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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K x            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2004 OR o            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _________. Commission File Number: 333-117362 IASIS HEALTHCARE LLC  DELAWARE
    
    20-1150104(State or Other Jurisdiction
    
    (I.R.S. Employerof Incorporation or Organization)
    
    Identification No.)DOVER CENTRE117 SEABOARD LANE, BUILDING EFRANKLIN, TENNESSEE
    
    37067(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants Telephone Number, Including Area Code: (615) 844-2747 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES
o NO x Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrants knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. x 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 December 17, 2004, 100% of the registrants common interests
outstanding (all of which are privately owned and are not traded on any public
market) were owned by IASIS Healthcare Corporation, its sole member. *This Constitutes Registrants Special Report pursuant to Rule 15d-2
under the Securities Exchange
Act of 1934.




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TABLE OF CONTENTS PART IItem 1.   Business
    
    
    1Item 2.   Properties
    
    
    28Item 3.   Legal Proceedings
    
    
    29Item 4.   Submission of Matters to a Vote of Security Holders
    
    
    29PART IIItem 5.   Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    30Item 6.   Selected Financial Data
    
    
    30Item 7.   Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    32Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 8.   Financial Statements and Supplementary Data
    
    
    53Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    94Item 9A. Controls and Procedures
    
    
    94Item 9B. Other Information
    
    
    94PART IIIItem 10.   Directors and Executive Officers of the Registrant
    
    
    94Item 11.   Executive Compensation
    
    
    98Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    103Item 13.   Certain Relationships and Related Transactions
    
    
    105Item 14.   Principal Accountant Fees and Services
    
    
    106Item 15.   Exhibits and Financial Statement Schedules
    
    
    107EX-4.5  SUPPLEMENTAL INDENTUREEX-10.17  ARIZONA HEALTH CARE COST CONTAINMENT SYSTEMEX-10.23  JOINER AGREEMENTEX-21  LIST OF SUBSIDIARIESEX-31.1  SECTION 302 CEO CERTIFICATIONEX-31.2  SECTION 302 CFO CERTIFICATIONEX-32  SECTION 906 CEO & CFO CERTIFICATION
  i




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IASIS HEALTHCARE LLC 
 Item 1. Business. Company Overview We are a leading owner and operator of medium-sized acute care hospitals
in high-growth urban and suburban markets. We operate our hospitals with a
strong community focus by offering and developing healthcare services targeted
to the needs of the markets we serve, promoting strong relationships with
physicians and working with local managed care plans. As of September 30, 2004,
we owned or leased 15 acute care hospitals and one behavioral health hospital
with a total of 2,267 beds in service. Our hospitals are located in five
regions, each of which has a projected population growth rate in excess of the
national average:  
    
    Salt Lake City, Utah;
    
    Phoenix, Arizona;
    
    Tampa-St. Petersburg, Florida;
    
    Las Vegas, Nevada; and
    
    four cities in Texas, including San Antonio. Our general, acute care hospitals offer a variety of medical and surgical
services commonly available in hospitals, including emergency services, general
surgery, internal medicine, cardiology, obstetrics, orthopedics and physical
rehabilitation. In addition, our facilities provide outpatient and ancillary
services including outpatient surgery, physical therapy, radiation therapy,
diagnostic imaging and respiratory therapy. We also own and operate a Medicaid managed health plan in Phoenix called
Health Choice Arizona, Inc., or Health Choice, that served over 105,000 members
as of September 30, 2004. In addition, we have ownership interests in three
ambulatory surgery centers. Our principal executive offices are located at Dover Centre, 117 Seaboard
Lane, Building E, Franklin, Tennessee 37067 and our telephone number at that
address is (615) 844-2747. Our Internet website address is
www.iasishealthcare.com. Information contained on our website is not part of
this annual report on Form 10-K. Merger and Related Financing Transactions IASIS Healthcare Corporation, or IAS, entered into a definitive merger
agreement dated as of May 4, 2004 pursuant to which an investor group led by
Texas Pacific Group acquired IAS through a merger on June 22, 2004. In order
to effect the acquisition, the investor group established IASIS Investment LLC,
or IASIS Investment, and a wholly owned subsidiary of IASIS Investment, which
merged with and into IAS. In the merger, IAS issued shares of common and
preferred stock to IASIS Investment, which is the sole stockholder of IAS after
giving effect to the merger. Prior to the merger, IAS contributed substantially
all of its assets and liabilities to IASIS Healthcare LLC, or IASIS LLC, in
exchange for all of the equity interests in IASIS LLC. As a result, IAS is a
holding company, IASIS LLC is a limited liability company consisting of 100%
common interests owned by IAS and IASs operations are conducted by IASIS LLC
and its subsidiaries. The following financing transactions occurred in connection with the
merger:  
    
    an investment made by entities controlled by Texas
Pacific Group, such entities referred to as TPG, totaling $434.0
million in cash;
    
    an investment made by an entity controlled by JLL
Partners Fund IV, such entity referred to as JLL, totaling $110.0
million in cash;
    
    a contribution of shares of IAS common stock by
entities controlled by Trimaran Fund Management, L.L.C., such
entities referred to as Trimaran, of $40.0 million;
    
    the execution of an amended and restated credit
agreement governing new senior secured credit facilities
providing for a $425.0 million term loan, drawn at closing, and a
$250.0 million revolving credit facility for working capital and
general corporate purposes, which was not drawn at closing; and
    
    the issuance and sale of $475.0 million in aggregate
principal amount of 8 3/4% senior subordinated notes due 2014. 1




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The proceeds from the financing transactions were used to:  
    
    pay all amounts due to the security holders of IAS under the terms of the merger agreement;
    
    repay all outstanding indebtedness under IASs existing senior secured credit facilities;
    
    repurchase IASs 13% senior subordinated notes due
2009, or the 13% notes, and 8 1/2% senior subordinated notes due
2009, or the 8 1/2% notes, and pay the related tender premiums
and consent fees, pursuant to a tender offer and consent
solicitation by IAS;
    
    retire, in October 2004, $3.5 million of IASs 13%
notes that were not tendered pursuant to the tender offer and
consent solicitation; and
    
    pay the fees and expenses related to the merger and the
related financing transactions. We refer to the merger, the related financing transactions and the
applications of the proceeds from the financing transactions as the
Transactions. In this report, unless we indicate otherwise or the context
requires, we, us, our or our company refers to IASIS LLC and its
consolidated subsidiaries and includes IAS, our predecessor company. Business Strategy Our objective is to provide high-quality, cost-effective healthcare
services in the communities we serve. The key elements of our business strategy
are:  Focus on Operational Excellence. Our management team has extensive
multi-facility operating experience and focuses on operational excellence at
each of our facilities. We intend to continue to improve our operations and
profitability by:  
    
    using our advanced information systems platform across all of
our hospitals to provide us with accurate, timely and cost-effective
financial and clinical information;
    
    expanding our profitable product lines and improving our business mix;
    
    focusing on efficient staffing and supply utilization;
    
    capitalizing on purchasing efficiencies and reducing
operating costs through our relationship with a national group
purchasing organization; and
    
    improving our processes for patient registration, billing,
collections, managed care contract compliance and all other aspects
of our revenue cycle.  Strategically Invest in Our Markets to Expand Services and Increase
Revenue. Our disciplined approach to investing our capital includes analyzing
demographic data, utilizing our advanced information systems to identify the
profitability of our product lines and consulting with physicians and payors to
prioritize the healthcare needs of the communities we serve. We intend to
continue to increase our revenue and local presence by focusing our investment
efforts on:  
    
    upgrading and expanding specialty services and surgical
capacity, including cardiology, orthopedics, bariatrics, obstetrics
and sub-acute care;
    
    expanding emergency room capacity;
    
    updating our technology in surgery, such as robotic surgery,
diagnostic imaging and other medical equipment;
    
    increasing capacity and utilization of services at certain of
our hospitals; and
    
    enhancing the convenience and quality of our outpatient
services and expanding outpatient specialty services. We are continually engaged in strategic investments in our markets to
expand services and increase revenue. For example, we are currently
constructing a state-of-the-art facility in Port Arthur, Texas that will
consolidate our Mid-Jefferson and Park Place facilities, currently located
within four miles of each other, and we expect to open the facility during our
third quarter of fiscal 2005. We believe the new hospital, to be known as The
Medical Center of Southeast Texas, will be a leading provider of acute care
services in the region. We expect this new facility to enhance our presence and
reduce patient out-migration in the Port Arthur area, increasing our future net
revenue. A portion of the capital for this new facility was provided by local
investors, including physicians. Our 2




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existing partnerships with local investors have provided us with an
attractive source of capital and enhanced our market presence. Additionally, in November 2004, we paid $8.3 million in cash for the
purchase of a 47-acre parcel of undeveloped land in the East Valley of our
Phoenix, Arizona market. We are currently evaluating future expansion
opportunities on this property.  Provide High-Quality Services. We strive to provide high-quality
services at each of our facilities. We believe that the measurement of quality
of care is becoming an increasingly important factor in governmental
reimbursement as well as in negotiating preferred managed care contracting
rates. Reflecting our commitment to the quality of care and in anticipation of
these developments, we are implementing an advanced clinical information system
to provide us with more timely availability of key clinical care data. We
believe that this system will help us enhance patient safety, reduce medical
errors, automate medication administration (through bar coding), increase staff
time available for direct patient care and maximize reimbursement that is tied
to quality of care indicators.  Recruit and Retain Quality Physicians. We intend to continue to recruit
and retain quality physicians for our medical staffs and maintain their loyalty
to our facilities by:  
    
    dedicating corporate personnel and resources to physician recruitment;
    
    equipping our hospitals with technologically advanced equipment;
    
    enhancing physician convenience and access;
    
    sponsoring training programs to educate physicians on advanced medical procedures; and
    
    allowing physicians to remotely access clinical data through our information
systems to facilitate convenient and timely patient care. We will continue to use our existing physician relationships to recruit
new primary care physicians and specialists. In addition, we have established
local physician advisory committees to work closely with our local management
teams and to advise us on facility and market-specific needs and strategies.  Continue to Develop Favorable Managed Care Relationships. We plan to
increase patient volume at our facilities and improve profitability by
negotiating favorable terms with managed care plans, entering into contracts
with additional managed care plans and aligning reimbursement with acuity of
services. Additionally, our advanced information systems improve our hospitals
ability to administer managed care contracts, helping to ensure that claims are
adjudicated correctly. We believe that the broad geographic coverage of our
hospitals in certain of the regions in which we operate increases our
attractiveness to managed care plans in those areas. Our favorable managed care
relationships are evidenced by an increase in our same-facility net patient
revenue per adjusted admission of 10.6% in fiscal 2004, as compared to the year
ended September 30, 2003, driven primarily by managed care rate increases and
supplemented by increases in acuity.  Selectively Pursue Acquisitions and Strategic Alliances. We intend to
selectively pursue hospital acquisitions in existing and new markets where we
believe we can improve the financial and operational performance of the
acquired hospital and/or enhance our regional presence. We intend to target
hospitals with 100 to 400 beds. We will focus our new market development
efforts to acquire under-managed and under-capitalized facilities in growing
urban and suburban regions with stable or improving managed care environments
and other opportunistic acquisitions. We will also continue to identify
opportunities to expand our presence through strategic alliances with other
healthcare providers. As an example of our selective acquisition strategy, on February 1, 2004,
we acquired North Vista Hospital (formerly known as Lake Mead Hospital Medical
Center) (North Vista) in Las Vegas, Nevada from a subsidiary of Tenet
Healthcare Corporation. This acute care hospital (with 176 beds in service)
provides inpatient, outpatient and emergency care services. We believe that
North Vista provides us with a significant opportunity to implement our
operational controls and management experience to increase this facilitys
contribution in the near-term. We plan to continue improving North Vistas
financial performance by investing in profitable product lines, focusing on
managed care contracting, improving the business office and closely monitoring
the hospitals payor mix. 3




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Hospital Operations Our senior management team has extensive multi-facility operating
experience and focuses on maintaining clinical and operational excellence at
our facilities. At each hospital we operate, we have implemented systematic
policies and procedures to improve the hospitals operating and financial
performance. A hospitals local management team is generally comprised of a
chief executive officer, chief financial officer and chief nursing officer.
Local management teams, in consultation with our corporate staff, develop
annual operating plans setting forth revenue growth and operating profit
strategies. These strategies can include the expansion of services offered by
the hospital and the recruitment of physicians in each community, as well as
plans to reduce costs by improving operating efficiencies. We believe that the
competence, skills and experience of the management team at each hospital is
critical to the hospitals success because of its role in executing the
hospitals operating plan. Our performance-based compensation program for each
local management team is based upon the achievement of qualitative and
quantitative goals set forth in the annual operating plan. Our hospital
management teams are advised by boards of trustees that include members of
hospital medical staffs as well as community leaders. Each board of trustees
establishes policies concerning medical, professional and ethical practices,
monitors such practices and is responsible for ensuring that these practices
conform to established standards. Factors that affect demand for our services include:  
    
    the geographic location of our hospitals and their convenience for patients and physicians;
    
    our participation in managed care programs;
    
    capital investment at our facilities;
    
    the quality of our medical staff;
    
    competition from other healthcare providers;
    
    the size of and growth in local population; and
    
    local economic conditions. Improved treatment protocols as a result of advances in medical technology
and pharmacology also affect the nature and demand for healthcare services
across the industry, including at our hospitals. We believe that the ability of our hospitals to meet the healthcare needs
of their communities is determined by the:  
    
    level of physician support;
    
    availability of nurses and other healthcare professionals;
    
    quality, skills and compassion of our employees;
    
    breadth of our services;
    
    physical capacity and level of technology at our facilities; and
    
    emphasis on quality of care. We operate 15 acute care hospitals and one behavioral health hospital and
have ownership interests in three ambulatory surgery centers. We own 14 and
lease two of our hospitals. Five of the acute care hospitals we own have third
party investors. The following table presents certain unaudited combined operating
statistics for our hospitals: Years Ended September 30,2004
    
    2003
    
    2002Acute Care: (1)Number of acute care hospitals at end of period
    
    
    15
    
    
    
    14
    
    
    
    14Number of beds in service at end of period  (2)
    
    
    2,267
    
    
    
    2,028
    
    
    
    2,012Average length of stay (days) (3)
    
    
    4.37
    
    
    
    4.44
    
    
    
    4.29Occupancy rates (average beds in service)
    
    
    49.8
    %
    
    
    50.0
    %
    
    
    45.6
    %Admissions  (4)
    
    
    90,749
    
    
    
    83,229
    
    
    
    77,806Adjusted admissions  (5)
    
    
    145,591
    
    
    
    138,494
    
    
    
    131,501Patient days  (6)
    
    
    396,484
    
    
    
    369,620
    
    
    
    333,922Adjusted patient days  (5)
    
    
    614,594
    
    
    
    589,267
    
    
    
    544,337Outpatient revenue as a percentage of gross
patient revenue
    
    
    34.2
    %
    
    
    36.7
    %
    
    
    38.6
    %
   (1)
    
    Includes North Vista for the period from February 1, 2004 to
September 30, 2004.(2)
    
    Excludes St. Lukes Behavioral Hospital. (3)
    
    Represents the average number of days that a patient stayed in our
hospitals.(4)
    
    Represents the total number of patients admitted to our hospitals
for stays in excess of 23 hours. Management and investors use this
number as a general measure of inpatient volume.(5)
    
    Adjusted admissions and adjusted patient days are general measures
of combined inpatient and outpatient volume. We compute adjusted
admissions/patient days by multiplying admissions/patient days by gross
patient revenue and then dividing that number by gross inpatient
revenue.(6)
    
    Represents the number of days our beds were occupied by inpatients
over the period. 4




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We continuously evaluate our services with a view to expanding our
profitable lines of business and improving our business mix. We use our
advanced information systems to perform detailed product line margin analyses
and monitor the profitability of the services provided at our facilities. We
use these analyses to capitalize on price and volume trends through the
expansion of certain services. We also use our information systems to monitor
patient care and other quality of care assessment activities on a continuing
basis. A large percentage of our hospitals net patient revenue consists of fixed
payment, discounted sources including Medicare, Medicaid and managed care
organizations. Reimbursement for Medicare and Medicaid services is often fixed
regardless of the cost incurred or the level of services provided. We expect
patient volumes from Medicare to increase over time due to the general aging of
the population. Inpatient care is expanding to include sub-acute care when a
less-intensive, lower cost level of care is appropriate. By offering
cost-effective sub-acute services in appropriate circumstances, we are able to
provide a continuum of care when the demand for such services exists. We have
identified opportunities to expand existing physical rehabilitation units and
develop other post-acute services within our facilities. The results of our
product line analyses confirm that the development and use of such units
improves clinical outcomes and is economically beneficial. Sources of Revenue We receive payment for patient services from:  
    
    the federal government, primarily under the Medicare program;
    
    state Medicaid programs;
    
    health maintenance organizations and preferred provider organizations; and
    
    individual patients and private insurers. The table below presents the approximate percentages of net patient
revenue from the following sources: Percentage of Net Patient RevenueYears Ended September 30,Payor Source
    
    2004
    
    2003
    
    2002Medicare
    
    
    26.3
    %
    
    
    27.6
    %
    
    
    27.8
    %Medicaid
    
    
    14.1
    
    
    
    12.4
    
    
    
    11.1Managed care
    
    
    43.5
    
    
    
    45.2
    
    
    
    46.3Self-pay and other
    
    
    16.1
    
    
    
    14.8
    
    
    
    14.8Total (1)
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   (1)
    
    For the years ended September 30, 2004, 2003 and 2002, net patient
revenue comprised 78.4%, 84.2% and 85.2%, respectively, of our total net
revenue. Most of our hospitals offer discounts from established charges to managed
care plans if they are large group purchasers of healthcare services. These
discount programs generally limit our ability to increase net patient revenue
in response to increasing costs. Patients generally are not responsible for any
difference between established hospital charges and amounts reimbursed for such
services under Medicare, Medicaid, health maintenance organizations, preferred
provider organizations or private insurance plans. Patients generally are
responsible for services not covered by these plans, and exclusions,
deductibles or co-insurance features of their coverage. Collecting amounts due
from patients is more difficult than collecting from governmental programs or
managed care plans. Increases in the population of uninsured individuals,
changes in the states indigent and Medicaid eligibility requirements and
continued efforts by employers to pass more out-of-pocket health care costs to
employees in the 5




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form of increased co-payments and deductibles have resulted in an increase
in our provision for bad debts. We centralized our self-pay patient account
collection efforts through a national call center established during fiscal
2002. During 2004, collections through our national call center increased 48%
over fiscal year 2003. Additionally, weve made investments in a majority of
our emergency rooms through facilities redesign, Medicaid eligibility
automation and process-flow improvements, which have contributed to a 42%
increase in point-of-service collections in fiscal year 2004 as compared to
fiscal year 2003. Effective October 1, 2004, we expanded our charity care
policy to cover uninsured patients with income above 200% of the federal
poverty level. Under the new program, a sliding scale of significantly reduced
rates will be offered to uninsured patients with income between 200% and 400%
of the federal poverty level at all of our hospitals. Currently, we do not
expect that implementation of such a change will have a material impact on our
results of operations. Competition Our facilities and related businesses operate in competitive environments.
A number of factors affect our competitive position, including:  
    
    our managed care contracting relationships;
    
    the number, availability, quality and specialties of
physicians, nurses and other healthcare professionals;
    
    the scope, breadth and quality of services;
    
    the reputation of our facilities and physicians;
    
    the physical condition of our facilities and medical equipment;
    
    the location of our facilities and availability of physician office space;
    
    certificate of need restrictions, where applicable;
    
    the availability of parking or proximity to public transportation;
    
    growth in outpatient service providers;
    
    charges for services; and
    
    the geographic coverage of our hospitals in the regions in which we operate. We currently face competition from established, not-for-profit healthcare
companies, investor-owned hospital companies, large tertiary care centers,
specialty hospitals and outpatient service providers such as surgery centers
and imaging centers. In addition, some of our hospitals operate in regions with
vertically integrated healthcare providers that include both payors and
healthcare providers, which could affect our ability to obtain managed care
contracts. We expect to encounter increased competition from specialty
hospitals, outpatient service providers and companies, like ours, that
consolidate hospitals and healthcare companies in specific geographic markets.
Continued consolidation in the healthcare industry will be a leading
contributing factor to increased competition in markets in which we already
have a presence and in markets we may enter in the future. Another factor in the competitive position of a hospital is the ability of
its management to obtain contracts with purchasers of group healthcare
services. The importance of obtaining managed care contracts has increased in
recent years and is expected to continue to increase as private and government
payors and others turn to managed care organizations to help control rising
healthcare costs. Most of our markets have experienced significant managed care
penetration. The revenue and operating results of our hospitals are
significantly affected by our hospitals ability to negotiate favorable
contracts with managed care plans. Health maintenance organizations and
preferred provider organizations use managed care contracts to encourage
patients to use certain hospitals in exchange for discounts from the hospitals
established charges. Traditional health insurers also are interested in
containing costs through similar contracts with hospitals. An additional competitive factor is whether a hospital is part of a local
hospital network and the scope and quality of services offered by the network
and by competing networks. A hospital that is part of a network offering a
broad range of services in a wide geographic area is more likely to obtain more
favorable managed care contracts than a hospital that is not. We evaluate
changing circumstances in each geographic area in which we operate on an
ongoing basis. We may position ourselves to compete in these managed care
markets by forming our own, or joining with others to form, local hospital
networks. 6




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Employees And Medical Staff As of September 30, 2004, we had approximately 9,000 employees, including
approximately 3,000 part-time employees. We consider our employee relations to
be good. In certain markets, there is currently a shortage of nurses and other
medical support personnel. We recruit and retain nurses and medical support
personnel by creating a desirable, professional work environment, providing
competitive wages, benefits and long-term incentives, and providing career
development and other training programs. In order to supplement our current
employee base, we are expanding our relationship with colleges, universities
and other medical education institutions in our markets and recruiting nurses
and other medical support personnel from abroad. Our hospitals are staffed by
licensed physicians who have been admitted to the medical staff of our
individual hospitals. Any licensed physician may apply to be admitted to the
medical staff of any of our hospitals, but admission to the staff must be
approved by each hospitals medical staff and the appropriate governing board
of the hospital in accordance with established credentialing criteria. Our employees are not subject to collective bargaining agreements,
although nurses at one of the hospitals in our Salt Lake City, Utah market
voted in the third quarter of fiscal 2002 regarding union representation. These
ballots have been impounded by the National Labor Relations Board (NLRB)
pending the results of an appeal filed by us. We anticipate a decision from the
NLRB regarding our appeal in fiscal 2005. Because we believe that unionization
is not in the best interests of the hospitals employees or patients, we are
vigorously opposing the unionization attempt. We do not believe the
unionization attempt will be ultimately successful or will have a material
effect on our financial condition or results of operations. Compliance Program Our compliance program is designed to ensure that we maintain high
standards of conduct in the operation of our business and implement policies
and procedures so that employees act in compliance with all applicable laws,
regulations and company policies. The organizational structure of our
compliance program includes a compliance committee of our board of directors, a
corporate management compliance committee and local management compliance
committees at each of our hospitals. These committees have the oversight
responsibility for the effective development and implementation of our program.
Our Vice President of Ethics and Business Practices, who reports directly to
our Chairman and Chief Executive Officer and to the compliance committee of our
board of directors, serves as Chief Compliance Officer and is charged with
direct responsibility for the development and implementation of our compliance
program. Other features of our compliance program include designating a
Facility Compliance Officer for each of our hospitals, periodic ethics and
compliance training and effectiveness reviews, the development and
implementation of policies and procedures and a mechanism for employees to
report, without fear of retaliation, any suspected legal or ethical violations. Reimbursement Medicare. Medicare is a federal program that provides hospital and medical
insurance benefits to persons age 65 and over, some disabled persons and
persons with end-stage renal disease. All of our hospitals are certified as
providers of Medicare services. Under the Medicare program, acute care
hospitals receive reimbursement under a prospective payment system for
inpatient and outpatient hospital services. Currently, certain types of
facilities are exempt from the prospective payment system methodology,
including psychiatric hospitals and specially designated units, childrens
hospitals and cancer hospitals. Hospitals and units exempt from the prospective
payment system are reimbursed on a reasonable cost-based system, subject to
cost limits. Under the inpatient prospective payment system, a hospital receives a
fixed payment based on the patients assigned diagnosis related group. The
diagnosis related group classifies categories of illnesses according to the
estimated intensity of hospital resources necessary to furnish care for each
principal diagnosis. The diagnosis related group rates for acute care hospitals
are based upon a statistically normal distribution of severity. When treatments
for patients fall well outside the normal distribution, providers may receive
additional payments known as outlier payments. The diagnosis related group
payments do not consider a specific hospitals actual costs but are adjusted
for geographic area wage differentials. Inpatient capital costs for acute care
hospitals are reimbursed on a prospective system based on diagnosis related
group weights multiplied by geographically adjusted federal weights. In the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003,
Congress equalized the diagnosis related group payment rate for urban and rural
hospitals at the large urban rate for all hospitals for discharges on or after
April 1, 2003. 7




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The diagnosis related group rates are adjusted each federal fiscal year
and have been affected by federal legislation. The index used to adjust the
diagnosis related group rates, known as the market basket index, gives
consideration to the inflation experienced by hospitals and entities outside of
the healthcare industry in purchasing goods and services. However, for several
years the percentage increases to the diagnosis related group rates have been
lower than the percentage increases in the costs of goods and services
purchased by hospitals. Under the Medicare, Medicaid, and SCHIP Benefit
Improvement and Protection Act of 2000, the diagnosis related group rate
increased in the amount of the market basket minus 0.55% for federal fiscal
year 2003 and the market basket for federal fiscal year 2004. Further, the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 provides
for diagnosis related group rate increases for federal fiscal years 2005, 2006,
and 2007 at the full market basket, if the facility submits data for ten
patient care indicators to the Secretary of Health and Human Services. We
currently have the ability to monitor our compliance with the quality
indicators and intend to submit the quality data required to receive the full
market basket pricing update when appropriate. Those hospitals not submitting
data on the quality indicators will receive an increase equal to the market
basket rate minus 0.4%. Consistent with this law, CMS issued a final rule that
provides for an increase in the hospital diagnosis related group payment rates
by the full market basket of 3.3% for fiscal year 2005 for those hospitals
submitting data on the ten quality indicators. Under the final rule, those
hospitals not submitting the required data will receive an increase in payment
equal to the market basket minus 0.4%. Based on the historical adjustments to
the market baskets, future legislation may decrease the future rate of increase
for diagnosis related group payments, but we are unable to predict the amount
of the reduction. On June 9, 2003, CMS published a final rule modifying the methodology for
determining Medicare outlier payments in order to ensure that only the highest
cost cases are entitled to receive additional payments under the inpatient
prospective payment system. For discharges occurring on or after October 1,
2003, outlier payments are based on either a providers most recent tentatively
settled cost report or the most recent settled cost report, whichever is from
the latest cost reporting period. Previously, outlier payments had been based
on the most recent settled cost report, resulting in excessive outlier payments
for some hospitals. The final rule requires, in most cases, the use of
hospital-specific cost to charge ratios instead of a statewide ratio. Further,
outlier payments may be adjusted retroactively to recoup any past outlier
overpayments plus interest or to return any underpayments plus interest. We
believe that these changes to the outlier payment methodology will not have a
material adverse effect on our business, financial position or results of
operations. CMS reimburses hospital outpatient services and certain Medicare Part B
services furnished to hospital inpatients who have no Part A coverage on a
prospective payment system basis. CMS will continue to use existing fee
schedules to pay for physical, occupational and speech therapies, durable
medical equipment, clinical diagnostic laboratory services and nonimplantable
orthotics and prosthetics. Freestanding surgery centers are reimbursed on a fee
schedule. All services paid under the prospective payment system for hospital
outpatient services are classified into groups called ambulatory payment
classifications or APCs. Services in each APC are similar clinically and in
terms of the resources they require. A payment rate is established for each
APC. The fee schedule for the outpatient prospective payment system was updated
by a conversion factor equal to the market basket index of 3.5% for the
calendar year 2003 and by a conversion factor increased by approximately 4.6%
for calendar year 2004. CMS has published a final rule increasing the
conversion factor for calendar year 2005 by approximately 3.3%. We anticipate
that future legislation may decrease the future rate of increase for APC
payments, but we are unable to predict the amount of the reduction. Under the outpatient prospective payment system, hospitals may receive
additional amounts known as pass-through payments for using new technology,
but the total amount of pass-through payments in a calendar year is subject to
a cap. For calendar year 2004 and subsequent years, the cap has been reduced to
2.0% of projected total payments under the hospital outpatient prospective
payment system. CMS has announced that pass-through payments for calendar year
2005 will not be reduced because these payments are not expected to exceed the
statutory cap. CMS may implement reductions in the pass-through payments in
future years to reflect the cap. Hospitals that treat a disproportionately large number of low-income
patients (Medicare and Medicaid patients eligible to receive supplemental
Social Security income) currently receive additional payments from the federal
government in the form of Disproportionate Share Payments. CMS is required by
law to study the formula used to calculate these payments. One change being
considered would give greater weight to the amount of 8




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uncompensated care provided by a hospital than it would to the number of
low-income patients treated, and CMS started collecting uncompensated care data
from hospitals in 2003. In addition, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 increases Disproportionate Share
Payments effective April 1, 2004 for rural hospitals and some urban hospitals. Inpatient rehabilitation hospitals and designated units were fully
transitioned from a reasonable cost reimbursement system to a prospective
payment system in 2002. Under this prospective payment system, patients are
classified into case mix groups based upon impairment, age, comorbidities and
functional capability. Inpatient rehabilitation facilities are paid a
predetermined amount per discharge that reflects the patients case mix group
and is adjusted for area wage levels, low-income patients, rural areas and
high-cost outliers. For federal fiscal year 2004, CMS updated the payment rate
for inpatient rehabilitation facilities by the full market basket rate of 3.2%.
The update for federal fiscal year 2005 is the full market basket rate of 3.1%. On May 7, 2004, CMS issued a final rule modifying the criteria for
classification as an inpatient rehabilitation facility as a result of data
indicating that most facilities do not meet the existing criteria. Under the
previous rules, in order for a facility to be considered an inpatient
rehabilitation facility, at least 75% of the facilitys inpatient population
during the most recent 12-month cost reporting period must have required
intensive rehabilitation services for one or more of ten specified conditions.
The new rule expands the list of specified conditions to thirteen and
temporarily reduces the percentage of the patient population who must have one
of the specified conditions. For cost reporting periods beginning on or after
July 1, 2004 to June 30, 2005, 50% of the facilitys inpatient population must
have one of the specified conditions in order to meet the criteria. For cost
reporting periods beginning on or after July 1, 2005 to June 30, 2006, 60% of
the facilitys inpatient population must have one of the specified conditions.
For cost reporting periods beginning on July 1, 2006 to June 30, 2007, 65% of
the facilitys inpatient population must have one of the specified conditions.
During this transition period, CMS will study the utilization of rehabilitation
services. Unless CMS takes further regulatory action, for cost reporting
periods beginning on or after July 1, 2007, 75% of the facilitys inpatient
population must have one of the specified conditions. Congress recently enacted
legislation preventing CMS from enforcing this rule until the General
Accounting Office completes a study on the rules impact on inpatient
rehabilitation facilities and patients. As of September 30, 2004, we operated
seven inpatient rehabilitation units within our hospitals. Currently, Medicare reimburses inpatient psychiatric hospitals and units
on a reasonable-cost basis, subject to certain cost limits. On August 11, 2004,
CMS published a final rule to implement a prospective payment system for these
inpatient psychiatric facilities effective for cost report periods beginning on
or after January 1, 2005, with a three year transition period. Under this
prospective payment system, inpatient psychiatric facilities will receive a
federal per diem base rate that is based on the sum of the average routine
operating, ancillary and capital costs for each patient day of psychiatric care
in an inpatient psychiatric facility, adjusted for budget neutrality. This
federal per diem base rate will be further adjusted to reflect certain patient
and facility characteristics, including patient age, certain diagnostic related
groups, facility wage index adjustment, and facility rural location. Beginning
in 2006, the payment rates will be adjusted annually on a July 1 update cycle.
Inpatient psychiatric facilities will receive additional outlier payments for
cases in which estimated costs for the case exceed an adjusted threshold amount
plus the total adjusted payment amount for the stay. The initial adjusted
threshold amount will be $5,700. We currently operate one behavioral health
hospital and four specially designated psychiatric units that will be subject
to these rules, when implemented. Medicare historically reimbursed skilled nursing units within hospitals on
the basis of actual costs, subject to limits. CMS has established a prospective
payment system for Medicare skilled nursing units, under which units are paid a
federal per diem rate for virtually all covered services. The effect of the new
payment system generally has been to significantly reduce reimbursement for
skilled nursing services, which has led many hospitals to close such units. We
will monitor closely and evaluate the few remaining skilled nursing units in
our hospitals and related facilities to determine whether it is feasible to
continue to offer such services under the new reimbursement system. Medicaid Medicaid programs are jointly funded by federal and state governments and
are administered by states under an approved plan that provides hospital and
other healthcare benefits to qualifying individuals who are unable to afford
care. All of our hospitals are certified as providers of Medicaid services.
State Medicaid programs may use a prospective payment system, cost-based or
other payment methodology for hospital services. Medicaid programs are required
to take into account and make additional payments to hospitals serving
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income patients with special needs. Some of our hospitals receive such
additional payments. The federal government and many states from time to time
consider altering the level of Medicaid funding or expanding Medicaid benefits
in a manner that could adversely affect future levels of Medicaid
reimbursements received by our hospitals. Enrollment in managed Medicaid plans
has increased in recent years, as state governments seek to control the cost of
Medicaid programs. Annual Cost Reports All hospitals participating in the Medicare and Medicaid programs, whether
paid on a reasonable cost basis or under a prospective payment system, are
required to meet specific financial reporting requirements. Federal regulations
require submission of annual cost reports identifying medical costs and
expenses associated with the services provided by each hospital to Medicare
beneficiaries and Medicaid recipients. These annual cost reports are subject to
routine audits, which may result in adjustments to the amounts ultimately
determined to be due to us under these reimbursement programs. The audit
process may take several years to reach the final determination of allowable
amounts under the programs. Providers also have the right of appeal, and it is
common to contest issues raised in audits of prior years reports. Further, CMS
extended filing due dates for cost reports for periods ended August 31, 2000
through April 2003 as a result of problems it experienced with updating the
Provider Statistical and Reimbursement System (data used to complete cost
reports). All of our hospitals are currently filing cost reports under the
normal, non-extended filing requirements. Cost reports filed by our facilities generally remain open for three years
after the notice of program reimbursement date. If any of our facilities are
found to have been in violation of federal or state laws relating to preparing
and filing of Medicare or Medicaid cost reports, whether prior to or after our
ownership of these facilities, our facilities and we could be subject to
substantial monetary fines, civil and criminal penalties and exclusion from
participation in the Medicare and Medicaid programs. If an allegation is lodged
against one of our facilities for a violation occurring during the time period
before we owned the facility, we may have indemnification rights against the
former owner of the facility for any damages we may incur based on negotiated
indemnification and hold harmless provisions in the transaction documents. We
cannot assure you, however, that any such matter would be covered by
indemnification, or if covered, that such indemnification would be adequate to
cover any potential losses, fines and penalties. Managed Care Managed care providers, including health maintenance organizations and
preferred provider organizations, are organizations that provide insurance
coverage and a network of healthcare providers to members for a fixed monthly
premium. To control costs, these organizations typically contract with
hospitals and other providers for discounted prices, review medical services to
ensure that no unnecessary services are provided and market providers within
their networks to patients. A significant percentage of our overall payor mix
is commercial managed care. We generally receive lower payments for similar
services from commercial managed care payors than from traditional
commercial/indemnity insurers. The Medicare program allows beneficiaries to choose enrollment in certain
managed Medicare plans. Enrollment in managed Medicare plans decreased over
fiscal years 2003 and 2004 due to managed Medicare plans withdrawing from the
Medicare program or reducing their service areas. The Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 increases reimbursement to
Medicare managed care plans and includes provisions limiting, to some extent,
the financial risk to the companies offering the plans. These changes may
increase the number of companies offering Medicare managed care plans and the
number of beneficiaries choosing to receive their Medicare benefits through
such plans. Commercial Insurance Our hospitals provide services to a decreasing number of individuals
covered by traditional private healthcare insurance. Private insurance carriers
make direct payments to hospitals or, in some cases, reimburse their policy
holders, based upon negotiated discounts from the particular hospitals
established charges and the particular coverage provided in the insurance
policy. Commercial insurers are continuing efforts to limit the payments for
hospital services by adopting discounted payment mechanisms, including
prospective payment or diagnosis related group-based payment systems, 10




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for more inpatient and outpatient services. To the extent that these
efforts are successful, hospitals may receive reduced levels of reimbursement,
which would have a negative effect on operating results. Government Regulation and Other Factors Licensure, Certification and Accreditation Healthcare facility construction and operation is subject to federal,
state and local regulations relating to the adequacy of medical care,
equipment, personnel, operating policies and procedures, fire prevention,
rate-setting and compliance with building codes and environmental protection
laws. Our facilities also are subject to periodic inspection by governmental
and other authorities to assure continued compliance with the various standards
necessary for licensing and accreditation. We believe that all of our operating
healthcare facilities are properly licensed under appropriate state healthcare
laws. All of our operating hospitals are certified under the Medicare program
and are accredited by the Joint Commission on Accreditation of Healthcare
Organizations, the effect of which is to permit the facilities to participate
in the Medicare and Medicaid programs. If any facility loses its accreditation
by this Joint Commission, or otherwise loses its certification under the
Medicare program, then the facility will be unable to receive reimbursement
from the Medicare and Medicaid programs. We intend to conduct our operations in
compliance with current applicable federal, state, local and independent review
body regulations and standards. The requirements for licensure, certification
and accreditation are subject to change and, in order to remain qualified, we
may need to make changes in our facilities, equipment, personnel and services. Utilization Review Federal law contains numerous provisions designed to ensure that services
rendered by hospitals to Medicare and Medicaid patients meet professionally
recognized standards and are medically necessary and that claims for
reimbursement are properly filed. These provisions include a requirement that a
sampling of admissions of Medicare and Medicaid patients be reviewed by quality
improvement organizations that analyze the appropriateness of Medicare and
Medicaid patient admissions and discharges, quality of care provided, validity
of diagnosis related group classifications and appropriateness of cases of
extraordinary length of stay or cost. Quality improvement organizations may
deny payment for services provided, assess fines and recommend to the
Department of Health and Human Services that a provider not in substantial
compliance with the standards of the quality improvement organization be
excluded from participation in the Medicare program. Most non-governmental
managed care organizations also require utilization review. Federal and State Fraud and Abuse Provisions Participation in any federal healthcare program, like Medicare, is
regulated heavily by statute and regulation. If a hospital provider fails to
substantially comply with the numerous conditions of participation in the
Medicare or Medicaid program or performs specific prohibited acts, the
hospitals participation in the Medicare program may be terminated or civil or
criminal penalties may be imposed upon it under provisions of the Social
Security Act and other statutes. Among these statutes is a section of the Social Security Act known as the
federal anti-kickback statute. This law prohibits providers and others from
soliciting, receiving, offering or paying, directly or indirectly, any
remuneration with the intent of generating referrals or orders for services or
items covered by a federal healthcare program. Violation of this statute is a
felony. The Office of the Inspector General of the Department of Health and Human
Services has published final safe harbor regulations that outline categories of
activities that are deemed protected from prosecution under the anti-kickback
statute. Currently there are safe harbors for various activities, including the
following: investment interests, space rental, equipment rental, practitioner
recruitment, personal services and management contracts, sale of practice,
referral services, warranties, discounts, employees, group purchasing
organizations, waiver of beneficiary coinsurance and deductible amounts,
managed care arrangements, obstetrical malpractice insurance subsidies,
investments in group practices, ambulatory surgery centers, and referral
agreements for specialty services. The fact that conduct or a business arrangement does not fall within a
safe harbor does not automatically render the conduct or business arrangement
illegal under the anti-kickback statute. The conduct or business arrangement,
however, does risk increased scrutiny by government enforcement authorities. We
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than some of our competitors to take actions or enter into business
arrangements that do not clearly satisfy the safe harbors. As a result, this
unwillingness may put us at a competitive disadvantage. The Office of the Inspector General, among other regulatory agencies, is
responsible for identifying and eliminating fraud, abuse and waste. The Office
of the Inspector General carries out this mission through a nationwide program
of audits, investigations and inspections. In order to provide guidance to
healthcare providers, the Office of the Inspector General has from time to time
issued fraud alerts that, although they do not have the force of law,
identify features of a transaction that may indicate that the transaction could
violate the anti-kickback statute or other federal healthcare laws. The Office
of the Inspector General has identified several incentive arrangements as
potential violations, including:  
    
    payment of any incentive by the hospital when a physician
refers a patient to the hospital;
    
    use of free or significantly discounted office space or
equipment for physicians in facilities usually located close to the
hospital;
    
    provision of free or significantly discounted billing, nursing, or other staff services;
    
    free training for a physicians office staff, including management and laboratory techniques;
    
    guaranties that provide that, if the physicians income fails
to reach a predetermined level, the hospital will pay any portion of
the remainder;
    
    low-interest or interest-free loans, or loans which may be
forgiven if a physician refers patients to the hospital;
    
    payment of the costs of a physicians travel and expenses for
conferences or a physicians continuing education courses;
    
    coverage on the hospitals group health insurance plans at an
inappropriately low cost to the physician;
    
    payment of services which require few, if any, substantive
duties by the physician, or payment for services in excess of the
fair market value of the services rendered; or
    
    gainsharing, the practice of giving physicians a share of
any reduction in a hospitals costs for patient care attributable in
part to the physicians efforts. In addition to issuing fraud alerts, the Office of the Inspector General
from time to time issues compliance program guidance for certain types of
healthcare providers. On June 8, 2004, the Office of the Inspector General
issued draft supplemental compliance program guidance for hospitals in the
Office of the Inspector General identifies areas of potential risk of liability
under federal fraud and abuse statutes and regulations. These areas of risk
include compensation arrangements with physicians, recruitment arrangements
with physicians and joint venture relationships with physicians. The Office of
the Inspector General recommends structuring arrangements to fit squarely
within a safe harbor. We have a variety of financial relationships with physicians who refer
patients to our hospitals. Physicians currently own interests in two of our
ambulatory surgery centers and five of our hospitals. We may sell ownership
interests in certain other of our facilities to physicians and other qualified
investors in the future. We also have contracts with physicians providing for a
variety of financial arrangements, including employment contracts, leases and
professional service agreements. We provide financial incentives to recruit
physicians to relocate to communities served by our hospitals, including
minimum cash collections guaranties and loans. Although we have established
policies and procedures to ensure that our arrangements with physicians comply
with current law and available interpretations, we cannot assure you that
regulatory authorities that enforce these laws will not determine that some of
these arrangements violate the anti-kickback statute or other applicable laws.
This determination could subject us to liabilities under the Social Security
Act, including criminal penalties of imprisonment or fines, civil penalties up
to $50,000, damages up to three times the total amount of the improper payment
to the referral source and exclusion from participation in Medicare, Medicaid
or other federal healthcare programs, any of which could have a material
adverse effect on our business, financial condition or results of operations. The Social Security Act also imposes criminal and civil penalties for
submitting false claims to Medicare and Medicaid. False claims include, but are
not limited to, billing for services not rendered, misrepresenting actual
services rendered in order to obtain higher reimbursement and cost report
fraud. Like the anti-kickback statute, these provisions are very broad.
Further, the Social Security Act contains civil penalties for conduct including
improper coding and billing for unnecessary goods and services. Careful and
accurate preparation and submission of claims for reimbursement must be
performed in order to avoid liability. 12




