
    
    (131
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (131
    )Preferred and common unit issuance costs
    
    
    (1,886
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,886
    )Net cash provided by (used in)
financing activities
    
    
    
    
    
    
    339
    
    
    
    (108,532
    )
    
    
    228,483
    
    
    
    
    
    
    
    120,290Net cash provided by discontinued
operations
    
    
    
    
    
    
    
    
    
    
    155
    
    
    
    
    
    
    
    
    
    
    
    155Net (decrease) increase in cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    (98,894
    )
    
    
    34,062
    
    
    
    
    
    
    
    (64,832
    )Cash and cash equivalents, beginning of period
    
    
    
    
    
    
    
    
    
    
    102,853
    
    
    
    11,006
    
    
    
    
    
    
    
    113,859Cash and cash equivalents, end of period
    
    $
    
    
    
    $
    
    
    
    $
    3,959
    
    
    $
    45,068
    
    
    $
    
    
    
    $
    49,027Supplemental cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    1,926
    
    
    $
    
    
    
    $
    112
    
    
    $
    
    
    
    $
    2,038Cash paid for income taxes
    
    
    
    
    
    
    
    
    
    
    361
    
    
    
    
    
    
    
    
    
    
    
    361Non-cash common units issued
    
    
    4,639
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,639Preferred unit dividends accrued
    
    
    1,947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,947Non-cash changes due to acquisitions and
divestitures:Current assets
    
    
    
    
    
    
    
    
    
    
    (2,613
    )
    
    
    73,212
    
    
    
    
    
    
    
    70,599Non current assets
    
    
    
    
    
    
    
    
    
    
    (184
    )
    
    
    221,111
    
    
    
    
    
    
    
    220,927Current liabilities
    
    
    
    
    
    
    
    
    
    
    (98
    )
    
    
    78,469
    
    
    
    
    
    
    
    78,371Non current liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    576
    
    
    
    
    
    
    
    576


19



---



##### 






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
consolidated financial statements and related notes appearing elsewhere in this
report and the more detailed discussion contained in Managements Discussion
and Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the year ended December 31, 2003.

Forward Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
which are intended to be covered by the safe harbors created under that Act.
These statements are based on our current estimates and expectations.
Forward-looking statements may include words such as may, will, plans,
estimates, anticipates, believes, expects, intends and similar
expressions. These forward-looking statements are subject to various factors,
risks and uncertainties that could cause actual outcomes and results to be
materially different from those projected or assumed. These factors, risks and
uncertainties include, without limitation, the satisfaction of customary
conditions to the closings of the acquisitions of Hillcrest and
Molina (including timely receipt of various regulatory approvals) and
the obtaining of necessary financing of such transactions,
possible changes in the Medicare and Medicaid programs that may limit
reimbursement to health care providers and insurers; a possible reduction of
profitability of our Health Plan caused by lower enrollment; our failure to
maintain satisfactory relationships with providers or our ability to
effectively price our health care premiums or manage medical costs; the
geographic concentration of our operations, particularly in Albuquerque, New
Mexico; the availability, cost and terms of malpractice insurance coverage;
claims and legal actions relating to professional liabilities or other matters
exceeding the scope of our liability coverage; the highly competitive nature of
the health care business, including the competition to recruit and retain
physicians and other health care personnel and the ability to retain qualified
management; the potential adverse impact of government investigations or qui
tam lawsuits brought under the False Claims Act or other whistleblower
statutes; our ability to integrate newly acquired facilities and improve their
operations and realize the anticipated benefits of the acquisitions; our
ability to acquire hospitals and other related health care entities that meet
our target criteria; our ability to manage and integrate our information
systems effectively; any reduction in payments to health care providers by
government and commercial third-party payors, as well as cost-containment
efforts of insurers and other payors; uncertainty associated with compliance
with HIPAA and other privacy laws and regulations; the restrictions and
covenants in our credit facility and debt instruments and the potential lack of
adequate alternative financing; changes in, or violations of, federal, state or
local regulation affecting the health care industry; the possible enactment of
Federal or state health care reform; changes in general economic conditions and
those factors, risks, and uncertainties described in our Annual Report on Form
10-K under the caption Risk Factors and from time to time in our filings with
the Securities and Exchange Commission (the SEC). We can give no assurance
that the forward-looking statements included in this report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, 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.

Executive Overview

2004 Operations Summary

During the three-month period ended March 31, 2004, we experienced
positive trends including:



| |  |  | increased admissions and patient days in both our acute
care and behavioral segments, including on a same facility basis;                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increased net revenue per adjusted admission/patient
day, which has been positively impacted by continued successes in
the managed care contracting and billing areas; and
|
| |  |  | increased Health Plan revenue, successful retention of plan members and effective management of the cost of
medical care;                                                 

20



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However, we continue to face certain challenges, including:



| |  |  | the delay in the Centers for Medicare and Medicaid
Services (CMS) certification at our Brooke Glen behavioral
hospital;                                        
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | continued deterioration in the collectability of
self-pay accounts due to general economic conditions, which
continues to negatively impact our bad debt expense;
|
| |  |  | integration of the recently announced Hillcrest and Molina
acquisitions;                                                                                         
|
| |  |  | continued labor pricing pressures; and                                                                                                                           
|
| |  |  | continued increases in the cost of insurance.                                                                                                                    

On May 11, 2004, we entered into a definitive agreement to acquire
Hillcrest HealthCare System (Hillcrest) of Tulsa, Oklahoma for $281.2 million
plus working capital that we expect to range from $40.0 million to $60.0
million. We entered into a definitive agreement on May 12, 2004, with Molina
Healthcare, Inc. (Molina) to transfer the approximately 38,000 commercial
members of Cimarron Health Plan to the Lovelace Health Plan, which is part of
Lovelace Sandia Health System, Inc., for approximately $22.0 million, subject
to adjustments. We intend to fund these transactions with borrowings under the
August 2003 Credit Agreement, which we are seeking to amend to accommodate additional
borrowing capacity, and proceeds from the $58.3 million remaining under the
subscription agreement with Welsh, Carson, Anderson and Stowe IX, L.P., FFC Partners II, L.P. and BancAmerica Capital Investors I, L.P.
However, it is at WCASs discretion whether any such investment will be made
under the subscription agreement. There can be no assurance that we will be
able to obtain the financing required by these acquisitions. The
closings of these transactions are not conditioned on the Company
obtaining any necessary financing.

Revenues

We generate revenue predominantly through three sources: the provision of
patient care at our acute care and behavioral facilities; premiums charged to
our Health Plan membership; and other health care services. We evaluate the
growth of our revenue in many ways. In our acute care segment, we utilize
admissions and adjusted admissions, which are volume measures, and revenue per
adjusted admission, which is a pricing and acuity measure. However, it has been
difficult to utilize revenue per adjusted admission due to the historical
treatment of revenues associated with our Health Plan members who receive
health care services at our acute care hospitals, which is discussed below
under net patient service revenue. In our behavioral care segment, we utilize
patient days and average length of stay, measures of volume and acuity, as well
as revenue per patient day, a measure of pricing and acuity.

The following is an analysis of our revenue from each source (in
thousands):

Three-Month Period
    
    Three-Month Period EndedEnded March 31, 2004
    
    March 31, 2003Net patient service
revenue
    
    $
    190,614
    
    
    
    52.0
    %
    
    $
    149,341
    
    
    
    48.0
    %Premium revenue
    
    
    155,206
    
    
    
    42.3
    
    
    
    142,753
    
    
    
    45.9Other revenue
    
    
    20,676
    
    
    
    5.7
    
    
    
    18,853
    
    
    
    6.1Total net revenues
    
    $
    366,496
    
    
    
    100.0
    %
    
    $
    310,947
    
    
    
    100.0
    %


21



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Net Patient Service Revenue

Our net patient service revenue is primarily derived from Medicare and
Medicaid programs and managed care programs. These revenues are net of
contractual adjustments and policy discounts, which represent the difference
between our hospitals established charges and the payment rates under the
Medicare and Medicaid programs and managed care programs. The percentage of our
net patient service revenue from Medicare and Medicaid programs and managed
care programs (expressed in patient days) was as follows:

Three Month Period Ended March 31,2004
    
    2003Acute
    
    Behavioral
    
    Acute
    
    BehavioralMedicare
    
    
    41.1
    %
    
    
    9.5
    %
    
    
    43.5
    %
    
    
    8.6
    %Medicaid
    
    
    5.5
    
    
    
    35.1
    
    
    
    5.9
    
    
    
    35.0Managed care
    
    
    44.8
    
    
    
    30.0
    
    
    
    38.9
    
    
    
    30.7Other payors
    
    
    8.6
    
    
    
    25.4
    
    
    
    11.7
    
    
    
    25.7100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %


Other payors primarily include state and local governments, commercial
payors, workers compensation and self pay patients.

Net patient service revenue within our consolidated acute care services
segment prior to January 1, 2004 excludes revenue for services provided to our
Health Plan members. During 2003, the Health Plan did not qualify as a separate
operating segment in accordance with the criteria set forth by SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information.However,
beginning on January 1, 2004, we managed the Health Plan as a separate
operating segment and our acute care services segment excludes the operations
of the Health Plan and includes net patient service revenue related to services
rendered at our acute care hospitals to our Health Plan members. We believe
this allows us to better manage the businesses within our company and make
better financial and operational decisions. As a result of this change in how
we managed these operations, our Health Plan business is a separate reportable
segment in 2004. However, due to system limitations it is impractical to
restate our segment information for prior periods to correspond with this
change in our reportable segments.