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The Health Insurance Portability and Accountability Act of 1996 broadened
the scope of the fraud and abuse laws by adding several criminal provisions for
healthcare fraud offenses that apply to all health benefit programs. This act
also created new enforcement mechanisms to combat fraud and abuse, including
the Medicare Integrity Program and an incentive program under which individuals
can receive up to $1,000 for providing information on Medicare fraud and abuse
that leads to the recovery of at least $100 of Medicare funds. In addition,
federal enforcement officials now have the ability to exclude from Medicare and
Medicaid any investors, officers and managing employees associated with
business entities that have committed healthcare fraud. Additionally, this act
establishes a violation for the payment of inducements to Medicare or Medicaid
beneficiaries in order to influence those beneficiaries to order or receive
services from a particular provider or practitioner. The Social Security Act also includes a provision commonly known as the
Stark Law. This law prohibits physicians from referring Medicare and Medicaid
patients to entities with which they or any of their immediate family members
have a financial relationship for the provision of certain designated health
services that are reimbursable by Medicare or Medicaid, including inpatient and
outpatient hospital services. The law also prohibits the entity from billing
the Medicare program for any items or services that stem from a prohibited
referral. Sanctions for violating the Stark Law include civil money penalties
up to $15,000 per item or service improperly billed and exclusion from the
federal healthcare programs. There are a number of exceptions to the
self-referral prohibition, including an exception for a physicians ownership
interest in an entire hospital as opposed to an ownership interest in a
hospital department. There are also exceptions for many of the customary
financial arrangements between physicians and providers, including employment
contracts, leases, professional services agreements, non-cash gifts having a
value less than $300 and recruitment agreements. In 2003, Congress passed legislation that modifies the hospital ownership
exception to the Stark Law by creating an 18-month moratorium on allowing
physicians to own interests in new specialty hospitals. During the moratorium,
the Department of Health and Human Services is required to conduct an analysis
of specialty hospitals, including payment issues, quality of care provided and
physician referral patterns to these facilities. The moratorium applies to
hospitals that primarily or exclusively treat cardiac, orthopedic or surgical
conditions or any other specialized category of patients or cases designated by
regulation, unless the hospitals were in operation or development before
November 18, 2003, do not increase the number of physician investors, and meet
certain other requirements. It is uncertain how CMS will interpret this
legislation, what recommendations the Department will make regarding specialty
hospitals, or whether additional changes will be made to the hospital ownership
exception. On January 4, 2001, CMS issued a final rule subject to a comment period
intended to clarify parts of the Stark Law and some of the exceptions to it.
The majority of these regulations became effective on or before January 4,
2002. On March 26, 2004, CMS issued an interim final rule subject to a comment
period intended to clarify the remaining portions of the Stark Law. These
rules, known as phase two of the Stark Law rulemaking, became effective July
26, 2004. While these phase two rules help clarify the requirements of the
exceptions to the Stark Law, until the government begins enforcement of the
rules, it is difficult to determine fully their effect. Evolving interpretations of current, or the adoption of new, federal or
state laws or regulations could affect many of the arrangements entered into by
each of our hospitals. In addition, law enforcement authorities, including the
Office of the Inspector General, the courts and Congress are increasing
scrutiny of arrangements between healthcare providers and potential referral
sources to ensure that the arrangements are not designed as a mechanism to
improperly pay for patient referrals and or other business. Investigators also have demonstrated a willingness to look behind the
formalities of a business transaction to determine the underlying purpose of
payments between healthcare providers and potential referral sources. Many of the states in which we operate also have adopted laws that
prohibit payments to physicians in exchange for referrals similar to the
federal anti-kickback statute or that otherwise prohibit fraud and abuse
activities. Many states also have passed self-referral legislation similar to
the Stark Law, prohibiting the referral of patients to entities with which the
physician has a financial relationship. Often these state laws are broad in
scope and they may apply regardless of the source of payment for care. These
statutes typically provide criminal and civil penalties, as well as loss of
licensure. Little precedent exists for the interpretation or enforcement of
these state laws. Our operations could be adversely affected by the failure of our
arrangements to comply with the anti-kickback statute, the Stark Law, billing
laws and regulations, current state laws or other legislation or regulations in
these areas adopted in the future. We are unable to predict whether other
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state level in any of these areas will be adopted, what form such
legislation or regulations may take or how they may impact our operations. We
are continuing to enter into new financial arrangements with physicians and
other providers in a manner structured to comply in all material respects with
these laws. We cannot assure you, however, that governmental officials
responsible for enforcing these laws will not assert that we are in violation
of them or that such statutes or regulations ultimately will be interpreted by
the courts in a manner consistent with our interpretation. The Federal False Claims Act and Similar State Laws Another trend affecting the healthcare industry today is the increased use
of the federal False Claims Act, and, in particular, actions being brought by
individuals on the governments behalf under the False Claims Acts qui tam
or whistleblower provisions. Whistleblower provisions allow private individuals
to bring actions on behalf of the government alleging that the defendant has
defrauded the federal government. If the government intervenes in the action
and prevails, the party filing the initial complaint may share in any
settlement or judgment. If the government does not intervene in the action, the
whistleblower plaintiff may pursue the action independently, and may receive a
larger share of any settlement or judgment. When a private party brings a qui
tam action under the False Claims Act, the defendant generally will not be made
aware of the lawsuit until the government makes a determination whether it will
intervene. When a defendant is determined by a court of law to be liable under the
False Claims Act, the defendant must pay three times the actual damages
sustained by the government, plus mandatory civil penalties of between $5,500
to $11,000 for each separate false claim. Settlements entered into prior to
litigation usually involve a less severe calculation of damages. There are many
potential bases for liability under the False Claims Act. Although liability
often arises when an entity knowingly submits a false claim for reimbursement
to the federal government, the False Claims Act defines the term knowingly
broadly. Thus, simple negligence will not give rise to liability under the
False Claims Act, but submitting a claim with reckless disregard to its truth
or falsity can constitute knowingly submitting a false claim and result in
liability. In some cases, whistleblowers or the federal government have taken
the position that providers who allegedly have violated other statutes, such as
the anti-kickback statute or the Stark Law, have thereby submitted false claims
under the False Claims Act. A number of states, including states in which we operate, have adopted
their own false claims provisions as well as their own whistleblower provisions
whereby a private party may file a civil lawsuit in state court. From time to
time, companies in the healthcare industry, including ours, may be subject to
actions under the False Claims Act or similar state laws. Corporate Practice of Medicine/Fee Splitting The states in which we operate have laws that prohibit unlicensed persons
or business entities, including corporations, from employing physicians or laws
that prohibit certain direct or indirect payments or fee-splitting arrangements
between physicians and unlicensed persons or business entities. Possible
sanctions for violations of these restrictions include loss of a physicians
license, civil and criminal penalties and rescission of business arrangements
that may violate these restrictions. These statutes vary from state to state,
are often vague and seldom have been interpreted by the courts or regulatory
agencies. Although we exercise care to structure our arrangements with
healthcare providers to comply with the relevant state law, and believe these
arrangements comply with applicable laws in all material respects, we cannot
assure you that governmental officials responsible for enforcing these laws
will not assert that we, or transactions in which we are involved, are in
violation of such laws, or that such laws ultimately will be interpreted by the
courts in a manner consistent with our interpretations. 14




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The Health Insurance Portability and Accountability Act of 1996 The Health Insurance Portability and Accountability Act of 1996 requires
the use of uniform electronic data transmission standards for healthcare claims
and payment transactions submitted or received electronically. These provisions
are intended to encourage electronic commerce in the healthcare industry. The
Department of Health and Human Services published final regulations
establishing electronic data transmission standards that all healthcare
providers must use when submitting or receiving certain healthcare transactions
electronically. Compliance with these standards for our company became
mandatory on October 16, 2003. The Department of Health and Human Services has
agreed to accept noncompliant Medicare claims for an unspecified time to assist
providers that are not yet able to process compliant transactions. However,
this extension may be terminated by the Department of Health and Human Services
and is not binding on private payors. On February 27, 2004, the Department of
Health and Human Services announced that non-compliant claims received by
Medicare on or after July 1, 2004 will be paid no earlier than the 27th day
after such claims are received. Compliant claims will continue to be paid no
earlier than the 14th day after such claims are received. The Health Insurance Portability and Accountability Act also requires the
Department of Health and Human Services to adopt standards to protect the
security and privacy of health-related information. The Department of Health
and Human Services released final regulations containing privacy standards,
which became mandatory on April 14, 2003. The privacy regulations extensively
regulate the use and disclosure of individually identifiable health-related
information. The privacy regulations also provide patients with significant new
rights related to understanding and controlling how their health information is
used or disclosed. The Department of Health and Human Services released final
security regulations on February 20, 2003. The security regulations will become
mandatory on April 20, 2005 and will require health care providers to implement
administrative, physical and technical practices to protect the security of
individually identifiable health information that is electronically maintained
or transmitted. Violations of the Health Insurance Portability and Accountability Act
could result in civil penalties of up to $25,000 per type of violation in each
calendar year and criminal penalties of up to $250,000 per violation. In
addition, our facilities will continue to remain subject to any privacy-related
federal or state laws that are more restrictive than the privacy regulations
issued under the Health Insurance Portability and Accountability Act. These
laws vary by jurisdiction and could impose additional penalties. The Emergency Medical Treatment and Active Labor Act The Federal Emergency Medical Treatment and Active Labor Act (EMTALA) was
adopted by Congress in response to reports of a widespread hospital emergency
room practice of patient dumping. At the time of the enactment, patient
dumping was considered to have occurred when a hospital capable of providing
the needed care sent a patient to another facility or simply turned the patient
away based on such patients inability to pay for his or her care. The law
imposes requirements upon physicians, hospitals and other facilities that
provide emergency medical services. Such requirements pertain to what care must
be provided to anyone who comes to such facilities seeking care before they may
be transferred to another facility or otherwise denied care. The government
broadly interprets the law to cover situations in which patients do not
actually present to a hospitals emergency department, but present to a
hospital-based clinic that treats emergency medical conditions on an urgent
basis or are transported in a hospital-owned ambulance, subject to certain
exceptions. EMTALA does not generally apply to patients admitted for inpatient
services. Sanctions for violations of this statute include termination of a
hospitals Medicare provider agreement, exclusion of a physician from
participation in Medicare and Medicaid programs and civil money penalties. In
addition, the law creates private civil remedies that enable an individual who
suffers personal harm as a direct result of a violation of the law, and a
medical facility that suffers a financial loss as a direct result of another
participating hospitals violation of the law, to sue the offending hospital
for damages and equitable relief. Although we believe that our practices are in
material compliance with the law, we can give no assurance that governmental
officials responsible for enforcing the law will not assert from time to time
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Healthcare Reform The healthcare industry attracts much legislative interest and public
attention. Changes in the Medicare, Medicaid and other programs, hospital
cost-containment initiatives by public and private payors, proposals to limit
payments and healthcare spending and industry-wide competitive factors are
highly significant to the healthcare industry. In addition, a framework of
extremely complex federal and state laws, rules and regulations governs the
healthcare industry and, for many provisions, there is little history of
regulatory or judicial interpretation upon which to rely. Many states have enacted or are considering enacting measures designed to
reduce their Medicaid expenditures and change private healthcare insurance.
Most states, including the states in which we operate, have applied for and
been granted federal waivers from current Medicaid regulations to allow them to
serve some or all of their Medicaid participants through managed care
providers. We are unable to predict the future course of federal, state or
local healthcare legislation. Further changes in the law or regulatory
framework that reduce our revenue or increase our costs could have a material
adverse effect on our business, financial condition or results of operations. Conversion Legislation Many states have enacted or are considering enacting laws affecting the
conversion or sale of not-for-profit hospitals. These laws generally include
provisions relating to attorney general approval, advance notification and
community involvement. In addition, attorneys general in states without
specific conversion legislation may exercise authority over these transactions
based upon existing law. In many states, there has been an increased interest
in the oversight of not-for-profit conversions. The adoption of conversion
legislation and the increased review of not-for-profit hospital conversions may
increase the cost and difficulty or prevent the completion of transactions with
or acquisitions of not-for-profit organizations in various states. Healthcare Industry Investigations Significant media and public attention has focused in recent years on the
hospital industry. Recently, increased attention has been paid by government
investigators as well as private parties pursuing civil lawsuits to the amounts
charged by hospitals to uninsured and indigent patients and the related
collection practices of hospitals. Other current areas of interest include
hospitals with high Medicare outlier payments and recruitment arrangements with
physicians. Further, there are numerous ongoing federal and state
investigations regarding multiple issues. These investigations have targeted
hospital companies as well as their executives and managers. We have
substantial Medicare, Medicaid and other governmental billings, which could
result in heightened scrutiny of our operations. We continue to monitor these
and all other aspects of our business and have developed a compliance program
to assist us in gaining comfort that our business practices are consistent with
both legal principles and current industry standards. However, because the law
in this area is complex and constantly evolving, we cannot assure you that
government investigations will not result in interpretations that are
inconsistent with industry practices, including ours. In public statements
surrounding current investigations, governmental authorities have taken
positions on a number of issues, including some for which little official
interpretation previously has been available, that appear to be inconsistent
with practices that have been common within the industry and that previously
have not been challenged in this manner. In some instances, government
investigations that have in the past been conducted under the civil provisions
of federal law may now be conducted as criminal investigations. Many current healthcare investigations are national initiatives in which
federal agencies target an entire segment of the healthcare industry. One
example is the federal governments initiative regarding hospital providers
improper requests for separate payments for services rendered to a patient on
an outpatient basis within three days prior to the patients admission to the
hospital, where reimbursement for such services is included as part of the
reimbursement for services furnished during an inpatient stay. In particular,
the government has targeted all hospital providers to ensure conformity with
this reimbursement rule. Further, the federal government continues to
investigate Medicare overpayments to prospective payment hospitals that
incorrectly report transfers of patients to other prospective payment system
hospitals as discharges. We are aware that prior to our acquisition of them,
several of our hospitals were contacted in relation to certain government
investigations that were targeted at an entire segment of the healthcare
industry. Although we take the position that, under the terms of the
acquisition agreements, the prior owners of these hospitals retained any
liability resulting from these government investigations, 16




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we cannot assure you that the prior owners resolution of these matters or
failure to resolve these matters, in the event that any resolution was deemed
necessary, will not have a material adverse effect on our operations. It is possible that governmental entities may conduct investigations at
facilities operated by us and that such investigations could result in
significant penalties to us, as well as adverse publicity. It is also possible
that our executives and managers, many of whom have worked at other healthcare
companies that are or may become the subject of federal and state
investigations and private litigation, could be included in governmental
investigations or named as defendants in private litigation. The positions
taken by authorities in any future investigations of us, our executives or
managers or other healthcare providers and the liabilities or penalties that
may be imposed could have a material adverse effect on our business, financial
condition and results of operations. Certificates of Need In some states, the construction of new facilities, acquisition of
existing facilities or addition of new beds or services may be subject to
review by state regulatory agencies under a certificate of need program.
Florida and Nevada are the only states in which we currently operate that
require approval under a certificate of need program. These laws generally
require appropriate state agency determination of public need and approval
prior to the addition of beds or services or other capital expenditures.
Failure to obtain necessary state approval can result in the inability to
expand facilities, add services and complete an acquisition or change
ownership. Further, violation may result in the imposition of civil sanctions
or the revocation of a facilitys license. Health Choice Health Choice is a prepaid Medicaid managed health plan in the Phoenix,
Arizona area. For the years ended September 30, 2004, 2003 and 2002, Health
Choice net revenue comprised approximately 21%, 14% and 15%, respectively, of
our total net revenue. Health Choice derives its revenue through a contract
with the Arizona Health Care Cost Containment System to provide specified
health services to qualified Medicaid enrollees through contracts with
providers. The contract requires us to provide healthcare services in exchange
for fixed periodic payments and supplemental payments from the Arizona Health
Care Cost Containment System. These services are provided regardless of the
actual costs incurred to provide these services. We receive reinsurance and
other supplemental payments from the Arizona Health Care Cost Containment
System to cover certain costs of healthcare services that exceed certain
thresholds. Health Choice is reimbursed for healthcare costs that exceed stated
amounts at rates ranging from 75% to 100% of qualified healthcare costs in
excess of stated levels of $5,000 to $35,000 depending on medical condition and
eligibility classification of the member. Qualified costs are the amount paid
by Health Choice in reimbursement for the members health care services. Heath Choice entered into a new three-year contract with the Arizona
Health Care Cost Containment System effective October 1, 2003. As a result of
our new contract, our membership at Health Choice has increased from
approximately 70,000 as of September 30, 2003 to over 105,000 as of September
30, 2004. The contract provides the Arizona Health Care Cost Containment System
with two one-year renewal options following the initial term. In the event our
contract were to be discontinued, our revenue would be reduced and our
profitability would be adversely affected. As of September 30, 2004, we
provided a performance guaranty in the form of a letter of credit in the amount
of $20.6 million for the benefit of the Arizona Health Care Cost Containment
System to support our obligations under the contract to provide and pay for the
healthcare services. The amount of the performance guaranty is based primarily
upon the membership in the plan and the related capitation paid to us.
Additionally, Health Choice maintains a cash balance of $5.0 million and an
intercompany demand note with IASIS LLC. Health Choice is subject to state and federal laws and regulations, and
the Centers for Medicare and Medicaid Services and the Arizona Health Care Cost
Containment System have the right to audit Health Choice to determine the
plans compliance with such standards. Health Choice is required to file
periodic reports with the Arizona Health Care Cost Containment System and to
meet certain financial viability standards. Health Choice also must provide its
enrollees with certain mandated benefits and must meet certain quality
assurance and improvement requirements. Health Choice must also comply with the
electronic transactions regulations and privacy standards of the Health
Insurance Portability and Accountability Act. Health Choice will be required to
comply with the security and identifier regulations of the act when compliance
with those regulations becomes mandatory. We cannot predict the impact that the
final regulations, when fully implemented, will have on Health Choice. 17




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The federal anti-kickback statute has been interpreted to prohibit the
payment, solicitation, offering or receipt of any form of remuneration in
return for the referral of federal healthcare program patients or any item or
service that is reimbursed, in whole or in part, by any federal healthcare
program. Similar anti-kickback statutes have been adopted in Arizona, which
apply regardless of the source of reimbursement. The Department of Health and
Human Services has adopted safe harbor regulations specifying the following
relationships and activities that are deemed not to violate the federal
anti-kickback statute that specifically relate to managed care:  
    
    waivers by health maintenance organizations of Medicare and
Medicaid beneficiaries obligation to pay cost-sharing amounts or to
provide other incentives in order to attract Medicare and Medicaid
enrollees;
    
    certain discounts offered to prepaid health plans by contracting providers;
    
    certain price reductions offered to eligible managed care organizations; and
    
    certain price reductions offered by contractors with
substantial financial risk to managed care organizations. We believe that the incentives offered by Health Choice to its Medicaid
enrollees and the discounts it receives from contracting healthcare providers
satisfy the requirements of the safe harbor regulations. However, failure to
satisfy each criterion of the applicable safe harbor does not mean that the
arrangement constitutes a violation of the law; rather the safe harbor
regulations provide that the arrangement must be analyzed on the basis of its
specific facts and circumstances. We believe that Health Choices arrangements
comply in all material respects with the federal anti-kickback statute and
similar Arizona statutes. Environmental Matters We are subject to various federal, state and local environmental laws and
regulations, including those relating to the protection of human health and the
environment. The principal environmental requirements applicable to our
operations relate to:  
    
    the proper handling and disposal of medical waste, hazardous
waste and low level radioactive medical waste;
    
    the proper use, storage and handling of mercury and other hazardous materials;
    
    underground and above-ground storage tanks;
    
    management of hydraulic fluid or oil associated with elevators, chiller units or other equipment;
    
    management of asbestos-containing materials or lead-based
paint present or likely to be present at some locations; and
    
    air emission permits and standards for boilers or other
equipment. We do not expect our obligations under these or other applicable
environmental laws and requirements to have a material effect on us. In the
course of our operations, we may also identify other circumstances at our
facilities, such as water intrusion or the presence of mold or fungus, which
warrant action and we can and do incur additional costs to address those
circumstances. Under various environmental laws, we may also be required to
clean up or contribute to the cost of cleaning up substances that have been
released to the environment either at properties owned or operated by us or our
predecessors or at properties to which substances from our operations were sent
for off-site treatment or disposal. These remediation obligations may be
imposed without regard to fault, and liability for environmental remediation
can be substantial. While we cannot predict whether or to what extent we might
be held responsible for such cleanup costs in the future, at present we have
not identified any significant cleanup costs or liabilities that are expected
to have a material effect on us. Insurance As is typical in the healthcare industry, we are subject to claims and
legal actions by patients in the ordinary course of business. To cover these
claims, we maintain professional malpractice liability insurance and general
liability insurance in amounts that we believe to be sufficient for our
operations, although some claims may exceed the scope of the coverage in
effect. We also maintain umbrella coverage. Losses up to our self-insured
retentions and any losses incurred in excess of amounts maintained under such
insurance will be funded from working capital. 18




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The cost of malpractice and other liability insurance, and the premiums
and self-retention limits of such insurance, have risen historically.
Consistent with 2004, our fiscal 2005 self-insured retention for professional
and general liability coverage is $5.0 million per claim and $45.0 million in
the aggregate. Additionally, the maximum coverage under our insurance policies
is unchanged at $75.0 million. We cannot assure you that this insurance will
continue to be available at reasonable prices that will allow us to maintain
adequate levels of coverage. We also cannot assure you that our cash flow will
be adequate to provide for professional and general liability claims in the
future. Our Information Systems We use a common information systems platform across all of our hospitals.
We use McKesson HBOCs clinical and patient accounting software and Lawsons
financial application and enterprise resource planning software. We use other
vendors for specialized information systems needs for our decision support and
emergency and radiology departments. Our information systems are essential to the following areas of our
business operations, among others:  
    
    patient accounting, including billing and collection of net revenue;
    
    financial, accounting, reporting and payroll;
    
    coding and compliance;
    
    laboratory, radiology and pharmacy systems;
    
    materials and asset management; and
    
    negotiating, pricing and administering our managed care contracts. Utilizing a common information systems platform across all our hospitals allows us to:  
    
    optimize staffing levels according to patient volumes, acuity and seasonal needs at each facility;
    
    perform product line analyses;
    
    track quality of care indicators on a current basis;
    
    effectively monitor registration, billing, collections,
managed care contract compliance and all other aspects of our
revenue cycle; and
    
    control supply costs by complying with our group purchasing
organization contract. During 2004, we entered into a three-year agreement with an information
systems vendor to provide clinical information technology products and services
to our hospitals that we believe will enhance patient safety, automate
medication administration, increase staff time available for direct patient
care and maximize reimbursement that is tied to quality of care indicators. Risk Factors Servicing Our Indebtedness Will Require A Significant Amount of Cash. Our
Ability To Generate Sufficient Cash Depends On Numerous Factors Beyond Our
Control, And We May Be Unable To Generate Sufficient Cash Flow To Service Our
Debt Obligations, Including Making Payments On Our 8 3/4% Notes. In connection with the Transactions, we issued $475.0 million in aggregate
principal amount of 8 3/4% senior subordinated notes due 2014, that were
subsequently exchanged for a like amount of 8 3/4% senior subordinated note due
2014 that have been registered under the Securities Act of 1933, as amended,
which we refer to as the 8 3/4% notes. Our ability to pay principal, premium,
if any, and interest on and to refinance indebtedness, including the 8 3/4%
notes, and to fund planned capital expenditures, which are expected to be
approximately $140.0 million to $150.0 million for fiscal 2005, will depend on our ability to
generate cash in the future. Our ability to fund these payments is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. We cannot assure you that our business will generate sufficient cash flow
from operations or that future borrowing will be available to us under our new
senior secured credit facilities in an amount sufficient to enable us to pay
the principal, premium, if any, and interest on our indebtedness, including the
8 3/4% notes, or to fund our other liquidity needs. We may need to refinance
all or a portion of our indebtedness, including the 8 3/4% notes, on or before
maturity. We cannot assure you that we will be able to refinance any of our
indebtedness, including the 19




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new senior secured credit facilities, on commercially reasonable terms or at
all. In addition, the terms of existing or future debt agreements, including
the amended and restated credit agreement governing the new senior secured
credit facilities and the indenture governing the notes, may restrict us from
effective any of these alternatives. During the next twelve months, we are required to repay $4.3 million in
principal under our new senior secured credit facilities, $41.6 million in
interest under the 8 3/4% notes and $3.6 million under our capital lease
obligations. If we cannot make scheduled payments on our debt, we will be in
default and, as a result:  
    
    our debt holders could declare all outstanding principal and
interest to be due and payable;
    
    our secured debt lenders could terminate their commitments
and commence foreclosure proceedings against our assets; and
    
    we could be forced into bankruptcy or liquidation. Our Substantial Level Of Indebtedness Could Adversely Affect Our Financial
Condition And Prevent Us From Fulfilling Our Obligations Under the8 3/4%
Notes. We have a significant amount of indebtedness. As of September 30, 2004, we
had $475.0 million of outstanding 8 3/4% senior subordinated notes due 2014 and
$437.7 million of other indebtedness (of which $423.9 consisted of borrowings
under the new senior secured credit facilities, $3.5 million consisted of the
13% notes that were not tendered but retired in October 2004 and $10.3 million
consisted of capital lease obligations and other debt). All of our other
indebtedness ranks senior to the 8 3/4% notes. In addition, subject to
restrictions in the indenture governing the 8 3/4% notes and the amended and
restated credit agreement governing the new senior secured credit facilities,
we may incur additional indebtedness. Our substantial indebtedness could have important consequences to our
financial condition and results of operations, including the following:  
    
    it may be more difficult for us to satisfy our obligations,
including debt service requirements under our outstanding debt;
    
    our ability to obtain additional financing for working
capital, capital expenditures, debt service requirements, or other
general corporate purposes may be impaired;
    
    we must use a substantial portion of our cash flow to pay
principal, premium, if any, and interest on our 8 3/4% notes and
other indebtedness which will reduce the funds available to us for
other purposes;
    
    we are more vulnerable to economic downturns and adverse
industry conditions;
    
    our ability to capitalize on business opportunities and to
react to competitive pressures as compared to our competitors may be
compromised due to our high level of indebtedness; and
    
    our ability to borrow additional funds or to refinance
indebtedness may be limited. Our new senior secured credit facilities are rated by Moodys and Standard
& Poors. If these ratings were ever downgraded, our access to and cost of
future capital could be adversely affected. Furthermore, all of our
indebtedness under the new senior secured credit facilities bears interest at
variable rates. If these rates were to increase significantly, our ability to
borrow additional funds may be reduced and the risks related to our substantial
indebtedness would intensify. If We Are Unable To Retain And Negotiate Favorable Contracts With Managed
Care
Plans, Our Net Revenue May Be Reduced. Our ability to obtain favorable contracts with health maintenance
organizations, preferred provider organizations and other managed care plans
significantly affects the revenue and operating results of our hospitals.
Revenue derived from health maintenance organizations, preferred provider
organizations and other managed care 20




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plans accounted for 43.5% and 45.2% of our net patient revenue for the
years ended September 30, 2004 and September 30, 2003, respectively. Our
hospitals have approximately 300 managed care contracts with no one commercial
payor representing more than 5% of our total net patient revenue. In most
cases, we negotiate our managed care contracts annually as they come up for
renewal at various times during the year. Further, many of these contracts are
terminable by either party on relatively short notice. Our future success will
depend, in part, on our ability to retain and renew our managed care contracts
and enter into new managed care contracts on terms favorable to us. Other
healthcare providers, including some with greater geographic coverage or a
wider range of services, may impact our ability to enter into managed care
contracts or negotiate increases in our reimbursement and other favorable terms
and conditions. In one region in which we operate, the largest healthcare
provider organization controls one of the largest payor organizations and
operates it primarily as a closed network. The patients enrolled in this
integrated health system are largely unavailable to us. Changes In Legislation May Significantly Reduce Government Healthcare
Spending And Our Revenue. Governmental healthcare programs, principally Medicare and Medicaid,
accounted for 40.4% and 40.0% of our net patient revenue for the years ended
September 30, 2004 and 2003, respectively. In recent years, legislative changes
have resulted in limitations on and, in some cases, reductions in levels of,
payments to healthcare providers for certain services under many of these
government programs. Further, legislative changes have altered the method of
payment for various services under the Medicare and Medicaid programs. We
believe that hospital operating margins across the country, including ours,
have been and may continue to be under pressure because of limited pricing
flexibility and growth in operating expenses in excess of the increase in
prospective payments under the Medicare program. In addition, a number of
states are experiencing budget problems and have adopted or are considering
legislation designed to reduce their Medicaid expenditures and to provide
universal coverage and additional care, including enrolling Medicaid recipients
in managed care programs and imposing additional taxes on hospitals to help
finance or expand states Medicaid systems. Our Hospitals Face Competition For Patients From Other Hospitals And
Healthcare Providers That Could Impact Patient Volume. In general, the hospital industry is highly competitive. Our hospitals
face competition for patients from other hospitals in our markets, large
tertiary care centers and outpatient service providers that provide similar
services to those provided by our hospitals. Most of our facilities are located
in geographic areas in which at least one other hospital provides services
comparable to those offered by our hospitals, including national for-profit
chains and nonprofit health systems. Some of the hospitals that compete with
ours are owned by governmental agencies or not-for-profit corporations
supported by endowments and charitable contributions and can finance capital
expenditures and operations on a tax-exempt basis. In addition, the number of
freestanding specialty hospitals, outpatient surgery centers and outpatient
diagnostic centers has increased significantly in the areas in which we
operate. Some of our competitors also have greater geographic coverage, offer a
wider range of services or invest more capital or other resources than we do.
If our competitors are able to achieve greater geographic coverage, improve
access and convenience to physicians and patients, recruit physicians to
provide competing services at their facilities, expand or improve their
services or obtain more favorable managed care contracts, we may experience a
decline in patient volume. Beginning in 2005, CMS expects to make public
performance data relating to ten quality measures that hospitals submit in
connection with their Medicare reimbursement. If any of our hospitals should
achieve poor results (or results that are lower than our competitors) on these
ten quality criteria, patient volumes could decline. In the future, other
trends toward clinical transparency may have an unanticipated impact on our
competitive position and patient volume. If We Continue To Experience Growth In Self-Pay Volume And Revenue, Our
Financial Condition Or Results Of Operations Could Be Adversely Affected. Like others in the hospital industry, we have experienced an increase in
our provision for bad debts as a percentage of net revenue due to a growth in
self-pay volume and revenue resulting in large part from an increase in the
number of uninsured patients, along with an increase in the amount of
co-payments and deductibles passed on by employers to employees. Although we
continue to seek ways of improving point of service collection efforts and
implementing appropriate payment plans with our patients, if we continue to
experience growth in self-pay volume and revenue, our results of operations
could be adversely affected. Further, our ability to improve collections for
self-pay patients may be limited by regulatory and investigatory initiatives,
including private lawsuits directed at hospital charges and collection
practices for uninsured and underinsured patients. 21




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If We Are Unable To Recruit And Retain Quality Physicians, Our Financial
Condition Or Results Of Operations Could Be Adversely Affected. The success of our hospitals depends on the following factors, among
others:  
    
    the number and quality of the physicians on the medical staffs of our hospitals;
    
    the admitting practices of those physicians; and
    
    our maintenance of good relations with those physicians. We generally do not employ physicians. Our efforts to recruit and retain
physicians are affected by our managed care contracting relationships, national
shortages in some specialties, such as anesthesiology and radiology, the
adequacy of our support personnel, the condition of our facilities and medical
equipment, the availability of suitable medical office space and federal and
state laws and regulations prohibiting financial relationships that may have
the effect of inducing patient referrals. Our efforts to recruit physicians has
also been impacted by the inability of physicians in Texas and Florida to
obtain professional liability insurance on acceptable terms. The impact in
Texas has been mitigated by the recent enactment of tort reform. Although some
physicians in our Florida market are continuing to have difficulty obtaining
coverage, it appears that the issues in our Florida market are subsiding as
carriers have begun issuing policies on terms acceptable to our physicians. We
generally require all of the physicians on our medical staffs to maintain
professional liability insurance or other financial guaranty as permitted by
state law. If we are unable to meet the needs of physicians in the regions in
which our hospitals are located, they may not want to serve on our medical
staffs or they may be discouraged from referring patients to our hospitals,
which could adversely affect our financial condition or results of operations. Our Hospitals Face Competition For Staffing, Which May Increase Our Labor
Costs And Reduce Profitability. We compete with other healthcare providers in recruiting and retaining
qualified management and staff personnel responsible for the day-to-day
operations of each of our hospitals, including nurses and other non-physician
healthcare professionals. In some markets, the scarce availability of nurses
and other medical support personnel has become a significant operating issue.
This shortage may require us to enhance wages and benefits to recruit and
retain nurses and other medical support personnel, recruit personnel from
foreign countries, and hire more expensive temporary personnel. We also depend
on the available labor pool of semi-skilled and unskilled employees in each of
the markets in which we operate. Because a significant percentage of our
revenue consists of fixed, prospective payments, our ability to pass along
increased labor costs is constrained. Our failure to recruit and retain
qualified management, nurses and other medical support personnel, or to control
our labor costs could have a material adverse effect on our financial condition
or results of operations. If We Fail To Comply With Extensive Laws And Government Regulations, We
Could Suffer Penalties, Be Required To Alter Arrangements With Investors In Our
Hospitals Or Be Required To Make Significant Changes To Our Operations. The healthcare industry, including our company, is required to comply with
extensive and complex laws and regulations at the federal, state and local
government levels relating to, among other things:  
    
    billing for services;
    
    relationships with physicians and other referral sources;
    
    adequacy of medical care;
    
    quality of medical equipment and services;
    
    qualifications of medical and support personnel;
    
    confidentiality, maintenance and security issues associated
with health-related information and medical records;
    
    the screening, stabilization and transfer of patients who have emergency medical conditions;
    
    licensure and certification;
    
    operating policies and procedures; and
    
    addition of facilities and services. 22




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Because many of these laws and regulations are relatively new, we do not
always have the benefit of significant regulatory or judicial interpretation of
these laws and regulations. For that reason and because these laws and
regulations are so complex, hospital companies face a risk of inadvertent
violations. In the future, different interpretations or enforcement of these
laws and regulations could subject our current or past practices to allegations
of impropriety or illegality or could require us to make changes in our
facilities, equipment, personnel, services, capital expenditure programs and
operating expenses. If we fail to comply with applicable laws and regulations, we could be
subjected to liabilities, including:  
    
    criminal penalties;
    
    civil penalties, including the loss of our licenses to operate one or more of our facilities; and
    
    exclusion of one or more of our facilities from participation
in the Medicare, Medicaid and other federal and state healthcare
programs. Further,
Congress, other governmental entities and private entities currently
are performing studies or considering recommendations regarding the
effects of physician ownership of both specialty and general acute
care hospitals. The results of these studies and recommendations may
lead to legislative and regulatory changes that could adversely
affect our ability to undertake joint ventures with physicians. Providers In The Healthcare Industry Have Been The Subject Of Federal And
State Investigations, And We May Become Subject To Investigations In The Future
Which Could Result In Significant Liabilities Or Penalties To Us. Both federal and state government agencies have increased their focus on
and coordination of civil and criminal enforcement efforts in the healthcare
area. As a result, there are numerous ongoing investigations of hospital
companies, as well as their executives and managers. The Office of the
Inspector General of the U.S. Department of Health and Human Services, or OIG,
and the Department of Justice have, from time to time, established national
enforcement initiatives that focus on specific billing practices or other
suspected areas of abuse. Further, under the federal False Claims Act, private
parties have the right to bring qui tam whistleblower lawsuits against
companies that submit false claims for payments to the government. Some states
have adopted similar state whistleblower and false claims provisions. Federal and state investigations relate to a wide variety of routine
healthcare operations including:  
    
    cost reporting and billing practices, including for Medicare outliers;
    
    financial arrangements with referral sources;
    
    physician recruitment activities;
    
    physician joint ventures; and
    
    hospital charges and collection practices for self-pay patients. We engage in many of these and other activities which could be the subject
of governmental investigations or inquiries from time to time. For example, we
have significant Medicare and Medicaid billings, we have numerous financial
arrangements with physicians who are referral sources to our hospitals, we have
non-hospital joint venture arrangements involving physician investors and we
have five hospitals that have physician investors. In addition, our executives
and managers, many of whom have worked at other healthcare companies that are
or may become the subject of federal and state investigations and private
litigation, may be included in governmental investigations or named as
defendants in private litigation. Any investigations of us, our executives or
managers could result in significant liabilities or penalties to us, as well as
adverse publicity. Compliance With Section 404 Of The Sarbanes-Oxley Act May Negatively
Impact Our Results Of Operations And Failure To Comply May Subject The Company
To Regulatory Scrutiny And A Loss Of Investors Confidence In Our Internal
Control Over Financial Reporting. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to perform an
evaluation of our internal control over financial reporting and have our
auditor attest to such evaluation beginning with fiscal 2005. Compliance with
these requirements, and any changes in our internal control over financial
reporting in response to our internal evaluations, may be expensive and
time-consuming and may negatively impact our results of operations. In
addition, we cannot assure you that we will be able to meet the required
deadlines for compliance with Section 404. Any failure on our part to meet the
required compliance deadlines may subject us to regulatory scrutiny and a loss
of public confidence in our internal control over financial reporting. 23




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A Failure Of Our Information Systems Would Adversely Affect Our Ability To
Properly Manage Our Operations. We rely on our advanced information systems and our ability to
successfully use these systems in our operations. These systems are essential
to the following areas of our business operations, among others:  
    
    patient accounting, including billing and collection of net revenue;
    
    financial, accounting, reporting and payroll;
    
    coding and compliance;
    
    laboratory, radiology and pharmacy systems;
    
    negotiating, pricing and administering managed care contracts; and
    
    monitoring quality of care. If we are unable to use these systems effectively, we may experience
delays in collection of net revenue and may not be able to properly manage our
operations or oversee the compliance with laws or regulations. If Any One Of The Regions In Which We Operate Experiences An Economic
Downturn
Or Other Material Change, Our Overall Business Results May Suffer. Of our 15 acute care hospitals, four are located in Salt Lake City, three
are located in Phoenix, three are located in Tampa-St. Petersburg, one is
located in Las Vegas and four are located in the state of Texas. Any material
change in the current demographic, economic, competitive or regulatory
conditions in any of these regions could adversely affect our overall business
results because of the significance of our operations in each of these regions
to our overall operating performance. Moreover, our business is not as
diversified as some competing multi-facility healthcare companies and,
therefore, is subject to greater market risks. The projected population growth
rates in these regions are based on assumptions beyond our control. Such
projected growth may not be realized. We May Be Subject To Liabilities Because Of Claims Brought Against Our
Facilities. Plaintiffs frequently bring actions against hospitals and other healthcare
providers, alleging malpractice, product liability or other legal theories.
Many of these actions involve large claims and significant defense costs. Certain other hospital companies have been subject to class-action claims
in connection with their billing practices relating to uninsured patients.
Although we believe that our billing practices with respect to uninsured
patients have been and will continue to be in compliance with all applicable
legal requirements, we could be subject to similar claims. We maintain professional malpractice liability insurance and general
liability insurance in amounts we believe are sufficient to cover claims
arising out of the operations of our facilities. Some of the claims could
exceed the scope of the coverage in effect or coverage of particular claims or
damages could be denied. The premiums and self-insurance retentions associated with such insurance
have risen substantially in recent years while our maximum coverage under our
insurance policies has decreased. Consistent with 2004, our fiscal 2005
self-insured retention for professional and general liability coverage is $5.0
million per claim and $45.0 million in the aggregate. Additionally, the maximum
coverage under our insurance policies is unchanged at $75.0 million. As of
September 30, 2004 and September 30, 2003, our professional and general
liability accrual for asserted and unasserted claims was approximately $28.8
million and $24.3 million, respectively. The rising cost of professional liability insurance and, in some cases,
the lack of availability of such insurance coverage, for physicians with
privileges at our hospitals increases our risk of vicarious liability in cases
where both our hospital and the uninsured or underinsured physician are named
as co-defendants. As a result, we are subject to greater self-insured risk and
may be required to fund losses out of our operating cash flow to a greater
extent than during 2004. We cannot assure you that we will be able to continue
to obtain insurance coverage in the future or that, if such insurance is
available, that it will be available on acceptable terms. Our Hospitals Face Increasing Insurance Costs That May Reduce Our Cash
Flows And Net Earnings. The cost of insurance has negatively affected operating results and cash
flows throughout the healthcare industry due to pricing pressures on insurers
and fewer carriers willing to underwrite professional and general liability
insurance. The rising cost of professional liability insurance coverage and, in
some cases, the lack of 24




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##### Table of Contents



availability of such insurance coverage, for physicians with privileges at
our hospitals increases our risk of vicarious liability in cases where both our
hospital and the uninsured or underinsured physician are named as
co-defendants. For the year ended September 30, 2004, our insurance expense on
a same facility basis was $25.6 million, an increase of $4.4 million over the
year ended September 30, 2003. Some states, including certain states in which
we operate, have recently passed tort reform legislation or are considering
such legislation to place limits on non-economic damages. However, there is no
assurance that continued increases in insurance costs will not have a material
adverse effect on our future operating results and cash flows. Furthermore, we
cannot assure you that we will be able to continue to obtain insurance coverage
in the future or that, if such insurance is available, that it will be
available on acceptable terms. If We Are Unable To Control Healthcare Costs At Health Choice, Our
Profitability May Be Adversely Affected. Health Choice derives its net revenue through a contract with the Arizona
Health Care Cost Containment System, which is the state agency that administers
Arizonas Medicaid program. For the year ended September 30, 2004, we derived
20.9% of our consolidated net revenue from this contract, compared to 14.1% in
the year ended September 30, 2003. The Arizona Health Care Cost Containment
System sets the capitated rates we receive at Health Choice and Health Choice
subcontracts with physicians, hospitals and other healthcare providers to
provide services to its enrollees. If we fail to effectively manage healthcare
costs, these costs may exceed the payments we receive. Historically, our
medical claims expense as a percentage of premium and other operating revenue
has fluctuated. Our medical loss ratio excluding the impact of premium taxes
was 89.0% for the year ended September 30, 2004, compared to 88.1% in the year
ended September 30, 2003. Relatively small changes in these medical loss ratios
can create significant changes in the profitability of Health Choice. Many
factors can cause actual healthcare costs to exceed the capitated rates set by
the Arizona Health Care Cost Containment System, including:  
    
    our ability to contract with cost-effective healthcare providers;
    
    the increased cost of individual healthcare services;
    
    the type and number of individual healthcare services delivered; and
    
    the occurrence of catastrophes, epidemics or other unforeseen occurrences. Although we have been able to manage medical claims expense through a
variety of techniques, we may not be able to continue to effectively manage
medical claims expense in the future. Additionally, the significant increase in
members since September 30, 2003 increases the risk associated with effectively
managing health claims expense. If our medical claims expense increases or
capitated rates set by the Arizona Health Care Cost Containment System
decrease, our financial condition or results of operations may be adversely
affected. If Health Choices Contract With The Arizona Health Care Cost Containment
System Were Discontinued, Our Net Revenue And Profitability Would Be Adversely
Affected. Our contract with the Arizona Health Care Cost Containment System expires
September 30, 2006 with two additional one-year renewals and is terminable
without cause on 90 days written notice or for cause upon written notice if we
fail to comply with any term or condition of the contract or fail to take
corrective action as required to comply with the terms of the contract.
Additionally, the Arizona Health Care Cost Containment System can terminate our
contract in the event of the unavailability of state or federal funding. As
other health plans attempt to enter the Arizona market, we may face increased
competition. If we are unable to renew, successfully rebid or compete for our
contract with the Arizona Health Care Cost Containment System, or if our
contract is terminated, our financial condition and results of operations would
be adversely affected. Significant Competition From Other Healthcare Companies And State Efforts
To Regulate The Sale Of Not-For-Profit Hospitals May Affect Our Ability To
Acquire Hospitals. One element of our business strategy is to expand through selective
acquisitions of hospitals in our existing markets and in new growing markets.
We compete for acquisitions with other healthcare companies, some of which have
greater competitive advantages or financial resources than us. Therefore, we
may not be able to acquire hospitals on terms favorable to us or at all.
Additionally, many states, including some where we have hospitals and others
where we may in the future acquire hospitals, have adopted legislation
regarding the sale or other disposition of hospitals operated by not-for-profit
entities. In other states that do not have specific legislation, the attorneys
general have demonstrated an interest in these transactions under their general
obligations to protect charitable assets 25




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from waste. These legislative and administrative efforts focus primarily
on the appropriate valuation of the assets divested and the use of the proceeds
of the sale by the not-for-profit seller. These review and approval processes
can add time to the closing of an acquisition of a not-for-profit hospital and
future actions on the state level could seriously delay or even prevent our
ability to acquire not-for-profit hospitals in the future. Difficulties With The Integration Of Acquisitions May Disrupt Our Ongoing
Operations. We are currently in the process of integrating North Vista Hospital, which
we acquired February 1, 2004, into our system. To date, we have experienced no
significant difficulties in connection with this process. If we are able to
successfully complete other hospital acquisitions, we cannot guarantee that we
will be able to effectively integrate the acquired facilities with our existing
operations. The process of integrating acquired hospitals may require a
disproportionate amount of managements time and attention, potentially
distracting management from its day-to-day responsibilities. In addition, poor
integration of acquired facilities could cause interruptions to our business
activities, including those of the acquired facilities. As a result, we may not
realize all or any of the anticipated benefits of an acquisition and we may
incur significant costs related to the acquisitions or integration of these
facilities. In addition, we may acquire hospitals that have unknown or
contingent liabilities, including liabilities for failure to comply with
healthcare laws and regulations. Although we seek indemnification from
prospective sellers covering these matters, we may nevertheless have material
liabilities for past activities of acquired hospitals. Difficulties With Consolidation Of Our New Hospital May Disrupt Our
Ongoing Operations And May Require Unanticipated Capital Expenditures. We are constructing The Medical Center of Southeast Texas, a new 210-bed
hospital in Port Arthur, Texas, which we expect to open in the third fiscal
quarter of 2005. The total cost to build the new hospital is currently
estimated to be approximately $95.0 million, and we expect to incur
approximately $35 to $40 million in capital expenditures during fiscal 2005
related to the construction of this hospital. In connection with the opening of
this new hospital, we are consolidating the operations and medical staffs of
Mid-Jefferson Hospital and Park Place Medical Center. Delays in obtaining necessary licensing and other governmental
authorizations and other unforeseen problems and delays could delay our
commencing operations in the new facility. We cannot assure you that we will
not experience a disruption in our business when we transfer our operations to
The Medical Center of Southeast Texas. In addition, some of the doctors that
currently practice at Mid-Jefferson Hospital and Park Place Medical Center may
not apply for privileges at the new hospital, or may change their referral
patterns and choose to refer patients and perform procedures at other
hospitals. Some patients that currently use our facilities at Mid-Jefferson
Hospital and Park Place Medical Center may also choose to use facilities other
than the new Port Arthur facility. Any disruption in our business or change in
physician referral patterns or patient preferences could affect the number of
admissions and volume of services provided at our new hospital and adversely
affect our business, financial condition and results of operations. The Construction Of Other New Hospitals Would Involve Significant Capital
Expenditures Which Could Have An Adverse Impact On Our Liquidity. We could decide to construct a new hospital in the future. Our ability to
complete construction of a new hospital on our anticipated budget and schedule
would depend on a number of factors, including, but not limited to:  
    
    our ability to control construction costs;
    
    the failure of general contractors or subcontractors to perform under their contracts;
    
    adverse weather conditions;
    
    shortages of labor or materials;
    
    our ability to obtain necessary licensing and other required governmental authorizations; and
    
    other unforeseen problems and delays. As a result of these and other factors, we cannot assure you that we will
not experience increased construction costs, or that we will be able to
construct any new hospitals as originally planned. In addition, the
construction of a new hospital would involve a significant commitment of
capital with no revenue associated with the hospital during construction, which
could have an adverse impact on our liquidity. 26




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##### Table of Contents



State Efforts To Regulate The Construction Or Expansion Of Hospitals Could
Impair Our Ability To Operate And Expand Our Operations. Some states require healthcare providers to obtain prior approval, known
as certificates of need, for:  
    
    the purchase, construction or expansion of healthcare facilities;
    
    capital expenditures exceeding a prescribed amount; or
    
    changes in services or bed capacity. In giving approval, these states consider the need for additional or
expanded healthcare facilities or services. Florida and Nevada are the only
states in which we currently own hospitals that have certificate of need laws.
The failure to obtain any required certificate of need could impair our ability
to operate or expand operations. Our Hospitals Are Subject To Potential Responsibilities And Costs Under
Environmental Laws That Could Lead To Material Expenditures Or Liability. We are subject to various federal, state and local environmental laws and
regulations, including those relating to the protection of human health and the
environment. We could incur substantial costs to maintain compliance with these
laws and regulations. To our knowledge, we have not been and are not currently
the subject of any investigations relating to noncompliance with environmental
laws and regulations. We could become the subject of future investigations,
which could lead to fines or criminal penalties if we are found to be in
violation of these laws and regulations. The principal environmental
requirements and concerns applicable to our operations relate to proper
management of hazardous materials, hazardous waste and medical waste, above
ground and underground storage tanks, operation of boilers, chillers and other
equipment, and management of building conditions, such as the presence of mold,
lead-based paint or asbestos. Our hospitals engage independent contractors for
the transportation and disposal of hazardous waste, and we require that our
hospitals be named as additional insureds on the liability insurance policies
maintained by these contractors. In addition, we maintain insurance coverage
for third party liability related to the storage tanks located at our
facilities in the amount $5.0 million per claim and $10.0 million in the
aggregate. We also may be subject to requirements related to the remediation of
substances that have been released into the environment at properties owned or
operated by us or our predecessors or at properties where substances were sent
for off-site treatment or disposal. These remediation requirements may be
imposed without regard to fault, and liability for environmental remediation
can be substantial. 27




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##### Table of Contents



Item 2. Properties. We operate 15 acute care hospitals and one behavioral health hospital and
have ownership interests in three ambulatory surgery centers. We own 14 and
lease two of our hospitals. Five of the acute care hospitals we own have third
party investors. The following table contains information concerning our
hospitals and ambulatory surgery centers. LicensedHospitals
    
    City
    
    BedsUtahDavis Hospital & Medical Center (1)
    
    Layton
    
    
    136Jordan Valley Hospital (2)
    
    West Jordan
    
    
    92Pioneer Valley Hospital (3)
    
    West Valley City
    
    
    139Salt Lake Regional Medical Center
    
    Salt Lake City
    
    
    168ArizonaMesa General Hospital Medical Center (4)
    
    Mesa
    
    
    126St. Lukes Medical Center (5)
    
    Phoenix
    
    
    320Tempe St. Lukes Hospital
    
    Tempe
    
    
    109FloridaMemorial Hospital of Tampa
    
    Tampa
    
    
    174Palms of Pasadena Hospital
    
    St. Petersburg
    
    
    307Town & Country Hospital
    
    Tampa
    
    
    201NevadaNorth Vista Hospital
    
    Las Vegas
    
    
    198TexasMid-Jefferson Hospital (6)
    
    Nederland
    
    
    138Odessa Regional Hospital (7)
    
    Odessa
    
    
    146Park Place Medical Center (6)
    
    Port Arthur
    
    
    215Southwest General Hospital
    
    San Antonio
    
    
    289Total
    
    
    
    
    2,758Surgery CentersUtahDavis Surgical Center (8)
    
    Layton
    
    
    ArizonaBiltmore Surgery Center (9)
    
    Phoenix
    
    
    Arizona Diagnostic and Surgery Center
    
    Mesa
    
    
    
   (1)
    
    Owned by a limited partnership in which we own a 97.5% interest.(2)
    
    Owned by a limited partnership in which we own a 97.4% interest.(3)
    
    Leased under an agreement that expires on January 31, 2019. We have
options to extend the term of the lease through January 31, 2039.(4)
    
    Leased under an agreement that expires on July 31, 2006.(5)
    
    Includes St. Lukes Behavioral Hospital, which has 85 licensed
beds.(6)
    
    Owned by a limited partnership in which we own an 88.8% interest.
We are currently constructing a new hospital on land that we own in
Port Arthur, Texas that will consolidate our Mid-Jefferson and Park
Place facilities. This new facility will be known as The Medical Center
of Southeast Texas. We expect to open the new facility in the third
fiscal quarter of 2005.(7)
    
    Owned by a limited partnership in which we own an 88.8% interest.(8)
    
    Owned by a joint venture in which we own a 26.6% interest.(9)
    
    Owned by a joint venture in which we own a 62.4% interest. We also operate and lease medical office buildings in conjunction with our
hospitals. These office buildings are occupied primarily by physicians who
practice at our hospitals. Our principal executive offices in Franklin, Tennessee are located in
approximately 38,000 square feet of office space. Our office space is leased
pursuant to a lease with a seven-year term that commenced on January 1, 2004.
Our principal executive offices, hospitals and other facilities are suitable
for their respective uses and generally are adequate for our present needs. 28




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##### Table of Contents



Item 3. Legal Proceedings. We have been advised that our hospital in San Antonio, Texas, Southwest
General Hospital, is the subject of an investigation relating to the provision
of hyperbaric oxygen therapy services. In a letter dated February 11, 2003, the
U.S. Attorney for the Western District of Texas stated that the investigation
relates to certain billing practices for these services since 1998. We are
cooperating with the U.S. Attorneys office with respect to this investigation.
Based on information currently available, we believe the investigation relates
primarily to the period when Tenet Healthcare Corporation owned the hospital.
Although we are unable to predict the outcome of this investigation, we do not
believe it will have a material adverse effect on our business, financial
condition or results of operations. We are involved in other litigation and proceedings in the ordinary course
of our business. We do not believe the outcome of any such litigation will have
a material adverse effect upon our business, financial condition or results of
operations. 
 Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of security holders during the fourth
quarter ended September 30, 2004. 29




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##### Table of Contents



PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities. There is no established public trading market for our common interests. At
September 30, 2004, all of our common interests were owned by IASIS Healthcare
Corporation, a Delaware corporation, referred to as IAS. See Item 12., Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters, included elsewhere in this report
for information regarding our equity compensation plans. 
 Item 6. Selected Financial Data. The following tables present selected historical financial data for the
fiscal years ended September 30, 2000, 2001, 2002 and 2003 and the period ended
June 22, 2004, derived from the audited consolidated financial statements of
IAS, as predecessor to IASIS LLC. The audited consolidated financial statements
and the related notes to the audited consolidated financial statements for the
fiscal years ended September 30, 2002 and 2003 and the period ended June 22,
2004, together with the related report of the independent registered public
accounting firm, are included elsewhere in this report. The selected financial data for the period from June 23, 2004 through
September 30, 2004 reflects the results of operations of IASIS LLC following
the Transactions and is derived from the audited consolidated financial
statements of IASIS LLC for the period beginning June 23, 2004 and ended
September 30, 2004. The audited consolidated financial statements for the
period beginning June 23, 2004 and ended September 30, 2004, together with the
related report of the independent registered public accounting firm, are
included elsewhere is this report. The selected financial information and other
data presented below should be read in conjunction with the information
contained in Managements Discussion and Analysis of Financial Condition and
Results of Operations and the consolidated financial statements and the
related notes thereto included elsewhere in this report. IASISLLCIASJune 23,2004
    
    October 1
    
    Year Endedthrough
    
    2003
    
    September 30,September 30,
    
    through2004 (1)
    
    June 22, 2004 (1)
    
    2003
    
    2002
    
    2001 (1)
    
    2000 (1)(dollars in thousands)Statement of Operations Data:Net Revenue
    
    $
    389,474
    
    
    $
    997,160
    
    
    $
    1,088,156
    
    
    $
    949,888
    
    
    $
    889,541
    
    
    $
    815,163Costs and expenses:Salaries and benefits
    
    
    115,538
    
    
    
    308,881
    
    
    
    375,509
    
    
    
    324,713
    
    
    
    317,439
    
    
    
    285,451Supplies and other operating
expenses
    
    
    113,512
    
    
    
    298,471
    
    
    
    350,226
    
    
    
    306,300
    
    
    
    303,819
    
    
    
    285,083Medical claims
    
    
    74,051
    
    
    
    168,338
    
    
    
    128,595
    
    
    
    116,607
    
    
    
    91,498
    
    
    
    72,469Provision for bad debts
    
    
    39,486
    
    
    
    87,466
    
    
    
    86,231
    
    
    
    72,238
    
    
    
    73,417
    
    
    
    60,579Interest, net
    
    
    15,667
    
    
    
    39,673
    
    
    
    53,881
    
    
    
    55,317
    
    
    
    64,346
    
    
    
    62,352Depreciation and amortization
    
    
    21,648
    
    
    
    50,490
    
    
    
    56,280
    
    
    
    46,111
    
    
    
    53,163
    
    
    
    47,559Recapitalization costs (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,478Provision for asset
revaluation, closure and
other costs (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,612
    
    
    
    Write-off of debt issue costs
    
    
    
    
    
    
    8,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on early extinguishment
of debt
    
    
    232
    
    
    
    51,852
    
    
    
    3,900
    
    
    
    
    
    
    
    
    
    
    
    Impairment of assets held for
sale (3)
    
    
    
    
    
    
    
    
    
    
    11,741
    
    
    
    
    
    
    
    
    
    
    
    Merger expenses (4)
    
    
    
    
    
    
    19,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total costs and expenses
    
    
    380,134
    
    
    
    1,033,771
    
    
    
    1,066,363
    
    
    
    921,286
    
    
    
    920,294
    
    
    
    816,971
 30




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##### Table of Contents



IASISLLCIASJune 23,2004
    
    October 1
    
    Year Endedthrough
    
    2003
    
    September 30,September 30,
    
    through2004 (1)
    
    June 22, 2004 (1)
    
    2003
    
    2002
    
    2001 (1)
    
    2000 (1)(dollars in thousands)Earning
(loss) from continuing operations before gain (loss)
on sale of assets, minority
interests, income taxes and
cumulative effect of a change
in accounting principle
    
    
    9,340
    
    
    
    (36,611
    )
    
    
    21,793
    
    
    
    28,602
    
    
    
    (30,753
    )
    
    
    (1,808
    )Gain (loss) on sale of assets,
net (3)
    
    
    (107
    )
    
    
    3,731
    
    
    
    588
    
    
    
    (7
    )
    
    
    314
    
    
    
    Minority interests
    
    
    (1,207
    )
    
    
    (3,098
    )
    
    
    (1,828
    )
    
    
    (1,042
    )
    
    
    (441
    )
    
    
    (74
    )Earnings (loss) from
continuing operations
before income taxes and
cumulative effect of a change
in accounting principle
    
    
    8,026
    
    
    
    (35,978
    )
    
    
    20,553
    
    
    
    27,553
    
    
    
    (30,880
    )
    
    
    (1,882
    )Income tax expense
    
    
    3,321
    
    
    
    1,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,219Net earnings (loss) from
continuing operations
before cumulative effect of a
change in accounting
principle
    
    
    4,705
    
    
    
    (37,130
    )
    
    
    20,553
    
    
    
    27,553
    
    
    
    (30,880
    )
    
    
    (4,101
    )Earning (loss) from
discontinued operations
and cumulative effect
of a change in
accounting principle (5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,525
    )
    
    
    1,000
    
    
    
    (10,602
    )Net earnings (loss)
    
    $
    4,705
    
    
    $
    (37,130
    )
    
    $
    20,553
    
    
    $
    (10,972
    )
    
    $
    (29,880
    )
    
    $
    (14,703
    )Balance Sheet Data (at end of
period):Cash and cash equivalents
    
    $
    98,805
    
    
    $
    
    
    
    $
    101,070
    
    
    $
    
    
    
    $
    6,056
    
    
    $
    Total assets
    
    
    1,724,161
    
    
    
    
    
    
    
    1,029,999
    
    
    
    898,483
    
    
    
    866,309
    
    
    
    873,839Long-term debt and capital
lease obligations (including
current portion)
    
    
    912,754
    
    
    
    
    
    
    
    664,434
    
    
    
    582,943
    
    
    
    550,177
    
    
    
    557,654Stockholders equity
(6)
    
    
    
    
    
    
    
    
    
    
    176,099
    
    
    
    155,544
    
    
    
    166,294
    
    
    
    5,431Members equity
    
    
    573,705
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    The selected financial data includes complete financial data for all of
the periods noted with the exception of Rocky Mountain Medical Center and
North Vista. We opened Rocky Mountain Medical Center on April 10, 2000 and
subsequently closed it on June 2, 2001. The results of Rocky Mountain
Medical Center are included in the years ended September 30, 2000 and
2001. The results of North Vista are included from February 1, 2004, the
date of acquisition.(2)
    
    We incurred legal, accounting and other related charges of approximately
$3.5 million in connection with a recapitalization transaction with
Paracelsus Healthcare Corporation (currently known as Clarent Hospital
Corporation) in fiscal 2000.(3)
    
    In 2001, we recorded asset revaluation, closure and other costs of $16.6
million related to the closure of Rocky Mountain Medical Center in June
2001, employee severance costs and the write-off of deferred initial
public offering costs. During 2003, we recorded an impairment charge of
$11.7 million on the Rocky Mountain Medical Center net assets held for
sale to reflect the estimated net proceeds from sale to potential
purchasers who would convert the propertys use to retail. During the
quarter ended March 31, 2004, we sold Rocky Mountain Medical Center
property and recorded a gain on the sale of this property of approximately
$3.6 million.(4)
    
    Merger expenses include legal and advisory expenses and special bonus
compensation of IAS incurred in connect with its acquisition by the
investor group led by Texas Pacific Group.(5)
    
    Consists of the cumulative effect of a change in accounting principle of
a $39.5 million non-cash transitional impairment charge, related to the
adoption of SFAS 142, Goodwill and Other Intangible Assets, during the
fiscal year ended September 30, 2002 and reversal of excess loss accrual
(loss on discontinued operations and disposal) of $(10.6) million, $1.0
million, and $1.0 million for the fiscal years ended September 30, 2000,
2001 and 2002, respectively.(6)
    
    On October 26, 2000, all shares of our mandatorily redeemable Series A
and Series B preferred stock were exchanged for shares of our common stock
on the basis of ten common shares for each preferred share. The exchange
was recorded in the first quarter of 2001 and increased our stockholders
equity by approximately $189.3 million. 31




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Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations. The following discussion and analysis of financial condition and results
of operations should be read in conjunction with our audited consolidated
financial statements, the notes to our audited consolidated financial
statements, and the other financial information appearing elsewhere in this
report. To assist in the comparability of our financial results and facilitate
an understanding of our results of operations, the following overview and
analysis combines the results of operations of IAS for October 1, 2003 to June
22, 2004, with the results of operations of IASIS LLC for June 23, 2004 to
September 30, 2004 to discuss results for the year ended September 30, 2004,
and compares such combined results with the results of operations of IAS for
the year ended September 30, 2003. Data for the fiscal years ended September
30, 2004, 2003 and 2002 has been derived from our audited consolidated
financial statements. Forward Looking Statements Some of the statements we make in this annual report on Form 10-K are
forward-looking within the meaning of the federal securities laws, which are
intended to be covered by the safe harbors created thereby. Those
forward-looking statements include all statements that are not historical
statements of fact and those regarding our intent, belief or expectations
including, but not limited to, the discussions of our operating and growth
strategy (including possible acquisitions or dispositions), financing needs,
projections of revenue, income or loss and future operations. Forward-looking
statements involve known and unknown risks and uncertainties that may cause
actual results in future periods to differ materially from those anticipated in
the forward-looking statements. Those risks and uncertainties include, among
others, the risks and uncertainties discussed under the caption Risk Factors
in this annual report on Form 10-K. Although we believe that the assumptions
underlying the forward-looking statements contained in this report are
reasonable, any of these assumptions could prove to be inaccurate and,
therefore, there can be no assurance that the forward-looking statements
included in this annual report on Form 10-K will prove to be accurate. In light
of the significant uncertainties inherent in the forward-looking statements
included in this report, you should not regard the inclusion of such
information as a representation by us or any other person that our objectives
and plans will be achieved. We undertake no obligation to publicly release any
revisions to any forward-looking statements contained in this report to reflect
events and circumstances occurring after the date hereof or to reflect the
occurrence of unanticipated events. Executive Overview We are a leading owner and operator of medium-sized acute care hospitals
in high-growth urban and suburban markets. We operate our hospitals with a
strong community focus by offering and developing healthcare services targeted
to the needs of the markets we serve, promoting strong relationships with
physicians and working with local managed care plans. At September 30, 2004, we
owned or leased 15 acute care hospitals and one behavioral health hospital,
with a total of 2,267 beds in service, located in five regions:  
    
    Salt Lake City, Utah;
    
    Phoenix, Arizona;
    
    Tampa-St. Petersburg, Florida;
    
    Las Vegas, Nevada; and
    
    four cities in the State of Texas, including San Antonio. We also own and operate a Medicaid managed health plan in Phoenix called
Health Choice, that served over 105,000 members at September 30, 2004. In
addition, we have ownership interests in three ambulatory surgery centers. 32




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##### Table of Contents



The Merger IASIS Healthcare Corporation, or IAS, entered into a definitive merger
agreement dated as of May 4, 2004 pursuant to which an investor group led by
Texas Pacific Group acquired IAS through a merger on June 22, 2004. In the
merger, IASs security holders received, in the aggregate, $738.0 million less
the amount of certain expenses and other adjustments. In addition,
approximately $647.6 million of existing indebtedness was refinanced in
connection with the acquisition. The total transaction value, including tender
premiums, consent fees and other merger-related fees and expenses, was
approximately $1.5 billion. See Merger and Related
Financing Transactions beginning on page 1 for
additional information on the merger and the related Transactions. Impact of Acquisitions Effective as of February 1, 2004, we acquired substantially all of the
assets of North Vista in Las Vegas, Nevada from a subsidiary of Tenet
Healthcare Corporation. The purchase price, including direct transaction costs,
was $25.0 million, which was funded with cash on hand. The Tenet subsidiary
retained the accounts receivable related to the operations of the hospital. The
acquisition of North Vista was accounted for using the purchase method of
accounting. The results of operations of North Vista are included in our
results of operations for the year ended September 30, 2004 from the effective
date of the acquisition. Sale of Rocky Mountain Medical Center Property On February 13, 2004, we sold our Rocky Mountain Medical Center property
in Salt Lake City, Utah. The approximately 23.5-acre property, as well as
certain associated equipment, fixtures and other personal property, were
acquired by the Board of Education of the Granite School District (of Salt Lake
County) for approximately $15.2 million. We recorded a gain on sale of the
property during the year ended September 30, 2004 of $3.6 million. Revenue and Volume Trends Net revenue is comprised of acute care and premium revenue. Net acute care
revenue is comprised of net patient revenue and other revenue. Our acute care
facilities have experienced net revenue growth due to changes in patient acuity
and favorable pricing trends. Net patient revenue is reported net of
contractual adjustments. The adjustments principally result from differences
between the hospitals established charges and payment rates under Medicare,
Medicaid and various managed care plans. The calculation of appropriate
payments from the Medicare and Medicaid programs as well as terms governing
agreements with other third-party payors are complex and subject to
interpretation. As a result, there is at least a reasonable possibility that
recorded estimates will change by a material amount. Premium revenue consists
of revenue from Health Choice, our Medicaid managed health plan, while other
revenue includes medical office building rental income and other miscellaneous
revenue. Health Choice has experienced significant revenue growth as a result
of additional covered lives obtained as part of a new three-year contract
between Health Choice and Arizona Health Care Cost Containment System effective
October 1, 2003 and the resulting expansion of coverage in six new counties.
Terms of the contract include two one-year renewal periods beyond the initial
termination date. The following table provides the sources of our net patient revenue by
payor for the years ended September 30, 2004, 2003 and 2002. Year EndedSeptember 30,2004
    
    2003
    
    2002Medicare
    
    
    26.3
    %
    
    
    27.6
    %
    
    
    27.8
    %Medicaid
    
    
    14.1
    
    
    
    12.4
    
    
    
    11.1Managed care
    
    
    43.5
    
    
    
    45.2
    
    
    
    46.3Self-pay and other
    
    
    16.1
    
    
    
    14.8
    
    
    
    14.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 North Vista, whose results are included from February 1, 2004, has a
higher concentration of self-pay revenue and volume as compared to our other
acute care hospitals, which has contributed to the increase in the self-pay
component of our payor mix. 33




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##### Table of Contents



A large percentage of our hospitals net patient revenue consists of fixed
payment, discounted sources, including Medicare, Medicaid and managed care
organizations. Reimbursement for Medicare and Medicaid services are often fixed
regardless of the cost incurred or the level of services provided. We expect
patient volumes from Medicare to increase over the long term due to the general
aging of the population. We continued to experience growth in net revenue during fiscal year 2004.
Our consolidated net revenue increased 27.4%, 14.6% and 6.8% for the years
ended September 30, 2004, 2003 and 2002, respectively, over the prior year. We have experienced an increase in net patient revenue at our hospital
operations due to the introduction of new and expanded services at our
hospitals and the acquisition of North Vista. On a same facility basis, the
growth in net revenue from our hospital operations has been driven primarily by
increases in price and supplemented with increases in acuity, while adjusted
admissions remained consistent with fiscal 2003. Although patient volumes
declined during the fourth quarter of fiscal 2004 compared to the same prior
year period, volume in certain profitable product lines such as bariatric
services and rehabilitation services increased during the fourth quarter and
fiscal 2004. We continue to benefit from managed care contracting strategies
and related price increases that were obtained throughout the past year, along
with an increase in acuity levels from growth in inpatient surgical volume and
other higher acuity product lines. Our same facility net patient revenue per
adjusted admission increased 10.6% for the year ended September 30, 2004
compared to the year ended September 30, 2003. Health Choice derives its revenue through a contract with the Arizona
Health Care Cost Containment System to provide specified health services to
qualified Medicaid enrollees through contracts with providers. The contract
requires us to provide healthcare services in exchange for fixed periodic
payments and supplemental payments from the Arizona Health Care Cost
Containment System. Heath Choice entered into a new three-year contract with
the Arizona Health Care Cost Containment System effective October 1, 2003. As a
result of our new contract, our membership at Health Choice has increased from
approximately 70,000 enrollees as of September 30, 2003 to over 105,000
enrollees as of September 30, 2004. The new contract provides the Arizona
Health Care Cost Containment System with two one-year renewal options following
the initial term. In the event our contract was to be discontinued, our net
revenue would be reduced and our profitability would be adversely affected. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(Medicare Modernization Act), which was signed into law on December 8, 2003,
made a number of significant changes to the Medicare program. The Medicare
Modernization Act provides a number of potential benefits to our hospitals
including, but not limited to: a provision confirming current law that the
update factor for inpatients for federal fiscal year 2004 will be the full
market basket of 3.4%; a provision allocating $250.0 million per year for
federal years 2005-2008 to pay for healthcare costs of undocumented aliens;
provisions basically providing hospitals with more reimbursement for outpatient
drugs; a provision increasing our reimbursement by reducing the labor share
percentage from 71% to 62% for hospitals with wage indices less than 1.0; and a
provision eliminating the requirement that hospitals must obtain secondary
payment information from all Medicare beneficiaries receiving reference
laboratory services; among others. In addition, for federal fiscal years 2005,
2006 and 2007, the Act confirms current law that hospitals are to receive full
market basket updates for these years, but now conditions such update amounts
upon a hospital providing CMS with specific quality data relating to the
quality of services provided. Those hospitals failing to provide CMS with the
required data specified under the National Voluntary Hospital Reporting
Initiative will receive an update equal to the market basket minus 0.4%. Our
hospitals are complying with this reporting requirement. The Medicare
Modernization Act also decreases hospital reimbursement in a few areas,
including, but not limited to, a provision denying updates to hospitals with
high-cost direct medical education programs. We are unable to predict the
ultimate impact of the Medicare Modernization Act, and no assurance can be
given that it will not have an adverse effect on our business. Other Trends The following paragraphs discuss recent trends that we believe are
significant factors in our current and/or future operating results and cash
flows. Certain of these trends apply to the entire acute care hospital industry
while others may apply to us more specifically. These trends could be short
term in nature or could require long-term attention and resources. While these
trends may involve certain factors that are outside of our control, the extent
to which these trends affect our hospitals and our ability to manage the impact
of these trends play vital roles in our current and future success. In many
cases, we are unable to predict what impact these trends, if any, will have on
us. 34




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Growth in Bad Debts Resulting From Increased Self-Pay Volume and Revenue Like others in the hospital industry, we have experienced an increase in
our provision for bad debts as a percentage of net revenue. This increase is
due to a growth in self-pay volume and revenue resulting in large part from an
increase in the number of uninsured patients, along with an increase in the
amount of co-payments and deductibles passed on by employers to employees. We
continue to focus on our emergency rooms through facilities redesign, Medicaid
eligibility automation and process-flow improvements. As a result of our focus,
point-of-service collections have increased 42% for the year ended September
30, 2004 compared to the year ended September 30, 2003. However, we anticipate
that if we continue to experience growth in self-pay volume and revenue, our
provision for bad debts will continue to increase and our results of operations
could be adversely affected. Additional Charity Care and Charges to the Uninsured We currently record revenue deductions for patient accounts that meet our
guidelines for charity care. We have traditionally provided charity care to
patients with income levels below 200% of the federal property level and will
continue this practice. Effective October 1, 2004, we expanded our charity
care policy to cover uninsured patients with income above 200% of the federal
poverty level. Under the new program, a sliding scale of significantly reduced
rates will be offered to uninsured patients with income between 200% and 400%
of the federal poverty level at all of our hospitals. Currently, we do not
expect that implementation of such a change will have a material impact on our
results of operations. Development of Sub-Acute Care Services Inpatient care is expanding to include sub-acute care when a less
intensive, lower cost level of care is appropriate. We have been proactive in
the development of a variety of sub-acute inpatient services to utilize a
portion of our available capacity. By offering cost-effective sub-acute
services in appropriate circumstances, we are able to provide a continuum of
care when the demand for such services exists. We have identified opportunities
to expand existing physical rehabilitation units and develop other post-acute
services within our facilities. The results of our product line analyses
confirm that the development and use of such units continues to be economically
beneficial. Nursing Shortage The hospital industry continues to experience a shortage of nurses. This
shortage is forecasted to continue. Like other providers in the Phoenix,
Arizona region, we have experienced difficulty in retaining and recruiting
nurses in that market. We have a comprehensive recruiting and retention plan
for nurses that focuses on competitive salaries and benefits as well as
employee satisfaction, best practices, tuition assistance, effective training
programs and workplace environment. Additionally, we are attempting to recruit
qualified nurses from countries outside of the United States. Although same
facility contract labor has declined, our efforts during the current fiscal
year to address the nursing and other medical support personnel shortage, along
with managing contract labor utilization, have contributed to an increase in
nurse recruiting costs of $500,000 and an increase in total employee benefits
expense of $4.8 million, or 0.5% of same facility acute care net revenue, for
the year ended September 30, 2004 over the year ended
September 30, 2003. Should we be
unsuccessful in our attempts to maintain nursing coverage adequate for our
present and future needs, our future operating results could be adversely
affected. Decreased State Funding for Medicaid Programs Some of the states in which we operate have experienced budget constraints
as a result of increased costs and lower than expected tax collections. Health
and human services programs, including Medicaid and similar programs, represent
a significant portion of state spending. As a response to these budgetary
concerns, some states have proposed and other states may propose decreased
funding for these programs. If such funding decreases are approved by the
states in which we operate, our operating results and cash flows could be
adversely affected. Increasing Insurance Costs Consistent with 2004, our fiscal 2005 self-insured retention for
professional and general liability coverage was $5.0 million per claim and
$45.0 million in the aggregate. Additionally, the maximum coverage under our 35




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insurance policies was unchanged at $75.0 million. The rising cost of
professional liability insurance coverage and, in some cases, the lack of
availability of such insurance coverage for physicians with privileges at our
hospitals, increases our risk of vicarious liability in cases where both our
hospital and the uninsured or underinsured physician are named as
co-defendants. The cost of insurance has negatively affected operating results
and cash flows throughout the healthcare industry due to pricing pressures on
insurers and fewer carriers willing to underwrite professional and general
liability insurance. For the year ended September 30, 2004, our insurance
expense on a same facility basis increased 20.6% over the year ended September
30, 2003. For the year ended September 30, 2003, our insurance expense
increased 17.4% over the year ended September 30, 2002. Some states, including
some states in which we operate, have recently passed tort reform legislation
or are considering such legislation to place limits on non-economic damages.
There is no assurance that continued increases in insurance costs will not have
a material adverse effect on our future operating results and cash flows. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. In
preparing our financial statements, we make estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the
dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those
estimates. The following represent the estimates that we consider most critical
to our operating performance and involve the most subjective and complex
assumptions and assessments. Allowance for Doubtful Accounts.Our ability to collect outstanding
receivables from third-party payors and patients is critical to our operating
performance and cash flows. The primary collection risk lies with uninsured
patient accounts or patient accounts for which primary insurance has paid but a
patient portion remains outstanding. The provision for bad debts and the
allowance for doubtful accounts relate primarily to amounts due directly from
patients. Our policy for estimating the allowance for doubtful accounts is
based primarily upon the type and age of the patient accounts receivable, the
patients economic inability to pay and the effectiveness of our collection
efforts. We monitor our accounts receivable balances on a monthly basis and
review various analytics to support the basis for our estimates. In addition,
we regularly perform hindsight procedures on historical collection and
write-off experience throughout the year to determine the reasonableness of our
policy for estimating the allowance for doubtful accounts. We do not pursue
collection of amounts related to patients that qualify for charity care under
our guidelines. Charity care accounts are deducted from gross revenue and do
not affect the provision for bad debt. At September 30, 2004, our self pay
including amounts due from uninsured patients and co-payment and deductible
amounts due from insured patients was $127.2 million and our total allowance
for doubtful accounts was $94.1 million. Excluding third-party settlement
receivables, days revenue in accounts receivable were 50 and 56 at September
30, 2004 and September 30, 2003, respectively. For the year ended September 30,
2004, the provision for bad debts on a same facility basis increased to 10.2%
of acute care net revenue compared to 9.2% for the year ended September 30,
2003. Significant changes in payor mix or business office operations could have
a significant impact on our results of operations and cash flows. Allowance for Contractual Discounts and Settlement Estimates.We derive a
significant portion of our net patient revenue from Medicare, Medicaid and
managed care payors that receive discounts from our standard charges. For the
years ended September 30, 2004, 2003 and 2002, Medicare, Medicaid and managed
care revenue accounted for 83.9%, 85.2% and, 85.2%, respectively, of total net
patient revenue. Medicare and Medicaid regulations and various managed care
contracts are often complex and may include multiple reimbursement mechanisms
for different types of services provided in our healthcare facilities and cost
settlement provisions requiring complex calculations and assumptions subject to
interpretation. We estimate the allowance for contractual discounts on a
payor-specific basis by discharge at the patient level given our interpretation
of the applicable regulations or contract terms. Management has invested
significant resources in human resources and information systems to improve the
estimation process. However, the services authorized and provided and resulting
reimbursement are often subject to interpretation. These interpretations
sometimes result in payments that differ from our estimates. Additionally,
updated regulations and contract renegotiations occur frequently necessitating
continual review and assessment of the estimation process by management. Insurance Reserves.Given the nature of our operating environment, we may
become subject to medical malpractice or workers compensation claims or
lawsuits. We maintain third-party insurance coverage for individual malpractice
and workers compensation claims to mitigate a portion of this risk. In
addition, we maintain excess coverage limiting our exposure to an aggregate
annual amount for claims. We estimate our reserve for self-insured 36




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##### Table of Contents



professional and general liability and workers compensation risks using
historical claims data, demographic factors, severity factors, current incident
logs and other actuarial analysis. As of September 30, 2004 and 2003, our
professional and general liability accrual for asserted and unasserted claims
was approximately $28.8 million and $24.3 million, respectively, which are
included within other long-term liabilities. For the year ended September 30,
2004, our total premiums and self-insured retention cost for professional and
general liability insurance was approximately $26.7 million. On a same facility
basis, our insurance expense was $25.6 million for the year ended September 30,
2004, an increase of $4.4 million over the year ended September 30, 2003.
Insurance expense for the years ended September 30, 2003 and 2002 was $21.5
million and $18.4 million, respectively. Our estimated accrual of the
self-insurance risk for workers compensation claims at September 30, 2004 and
at September 30, 2003 was $7.8 million and $6.0 million, respectively, which is
included in accrued expenses and other current liabilities. The estimated
accrual for malpractice and workers compensation claims could be significantly
affected should current and future occurrences differ from historical claims
trends. The estimation process is also complicated by the relatively short
period of time in which we have owned our healthcare facilities, as occurrence
data under previous ownership may not necessarily reflect occurrence data under
our ownership. While we monitor current claims closely and consider outcomes
when estimating our insurance accruals, the complexity of the claims and wide
range of potential outcomes often hampers timely adjustments to the assumptions
used in the estimates. Medical Claims Payable.Medical claims expense, including claims paid to
our hospitals, was $253.2 million, $135.7 million and $123.0 million, or 87.2%,
88.1% and 89.0% of Health Choice revenue, for the years ended September 30,
2004, 2003 and 2002, respectively. Our liability for medical claims was $55.4
million and $25.8 million at September 30, 2004 and at September 30, 2003,
respectively. We estimate the medical claims payable using historical claims
experience (including severity and payment lag time) and other actuarial
analysis including number of enrollees, age of enrollees and certain enrollee
health indicators to predict the cost of healthcare services provided to
enrollees during any given period. While management believes that its
estimation methodology effectively captures trends in medical claims costs,
actual payments could differ significantly from our estimates given changes in
healthcare costs or adverse experience. For the years ended September 30, 2004,
2003 and 2002, approximately $10.8 million, $7.1 million and $6.4 million,
respectively, of health plan payments made to hospitals and other healthcare
entities owned by us for services provided to our enrollees were eliminated in
consolidation. Our operating results and cash flows could be materially
affected by increased or decreased utilization of our owned healthcare
facilities by enrollees of our health plan. The estimates, judgments and assumptions used by us under Allowance for
Doubtful Accounts, Allowance for Contractual Discounts, Insurance Reserves
and Medical Claims Payable are, we believe, reasonable, but involve inherent
uncertainties as described above, which may or may not be controllable by
management. As a result, the accounting for such items could result in
different amounts if management used different assumptions or if different
conditions occur in future periods. 37




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##### Table of Contents



Selected Operating Data The following table sets forth certain unaudited operating data for each
of the periods presented. Year EndedSeptember 30,2004
    
    2003
    
    2002Acute Care (1):Number of acute care hospitals
at end of period (2)
    
    
    15
    
    
    
    14
    
    
    
    14Beds in service at end of
period
    
    
    2,267
    
    
    
    2,028
    
    
    
    2,012Average length of stay (days)
(3)
    
    
    4.37
    
    
    
    4.44
    
    
    
    4.29Occupancy rates (average beds in
service)
    
    
    49.8
    %
    
    
    50.0
    %
    
    
    45.6
    %Admissions (4)
    
    
    90,749
    
    
    
    83,229
    
    
    
    77,806Adjusted admissions (5)
    
    
    145,591
    
    
    
    138,494
    
    
    
    131,501Patient days (6)
    
    
    396,484
    
    
    
    369,620
    
    
    
    333,922Adjusted patient days (5)
    
    
    614,594
    
    
    
    589,267
    
    
    
    544,337Net patient revenue per adjusted
admission
    
    $
    7,433
    
    
    $
    6,631
    
    
    $
    6,017Acute Care (Same-Facility)
(7):Number of acute care hospitals
at end of period (2)
    
    
    14
    
    
    
    14
    
    
    
    14Beds in service at end of
period
    
    
    2,081
    
    
    