The final determination of amounts earned under Medicare and Medicaid
programs often does not occur until the fiscal year subsequent to submission of
claims due to audits by the administering agency, rights of appeal and the
application of numerous technical provisions. Differences between original
estimates and subsequent revisions, including final settlements, are included
in the statement of income in the period in which the revisions are made. We
did not assume any of the cost report settlements under these programs for our
acquisitions for dates prior to our purchases. Adjustments to estimated
settlements resulted in increases to net patient service revenue of $377,000
and $417,000 for the three-month periods ended March 31, 2004 and 2003,
respectively.

Recent Behavioral Hospital Trends

The Medicare, Medicaid and SCHIP Balanced Budget Refinement Act of 1999
(BBRA of 1999) required CMS to develop an inpatient psychiatric per diem
effective for the federal fiscal year beginning October 1, 2002. On November
28, 2003, CMS proposed a rule to implement a prospective payment system (PPS)
for psychiatric hospitals and units. This new system will replace the current
inpatient psychiatric payment system. The proposed rule designates that PPS
under the new system will be effective for cost reports beginning on or after
April 1, 2004. Accordingly to CMS recent notice on
Proposed Changes to the Hospital Inpatient Prospective Payment
Systems and Fiscal Year 2005 Rates, CMS is still in the process of
analyzing public comments and developing a final rule related to this
new system. The effective date of this new system would occur five
months following publication of the final rule. The plan is scheduled to be implemented through a three year
transition, ultimately phasing into 100% PPS (year one: 75% cost/25% PPS; year
two: 50% cost/50% PPS; year three: 25% cost/75% PPS; year four: 100% PPS.) CMS
did not issue a final rule for the inpatient psychiatric PPS to accomplish the
proposed effective date of April 1, 2004. We cannot predict the date the final
rule will be published, the actual effective date of the final rule, or whether
the final rule will mirror provisions of the proposed rule or its ultimate
impact on our results of operations.

Charity Care and Contemplated Revisions to Policies

In February 2004, CMS and the Office of Inspector General issued guidance
that hospitals have the ability under Medicare regulations to provide relief to
uninsured and under-insured patients who cannot afford their hospital bills and
to Medicare beneficiaries who cannot afford their Medicare cost sharing
amounts. We have approved and are in the process of implementing a charity care
policy that will provide discounts to uninsured and under-insured

22



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##### 



patients. The
policy will require facility personnel to first determine if a patient has
insurance or can qualify for state or locally funded programs. If not, facility
personnel will seek to qualify the patient for charity care. The policy
considers income level, family size and the total annual family medical bills.
Discounts will be applied on a sliding scale depending on income and family
size. We will begin the program at a pilot hospital and then implement the
policy throughout all facilities. Implementation of this policy could result in
decreased net patient service revenue with a commensurate offsetting decrease
to the provision for doubtful accounts.

Premium Revenue

Our premium revenue is derived from our Health Plan in New Mexico. We
offer a portfolio of health plan products to private and public purchasers.
Premium revenue is comprised of premiums we receive from our Health Plan
members, for which we then are responsible for the costs of health care
services provided to those members. Because our Health Plan is part of our
integrated health care delivery network in New Mexico, we ultimately provide
many of those health care services to our Health Plan members.

Although premium revenue was 42.3% of total net revenues for the
three-month period ended March 31, 2004, expanding our presence in the managed
care business is not one of our primary growth strategies. One of our key
growth strategies is to expand through the selective acquisition of acute care
and behavioral hospitals in targeted markets. On May 12, 2004, we entered into
a definitive agreement with Molina Healthcare, Inc. to transfer the
approximately 38,000 commercial members of Cimarron Health Plan to our Health
Plan in New Mexico. The potential transaction is a strategic opportunity to
expand our current Health Plan services in the Albuquerque market; however, we
do not generally plan to acquire additional health plans unless these plans are
tangential parts of the hospitals or systems that we acquire. The Health Plan
is an important part of our integrated delivery system in Albuquerque, and we
expect to ultimately provide a higher proportion of health care services to the
former Cimarron commercial members as a result of transferring them to our
Health Plan. As we expand into new targeted markets over time, we anticipate
that Health Plan revenues will become a smaller percentage of our total net
revenues.

Other Revenue

We also derive revenue from our commercial laboratory, retail pharmacies
within our hospitals, provider network access and medical management services
through our Health Plan, and educational services through our behavioral
segment.

Accounts Receivable
Collection Risks and Resulting Increased Provision for Bad Debts

We are susceptible to the industry-wide issue of increased collection risk
on uninsured self-pay patients as well as insured patients whose employers have
required them to pay higher deductibles and co-payments. This increase in
uninsured self-pay patients has caused deterioration in our accounts
receivable, primarily related to the uninsured self-pay patients, which has
resulted in increased write-offs and a larger provision for doubtful accounts
as a percentage of net patient service revenues. The increase in self-pay
accounts receivable results from a combination of factors including general
economic weakness, higher levels of patient deductibles and co-insurance,
continuing state budget struggles resulting in reductions of Medicaid enrollees
and an increase in uninsured patients who may not qualify for charity care
programs. We have implemented policies and procedures designed to accelerate
upfront cash collections as well as to continue to focus on cash collection
efforts after discharge. However, we believe that increased bad debts will
remain a prevalent trend in the hospital industry during the foreseeable
future.

Our self-pay amounts due from patients were $30.7 million and our total
allowance for doubtful accounts was $55.1 million at March 31, 2004. The
valuation allowance related to the self-pay portion of our business is
substantially greater than any other payor and is based upon our historical
collection rates. Our total allowance for doubtful accounts exceeds self-pay
amounts due from patients primarily due to our billing systems not currently
tracking co-payments and deductibles due from patients for which collection of
the primary payor accounts has not occurred. Therefore, our accounts
receivable agings reflect certain co-payments and deductibles as due from
third-party payors until those third-party payors have made payment, at which
time the co-payments and deductibles due from patients are reclassified to
self-pay.

Our total allowance for doubtful accounts represented approximately 180.0%
and 152.0% of self-pay amounts

23



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##### 



due from patients at March 31, 2004 and December
31, 2003, respectively. The increase in our provision for doubtful accounts is
also the result of deterioration in the aging of third party-payor accounts,
which has negatively impacted the collectability of estimated co-payments and
deductibles that have not yet been reclassified to self-pay. Our accounts
receivable has increased due to a corresponding increase in net patient service
revenue and an increase in days sales outstanding, which were 71 and 59 as of
March 31, 2004 and December 31, 2003, respectively.

The increase in days sales outstanding is primarily related to changes in
how we manage the acute care activity within the Lovelace Sandia Health System.
Beginning on January 1, 2004, we managed the Health Plan as a separate
operating segment and our acute care services segment excludes the operations
of the Health Plan and includes net patient service revenue related to services
rendered at our acute care hospitals to our Health Plan members. We believe
this allows us to better manage the businesses within our company and make
better financial and operational decisions. As a result of this change in how
we managed these operations, we began adjudicating claims for services provided
to our Health Plan members. The adjudication of our Health Plan claims,
coupled with increased adjusted admissions and patient days, resulted in a
build up of accounts receivable during the three-months ended March 31, 2004.
We expect to decrease our days sales outstanding during the remainder of 2004
as we continue to increase our business office personnel to adjust to the
increased volumes.

Our Business Strategy

Key elements of our business strategy include the following:



| |  |  | Physician Recruiting and Retention.We strive to recruit both
primary and specialty care physicians who can provide quality services
that we believe are currently needed in the communities we serve. We
similarly seek to recruit new physicians (primarily psychiatrists) to
our behavioral hospitals to provide services to our patients. This
reflects our strategy to expand capacity and more importantly our
service lines at our facilities. Additionally, we strive to retain our
physicians by maintaining strong relationships with them, by enhancing
the scope and quality of services at our hospitals, and by constantly
improving our hospitals work environment. We believe that as we
continue to strengthen our position in each of our markets, we will
further improve our ability to attract and retain quality physicians. An
example of our retention efforts is the use of a program we refer to as
Physician Leadership Councils, or PLCs. PLCs generally consist of
leading physicians in our communities who provide their ideas and
recommendations to the management of each facility on improving its
operations. We use PLCs to develop and maintain strong relationships
with members of the medical staffs at each of our acute care hospitals.
Generally, PLCs meet with our hospital management teams on a regular
basis to discuss operating and strategic issues, serve as a sounding
board for the medical community at each hospital and enable our local
management teams to communicate on a regular basis with the medical
staff. PLCs also actively participate in the strategic planning process
of each of our acute care hospitals.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Acquisitions.An integral part of our business strategy is the
continued selective acquisitions of acute care hospitals in urban and
suburban markets and behavioral hospitals. To accomplish this, we
selectively seek acquisition opportunities in markets with populations
over 100,000 and growth rates above the national average, either through
the acquisition of a network of hospitals and other health care
facilities or a single well-positioned facility, where we generally can
improve operating performance and profitability. For example, we entered
into a definitive agreement on May 11, 2004, to acquire Hillcrest
HealthCare System of Tulsa, Oklahoma for $281.2 million plus working
capital that we expect to range from $40.0 million to $60.0 million.
Hillcrest is comprised of 39 entities, including six metropolitan Tulsa
hospitals, ten regional hospitals operated through management agreements
and two long-term care facilities. We have generally acquired relatively
underperforming acute care hospitals where we believe we can improve
their operational performance, profitability and their financial systems
and internal controls. After we acquire a hospital, we implement a
number of measures designed to increase revenues, lower operating costs
and improve their financial systems and internal controls. We also may
make significant investments in the acquired hospital to expand
services, strengthen the medical staff, improve our market position
overall and integrate the acquired hospitals systems into our systems.                                                                                           
|
| |  |  | Capital Expenditures.Upon acquisition of a health care system or a
single facility, we generally invest substantial capital in those new
markets. For example, upon the acquisition of the facilities now
comprising                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |  |  | Lovelace Sandia Health System, we committed to invest $80.0
million of capital into those facilities in the Albuquerque, New Mexico
market over a five-year period. Through March 31, 2004, we had invested
approximately $54.7 million and we anticipate completing our commitment
during 2004. As part of the Hillcrest acquisition, we have committed to
invest approximately $100.0 million in capital expenditures in the Tulsa
market over the next five years. See Liquidity and Capital Resources
below for additional discussion of our capital expenditures.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our ability to realize the benefits of these strategies will be affected
by a number of important factors, including factors described under the
captions, Risk Factors and Managements Discussion and Analysis of Financial
Condition and Results of Operations  Known Legislative, Industry and Economic
Trends contained in our Annual Report on Form 10-K for the year ended December
31, 2003.