    2,028
    
    
    
    2,012Average length of stay (days)
(3)
    
    
    4.36
    
    
    
    4.44
    
    
    
    4.29Occupancy rates (average beds
in service)
    
    
    49.3
    %
    
    
    50.0
    %
    
    
    45.6
    %Admissions (4)
    
    
    85,030
    
    
    
    83,229
    
    
    
    77,806Adjusted admissions (5)
    
    
    138,406
    
    
    
    138,494
    
    
    
    131,501Patient days (6)
    
    
    370,683
    
    
    
    369,620
    
    
    
    333,922Adjusted patient days (5)
    
    
    582,176
    
    
    
    589,267
    
    
    
    544,337Net patient revenue per
adjusted admission
    
    $
    7,339
    
    
    $
    6,631
    
    
    $
    6,017Health Choice:Covered lives
    
    
    105,372
    
    
    
    70,546
    
    
    
    58,342Medical loss ratio (8)
    
    
    87.2
    %
    
    
    88.1
    %
    
    
    89.0
    %
  (1)
    
    Includes North Vista for the period from February 1, 2004 to
September 30, 2004.(2)
    
    Excludes St. Lukes Behavioral Hospital.(3)
    
    Represents the average number of days that a patient stayed
in our hospitals.(4)
    
    Represents the total number of patients admitted to our
hospitals for stays in excess of 23 hours. Management and investors
use this number as a general measure of inpatient volume.(5)
    
    Adjusted admissions and adjusted patient days are general
measures of combined inpatient and outpatient volume. We compute
adjusted admissions/patient days by multiplying admissions/patient
days by gross patient revenue and then dividing that number by gross
inpatient revenue.(6)
    
    Represents the number of days our beds were occupied by
inpatients over the period.(7)
    
    Excludes North Vista for the period from February 1, 2004 to
September 30, 2004.(8)
    
    Represents medical claims expense as a percentage of premium
revenue, including claims paid to our hospitals. 38




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##### Table of Contents



Results of Operations Summary The
following table sets forth for the periods indicated results of
operations data expressed in dollar terms and as a percentage of net
revenue. The table includes information both on a consolidated basis
and by reportable business segment. Year Ended
    
    Year Ended
    
    Year EndedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2002Consolidated (in thousands):
    
    Amount
    
    Percentage
    
    Amount
    
    Percentage
    
    Amount
    
    PercentageNet Revenue:Acute care revenue
    
    $
    1,096,192
    
    
    
    79.1
    %
    
    $
    934,192
    
    
    
    85.9
    %
    
    $
    811,732
    
    
    
    85.5
    %Premium revenue
    
    
    290,442
    
    
    
    20.9
    %
    
    
    153,964
    
    
    
    14.1
    %
    
    
    138,156
    
    
    
    145
    %Total net revenue
    
    
    1,386,634
    
    
    
    100.0
    %
    
    
    1,088,156
    
    
    
    100.0
    %
    
    
    949,888
    
    
    
    100.0
    %Costs and expenses:Salaries and benefits
    
    
    424,419
    
    
    
    30.6
    %
    
    
    375,509
    
    
    
    34.5
    %
    
    
    324,713
    
    
    
    34.2
    %Supplies
    
    
    176,245
    
    
    
    12.7
    %
    
    
    152,199
    
    
    
    14.0
    %
    
    
    132,960
    
    
    
    14.0
    %Medical claims
    
    
    242,389
    
    
    
    17.5
    %
    
    
    128,595
    
    
    
    11.8
    %
    
    
    116,607
    
    
    
    12.3
    %Rents and leases
    
    
    31,998
    
    
    
    2.3
    %
    
    
    33,545
    
    
    
    3.1
    %
    
    
    31,998
    
    
    
    3.4
    %Other operating expenses
    
    
    202,994
    
    
    
    14.6
    %
    
    
    164,482
    
    
    
    15.0
    %
    
    
    141,342
    
    
    
    14.8
    %Provision for bad debts
    
    
    126,952
    
    
    
    9.2
    %
    
    
    86,231
    
    
    
    7.9
    %
    
    
    72,238
    
    
    
    7.6
    %Interest, net
    
    
    55,340
    
    
    
    4.0
    %
    
    
    53,881
    
    
    
    5.0
    %
    
    
    55,317
    
    
    
    5.8
    %Depreciation and amortization
    
    
    72,138
    
    
    
    5.2
    %
    
    
    56,280
    
    
    
    5.2
    %
    
    
    46,111
    
    
    
    4.9
    %Management fees
    
    
    746
    
    
    
    0.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    52,084
    
    
    
    3.8
    %
    
    
    11,741
    
    
    
    1.1
    %
    
    
    
    
    
    
    Merger expenses
    
    
    19,750
    
    
    
    1.4
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Write-off debt issue costs
    
    
    8,850
    
    
    
    0.6
    %
    
    
    3,900
    
    
    
    0.4
    %
    
    
    
    
    
    
    Total costs and expenses
    
    
    1,413,905
    
    
    
    102.0
    %
    
    
    1,066,363
    
    
    
    98.0
    %
    
    
    921,286
    
    
    
    97.0
    %Earnings before (gain) loss on sale of
assets, minority interests,
and income taxes
    
    
    (27,271
    )
    
    
    (2.0
    )%
    
    
    21,793
    
    
    
    2.0
    %
    
    
    28,602
    
    
    
    3.0
    %Gain (loss) on sale of assets, net
    
    
    3,624
    
    
    
    0.3
    %
    
    
    588
    
    
    
    0.1
    %
    
    
    (7
    )
    
    
    Minority interests
    
    
    (4,305
    )
    
    
    (0.3
    )%
    
    
    (1,828
    )
    
    
    (0.2
    )%
    
    
    (1,042
    )
    
    
    (0.1
    )%Earnings before income taxes
    
    
    (27,952
    )
    
    
    (2.0
    )%
    
    
    20,553
    
    
    
    1.9
    %
    
    
    27,553
    
    
    
    2.9
    %Income tax expense
    
    
    4,473
    
    
    
    0.3
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss) from continuing
operations before cumulative
effect of a change in accounting
principle
    
    
    (32,425
    )
    
    
    (2.3
    )%
    
    
    20,553
    
    
    
    1.9
    %
    
    
    27,553
    
    
    
    2.9
    %Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,497
    )
    
    
    (4.2
    )%Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    972
    
    
    
    0.1
    %Net earnings (loss)
    
    $
    (32,425
    )
    
    
    (2.3
    )%
    
    $
    20,553
    
    
    
    1.9
    %
    
    $
    (10,972
    )
    
    
    (1.2
    )%
 39




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##### Table of Contents



Year Ended
    
    Year Ended
    
    Year EndedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2002Acute Care (in thousands):
    
    Amount
    
    Percentage
    
    Amount
    
    Percentage
    
    Amount
    
    PercentageNet Revenue:Acute care revenue
    
    $
    1,096,192
    
    
    
    99.0
    %
    
    $
    934,192
    
    
    
    99.2
    %
    
    $
    811,732
    
    
    
    99.2
    %Revenue between segments
    
    
    10,821
    
    
    
    1.0
    %
    
    
    7,062
    
    
    
    0.8
    %
    
    
    6,387
    
    
    
    0.8
    %Total net revenue (1)
    
    
    1,107,013
    
    
    
    100.0
    %
    
    
    941,254
    
    
    
    100.0
    %
    
    
    818,119
    
    
    
    100.0
    %Costs and expenses:Salaries and benefits
    
    
    414,797
    
    
    
    37.5
    %
    
    
    368,799
    
    
    
    39.2
    %
    
    
    319,413
    
    
    
    39.0
    %Supplies
    
    
    176,031
    
    
    
    15.9
    %
    
    
    151,896
    
    
    
    16.1
    %
    
    
    132,600
    
    
    
    16.2
    %Rents and leases
    
    
    31,296
    
    
    
    2.8
    %
    
    
    33,033
    
    
    
    3.5
    %
    
    
    31,522
    
    
    
    3.9
    %Other operating expenses
    
    
    193,189
    
    
    
    17.4
    %
    
    
    162,153
    
    
    
    17.2
    %
    
    
    139,487
    
    
    
    17.1
    %Provision for bad debts
    
    
    126,952
    
    
    
    11.5
    %
    
    
    86,231
    
    
    
    9.2
    %
    
    
    72,238
    
    
    
    8.8
    %Interest, net
    
    
    55,340
    
    
    
    5.0
    %
    
    
    53,881
    
    
    
    5.7
    %
    
    
    55,365
    
    
    
    6.8
    %Depreciation and amortization
    
    
    71,947
    
    
    
    6.5
    %
    
    
    56,154
    
    
    
    6.0
    %
    
    
    45,978
    
    
    
    5.6
    %Management fees
    
    
    746
    
    
    
    0.1
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    52,084
    
    
    
    4.7
    %
    
    
    11,741
    
    
    
    1.3
    %
    
    
    
    
    
    
    Merger expenses
    
    
    19,750
    
    
    
    1.8
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Write-off debt issue costs
    
    
    8,850
    
    
    
    0.8
    %
    
    
    3,900
    
    
    
    0.4
    %
    
    
    
    
    
    
    Total costs and expenses
    
    
    1,150,982
    
    
    
    104.0
    %
    
    
    927,788
    
    
    
    98.6
    %
    
    
    796,603
    
    
    
    97.4
    %Earnings before (gain) loss on sale of
assets, minority interests,
and income taxes
    
    
    (43,969
    )
    
    
    (4.0
    )%
    
    
    13,466
    
    
    
    1.4
    %
    
    
    21,516
    
    
    
    2.6
    %Gain (loss) on sale of assets, net
    
    
    3,624
    
    
    
    0.3
    %
    
    
    588
    
    
    
    0.1
    %
    
    
    (7
    )
    
    
    Minority interests
    
    
    (4,305
    )
    
    
    (0.4
    )%
    
    
    (1,828
    )
    
    
    (0.2
    )%
    
    
    (1,042
    )
    
    
    (0.1
    )%Earnings before income taxes
    
    
    (44,650
    )
    
    
    (4.1
    )%
    
    
    12,226
    
    
    
    1.3
    %
    
    
    20,467
    
    
    
    2.5
    %Income tax expense
    
    
    4,473
    
    
    
    0.4
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss) from continuing
operations before cumulative
effect of a change in accounting
principle
    
    
    (49,123
    )
    
    
    (4.5
    )%
    
    
    12,226
    
    
    
    1.3
    %
    
    
    20,467
    
    
    
    2.5
    %Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,497
    )
    
    
    (4.8
    )%Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    972
    
    
    
    0.1
    %Net earnings (loss)
    
    $
    (49,123
    )
    
    
    (4.5
    )%
    
    $
    12,226
    
    
    
    1.3
    %
    
    $
    (18,058
    )
    
    
    (2.2
    )%
  (1)
    
    Revenue between segments is eliminated in our consolidated results. 40




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##### Table of Contents



Year Ended
    
    Year Ended
    
    Year EndedSeptember 30, 2004
    
    September 30, 2003
    
    September 30, 2002Health Choice (in thousands):
    
    Amount
    
    Percentage
    
    Amount
    
    Percentage
    
    Amount
    
    PercentagePremium revenue
    
    $
    290,442
    
    
    
    100.0
    %
    
    $
    153,964
    
    
    
    100.0
    %
    
    $
    138,156
    
    
    
    100.0
    %Total net revenue
    
    
    290,442
    
    
    
    100.0
    %
    
    
    153,964
    
    
    
    100.0
    %
    
    
    138,156
    
    
    
    100.0
    %Costs and expenses:Salaries and benefits
    
    
    9,622
    
    
    
    3.3
    %
    
    
    6,710
    
    
    
    4.4
    %
    
    
    5,300
    
    
    
    3.8
    %Supplies
    
    
    214
    
    
    
    0.1
    %
    
    
    303
    
    
    
    0.2
    %
    
    
    360
    
    
    
    0.3
    %Medical claims (2)
    
    
    253,210
    
    
    
    87.2
    %
    
    
    135,657
    
    
    
    88.1
    %
    
    
    122,994
    
    
    
    89.0
    %Rents and leases
    
    
    702
    
    
    
    0.2
    %
    
    
    512
    
    
    
    0.3
    %
    
    
    476
    
    
    
    0.3
    %Other operating expenses
    
    
    9,805
    
    
    
    3.4
    %
    
    
    2,329
    
    
    
    1.5
    %
    
    
    1,855
    
    
    
    1.4
    %Interest, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    Depreciation and amortization
    
    
    191
    
    
    
    0.1
    %
    
    
    126
    
    
    
    0.1
    %
    
    
    133
    
    
    
    0.1
    %Total costs and expenses
    
    
    273,744
    
    
    
    94.3
    %
    
    
    145,637
    
    
    
    94.6
    %
    
    
    131,070
    
    
    
    94.9
    %Net earnings (loss)
    
    $
    16,698
    
    
    
    5.7
    %
    
    $
    8,327
    
    
    
    5.4
    %
    
    $
    7,086
    
    
    
    5.1
    %
  (2)
    
    Medical claims paid to our hospitals of $10.8 million, $7.1 million and
$6.4 million for the years ended September 30, 2004, 2003 and 2002,
respectively, is eliminated in our consolidated results. 41




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##### Table of Contents



Year Ended September 30, 2004 Compared to Year Ended September 30, 2003 Net revenue Net revenue for the fiscal year ended September 30, 2004 was
$1.4 billion, an increase of $298.5 million, or 27.4%, from $1.1 billion for
the year ended September 30, 2003. The increase in net revenue was a
combination of an increase of $162.0 million in net revenue from hospital
operations, which we refer to as our acute care service segment in our
financial statements, and an increase of $136.5 million in net revenue from
Health Choice. Before eliminations, net revenue from our hospital operations for the year
ended September 30, 2004 was $1.1 billion, an increase of $165.7 million, or
17.6%, from $941.3 million for the year ended September 30, 2003. For the years
ended September 30, 2004 and 2003, approximately $10.8 million and $7.1
million, respectively, of net revenue received from Health Choice by hospitals
and other healthcare entities owned by us was eliminated in consolidation. On a
same facility basis, which excludes the results of North Vista, net revenue
from our hospital operations increased $98.7 million, or 10.5%, which was
primarily driven by a 10.6% increase in net patient revenue per adjusted
admission. The increase in net patient revenue per adjusted admission is
compromised primarily of rate increases and supplemented by increased acuity.
Net adjustments to estimated third-party payor settlements, also known as prior
years contractuals, resulted in a decrease in net revenue of $1.1 million for
the year ended September 30, 2004 compared to a decrease in net revenue of $5.0 million for the prior year. Our net patient revenue per
adjusted admission on a consolidated basis increased 12.1% for the
year ended September 30, 2004 compared to the prior year. Net revenue from Health Choice was $290.4 million for the year ended
September 30, 2004, an increase of $136.4 million, or 88.6%, from $154.0
million for the year ended September 30, 2003. Covered lives under this prepaid
Medicaid plan increased 43.0% from 70,000 at September 30, 2003 to approximately
105,000 at September 30, 2004. The increase in covered lives positively
impacted Health Choices net revenue for the year ended September 30, 2004
compared to the prior year. The growth in covered lives was
due primarily to a new three-year contract between Health Choice and Arizona
Health Care Cost Containment System effective October 1, 2003 and the resulting
expansion of coverage into six new counties. Salaries and benefits Salaries and benefits expense from our hospital
operations for the year ended September 30, 2004 was $414.8 million, or 37.5%,
of acute care net revenue, compared to $368.8 million, or 39.2%, for the prior year. On a same facility basis, which excludes North Vista,
salaries and benefits expense was 37.7% of acute care net revenue for the year ended
September 30, 2004. The 1.5% decrease as a percentage of acute care net revenue
on a same facility basis resulted primarily from a reduction in contract labor
in all our markets. Contract labor, a component of salaries and benefits
expense, decreased by $6.6 million, or a 1.0% decrease as a percent of acute
care net revenue, for the year ended September 30, 2004 compared to the prior year as a result of our operational focus on managing the
utilization of contract nursing services. Nevertheless, during the year ended
September 30, 2004, we experienced a high level of contract labor utilization
in our Arizona market as a result of continued volume growth and increases in
acuity levels. Supplies Supplies expense from our hospital operations for the year
ended September 30, 2004 was $176.0 million, or 15.9% of acute care net
revenue, compared to $151.9 million, or 16.1%, for the prior year. On a same facility basis, supplies expense was 15.9% of acute care net
revenue. The 0.2% decrease as a percentage of acute care net revenue on a same
facility basis was due in part to a decrease in the utilization of high-cost
orthopedic implants and other surgical supplies and a continued focus on
compliance under our national group purchasing contract. Additionally, supply
utilization in the product lines where we have experienced volume growth such
as bariatric and rehabilitation services require less supply costs versus other
surgical and critical care service lines utilizing higher cost implants. Medical claims Medical claims expense before eliminations for Health
Choice increased $117.6 million to $253.2 million for the year ended September
30, 2004 compared to $135.7 million for the prior year as
the result of an increase in enrollment from 70,000 members at September 30,
2003 to approximately 105,000 at September 30, 2004. For the years ended
September 30, 2004 and 2003 approximately $10.8 million and $7.1 million,
respectively, of medical claims expense paid to our hospitals was eliminated in
consolidation. Medical claims expense represents the amounts paid by Health
Choice for health care services provided to its members. Medical claims as a
percentage of premium revenue, before the reimbursement for premium taxes (as
discussed below in Other Operating Expenses), were 89.0% and 88.1% of premium
revenue for the years ended September 30, 2004 and 2003, respectively. The
increase in medical claims expense as a percentage of premium revenue is the 42




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##### Table of Contents



result of increases in medical expenses including drug costs, along with
higher utilization in certain of our counties for outpatient and specialty
services. Rents
and leases Rents and leases for our hospital operations for the
year ended September 30, 2004 was $31.3 million, or 2.8% of acute care net
revenue, compared to $33.0 million, or 3.5%, for the prior year. Other operating expenses Other operating expenses from our hospital
operations for the year ended September 30, 2004 was $193.2 million, or 17.4%
of acute care net revenue, compared to $162.2 million, or 17.2%,
for the prior year. On a same facility basis, other operating expenses
was 17.8% of acute care net revenue for the year ended September 30, 2004. The
0.6% increase as a percentage of acute care net revenue on a same facility
basis was primarily a result of increases in insurance, physician recruiting
and marketing expenses. Insurance expense on a same facility basis increased by
approximately $4.3 million, or in excess of 20.6%, for the year ended September
30, 2004 compared to the prior year. Physician recruiting
expense and marketing expense on a same facility basis increased $2.4 million
and $2.7 million, respectively, during fiscal 2004 compared to fiscal 2003. The
$7.5 million increase in other operating expenses for our Health Choice segment
from $2.3 million at September 30, 2003 to $9.8 million at September 30, 2004
was primarily the result of a new premium tax which was implemented by the
Arizona Health Care Cost Containment System effective October 1, 2003. The
premium tax for the year ended September 30, 2004 equaled $6.0 million and is
offset by a corresponding increase in the premium revenue paid by the Arizona
Health Care Cost Containment System to Health Choice. Provision for bad debts Provision for bad debts for our hospital
operations for the year ended September 30, 2004 was $127.0 million, or 11.5%
of acute care net revenue, compared to $86.2 million, or 9.2%,
for the prior year. On a same facility basis, the provision for bad debts
was $106.3 million, or 10.2% of acute care net revenue for the year ended
September 30, 2004. The 1.0% increase as a percentage of acute care net revenue
on a same facility basis was due primarily to growth in self-pay revenue
resulting from an increase in the number of uninsured patients. Additionally,
the provision for bad debts was negatively impacted by an increase in the
amount of co-payments and deductibles passed on by employers to employees. We
anticipate that growth in self-pay revenue will continue to negatively impact
the provision for bad debts. We continue to focus on our emergency rooms
through facilities redesign, Medicaid eligibility automation and process-flow
improvements. As a result of our focus, point-of-service collections increased
42.0% for the year ended September 30, 2004 compared to the prior year. Depreciation and amortization The $15.8 million increase in depreciation
and amortization expense from $56.3 million for the year ended September 30,
2003 to $72.1 million for the year ended September 30, 2004 was primarily the
result of the acceleration of depreciation on two of our facilities in
anticipation of consolidating these hospitals operations into a new hospital
for 2005. This resulted in $12.0 million of additional depreciation in 2004 as
compared to 2003. The remaining change in depreciation expense for the year
ended September 30, 2004 was the result of incremental depreciation expense on
North Vista and other additions to property and equipment during fiscal years
2003 and 2004. These additions were the result of the implementation of our
capital strategy, pursuant to which we made substantial investments in our
existing facilities. Interest, net The $1.4 million increase in interest expense, net of
interest income, from $53.9 million for the year ended September 30, 2003 to
$55.3 million for the year ended September 30, 2004 was due to an increase in
average debt outstanding offset by a decrease in interest rates during the year
ended September 30, 2004. Borrowings under both our current and former senior
secured credit facilities are and were subject to interest at variable rates. The weighted
average interest rate of outstanding borrowings under the senior secured credit
facilities was approximately 4.5% for the year ended September 30, 2004
compared to 5.7% for the prior year. Minority interests Minority interests increased $2.5 million to $4.3
million in fiscal 2004 compared to $1.8 million in fiscal 2003. Minority
interests represents the third party portion of earnings of our non-wholly owned
subsidiaries included in our consolidated statements of operations. The
increase in minority interests relates primarily to our successful syndication
of four of our subsidiaries during fiscal 2003 and the first three months of
fiscal 2004, pursuant to which each subsidiary sold limited partnership units
to third party investors. 43




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##### Table of Contents



Income tax expense The provision for income taxes for the year ended
September 30, 2004 was $4.5 million. We recorded no provision for income taxes
for the year ended September 30, 2003 due to the use of deferred tax assets
that were previously reserved with a valuation allowance. Net earnings(loss) Net earnings decreased from $20.6 million in fiscal
2003 to a loss of $32.4 million in fiscal 2004. Net earnings for the fiscal
year ended September 30, 2004 includes a $3.6 million gain on the sale of Rocky
Mountain Medical Center property and an $8.9 million write-off of deferred
financing costs resulting from an amendment to our former senior secured
credit facilities. Additionally, net earnings for fiscal 2004 was adversely
affected by a $52.1 million loss on early extinguishment of debt and $19.8
million in merger expenses, both incurred in connection with the Transactions. Year Ended September 30, 2003 Compared to Year Ended September 30, 2002 Net revenue Net revenue for the year ended September 30, 2003 was $1.1
billion, an increase of $138.3 million, or 14.6%, from $949.9 million for the
prior year. The increase in net revenue was a combination of
an increase of $122.5 million in net revenue from hospital operations, which we
refer to as our acute care service segment in our financial statements, and an
increase of $15.8 million in net revenue from Health Choice. Before eliminations, net revenue from our hospital operations for the year
ended September 30, 2003 was $941.3 million, an increase of $123.2 million, or
15.1%, from $818.1 million for the prior year. For
the years ended September 30, 2003 and 2002, approximately $7.1 million and
$6.4 million, respectively, of net revenue received from Health Choice by
hospitals and other healthcare entities owned by us was eliminated in
consolidation. Net adjustments to estimated third-party payor settlements, also
known as prior years contractuals, resulted in a decrease in net revenue of
$5.0 million for the year ended September 30, 2003 compared to an increase in
net revenue of $2.0 million for the prior year. Our net patient
revenue per adjusted admission increased 10.2% for the year ended September 30,
2003 compared to the prior year. The increase in net patient
revenue per adjusted admission was due primarily to rate increases and
increased acuity. Net revenue from Health Choice was $154.0 million for the year ended
September 30, 2003, an increase of $15.8 million, or 11.4%, from $138.2 million
for the prior year. Covered lives under this prepaid
Medicaid plan increased 13.4% from 58,342 at September 30, 2002 to
approximately 70,000 at September 30, 2003. The increase in covered lives
positively impacted Health Choices net revenue for the year ended September
30, 2003 compared to the prior year. The growth in covered
lives was due primarily to a change in the eligibility standards in Arizona
beginning in April 2001, with additional phase-in dates in July 2001 and
October 2001, which increased the Medicaid-eligible population. Salaries and benefits Salaries and benefits expense from our hospital
operations for the year ended September 30, 2003 was $368.8 million, or 39.2%,
of acute care net revenue, compared to $319.4 million, or 39.0%,
for the prior year. The 0.2% increase as a percentage of acute care net
revenue was due primarily to general wage inflation and an increase in employee
benefits and contract labor. Contract labor, a component of salaries and
benefits expense, increased by $9.7 million, or a 0.8% increase as a percent of
acute care net revenue, for the year ended September 30, 2003 compared to the
prior year. This increase was due primarily to significant
volume growth in certain markets requiring greater utilization of agency nurses
and technicians, coupled with increases in rates charged by staffing agencies.
Benefits expense from our hospital operations increased by approximately $10.1
million, or a 0.2% increase as a percent of acute care net revenue, for the
year ended September 20, 2003 compared to the prior year due
primarily to the increased cost and utilization of healthcare benefits for
employees. Supplies Supplies expense from our hospital operations for the year
ended September 30, 2003 was $151.9 million, or 16.1% of acute care net
revenue, compared to $132.6 million, or 16.2%, for the prior year. The 0.1% decrease as a percentage of acute care net revenue was due in
part to increased compliance with our group purchasing contract. This contract
resulted in better pricing generally and greater discounts on certain implants,
offset by an overall increase in acuity levels, which resulted in an increased
utilization of higher cost medical supplies such as cardiac implants and
certain drugs. During the fourth quarter of 2003, we entered into a new
contract for the distribution of pharmaceutical and medical supplies for
certain of our facilities. The change in distributor was made to achieve better
service and price savings on such supplies. 44




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##### Table of Contents



Medical claims Medical claims expense before eliminations for Health
Choice increased $12.7 million to $135.7 million for the year ended September
30, 2003 compared to $123.0 million for the year ended September 30, 2002. For
the years ended September 30, 2003 and 2002, approximately $7.1 million and
$6.4 million, respectively, of medical claims expense paid to our hospitals was
eliminated in consolidation. Medical claims expense represents the amounts paid
by Health Choice for health care services provided to its members. The increase
in medical claims expense was due to the incremental cost of increased
enrollment. Rents and leases Rents and leases for our hospital operations for the
year ended September 30, 2003 was $33.0 million, or 3.5% of acute care net
revenue, compared to $32.0 million, or 3.9%, for the prior year. Other operating expenses Other operating expenses from our hospital
operations for the year ended September 30, 2003 was $162.2 million, or 17.3%
of acute care net revenue, compared to $139.0 million, or 17.1%,
for the prior year. The 0.2% decrease as a percentage of acute care net
revenue was primarily a result of the leveraging of fixed costs through the
growth in net revenue, offset to an extent by an increase in insurance,
physician recruiting and legal expenses. Insurance expense increased by
approximately $3.1 million, or in excess of 17%, for the year ended September
30, 2003 compared to the prior year. Physician recruiting expense
increased by $2.9 million for the year ended September 30, 2003 compared to the
prior year. Additionally, litigation-related expenses for Rocky Mountain
Medical Center during fiscal year 2003 were $2.6 million. Provision for bad debts Provision for bad debts for our hospital
operations for the year ended September 30, 2003 was $86.2 million, or 9.2% of
acute care net revenue, compared to $72.2 million, or 8.8%, for
the prior year. The 0.4% increase as a percentage of acute care net revenue
was due primarily to growth in self-pay revenue resulting from an increase in
the number of uninsured patients. Additionally, the provision for bad debts was
negatively impacted by an increase in the amount of co-payments and deductibles
passed on by employers to employees. Depreciation and amortization The $10.2 million increase in depreciation
and amortization expense from $46.1 million for the year ended September 30,
2002 to $56.3 million for the year ended September 30, 2003 was primarily the
result of the incremental depreciation expense on additions to property and
equipment during fiscal 2003. These additions were the result of the
implementation of our operating strategy, pursuant to which we made substantial
investments in our existing facilities. Additionally, during the fourth quarter
of 2003, we began the acceleration of depreciation on two of our facilities in
anticipation of consolidating these hospitals operations into a new hospital
in fiscal 2005. This resulted in $3.0 million of additional depreciation in
fiscal 2003 as compared to fiscal 2002. Interest, net The $1.4 million decrease in interest expense, net of
interest income, from $55.3 million for the year ended September 30, 2002 to
$53.9 million for the year ended September 30, 2003 was due to a decline in
interest rates during fiscal 2003, offset by additional interest expense
incurred on the 8 1/2% notes. Borrowings under our former senior secured credit
facilities bore interest at variable rates. The weighted average interest rate
of outstanding borrowings under the former senior secured credit facilities was
approximately 5.7% for the fiscal year ended September 30, 2003 compared to
6.5% for the prior year. Loss on early extinguishment of debt During the year ended September 30,
2003, we recorded a $3.9 million loss on debt extinguishment as a result of the
expensing of unamortized deferred financing costs associated with the
refinancing of former senior secured credit facilities. Impairment of assets held for sale During fiscal 2003, we recorded an
impairment charge of $11.7 million on assets held for sale. This charge was
based on the then current estimated net proceeds anticipated from the eventual
sale of the Rocky Mountain Medical Center real property. The charge was taken
to reflect the fact that we were considering the sale of the property to
potential purchasers who would convert its use to retail. 45




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##### Table of Contents



Minority interests Minority interests increased $786,000 to $1.8 million
in fiscal 2003 compared to $1.0 million in fiscal 2002. Minority interests
represents the third party portion of earnings of our non-wholly owned
subsidiaries included in our consolidated statements of operations. The
increase in minority interests relates primarily to our successful syndication
of three of our subsidiaries during fiscal 2003, pursuant to which each
subsidiary sold limited partnership units to third party investors. Income tax expense We recorded no provision for income taxes for the
years ended September 30, 2003 and 2002 due to the use of deferred tax
assets that were previously reserved with a valuation allowance. Cumulative effect of a change in accounting principle During the year ended September 30, 2002, we recorded a $39.5 million cumulative effect of
a change in accounting principle, consisting of a non-cash transitional
impairment charge, related to the adoption of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. Net earnings (loss) Net earnings (loss) increased from $(11.0) million
in fiscal 2002, including the effect of the $39.5 million cumulative effect of
a change in accounting principle discussed above and the $972,000 reversal of
excess loss accrual for discontinued operations, to $20.6 million in fiscal
2003. Net earnings for the year ended September 30, 2003 was adversely affected
by increases in depreciation and amortization expense, the impairment of assets
held for sale and loss on debt extinguishment, along with interest expense on
the 8 1/2% notes. Asset Revaluation During the year ended September 30, 2003, we recorded an impairment charge
of $11.7 million on assets held for sale based on the then current estimated
net proceeds anticipated from the eventual sale of the Rocky Mountain Medical
Center real property. This charge was taken to reflect the fact that we were
considering the sale of the property to potential purchasers who would convert
its use to retail. On February 13, 2004, we sold the Rocky Mountain Medical
Center property. The approximately 23.5-acre property and certain associated
equipment, fixtures and other personal property were acquired by the Board of
Education of the Granite School District (of Salt Lake County) for
approximately $15.2 million. Rocky Mountain Medical Center was a hospital owned
by us that ceased operations in June 2001. We recorded a gain on sale of the
property during the year ended September 30, 2004 of approximately $3.6
million. Summary of Operations by Quarter The following table presents unaudited quarterly operating results for the
years ended September 30, 2004 and 2003. We believe that all necessary
adjustments have been included in the amounts stated below to present fairly
the quarterly results when read in conjunction with the consolidated financial
statements. Results of operations for any particular quarter are not
necessarily indicative of results of operations for a full year or predictive
of future periods. Quarter EndedSept. 30,
    
    June 30,
    
    March 31,
    
    Dec. 31,2004
    
    2004 (2)
    
    2004
    
    2003(in thousands)Net revenue
    
    $
    357,748
    
    
    $
    355,267
    
    
    $
    355,515
    
    
    $
    318,104Net earnings (loss) from continuing
operations before income
taxes (1)
    
    
    8,023
    
    
    
    (54,619
    )
    
    
    10,235
    
    
    
    9,090Net earnings (loss) (1)
    
    
    3,547
    
    
    
    (56,041
    )
    
    
    11,851
    
    
    
    8,218
 Quarter EndedSept. 30,
    
    June 30,
    
    March 31,
    
    Dec. 31,2003
    
    2003
    
    2003
    
    2002(in thousands)Net revenue
    
    $
    283,156
    
    
    $
    278,799
    
    
    $
    271,436
    
    
    $
    254,765Net earnings from continuing
operations before income
taxes (3)
    
    
    2,041
    
    
    
    82
    
    
    
    10,938
    
    
    
    7,492Net earnings (3)
    
    
    2,041
    
    
    
    82
    
    
    
    10,938
    
    
    
    7,492
  (1)
    
    Results for the quarter ended March 31, 2004 include $8.5
million in write-off of debt issue costs and gain on sale of assets
of $3.6 million.(2)
    
    For comparability, the results of IAS and IASIS LLC have been
combined for the quarter ended June 30, 2004. These results include
$51.9 million of loss on the early extinguishment of debt and $19.8
million of merger expenses.(3)
    
    Results for the quarter ended June 30, 2003 include a $3.9
million loss on the extinguishment of debt and an $11.7 million
charge to record the impairment of assets held for sale. 46




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Liquidity and Capital Resources Operating Activities Our primary sources of liquidity are cash flow provided by our operations,
available cash on hand and our revolving credit facility. At September 30,
2004, we had $107.8 million in net working capital, compared to $137.2 million
at September 30, 2003, excluding $11.1 million in assets held for sale. We
generated cash from operating activities of $82.1 million during the year ended September 30, 2004, compared to $117.3 million during the year ended September 30, 2003. Excluding $56.6 million of bond tender premiums,
consent fees and other merger related expenses, cash flows provided by
operating activities for the fiscal year ended September 30, 2004 would have
been $138.7 million. Net accounts receivable increased $12.1 million (including
$17.1 million in North Vista accounts receivable at September 30, 2004) from
$153.2 million at September 30, 2003 to $165.3 million at September 30, 2004.
Since its acquisition on February 1, 2004, we have invested
approximately $14.4
million in working capital at North Vista. Excluding third-party settlement
receivables, our days of net revenue outstanding on a same facility basis at
September 30, 2004 were 49 as compared to 56 at September 30, 2003. Investing Activities Investing activities used $138.0 million during the year ended
September 30, 2004. During the year ended September 30, 2004, we paid
$25.0 million for the acquisition of North Vista, including direct transaction
costs. Capital expenditures, including $12.5 million of amounts accrued in
accounts payable and capital lease obligations for the year ended
September 30, 2004, were approximately $139.6 million. Additionally, we
received $14.9 million in net proceeds from the sale of the Rocky Mountain
Medical Center property. Our growth strategy requires significant capital
expenditures during the year ended September 30, 2005 and future years. We
expect our capital expenditures for fiscal 2005 to be approximately $140.0
million to $150.0 million, including approximately $35.0 to $40.0 million for the construction on
our new hospital in Port Arthur, Texas. We plan to open the new facility in
Port Arthur in our third fiscal quarter of 2005. Additionally, we plan to spend
in the range of $45.0 to $55.0 million for growth and new business projects and
$30.0 million in replacement or maintenance related projects at our hospitals.
Our plan for fiscal 2005 also includes $8.0 million in capital expenditures for
North Vista. At September 30, 2004, we had construction and other various
projects in progress with an estimated cost to complete and equip over the next
three years of approximately $81.5 million. In November 2004, we paid $8.3
million in cash for the purchase of a 47-acre parcel of undeveloped land in the
East Valley of our Phoenix, Arizona market. We are currently evaluating future
expansion opportunities on this property. During the year ended September 30,
2004, we entered into a three-year agreement with an information systems vendor
to provide clinical information technology products and services at our
hospitals. We believe that providing and demonstrating high quality of care is
becoming an increasingly important factor in governmental reimbursement as well
as in negotiating preferred managed care contracting rates. During fiscal 2005,
we expect to spend approximately $7.5 million in hardware and software related
costs in connection with the implementation of this advanced clinical system.
We plan to finance our proposed capital expenditures with borrowings under our
new senior credit facilities, as well as with cash generated from operations,
cash on hand and other capital sources that may become available. 47




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##### Table of Contents



Financing Activities Financing activities provided net cash of $53.7 million during the year ended September 30, 2004. During the year ended September 30, 2004,
we repaid $326.5 million of our 13% and 8 1/2% notes and $321.1 million of our
former senior secured credit facilities in connection with the Transactions.
Cash paid to securities holders of IAS in connection with the Transactions
totaled $677.8 million. In addition, we repaid $1.8 million pursuant to the
terms of our former senior secured credit facilities, repaid $1.0 million
pursuant to the terms of our new senior secured credit facilities, repaid $2.8
million in capital lease obligations and incurred $31.8 million in debt
financing costs. Sources of financing include net proceeds received in
connection with the Transactions, which were comprised of $529.0 million in
cash equity, $425.0 million in new senior secured debt and $475.0 million in
our outstanding 8 3/4% notes. On June 22, 2004, as part of the Transactions, we entered into an amended
and restated senior credit agreement with various lenders and repaid all
outstanding indebtedness under our former senior secured credit facilities. The senior secured credit facilities consist of:  
    
    a senior secured Tranche B term loan of $425.0 million, which
we refer to as the Term Facility; and;
    
    a senior secured revolving credit facility of up to $250.0
million, which we refer to as the Revolving Facility, and which is
available for working capital and other general corporate purposes. The amended and restated senior credit agreement also contains an
accordion feature that permits us to borrow at a later date additional term
loans, maturing no earlier than the Term Facility, in an aggregate amount up to
$300.0 million, subject to the receipt of commitments and the satisfaction of
other conditions (including compliance with the indebtedness covenant under the
notes). No commitments for such increase have been received at this time. The Term Facility has a maturity of seven years, with principal due in 24
consecutive equal quarterly installments in an aggregate annual amount equal to
1.0% of the original principal amount of the Term Facility during the first six
years thereof, with the balance payable in four equal installments in year
seven. Unless terminated earlier, the Revolving Facility has a maturity of six
years. The new senior secured credit facilities are subject to mandatory
prepayment under specific circumstances, including a portion of excess cash
flow, a portion of the net proceeds from an initial public offering, asset
sales, debt issuances and specified casualty events, each subject to various
exceptions. The Tranche B term loan bears interest at a rate equal to LIBOR plus 2.25%
per annum or at our option, the base rate plus 1.25% per annum. The loans under
the Revolving Facility initially bear interest at a rate equal to LIBOR plus
2.50% per annum or at our option, the base rate plus 1.50% per annum, and,
beginning after December 31, 2004, such interest may decline by as much as
0.50% if certain leverage ratios are met. A commitment fee equal to 0.50% per
annum times the daily average undrawn portion of the Revolving Facility accrues
and is payable quarterly in arrears. The amended and restated senior credit agreement provides for capital
expenditure limitations and requires that we comply with various other
financial ratios and tests and contains covenants limiting our ability to,
among other things, incur additional indebtedness; sell or dispose of assets;
make investments, loans or advances; pay certain restricted payments and
dividends; or amend the terms of the 8 3/4% notes. Under the amended and
restated credit agreement, we may acquire hospitals and other related
businesses upon satisfaction of certain requirements, including demonstrating
pro forma compliance with a maximum senior leverage ratio of 3.5 to 1, along
with the maximum total leverage and minimum interest coverage ratios discussed
below. Financial related covenants under the amended and restated senior credit
agreement, applicable to us as of September 30, 2004, include the following
ratios: September 30,2004Actual Total Leverage Ratio
    
    
    4.41Maximum Total Leverage Ratio
    
    
    6.25Actual Interest Coverage Ratio
    
    
    3.16Minimum Interest Coverage Ratio
    
    
    2.00
 48




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##### Table of Contents



Consolidated EBITDA is defined by the
new senior secured credit facilities as earnings (loss) before interest expense, income taxes,
depreciation and amortization, loss on early extinguishment of debt,
write-off of debt issue costs, impairment of assets held for sale,
merger expenses, management fees, gain (loss) on sale of assets,
minority interests, and Rocky Mountain Medical Center legal costs.
Consolidated EBITDA is used as a basis for the ratios above. Failure to comply with these ratios would constitute an event of default under
the new senior secured credit facilities, thereby accelerating all amounts
outstanding under the Term Facility and Revolving Facility, including all
accrued interest thereon, as due and payable upon demand by the lenders. In
addition, the occurrence of an event of default under the new senior secured
credit facilities would constitute an event of default under the indenture
governing the 8 3/4% notes. Such an event would have a material adverse effect
on our liquidity and financial condition. At September 30, 2004, $423.9 million was outstanding under the Term
Facility, no amounts were outstanding under the Revolving Facility and we had
$36.7 million outstanding in letters of credit. During the next twelve months,
we are required to repay $4.3 million in principal under our new senior secured
credit facilities and $3.6 million under our capital lease obligations. On October 13, 1999, IAS issued $230.0 million of 13% senior subordinated
notes due 2009. On May 25, 2000, IAS exchanged all of its outstanding 13%
senior subordinated notes due 2009 for 13% senior subordinated exchange notes
due 2009 registered under the Securities Act of 1933, as amended, which we
refer to as the 13% notes. Terms and conditions of the exchange offer were as
set forth in the registration statement on Form S-4 filed with the Securities
and Exchange Commission that became effective on April 17, 2000. On June 6, 2003, IAS issued $100.0 million of 8 1/2% senior subordinated
notes due 2009. On August 14, 2003, IAS exchanged all of its outstanding 8 1/2%
senior subordinated notes due 2009 for 8 1/2% senior subordinated notes due
2009 registered under the Securities Act, which we refer to as the 8 1/2%
notes. Terms and conditions of the exchange offer were as set forth in the
registration statement on Form S-4 filed with the Securities and Exchange
Commission that became effective on July 16, 2003. In connection with the Transactions, IAS retired approximately 98.5% of
the outstanding principal amount of the 13% notes and 100% of the outstanding
principal amount of the 8 1/2% notes pursuant to a cash tender offer and
consent solicitation. Holders of approximately $3.5 million of the 13% notes
did not tender their notes. Of the proceeds from the Transactions, $3.5 million
was allocated for the future retirement of the outstanding 13% notes, which
were subsequently retired in October 2004. On June 22, 2004, in connection with the Transactions, IASIS LLC and IASIS
Capital Corporation, a wholly owned subsidiary of IASIS LLC formed solely for
the purpose of serving as a co-issuer, or IASIS Capital, issued $475.0 million
aggregate principal amount of 8 3/4% senior subordinated notes due 2014. On
December 15, 2004, IASIS LLC and IASIS Capital exchanged all of their
outstanding 8 3/4% senior subordinated notes due 2014 for 8 3/4% senior
subordinated notes due 2014 registered under the Securities Act, which we refer
to as the 8 3/4% notes. Terms and conditions of the exchange offer were as set
forth in the registration statement on Form S-4 filed with the Securities and
Exchange Commission that became effective on November 12, 2004. The 8 3/4% notes are general unsecured senior subordinated obligations of
the issuers, are subordinated in right of payment to their existing and future
senior debt, are pari passu in right of payment with any of their future senior
subordinated debt and are senior in right of payment to any of their future
subordinated debt. Our existing domestic subsidiaries, other than non-guarantor
subsidiaries which include Health Choice and our non-wholly owned subsidiaries,
are guarantors of the 8 3/4% notes. The indenture governing the notes generally
provides that we may designate other subsidiaries as non-guarantors under
certain circumstances. The 8 3/4% notes are effectively subordinated to all of
the issuers and the guarantors secured debt to the extent of the value of the
assets securing the debt and are structurally subordinated to all liabilities
and commitments (including trade payables and lease obligations) of our
subsidiaries that are not guarantors of the 8 3/4% notes. As of September 30, 2004, we provided a performance guaranty in the form
of a letter of credit in the amount of $20.6 million for the benefit of the
Arizona Health Care Cost Containment System to support our 49




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##### Table of Contents



obligations under the Health Choice contract to provide and pay for
healthcare services. Additionally, Health Choice maintains a cash balance of
$5.0 million and an intercompany demand note with us. The amount of the
performance guaranty is based in part upon the membership in the plan and the
related capitation revenue paid to us. Based upon our current level of operations and anticipated growth, we
believe we have sufficient liquidity to meet our cash requirements over the
short term (next 12 months) and over the next three years. In evaluating the
sufficiency of our liquidity for both the short term and long term, we
considered the expected cash flow to be generated by our operations, cash on
hand and the available borrowings under our senior secured credit facilities
compared to our anticipated cash requirements for debt service, working
capital, capital expenditures and the payment of taxes, as well as funding
requirements for long term liabilities. As a result of this evaluation, we
believe that we will have sufficient liquidity for the next three years to fund
the expenditures set forth in the Tabular Disclosure of Contractual Obligations
below, as well as sufficient liquidity to fund cash required for the payment of
taxes and the capital expenditures required to maintain our facilities during
this period of time. We are unable at this time to extend our evaluation of the
sufficiency of our liquidity beyond three years. We cannot assure you, however,
that our operating performance will generate sufficient cash flow from
operations or that future borrowings will be available under our new senior
secured credit facilities, or otherwise, to enable us to grow our business,
service our indebtedness, including the new senior secured credit facilities
and the 8 3/4% notes, or make anticipated capital expenditures. See Risk
Factors beginning on page 19. One element of our business strategy is to selectively pursue acquisitions
and strategic alliances in existing and new markets. Any acquisitions or
strategic alliances may result in the incurrence of, or assumption by us, of
additional indebtedness. We continually assess our capital needs and may seek
additional financing, including debt or equity as considered necessary to fund
capital expenditures and potential acquisitions or for other corporate
purposes. Our future operating performance, ability to service or refinance the
notes and ability to service and extend or refinance the new senior secured
credit facilities will be subject to future economic conditions and to
financial, business and other factors, many of which are beyond our control.
See Risk Factors beginning on page 19. Off-Balance Sheet Arrangements We are a party to a rent shortfall agreement and certain master lease
agreements with non-affiliated entities and an unconsolidated entity, including
parent-subsidiary guarantees, in the ordinary course of business. We do not
believe we have engaged in any transaction or arrangement with an
unconsolidated entity that is reasonably likely to materially affect liquidity. We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes. Accordingly, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships. 50




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##### Table of Contents



Tabular Disclosure of Contractual Obligations The following table reflects a summary of obligations and commitments
outstanding including both the principal and interest portions of long-term
debt and capital lease obligations, as of September 30, 2004. Payments Due By PeriodLess than
    
    
    
    
    
    
    
    
    
    More than1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 Years
    
    Total(in millions)Contractual Cash
Obligations:Long-term debt, with interest
(1)
    
    $
    68.4
    
    
    $
    128.8
    
    
    $
    128.0
    
    
    $
    1,097.9
    
    
    $
    1,423.1Capital lease obligations,
with interest
    
    
    3.6
    
    
    
    6.5
    
    
    
    1.4
    
    
    
    
    
    
    
    11.5Medical claims
    
    
    55.4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55.4Operating leases
    
    
    24.1
    
    
    
    36.9
    
    
    
    26.7
    
    
    
    72.5
    
    
    
    160.2Purchase obligations
    
    
    7.7
    
    
    
    8.5
    
    
    
    1.8
    
    
    
    
    
    
    
    18.0Subtotal
    
    $
    159.2
    
    
    $
    180.7
    
    
    $
    157.9
    
    
    $
    1,170.4
    
    
    $
    1,668.2
 Amount of Commitment Expiration Per PeriodLess than
    
    
    
    
    
    
    
    
    
    More than1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 Years
    
    Total(in millions)Other Commitments:Construction and improvement
commitments
    
    $
    66.3
    
    
    $
    15.2
    
    
    $
    
    
    
    $
    
    
    
    $
    81.5Guarantees of surety bonds
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.5Letters of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36.7
    
    
    
    36.7Physician commitments
    
    
    6.8
    
    
    
    0.1
    
    
    
    
    
    
    
    
    
    
    
    6.9Other commitments
    
    
    0.6
    
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    2.0Subtotal
    
    $
    74.2
    
    
    $
    15.9
    
    
    $
    0.5
    
    
    $
    37.0
    
    
    $
    127.6Total obligations and
commitments
    
    $
    233.4
    
    
    $
    196.6
    
    
    $
    158.4
    
    
    $
    1,207.4
    
    
    $
    1,795.8
  (1)
    
    We used 4.46%, the weighted average interest rate incurred on our bank
credit facility in 2004, as the assumed interest rate to be paid on
amounts outstanding under the Term Facility which accrues actual interest
at a variable rate. Seasonality The patient volumes and net revenue at our healthcare operations are
subject to seasonal variations and generally are greater during the quarter
ended March 31 than other quarters. These seasonal variations are caused by a
number of factors, including seasonal cycles of illness, climate and weather
conditions in our markets, vacation patterns of both patients and physicians
and other factors relating to the timing of elective procedures. Recent Accounting Pronouncements In December 2003, the Financial Accounting Standards Board issued Revised
Interpretation No. 46, Consolidation of Variable Interest Entities, referred
to as FIN 46R, which requires the consolidation of variable interest entities.
FIN 46R was applicable to financial statements of companies that had interests
in special purpose entities during the calendar year 2003. Effective as of
our second fiscal quarter of 2004, FIN 46R is applicable to financial
statements of companies that have interests in all other types of entities. The
adoption of FIN 46R did not have a material effect on our results of operations
or financial position. 51




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are subject to market risk from exposure to changes in interest rates
based on our financing, investing, and cash management activities. We have in
place $675.0 million of new senior secured credit facilities bearing interest
at variable rates at specified margins above either the agent banks alternate
base rate or its LIBOR rate. The new senior secured credit facilities consist
of the Term Facility, which is a $425.0 million, seven-year Tranche B term
loan, and the Revolving Facility, which is a $250.0 million, six-year revolving
credit facility. Although changes in the alternate base rate or the LIBOR rate
would affect the cost of funds borrowed in the future, we believe the effect,
if any, of reasonably possible near-term changes in interest rates on our
consolidated financial position, results of operations or cash flow would not
be material. As of September 30, 2004, we had variable rate debt of
approximately $424 million. Holding other variables constant, including levels
of indebtedness, a 0.125% increase in interest rates would have had an
estimated impact on pre-tax earnings and cash flows for the next twelve month
period of $530,000. We have not taken any action to cover interest rate risk
and are not a party to any interest rate market risk management activities. The Term Facility bears interest at a rate equal to LIBOR plus 2.25% per
annum or at our option, the base rate plus 1.25% per annum, and will mature in
2011. The loans under the Revolving Facility bear interest at a rate equal to
the LIBOR rate, plus a margin of 2.00% to 2.50% or at our option, the base
rate, plus a margin of 1.00% to 1.50%, such rate in each case depending on our
total leverage ratio. The Revolving Facility matures in 2010. No amounts were
outstanding under the Revolving Facility as of September 30, 2004. At September 30, 2004, the fair market value of the outstanding notes was
$496.4 million, based upon quoted market prices as of that date. 52




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data IASIS Healthcare LLC
Index to Consolidated Financial Statements PageReport of Independent Registered Public Accounting Firm
    
    
    54Consolidated Balance Sheets at September 30, 2004 and 2003 (Predecessor)
    
    
    55Consolidated Statements of Operations for the periods June 23, 2004 to
September 30, 2004 and October 1, 2003 to June 22, 2004 (Predecessor)
and the Years Ended September 30, 2003 and 2002 (Predecessor)
    
    
    56Consolidated Statements of Equity for the periods June 23, 2004 to
September 30, 2004 and October 1, 2003 to June 22, 2004 (Predecessor)
and the Years Ended September 30, 2003 and 2002 (Predecessor)
    
    
    57Consolidated Statements of Cash Flows for the periods June 23, 2004 to
September 30, 2004 and October 1, 2003 to June 22, 2004 (Predecessor)
and the Years Ended September 30, 2003 and 2002 (Predecessor)
    
    
    58Notes to Consolidated Financial Statements
    
    
    60
 53




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To the Board of Directors of
IASIS Healthcare Corporation, sole member of IASIS Healthcare LLC We have audited the accompanying consolidated balance sheet of IASIS Healthcare
LLC as of September 30, 2004 and the consolidated balance sheet of IASIS
Healthcare Corporation (Predecessor) as of September 30, 2003 and the related
consolidated statements of operations, equity and cash flows for the period
from June 23, 2004 to September 30, 2004 (Successor) and the related
consolidated statements of operations, shareholders equity and cash flows for
the period from October 1, 2003 to June 22, 2004 and the years ended September
30, 2003 and 2002 (Predecessor). These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IASIS
Healthcare LLC at September 30, 2004 and the consolidated financial position of
IASIS Healthcare Corporation (Predecessor) at September 30, 2003, and the
consolidated results of its operations and its cash flows for the period from
June 23, 2004 to September 30, 2004 and the consolidated results of its
operations and its cash flows for the period from October 1, 2003 to June 22,
2004 and for the years ended September 30, 2003 and 2002 (Predecessor) in
conformity with U.S. generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, effective
October 1, 2001, the Company changed its method of accounting for goodwill and
other intangible assets. /s/ Ernst & Young LLP Nashville, Tennessee
November 12, 2004 54




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##### Table of Contents



IASIS HEALTHCARE LLC 
 CONSOLIDATED BALANCE
SHEETS  (In thousands except share amounts)
 PredecessorSeptember 30,
    
    September 30,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    98,805
    
    
    $
    101,070Accounts receivable, net of allowance for doubtful accounts of
$94,139 and $47,028, respectively
    
    
    165,280
    
    
    
    153,183Inventories
    
    
    26,253
    
    
    
    23,842Prepaid expenses and other current assets
    
    
    21,297
    
    
    
    16,316Assets held for sale
    
    
    
    
    
    
    11,070Total current assets
    
    
    311,635
    
    
    
    305,481Property and equipment, net
    
    
    532,459
    
    
    
    435,477Goodwill
    
    
    252,204
    
    
    
    252,204Unallocated purchase price
    
    
    585,013
    
    
    
    Other assets, net
    
    
    42,850
    
    
    
    36,837Total assets
    
    $
    1,724,161
    
    
    $
    1,029,999LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    61,295
    
    
    $
    54,172Salaries and benefits payable
    
    
    36,463
    
    
    
    29,842Accrued interest payable
    
    
    13,821
    
    
    
    20,978Medical claims payable
    
    
    55,421
    
    
    
    25,767Other accrued expenses and other current liabilities
    
    
    26,142
    
    
    
    20,529Current portion of long-term debt and capital lease obligations
    
    
    10,728
    
    
    
    5,903Total current liabilities
    
    
    203,870
    
    
    
    157,191Long-term debt and capital lease obligations
    
    
    902,026
    
    
    
    658,531Other long-term liabilities
    
    
    31,596
    
    
    
    27,795Minority interest
    
    
    12,964
    
    
    
    10,383Equity:Members Equity
    
    
    573,705
    
    
    
    Preferred stock  $0.01 par value, authorized 5,000,000 shares at
September 30, 2003; no shares issued and outstanding at September 30,
2003
    
    
    
    
    
    
    Common stock  $0.01 par value, authorized 100,000,000 shares at
September 30, 2003; 31,985,029 shares issued and 31,956,113 shares
outstanding at September 30, 2003
    
    
    
    
    
    
    320Nonvoting common stock  $0.01 par value, authorized 10,000,000
shares at September 30, 2003; no shares issued and outstanding at
September 30, 2003
    
    
    
    
    
    
    Additional paid-in capital
    
    
    
    
    
    
    450,720Treasury stock, at cost, 16,306,541 shares at September 30, 2003
    
    
    
    
    
    
    (155,300
    )Accumulated deficit
    
    
    
    
    
    
    (119,641
    )Total equity
    
    
    573,705
    
    
    
    176,099Total liabilities and equity
    
    $
    1,724,161
    
    
    $
    1,029,999
 See accompanying notes. 55




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##### Table of Contents



IASIS HEALTHCARE LLC 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands)
 PredecessorJune 23, 2004
    
    October 1, 2003
    
    Year Ended
    
    Year Endedthrough
    
    through
    
    September 30, 2003
    
    September 30,September 30, 2004
    
    June 22, 2004
    
    2003
    
    2002Net revenue:Acute care revenue
    
    $
    301,305
    
    
    $
    794,887
    
    
    $
    934,192
    
    
    $
    811,732Premium revenue
    
    
    88,169
    
    
    
    202,273
    
    
    
    153,964
    
    
    
    138,156Total net revenue
    
    
    389,474
    
    
    
    997,160
    
    
    
    1,088,156
    
    
    
    949,888Costs and expenses:Salaries and benefits
    
    
    115,538
    
    
    
    308,881
    
    
    
    375,509
    
    
    
    324,713Supplies
    
    
    46,580
    
    
    
    129,665
    
    
    
    152,199
    
    
    
    132,960Medical claims
    
    
    74,051
    
    
    
    168,338
    
    
    
    128,595
    
    
    
    116,607Rents and Leases
    
    
    8,840
    
    
    
    23,158
    
    
    
    33,545
    
    
    
    31,998Other operating expenses
    
    
    57,346
    
    
    
    145,648
    
    
    
    164,482
    
    
    
    141,342Provision for bad debts
    
    
    39,486
    
    
    
    87,466
    
    
    
    86,231
    
    
    
    72,238Interest expense, net
    
    
    15,667
    
    
    
    39,673
    
    
    
    53,881
    
    
    
    55,317Depreciation and amortization
    
    
    21,648
    
    
    
    50,490
    
    
    
    56,280
    
    
    
    46,111Management fees
    
    
    746
    
    
    
    
    
    
    
    
    
    
    
    Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    11,741
    
    
    
    Loss on early extinguishment of debt
    
    
    232
    
    
    
    51,852
    
    
    
    3,900
    
    
    
    Merger expenses
    
    
    
    
    
    
    19,750
    
    
    
    
    
    
    
    Write-off of debt issue costs
    
    
    
    
    
    
    8,850
    
    
    
    Total costs and expenses
    
    
    380,134
    
    
    
    1,033,771
    
    
    
    1,066,363
    
    
    
    921,286Earnings (loss) before gain (loss) on
sale of assets, minority interests and
income taxes
    
    
    9,340
    
    
    
    (36,611
    )
    
    
    21,793
    
    
    
    28,602Gain (loss) on sale of assets, net
    
    
    (107
    )
    
    
    3,731
    
    
    
    588
    
    
    
    (7
    )Minority interests
    
    
    (1,207
    )
    
    
    (3,098
    )
    
    
    (1,828
    )
    
    
    (1,042
    )Earnings (loss) before income taxes
    
    
    8,026
    
    
    
    (35,978
    )
    
    
    20,553
    
    
    
    27,553Income tax expense
    
    
    3,321
    
    
    
    1,152
    
    
    
    
    
    
    
    Net earnings from continuous operations
before cumulative effect of a
change in accounting principle
    
    
    4,705
    
    
    
    (37,130
    )
    
    
    20,553
    
    
    
    27,553Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39,497
    )Discontinued operations:Reversal of excess loss accrual for
discontinued physician practice
operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    972Net earnings (loss)
    
    $
    4,705
    
    
    $
    (37,130
    )
    
    $
    20,553
    
    
    $
    (10,972
    )
 See accompanying notes. 56




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IASIS HEALTHCARE LLC 
 CONSOLIDATED STATEMENTS OF EQUITY
 (In thousands except share amounts)
 Common Stock
    
    AdditionalPaid-In
    
    Treasury
    
    Accumulated
    
    MembersShares
    
    Par Value
    
    Capital
    
    Stock
    
    Deficit
    
    Equity
    
    TotalBalance at September 30, 2001 (Predecessor)
    
    
    31,932,529
    
    
    $
    320
    
    
    $
    450,496
    
    
    $
    (155,300
    )
    
    $
    (129,222
    )
    
    $
    
    
    
    $
    166,294Shares issued
    
    
    23,334
    
    
    
    
    
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,972
    )
    
    
    
    
    
    
    (10,972
    )Balance at September 30, 2002 (Predecessor)
    
    
    31,955,863
    
    
    
    320
    
    
    
    450,718
    
    
    
    (155,300
    )
    
    
    (140,194
    )
    
    
    
    
    
    
    155,544Stock options exercised
    
    
    250
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,553
    
    
    
    
    
    
    
    20,553Balance at September 30, 2003 (Predecessor)
    
    
    31,956,113
    
    
    
    320
    
    
    
    450,720
    
    
    
    (155,300
    )
    
    
    (119,641
    )
    
    
    
    
    
    
    176,099Net loss for the period October 1,
2003 to June 22, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,130
    )
    
    
    
    
    
    
    (37,130
    )Balance at June 22, 2004 (Predecessor)
    
    
    31,956,113
    
    
    
    320
    
    
    
    450,720
    
    
    
    (155,300
    )
    
    
    (156,771
    )
    
    
    
    
    
    
    138,969Elimination of the Predecessors
equity accounts as a result of the
merger
    
    
    (31,956,113
    )
    
    
    (320
    )
    
    
    (450,720
    )
    
    
    155,300
    
    
    
    156,771
    
    
    
    
    
    
    
    (138,969
    )Initial equity in IASIS Healthcare LLC
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    544,000
    
    
    
    544,000Rollover equity investment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,000
    
    
    
    40,000Sponsor fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,000
    )
    
    
    (15,000
    )Net earnings for the period June 23,
2004 to September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,705
    
    
    
    4,705Balance at September 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    573,705
    
    
    $
    573,705
 57




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##### Table of Contents



IASIS HEALTHCARE LLC 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 June 23, 2004
    
    Predecessorthrough
    
    October 1, 2003
    
    Year Ended
    
    Year EndedSeptember 30,
    
    through
    
    September 30,
    
    September 30,2004
    
    June 22, 2004
    
    2003
    
    2002Cash flows from operating activities:Net earnings (loss)
    
    $
    4,705
    
    
    $
    (37,130
    )
    
    $
    20,553
    
    
    $
    (10,972
    )Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:Depreciation and amortization
    
    
    21,648
    
    
    

    50,490
    
    
    
    56,280
    
    
    
    46,111Minority interests
    
    
    1,207
    
    
    
    3,098
    
    
    
    1,828
    
    
    
    1,042Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,497Reversal of excess accrual for
discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (972
    )Impairment of assets held for sale
    
    
    
    
    
    
    
    
    
    
    11,741
    
    
    
    Deferred income taxes
    
    
    3,234
    
    
    
    
    
    
    
    
    
    
    
    Loss (gain) on sale of assets
    
    
    107
    
    
    
    (3,731
    )
    
    
    (588
    )
    
    
    7Loss on early extinguishment of debt
    
    
    
    
    
    
    14,993
    
    
    
    3,900
    
    
    
    Write-off of debt issue costs
    
    
    
    
    
    
    8,850
    
    
    
    Changes in operating assets and liabilities, net of
acquisition and disposal:Accounts receivable
    
    
    8,722
    
    
    
    (8,542
    )
    
    
    1,413
    
    
    
    (6,427
    )Establishment of accounts receivable of
recent acquisition
    
    
    
    
    
    
    (11,325
    )
    
    
    
    
    
    
    Inventories, prepaid expenses and other
current assets
    
    
    (1,581
    )
    
    
    (5,656
    )
    
    
    (2,356
    )
    
    
    (3,706
    )Accounts payable and other accrued liabilities
    
    
    25,978
    
    
    
    6,991
    
    
    
    24,508
    
    
    
    12,525Net cash provided by operating activities
    
    
    64,020
    
    
    
    18,038
    
    
    
    117,279
    
    
    
    77,105Cash flows from investing activities:Purchase of property and equipment
    
    
    (44,806
    )
    
    
    (82,265
    )
    
    
    (80,600
    )
    
    
    (47,625
    )Acquisitions including working capital settlement
payments
    
    
    (1,950
    )
    
    
    (23,032
    )
    
    
    Purchase of real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (55,338
    )Proceeds from sale of assets
    
    
    
    
    
    
    14,928
    
    
    
    3,205
    
    
    
    148Change in other assets
    
    
    797
    
    
    
    (1,650
    )
    
    
    (2,853
    )
    
    
    (5,377
    )Net cash used in investing activities
    
    
    (45,959
    )
    
    
    (92,019
    )
    
    
    (80,248
    )
    
    
    (108,192
    )Cash flows from financing activities:Proceeds from issuance of common stock, net
    
    
    
    
    
    
    529,000
    
    
    
    2
    
    
    
    222Proceeds from debt borrowings
    
    
    
    
    
    
    900,000
    
    
    
    589,600
    
    
    
    190,100Cash paid to security holders
    
    
    
    
    
    
    (677,780
    )
    
    
    
    
    
    
    Payment of merger costs incurred by members of
IASIS Investment LLC
    
    
    
    
    
    
    (10,800
    )
    
    
    
    
    
    
    Payment of debt and capital leases
    
    
    (1,852
    )
    
    
    (651,371
    )
    
    
    (516,249
    )
    
    
    (162,019
    )Debt financing costs incurred
    
    
    (349
    )
    
    
    (31,469
    )
    
    
    (14,667
    )
    
    
    (2,587
    )Distribution of minority interests
    
    
    (983
    )
    
    
    (2,510
    )
    
    
    (762
    )
    
    
    (685
    )Proceeds received from (costs paid for) hospital
syndications
    
    
    (15
    )
    
    
    1,784
    
    
    
    6,115
    
    
    
    Net cash provided by (used in) financing activities
    
    
    (3,199
    )
    
    
    56,854
    
    
    
    64,039
    
    
    
    25,031Increase (decrease) in cash and cash equivalents
    
    
    14,862
    
    
    
    (17,127
    )
    
    
    101,070
    
    
    
    (6,056
    )Cash and cash equivalents at beginning of period
    
    
    83,943
    
    
    
    101,070
    
    
    
    
    
    
    
    6,056Cash and cash equivalents at end of period
    
    $
    98,805
    
    
    $
    83,943
    
    
    $
    101,070
    
    
    $
    Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    3,285
    
    
    $
    62,069
    
    
    $
    49,198
    
    
    $
    58,875Cash paid (refund received) for income taxes, net
    
    $
    (3
    )
    
    $
    (105
    )
    
    $
    57
    
    
    $
    (1,830
    )
 58




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##### Table of Contents



IASIS HEALTHCARE LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)(In thousands) PredecessorJune 23, 2004
    
    October 1,through
    
    2003
    
    Year Ended
    
    Year EndedSeptember 30,
    
    through
    
    September
    
    September2004
    
    June 22, 2004
    
    30, 2003
    
    30, 2002Supplemental schedule of noncash investing and
financing activities:Capital lease obligations incurred to
acquire equipment
    
    $
    
    
    
    $
    1,542
    
    
    $
    8,033
    
    
    $
    4,686Property and equipment in accounts payable
    
    $
    11,006
    
    
    $
    13,165
    
    
    $
    
    
    
    $Stock consideration received
    
    $
    
    
    
    $
    40,000
    
    
    $
    
    
    
    $
 See accompanying notes. 59




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##### Table of Contents



IASIS HEALTHCARE LLC 
 NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
 1. Organization and Basis of Presentation IASIS Healthcare Corporation (IAS or the Predecessor) entered into a
definitive merger agreement dated as of May 4, 2004 (the Merger Agreement)
pursuant to which an investor group led by Texas Pacific Group acquired IAS
through a merger on June 22, 2004 (the Merger). In order to consummate the Merger, the investor group established IASIS
Investment LLC, a Delaware -limited liability company (IASIS Investment), and
capitalized it with cash and shares of IASs common stock. The cash
contributed by the investor group was contributed by IASIS Investment to a
wholly owned subsidiary of IASIS Investment, which merged with and into IAS.
In the Merger, IAS issued shares of common and preferred stock to IASIS
Investment, which became the sole stockholder of IAS after giving effect to the
Merger. Prior to the Merger, IAS contributed substantially all of its assets and
liabilities to IASIS Healthcare LLC, a newly formed Delaware limited liability
company (IASIS LLC), in exchange for all of the equity interests in IASIS
LLC. As a result, IAS is a holding company and IASs operations are conducted
by IASIS LLC and its subsidiaries. References herein to the Company are to
IASIS LLC and its subsidiaries and, unless indicated otherwise or the context
requires, include the Predecessor. For a discussion of the Merger and related financing transactions, see
Notes 3 and 4 to these financial statements. The Merger, the related financing
transactions and the use of the proceeds from the financing transactions are
referred to herein as the Transactions. The accompanying consolidated financial statements as of the dates and for
all periods prior to June 23, 2004 reflect the financial position, results of
operations and cash flows of the Predecessor. The consolidated financial
statements as of the dates and for the periods on and after June 23, 2004,
reflect the financial position, results of operations and cash flows of IASIS
LLC. The Merger has been accounted for as a purchase in accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations.Because of this accounting treatment the consolidated financial
statements of IASIS LLC reflect a step-up in basis. IASIS LLC owns and operates medium-sized acute care hospitals in
high-growth urban and suburban markets. At September 30, 2004, the Company
owned or leased 15 acute care hospitals and one behavioral health hospital,
with a total of 2,267 beds in service, located in five regions:  
    
    Salt Lake City, Utah;
    
    Phoenix, Arizona;
    
    Tampa-St. Petersburg, Florida;
    
    Las Vegas, Nevada; and
    
    four cities in Texas, including San Antonio. The Company also owns and operates a Medicaid managed health plan in
Phoenix called Health Choice Arizona, Inc. (Health Choice or the Plan),
serving over 105,000 members at September 30, 2004. In addition, the Company
has an ownership interest in three ambulatory surgery centers. 60




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS The preparation of the financial statements in conformity with U.S.
generally accepted accounting principles 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. The consolidated financial statements include all subsidiaries and
entities under common control of the Company. Control is generally defined by
the Company as ownership of a majority of the voting interest of an entity.
Significant intercompany transactions have been eliminated. Investments in
entities that the Company does not control, but in which it has a substantial
ownership interest and can exercise significant influence, are accounted for
using the equity method. The majority of the Companys expenses are cost of revenue items. Costs
that could be classified as general and administrative by the Company would
include the IASIS LLC corporate office costs, which were $7.4 million, $25.2
million, $32.1 million and $19.1 million, respectively, for the period June 23,
2004 through September 30, 2004, the period October 1, 2003 through June 22,
2004, and the years ended September 30, 2003 and 2002. 2. Significant Accounting Policies Net Revenue The Companys healthcare facilities have entered into agreements with
third-party payors, including government programs and managed care health
plans, under which the facilities are paid based upon established charges, the
cost of providing services, predetermined rates per diagnosis, fixed per diem
rates or discounts from established charges. Net patient revenue is reported at the estimated net realizable amounts
from third-party payors and others for services rendered, including estimated
retroactive adjustments under reimbursement agreements with third-party payors.
Retroactive adjustments are accrued on an estimated basis in the period the
related services are rendered and are adjusted, if necessary, in future periods
when final settlements are determined. Net adjustments to estimated third-party
payor settlements (prior year contractuals) resulted in an increase in net
revenue of $38,000 for the period June 23, 2004 through September 30, 2004; a
decrease in net revenue of $1.1 million for the period October 1, 2003 through
June 22, 2004, a decrease of $5.0 million for the year ended September 30, 2003
and an increase in net revenue of $2.0 million for the year ended September 30,
2002. The calculation of appropriate payments from the Medicare and Medicaid
programs as well as terms governing agreements with other third-party payors
are complex and subject to interpretation. As a result, there is at least a
reasonable possibility that recorded estimates will change by a material amount
in the near term. The Company believes that it is in material compliance with
all applicable laws and regulations and is not aware of any pending or
threatened investigations involving allegations of potential wrongdoing that
would have a material effect on the Companys financial statements. Compliance
with such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties and exclusion from the Medicare and Medicaid programs. The Company provides care without charge to patients who are financially
unable to pay for the healthcare services they receive. Because the Company
does not pursue collection of amounts determined to qualify as charity care,
they are not reported in net revenue. Health Choice is a prepaid Medicaid managed health plan that derives
approximately 100% of its revenue through a contract with the Arizona Health
Care Cost Containment System (AHCCCS) to provide specified health services
through contracted providers to qualified Medicaid enrollees. Revenue generated
under the AHCCCS contract with Health Choice represented approximately 23%,
20%, 14% and 15% of the net revenue of the Company for the periods ended
September 30, 2004 and June 22, 2004 and years ended September 30, 2003 and
2002, 61




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS respectively. Health Choice entered into a new three year contract with
AHCCCS effective October 1, 2003. The new contract provides AHCCCS with two
one-year renewal options following the initial term. Contractually, Health
Choice is reimbursed by AHCCCS for healthcare costs that exceed stated amounts
at a rate ranging from 75% to 100% of qualified healthcare costs in excess of
stated levels of $5,000 to $35,000, depending on eligibility classification of
the member. Qualified costs must be incurred during the contract year and are
the lesser of the amount paid by the Plan or the AHCCCS fee schedule.
Reinsurance recoveries are recognized under the contract with AHCCCS when
healthcare costs exceed stated amounts as provided under the contract including
estimates of such costs at the end of each accounting period. Capitation
payments received by Health Choice are recognized as revenue in the month that
members are entitled to healthcare services. Cash and Cash Equivalents The Company considers highly liquid investments with original maturities
of three months or less to be cash equivalents. The Company maintains its cash
and cash equivalents balances primarily with high credit quality financial
institutions. The Company manages its credit exposure by placing its
investments in high quality securities and by periodically evaluating the
relative credit standing of the financial institution. Accounts Receivable The Company receives payments for services rendered from federal and state
agencies (under the Medicare, Medicaid and TRICARE programs), managed care
health plans, commercial insurance companies, employers and patients. During
the periods ended September 30, 2004 and June 22, 2004 and the years ended
September 30, 2003 and 2002 approximately 42%, 39%, 40% and 39%, respectively,
of the Companys net patient revenue related to patients participating in the
Medicare and Medicaid programs. The Company recognizes that revenue and
receivables from government agencies are significant to its operations, but
does not believe that there are significant credit risks associated with these
government agencies. The Company believes that concentration of credit risk
from other payors is limited by the number of patients and payors. Net Medicare settlement receivables estimated as of September 30, 2004 and
2003 and included in accounts receivable in the accompanying consolidated
balance sheets approximated $9.6 million and $4.5 million, respectively. Inventories Inventories, principally medical supplies, implants and pharmaceuticals,
are stated at the lower of average cost or market. Long-lived Assets (a) Property and Equipment Property and equipment are stated at cost. Routine maintenance and repairs
are charged to expense as incurred. Expenditures that increase capacities or
extend useful lives are capitalized. Depreciation expense, including
amortization of assets capitalized under capital leases, is computed using the
straight-line method and was $19.7 million, $48.3 million, $52.5 million and
$41.6 million for the periods September 30, 2004 and June 22, 2004 and the
years ended September 30, 2003 and 2002, respectively. Buildings and
improvements are depreciated over estimated useful lives ranging generally from
14 to 40 years. Estimated useful lives of equipment vary generally from 3 to 25
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the terms of the respective leases or their estimated useful lives.
The Company capitalized interest associated with construction projects totaling
$0.8 million, $1.5 million, $1.3 million and $0.8 million, respectively, for
the periods ended September 30, 2004, and June 22, 2004, and the years ended
September 30, 2003 and 2002. The Company adopted Statement of Financial Accounting Standards No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No.
144) effective October 1, 2002. Prior to October 1, 62




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 2002, the Company recognized impairments of long-lived assets in accordance
with SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. In accordance with SFAS No. 144, when
events, circumstances or operating results indicate that the carrying values of
certain long-lived assets and related identifiable intangible assets (excluding
goodwill) that are expected to be held and used might be impaired, the Company
considers the recoverability of assets to be held and used by comparing the
carrying amount of the assets to the present value of future net cash flows
expected to be generated by the assets. If assets are identified as impaired,
the impairment is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets as determined by independent
appraisals or estimates of discounted future cash flows. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. (b) Goodwill Effective October 1, 2001, the Company adopted the provisions of SFAS No.
141, Business Combinations, and SFAS No. 142 Goodwill and Other Intangible
Assets. Under the provisions of SFAS No. 142 amortization of goodwill ceased as
of October 1, 2001. As a result of the transitional impairment test required
by SFAS No. 142, the Company recorded an impairment charge to goodwill of $39.5
million as of October 1, 2001. The impairment charge to goodwill is reflected
as a cumulative effect of a change in accounting principle in the accompanying
consolidated statements of operations. The impairment relates to goodwill
associated with the Arizona market included in the acute care service segment
and was based on a discounted cash flow analysis using a discount rate of 17%.
Pursuant to the provisions of SFAS No. 142, goodwill is no longer amortized but
is subject to annual impairment reviews. The Company completed its annual
impairment test of goodwill during 2004 noting no impairment. All of the
Companys goodwill is recorded in the acute care segment. (c) Unallocated Purchase Price Unallocated purchase price of approximately $585.0 million is included in
the accompanying balance sheet as of September 30, 2004 and represents the
preliminary purchase price for IAS pending a final appraisal from an
independent third party. (d) Other Assets Other assets consist primarily of costs associated with the issuance of
debt, which are amortized over the life of the related debt, and costs to
recruit physicians to the Companys markets, which are deferred and amortized
over the term of the respective physician recruitment agreement. Amortization
of deferred financing costs is included in depreciation and amortization
expense. Amortization of physician recruiting costs is included in other
operating expenses and equaled $1.9 million, $4.4 million, $3.9 million and
$1.1 million, respectively, for the periods ended September 30, 2004 and June
22, 2004 and the years ended September 30, 2003 and 2002. Net physician
recruiting costs included in the accompanying consolidated balance sheets at
September 30, 2004 and 2003, equaled $9.8 million and $8.5 million,
respectively. Income Taxes The Company accounts for income taxes under the asset and liability
method. This approach requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. The
Company assesses the likelihood that deferred tax assets will be recovered from
future taxable income to determine whether a valuation allowance should be
established. Minority Interest in Consolidated Entities The consolidated financial statements include all assets, liabilities,
revenues and expenses of less than 100% owned entities controlled by the
Company. Accordingly, management has recorded minority interests in the
earnings and equity of such consolidated entities. 63




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Medical Claims Payable Monthly capitation payments made by Health Choice to physicians and other
healthcare providers are expensed in the month services are contracted to be
performed. Claims expense for non-capitated arrangements is accrued as
services are rendered by hospitals, physicians, and other healthcare providers
during the year. The Plans medical claims expense, including claims paid to
the Companys hospitals in Phoenix, Arizona, was approximately $76.8 million,
$176.4, $135.7 million and $123.0 million for the periods ended September 30,
2004 and June 22, 2004 and the years ended September 30, 2003 and 2002,
respectively. Medical claims payable related to Health Choice include claims received
but not paid and an estimate of claims incurred but not reported. Incurred but
not reported claims are estimated using a combination of historical claims
experience (including severity and payment lag time) and other actuarial
analysis including number of enrollees, age of enrollees and certain enrollee
health indicators to predict the cost of healthcare services provided to
enrollees during any given period. While management believes that its
estimation methodology effectively captures trends in medical claims costs,
actual payments could differ significantly from our estimates given changes in
the healthcare cost structure or adverse experience. Stock Based Compensation Although IASIS LLC has no stock option plan or outstanding stock options,
the Company, through its parent, IASIS Healthcare Corporation, grants stock
options for a fixed number of common shares to employees. SFAS No. 123,
Accounting for Stock-Based Compensation, encourages, but does not require,
companies to record compensation cost for stock-based employee compensate plans
at fair value. The Company has chosen to account for employee stock option
grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employeesand, accordingly, recognizes no compensation expense for the stock
option grants when the exercise price of the options equals, or is greater
than, the market value of the underlying stock on the date of grant. If the Company had measured compensation cost for the stock options
granted under the fair value based method prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, net earnings (loss) would have been
changed to the pro forma amounts set forth below (in thousands): June 23, 2004
    
    Predecessorthrough
    
    October 1, 2003
    
    Year Ended
    
    Year EndedSeptember 30,
    
    through June 22,
    
    September 30,
    
    September 30,2004
    
    2004
    
    2003
    
    2002Net earnings (loss)As reported
    
    $
    4,705
    
    
    $
    (37,130
    )
    
    $
    20,553
    
    
    $
    (10,972
    )Pro forma
    
    
    4,441
    
    
    
    (38,227
    )
    
    
    18,938
    
    
    
    (12,802
    )
 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. Fair Value of Financial Instruments Cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities are reflected in the accompanying consolidated financial
statements at fair value because of the short-term nature of these instruments.
The fair value of the Companys long-term bank facility debt and capital lease
obligations also approximate carrying value as they bear interest at current
market rates. The estimated fair value of the Companys 8 3/4% senior
subordinated notes was approximately $496.4 million at September 30, 2004. The
estimated fair values of the 8 3/4% senior subordinated notes at September 30,
2004 are based upon quoted market prices at that date. 64




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Reclassifications Certain prior period amounts have been reclassified to conform to current
period presentation. Such reclassifications had no material effect on the
financial position and results of operations as previously reported. Recently Issued Accounting Pronouncements In December 2003, the Financial Accounting Standards Board (FASB) issued
Revised Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46R), which requires the consolidation of variable interest entities.
FIN 46R was applicable to financial statements of companies that had interests
in special purpose entities during the calendar year 2003. Effective as of
the Companys second fiscal quarter of 2004, FIN 46R is applicable to financial
statements of companies that have interests in all other types of entities.
The adoption of FIN 46R did not have a material effect on the Companys results
of operations or financial position. Related Party Transaction Pursuant to the terms and conditions of a management agreement among the
Company, Texas Pacific Group and certain other persons, the Company has agreed
to pay Texas Pacific Group and such other persons a monitoring fee of 0.25% of
budgeted net revenue, up to a maximum of $5 million per fiscal year, on a
quarterly basis, during the term of the management agreement, plus reimburse
them for their reasonable disbursements and out-of-pocket expenses. During the
period ended September 30, 2004 the Company paid $746,000 in monitoring fees. Pursuant to the terms and conditions of a stockholders agreement among
IAS, JLL Healthcare, LLC, and certain other stockholders, the Company agreed to
pay certain administrative fees and expenses incurred by JLL Healthcare, LLC
during the term of the stockholders agreement. During the periods from October 1, 2003 through June 22,
2004, and the years ended September 30, 2003 and 2002, the Company paid JLL
Healthcare, LLC approximately $173,000, $360,000 and $450,000, respectively,
for its administrative fees and expenses. The stockholders agreement was
terminated in connection with the Transactions and no amounts were paid to JLL
Healthcare, LLC under the stockholders agreement during the period from June
23, 2004 through September 30, 2004. 3. The Transactions The Merger Pursuant to the Merger Agreement, an investor group led by Texas Pacific
Group acquired IAS on June 22, 2004. In the Merger, IASs security holders
received, in the aggregate, $738.0 million less the amount of certain expenses
and other adjustments. In addition, approximately $647.6 million of existing
indebtedness was refinanced in connection with the Merger. The total
transaction value, including tender premiums, consent fees and other fees and
expenses, was approximately $1.5 billion. In order to consummate the Merger, the investor group established IASIS
Investment and capitalized it with $544.0 million in cash and a contribution of
shares of IASs common stock valued at $40.0 million. The cash contributed by
the investor group was contributed by IASIS Investment to a wholly owned
subsidiary of IASIS Investment, which merged with and into IAS. Prior to the
Merger, IAS contributed substantially all of its assets and liabilities to
IASIS LLC in exchange for all of the equity interests in IASIS LLC. As a
result, IAS is a holding company, IASIS LLC is a wholly-owned subsidiary of
IAS, and IASs operations are conducted by IASIS LLC. The following capitalization and financing transactions occurred in connection with the Merger:  
    
    a cash investment made by the investor group totaling $544.0 million in cash;
    
    a contribution of shares of IAS common stock of $40.0 million; 65




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  
    
    the execution of an amended and restated credit
agreement governing new senior secured credit facilities
providing for a $425.0 million term loan, drawn at closing, and a
$250.0 million revolving credit facility for working capital and
general corporate purposes, which was not drawn at closing as
discussed below; and
    
    the issuance and sale of $475.0 million in aggregate
principal amount of the 8 3/4% notes, as discussed below. The proceeds from the financing transactions were used to:  
    
    pay all amounts due to the security holders of IAS under the terms of the Merger Agreement;
    
    repay all outstanding indebtedness under IASs existing senior secured credit facilities;
    
    repurchase IASs 13% notes and 8 1/2% notes, as
discussed below, and pay the related tender premiums and consent
fees, pursuant to a tender offer and consent solicitation by IAS;
and
    
    pay the fees and expenses related to the Merger and the
related financing transactions. In connection with the Transactions, the Company incurred a loss on early
extinguishment of debt of $51.9 million, which includes tender premiums and
consent fees totaling $36.9 million and the write-off of deferred financing
costs of $15.0 million. In addition, the Company incurred $19.8 million in
merger related expenses, which include legal and advisory costs and special
bonus compensation to management of IAS. The Company also paid a sponsor fee
of $15 million to the investor group, which was recorded as a reduction of the
equity investment received from them. 4. Long-Term Debt and Capital Lease Obligations Long-term debt and capital lease obligations consist of the following (in
thousands): PredecessorSeptember 30,
    