Acquisitions and Divestitures

2003 Acquisitions

Effective January 1, 2003, we acquired Lovelace Health Systems, Inc. in
Albuquerque, New Mexico, for $209.4 million, plus acquisition costs. Lovelace
Health Systems, Inc. included Lovelace Medical Center, a 201 bed acute care
hospital, and the Lovelace Health Plan, a health maintenance organization. We
financed the acquisition of Lovelace Health Systems, Inc. through a combination
of $112.5 million of bank debt, $36.0 million of subordinated debt and the
balance from the proceeds of the sale of equity securities. Results of
operations for the year ended December 31, 2003 include an entire year of
operations for this system. Effective October 1, 2003, we completed the merger
of Sandia Health System (previously acquired in 2002) and Lovelace Health
Systems, Inc. The merged entity is named Lovelace Sandia Health System, Inc.,
and is part of Lovelace Sandia Health System, the second largest integrated
health care delivery system in Albuquerque, New Mexico.

Effective October 8, 2003, we acquired the 146-bed Northwestern Institute
of Psychiatry (renamed Brooke Glen), a private behavioral health services
facility located in Fort Washington, Pennsylvania, for $7.7 million, plus
acquisition costs. The purchase price was paid in cash and funded from the
proceeds of our $225.0 million senior subordinated notes issued in August 2003.
Results of operations for the year ended December 31, 2003 include
approximately three months of operations for this facility.

2004 Acquisitions

On May 11, 2004, we entered into a definitive agreement to acquire
Hillcrest for $281.2 million plus working capital that we expect to range from
$40.0 million to $60.0 million. Hillcrest is comprised of 39 entities,
including six metropolitan Tulsa hospitals, ten regional hospitals operated
through management agreements and two long-term care facilities. As part of the
acquisition, we have committed to invest approximately $100.0 million in
capital expenditures over the next five years. We expect to close the
transaction during the third quarter of 2004, subject to regulatory approvals
and other customary conditions.

On May 12, 2004, we entered into a definitive agreement with Molina to
transfer the approximately 38,000 commercial members of Cimarron Health Plan to
the Lovelace Health Plan, which is part of Lovelace Sandia Health System, Inc., for
approximately $22.0 million, subject to adjustments. The transfer is intended
to occur immediately following the completion of Molinas previously announced
acquisition of Cimarron Health Plans parent company, Health Care Horizons,
Inc. We expect to close the transaction during the third quarter of 2004,
subject to regulatory approvals and other customary conditions.

We
intend to fund these transactions with borrowings under the August 2003 Credit
Agreement, which we are seeking to amend to accommodate additional borrowing
capacity, and proceeds from the $58.3 million remaining under the subscription
agreement with Welsh, Carson, Anderson and Stowe IX, L.P., FFC Partners II,
L.P. and BancAmerica Capital Investors I, L.P. However, it is at WCASs
discretion whether any such investment will be made under the subscription
agreement. There can be no assurance that we will be able to obtain the
financing required by these acquisitions. The closings of these
transactions are not conditioned on the Company obtaining any
necessary financing.

25



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##### 



2003 Divestitures

During the three-month period ended March 31, 2003, we recognized pretax
gains of $928,000 and $699,000 from the respective sales of two behavioral
hospitals. One hospital was previously identified for sale under SFAS No. 121.
The results of operations and the related gain on sale of the other hospital
are included in income from discontinued operations in the accompanying
condensed consolidated statements of operations in accordance with SFAS No.
144.

2004 Divestiture

Effective April 1, 2004, we sold a behavioral hospital for consideration
of approximately $6.1 million. The hospitals results of operations and net
assets are included in income from discontinued operations and assets held for
sale, respectively, for the periods presented in the accompanying unaudited
condensed consolidated financial statements in accordance with SFAS No. 144.

Critical Accounting Policies

A summary of significant accounting policies is disclosed in Note 1 to the
Consolidated Financial Statements contained in our Annual Report on Form 10-K
for the year ended December 31, 2003. Our critical accounting policies are
further described under the caption Critical Accounting Policies in
Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the year ended
December 31, 2003. There have been no significant changes in the nature of our
critical accounting policies or the application of those policies since
December 31, 2003.

Results of Operations

The following table sets forth for the periods indicated selected results
of operations data expressed in dollar terms and as a percentage of total net
revenues (dollars in thousands).

Three-Month Period Ended
    
    Three-Month Period EndedMarch 31, 2004
    
    March 31, 2003CONSOLIDATED (1)
    
    Amount
    
    %
    
    Amount
    
    %
    
    ChangeResults of Operations Data:Revenues:Net patient service revenue
    
    $
    190,614
    
    
    
    52.0
    %
    
    $
    149,341
    
    
    $
    48.0
    %
    
    $
    41,273Premium revenue
    
    
    155,206
    
    
    
    42.3
    
    
    
    142,753
    
    
    
    45.9
    
    
    
    12,453Other revenue
    
    
    20,676
    
    
    
    5.7
    
    
    
    18,853
    
    
    
    6.1
    
    
    
    1,823Total net revenues
    
    
    366,496
    
    
    
    100.0
    
    
    
    310,947
    
    
    
    100.0
    
    
    
    55,549Expenses:Salaries and benefits
    
    
    147,417
    
    
    
    40.2
    
    
    
    125,056
    
    
    
    40.2
    
    
    
    22,361Professional fees
    
    
    30,258
    
    
    
    8.2
    
    
    
    29,735
    
    
    
    9.6
    
    
    
    523Claims and capitation
    
    
    71,221
    
    
    
    19.4
    
    
    
    67,492
    
    
    
    21.7
    
    
    
    3,729Supplies
    
    
    42,046
    
    
    
    11.4
    
    
    
    36,955
    
    
    
    11.9
    
    
    
    5,091Provision for doubtful accounts
    
    
    17,175
    
    
    
    4.7
    
    
    
    10,951
    
    
    
    3.5
    
    
    
    6,224Interest, net
    
    
    6,499
    
    
    
    1.8
    
    
    
    3,701
    
    
    
    1.2
    
    
    
    2,798Change in fair value of interest rate swap
agreements
    
    
    (1,235
    )
    
    
    (0.3
    )
    
    
    
    
    
    
    
    
    
    
    (1,235
    )Depreciation and amortization
    
    
    10,826
    
    
    
    3.0
    
    
    
    7,351
    
    
    
    2.3
    
    
    
    3,475Gain on divestitures
    
    
    
    
    
    
    
    
    
    
    (928
    )
    
    
    (0.3
    )
    
    
    928Other
    
    
    32,559
    
    
    
    8.9
    
    
    
    27,299
    
    
    
    8.8
    
    
    
    5,260Income from continuing operations before
income taxes
    
    
    9,730
    
    
    
    2.7
    
    
    
    3,335
    
    
    
    1.1
    
    
    
    6,395Income tax expense
    
    
    3,716
    
    
    
    1.0
    
    
    
    1,334
    
    
    
    0.5
    
    
    
    2,382Income from continuing operations, net
    
    
    6,014
    
    
    
    1.7
    
    
    
    2,001
    
    
    
    0.6
    
    
    
    4,013Discontinued operations:Income from
discontinued operations
    
    
    193
    
    
    
    
    
    
    
    1,028
    
    
    
    0.3
    
    
    
    (835
    )Income tax expense
    
    
    78
    
    
    
    
    
    
    
    411
    
    
    
    0.1
    
    
    
    (333
    )Income from discontinued operations, net
    
    
    115
    
    
    
    
    
    
    
    617
    
    
    
    0.2
    
    
    
    (502
    )Net income
    
    $
    6,129
    
    
    
    1.7
    %
    
    $
    2,618
    
    
    
    0.8
    %
    
    $
    3,511


26



---



##### 



Three-Month Period Ended
    
    
    Three-Month Period EndedMarch 31, 2004

    
    
    March 31, 2003CONSOLIDATED ACUTE CARE
    
    Acute
    
    Lovelace
    
    
    
    
    
    Consolidated
    
    
    
    
    
    ConsolidatedSERVICES SEGMENT
    
    Care
    
    Health
    
    
    
    
    
    Acute Care
    
    
    
    
    
    Acute CareServices
    
    Plan
    
    Eliminations
    
    Services
    
    %
    
    Services
    
    %
    
    ChangeResults of Operations Data:Revenues:Net patient service
revenue
    
    $
    175,502
    
    
    $
    
    
    
    $
    (53,769
    )
    
    $
    121,733
    
    
    
    41.4
    %
    
    $
    86,953
    
    
    
    35.5
    %
    
    $
    34,780Premium revenue
    
    
    
    
    
    
    155,521
    
    
    
    (305
    )
    
    
    155,216
    
    
    
    52.8
    
    
    
    142,753
    
    
    
    58.2
    
    
    
    12,463Other revenue
    
    
    21,925
    
    
    
    3,057
    
    
    
    (8,044
    )
    
    
    16,938
    
    
    
    5.8
    
    
    
    15,519
    
    
    
    6.3
    
    
    
    1,419Total net revenues
    
    
    197,427
    
    
    
    158,578
    
    
    
    (62,118
    )
    
    
    293,887
    
    
    
    100.0
    
    
    
    245,225
    
    
    
    100.0
    
    
    
    48,662Expenses:Salaries and benefits
    
    
    93,549
    
    
    
    4,986
    
    
    
    (295
    )
    
    
    98,240
    
    
    
    33.4
    
    
    
    84,158
    
    
    
    34.3
    
    
    
    14,082Professional fees
    
    
    14,520
    
    
    
    9,118
    
    
    
    
    
    
    
    23,638
    
    
    
    8.0
    
    
    
    21,628
    
    
    
    8.8
    
    
    
    2,010Claims and capitation
    
    
    
    
    
    
    133,044
    
    
    
    (61,823
    )
    
    
    71,221
    
    
    
    24.2
    
    
    
    67,492
    
    
    
    27.5
    
    
    
    3,729Supplies
    
    
    38,095
    
    
    
    66
    
    
    
    
    
    
    
    38,161
    
    
    
    13.0
    
    
    
    33,308
    
    
    
    13.6
    
    
    
    4,853Provision for doubtful
accounts
    
    
    15,048
    
    
    
    
    
    
    
    
    
    
    
    15,048
    
    
    
    5.1
    
    
    
    9,245
    
    
    
    3.8
    
    
    
    5,803Interest, net
    
    
    443
    
    
    
    (36
    )
    
    
    
    
    
    
    407
    
    
    
    0.1
    
    
    
    1,807
    
    
    
    0.7
    
    
    
    (1,400
    )Depreciation and
amortization
    
    
    7,087
    
    
    
    168
    
    
    
    
    
    
    
    7,255
    
    
    
    2.5
    
    
    
    5,781
    
    
    
    2.4
    
    
    
    1,474Other
    
    
    18,757
    
    
    
    4,479
    
    
    
    
    
    
    
    23,236
    
    
    
    8.0
    
    
    
    20,506
    
    
    
    8.4
    
    
    
    2,730Income from continuing
operations
before income taxes
    
    $
    9,928
    
    
    $
    6,753
    
    
    $
    
    
    
    $
    16,681
    
    
    
    5.7
    %
    
    $
    1,300
    
    
    
    0.5
    %
    
    $
    15,381


Three-Month Period Ended
    
    Three-Month Period EndedMarch 31, 2004
    

March 31, 2003Amount
    
    %
    
    Amount
    
    %
    
    ChangeBEHAVIORAL CARE SERVICES SEGMENT (1)Results of Operations Data:Revenues:Net patient service revenue
    
    $
    68,881
    
    
    
    93.2
    %
    
    $
    62,388
    
    
    
    93.6
    %
    
    $
    6,493Other revenue
    
    
    5,046
    
    
    
    6.8
    
    
    
    4,287
    
    
    
    6.4
    
    
    
    759Total net revenues
    
    
    73,927
    
    
    
    100.0
    
    
    
    66,675
    
    
    
    100.0
    
    
    
    7,252Expenses:Salaries and benefits
    
    
    41,940
    
    
    
    56.7
    
    
    
    36,727
    
    
    
    55.1
    
    
    
    5,213Professional fees
    
    
    8,124
    
    
    
    11.0
    
    
    
    6,913
    
    
    
    10.4
    
    
    
    1,211Supplies
    
    
    3,820
    
    
    
    5.2
    
    
    
    3,575
    
    
    
    5.4
    
    
    
    245Provision for doubtful accounts
    
    
    2,127
    
    
    
    2.9
    
    
    
    1,706
    
    
    
    2.6
    
    
    
    421Interest, net
    
    
    725
    
    
    
    1.0
    
    
    
    464
    
    
    
    0.7
    
    
    
    261Depreciation and amortization
    
    
    443
    
    
    
    0.6
    
    
    
    384
    
    
    
    0.6
    
    
    
    59Gain on divestitures
    
    
    
    
    
    
    
    
    
    
    (928
    )
    
    
    (1.4
    )
    
    
    928Other
    
    
    6,334
    
    
    
    8.5
    
    
    
    5,543
    
    
    
    8.2
    
    
    
    791Income from continuing operations
        before income
taxes
    
    $
    10,414
    
    
    
    14.1
    %
    
    $
    12,291
    
    
    
    18.4
    %
    
    $
    (1,877
    )Income from discontinued operations
    
    $
    193
    
    
    
    0.3
    %
    
    $
    1,028
    
    
    
    1.5
    %
    
    $
    (835
    )




---

|(1) |  | The operating data for the behavioral hospital sold on April 1, 2004 was excluded as the hospital was
accounted for as discontinued operations.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

27



---



##### 



Selected Operating
Statistics

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

Three-Month
    
    Three-MonthPeriod Ended
    
    Period EndedMarch 31,
    
    March 31,2004
    
    2003Acute Care Operating Data:Actual and Same Facilities for 2004 (1):Number of hospitals (end of period)
    
    
    7
    
    
    
    7Number of licensed beds (end of period)(2)
    
    
    1,263
    
    
    
    1,269Total delivery system admissions(3) (4)
    
    
    8,580
    
    
    
    8,136Total delivery system adjusted
admissions(4)(5)
    
    
    19,856
    
    
    
    18,176Average length of stay (days)(6)
    
    
    5.7
    
    
    
    5.7Average daily census(7)
    
    
    534.7
    
    
    
    511.5Behavioral Operating Data:Actual:Number of hospitals (end of period)
    
    
    20
    
    
    
    19Number of licensed beds (end of period) (2)
    
    
    1,999
    
    
    
    1,840Patient days(8)
    
    
    126,872
    
    
    
    118,629Adjusted patient days(5)
    
    
    133,765
    
    
    
    125,198Average length of stay (days)(6)
    
    
    13.4
    
    
    
    14.2Average daily census(7)
    
    
    1,394.2
    
    
    
    1,318.1Same Facilities for 2004 (1):Number of hospitals (end of period)
    
    
    19
    
    
    
    19Number of licensed beds (end of period) (2)
    
    
    1,853
    
    
    
    1,840Patient days(8)
    
    
    124,217
    
    
    
    118,629Adjusted patient days(5)
    
    
    131,126
    
    
    
    125,198Average length of stay (days)(6)
    
    
    13.4
    
    
    
    14.2Average daily census(7)
    
    
    1,365.0
    
    
    
    1,318.1Health Plan Operating Data:Health Plan members (end of period)
    
    
    164,129
    
    
    
    162,416




---

|(1) |  | Same facility statistics exclude the operations of facilities that were
either acquired or divested subsequent to January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Licensed beds are those beds for which a facility has been granted approval
to operate from the applicable state licensing agency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) |  | Represents the total number of patients admitted (for a period in excess of
23 hours) to our hospitals and is used by management and certain investors
as a general measure of inpatient volume.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(4) |  | Total delivery system includes all operating data at our owned hospitals
prior to elimination of services rendered to our Health Plan members.
Excluding Health Plan members, admissions and adjusted admissions were 6,411
and 13,230, respectively, for the three-month period ended March 31, 2004.                                                                                                                                                                                                                                                                                                                                               
|   
|(5) |  | Adjusted admissions and adjusted patient days are used by management and
certain investors as a general measure of combined inpatient and outpatient
volume. Adjusted admissions/patient days are computed by multiplying
admissions/patient days (inpatient volume) by the sum of gross inpatient
revenue and gross outpatient revenue and then dividing the resulting amount
by gross inpatient revenue. The adjusted admissions/patient days computation
equates outpatient revenue to the volume measure (admissions/patient days)
used to measure inpatient volume resulting in a general measure of combined
inpatient and outpatient volume.
|   
|(6) |  | Represents the average number of days admitted patients stay in our hospitals.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(7) |  | Represents the average number of patients in our hospitals each day during our ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(8) |  | Represents the number of days our beds were occupied by patients over the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

28



---



##### 



Three-Month Period Ended March 31, 2004 Compared to Three-Month Period Ended March 31, 2003

Total Net Revenues.The $55.5 million increase in total net revenues, a
17.9% increase over the three-month period ended March 31, 2003, was due to a
combination of an increase of $48.7 million in total net revenues from our
consolidated acute care services segment, and an increase of $7.3 million in
total net revenues from our behavioral care services segment.

The $48.7 million, or 19.8%, increase in our consolidated acute care total
net revenues was primarily due to increases of $34.8 million in net patient
revenue and $12.5 million in premium revenues. Net patient revenue increased
due to an increase in patient volumes including new services, the expansion of
existing services and pricing increases. Total delivery system adjusted
admissions increased 9.2% during the three-month period ended March 31, 2004.
Premium revenue increased primarily due to an increase in pricing as membership
remained relatively consistent.

The $7.3 million, or 10.9%, increase in our behavioral care total net
revenues was attributed to $1.3 million in total net revenues from the
acquisition of Brooke Glen effective October 8, 2003, as well as a $5.8 million
increase in our same facility behavioral care total net revenues. Adjusted
patient days contributed by Brooke Glen totaled 2,639 during the three-month
period ended March 31, 2004. We have experienced a delay in obtaining our
Medicare certification at Brooke Glen. We continue to work with CMS and expect
to obtain our Medicare certification during the second quarter of 2004. This
delay has had and will continue to have a negative impact on our 2004 total net
revenues and results of operations depending on the length of time before
certification occurs. The $5.8 million increase in same facility behavioral
care total net revenues was predominantly related to increases in patient
volumes, pricing, expansion of existing services and intensity of services.
Adjusted patient days on a same facility basis increased 4.7%.