    September 30,2004
    
    2003Senior secured credit facilities
    
    $
    423,938
    
    
    $
    322,875Senior subordinated notes
    
    
    478,500
    
    
    
    330,000Capital lease obligations
    
    
    10,316
    
    
    
    11,559912,754
    
    
    
    664,434Less current maturities
    
    
    10,728
    
    
    
    5,903$
    902,026
    
    
    $
    658,531
 Senior Secured Credit Facilities On February 7, 2003, IAS completed the refinancing of its bank credit
facility to provide for a $475.0 million credit facility in the form of a
$350.0 million, six year term B loan and a $125.0 million, five year revolving
credit facility (the 2003 credit facility). Effective June 6, 2003, the 2003
credit facility was amended to allow for the issuance of IASs 8 1/2% senior
subordinated notes, as discussed below. Proceeds from the 2003 credit facility
were used to refinance amounts outstanding under the Companys former credit
facility and to fund closing and other transaction related costs of $10.6
million incurred in connection with the refinancing. Amounts outstanding under
the 2003 credit facility were repaid with proceeds from the Transactions as
discussed in Note 3. As part of the Transactions, the Company entered into an amended and
restated senior credit agreement with various lenders and Bank of America,
N.A., as administrative agent, and repaid all outstanding indebtedness under
the 2003 credit facility. 66




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS The new senior secured credit facilities consist of a new senior secured
term loan of $425.0 million (the Term Facility) and a new senior secured
revolving credit facility of $250.0 million (the Revolving Facility). The
Term Facility has a maturity of seven years, with principal due in 24
consecutive equal quarterly installments in an aggregate annual amount equal to
1.0% of the original principal amount of the Term Facility during the first six
years thereof, with the balance payable in four equal installments in year
seven. Unless terminated earlier, the Revolving Facility has a single maturity
of six years. The new senior secured credit facilities are also subject to
mandatory prepayment under specific circumstances, including a portion of
excess cash flow, a portion of the net proceeds from an initial public
offering, asset sales, debt issuances and specified casualty events, each
subject to various exceptions. The term loans under the Term Facility bear interest at a rate equal to
LIBOR plus 2.25% per annum or at our option, the base rate plus 1.25% per
annum. The loans under the Revolving Facility initially bear interest at a
rate equal to LIBOR plus 2.50% per annum or at our option, the base rate plus
1.50% per annum, and, beginning after December 31, 2004, may decline by as much
as 0.50% if certain leverage ratios are met. A commitment fee equal to 0.50%
per annum times the daily average undrawn portion of the Revolving Facility
will accrue and will be payable quarterly in arrears. All of the obligations under the new senior secured credit facilities are
guaranteed by IAS and the Companys existing and subsequently acquired or
organized domestic subsidiaries (except Health Choice and Biltmore Surgery
Center Limited Partnership). The new senior secured credit facilities are secured by first priority
security interests in substantially all assets of the Company and the
guarantors thereunder. In addition, the new senior secured credit facilities
are secured by a first priority security interest in 100% of the common
interests of the Company and 100% of the capital stock of each of the Companys
present and future domestic subsidiaries to the extent owned by the Company or
a guarantor, and all intercompany debt owed to the Company or any guarantor. The new senior secured credit facilities contain a number of covenants
that, among other things, limit the Companys ability and the ability of its
subsidiaries to (i) dispose of assets; (ii) incur additional indebtedness;
(iii) incur guarantee obligations; (iv) repay other indebtedness; (v) pay
certain restricted payments and dividends; (vi) create liens on assets or
prohibit liens securing the new senior secured credit facilities; (vii) make
investments, loans or advances; (viii) restrict distributions to the Company;
(ix) make certain acquisitions; (x) engage in mergers or consolidations; (xi)
enter into sale and leaseback transactions; (xii) engage in certain
transactions with subsidiaries and affiliates; or (xiii) amend the terms of the
8 3/4% notes, and otherwise restrict corporate activities. In addition, under
the new senior secured credit facilities, the Company is required to comply
with specified financial ratios and tests, including a minimum interest
coverage ratio, a maximum leverage ratio and maximum capital expenditures. At September 30, 2004, there was $423.9 million outstanding under the Term
Facility loan and no amounts outstanding under the revolving credit facility.
The Term Facility includes a $75.0 million sublimit for letters of credit that
may be issued. At September 30, 2004, the Company had issued $36.7 million in
letters of credit. The Company pays a commitment fee equal to 0.5% of the
average daily amount available under the revolving credit facility. The
weighted average interest rate of outstanding borrowings under the 2003 credit
facility and the Term Facility was approximately 3.8% and 4.6% for the periods
ended September 30, 2004 and June 22, 2004, respectively. 13% Senior Subordinated Notes and 8 1/2% Senior Subordinated Notes On October 13, 1999, IAS issued $230.0 million of 13% senior subordinated
notes due 2009. On May 25, 2000, IAS exchanged all of its outstanding 13%
senior subordinated notes due 2009 for 13% senior subordinated exchange notes
due 2009 registered under the Securities Act of 1933, as amended (the 13%
notes). Terms and conditions of the exchange offer were as set forth in the
registration statement on Form S-4 filed with the Securities and Exchange
Commission that became effective on April 17, 2000. 67




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS On June 6, 2003, IAS issued $100.0 million of 8 1/2% senior subordinated
notes due 2009. On August 14, 2003, IAS exchanged all of its outstanding 8
1/2% senior subordinated notes due 2009 for 8 1/2% senior subordinated notes
due 2009 registered under the Securities Act (the 8 1/2% notes). Terms and
conditions of the exchange offer were as set forth in the registration
statement on Form S-4 filed with the Securities and Exchange Commission that
became effective on July 16, 2003. In connection with the Transactions, on May 6, 2004, IAS commenced a cash
tender offer to purchase any and all of the 13% notes and the 8 1/2% notes.
IAS also commenced a solicitation of consents to proposed amendments to the
indentures governing the notes that would amend or eliminate substantially all
of the restrictive covenants contained in the indentures. As of the consent
payment deadline, holders of approximately 98.5% of the outstanding principal
amount of the 13% notes and 100% of the outstanding principal amount of the 8
1/2% notes had tendered their notes and consented to the applicable proposed
amendments. IAS executed supplemental indentures implementing the proposed
amendments shortly thereafter, thereby terminating withdrawal rights for
tendering holders. The proposed amendments became operative when IAS accepted
for purchase and paid for tendered notes. In October 2004, the remaining $3.5
million of the 13% notes were retired. Such amounts are included in current
liabilities on the Companys balance sheet at September 30, 2004. 8 3/4% Senior Subordinated Notes In connection with the Transactions, on June 22, 2004, the Company and
IASIS Capital Corporation, a wholly owned subsidiary of IASIS LLC formed solely
for the purpose of serving as a co-issuer (IASIS Capital) (IASIS LLC and
IASIS Capital referred to collectively as the Issuers), issued $475.0 million
aggregate principal amount of 8 3/4% senior subordinated notes due 2014. On December 15, 2004, the Issuers exchanged all of their outstanding 8
3/4% senior subordinated notes due 2014 for 8 3/4% senior subordinated notes
dues 2014 registered under the Securities Act (the 8 3/4%
notes). Terms and
conditions of the exchange offer were as set forth in the registration
statement on Form S-4 filed with the Securities and Exchange Commission that
became effective on November 12, 2004. The 8 3/4% notes are general unsecured senior subordinated obligations and
are subordinated in right of payment to all existing and future senior debt of
the Company. The Companys existing domestic subsidiaries, other than
non-guarantor subsidiaries which include Health Choice and the Companys
non-wholly owned subsidiaries, are guarantors of the 8 3/4% notes. The 8 3/4%
notes are effectively subordinated to all of the Issuers and the guarantors
secured debt to the extent of the value of the assets securing the debt and are
structurally subordinated to all liabilities and commitments (including trade
payables and lease obligations) of the Companys subsidiaries that are not
guarantors of the 8 3/4% notes. 68




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Maturities of long-term debt, excluding capital lease obligations at
September 30, 2004 are as follows (in thousands): 2005
    
    $
    7,7502006
    
    
    4,2502007
    
    
    4,2502008
    
    
    4,2502009
    
    
    4,250Thereafter
    
    
    877,688$
    902,438
 5. Acquisitions and Dispositions Acquisition of IASIS Healthcare Corporation As previously discussed in Note 3, IAS entered into the Merger Agreement
dated as of May 4, 2004, pursuant to which an investor group led by Texas
Pacific Group acquired IAS through the Merger on June 22, 2004. The Merger has been accounted for as a purchase in accordance with SFAS
No. 141, Business Combinations. The allocation of the Merger purchase price is
based on preliminary estimates of the fair value of the assets acquired and
liabilities assumed. The preliminary purchase price allocation is subject to
the Company obtaining a final valuation prepared by an independent appraiser.
The preliminary purchase price for IAS, including direct transaction costs,
equaled $1.5 billion, of which $585.0 million remains in unallocated purchase
price on the Companys September 30, 2004 balance sheet. The Company expects a
significant portion of the unallocated purchase to ultimately be allocated to
goodwill. Any goodwill resulting from the purchase price allocation will not
result in additional deductible goodwill for tax purposes. Acquisition of North Vista Hospital Effective as of February 1, 2004, the Predecessor, through a wholly-owned
subsidiary, acquired substantially all of the assets of North Vista Hospital
(formerly known as Lake Mead Hospital Medical Center) in Las Vegas, Nevada
(North Vista). The Predecessor acquired the 198-bed hospital from a
subsidiary of Tenet Healthcare Corporation (Tenet). The net consideration
paid, after working capital adjustments and including direct transaction costs,
was $25.0 million, which was funded with cash on hand. The Tenet subsidiary
retained the accounts receivable related to the operation of the hospital prior
to the acquisition. In addition, the Tenet subsidiary agreed to indemnify the
purchaser for all liabilities related to the operation of the hospital prior to
closing, other than the assumed liabilities. The subsidiarys indemnification
obligations are guaranteed by Tenet. The results of the operations of North
Vista are included in the accompanying consolidated statements of operations
from the effective date of the acquisition. The purchase price for the North Vista acquisition was allocated as
follows (in thousands). TotalFair value of assets acquired:Prepaid assets
    
    $
    105Inventory
    
    
    1,717Property, plant and equipment
    
    
    25,531Assets acquired
    
    
    27,353Liabilities assumed
    
    
    2,371Cash paid for net assets acquired
    
    $
    24,982
 69




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Pro Forma Results The following table shows the unaudited pro forma results of consolidated
operations of the Predecessor as if the North Vista acquisition and the
Transactions (as previously described in Note 3) had occurred at the beginning
of the period presented, after giving effect to certain adjustments, including
the depreciation and amortization of the assets acquired based upon their fair
values, changes in net interest expense resulting from changes to consolidated
debt and invested cash and changes in income taxes (in millions): PredecessorYearOctober 1, 2003
    
    Endedthrough June 22,
    
    September 30,2004
    
    2003Net revenue
    
    $
    1,036
    
    
    $
    1,184Earnings before income taxes
    
    
    13
    
    
    
    16Income tax expense
    
    
    1
    
    
    
    Net earnings
    
    $
    12
    
    
    $
    16
 Results for periods October 1, 2003 through June 22, 2004 exclude the loss
on the early extinguishment of debt totaling $51.9 million and merger expenses
of $19.8 million. Both charges resulted directly from the Transactions and are
excluded because such amounts will not have a continuing impact on the Company.
Results for the year ended September 30, 2003 include an impairment charge of
$11.7 million recorded by the Company to write down the value of the Rocky
Mountain Medical Center property to its estimated realizable value. Sale of Rocky Mountain Medical Center On February 13, 2004, the Predecessor closed the sale of its Rocky
Mountain Medical Center property in Salt Lake City, Utah. The approximately
23.5-acre property and certain associated equipment, fixtures and other
personal property were acquired by the Board of Education of the Granite School
District (of Salt Lake County) for approximately $15.2 million. Rocky Mountain
Medical Center was a hospital owned by the Predecessor that ceased operations
in June 2001. The Company recorded a gain on the sale of the property during
the period ended June 22, 2004 of approximately $3.6 million. 6. Property and Equipment Property and equipment consist of the following (in thousands): PredecessorSeptember 30,2004
    
    September 30,2003Land
    
    $
    37,981
    
    
    $
    34,050Buildings and improvements
    
    
    314,631
    
    
    
    251,206Equipment
    
    
    352,406
    
    
    
    281,141705,018
    
    
    
    566,397Less accumulated depreciation and amortization
    
    
    (242,728
    )
    
    
    (176,846
    )462,290
    
    
    
    389,551Construction-in-progress (estimated cost to
complete at September 30, 2004 - $81.5
million)
    
    
    70,169
    
    
    
    45,926$
    532,459
    
    
    $
    435,477
 70




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Included in equipment are assets leased under capital leases of $14.5
million and $13.7 million, net of accumulated amortization of approximately
$4.1 million and $3.4 million, at September 30, 2004 and 2003, respectively. 7. Members Equity and Stockholders Equity Common Interests of IASIS LLC As of September 30, 2004, all of the common interests of IASIS LLC were
owned by IAS, its sole member. IASIS LLC was formed as a wholly owned
subsidiary of IAS in connection with the Transactions. Shares of Common Stock of IAS As of June 22, 2004, immediately preceding the Merger, IAS had 31,956,113
shares of common stock outstanding. As discussed in Note 3, in connection with
the Merger, holders of shares of common stock of IAS received cash proceeds
totaling $655.4 million. Certain shareholders of IAS contributed 1.8 million
shares of IAS common stock in connection with the Merger to IASIS Investment.
Holders of IAS common stock options received cash proceeds totaling $21.9
million. 8. Stock Options 2000 Stock Option Plan The Predecessor maintained a stock option plan, IASIS Healthcare
Corporation 2000 Stock Option Plan (2000 Stock Option Plan). The maximum
number of shares of common stock reserved for the grant of stock options under
the 2000 Stock Option Plan was 7,208,940, subject to adjustment as provided for
in the 2000 Stock Option Plan. As a condition to the exercise of an option,
optionees agreed to be bound by the terms and conditions of a stockholders
agreement among the Company, JLL Healthcare, LLC, and certain other
stockholders, including restrictions on transferability contained therein. The
options were exercisable over a period not to exceed five years after the date
of grant, subject to earlier vesting provisions as provided for in the 2000
Stock Option Plan. 71




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Information regarding the Predecessors stock option activity for the periods
indicated is summarized below: WeightedOption Price Per
    
    AverageStock Options
    
    Share
    
    Exercise PriceBalance at September 30, 2001
(Predecessor)
    
    
    5,585,797
    
    
    $
    9.5240.00
    
    
    $
    24.31Granted
    
    
    2,415,423
    
    
    $
    9.5240.00
    
    
    $
    24.35Exercised
    
    
    
    
    
    $
    9.52
    
    
    $
    Cancelled/Forfeited
    
    
    (1,425,967
    )
    
    $
    9.5240.00
    
    
    $
    24.29Balance at September 30, 2002
(Predecessor)
    
    
    6,575,253
    
    
    $
    9.5240.00
    
    
    $
    24.32Granted
    
    
    1,166,349
    
    
    $
    9.5240.00
    
    
    $
    24.35Exercised
    
    
    (250
    )
    
    $
    9.52
    
    
    $
    9.52Cancelled/Forfeited
    
    
    (907,648
    )
    
    $
    9.5240.00
    
    
    $
    24.35Balance at September 30, 2003
(Predecessor)
    
    
    6,833,704
    
    
    $
    9.5240.00
    
    
    $
    24.33Granted
    
    
    133,856
    
    
    $
    9.5240.00
    
    
    $
    24.35Exercised
    
    
    (1,792,193
    )
    
    $
    9.52
    
    
    $
    9.52Rolled over
    
    
    (299,900
    )
    
    $
    9.52
    
    
    $
    9.52Cancelled/Forfeited
    
    
    (4,875,467
    )
    
    $
    9.5240.00
    
    
    $
    24.35Balance at June 22, 2004 (Predecessor)
    
    
    
 In connection with the Merger, holders of Predecessor common stock options
effectively exercised 1,792,193 of in-the-money options, receiving cash
proceeds totaling $21.9 million, or $12.24 per share, calculated as the excess
of the $21.76 per share Merger consideration over the option exercise price of
$9.52. In addition, certain holders of 299,900 of in-the-money Predecessor
common stock options (the Rollover Options) elected to rollover and convert
such options into options to purchase an aggregate 3,263 shares of preferred
stock, with an exercise price of $437.48 per share, and 163,150 shares of
common stock, with an exercise price of $8.75 per share, of IASIS Healthcare
Corporation (IASIS LLCs parent company). All remaining outstanding options of
the Predecessor were cancelled upon consummation of the Merger. 2004 Stock Option Plan The IASIS Healthcare Corporation 2004 Stock Option Plan was established to
promote the Companys interests by providing additional incentives to its key
employees, directors, service providers and consultants. The options granted
under the plan represent the right to purchase IAS (the Companys parent)
common stock upon exercise. Each option shall be identified as either an
incentive stock option or a non-qualified stock option. The plan was adopted by
the board of directors and sole stockholder of IAS in connection with the
Transactions. The maximum number of shares of IAS common stock that may be
issued pursuant to options granted under the plan is 1,168,000; provided,
however, that on each anniversary of the closing of the Transactions prior to
an initial public offering, an additional 146,000 shares of common stock will
be available for grant. The options become exercisable over a period not to
exceed five years after the date of grant, subject to earlier vesting
provisions as provided for in the 2004 Stock Option Plan. All options granted
under the 2004 Stock Option Plan expire no later than 10 years from the
respective dates of grant. At September 30, 2004, there were 62,250 options
available for grant. Information regarding the Companys stock option activity for the periods
indicated is summarized below: 2004 Stock Option Plan
    
    Rollover OptionsWeighted
    
    
    
    
    
    
    
    
    
    WeightedOption
    
    Average
    
    
    
    
    
    
    
    
    
    AveragePrice Per
    
    Exercise
    
    
    
    
    
    Option Price
    
    ExerciseOptions
    
    Share
    
    Price
    
    Options
    
    Per Share
    
    PriceBalance at June 23, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted/Rolled over
    
    
    1,105,750
    
    
    $
    20.00
    
    
    $
    20.00
    
    
    
    166,413
    
    
    $
    8.76-$437.48
    
    
    $
    17.16Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cancelled/Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at September 30,
2004
    
    
    1,105,750
    
    
    $
    20.00
    
    
    $
    20.00
    
    
    
    166,413
    
    
    $
    8.76-$437.48
    
    
    $
    223.12
 72




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS The following table summarizes information regarding the options
outstanding and exercisable at September 30, 2004: Options OutstandingWeighted-Number
    
    Average
    
    OptionsOutstanding at
    
    Remaining
    
    Exercisable atExercise
    
    September 30,
    
    Contractual
    
    September 30,Price
    
    2004
    
    Life
    
    2004$    8.75
    
    
    163,150
    
    
    
    6.5
    
    
    
    163,150$  20.00
    
    
    1,105,750
    
    
    
    9.8
    
    
    
    $437.48
    
    
    3,263
    
    
    
    6.5
    
    
    
    3,2631,272,163
    
    
    
    
    
    
    
    166,413
 The per share weighted-average fair value of stock options granted at an
exercise price of $20.00 during the period ended September 30, 2004 was $6.91.
The per share weighted-average fair value of stock options granted at an
exercise price of $9.52 during the period ended June 22, 2004 and the years
ended 2003 and 2002 was $1.63, $1.63 and $1.97, respectively, on the date of
grant. All fair value amounts were determined using a minimum value
option-pricing model based on the following assumptions: PredecessorJune 23, 2004through
    
    October 1, 2003
    
    Year Ended
    
    Year EndedSeptember 30,
    
    through June
    
    September 30,
    
    September 30,2004
    
    22, 2004
    
    2003
    
    2002Risk-free interest rate
    
    
    4.24
    %
    
    
    3.15
    %
    
    
    3.15
    %
    
    
    3.87
    %Expected life
    
    9.8 years
    
    6.0 years
    
    6.0 years
    
    6.0 yearsExpected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 73




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 9. Income Taxes Income tax expense on income from continuing operations consists of the
following (in thousands): (Predecessor)June 23, 2004
    
    October 1, 2003
    
    Year ended
    
    Year endedthrough
    
    through
    
    September 30,
    
    September 30,September 30, 2004
    
    June 22, 2004
    
    2003
    
    2002Current:Federal
    
    $
    
    
    
    $
    (136
    )
    
    $
    
    
    
    $
    State
    
    
    87
    
    
    
    1,288
    
    
    
    
    
    
    
    Deferred:Federal
    
    
    2,700
    
    
    
    
    
    
    
    
    
    
    
    State
    
    
    534
    
    
    
    
    
    
    
    
    
    
    
    $
    3,321
    
    
    $
    1,152
    
    
    $
    
    
    
    $
    
 A reconciliation of the federal statutory rate to the effective income tax
rate applied to earnings before income taxes for the periods ended September
30, 2004, June 22, 2004, September 30, 2003 and 2002 follows (in thousands): (Predecessor)June 23, 2004
    
    October 1, 2003
    
    Year ended
    
    Year endedthrough
    
    through
    
    September 30,
    
    September 30,September 30, 2004
    
    June 22, 2004
    
    2003
    
    2002Federal statutory rate
    
    $
    2,809
    
    
    $
    (12,592
    )
    
    $
    7,194
    
    
    $
    9,644State income taxes, net of
federal income tax benefit
    
    
    404
    
    
    
    837
    
    
    
    
    
    
    
    Other non-deductible expenses
    
    
    78
    
    
    
    4,417
    
    
    
    223
    
    
    
    144Change in valuation
allowance charged to federal
tax provision
    
    
    
    
    
    
    8,097
    
    
    
    (8,235
    )
    
    
    (10,084
    )Other items, net
    
    
    30
    
    
    
    393
    
    
    
    818
    
    
    
    296Provision for income taxes
    
    $
    3,321
    
    
    $
    1,152
    
    
    $
    
    
    
    $
    
 A summary of the items comprising the deferred tax assets and liabilities
at September 30, 2004 and 2003 follows (in thousands): 2004
    
    2003(Predecessor)Assets
    
    Liabilities
    
    Assets
    
    LiabilitiesDepreciation and fixed asset basis differences
    
    $
    
    
    
    $
    49,456
    
    
    $
    
    
    
    $
    35,071Amortization and intangible asset basis differences
    
    
    5,710
    
    
    
    
    
    
    
    24,377
    
    
    
    Allowance for doubtful accounts
    
    
    25,444
    
    
    
    
    
    
    
    3,129
    
    
    
    Professional liability
    
    
    11,288
    
    
    
    
    
    
    
    9,520Accrued expenses and other liabilities
    
    
    10,586
    
    
    
    
    
    
    
    8,766Deductible carryforwards and credits
    
    
    53,117
    
    
    
    
    
    
    
    39,853
    
    
    
    Other, net
    
    
    744
    
    
    
    
    
    
    
    654
    
    
    
    Valuation allowance
    
    
    (57,433
    )
    
    
    
    
    
    
    (51,228
    )
    
    
    Total
    
    $
    49,456
    
    
    $
    49,456
    
    
    $
    35,071
    
    
    $
    35,071
 There were no net deferred income tax assets at September 30, 2004 or
2003. The Company had a net income tax payable balance of $1.4 million at
September 30, 2004, which is included in other current liabilities in the
accompanying consolidated balance sheet. There were no income taxes payable or
receivable at September 30, 2003. The Merger constituted a tax-free transaction to the Company, although the
Merger was accounted for as a purchase for financial statement purposes (see
Note 5 above). Therefore, changes in the carrying values of assets and
liabilities as a result of the purchase price allocation will not affect the
respective tax bases. When the final purchase 74




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS price allocation is completed, changes to the carrying amounts of assets
and liabilities will result in adjustments to certain items of deferred tax
assets and liabilities. The Company maintains a valuation allowance for deferred tax assets it
believes may not be utilized. The valuation allowance increased by $6.2 million
during the year ended September 30, 2004 to offset a net increase in deferred
tax assets. The deferred tax assets and liabilities recorded in the ultimate
purchase price allocation will result in a reduction of the acquired intangible
assets if realized in the future. Between June 23, 2004 and September 30,
2004, the successor utilized approximately $3.2 million of net deferred tax
assets previously reserved by a valuation allowance, which resulted in a $3.2
million decrease to unallocated purchase price from the Transactions. At September 30, 2004, federal and state net operating loss carryforwards
are available to offset future taxable income of approximately $135 million.
The net operating losses begin to expire in 2019. A portion of the loss
carryforward is subject to annual usage limitations after the ownership change
caused by the Merger. The Company has an alternative minimum tax credit
carryforward of $79,000 at September 30, 2004. During the year ended September 30, 2004, the Internal Revenue Service
(IRS) concluded its examination of the Predecessors federal income tax
returns for the years ended September 30, 2000 and 2001. The Company consented
to the adjustments proposed by the IRS, all of which were temporary
differences. As a result of the adjustments, the Company received a refund of
approximately $200,000, attributable to an overpayment of alternative minimum
tax, offset by interest charges on certain temporary differences. The net tax
refund reduced current federal income tax expense for the period October 1,
2003 through June 22, 2004. 10. Contingencies Net Revenue The calculation of appropriate payments from the Medicare and Medicaid
programs as well as terms governing agreements with other third party payors
are complex and subject to interpretation. Final determination of amounts
earned under the Medicare and Medicaid programs often occurs subsequent to the
year in which services are rendered because of audits by the programs, rights
of appeal and the application of numerous technical provisions. As a result,
there is at least a reasonable possibility that recorded estimates will change
by a material amount in the near term. In the opinion of management, adequate
provision has been made for adjustments that may result from such routine
audits and appeals. Professional, General and Workers Compensation Liability Risks The Company is subject to claims and legal actions in the ordinary course
of business, including claims relating to patient treatment and personal
injuries. To cover these types of claims, the Company maintains general
liability and professional liability insurance in excess of self-insured
retentions through a commercial insurance carrier in amounts that the Company
believes to be sufficient for its operations, although, potentially, some
claims may exceed the scope of coverage in effect. Plaintiffs in these matters
may request punitive or other damages that may not be covered by insurance.
The Company is currently not a party to any such proceedings that, in the
Companys opinion, would have a material adverse effect on the Companys
business, financial condition or results of operations. The Company expenses
an estimate of the costs it expects to incur under the self-insured retention
exposure for general and professional liability claims using historical claims
data, demographic factors, severity factors, current incident logs and other
actuarial analysis. As of September 30, 2004 and 2003, the Companys
professional and general liability accrual for asserted and unasserted claims
was approximately $28.8 million and $24.3 million, respectively, which is
included within other long-term liabilities in the accompanying consolidated
balance sheets. The Company is subject to claims and legal actions in the ordinary course
of business relative to workers compensation and other labor and employment
matters. To cover these types of claims, the Company maintains workers
compensation insurance coverage with a self-insured retention. The Company
accrues costs of workers compensation claims based upon estimates derived from
its claims experience. 75




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Health Choice Health Choice has entered into a capitated contract whereby the Plan
provides healthcare services in exchange for fixed periodic and supplemental
payments from AHCCCS. These services are provided regardless of the actual
costs incurred to provide these services. The Company receives reinsurance and
other supplemental payments from AHCCCS to cover certain costs of healthcare
services that exceed certain thresholds. The Company believes the capitated
payments, together with reinsurance and other supplemental payments are
sufficient to pay for the services Health Choice is obligated to deliver. As
of September 30, 2004, the Company has provided a performance guaranty in the
form of a letter of credit in the amount of $20.6 million for the benefit of
AHCCCS to support its obligations under the Health Choice contract to provide
and pay for the healthcare services. Additionally, Health Choice maintains a
cash balance of $5.0 million and an intercompany demand note with the Company.
The amount of the performance guaranty is based in part upon the membership in
the Plan and the related capitation revenue paid to Health Choice. Capital Expenditure Commitments The Company is building a new hospital in Port Arthur, Texas and expanding
and renovating some of its existing facilities to permit additional patient
volume and to provide a greater variety of services. The Company had incurred
approximately $70.2 million in uncompleted projects as of September 30, 2004,
which is included in property and equipment in its accompanying consolidated
balance sheets. At September 30, 2004, the Company had various construction
and other projects in progress with an estimated additional cost to complete
and equip of approximately $81.5 million. Tax Sharing Agreement and Consolidated Group Tax Liabilities Prior to the consummation of the Transactions, the Predecessor and some of
its subsidiaries were included in JLL Healthcare, LLCs consolidated group for
U.S. federal income tax purposes as well as in some consolidated, combined or
unitary groups which included JLL Healthcare, LLC for state, local and foreign
income tax purposes. The Predecessor and JLL Healthcare, LLC entered into a tax
sharing agreement in connection with the recapitalization transaction with
Paracelsus Healthcare Corporation (currently known as Clarent Hospital
Corporation) and the acquisition of hospitals and related facilities from Tenet
Healthcare Corporation that occurred in October 1999. The tax sharing agreement
required the Predecessor to make payments to JLL Healthcare, LLC such that,
with respect to tax returns for any taxable period in which the Predecessor or
any of its subsidiaries were included in JLL Healthcare, LLCs consolidated
group or any combined group including JLL Healthcare, LLC, the amount of taxes
to be paid by the Predecessor would be determined, subject to some adjustments,
as if it and each of its subsidiaries included in JLL Healthcare, LLCs
consolidated group or a combined group including JLL Healthcare, LLC filed
their own consolidated, combined or unitary tax returns. The tax sharing
agreement with JLL Healthcare, LLC terminated on June 22, 2004. IASIS LLC and some of its subsidiaries are included in IASs consolidated
group for U.S. federal income tax purposes as well as in some consolidated,
combined or unitary groups which include IAS for state, local and foreign
income tax purposes. With respect to tax returns for any taxable period in
which IASIS LLC or any of its subsidiaries are included in IASs consolidated
group or any combined group including IAS, the amount of taxes to be paid by
IASIS LLC is determined, subject to some adjustments, as if it and each of its
subsidiaries included in IASs consolidated group or a combined group including
IAS filed their own consolidated, combined or unitary tax returns. Each member of a consolidated group for U.S. federal income tax purposes
is jointly and severally liable for the federal income tax liability of each
other member of the consolidated group. Accordingly, although tax liabilities
will be allocated between the Company and its consolidated group parent, the
Company could be liable in the event that any federal tax liability was
incurred, but not discharged, by any other member of the consolidated group. 76




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Acquisitions The Company may choose to acquire businesses with prior operating
histories. If acquired, such companies may have unknown or contingent
liabilities, including liabilities for failure to comply with healthcare laws
and regulations, such as billing and reimbursement, fraud and abuse and similar
anti-referral laws. Although the Company has policies designed to conform
business practices to its policies following the completion of any
acquisitions, there can be no assurance that the Company will not become liable
for previous activities of prior owners that may later be asserted to be
improper by private plaintiffs or government agencies. Although the Company
generally would seek 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. Other The Company has been advised that its hospital in San Antonio, Texas,
Southwest General Hospital, is a subject of an investigation relating to the
provision of hyperbaric oxygen therapy services. In a letter dated February
11, 2003, the U.S. Attorney for the Western District of Texas stated that the
investigation relates to certain billing practices for these services since
1998. The Company is cooperating with the U.S. Attorneys office with respect
to this investigation. Based on information currently available, the Company
believes the investigation relates primarily to the period when Tenet owned the
hospital. Although the Company is unable to predict the outcome of this
investigation, management does not currently believe it will have a material
adverse effect on the Companys business, financial condition or results of
operations. Tenet and its affiliates are defendants in a civil action brought on
January 9, 2003 in the U.S. District Court for the Central District of
California by the United States for the improper assignment of diagnostic codes
and submitting false claims to Medicare. The litigation stems from an
investigation by the U.S. Department of Justice, in conjunction with the Office
of Inspector General, of certain hospital billings to Medicare for inpatient
stays reimbursed pursuant to diagnosis related groups 79 (pneumonia), 415
(operating room procedure for infectious and parasitic diseases), 416
(septicemia) and 475 (respiratory system diagnosis with mechanical ventilator).
Although hospitals that IAS acquired from Tenet are referenced in the
complaint, all of the actions complained of occurred prior to
December 31, 1998
and thus before the hospitals acquisition by IAS. IAS has informed Tenet that
IAS has no obligation or liability for any of the matters described in the
complaint and that IAS is entitled to indemnification if any damages or relief
were to be sought against IAS in connection with the proceeding. Tenet has
accepted service of process on behalf of these hospitals and has agreed to
indemnify IAS. The Company believes it is in material compliance with all applicable laws
and regulations. Compliance with such laws and regulations can be subject to
future government review and interpretation as well as significant regulatory
action, including fines, penalties and exclusion from the Medicare and Medicaid
programs. 11. Leases The Company leases various buildings, office space and equipment under
capital and operating lease agreements. The leases expire at various times and
have various renewal options. Operating lease rental expense relating
primarily to the rental of buildings and equipment for the periods ended
September 30, 2004 and June 22, 2004 and the years ended September 30, 2003 and
2002 approximated $8.8 million, $23.2 million, $33.5 million and $31.9 million,
respectively. In June 2002, the Company amended one of its facility lease agreements.
The Company exercised an option under the amended lease agreement to extend the
lease for an additional 15-year term with an annual lease cost of $5.25
million, beginning in February 2004. 77




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IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Future minimum payments at September 30, 2004, by fiscal year and in the
aggregate, under capital leases and noncancellable operating leases, net of
sublease income, with initial terms of one year or more consist of the
following (in thousands): Capital
    
    Net OperatingLeases
    
    Leases2005
    
    $
    3,560
    
    
    $
    21,9952006
    
    
    3,402
    
    
    
    19,5922007
    
    
    3,126
    
    
    
    15,5382008
    
    
    1,326
    
    
    
    14,9322009
    
    
    82
    
    
    
    11,076Thereafter
    
    
    
    
    
    
    72,445Total minimum lease payments
    
    
    11,496
    
    
    $
    155,578Amount representing interest (at rates ranging from 5.65% to 11.65%)
    
    
    1,180Present value of net minimum lease payments (including $2.9 million
classified as current)
    
    $
    10,316
 Aggregate future minimum rentals to be received under noncancellable
subleases as of September 30, 2004 were approximately $4.6 million. 12. Discontinued Operations During the fourth quarter of fiscal 2000 the Company recorded an estimated
loss of $7.4 million on the sale and closure of its physician practice
operations. During the year ended September 30, 2002, $1.0 million of
previously recorded loss accruals were reversed because the actual costs of
discontinuing these operations were less than previously estimated. At
September 30, 2004, the remaining accrual for estimated loss on sale and
closure was $1.0 million. Of these costs, $224,703 is expected to be paid
subsequent to fiscal year 2005 and is recorded within other long-term
liabilities in the accompanying consolidated balance sheets. 13. Retirement Plans Substantially all employees who are employed by the Company or its
subsidiaries, upon qualification, are eligible to participate in a defined
contribution 401(k) plan (the Retirement Plan). Employees who elect to
participate generally make contributions from 1% to 20% of their eligible
compensation, and the Company matches, at its discretion, such contributions up
to a maximum percentage. Generally, employees immediately vest 100% in their
own contributions and vest in the employer portion of contributions in a period
not to exceed five years. Company contributions to the Retirement Plan were
approximately $840,000, $2.5 million, $3.1 million and $3.1 million for the
periods ended September 30, 2004 and June 22, 2004 and the years ended
September 30, 2003 and 2002, respectively. 14. Segment and Geographic Information The Companys acute care hospitals and related healthcare businesses are
similar in their activities and the economic environments in which they operate
(i.e., urban and suburban markets). Accordingly, the Companys reportable
operating segments consist of (1) acute care hospitals and related healthcare
businesses, collectively, and (2) its Medicaid managed health plan, Health
Choice. The following is a financial summary by business segment for the
periods indicated: 78




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS For the Period June 23, 2004 through September 30, 2004Acute Care
    
    Health Choice
    
    Eliminations
    
    ConsolidatedNet acute care revenue
    
    $
    301,305
    
    
    $
    
    
    
    $
    
    
    
    $
    301,305Premium revenue
    
    
    
    
    
    
    88,169
    
    
    
    
    
    
    
    88,169Revenue between segments
    
    
    2,790
    
    
    
    
    
    
    
    (2,790
    )
    
    
    Net revenue
    
    
    304,095
    
    
    
    88,169
    
    
    
    (2,790
    )
    
    
    389,474Salaries and benefits
    
    
    112,702
    
    
    
    2,836
    
    
    
    
    
    
    
    115,538Supplies
    
    
    46,513
    
    
    
    67
    
    
    
    
    
    
    
    46,580Medical claims
    
    
    
    
    
    
    76,841
    
    
    
    (2,790
    )
    
    
    74,051Rents and Leases
    
    
    8,602
    
    
    
    238
    
    
    
    
    
    
    
    8,840Other operating expenses
    
    
    54,655
    
    
    
    2,691
    
    
    
    
    
    
    
    57,346Provision for bad debts
    
    
    39,486
    
    
    
    
    
    
    
    
    
    
    
    39,486Adjusted EBITDA(1)
    
    
    42,137
    
    
    
    5,496
    
    
    
    
    
    
    
    47,633Interest expense, net
    
    
    15,667
    
    
    
    
    
    
    
    
    
    
    
    15,667Depreciation and amortization
    
    
    21,587
    
    
    
    61
    
    
    
    
    
    
    
    21,648Management fees
    
    
    746
    
    
    
    
    
    
    
    
    
    
    
    746Loss on early extinguishment of debt
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    232Earnings before loss on sale of
assets, minority interests and
income taxes
    
    $
    3,905
    
    
    $
    5,435
    
    
    $
    
    
    
    $
    9,340Loss on sale of assets, net
    
    
    (107
    )
    
    
    
    
    
    
    
    
    
    
    (107
    )Minority interests
    
    
    (1,207
    )
    
    
    
    
    
    
    
    
    
    
    (1,207
    )Earnings before income taxes
    
    $
    2,591
    
    
    $
    5,435
    
    
    $
    
    
    
    $
    8,026Segment assets
    
    $
    1,713,849
    
    
    $
    10,312
    
    
    
    
    
    
    $
    1,724,161Capital expenditures
    
    $
    44,638
    
    
    $
    168
    
    
    
    
    
    
    $
    44,806
 79




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS For the Period October 1, 2003 through June 22, 2004Predecessor
    
    Acute Care
    
    Health Choice
    
    Eliminations
    
    ConsolidatedNet acute care revenue
    
    $
    794,887
    
    
    $
    
    
    
    $
    
    
    
    $
    794,887Premium revenue
    
    
    
    
    
    
    202,273
    
    
    
    
    
    
    
    202,273Revenue between segments
    
    
    8,031
    
    
    
    
    
    
    
    (8,031
    )
    
    
    Net revenue
    
    
    802,918
    
    
    
    202,273
    
    
    
    (8,031
    )
    
    
    997,160Salaries and benefits
    
    
    302,095
    
    
    
    6,786
    
    
    
    
    
    
    
    308,881Supplies
    
    
    129,518
    
    
    
    147
    
    
    
    
    
    
    
    129,665Medical claims
    
    
    
    
    
    
    176,369
    
    
    
    (8,031
    )
    
    
    168,338Rents and leases
    
    
    22,694
    
    
    
    464
    
    
    
    
    
    
    
    23,158Other operating expenses
    
    
    138,534
    
    
    
    7,114
    
    
    
    
    
    
    
    145,648Provision for bad debts
    
    
    87,466
    
    
    
    
    
    
    
    
    
    
    
    87,466Adjusted EBITDA(1)
    
    
    122,611
    
    
    
    11,393
    
    
    
    
    
    
    
    134,004Interest expense, net
    
    
    39,673
    
    
    
    
    
    
    
    
    
    
    
    39,673Depreciation and amortization
    
    
    50,360
    
    
    
    130
    
    
    
    
    
    
    
    50,490Loss on early extinguishment of debt
    
    
    51,852
    
    
    
    
    
    
    
    
    
    
    
    51,852Merger expenses
    
    
    19,750
    
    
    
    
    
    
    
    
    
    
    
    19,750Write-off of debt issue costs
    
    
    8,850
    
    
    
    
    
    
    
    
    
    
    
    8,850Earnings (loss) before gain on sale of
assets, minority interests and taxes
    
    $
    (47,874
    )
    
    $
    11,263
    
    
    $
    
    
    
    $
    (36,611
    )Gain on sale of assets, net
    
    
    3,731
    
    
    
    
    
    
    
    
    
    
    
    3,731Minority interests
    
    
    (3,098
    )
    
    
    
    
    
    
    
    
    
    
    (3,098
    )Earnings (loss) before income taxes
    
    $
    (47,241
    )
    
    $
    11,263
    
    
    $
    
    
    
    $
    (35,978
    )Capital expenditures
    
    $
    81,945
    
    
    $
    320
    
    
    
    
    
    
    $
    82,265
 80




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS For the Year Ended September 30, 2003Predecessor
    
    Acute Care
    
    Health Choice
    
    Eliminations
    
    ConsolidatedNet acute care revenue
    
    $
    934,192
    
    
    $
    
    
    
    $
    
    
    
    $
    934,192Premium revenue
    
    
    
    
    
    
    153,964
    
    
    
    
    
    
    
    153,964Revenue between segments
    
    
    7,062
    
    
    
    
    
    
    
    (7,062
    )
    
    
    Net revenue
    
    
    941,254
    
    
    
    153,964
    
    
    
    (7,062
    )
    
    
    1,088,156Salaries and benefits
    
    
    368,799
    
    
    
    6,710
    
    
    
    
    
    
    
    375,509Supplies
    
    
    151,896
    
    
    
    303
    
    
    
    
    
    
    
    152,199Medical claims
    
    
    
    
    
    
    135,657
    
    
    
    (7,062
    )
    
    
    128,595Rents and leases
    
    
    33,033
    
    
    
    512
    
    
    
    
    
    
    
    33,545Other operating expenses
    
    
    162,153
    
    
    
    2,329
    
    
    
    
    
    
    
    164,482Provision for bad debts
    
    
    86,231
    
    
    
    
    
    
    
    
    
    
    
    86,231Adjusted EBITDA(1)
    
    
    139,142
    
    
    
    8,453
    
    
    
    
    
    
    
    147,595Interest expense, net
    
    
    53,881
    
    
    
    
    
    
    
    
    
    
    
    53,881Depreciation and amortization
    
    
    56,154
    
    
    
    126
    
    
    
    
    
    
    
    56,280Impairment of assets held for sale
    
    
    11,741
    
    
    
    
    
    
    
    
    
    
    