Salaries and Benefits.Salaries and benefits were 40.2% of total net
revenues for each of the three-month periods ended March 31, 2004 and 2003.
Salaries and benefits in our consolidated acute care services segment were
33.4% of total net revenues for the three-month period ended March 31, 2004,
compared to 34.3% of total net revenues for the three-month period ended March
31, 2003. The improvement in our consolidated acute care salaries and benefits
as a percentage of total net revenues was primarily due to the growth in our
markets and the related economies of scale. Lovelace was acquired on January
1, 2003. Due to the size of this acquisition, its integration into Ardents
systems and the related synergies and economies of scale were not immediately
recognized, but occurred throughout 2003. Salaries and benefits in our
behavioral care services segment were 56.7% of total net revenues for the
three-month period ended March 31, 2004, compared to 55.1% of total net
revenues for the three-month period ended March 31, 2003. On a same facility
basis, salaries and benefits as a percentage of total net revenues were 55.4%
and 55.1% for the three-month periods ended March 31, 2004 and 2003,
respectively, in our behavioral care services segment. These increases, overall
and on a same facility basis, were primarily attributable to wage inflation
brought on by nursing labor pressures due to the national shortage of nurses.

The remainder of our salaries and benefits relate to costs not allocated
to our reportable operating segments, which include centralized services such
as information services, reimbursement, accounting, taxation, legal,
advertising, design and construction as well as our wholly-owned insurance
subsidiary. Salaries and benefits not allocated were $7.2 million during the
three-month period ended March 31, 2004, or 2.0% of total net revenues,
compared to $4.2 million during the three-month period ended March 31, 2003, or
1.3% of total net revenues. The increase in unallocated salaries and benefits
relates to the growth of our centralized services as we continued to strengthen
these areas in connection with our becoming a public reporting entity and
preparing for growth. We anticipate our centralized services costs to continue
to increase in total during 2004 as we continue to build out our public
reporting structure. However, as a percentage of total net revenues, we expect
these costs to decline during 2004.

During the three-month period ended March 31, 2004 our consolidated acute
care services segment was able to successfully manage the delivery of health
care services with proper staffing and utilization. However, we have been

29



---



##### 



negatively impacted by the industry-wide shortage of nurses, which has caused
labor pricing pressures and some level of dependence on contracted labor.
Should we be unable in the future to provide adequate nursing coverage at our
facilities, our future operating results could be negatively impacted through
increased salaries and wages and contract labor.

Professional Fees.Professional fees include amounts paid to non-employed
physicians, third-party contractors and legal, accounting and banking
firms. Professional fees were 8.2% of total net
revenues for the three-month period ended March 31, 2004, compared to 9.6% of
total net revenues for the three-month period ended March 31,
2003. Professional fees in our consolidated acute care services segment
were 8.0% of total net revenues for the three-month period ended March 31,
2004, compared to 8.8% of total net revenues for the three-month period ended
March 31, 2003. Professional fees in our behavioral care
services segment were 11.0% of total net revenues for the three-month period
ended March 31, 2004, compared to 10.4% of total net revenues for the
three-month period ended March 31, 2003. On a same facility basis, professional
fees as a percentage of total net revenues were 10.8% and 10.3% for the
three-month periods ended March 31, 2004 and 2003, respectively, in our
behavioral care services segment.

The decrease in our acute care professional fees as a percentage of total
net revenues was due to the growth within our markets and the related economies
of scale. The increase in our same facility behavioral care professional fees
as a percentage of total net revenues was due primarily to the increased acuity
of our patients. The remainder of our professional fees relate to costs not
allocated to our reportable operating segments. Professional fees not allocated
were $3.5 million for the three-month period ended March 31, 2004 compared to
$2.4 million for the three-month period ended March 31, 2003. These costs
predominantly relate to our centralized services, specifically information
services, legal and accounting.

Claims and Capitation.Claims and capitation expense was 19.4% of total
net revenues for the three-month period ended March 31, 2004, compared to 21.7%
of total net revenues for the three-month period ended March 31, 2003. Before
eliminations, our medical care ratio, the claims and capitation costs as a
percentage of premium revenue, was 85.7% during the three-month period ended
March 31, 2004. Prior to 2004, we did not record patient revenue within the
hospital or claims expense on the Lovelace Health Plan for Health Plan members
who received services within our integrated Lovelace Sandia Health System
network. Beginning January 1, 2004, we began to present the Lovelace Health
Plan as a separate reportable segment.

Supplies.Supply costs were 11.4% of total net revenues for the
three-month period ended March 31, 2004, compared to 11.9% of total net
revenues for the three-month period ended March 31, 2003. Supply costs in our
consolidated acute care services segment were 13.0% of total net revenues for
the three-month period ended March 31, 2004, compared to 13.6% of total net
revenues during the three-month period ended March 31, 2003. Supply costs in
our consolidated acute care services segment include the pharmaceutical costs
of our retail pharmacies, which were 74% of retail pharmacy revenue. Supply
costs in our behavioral care services segment were 5.2% of total net revenues
for the three-month period ended March 31, 2004, compared to 5.4% of total net
revenues for the three-month period ended March 31, 2003. On a same facility
basis, supply costs as a percentage of total net revenues were also 5.2% and
5.4% for the three-month periods ended March 31, 2004 and 2003, respectively,
in our behavioral care services segment.

Provision for Doubtful Accounts.Our provision for doubtful accounts is
analyzed herein as a percentage of total net revenues, less Health Plan
revenues, as we generally have minimal bad debt related to our Health
Plan
revenues. The provision for doubtful accounts was 8.3% of total net revenues,
less Health Plan revenues, during the three-month period ended March 31, 2004,
compared to 6.6% of total net revenues, less Health Plan revenues, during the
three-month period ended March 31, 2003. The provision for doubtful accounts in
our consolidated acute care services segment was 11.1% of total net revenues,
less Health Plan revenues, during the three-month period ended March 31, 2004,
compared to 9.0% of total net revenues, less Health Plan revenues, during the
three-month period ended March

30



---



##### 



31, 2003. The provision for doubtful accounts in
our behavioral care services segment was 2.9% of total net revenues during the
three-month period ended March 31, 2004, compared to 2.6% of total net revenues
during the three-month period ended March 31, 2003. On a same facility basis,
provision for doubtful accounts as a percentage of total net revenues was 2.7%
and 2.9% during the three-month periods ended March 31, 2004 and 2003,
respectively, in our behavioral care services segment.

As previously discussed, we have experienced an increase in self-pay
amounts due from patients and a deterioration in the collectability of such
amounts, which has resulted in an increase in our provision for doubtful
accounts as a percentage of total net revenues, less Health Plan
revenues. The
increase in our provision for doubtful accounts is also the result of
deterioration in the aging of third party-payor accounts, which has negatively
impacted the collectability of estimated co-payments and deductibles that have
not yet been reclassified to self-pay. Our accounts receivable has increased
due to a corresponding increase in net patient service revenue and an increase
in days sales outstanding, which were 71 and 59 as of March 31, 2004 and
December 31, 2003, respectively.

The increase in days sales outstanding is primarily related to changes in
how we manage the acute care activity within the Lovelace Sandia Health System.
Beginning on January 1, 2004, we managed the Health Plan as a separate
operating segment and our acute care services segment excludes the operations
of the Health Plan and includes net patient service revenue related to services
rendered at our acute care hospitals to our Health Plan members. We believe
this allows us to better manage the businesses within our company and make
better financial and operational decisions. As a result of this change in how
we managed these operations, we began adjudicating claims for services provided
to our Health Plan members. The adjudication of our Health Plan claims,
coupled with increased adjusted admissions and patient days, resulted in a
build up of accounts receivable during the three-months ended March 31, 2004.
We expect to decrease our days sales outstanding during the remainder of 2004
as we continue to increase our business office personnel to adjust to the
increased volumes.

The increase in the provision for doubtful accounts in our behavioral care
services segment is primarily attributable to the delay in obtaining our
Medicare certification at Brooke Glen. We continue to work with CMS and expect
to obtain our Medicare certification during the second quarter of 2004. This
delay has had and will continue to have a negative impact on our 2004 results
of operations depending on the length of time before certification occurs.

Interest and Change in Fair Value of Interest Rate Swap Agreements.
Interest expense increased to $6.5 million for the three-month period ended
March 31, 2004 compared to $3.7 million for the three-month period ended March
31, 2003. Our long-term debt balance was $261.1 million at March 31, 2004,
compared to $188.6 million at March 31, 2003. Our weighted average interest
rate on our outstanding debt was 9.27% at March 31, 2004, compared to 6.59% at
March 31, 2003. This increase is related to our senior subordinated notes and
subordinated debt having interest rates at 10.0% and 10.2%, respectively.

In conjunction with our $225.0 million senior subordinated notes, we
entered into four interest rate swap agreements which converted $80.0 million
of the $225.0 million fixed-rate 10.0% borrowings to floating-rate borrowings.
Our interest rate swap agreements did not qualify for hedge accounting under
the provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities;therefore, we have recognized the changes in fair value of
the swaps in earnings. At March 31, 2004, the fair value of our interest rate
swap agreements was an asset of $1.8 million.

Depreciation and Amortization.Depreciation and amortization expense
increased to $10.8 million for the three-month period ended March 31, 2004 from
$7.4 million for the three-month period ended March 31, 2003. The largest
contributor to the increase was our Albuquerque market where depreciation and
amortization increased $2.1 million during the three-month period ended March
31, 2004. Depreciation not allocated to our reportable operating segments
increased $1.1 million during the three-month period ended March 31, 2004,
which was predominantly related to the information systems build out to support
our centralized services and public reporting structure. Our capital
expenditures for the three-month periods ended March 31, 2004 and 2003 totaled
$9.3 million and $7.9 million, respectively. The capital expenditures during
the 2003 fiscal year were $87.0 million. These capital expenditures
contributed to the increase in depreciation as the respective assets became
utilized and depreciable.