    11,741Loss on early extinguishment of debt
    
    
    3,900
    
    
    
    
    
    
    
    
    
    
    
    3,900Earnings before gain on sale of
assets, minority interests and
taxes
    
    $
    13,466
    
    
    $
    8,327
    
    
    $
    
    
    
    $
    21,793Gain on sale of assets, net
    
    
    588
    
    
    
    
    
    
    
    
    
    
    
    588Minority interests
    
    
    (1,828
    )
    
    
    
    
    
    
    
    
    
    
    (1,828
    )Earnings before income taxes
    
    $
    12,226
    
    
    $
    8,327
    
    
    $
    
    
    
    $
    20,553Segment assets
    
    $
    1,027,643
    
    
    $
    2,356
    
    
    
    
    
    
    $
    1,029,999Capital expenditures
    
    $
    80,390
    
    
    $
    210
    
    
    
    
    
    
    $
    80,600
 Year ended September 30, 2002Predecessor
    
    Acute Care
    
    Health Choice
    
    Eliminations
    
    ConsolidatedNet acute care revenue
    
    $
    811,732
    
    
    $
    
    
    
    $
    
    
    
    $
    811,732Premium revenue
    
    
    
    
    
    
    138,156
    
    
    
    
    
    
    
    138,156Revenue between segments
    
    
    6,387
    
    
    
    
    
    
    
    (6,387
    )
    
    
    Net revenue
    
    
    818,119
    
    
    
    138,156
    
    
    
    (6,387
    )
    
    
    949,888Salaries and benefits
    
    
    319,413
    
    
    
    5,300
    
    
    
    
    
    
    
    324,713Supplies
    
    
    132,600
    
    
    
    360
    
    
    
    
    
    
    
    132,960Medical claims
    
    
    
    
    
    
    122,994
    
    
    
    (6,387
    )
    
    
    116,607Rents and leases
    
    
    31,522
    
    
    
    476
    
    
    
    
    
    
    
    31,998Other operating expenses
    
    
    139,487
    
    
    
    1,855
    
    
    
    
    
    
    
    141,342Provision for bad debts
    
    
    72,238
    
    
    
    
    
    
    
    
    
    
    
    72,238Adjusted EBITDA(1)
    
    
    122,859
    
    
    
    7,171
    
    
    
    
    
    
    
    130,030Interest, net
    
    
    55,365
    
    
    
    (48
    )
    
    
    
    
    
    
    55,317Depreciation and amortization
    
    
    45,978
    
    
    
    133
    
    
    
    
    
    
    
    46,111Earnings before loss on sale of
assets, minority interests and
taxes
    
    
    21,516
    
    
    
    7,086
    
    
    
    
    
    
    
    28,602Loss on sale of assets
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )Minority interests
    
    
    (1,042
    )
    
    
    
    
    
    
    
    
    
    
    (1,042
    )Earnings before income taxes
    
    $
    20,467
    
    
    $
    7,086
    
    
    $
    
    
    
    $
    27,553Capital expenditures
    
    $
    47,197
    
    
    $
    428
    
    
    
    
    
    
    $
    47,625
  (1)
    
    Adjusted EBITDA represents net earnings (loss) before interest expense,
income taxes, depreciation and amortization, loss on early extinguishment
of debt, write-off of debt issue costs, impairment of assets held for
sale, merger expenses, management fees, gain (loss) on sale of assets, and minority
interests. Merger expenses include legal and advisory expenses and
special bonus compensation of the Predecessor incurred in connection with
the Merger. Management fees represent monitoring and advisory fees paid to
TPG, the Companys majority financial sponsor, and certain other
stockholders. Management routinely calculates and communicates adjusted
EBITDA and believes that it is useful to investors because it is commonly
used as an analytical indicator within the healthcare industry to evaluate
hospital performance, allocate resources and measure leverage capacity and
debt service ability. In addition, the Company uses adjusted EBITDA as a
measure of performance for its business segments and for incentive
compensation purposes. 81




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS Adjusted EBITDA should not be considered as a measure of financial
performance under generally accepted accounting principles (GAAP), and the
items excluded from adjusted EBITDA are significant components in
understanding and assessing financial performance. Adjusted EBITDA should
not be considered in isolation or as an alternative to net income, cash
flows generated by operating, investing, or financing activities or other
financial statement data presented in the consolidated financial statements
as an indicator of financial performance or liquidity. Adjusted EBITDA, as
presented, may not be comparable to similarly titled measures of other
companies. 15. Accrued Expenses and Other Current Liabilities A summary of accrued expenses and other current liabilities consists of
the following (in thousands): September 302004
    
    2003Employee health insurance payable
    
    $
    6,854
    
    
    $
    3,519Taxes other than income taxes
    
    
    6,774
    
    
    
    5,539Workers compensation insurance payable
    
    
    7,800
    
    
    
    6,009Other
    
    
    4,714
    
    
    
    5,462$
    26,142
    
    
    $
    20,529
 16. Allowances for Doubtful Accounts A summary of activity in the Companys allowance for doubtful accounts
follows (in thousands): AccountsWritten Off,Beginning
    
    Provision for
    
    Net of
    
    EndingBalance
    
    Bad Debts
    
    Recoveries
    
    BalanceAllowance for doubtful accounts:Year ended September 30, 2002 (Predecessor)
    
    $
    25,945
    
    
    $
    72,238
    
    
    $
    (63,733
    )
    
    $
    34,450Year ended September 30, 2003 (Predecessor)
    
    
    34,450
    
    
    
    86,231
    
    
    
    (73,653
    )
    
    
    47,028Period October 1, 2003 to June 22, 2004
(Predecessor)
    
    
    47,028
    
    
    
    87,466
    
    
    
    (51,407
    )
    
    
    83,087Period June 23, 2004 to September 30, 2004
    
    $
    83,087
    
    
    $
    39,486
    
    
    $
    (28,434
    )
    
    $
    94,139
 17. Asset Revaluation, Closure and Other Costs Asset Revaluation and Closure Costs Related to Rocky Mountain Medical Center During the third quarter of 2003, the Company recorded an impairment
charge of $11.7 million on assets held for sale. The charge was based on the
current estimated net proceeds anticipated from the eventual sale of the Rocky
Mountain Medical Center real property, assuming the potential purchasers would
convert its use to retail. The Company sold Rocky Mountain Medical Center in
February 2004 as more fully discussed in footnote 5. 82




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS 18. Supplemental Condensed Consolidating Financial Information The 8 3/4% notes described in Note 4 are fully and unconditionally
guaranteed on a joint and several basis by all of the Companys existing
domestic subsidiaries, other than non-guarantor subsidiaries which include
Health Choice and the Companys non-wholly owned subsidiaries. Summarized condensed consolidating balance sheets at September 30, 2004
and 2003, condensed consolidating statements of operations for the periods June
23, 2004 to September 30, 2004 and October 1, 2003 to June 22, 2004 and the
years ended September 30, 2003 and 2002 and condensed consolidating statements
of cash flows for the periods June 23, 2004 to September 30, 2004 and October
1, 2003 to June 22, 2004 and the years ended September 30, 2003 and 2002 for
the Company, segregating the parent company issuer, the subsidiary guarantors,
the subsidiary non-guarantors and eliminations, are found below. 83




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Balance Sheet
September 30, 2004(in thousands) SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedParent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    97,463
    
    
    $
    1,342
    
    
    $
    
    
    
    $
    98,805Accounts receivable, net
    
    
    
    
    
    
    120,936
    
    
    
    44,344
    
    
    
    
    
    
    
    165,280Inventories
    
    
    
    
    
    
    18,320
    
    
    
    7,933
    
    
    
    
    
    
    
    26,253Prepaid expenses and other current assets
    
    
    
    
    
    
    9,542
    
    
    
    11,755
    
    
    
    
    
    
    
    21,297Total current assets
    
    
    
    
    
    
    246,261
    
    
    
    65,374
    
    
    
    
    
    
    
    311,635Property and equipment, net
    
    
    
    
    
    
    340,599
    
    
    
    191,860
    
    
    
    
    
    
    
    532,459Intercompany
    
    
    
    
    
    
    (60,977
    )
    
    
    60,977
    
    
    
    
    
    
    
    Net investment in and advances to subsidiaries
    
    
    871,269
    
    
    
    
    
    
    
    
    
    
    
    (871,269
    )
    
    
    Goodwill
    
    
    
    
    
    
    208,150
    
    
    
    44,054
    
    
    
    
    
    
    
    252,204Unallocated purchase price
    
    
    585,013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    585,013Other assets, net
    
    
    28,977
    
    
    
    10,450
    
    
    
    3,423
    
    
    
    
    
    
    
    42,850Total assets
    
    $
    1,485,259
    
    
    $
    744,483
    
    
    $
    365,688
    
    
    $
    (871,269
    )
    
    $
    1,724,161Liabilities and EquityCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    47,950
    
    
    $
    13,345
    
    
    $
    
    
    
    $
    61,295Salaries and benefits payable
    
    
    
    
    
    
    26,984
    
    
    
    9,479
    
    
    
    
    
    
    
    36,463Accrued interest payable
    
    
    13,821
    
    
    
    (853
    )
    
    
    853
    
    
    
    
    
    
    
    13,821Medical claims payable
    
    
    
    
    
    
    
    
    
    
    55,421
    
    
    
    
    
    
    
    55,421Other accrued expenses and other current liabilities
    
    
    
    
    
    
    24,117
    
    
    
    2,025
    
    
    
    
    
    
    
    26,142Current portion of long-term debt and capital lease
obligations
    
    
    7,750
    
    
    
    1,740
    
    
    
    3,759
    
    
    
    (2,521
    )
    
    
    10,728Total current liabilities
    
    
    21,571
    
    
    
    99,938
    
    
    
    84,882
    
    
    
    (2,521
    )
    
    
    203,870Long-term debt and capital lease obligations
    
    
    894,688
    
    
    
    4,817
    
    
    
    132,862
    
    
    
    (130,341
    )
    
    
    902,026Other long-term liabilities
    
    
    
    
    
    
    31,596
    
    
    
    
    
    
    
    
    
    
    
    31,596Minority interest
    
    
    
    
    
    
    12,964
    
    
    
    
    
    

    
    
    
    
    
    12,964Total liabilities
    
    
    916,259
    
    
    
    149,315
    
    
    
    217,744
    
    
    
    (132,862
    )
    
    
    1,150,456Members equity
    
    
    569,000
    
    
    
    595,168
    
    
    
    147,944
    
    
    
    (738,407
    )
    
    
    573,705Total liabilities and equity
    
    $
    1,485,259
    
    
    $
    744,483
    
    
    $
    365,688
    
    
    $
    (871,269
    )
    
    $
    1,724,161
 84




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Balance Sheet
September 30, 2003
(in thousands) SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedPredecessor
    
    Parent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    100,784
    
    
    $
    286
    
    
    $
    
    
    
    $
    101,070Accounts receivable, net
    
    
    
    
    
    
    112,682
    
    
    
    40,501
    
    
    
    
    
    
    
    153,183Inventories
    
    
    
    
    
    
    15,898
    
    
    
    7,944
    
    
    
    
    
    
    
    23,842Prepaid expenses and other current assets
    
    
    
    
    
    
    9,619
    
    
    
    6,697
    
    
    
    
    
    
    
    16,316Assets held for sale
    
    
    
    
    
    
    11,070
    
    
    
    
    
    
    
    
    
    
    
    11,070Total current assets
    
    
    
    
    
    
    250,053
    
    
    
    55,428
    
    
    
    
    
    
    
    305,481Property and equipment, net
    
    
    
    
    
    
    306,029
    
    
    
    129,448
    
    
    
    
    
    
    
    435,477Intercompany
    
    
    
    
    
    
    (103,842
    )
    
    
    103,842
    
    
    
    
    
    
    
    Net investment in and advances to subsidiaries
    
    
    948,121
    
    
    
    
    
    
    
    
    
    
    
    (948,121
    )
    
    
    Goodwill
    
    
    
    
    
    
    208,150
    
    
    
    44,054
    
    
    
    
    
    
    
    252,204Other assets, net
    
    
    21,472
    
    
    
    11,175
    
    
    
    4,190
    
    
    
    
    
    
    
    36,837Total assets
    
    $
    969,593
    
    
    $
    671,565
    
    
    $
    336,962
    
    
    $
    (948,121
    )
    
    $
    1,029,999Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    41,909
    
    
    $
    12,263
    
    
    $
    
    
    
    $
    54,172Salaries and benefits payable
    
    
    
    
    
    
    22,052
    
    
    
    7,790
    
    
    
    
    
    
    
    29,842Accrued interest payable
    
    
    20,978
    
    
    
    (889
    )
    
    
    889
    
    
    
    
    
    
    
    20,978Medical claims payable
    
    
    
    
    
    
    
    
    
    
    25,767
    
    
    
    
    
    
    
    25,767Other accrued expenses and other current liabilities
    
    
    
    
    
    
    17,037
    
    
    
    3,492
    
    
    
    
    
    
    
    20,529Current portion of long-term debt and capital lease
obligations
    
    
    3,500
    
    
    
    642
    
    
    
    3,747
    
    
    
    (1,986
    )
    
    
    5,903Total current liabilities
    
    
    24,478
    
    
    
    80,751
    
    
    
    53,948
    
    
    
    (1,986
    )
    
    
    157,191Long-term debt and capital lease obligations
    
    
    649,375
    
    
    
    (56,930
    )
    
    
    159,429
    
    
    
    (93,343
    )
    
    
    658,531Other long-term liabilities
    
    
    
    
    
    
    27,795
    
    
    
    
    
    
    
    
    
    
    
    27,795Minority interest
    
    
    
    
    
    
    10,383
    
    
    
    
    
    
    
    
    
    
    
    10,383Total liabilities
    
    
    673,853
    
    
    
    61,999
    
    
    
    213,377
    
    
    
    (95,329
    )
    
    
    853,900Stockholders equity
    
    
    295,740
    
    
    
    609,566
    
    
    
    123,585
    
    
    
    (852,792
    )
    
    
    176,099Total liabilities and stockholders equity
    
    $
    969,593
    
    
    $
    671,565
    
    
    $
    336,962
    
    
    $
    (948,121
    )
    
    $
    1,029,999
 85




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Operations(in thousands) For the Period June 23, 2004 through September 30, 2004SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedParent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedNet revenue:Acute care revenue
    
    $
    
    
    
    $

    214,678
    
    
    $
    89,415
    
    
    $
    (2,788
    )
    
    $
    301,305Premium revenue
    
    
    
    
    
    
    
    
    
    
    88,169
    
    
    
    
    
    
    
    88,169Total net revenue
    
    
    
    
    
    
    214,678
    
    
    
    177,584
    
    
    
    (2,788
    )
    
    
    389,474Costs and expenses:Salaries and benefits
    
    
    
    
    
    
    83,467
    
    
    
    32,071
    
    
    
    
    
    
    
    115,538Supplies
    
    
    
    
    
    
    35,810
    
    
    
    10,770
    
    
    
    
    
    
    
    46,580Medical claims
    
    
    
    
    
    
    
    
    
    
    76,839
    
    
    
    (2,788
    )
    
    
    74,051Rents and Leases
    
    
    
    
    
    
    6,149
    
    
    
    2,691
    
    
    
    
    
    
    
    8,840Other operating expenses
    
    
    
    
    
    
    41,563
    
    
    
    15,783
    
    
    
    
    
    
    
    57,346Provision for bad debts
    
    
    
    
    
    
    32,511
    
    
    
    6,975
    
    
    
    
    
    
    
    39,486Interest expense, net
    
    
    15,667
    
    
    
    
    
    
    
    2,328
    
    
    
    (2,328
    )
    
    
    15,667Depreciation and amortization
    
    
    1,792
    
    
    
    15,920
    
    
    
    3,936
    
    
    
    
    
    
    
    21,648Management fees
    
    
    (1,123
    )
    
    
    
    
    
    
    1,869
    
    
    
    
    
    
    
    746Loss on early extinguishment of debt
    
    
    232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    232Equity in earnings of affiliates
    
    
    (22,266
    )
    
    
    
    
    
    
    
    
    
    
    22,266
    
    
    
    Total costs and expenses
    
    
    (5,698
    )
    
    
    215,420
    
    
    
    153,262
    
    
    
    17,150
    
    
    
    380,134Earnings
(loss) before loss on sale of
assets, minority interests, and income
taxes
    
    
    5,698
    
    
    
    (742
    )
    
    
    24,322
    
    
    
    (19,938
    )
    
    
    9,340Loss on sale of assets, net
    
    
    
    
    
    
    (107
    )
    
    
    
    
    
    
    
    
    
    
    (107
    )Minority interests
    
    
    
    
    
    
    (1,207
    )
    
    
    
    
    
    
    
    
    
    
    (1,207
    )Earnings
(loss) before income taxes
    
    
    5,698
    
    
    
    (2,056
    )
    
    
    24,322
    
    
    
    (19,938
    )
    
    
    8,026Income tax expense
    
    
    3,321
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,321Net earnings (loss)
    
    $
    2,377
    
    
    $
    (2,056
    )
    
    $
    24,322
    
    
    $
    (19,938
    )
    
    $
    4,705
 86




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Operations (continued)(in thousands) For the Period October 1, 2003 through June 22, 2004SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedPredecessor
    
    Parent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedNet revenue:Acute care revenue
    
    $
    
    
    
    $
    563,697
    
    
    $
    239,221
    
    
    $
    (8,031
    )
    
    $
    794,887Premium revenue
    
    
    
    
    
    
    
    
    
    
    202,273
    
    
    
    
    
    
    
    202,273Total net revenue
    
    
    
    
    
    
    563,697
    
    
    
    441,494
    
    
    
    (8,031
    )
    
    
    997,160Costs and expenses:Salaries and benefits
    
    
    
    
    
    
    223,954
    
    
    
    84,927
    
    
    
    
    
    
    
    308,881Supplies
    
    
    
    
    
    
    99,439
    
    
    
    30,226
    
    
    
    
    
    
    
    129,665Medical claims
    
    
    
    
    
    
    
    
    
    
    176,369
    
    
    
    (8,031
    )
    
    
    168,338Rents and Leases
    
    
    
    
    
    
    16,180
    
    
    
    6,978
    
    
    
    
    
    
    
    23,158Other operating expenses
    
    
    
    
    
    
    105,238
    
    
    
    40,410
    
    
    
    
    
    
    
    145,648Provision for bad debts
    
    
    
    
    
    
    66,877
    
    
    
    20,589
    
    
    
    
    
    
    
    87,466Interest expense, net
    
    
    39,673
    
    
    
    
    
    
    
    7,753
    
    
    
    (7,753
    )
    
    
    39,673Depreciation and amortization
    
    
    2,293
    
    
    
    38,816
    
    
    
    9,381
    
    
    
    
    
    
    
    50,490Management fees
    
    
    (5,011
    )
    
    
    
    
    
    
    5,011
    
    
    
    
    
    
    
    Write-off of debt issue costs
    
    
    8,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,850Loss on early extinguishment of debt
    
    
    51,852
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,852Merger expenses
    
    
    19,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,750Equity in earnings of affiliates
    
    
    (73,676
    )
    
    
    
    
    
    
    
    
    
    
    73,676
    
    
    
    Total costs and expenses
    
    
    43,731
    
    
    
    550,504
    
    
    
    381,644
    
    
    
    57,892
    
    
    
    1,033,771Earnings (loss) before gain on sale of
assets, minority interests and income
taxes
    
    
    (43,731
    )
    
    
    13,193
    
    
    
    59,850
    
    
    
    (65,923
    )
    
    
    (36,611
    )Gain on sale of assets, net
    
    
    
    
    
    
    3,731
    
    
    
    
    
    
    
    
    
    
    
    3,731Minority interests
    
    
    
    
    
    
    (3,098
    )
    
    
    
    
    
    
    
    
    
    
    (3,098
    )Earnings (loss) before income taxes
    
    
    (43,731
    )
    
    
    13,826
    
    
    
    59,850
    
    
    
    (65,923
    )
    
    
    (35,978
    )Income tax expense
    
    
    1,152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,152Net earnings (loss)
    
    $
    (44,883
    )
    
    $
    13,826
    
    
    $
    59,850
    
    
    $
    (65,923
    )
    
    $
    (37,130
    )
 87




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Year Ended September 30, 2003(in thousands) SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedPredecessor
    
    Parent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedNet revenue:Acute care revenue
    
    $
    
    
    
    $
    640,181
    
    
    $
    301,073
    
    
    $
    (7,062
    )
    
    $
    934,192Premium revenue
    
    
    
    
    
    
    
    
    
    
    153,964
    
    
    
    
    
    
    
    153,964Total net revenue
    
    
    
    
    
    
    640,181
    
    
    
    455,037
    
    
    
    (7,062
    )
    
    
    1,088,156Costs and expenses:
    
    
    Salaries and benefits
    
    
    
    
    
    
    267,637
    
    
    
    107,872
    
    
    
    
    
    
    
    375,509Supplies
    
    
    
    
    
    
    111,419
    
    
    
    40,780
    
    
    
    
    
    
    
    152,199Medical claims
    
    
    
    
    
    
    
    
    
    
    135,657
    
    
    
    (7,062
    )
    
    
    128,595Rents and Leases
    
    
    
    
    
    
    25,560
    
    
    
    7,985
    
    
    
    
    
    
    
    33,545Other operating expenses
    
    
    
    
    
    
    117,374
    
    
    
    47,108
    
    
    
    
    
    
    
    164,482Provision for bad debts
    
    
    
    
    
    
    60,691
    
    
    
    25,540
    
    
    
    
    
    
    
    86,231Interest expense, net
    
    
    53,881
    
    
    
    
    
    
    
    27,902
    
    
    
    (27,902
    )
    
    
    53,881Depreciation and amortization
    
    
    3,671
    
    
    
    39,632
    
    
    
    12,977
    
    
    
    
    
    
    
    56,280Management fees
    
    
    (10,725
    )
    
    
    
    
    
    
    10,725
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    3,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,900Impairment of assets held for sale
    
    
    11,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,741Equity in earnings of affiliates
    
    
    (55,119
    )
    
    
    
    
    
    
    
    
    
    
    55,119
    
    
    
    Total costs and expenses
    
    
    7,349
    
    
    
    622,313
    
    
    
    416,546
    
    
    
    20,155
    
    
    
    1,066,363Earnings (loss) before gain on sale of
assets, minority interests and income
taxes
    
    
    (7,349
    )
    
    
    17,868
    
    
    
    38,491
    
    
    
    (27,217
    )
    
    
    21,793Gain (loss) on sale of assets, net
    
    
    
    
    
    
    780
    
    
    
    (192
    )
    
    
    
    
    
    
    588Minority interests
    
    
    
    
    
    
    (1,828
    )
    
    
    
    
    
    
    
    
    
    
    (1,828
    )Earnings (loss) before income taxes
    
    
    (7,349
    )
    
    
    16,820
    
    
    
    38,299
    
    
    
    (27,217
    )
    
    
    20,553Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    (7,349
    )
    
    $
    16,820
    
    
    $
    38,299
    
    
    $
    (27,217
    )
    
    $
    20,553
 88




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Year Ended September 30, 2002(in thousands) SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedPredecessor
    
    Parent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedNet revenue:Acute care revenue
    
    
    
    
    
    $
    568,618
    
    
    $
    249,501
    
    
    $
    (6,387
    )
    
    $
    811,732Premium revenue
    
    
    
    
    
    
    
    
    
    
    138,156
    
    
    
    
    
    
    
    138,156Total net revenue
    
    
    
    
    
    
    568,618
    
    
    
    387,657
    
    
    
    (6,387
    )
    
    
    949,888Costs and expenses:Salaries and benefits
    
    
    
    
    
    
    229,900
    
    
    
    94,813
    
    
    
    
    
    
    
    324,713Supplies
    
    
    
    
    
    
    99,095
    
    
    
    33,865
    
    
    
    
    
    
    
    132,960Medical claims
    
    
    
    
    
    
    
    
    
    
    122,994
    
    
    
    (6,387
    )
    
    
    116,607Rents and Leases
    
    
    
    
    
    
    25,385
    
    
    
    6,613
    
    
    
    
    
    
    
    31,998Other operating expenses
    
    
    
    
    
    
    99,293
    
    
    
    42,049
    
    
    
    
    
    
    
    141,342Provision for bad debts
    
    
    
    
    
    
    50,476
    
    
    
    21,762
    
    
    
    
    
    
    
    72,238Interest, net
    
    
    55,365
    
    
    
    
    
    
    
    30,909
    
    
    
    (30,957
    )
    
    
    55,317Depreciation and amortization
    
    
    4,554
    
    
    
    30,333
    
    
    
    11,224
    
    
    
    
    
    
    
    46,111Management fees
    
    
    (8,721
    )
    
    
    
    
    
    
    8,721
    
    
    
    
    
    
    
    Equity in earnings of affiliates
    
    
    (10,311
    )
    
    
    
    
    
    
    
    
    
    
    10,311
    
    
    
    Total costs and expenses
    
    
    40,887
    
    
    
    534,482
    
    
    
    372,950
    
    
    
    (27,033
    )
    
    
    921,286Earnings before (gain) loss on
sale of assets, minority interests
and income taxes
    
    
    (40,887
    )
    
    
    34,136
    
    
    
    14,707
    
    
    
    20,646
    
    
    
    28,602Loss on sale of assets, net
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )Minority interests
    
    
    (1,042
    )
    
    
    793
    
    
    
    (793
    )
    
    
    
    
    
    
    (1,042
    )Earnings (loss) before income taxes
    
    
    (41,929
    )
    
    
    34,922
    
    
    
    13,914
    
    
    
    20,646
    
    
    
    27,553Income tax expense (benefit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net earnings (loss) from
continuing operations before
cumulative effect of a change in
accounting principle
    
    
    (41,929
    )
    
    
    34,922
    
    
    
    13,914
    
    
    
    20,646
    
    
    
    27,553Reversal of discontinued operations
    
    
    
    
    
    
    972
    
    
    
    
    
    
    
    
    
    
    
    972Net earnings
(loss) before cumulative
effect of a change in accounting
principle
    
    
    (41,929
    )
    
    
    35,894
    
    
    
    13,914
    
    
    
    20,646
    
    
    
    28,525Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    (39,497
    )
    
    
    
    
    
    
    
    
    
    
    (39,497
    )Net earnings (loss)
    
    $
    (41,929
    )
    
    $
    (3,603
    )
    
    $
    13,914
    
    
    $
    20,646
    
    
    $
    (10,972
    )
 89




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows(in thousands) For the Period June 23, 2004 through September 30, 2004SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedParent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedCash flows from operating activitiesNet earnings (loss)
    
    $
    2,377
    
    
    $
    (2,056
    )
    
    $
    24,322
    
    
    $
    (19,938
    )
    
    $
    4,705Adjustments: to reconcile net earnings (loss) to net cash
provided operating activities:Depreciation and amortization
    
    
    1,792
    
    
    
    15,920
    
    
    
    3,936
    
    
    
    
    
    
    
    21,648Minority interests
    
    
    
    
    
    
    1,207
    
    
    
    
    
    
    
    
    
    
    
    1,207Deferred Income Taxes
    
    
    
    
    
    
    3,234
    
    
    
    
    
    
    
    
    
    
    
    3,234Loss on sale of property and equipment
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    107Equity in earnings of affiliates
    
    
    (22,266
    )
    
    
    
    
    
    
    
    
    
    
    22,266
    
    
    
    Changes in operating assets and liabilities, net of the
effect of dispositions:Accounts receivable
    
    
    
    
    
    
    9,270
    
    
    
    (548
    )
    
    
    
    
    
    
    8,722Inventories, prepaid expenses and other current assets
    
    
    
    
    
    
    2,867
    
    
    
    (4,448
    )
    
    
    
    
    
    
    (1,581
    )Accounts payable and other accrued liabilities
    
    
    12,538
    
    
    
    (228
    )
    
    
    13,668
    
    
    
    
    
    
    
    25,978Net cash provided by (used in) operating activities
    
    
    (5,559
    )
    
    
    30,321
    
    
    
    36,930
    
    
    
    2,328
    
    
    
    64,020Cash flows from investing activitiesPurchases of property and equipment
    
    
    
    
    
    
    (5,289
    )
    
    
    (39,517
    )
    
    
    
    
    
    
    (44,806
    )Acquisitions including working capital settlement payments
    
    
    
    
    
    
    (1,950
    )
    
    
    
    
    
    
    
    
    
    
    (1,950
    )Change in other assets
    
    
    
    
    
    
    987
    
    
    
    (190
    )
    
    
    
    
    
    
    797Net cash used in investing activities
    
    
    
    
    
    
    (6,252
    )
    
    
    (39,707
    )
    
    
    
    
    
    
    (45,959
    )Cash flows from financing activitiesPayment of debt and capital leases
    
    
    (1,129
    )
    
    
    (578
    )
    
    
    (145
    )
    
    
    
    
    
    
    (1,852
    )Debt financing costs incurred
    
    
    (349
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (349
    )Costs paid for hospital syndications
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )Change in intercompany balances with affiliates, net
    
    
    7,037
    
    
    
    (6,044
    )
    
    
    1,335
    
    
    
    (2,328
    )
    
    
    Distribution of minority interests
    
    
    
    
    
    
    
    
    
    
    (983
    )
    
    
    
    
    
    
    (983
    )Net cash provided by (used in) financing activities
    
    
    5,559
    
    
    
    (6,637
    )
    
    
    207
    
    
    
    (2,328
    )
    
    
    (3,199
    )Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    17,432
    
    
    
    (2,570
    )
    
    
    
    
    
    
    14,862Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    80,031
    
    
    
    3,912
    
    
    
    
    
    
    
    83,943Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    97,463
    
    
    $
    1,342
    
    
    $
    
    
    
    $
    98,805
 90




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows (continued)(in thousands) For the Period October 1, 2003 through June 22, 2004SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedPredecessor
    
    Parent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedCash flows from operating activitiesNet earnings (loss)
    
    $
    (44,883
    )
    
    $
    13,826
    
    
    $
    59,850
    
    
    $
    (65,923
    )
    
    $
    (37,130
    )Adjustments: to reconcile net earnings (loss) to net cash provided
by operating activities:Depreciation and amortization
    
    
    2,293
    
    
    
    38,816
    
    
    
    9,381
    
    
    
    
    
    
    
    50,490Minority interests
    
    
    
    
    
    
    3,098
    
    
    
    
    
    
    
    
    
    
    
    3,098Gain on sale of assets, net
    
    
    
    
    
    
    (3,731
    )
    
    
    
    
    
    
    
    
    
    
    (3,731
    )Loss on early extinguishment of debt
    
    
    14,993
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,993Write-off of debt issue costs
    
    
    8,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,850Equity in earnings of affiliates
    
    
    (73,676
    )
    
    
    
    
    
    
    
    
    
    
    73,676
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (6,197
    )
    
    
    (2,345
    )
    
    
    
    
    
    
    (8,542
    )Establishment of accounts receivable of recent acquisition
    
    
    
    
    
    
    (11,325
    )
    
    
    
    
    
    
    
    
    
    
    (11,325
    )Inventories, prepaid expenses and other current assets
    
    
    
    
    
    
    (4,096
    )
    
    
    (1,560
    )
    
    
    
    
    
    
    (5,656
    )Accounts payable and other accrued liabilities
    
    
    (19,695
    )
    
    
    9,590
    
    
    
    17,096
    
    
    
    
    
    
    
    6,991Net cash provided by (used in) operating activities
    
    
    (112,118
    )
    
    
    39,981
    
    
    
    82,422
    
    
    
    7,753
    
    
    
    18,038Cash flows from investing activitiesPurchase of property and equipment
    
    
    
    
    
    
    (46,095
    )
    
    
    (36,170
    )
    
    
    
    
    
    
    (82,265
    )Acquisitions including working capital settlement payments
    
    
    
    
    
    
    (23,032
    )
    
    
    
    
    
    
    
    
    
    
    (23,032
    )Proceeds from sale of assets
    
    
    
    
    
    
    14,928
    
    
    
    
    
    
    
    
    
    
    
    14,928Change in other assets
    
    
    
    
    
    
    (1,969
    )
    
    
    319
    
    
    
    
    
    
    
    (1,650
    )Net cash used in investing activities
    
    
    
    
    
    
    (56,168
    )
    
    
    (35,851
    )
    
    
    
    
    
    
    (92,019
    )Cash flows from financing activitiesProceeds from issuance of common stock, net
    
    
    529,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    529,000Proceeds from debt borrowings
    
    
    900,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    900,000Cash paid to security holders
    
    
    (677,780
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (677,780
    )Payment of merger costs incurred by members of IASIS Investment
LLC
    
    
    (10,800
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,800
    )Payment of debt and capital leases
    
    
    (649,309
    )
    
    
    (1,019
    )
    
    
    (1,043
    )
    
    
    
    
    
    
    (651,371
    )Debt financing costs incurred
    
    
    (31,469
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,469
    )Proceeds from hospital syndications
    
    
    
    
    
    
    1,784
    
    
    
    
    
    
    
    
    
    
    
    1,784Change in intercompany balances with affiliates, net
    
    
    52,476
    
    
    
    (5,331
    )
    
    
    (39,392
    )
    
    
    (7,753
    )
    
    
    Distribution of minority interests
    
    
    
    
    
    
    
    
    
    
    (2,510
    )
    
    
    
    
    
    
    (2,510
    )Net cash provided by (used in) financing activities
    
    
    112,118
    
    
    
    (4,566
    )
    
    
    (42,945
    )
    
    
    (7,753
    )
    
    
    56,854Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    (20,753
    )
    
    
    3,626
    
    
    
    
    
    
    
    (17,127
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    100,784
    
    
    
    286
    
    
    
    
    
    
    
    101,070Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    80,031
    
    
    $
    3,912
    
    
    $
    
    
    
    $
    83,943
 91




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
For the Year Ended September 30, 2003(in thousands) SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedPredecessor
    
    Parent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedCash flows from operating activitiesNet earnings (loss)
    
    $
    (7,349
    )
    
    $
    16,820
    
    
    $
    38,299
    
    
    $
    (27,217
    )
    
    $
    20,553Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,671
    
    
    
    39,632
    
    
    
    12,977
    
    
    
    
    
    
    
    56,280Minority interests
    
    
    
    
    
    
    1,828
    
    
    
    
    
    
    
    
    
    
    
    1,828Loss
(gain) on sale of assets
    
    
    
    
    
    
    (780
    )
    
    
    192
    
    
    
    
    
    
    
    (588
    )Loss on early extinguishment of debt
    
    
    3,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,900Impairment of assets held for sale
    
    
    11,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,741Equity in earnings of affiliates
    
    
    (55,119
    )
    
    
    
    
    
    
    
    
    
    
    55,119
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (425
    )
    
    
    1,838
    
    
    
    
    
    
    
    1,413Inventories, prepaid expenses and other current assets
    
    
    
    
    
    
    (2,657
    )
    
    
    301
    
    
    
    
    
    
    
    (2,356
    )Accounts payable and other accrued liabilities
    
    
    5,961
    
    
    
    17,734
    
    
    
    813
    
    
    
    
    
    
    
    24,508Net cash provided by (used in) operating activities
    
    
    (37,195
    )
    
    
    72,152
    
    
    
    54,420
    
    
    
    27,902
    
    
    
    117,279Cash flows from investing activitiesPurchase of property and equipment
    
    
    
    
    
    
    (44,328
    )
    
    
    (36,272
    )
    
    
    
    
    
    
    (80,600
    )Proceeds from sale of assets
    
    
    
    
    
    
    3,205
    
    
    
    
    
    
    
    
    
    
    
    3,205Change in other assets
    
    
    
    
    
    
    (5,355
    )
    
    
    2,502
    
    
    
    
    
    
    
    (2,853
    )Net cash used in investing activities
    
    
    
    
    
    
    (46,478
    )
    
    
    (33,770
    )
    
    
    
    
    
    
    (80,248
    )Cash flows from financing activitiesProceeds from issuance of common stock, net
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Proceeds from debt borrowings
    
    
    589,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    589,600Payment of debt and capital leases
    
    
    (514,590
    )
    
    
    (1,043
    )
    
    
    (616
    )
    
    
    
    
    
    
    (516,249
    )Debt financing costs incurred
    
    
    (14,677
    )
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    (14,667
    )Proceeds from hospital syndications
    
    
    
    
    
    
    6,115
    
    
    
    
    
    
    
    
    
    
    
    6,115Change in intercompany balances with affiliates, net
    
    
    (23,140
    )
    
    
    70,285
    
    
    
    (19,243
    )
    
    
    (27,902
    )
    
    
    Distribution of minority interests
    
    
    
    
    
    
    (48
    )
    
    
    (714
    )
    
    
    
    
    
    
    (762
    )Net cash provided by (used in) financing activities
    
    
    37,195
    
    
    
    75,319
    
    
    
    (20,573
    )
    
    
    (27,902
    )
    
    
    64,039Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    100,993
    
    
    
    77
    
    
    
    
    
    
    
    101,070Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    (209
    )
    
    
    209
    
    
    
    
    
    
    
    Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    100,784
    
    
    $
    286
    
    
    $
    
    
    
    $
    101,070
 92




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
For the Year Ended September 30, 2002(in thousands) SubsidiarySubsidiary
    
    Non-
    
    
    
    
    
    CondensedPredecessor
    
    Parent Issuer
    
    Guarantors
    
    Guarantors
    
    Eliminations
    
    ConsolidatedCash flows from operating activitiesNet earnings (loss)
    
    $
    (41,929
    )
    
    $
    (3,603
    )
    
    $
    13,914
    
    
    $
    20,646
    
    
    $
    (10,972
    )Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    4,554
    
    
    
    30,333
    
    
    
    11,224
    
    
    
    
    
    
    
    46,111Minority interests
    
    
    
    
    
    
    249
    
    
    
    793
    
    
    
    
    
    
    
    1,042Loss
(gain) on sale of assets
    
    
    
    
    
    
    19
    
    
    
    (12
    )
    
    
    
    
    
    
    7Cumulative Effect of Change in Accounting Principle
    
    
    39,497
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,497Reversal of
excess loss accrual for discontinued operations
    
    
    (972
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (972
    )Equity in earnings of affiliates
    
    
    (10,311
    )
    
    
    
    
    
    
    
    
    
    
    10,311
    
    
    
    Changes in operating assets and liabilities, net
of the effect of dispositions:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accounts receivable
    
    
    
    
    
    
    (7,813
    )
    
    
    1,386
    
    
    
    
    
    
    
    (6,427
    )Inventories, prepaid expenses and other current assets
    
    
    
    
    
    
    (2,628
    )
    
    
    (1,078
    )
    
    
    
    
    
    
    (3,706
    )Accounts payable and other accrued liabilities
    
    
    (3,280
    )
    
    
    949
    
    
    
    14,856
    
    
    
    
    
    
    
    12,525Net cash provided by (used in) operating activities
    
    
    (12,441
    )
    
    
    17,506
    
    
    
    41,083
    
    
    
    30,957
    
    
    
    77,105Cash flows from investing activitiesPurchase of property and equipment
    
    
    
    
    
    
    (22,895
    )
    
    
    (24,730
    )
    
    
    
    
    
    
    (47,625
    )Proceeds
from sale of assets
    
    
    
    
    
    
    136
    
    
    
    12
    
    
    
    
    
    
    
    148Proceeds from sale of property and equipment
    
    
    
    
    
    
    (55,338
    )
    
    
    
    
    
    
    
    
    
    
    (55,338
    )Change in other assets
    
    
    
    
    
    
    (2,349
    )
    
    
    (3,028
    )
    
    
    
    
    
    
    (5,377
    )Net cash used in investing activities
    
    
    
    
    
    
    (80,446
    )
    
    
    (27,746
    )
    
    
    
    
    
    
    (108,192
    )Cash flows from financing activitiesProceeds
from issuance of common stock, net
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222Proceeds from Subordinated Notes
    
    
    190,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190,100Payment of debt and capital leases
    
    
    (161,628
    )
    
    
    (113
    )
    
    
    (278
    )
    
    
    
    
    
    
    (162,019
    )Debt financing costs incurred
    
    
    (2,587
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,587
    )Change in intercompany balances with affiliates, net
    
    
    (13,666
    )
    
    
    61,789
    
    
    
    (17,166
    )
    
    
    (30,957
    )
    
    
    Distribution of minority interests
    
    
    
    
    
    
    (340
    )
    
    
    (345
    )
    
    
    
    
    
    
    (685
    )Net cash provided by (used in) financing activities
    
    
    12,441
    
    
    
    61,336
    
    
    
    (17,789
    )
    
    
    (30,957
    )
    
    
    25,031Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    (1,604
    )
    
    
    (4,452
    )
    
    
    
    
    
    
    (6,056
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    1,395
    
    
    
    4,661
    
    
    
    
    
    
    
    6,056Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    (209
    )
    
    $
    209
    
    
    $
    
    
    
    $
    
 93




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure None. 
 Item 9A. Controls and Procedures Evaluations of Disclosure Controls and Procedures Under the supervision and with the participation of our management team,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of our disclosure controls and procedures, as such term is
defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended, as of September 30, 2004. Based on this
evaluation, the principal executive officer and principal accounting officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in our periodic
reports. Changes in Internal Control Over Financial Reporting During the fourth fiscal quarter of the period covered by this report,
there has been no change in our internal control over financial reporting that
has materially affected or is reasonably likely to materially affect our
internal control over financial reporting. 
 Item 9B. Other Information None. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant The following table sets forth the name, age and position of the directors
and executive officers of IAS and executive officers of IASIS LLC. Texas
Pacific Group anticipates that it will cause to be elected additional
individuals, including individuals unaffiliated with either Texas Pacific
Group, JLL Partners or us, to serve as directors of IAS. See Certain
Relationships and Related Transactions. Name
    