Gain on Divestitures.Our gain on divestitures for the three-month period
ended March 31, 2003 was related to

31



---



##### 



the sale of a behavioral hospital in Oregon
that was previously identified for sale under SFAS No. 121.

Other Operating Expenses.Other operating expenses consist of insurance
costs (primarily general, professional and workers compensation), non-income
taxes (various states in which we operate have gross receipts taxes or premium
taxes), utilities, rents and leases, repairs and maintenance and other
operating expenses. Other operating expenses were 8.9% of total net revenues
during the three-month period ended March 31, 2004, compared to 8.8% of total
net revenues during the three-month period ended March 31, 2003. Other
operating expenses in our consolidated acute care services segment were 8.0% of
total net revenues during the three-month period ended March 31, 2004, compared
to 8.4% of total net revenues during the three-month period ended March 31,
2003. Other operating expenses in our behavioral care services segment were
8.5% of total net revenues during the three-month period ended March 31, 2004,
compared to 8.2% of total net revenues during the three-month period ended
March 31, 2003. On a same facility basis, other operating expenses as a
percentage of total net revenues were 8.1% and 8.2% during the three-month
periods ended March 31, 2004 and 2003, respectively, in our behavioral care
services segment.

The decrease in our consolidated acute care services segment other
operating expenses as a percentage of total net revenues was due to the growth
within our markets and related economies of scale. The behavioral care segment
other operating expenses have remained relatively constant.

The remainder of our other operating expenses relate to costs not
allocated to our reportable operating segments. Other operating expenses not
allocated were $3.0 million during the three-month period ended March 31, 2004
compared to $1.2 million during the three-month period ended March 31, 2003.
These costs predominantly relate to our centralized services, specifically our
lease costs for our corporate and information services facilities, which
increased as we grew our infrastructure. We anticipate these costs to decline
as a percentage of total net revenues during 2004 as we complete the build out
of our public reporting structure.

We expect to see continued increases in the cost of insurance, especially
for general and professional liability, as the market has fewer competitors and
remains depressed. We have offset the pace of increases through the
establishment of a wholly-owned captive insurance subsidiary that now insures
our professional and general liability risk for claims up to $2.0 million,
subject to a $500,000 deductible per claim. In addition, we purchased excess
insurance coverage with independent third-party carriers for claims totaling up
to $75.0 million per occurrence and in the aggregate.

Income Tax Expense.Our income tax effective rate from continuing
operations was 38.0% for the three-month period ended March 31, 2004 compared
to 38.4% for the three-month period ended March 31, 2003. The change primarily
relates to our state income tax rates.

Net Income from Continuing Operations.Net income from continuing
operations increased to $6.0 million for the three-month period ended March 31,
2004 from $2.0 million for the three-month period ended March 31, 2003,
primarily as a result of the increase in total net revenues while effectively
managing the utilization of our resources.

Accrued Preferred Dividends.Our accrued preferred dividends amount to
8.0% of the principal amount and accrued unpaid dividends outstanding on our
redeemable preferred units. Effective January 2004, we amended the terms of the
preferred units such that the mandatory redemption date of August 19, 2014 was
deleted, thereby removing the mandatory redemption feature. Had we not amended
the preferred units, effective January 1, 2004 we would have been required to
account for the preferred units as a liability and record the dividends as
interest expense.

Liquidity and Capital Resources

Liquidity

We require capital principally for the acquisition of additional acute
care and behavioral hospitals, the expansion of the services provided through
our existing facilities, improvements to these facilities, including designing
and implementing new information systems, and for debt service. Historically,
we have financed our capital requirements, including our acquisitions, through
a combination of cash flows from operations, borrowings under

32



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credit facilities and proceeds from the issuance of subordinated debt and equity securities.

Sources and Uses of Cash

Our cash and cash equivalents were $53.8 million at March 31, 2004,
compared to $89.8 million at December 31, 2003, a decrease of $36.0 million
primarily related to cash required for operations and capital expenditures. A
more detailed discussion on specific sources and uses of cash is set forth
below.

Three-Month Period EndedMarch 31,2004
    
    2003(Amounts in thousands)Statement of cash flows information:Cash flows (used in) provided by operating
activities
    
    $
    (24,737
    )
    
    $
    11,451Cash flows used in investing activities
    
    
    (10,247
    )
    
    
    (196,728
    )Cash flows (used in) provided by financing
activities
    
    
    (1,084
    )
    
    
    120,290


Cash flows used in operating activities were $24.7 million for the
three-month period ended March 31, 2004, compared to cash flows provided by
operating activities of $11.5 million for the three-month period ended March
31, 2003. Our cash flows used in operating activities were negatively impacted
primarily by a $47.3 million increase in accounts receivable. The increase in
accounts receivable relates to the previously discussed increase in our days
sales outstanding, which increased from 59 days at December 31, 2003 to 71 days
at March 31, 2004. The increase in days sales outstanding equates to
approximately $25.1 million. The remaining increase is due primarily to an
increase in net patient service revenue, which resulted in a corresponding
increase in accounts receivable.

Cash flows used in investing activities decreased to $10.2 million for the
three-month period ended March 31, 2004, compared to $196.7 million for the
three-month period ended March 31, 2003. Our total cash spent for the
three-month period ended March 31, 2004 related to capital expenditures was
$9.3 million. During the three-month period ended March 31, 2003, we spent
$192.6 million on acquisitions, primarily to acquire Lovelace Health System,
Inc.

Cash flows used in financing activities were $1.1 million in 2004,
compared to cash flows provided by financing activities of $120.3 million in
2003. We financed our Lovelace acquisition primarily from our credit
facilities, which were paid in full from the proceeds of our senior
subordinated notes and equity issued in 2002.

At March 31, 2004, we currently have borrowing capacity of $117.9 million
on our revolving line of credit and, in certain circumstances, $200.0 million
on our term loans. We anticipate that our acquisition strategy will necessitate
the funding of future acquisitions through use of our bank facility, amending
our current bank facility to accommodate, among other things, additional
borrowing capacity and use of other financing means that may be available to us
at those times. We expect to finance our proposed acquisitions of Hillcrest and
Molina in large part through borrowings under our amended credit facility;
however, there can be no assurance that we will be able to obtain future
financing or financing on terms favorable to us.

Restrictions on Cash Flows

Lovelace Sandia Health System, Inc., our wholly-owned subsidiary,
includes, in addition to hospitals and other health care facilities, the
Lovelace Health Plan. Lovelace Sandia Health System, Inc. is therefore subject
to certain restrictions on its ability to pay dividends or make other
distributions to us by state insurance company laws and regulations. These laws
and regulations require Lovelace Sandia Health System, Inc. to give notice to
the New Mexico Department of Insurance prior to paying dividends or making
distributions to us. Lovelace Sandia Health System, Inc. has paid dividends of
$25.0 million to our affiliates since its acquisition. As of March 31, 2004, cash
and cash equivalents at Lovelace Sandia Health System, Inc. were $19.1 million.
In addition, Lovelace Sandia Health System, Inc. is subject to state-imposed
net worth-based capital requirements that effectively limit the amount of funds
it has available to distribute to us. As of March 31, 2004, Lovelace Sandia
Health System, Inc. is required to

33



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maintain a net worth of approximately $34.8
million (based on the unaudited annual statement filing with the State of New
Mexico), as well as a minimum requirement of $610,000 in cash or short-term
government instruments. Actual net worth exceeded the requirement by
$10.3
million and, subject to the requirements, may be available to us. In addition,
as part of Lovelace Health Plans participation in the Medicaid Salud! program
for New Mexico, Lovelace Sandia Health System, Inc. is required to maintain a
cash reserve of at least 3.0% of the annual capitated payments per member for
each month of the first year of the contract. As of March 31, 2004, Lovelace
Sandia Health System, Inc. maintained a balance of $6.6 million to meet these
two required reserve amounts.

As a result of the consolidation and merger of our New Mexico operations
in October 2003, all of our operations in New Mexico (other than the operations
of AHS S.E.D. Medical Laboratories, Inc.) are owned by Lovelace Sandia Health
System, Inc. and are subject to the restrictions and requirements described
above.

Cash Requirements

During the three-month period ended March 31, 2004, there were no material
changes in our contractual obligations presented in our 2003 Annual Report on
Form 10-K.

Letters of Credit

We are required to issue letters of credit for the benefit of our insurers
related to our workers compensation and professional liability insurance
coverage. As of March 31, 2004, we had issued $7.1 million of standby letters
of credit which were secured by the collateral of our August 2003 Credit
Agreement.

Capital Expenditures (including Capital Commitments)

Capital expenditures, excluding amounts paid for acquisitions, were $9.3
million and $7.9 million for the three-month periods ended March 31, 2004 and
2003, respectively. Generally, the facilities and equipment at the hospitals we
have acquired were in good condition; however, we have invested, and will
continue to invest, significant funds into facility improvements and service
enhancements undertaken by our hospitals. Additionally, we have invested
considerable funds to install and implement sophisticated information systems
that we believe will keep us competitive and help achieve our business goals
and objectives. We expect to make total capital expenditures in our existing
facilities of approximately $60.0 million during 2004. We expect to fund these
expenditures through cash provided by operating activities and borrowings under
our current bank facility, which we are seeking to amend to accommodate
additional borrowing capacity.

As previously discussed, we have committed to invest $80.0 million of
capital expenditures in the Albuquerque market through 2008, of which $54.7
million has been invested through March 31, 2004. We expect that the remaining
$25.3 million will be invested in the Albuquerque market during the remainder
of 2004 as we continue to upgrade financial and clinical systems, expand
service lines and refurbish and retool facilities.

On May 11, 2004, we entered into a definitive agreement to acquire
Hillcrest for $281.2 million plus working capital that we expect to range from
$40.0 million to $60.0 million. As part of the Hillcrest acquisition, we have
committed to invest approximately $100.0 million in capital expenditures in the
Tulsa market over the next five years. We entered into a definitive agreement
on May 12, 2004, with Molina to transfer the approximately 38,000 commercial
members of Cimarron Health Plan to the Lovelace Health Plan, which is
part of Lovelace Sandia Health System, Inc., for approximately $22.0 million, subject to
adjustments.

We
intend to fund these transactions with borrowings under the August 2003 Credit
Agreement, which we are seeking to amend to accommodate additional borrowing
capacity, and proceeds from the $58.3 million remaining under the subscription
agreement with Welsh, Carson, Anderson and Stowe IX, L.P., FFC Partners II,
L.P. and BancAmerica Capital Investors I, L.P. However, it is at WCASs
discretion whether any such investment will be made under the subscription
agreement. There can be no assurance that we will be able to obtain the
financing required by these acquisitions. The closings of these
transactions are not conditioned on the Company obtaining any
necessary financing.

Our August 2003 Credit Agreement described below contains provisions that
limit annual capital expenditures. We are seeking to increase this limit in
conjunction with our other financing activities to provide for forecasted
capital expenditures, including the $100.0

34



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##### 



million capital expenditure commitment related to the recently announced Hillcrest acquisition. We believe
our forecasted and committed capital expenditures will be sufficient to meet
our quality and growth objectives while allowing us to expand our service lines
and complete our implementation of clinical and information systems; however,
there can be no assurance that we will be able to obtain the financing required
to provide for forecasted capital expenditures.

Capital Resources

Long-term Debt and Capital

On August 19, 2003, we received $225.0 million through the issuance of
10.0% senior subordinated notes due on August 15, 2013. We used the
proceeds from the offering to repay all amounts outstanding under our
then existing credit facilities of $155.2 million plus accrued interest. On March 1, 2004, we
exchanged all of our outstanding 10.0% senior subordinated notes due August 15,
2013, for 10.0% senior subordinated notes due August 15, 2013, that
have been registered under the Securities Act of 1933, as amended. Terms and conditions
of the exchange offer were as set forth in the registration statement on Form
S-1 filed with the Securities and Exchange Commission that became effective on
January 28, 2004. Interest on the senior subordinated notes is payable
semi-annually on February 15 and August 15. We may redeem the senior
subordinated notes, in whole or in part, at any time before August 15, 2008, at
the principal amount plus a premium and accrued and unpaid interest. We may
redeem the senior subordinated notes after August 15, 2008, at redemption
prices ranging from 105.0% to 100.0%, plus accrued and unpaid interest.
Additionally, at any time prior to August 15, 2006, we may redeem up to 35.0%
of the principal amount of the senior subordinated notes with the net cash
proceeds of one or more sales of our capital stock at a redemption price of
110.0% plus accrued and unpaid interest to the redemption date; provided that
at least 65.0% of the aggregate principal amount of the senior subordinated
notes originally issued on August 19, 2003 remains outstanding after each such
redemption and the redemption occurs within 90 days of the date of closing of
the equity offering.

Payment of the principal and interest of the senior subordinated notes is
subordinate to amounts owed for our existing and future senior indebtedness.
The senior subordinated notes are guaranteed, fully and unconditionally,
jointly and severally, on an unsecured senior subordinated basis by all of our
material subsidiaries (the Subsidiary Guarantors), other than Lovelace Sandia
Health System, Inc. and our captive insurance subsidiary. We are subject to
certain restrictive covenants under the Indenture governing the senior
subordinated notes.

On August 19, 2003, concurrent with the issuance of the senior
subordinated notes, we replaced our existing credit agreement with a new senior
secured credit facility (August 2003 Credit Agreement) with a syndicate of
banks and other institutional lenders. The August 2003 Credit Agreement
consists of a $125.0 million revolving line of credit, subject to a borrowing
base, including a swing-line loan of $10.0 million and an incremental term loan
under which we may request term loans of up to $200.0 million. The revolving
line of credit bears interest at LIBOR plus a margin ranging from 2.75% to 4.0%
or at a margin over the prime rate ranging from 1.75% to 3.0%. The margin is
based on the Companys leverage ratio. Interest on the revolving line of
credit is payable on the outstanding principal balance on the last day of the
selected interest period. The principal amount of the revolving line of credit
is to be paid in full on the maturity date (5 years on the revolving credit
facility and as agreed for the term loans, when requested). The payment of
interest and principal for the term loans are subject to scheduled amortization
as agreed upon by us and the lenders. The August 2003 Credit Agreement contains
various financial covenants including requirements to maintain a minimum
interest coverage ratio, a total leverage ratio, a senior leverage ratio, a
minimum net worth of the HMO subsidiaries, and a capital expenditures maximum.
At March 31, 2004, we were in compliance with all such covenants. The August
2003 Credit Agreement also restricts certain of our activities including our
ability to incur additional debt, declare dividends, repurchase stock, engage
in mergers and acquisitions and sell assets. The August 2003 Credit Agreement
is guaranteed by us along with our material current and future subsidiaries,
other than Lovelace Sandia Health System, Inc. and our wholly-owned captive
insurance subsidiary, and is secured by substantially all of our existing and
future property and assets and the capital stock of all of our subsidiaries. We
have designated certain of our immaterial subsidiaries as unrestricted
subsidiaries under the indenture governing the senior subordinated notes. None
of these unrestricted subsidiaries carry on any significant business or conduct
any operations and, as a result, they are not material to our business,
financial condition or results of operations.

35



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In connection with the merger of our New Mexico subsidiaries on October 1,
2003, Lovelace Sandia Health System, Inc. (the surviving entity) issued a $70.0
million intercompany note to Ardent Health Services, Inc. Interest accrues at a
rate equal to the greater of (i) our base rate plus 4.0% or (ii) 6.0%. Interest
is payable on demand. Principal is payable on the later of November 19, 2008 or
30 days after the maturity date of our incremental term loan, if any. We are
required to maintain a pledge of the intercompany note in favor of the lenders
of our August 2003 Credit Agreement and the holders of the senior subordinated
notes. Effective January 1, 2004, the intercompany note was transferred to a
subsidiary of Ardent Health Services, Inc.

Interest Rate Swap Agreements

In September 2003, we entered into four interest rate swap agreements with
large financial institutions which converted a notional amount of $80.0 million
of the senior subordinated notes to floating-rate borrowings. The swap
agreements mature in $40.0 million increments on August 15, 2006 and August 15,
2008. The floating interest rate is based on six-month LIBOR plus a margin and
is determined for the six-month period in arrears on semi-annual settlement
dates of February 15 and August 15. At March 31, 2004, the weighted average
floating rate was 7.61%. The swap agreements do not qualify for hedge
accounting, thus changes in the fair value of our interest rate hedging
arrangements are recognized each period in earnings. All earnings adjustments
resulting from changes in the fair values of the interest rate swaps are
non-cash charges or credits and do not impact cash flows from operations or
operating income. There may be periods with significant non-cash increases or
decreases to our earnings relating to the change in the fair value of the
interest rate swap agreements. The fair value of the swap obligations was an
asset of $1.8 million at March 31, 2004.

Availability of Capital Resources

We believe that the cash flows generated by our operations, together with
amounts available under our August 2003 Credit Agreement, which we are seeking
to amend to accommodate additional borrowing capacity, will be sufficient to
meet our operating and capital needs for at least the next twelve months. In
addition, there is an additional $58.3 million remaining under the subscription
agreement that Welsh, Carson, Anderson and Stowe IX, L.P., FFC Partners II,
L.P. and BancAmerica Capital Investors I, L.P. may invest. However, it is at
WCASs discretion whether any such investment will be made. No assurance can be
given that additional equity will be issued under the subscription agreement.

On May 11, 2004, we entered into a definitive agreement to acquire
Hillcrest for $281.2 million plus working capital that we expect to range from
$40.0 million to $60.0 million. On May 12, 2004, we entered into a definitive
agreement with Molina to transfer the approximately 38,000 commercial members
of Cimarron Health Plan to the Lovelace Health Plan, which is part of Lovelace Sandia Health System, Inc., for approximately $22.0 million, subject to
adjustments. We intend to fund these transactions with borrowings under our
August 2003 Credit Agreement, which we plan to amend to accommodate additional
borrowing capacity, and proceeds from the $58.3 million under the subscription
agreement discussed above. There can be no assurance that we will be able to
obtain the financing required by these acquisitions. The closings of
these transactions are not conditioned on the Company obtaining any
necessary financing.

We intend to acquire additional hospitals and are actively seeking
acquisitions that fit our corporate growth strategy. These acquisitions may,
however, require financing in addition to the capital on hand and future cash
flows from operations. We continually assess our capital needs and may seek
additional financing, including debt or equity, as considered necessary to fund
potential acquisitions or for other corporate purposes. There can be no
assurance that we will be able to obtain future financing or financing on terms
favorable to us.

Recently Issued Accounting Standards

A discussion of recently issued accounting pronouncements and their effect
on our financial position and results of operations can be found in Note 2 to
our unaudited condensed consolidated financial statements.

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Seasonality

We typically experience higher patient volumes in the first and fourth
quarters of each year. We typically experience such seasonal volume peaks because more people generally become ill during the winter months, which
in turn results in significant increases in the number of patients we treat
during those months.

Inflation

The health care industry is labor intensive. Wages, contract labor and
other expenses increase during periods of inflation and when shortages in
marketplaces occur. In addition, our supply costs and insurance costs are
subject to inflation as the respective vendors pass along their increased costs
to us in the form of higher prices. Our ability to pass on these increased
costs is limited because of increasing regulatory and competitive pressures.
Accordingly, inflationary pressures could have a material adverse effect on our
results of operations.




Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The information called for by this item is provided under the caption
Capital Resources under Item 2., Managements Discussion and Analysis of
Financial Condition and Results of Operations.




Item 4. Controls and Procedures.

We conducted an evaluation, under the supervision of our chief executive
officer and chief financial officer, of the effectiveness as of March 31, 2004
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act). Based on this evaluation, our chief executive officer and chief financial
officer have concluded that our disclosure controls and procedures were
effective as of March 31, 2004 to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms and that such information is accumulated and
communicated to management, including our chief executive officer and chief
financial officer, as appropriate to allow timely decisions regarding required
disclosure.

There was no change in our internal control over financial reporting
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

The Company has previously identified certain period-end closing processes
and the lack of timely and accurate review and reconciliation of account
balances related to the Companys internal controls. The Company is continuing
to implement action plans to remedy these conditions. The Company believes,
however, that none of these conditions constitute a material weakness in
internal control over financial reporting.

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PART II

OTHER INFORMATION




Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

| |  |                                                                                                                                                                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | During the three-month period ended March 31, 2004, an employee of the
Company exercised the right to purchase 250 common units at $3.43 per
unit. This transaction was exempt from registration pursuant to,
among other things, Rule 701 under the Securities Act of 1933, as
amended.




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

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Effective January 1, 2004, the holders of the Companys common
units and the mandatorily redeemable preferred units voted to
delete the mandatory redemption feature of the preferred units. This
amendment to the Companys Limited Liability Agreement was
approved by the written consent of holders representing 49,846,715 common
units (or approximately 87.4% of the outstanding common units) and
24,599,667 preferred units (or approximately 87.4% of the preferred units).




Item 6. Exhibits and Reports on Form 8-K.

|    |  |                                                             
|--- |  | ------------------------------------------------------------
|(a) |  | Exhibits: The following exhibits are filed with this report.

ExhibitNo.
    
    
    
    Description3.1
    
    
    
    Certificate of Formation of Ardent Health Services LLC, as filed
with the Delaware Secretary of State on June 1, 2001 (Incorporated
by reference to Exhibit 3.1 to the Registrants Registration
Statement on Form S-1, File No.
333-110117)3.2
    
    
    
    Limited Liability Company Agreement of Ardent Health Services LLC,
including Amendment No. 1 thereto (Incorporated by reference to
Exhibit 3.2 to the Registrants Registration Statement on Form S-1,
File No. 333-110117)3.3
    
    
    
    Amendment No. 2 to Limited Liability Company Agreement of Ardent
Health Services LLC (Incorporated by reference to Exhibit 3.3 to the
Registrants Annual Report on Form 10-K for the year ended December
31, 2003)4.1
    
    
    
    Indenture, dated as of August 19, 2003, among Ardent Health
Services, Inc., Ardent Health Services, LLC, the Subsidiary
Guarantors and U.S. Bank Trust National Association, as trustee
(Incorporated by reference to Exhibit 4.1 to the
Registrants Registration Statement on Form S-1, File No. 333-110117)4.2
    
    
    
    Form of Ardent Health Services, Inc. 10% Senior Subordinated Note
due 2013 (Incorporated by reference to Exhibit 4.2 to the
Registrants Registration Statement on Form S-1, File No.
333-110117)4.3
    
    
    
    Form of Notation of Guarantee, dated as of August 19, 2003, executed
by each of the Guarantors (Incorporated by reference to Exhibit 4.3
to the Registrants Registration Statement on Form S-1, File No.
333-110117)4.4
    
    
    
    Amended and Restated Intercompany Promissory Note dated October 1,
2003 issued by Lovelace Health Systems, Inc. in favor of Ardent
Health Services, Inc. (Incorporated by reference to Exhibit 4.4 to
the Registrants Registration
Statement on Form S-1, File No. 333-110117)4.5
    
    
    
    Amended and Restated Security Agreement, dated as of October 1,
2003, between Lovelace Health Systems, Inc. and Ardent Health
Services, Inc. (Incorporated by reference to Exhibit 4.5 to the
Registrants Registration Statement on Form S-1, File No.
333-110117)4.6
    
    
    
    Intercreditor and Subordination Agreement, dated as of August 19,
2003, among Bank one, NA, as Collateral Agent, Bank One, NA, as
Administrative Agent, U.S. Bank Trust National Association, as
Trustee, and Ardent Health
Services, Inc. (Incorporated by reference to Exhibit 4.6 to the
Registrants Registration Statement on Form S-1, File No.
333-110117)


38



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##### 



4.7
    
    
    
    Collateral Assignment of Note and Security Agreement dated October
1, 2003 issued by Ardent Health Services, Inc. to Bank One, NA, as
Collateral Agent (Incorporated by reference to Exhibit 4.7 to the
Registrants Registration Statement on Form S-1, File No.
333-110117)4.8
    
    
    
    Registration Rights Agreement, dated as of August 19, 2003,among
Ardent Health Services, Inc., Ardent Health Services, LLC and the
Subsidiary Guarantors and Banc of America Securities LLC, UBS
Securities LLC, Banc One Capital Markets, Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (Incorporated by reference to
Exhibit 4.8 to the Registrants Registration Statement on Form S-1,
File No. 333-110117)10.1
    
    
    
    Fourth Amended and Restated Ardent Health Services LLC and its
Subsidiaries Option and Restricted Unit Purchase Plan31.1
    
    
    
    Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    
    Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




|                                                                                                                                                                                                                        |  |                                                            
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------
|                                                                                                                                                                                                                       
|(b)                                                                                                                                                                                                                     |  | Reports on Form 8-K During the Quarter Ended March 31, 2004
|                                                                                                                                                                                                                       
|On March 11, 2004, the Company filed a Current Report on Form 8-K to
furnish, pursuant to Item 12, the Companys press releaserelating to our
earnings for the fourth quarter and fiscal year ending December 31, 2003.

39



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SIGNATURE

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.

ARDENT HEALTH SERVICES LLC(Registrant)By:
    
    /s/ R. Dirk AllisonR. Dirk Allison
Executive Vice President and Chief Financial Officer
(Principal Financial Officer, Chief Accounting Officerand Authorized Signatory)


Date: May 17, 2004

40



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EXHIBIT INDEX

ExhibitNo.
    
    
    
    Description3.1
    
    
    
    Certificate of Formation of Ardent Health Services LLC, as filed with
the Delaware Secretary of State on June 1, 2001 (Incorporated by
reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-1, File No. 333-110117)3.2
    
    
    
    Limited Liability Company Agreement of Ardent Health Services LLC,
including Amendment No. 1 thereto (Incorporated by reference to Exhibit
3.2 to the Registrants Registration Statement on Form S-1, File No.
333-110117)3.3
    
    
    
    Amendment No. 2 to Limited Liability Company Agreement of Ardent Health
Services LLC (Incorporated by reference to Exhibit 3.3 to the
Registrants Annual Report on Form 10-K for the year ended December 31,
2003)4.1
    
    
    
    Indenture, dated as of August 19, 2003, among Ardent Health Services,
Inc., Ardent Health Services, LLC, the Subsidiary Guarantors and U.S.
Bank Trust National Association, as
trustee (Incorporated by reference to Exhibit 4.1 to the Registrants
Registration Statement on Form S-1, File No. 333-110117)4.2
    
    
    
    Form of Ardent Health Services, Inc. 10% Senior Subordinated Note due
2013 (Incorporated by reference to Exhibit 4.2 to the Registrants
Registration Statement on Form S-1, File No. 333-110117)4.3
    
    
    
    Form of Notation of Guarantee, dated as of August 19, 2003, executed by
each of the Guarantors (Incorporated by reference to Exhibit 4.3 to the
Registrants Registration
Statement on Form S-1, File No. 333-110117)4.4
    
    
    
    Amended and Restated Intercompany Promissory Note dated October 1, 2003
issued by Lovelace Health Systems, Inc. in favor of Ardent Health
Services, Inc. (Incorporated by
reference to Exhibit 4.4 to the Registrants Registration Statement on
Form S-1, File No. 333-110117)4.5
    
    
    
    Amended and Restated Security Agreement, dated as of October 1, 2003,
between Lovelace Health Systems, Inc. and Ardent Health Services, Inc.
(Incorporated by reference to Exhibit 4.5 to the Registrants
Registration Statement on Form S-1, File No. 333-110117)4.6
    
    
    
    Intercreditor and Subordination Agreement, dated as of August 19, 2003,
among Bank one, NA, as Collateral Agent, Bank One, NA, as Administrative
Agent, U.S. Bank Trust
National Association, as Trustee, and Ardent Health Services, Inc.
(Incorporated by reference to Exhibit 4.6 to the Registrants
Registration Statement on Form S-1, File
No. 333-110117)4.7
    
    
    
    Collateral Assignment of Note and Security Agreement dated October 1,
2003 issued by Ardent Health Services, Inc. to Bank One, NA, as
Collateral Agent (Incorporated by reference to Exhibit 4.7 to the
Registrants Registration Statement on Form S-1, File No. 333-110117)4.8
    
    
    
    Registration Rights Agreement, dated as of August 19, 2003, among Ardent
Health Services, Inc., Ardent Health Services, LLC and the Subsidiary
Guarantors and Banc of America Securities LLC, UBS Securities LLC, Banc
One Capital Markets, Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated (Incorporated by reference to Exhibit 4.8 to
the Registrants Registration Statement on Form S-1, File No. 333-110117)10.1
    
    
    
    Fourth Amended and Restated Ardent Health Services LLC and its
Subsidiaries Option and Restricted Unit Purchase Plan31.1
    
    
    
    Certification of CEO pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of CFO pursuant to Rule 13a-14(a)/15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    
    Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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