    Age
    
    PositionDavid R. White
    
    
    57
    
    
    Chairman of the Board and Chief Executive OfficerSandra K. McRee
    
    
    48
    
    
    President and Chief Operating OfficerW. Carl Whitmer
    
    
    40
    
    
    Chief Financial OfficerFrank A. Coyle
    
    
    40
    
    
    Secretary and General CounselMcKinley D. Moore
    
    
    48
    
    
    Senior Vice President, DevelopmentJohn M. Doyle
    
    
    44
    
    
    Vice President and TreasurerLarry D. Hancock
    
    
    46
    
    
    President, Utah MarketPhillip J. Mazzuca
    
    
    45
    
    
    President, Texas MarketTim P. Adams
    
    
    36
    
    
    President, Florida MarketJim McKinney
    
    
    51
    
    
    President, Nevada MarketF. Scott Winslow
    
    
    49
    
    
    President, Arizona MarketDerek Morkel
    
    
    37
    
    
    Operations Chief Financial OfficerJames Moake
    
    
    35
    
    
    Division Chief Financial OfficerJeff Jensen
    
    
    43
    
    
    Division Chief Financial OfficerPeter Stanos
    
    
    41
    
    
    Vice President, Ethics and Business PracticesDavid Bonderman
    
    
    62
    
    
    DirectorJonathan J. Coslet
    
    
    40
    
    
    DirectorKirk E. Gorman
    
    
    54
    
    
    DirectorCurtis S. Lane
    
    
    47
    
    
    DirectorTodd B. Sisitsky
    
    
    33
    
    
    DirectorPaul S. Levy
    
    
    57
    
    
    DirectorJeffrey C. Lightcap
    
    
    45
    
    
    Director
 94




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##### Table of Contents



David R. Whitewas non-executive Chairman of the Board of Directors of IAS
from October 1999 until November 30, 2000. Mr. White was appointed Chief
Executive Officer of IAS on December 1, 2000. He also served as President of
IAS from May 2001 through May 2004. He was appointed Chief Executive Officer of
IASIS LLC upon consummation of the Transactions. Mr. White served as President
and Chief Executive Officer of LifeTrust, an assisted living company, from
November 1998 until November 2000. From June 1994 to September 1998, Mr. White
served as President of the Atlantic Group at Columbia/HCA, where he was
responsible for 45 hospitals located in nine states. Previously, Mr. White was
Executive Vice President and Chief Operating Officer at Community Health
Systems, Inc., a for-profit hospital management company that operated
approximately 20 acute-care hospitals. Sandra K. McReewas appointed Chief Operating Officer of IAS in May 2001
and President in May 2004. She was appointed President and Chief Operating
Officer of IASIS LLC upon consummation of the Transactions. Ms. McRee was a
Regional Vice President for Province Healthcare Corporation from April 1999
until May 2001, where she oversaw the operations of five facilities in Florida,
Louisiana and Mississippi. Ms. McRee also served as Vice President, Operations
of Province from October 1998 through March 1999. From August 1997 through
September 1998, she served as a Division President for Columbia/ HCA. Ms. McRee
also served as a Group Vice President, Operations for Columbia/HCA from May
1995 through July 1997. Prior to joining Columbia/HCA, Ms. McRee served as an
Assistant Vice President for Community Health Systems Inc. where she oversaw 36
facilities. Ms. McRee has spent her entire professional career in the
healthcare industry. W. Carl Whitmerserved as Vice President and Treasurer of IAS from March
2000 through October 2001, and was appointed Chief Financial Officer of IAS
effective November 2001. He was appointed Chief Financial Officer of IASIS LLC
upon consummation of the Transactions. Prior to joining our company, Mr.
Whitmer served as Vice President of Finance and Treasurer of PhyCor Inc., where
he was employed from July 1994 through February 2000. Mr. Whitmers
responsibilities at PhyCor included acquisitions, capital planning and
management, investor relations, treasury management and external financial
reporting. Prior to joining PhyCor, Mr. Whitmer served as a Senior Manager with
the accounting firm of KPMG LLP, where he was employed from July 1986 to July
1994. Frank A. Coylehas been Secretary and General Counsel of IAS since October
1999. He was appointed Secretary and General Counsel of IASIS LLC upon
consummation of the Transactions. From August 1998 until October 1999, Mr.
Coyle served as Secretary and General Counsel of a company formed by members of
our management that was merged into one of our subsidiaries. Mr. Coyle served
from May 1995 to August 1998 as Assistant Vice President Development in
Physician Services and in-house Development Counsel for Columbia/HCA. From May
1990 to May 1995, Mr. Coyle was an attorney with Baker, Worthington, Crossley,
Stansberry & Woolf where his work included mergers, acquisitions, securities
transactions, not-for-profit representation and formation of Tennessee health
maintenance organizations. McKinley D. Moorewas appointed Senior Vice President, Development of IAS
in January 2003. He was appointed Senior Vice President, Development of IASIS
LLC upon consummation of the Transactions. Prior to joining our company, Mr.
Moore served as Vice President, Development of Symbion, Inc. from June 2002
through December 2002 where he was responsible for surgery center acquisitions
and for development of joint venture relationships with hospitals. Mr. Moore
served as Vice President, Acquisitions at Quorum Health Group, Inc. from May
1995 through May 2001 where he was responsible for hospital acquisitions and
divestitures. From September 1987 through April 1995, Mr. Moore served as
Director of Development for HealthTrust, Inc. where he was responsible for
hospital acquisitions and divestitures and for developing joint ventures with
physicians and not-for-profit hospitals. John M. Doylehas been Vice President and Treasurer of IAS since April
2002. He was appointed Vice President and Treasurer of IASIS LLC upon
consummation of the Transactions. Mr. Doyle was a senior manager at Ernst &
Young LLP from February 1997 until March 2002 and at KPMG LLP from August 1994
to January 1997, where he specialized in healthcare audit and business advisory
services, including mergers and acquisitions. In addition, from October 1991 to
August, 1994, Mr. Doyle was the Chief Financial Officer for two community
hospitals in East Tennessee and North Carolina. 95




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##### Table of Contents



Larry D. Hancockwas named President for the Utah Market of IAS in June
2003. He was appointed President of the Utah Market of IASIS LLC upon
consummation of the Transactions. He served as President of Altius Health Plans
in Salt Lake City, Utah from 1998 to June 2003. Prior to joining Altius, he
served as President and Chief Executive Officer of American Family Care of Utah
from July 1996 to September 1998. He was Chief Financial Officer of St. Marks
Hospital in Salt Lake City from 1989 to 1994 and then served as President and
Chief Executive Officer of St. Marks from 1994 to 1996. Prior to 1989, Mr.
Hancock served as Chief Financial Officer and Controller of various hospitals
owned and operated by proprietary healthcare organizations. Phillip J. Mazzucaserved as Chief Executive Officer of Town & Country
Hospital, one of our Florida hospitals, from November 1999 to August 2001. He
served as a Division President of the Arizona market of IAS from August 2001 to
October 2001, reporting to the Division President of the Arizona and Utah
markets, and was appointed as the Division President of the Florida and Texas
markets of IAS in October 2001. Mr. Mazzuca served as President of the Florida
market of IAS through June 2004 and continues to serve as President of the
Texas market. He was appointed President of the Texas market of IASIS LLC upon
consummation of the Transactions. Mr. Mazzuca served as the Hospital Chief
Executive Officer for Parkway Medical Center Hospital from March 1993 until
November 1999. Prior to serving in that position, Mr. Mazzuca served as a
Hospital Chief Executive Officer for various hospitals owned and operated by
proprietary healthcare organizations. Tim P. Adamswas named President of the Florida market of IAS and IASIS
LLC effective July 2004. He served as Chief Executive Officer of Odessa
Regional Hospital, one of our Texas facilities, from October 2002 to June 2004.
Prior to joining IASIS, Mr. Adams was employed by Province Healthcare as Chief
Executive Officer of Parkview Regional Hospital and Palastine Regional Medical
Center from March 1999 to September 2002. Prior to that time, Mr. Adams was
employed by HCA and Health Management Associates in various other senior
management positions. Prior to 1996, he served as a Manager with the Healthcare
Regulatory Group of Coopers & Lybrand, LLPs Dallas, Texas office. Jim McKinneywas named President of the Nevada market of IAS and IASIS LLC
effective August 2004. He served as Vice President, Operations and Development
from April 2004 to August 2004. Before joining IAS, Mr. McKinney was
President/Chief Operating Officer for Leland Medical Centers, a hospital
development and management corporation. Prior to joining Leland, Mr. McKinney
served as President/CEO of Brim Healthcare, Inc., the nations second largest
hospital management company. While at Brim, Mr. McKinney was responsible for
60 hospitals representing $70 million in net revenues and over 13,000
employees. Additionally, Mr. McKinney has served in numerous operational,
management and development positions in hospital systems for the past 25 years. F. Scott Winslowwas named President of the Arizona Markets of IAS and
IASIS LLC in November 2004. Previously, he served as acting Chief Executive
Officer of St. Lukes Medical Center from October 2004 until November 2004.
From January 2003 to June 2004, Mr. Winslow was an
owner and consultant of F.
Scott Winslow & Associates, a healthcare consulting company. Prior to that, he
served as President and Manager of Citilife Developments LLC, a real estate
development company from October 2000 until January 2003. Mr. Winslow served
as Chief Executive Officer of Michael Reese Hospital from October 1998 until
October 2000. Derek Morkelhas been Operations Chief Financial Officer of IAS since
February 2002. He was appointed Operations Chief Financial Officer of IASIS LLC
upon consummation of the Transactions. From May 1999 until February 2002, Mr.
Morkel was employed by Province Healthcare as Chief Financial Officer of
Parkview Regional Hospital, and then Palestine Regional Medical Center. Prior
to joining Province, Mr. Morkel was employed by HCA as a Hospital Business
Office Manager from December 1998 to May 1999. Mr. Morkel also served as the
Chief Executive Officer of Nucare Medical from January 1997 to December 1998. James Moakehas served as a Division Chief Financial Officer of IAS since
March 2003 and currently serves in that capacity for the Florida/Texas
Division. He was appointed Division Chief Financial Officer of IASIS LLC upon
consummation of the Transactions. From November 2002 to March 2003, Mr. Moake
served as Operations Controller of IAS. Prior to joining the company, from
March 2000 to November 2002, he served as the Chief Financial Officer for two
regional medical centers of Province Healthcare, Inc. Mr. Moake served as the
Chief Financial Officer of HMA, Inc.s Community Hospital of Lancaster (PA)
from July 1999 to March 2000 and the Assistant Chief Financial Officer of HMA,
Inc.s Biloxi Regional Medical Center (MS) from June 1998 to June 96




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##### Table of Contents



1999. From December 1994 to May 1998, he served as the Chief Financial
Officer of Grant Regional Health Center, Inc. in Wisconsin. Jeff Jensenwas named Division Chief Financial Officer for the Utah/Nevada
Division of IAS in April 2004. Upon consummation of the Transactions, Mr.
Jensen was appointed Division Chief Financial Officer for the Utah/Nevada
Division of IASIS LLC. Previously, Mr. Jensen was Chief Financial Officer of
Davis Hospital and Medical Center from January 2003 until April 2004. Prior to
that, he served as Chief Financial Officer of Pocatello Regional Medical Center
from May 1999 until January 2003. Peter Stanosserved as Regional Director Clinical Operations, Utah Market
of IAS from July 2002 until April 2003. Mr. Stanos was appointed Vice
President, Ethics & Business Practices of IAS in April 2003. He was appointed
Vice President, Ethics & Business Practices of IASIS LLC upon consummation of
the Transactions. From May 2000 until July 2002, Mr. Stanos was employed by
Province Healthcare as Chief Quality Officer of Havasu Regional Medical Center
and as Regional Director of Quality and Resource Management. From 1997 until
2000, Mr. Stanos was employed by HCA and Triad Healthcare as an Associate
Administrator and Director of Quality and Resource Management, Materials,
Pharmacy and Risk Management. Prior to joining HCA, Mr. Stanos served as
Regional Director of several healthcare companies as well as an independent
healthcare consultant. David Bondermanbecame a Director of IAS upon the consummation of the
Transactions. Mr. Bonderman is a founder of Texas Pacific Group and serves as a
principal and general partner of the firm. Prior to forming Texas Pacific Group
in 1993, Mr. Bonderman was Chief Operating Officer of the Robert M. Bass Group,
Inc. (now doing business as Keystone, Inc.) in Fort Worth, Texas. Mr. Bonderman
serves on the boards of directors of the following public companies: CoStar
Group, Inc., Ducati Motor Holding, S.p.A., Gemplus International S.A. and
Ryanair Holdings, plc. He also serves on the boards of directors of the Grand
Canyon Trust, the World Wildlife Fund and the American Himalayan Foundation. Jonathan J. Cosletbecame a Director of IAS upon the consummation of the
Transactions. Mr. Coslet is a Senior Partner of Texas Pacific Group,
responsible for the firms generalist and healthcare investment activities. Mr.
Coslet is also a member of the firms Investment Committee and Management
Committee. Prior to joining Texas Pacific Group in 1993, Mr. Coslet was in the
Investment Banking department of Donaldson, Lufkin & Jenrette, specializing in
leveraged acquisitions and high yield finance from 1991 to 1993. Mr. Coslet
serves on the boards of directors of Quintiles Transnational Corp., Petco
Animal Supplies, Inc., J.Crew Group, Inc. and Burger King Corporation. Kirk E. Gormanwas appointed a Director of IAS in August 2004. Mr. Gorman
currently serves as Senior Vice President and Chief Financial Officer of
Jefferson Health System, a not-for-profit health system based in Radnor,
Pennsylvania, which he joined in October 2003. Prior to joining Jefferson
Health System, Mr. Gorman served as Senior Vice President and Chief Financial
Officer of Universal Health Services, Inc., a public hospital company based in
Pennsylvania, from 1987 to February 2003. Mr. Gorman also has 13 years of
experience in the banking industry and served as Senior Vice President of
Mellon Bank prior to his work in the healthcare industry. Curtis S. Lanebecame a Director of IAS upon the consummation of the
Transactions. Mr. Lane is a Senior Managing Director of MTS Health Partners,
L.P., a merchant banking firm focused on healthcare advisory and investment
opportunities. Prior to forming MTS Health Partners, L.P. in 2000, Mr. Lane
founded and managed the healthcare investment banking group at Bear, Stearns &
Co. Inc. from its inception in 1986 until 1998. Todd B. Sisitskybecame a Director of IAS upon the consummation of the
Transactions. Mr. Sisitsky manages Texas Pacific Groups health care investment
activities. Prior to joining Texas Pacific Group in 2003, Mr. Sisitsky worked
at Forstmann Little & Company from 2001 to 2003 and Oak Hill Capital Partners
from 1999 to 2001. Paul S. Levyhas been a Director of IAS since October 1999. Mr. Levy is a
Senior Managing Director of JLL Partners, Inc., which he founded in 1988. Mr.
Levy serves as a director of several companies, including Builders FirstSource,
Inc., Fairfield Manufacturing Company, Inc., Lancer Industries Inc., Motor
Coach Industries International Inc., New World Pasta Company, Mosaic Sales
Solutions and PGT Industries. 97




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Jeffrey C. Lightcaphas been a Director of IAS since October 1999. Mr.
Lightcap is a Senior Managing Director of JLL Partners, Inc., which he joined
in June 1997. From February 1993 to May 1997, Mr. Lightcap was a Managing
Director at Merrill Lynch & Co., Inc., where he was the head of leveraged
buyout firm coverage for the mergers and acquisitions group. Mr. Lightcap
serves as a director of several companies, including Motor Coach Industries
International Inc., New World Pasta Company, Mosaic Sales Solutions and PGT
Industries. The certificate of incorporation and by-laws of IAS provide that its board
of directors will consist of not less than three nor more than 15 members, the
exact number of which shall be determined by the board of directors in a
resolution. The directors are elected at the annual meeting of stockholders for
one-year terms and until their successors are duly elected and qualified. The
executive officers serve at the discretion of the board of directors. Pursuant to the limited liability company operating agreement of IASIS
Investment, JLL is entitled to nominate two directors to IASs board of
directors. TPG is entitled to nominate the remaining directors. Messrs. Levy
and Lightcap serve on IASs board of directors as designees of JLL. The
remaining directors serve as designees of TPG. Audit Committee Financial Expert The current members of our audit committee are Messrs. Lane, Sisitsky,
Lightcap and Gorman. IASs board of directors has determined
that Todd Sisitsky is an audit committee financial expert
as that term is defined in Item 401(h) of Regulation S-K promulgated
by the Securities and Exchange Commission. Code of Ethics We have adopted a code of ethics for our principal executive officer,
principal accounting and financial officer, controller and persons performing
similar functions, a copy of which is filed as Exhibit 14 to this annual report
on Form 10-K and which also has been posted on our Internet website at
www.iasishealthcare.com. Please note that our Internet website address is
provided as an inactive textual reference only. We will make any legally
required disclosures regarding amendments to, or waivers of, provisions of our
code of ethics on our Internet website. 
 Item 11. Executive Compensation The following table provides information as to annual, long-term or other
compensation during the last three fiscal years for:  -
    
    the individual serving as Chief Executive Officer of the
Company during the fiscal year ended September 30, 2004; and-
    
    the four other most highly compensated executive officers of
the Company who were serving as executive officers of the Company at
September 30, 2004. 98




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##### Table of Contents



SUMMARY COMPENSATION TABLE Annual Compensation
    
    Long-Term Compensation AwardsSecuritiesOther Annual
    
    Underlying
    
    All OtherName and Principal Position
    
    Year
    
    Salary ($)
    
    Bonus ($)
    
    Compensation ($)(1)
    
    Options (#)
    
    Compensation ($)David R. White (2)
    
    
    2004
    
    
    $
    700,000
    
    
    $
    4,400,000
    (3)
    
    $
    
    
    
    
    292,000
    
    
    $
    6,500
    (4)Chairman of the Board
    
    
    2003
    
    
    
    742,921
    
    
    
    1,400,000
    
    
    
    
    
    
    
    
    
    
    
    6,804& Chief
Executive Officer
    
    
    2002
    
    
    
    629,167
    
    
    
    450,000
    
    
    
    
    
    
    
    
    
    
    
    6,282Sandra K.
McRee (5)
    
    
    2004
    
    
    $
    468,000
    
    
    $
    1,968,000
    (3)
    
    
    
    
    
    
    116,800
    
    
    $
    6,500
    (4)President &
    
    
    2003
    
    
    
    502,422
    
    
    
    450,000
    
    
    
    
    
    
    
    
    
    
    
    7,087Chief Operating Officer
    
    
    2002
    
    
    
    427,379
    
    
    
    153,300
    
    
    
    
    
    
    
    
    
    
    
    2,508W. Carl
Whitmer (6)
    
    
    2004
    
    
    $
    417,200
    
    
    $
    1,917,200
    (3)
    
    
    
    
    
    
    116,800
    
    
    $
    4,936
    (4)Chief Financial Officer
    
    
    2003
    
    
    
    412,156
    
    
    
    380,000
    
    
    
    
    
    
    
    
    
    
    
    5,2202002
    
    
    
    379,024
    
    
    
    135,900
    
    
    
    
    
    
    
    457,993
    
    
    
    6,169Frank A. Coyle
    

    
    2004
    
    
    $
    274,917
    
    
    $
    429,554
    (3)
    
    
    
    
    
    
    30,000
    
    
    $
    5,627
    (4)Secretary &
    
    
    2003
    
    
    
    201,581
    
    
    
    70,539
    
    
    
    
    
    
    
    
    
    
    
    5,580General Counsel
    
    
    2002
    
    
    
    193,283
    
    
    
    39,976
    
    
    
    
    
    
    
    
    
    
    
    5,329Derek Morkel
(8)
    
    
    2004
    
    
    $
    221,781
    
    
    $
    466,402
    (3)
    
    
    
    
    
    
    30,000
    
    
    $
    5,179
    (4)Operations Chief Financial
    
    
    2003
    
    
    
    208,968
    
    
    
    104,463
    
    
    
    
    
    
    
    
    
    
    
    17,231
    (7)Officer
    
    
    2002
    
    
    
    118,805
    
    
    
    32,506
    
    
    
    
    
    
    
    125,996
    
    
    
    45,663
    (9)
   (1)
    
    Perquisites and other personal benefits did not
exceed the lesser of either $50,000 or 10% of the total of annual
salary and bonus for any named executive officer.(2)
    
    Mr. White served as IASs non-executive Chairman of the Board of
Directors from October 1999 until November 2000. He was appointed Chief
Executive Officer in December 2000 and President in May 2001. He served as
President of IAS until May 2004 and continues to serve as Chief Executive
Officer of IAS. Mr. White was appointed Chief Executive Officer of IASIS
LLC upon consummation of the Transactions.(3)
    
    Includes annual bonus compensation and special bonus compensation
received in connection with the Transactions.(4)
    
    Contribution on behalf of the employee to 401(k) plan.(5)
    
    Ms. McRee was appointed IASs Chief Operating Officer in May 2001 and
President in May 2004. She was appointed President and Chief Operating
Officer of IASIS LLC upon consummation of the Transactions.(6)
    
    Mr. Whitmer served as IASs Vice President and Treasurer from March 2000
until October 2001. He was appointed Chief Financial Officer of IAS in
November 2001. He was appointed Chief Financial Officer of IASIS LLC upon
consummation of the Transactions.(7)
    
    Contribution of $3,172 on behalf of Mr. Morkel to 401(k) plan and
relocation allowance of $14,059.(8)
    
    Mr. Morkel was appointed Operations Chief Financial Officer of IAS in
February 2002. He was appointed Operations Chief Financial Officer of
IASIS LLC upon consummation of the Transactions.(9)
    
    Relocation allowance. 99




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OPTION GRANTS IN LAST
FISCAL YEAR The following table provides information concerning individual grants of
stock options and freestanding SARs made during the fiscal year ended September
30, 2004 to each of the named executive officers: Potential Realizable Value atNumber of
    
    Percent of Total
    
    
    
    
    
    
    
    
    
    Assumed Annual Rates of Stock PriceSecurities
    
    Options/SARs
    
    
    
    
    
    
    
    
    
    AppreciationUnderlying
    
    Granted to
    
    
    
    
    
    
    
    
    
    for Option TermOptions/SARs
    
    Employees in
    
    ExerciseName
    
    Granted (#)
    
    Fiscal Year (%)
    
    Price ($)
    
    Expiration Date
    
    5% ($)
    
    10% ($)David R. White
    
    
    292,000
    
    
    
    26.4
    %
    
    $
    20.00
    
    
    June 23,
2014
    
    $
    3,672,744
    
    
    $
    9,307,456Sandra K. McRee
    
    
    116,800
    
    
    
    10.6
    %
    
    $
    20.00
    
    
    June 23, 2014
    
    $
    1,469,098
    
    
    $
    3,722,982W. Carl Whitmer
    
    
    116,800
    
    
    
    10.6
    %
    
    $
    20.00
    
    
    June 23, 2014
    
    $
    1,469,098
    
    
    $
    3,722,982Frank A. Coyle
    
    
    30,000
    
    
    
    2.7
    %
    
    $
    20.00
    
    
    September 9, 2014
    
    $
    377,337
    
    
    $
    956,245Derek Morkel
    
    
    30,000
    
    
    
    2.7
    %
    
    $
    20.00
    
    
    September 9, 2014
    
    $
    377,337
    
    
    $
    956,245
 The following table summarizes certain information with respect to
unexercised options to purchase common and preferred stock of IAS held by the
named executive officers at September 30, 2004. The securities underlying
unexercised options were valued at $20.00 per common share and $1,000.00 per
preferred share. AGGREGATED OPTION EXERCISES DURING 2004 AND FISCAL YEAR-END OPTION VALUES Number of Securities Underlying
    
    Value of UnexercisedUnexercised-Options Held at
    
    In-The-Money Options atSharesAcquired on
    
    
    
    
    
    September 30, 2004
    
    September 30, 2004Name
    
    Exercise (#) (1)
    
    Value Realized ($)
    
    Exercisable (#)
    
    Unexercisable (#)
    
    Exercisable (#)
    
    Unexercisable (#)David R. White
    
    
    446,029
    
    
    $
    5,459,759
    
    
    
    61,871
    
    
    
    292,000
    
    
    $
    1,364,851
    
    
    
    Sandra K. McRee
    
    
    121,222
    
    
    $
    1,483,856
    
    
    
    45,391
    
    
    
    116,800
    
    
    $
    1,001,299
    
    
    
    W. Carl Whitmer
    
    
    138,022
    
    
    $
    1,689,502
    
    
    
    36,068
    
    
    
    116,800
    
    
    $
    795,653
    
    
    
    Frank Coyle
    
    
    30,862
    
    
    $
    377,776
    
    
    
    5,549
    
    
    
    30,000
    
    
    $
    122,408
    
    
    
    Derek Morkel
    
    
    30,864
    
    
    $
    377,801
    
    
    
    5,549
    
    
    
    30,000
    
    
    $
    122,408
    
    
    
    
  (1)
    
    Represents in-the-money options in IAS held by the named executive
officers at June 22, 2004. These options were surrendered in
consideration for $12.24 per share, which represents the difference
between the per share merger consideration and the per share option
exercise price. We entered into rollover option agreements in connection with the
Transactions with each of the named executive officers and Phil Mazzuca, John
M. Doyle and Larry D. Hancock pursuant to which such executive officers agreed
to roll over options to purchase an aggregate 299,900 shares of common stock of
IAS into options to purchase an aggregate 3,263 shares of preferred stock of
IAS, with an exercise price of $437.48 per share, and an aggregate 163,150
shares of new common stock of IAS, with an exercise price of $8.75 per share.
These new rollover options are fully vested and shall remain outstanding and
exercisable for the remainder of their original term. In connection with the Transactions, each outstanding option other than
the rollover options granted under the IASIS Healthcare Corporation 2000 Stock
Option Plan was cancelled in exchange for a per share cash payment equal to the
excess of the per share merger consideration over the per share exercise price
of such option. In addition, the 2000 Stock Option Plan was terminated in
connection with the Transactions. In addition, in connection with the Transactions, IAS adopted the IASIS
Healthcare Corporation 2004 Stock Option Plan. Each of Mr. White, Ms. McRee and
Mr. Whitmer were granted options to purchase 292,000, 116,800 and 116,800
shares of common stock of IAS, respectively, at an exercise price of $20.00 per
share. Mr. Whites options vest in four equal installments on each anniversary
of the closing of the Transactions, and Ms. McRees and Mr. Whitmers options
vest in five equal installments on each anniversary of the closing of the
Transactions. 100




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Directors Compensation Currently, IASs directors do not receive any compensation for their
services. IAS does, however, reimburse them for travel expenses and other
out-of-pocket costs incurred in connection with attendance at board of
directors and committee meetings. Employment Agreements On May 4, 2004, we entered into five-year employment agreements that
commenced upon the consummation of the Transactions with each of David R.
White, under which he serves as Chairman of the Board and Chief Executive
Officer, Sandra K. McRee, under which she serves as Chief Operating Officer and
President, and W. Carl Whitmer, under which he serves as Chief Financial
Officer. Mr. Whites employment agreement provides for an initial base salary
of $700,000 each year. Ms. McRees employment agreement provides for an initial
base salary of $468,000 per year. Mr. Whitmers employment agreement provides
for an initial base salary of $417,200 each year. Mr. White is entitled to
receive an annual target bonus of up to 100% of his base salary and an annual
maximum bonus of up to 200% of his base salary based upon the achievement of
certain performance objectives set annually by the IAS board of directors. Ms.
McRee and Mr. Whitmer also are entitled to receive an annual target bonus of up
to 50% of their base salaries and an annual maximum bonus of up to 100% of
their base salaries based upon the achievement of certain performance
objectives set annually by the IAS board of directors. The employment agreements also contain severance provisions regarding
compensation upon termination of employment under certain circumstances. If we
terminate Mr. Whites, Ms. McRees or Mr. Whitmers employment without cause or
any of them leave our company for good reason, such person will be entitled
to receive a severance payment that includes an amount equal to two times the
applicable annual base salary, a lump sum payment equal to the present value of
all other benefits such person would have received through two years after the
date of termination and, if eligible to receive a pro-rata bonus (such bonus to
be determined based on a formula described in such persons employment
agreement) then two-times the pro rata bonus plus an additional pro-rata bonus
payment. Additionally, the next tranche of options scheduled to vest will
immediately vest and become exercisable and all vested options (other than the
rollover options) may be exercised within one year from the date of termination
or if eligible to receive a pro-rata bonus, then such options can be exercised
within two years of termination. In addition, each of Mr. White and Ms. McRee
has the right to terminate their employment one year after a change in control,
or six months if the acquiror is in the healthcare facilities business, and
receive their severance payments. The agreements contain non-competition and
non-solicitation provision pursuant to which Mr. White, Ms. McRee, and Mr.
Whitmer will not compete with IAS or its subsidiaries within 25 miles of the
location of any hospital we manage for two years following the date of
termination of such persons employment. The agreements provide that during
this time such person will not solicit or recruit our business partners and
employees. In certain circumstances following a change in control, IAS has
agreed to compensate Mr. White in the event any payment under his employment
agreement is subject to an excise tax under Section 4999 of the Internal
Revenue Code. By the terms of their employment agreements, upon the consummation of the
Transactions, Mr. White was granted an option to purchase 2% of the total
outstanding common stock of IAS, and each of Ms. McRee and Mr. Whitmer were
granted options to purchase 0.8% of the total outstanding common stock of IAS
under the IASIS Healthcare Corporation 2004 Stock Option Plan. Mr. Whites
options vest in four equal installments on each anniversary of the closing of
the Transactions and Ms. McRee and Mr. Whitmers options vest in five equal
installments on each anniversary of the closing of the Transactions. In the
event of a change in control, any portion of the stock option that is not
vested and exercisable shall immediately vest and become exercisable.
Additionally, in the event IAS consummates a merger, business combination or
other similar transaction with a company or entity that does not constitute a
change in control and immediately following the consummation of such a
transaction, the investor group led by Texas Pacific Group, which established
IASIS Investment, as of the consummation of the Transactions and their
affiliates beneficially own less than 50% of the voting power of such person
and Mr. White, Ms. McRee or Mr. Whitmers employment is terminated by IAS
without cause or by the executive for good reason, any portion of the stock
option that has not become vested and exercisable as of the date of termination
shall become immediately vested and exercisable. 101




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Compensation Committee Interlocks and Insider Participation in Compensation
Decisions During fiscal 2004, prior to the consummation of the Transactions, IASs
compensation committee was comprised of Messrs. White, Levy and Lightcap and
Mr. Frank J. Rodriguez, a former director of IAS. Messrs. Levy, Lightcap and
Rodriguez have never been officers of IAS. Mr. White was appointed IASs Chief
Executive Officer on December 1, 2000. Following the consummation of the
Transactions, IASs compensation committee became comprised of Messrs. White,
Bonderman and Coslet. Messrs. Bonderman and Coslet have never been officers of
IAS. Stock Option Plan The IASIS Healthcare Corporation 2004 Stock Option Plan was established to
promote our interests by providing our key employees, directors, service
providers and consultants with an additional incentive to continue to work for
or to perform services for us, and to improve our growth and profitability. The
options granted under the plan represent the right to purchase IAS (our parent)
common stock upon exercise. Each option shall be identified as either an
incentive stock option or a non-qualified stock option. The plan was adopted by
the board of directors and sole stockholder of IAS in connection with the
Transactions. Generally, the exercise price of the options will equal the fair market
value of a share of the common stock as of the grant date as determined by the
IAS board of directors. Upon a change in control, the options will become 100%
vested if the participants employment is terminated without cause or by the
participant for good reason within the 2-year period immediately following such
change in control. On a termination of a participants employment, unvested
options automatically expire and vested options expire on the earlier of (i)
the commencement of business on the date the employment is terminated for
cause; (ii) 90 days after the date employment is terminated for any reason
other than cause, death or disability; (iii) one year after the date employment
is terminated by reason of death or disability; or (iv) the 10th anniversary of
the grant date for such option. In connection with the plan, each participant is expected to enter into an
agreement that will generally provide that for the 90-day period following the
later of (i) a termination of employment or (ii) six months and one day
following the date that shares of common stock were acquired pursuant to the
exercise of the option, we have the right to repurchase each share then owned
by the participant at fair value, as determined in good faith by the IAS board
of directors. The plan is designed to comply with the requirements of performance-based
compensation under Section 162(m) of the Internal Revenue Code, and the
conditions for exemption from the short-swing profit recovery rules under Rule
16b-3 under the Securities Exchange Act. Under the terms of this plan, a
committee established by the IAS board of directors administers this plan and
may grant, in its discretion, incentive stock options and non-qualified stock
options to our selected directors, officers, employees and consultants. Among
other things, the committee has the power to determine at what time options may
be granted as well as the terms, conditions, restrictions and performance
criteria, if any, relating to the options. In addition, the plan prohibits the
transfer of options, except by will or the laws of descent. The maximum number of shares of IAS common stock that may be issued
pursuant to options granted under the plan is 1,168,000; provided, however,
that on each anniversary of the closing of the Transactions prior to an initial
public offering, an additional 146,000 shares of common stock will be available
for grant. The terms and conditions applicable to options are set forth by the
committee in each individual option agreement. However, no option granted under
this plan may expire later than ten years from its date of grant. In addition,
the committee may not grant incentive stock options to any person who is not
our employee on the date of the grant, and the exercise price of an incentive
stock option cannot be less than the fair market value of a share of IAS common
stock on the date of its grant. The exercise price of an incentive stock option
granted to a stockholder who owns at the time of the grant shares of IAS common
stock with more than ten percent of the total combined voting power of all
classes of IAS capital stock cannot be less than 110% of the fair market value
of a share of IAS common stock on the date of the grant and the exercise period
shall not exceed five years from the date of the grant. Furthermore, the
aggregate fair market value of the shares of IAS common stock for which
incentive stock options 102




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granted under this plan or any other stock option plan, determined as of
the date of grant, that become exercisable for the first time by any person
during any calendar year may not exceed $100,000. Any incentive stock options
granted in excess of this limitation will be treated for all purposes as
non-qualified stock options. The IAS board of directors may amend this plan at any time for any reason
subject to the stockholders approval to the extent necessary to meet the
requirements of applicable law. However, no amendment can adversely affect an
optionees right under a previously granted option without the consent of the
optionee. Unless terminated earlier by the board, this plan will terminate by
its terms effective June 22, 2014, although previously granted options may be
exercised after plan termination in accordance with the terms of the plan as in
effect upon termination. As of September 30, 2004, options to purchase a total of 1,105,750 shares
had been granted and were outstanding under this plan, of which no options to
purchase shares were then vested and exercisable. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters. Equity Compensation Plans The table below sets forth the following information as of September 30,
2004 with respect to IASs compensation plans (including individual
compensation arrangements) under which its equity securities are authorized for
issuance, aggregated by (i) all compensation plans previously approved by IASs
security holders and (ii) all compensation plans not previously approved by
IASs security holders: - the number of securities to be issued upon the exercise of outstanding
options; - the weighted-average exercise price of the outstanding options; and - the number of securities remaining available for future issuance under
the plans. IASs 2004 Stock Option Plan has been approved by its stockholders. IAS
has not issued any warrants or other rights to purchase its equity securities. Remaining Availablefor Future IssuanceNumber of
    
    
    
    
    
    Under EquitySecurities to be
    
    
    
    
    
    Compensation PlansIssued Upon
    
    Weighted-average
    
    (excluding securitiesExercise of
    
    Exercise Price of
    
    reflected in thePlan Category
    
    Outstanding Options
    
    Outstanding Options
    
    first column)Equity compensation plans
approved by security holdersPreferred stock(1)
    
    
    3,263
    
    
    $
    437.48
    
    
    
    Common stock(2)
    
    
    1,268,900
    
    
    $
    18.55
    
    
    
    62,250Equity compensation plans
not approved by security
holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,272,163
    
    
    $
    19.63
    
    
    
    62,250
   (1)
    
    Shares of preferred stock to be issued upon exercise of rollover options
issued in connection with the Transactions.(2)
    
    Consists of 163,150 shares of common stock to be issued upon exercise of
rollover options issued in connection with the Transactions, with an
exercise price of $8.75 per share, and 1,105,750 shares of common stock to
be issued upon exercise of options issued under the IASIS Healthcare
Corporation 2004 Stock Option Plan, with an exercise price of $20.00 per
share. Of the 1,168,000 shares of common stock currently authorized for
issuance under the 2004 Stock Option Plan, 62,250 shares remain available
for future issuance. 103




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Beneficial Ownership of Common Stock After giving effect to the Transactions, IASIS LLC is a limited liability
company consisting of 100% common interests owned by IAS. IASs outstanding
shares consist of one class of common stock and one class of preferred stock,
and 100% of the outstanding common and preferred stock is owned by IASIS
Investment. In addition, senior members of IASs management converted a portion
of their in-the-money options into options to purchase IASs common and
preferred shares in connection with the Transactions. The outstanding equity
interest of IASIS Investment is held 74.4% by TPG, 18.8% by JLL and
approximately 6.8% by Trimaran. The
following table presents information as of December 17, 2004 regarding ownership of shares of IAS common stock and preferred stock by each
person known to be a holder of more than 5% of IAS common stock and preferred
stock, the members of the IAS board of directors, each executive officer named
in the summary compensation table and all current directors and executive
officers as a group. When reviewing the following table, you should be aware that the amounts
and percentage of common stock and preferred stock beneficially owned are
reported on the basis of regulations of the Securities and Exchange Commission
governing the determination of beneficial ownership of securities. Under the
rules of the Securities and Exchange Commission, a person is deemed to be a
beneficial owner of a security if that person has or shares voting power,
which includes the power to vote or to direct the voting of such security, or
investment power, which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Unless otherwise indicated, the address of each person listed below is 117
Seaboard Lane, Building E, Franklin, Tennessee 37067. Percentage of
    
    Percentage ofPreferred Shares
    
    Common Shares
    
    Preferred Shares
    
    Common SharesBeneficial Owners
    
    Beneficially Owned (a)
    
    Beneficially Owned (b)
    
    Beneficially Owned
    
    Beneficially OwnedIASIS Investment (c)
    
    
    292,000.00
    
    
    
    14,600,000
    
    
    
    100.0
    %
    
    
    100.0
    %David R. White
    
    
    1,213.17
    
    
    
    60,658
    
    
    
    *
    
    
    
    *Sandra K. McRee
    
    
    890.02
    
    
    
    44,501
    
    
    
    *
    
    
    
    *W. Carl Whitmer
    
    
    707.23
    
    
    
    35,361
    
    
    
    *
    
    
    
    *Frank A. Coyle
    
    
    108.80
    
    
    
    5,440
    
    
    
    *
    
    
    
    *Derek Morkel
    
    
    108.80
    
    
    
    5,440
    
    
    
    *
    
    
    
    *David Bonderman (d)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Jonathan J. Coslet (d)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Kirk E. Gorman
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Curtis Lane
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Todd B. Sisitsky (d)
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    Paul S. Levy (e)
    
    
    54,986.00
    
    
    
    2,744,800
    
    
    
    18.8
    %
    
    
    18.8
    %Jeffrey C. Lightcap (e)
    
    
    54,986.00
    
    
    
    2,744,800
    
    
    
    18.8
    %
    
    
    18.8
    %Current directors and
executive officers
as a group (18
persons)
    
    
    295,263.00
    
    
    
    14,763,152
    
    
    
    100.0
    %
    
    
    100.0
    %
   *
    
    Less than 1%.(a)
    
    The following shares of preferred stock subject to options converted by
management in connection with the Transactions currently exercisable or
exercisable within 60 days of September 30, 2004, are deemed outstanding
for the purpose of computing the percentage ownership of the person
holding such options but are not deemed outstanding for the purpose of
computing the percentage ownership of any other person: Mr. White,
1,213.17; Ms. McRee, 890.02; Mr. Whitmer, 707.23; Mr. Coyle, 108.80; Mr.
Morkel, 108.80; and all current directors and executive officers as a
group (18 persons), 3,263.(b)
    
    The following shares of common stock subject to options converted by
management in connection with the Transactions currently exercisable or
exercisable within 60 days of September 30, 2004, are deemed outstanding
for the purpose of computing the percentage ownership of the person
holding such options but are not deemed outstanding for the purpose of
computing the percentage ownership of any other person: Mr. White, 60,658;
Ms. McRee, 44,501; Mr. Whitmer, 35,361; Mr. Coyle, 5,440; Mr. Morkel,
5,440; and all current directors and executive officers as a group (18
persons), 163,150. 104




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(c)
    
    The membership interests of IASIS Investment are owned as follows: TPG,
74.4%, JLL, 18.8%, and Trimaran, 6.8%. TPG Advisors III, Inc. and TPG
Advisors IV, Inc. through their ownership of TPG, which owns a controlling
interest in IASIS Investment, may be deemed to beneficially own all of the
shares of preferred stock and common stock owned by IASIS Investment.(d)
    
    David Bonderman, James G. Coulter and William S. Price, III are
directors, executive officers and the sole shareholders of TPG Advisors
III, Inc. and TPG Advisors IV, Inc. TPG Advisors III, Inc. and TPG
Advisors IV, Inc. through their ownership of TPG, which owns a controlling
interest in IASIS Investment, may be deemed to beneficially own all of the
shares of preferred stock and common stock owned by IASIS Investment.
Messrs. Bonderman, Coulter and Price, by virtue of their positions with
TPG Advisors III, Inc. and TPG Advisors IV, Inc. may be deemed to have
investment powers and beneficial ownership with respect to all of the
shares of preferred stock and common stock owned by IASIS Investment. Each
of Messrs. Bonderman, Coulter and Price disclaims beneficial ownership of
these shares of preferred stock and common stock. None of Messrs. Coslet
and Sisitsky has investment power over any of the shares of preferred
stock and common stock owned by IASIS Investment.(e)
    
    Messrs. Levy and Lightcap are senior managing directors of JLL Partners,
Inc. which, through its controlling interest in JLL, which owns 18.8% of
IASIS Investment, may be deemed to beneficially own 18.8% of the shares of
preferred stock and common stock owned by IASIS Investment. Accordingly,
each of Messrs. Levy and Lightcap may be deemed to beneficially own 18.8%
of the shares of preferred stock and common stock owned by IASIS
Investment. All of the membership interests in IASIS LLC are pledged to our lenders as
security for our obligations under our new senior secured credit facilities. In
the event of a default under our new senior secured credit facilities, our
lenders would have the right to foreclose on such membership interests, which
would result in a change in control of our company. 
 Item 13. Certain Relationships and Related Transactions. IASIS Investment Limited Liability Company Operating Agreement TPG is party to a limited liability company operating agreement of IASIS
Investment with Trimaran and JLL. TPG, JLL and Trimaran hold approximately
74.4%, 18.8% and 6.8%, respectively, of the equity interests of IASIS
Investment. TPG is the managing member of IASIS Investment. Pursuant to this agreement, initially JLL is entitled to nominate two
directors to the IAS board of directors, with the remainder of the board of
directors to be nominated by TPG. The right of JLL to nominate two directors is
subject to its ownership percentage in IASIS Investment remaining at or above
9.4%. In the event JLLs ownership percentage in IASIS Investment falls below
9.4%, but is at least 4.7%, JLL will have the right to nominate one director.
If JLLs ownership percentage falls below 4.7%, it will not have the right to
nominate any directors. The agreement also places certain restrictions on the
transfer of membership interests in IASIS Investment. JLL and Trimaran have the
right to participate in certain dispositions by TPG and can be required to
participate on the same terms in any sale by TPG in excess of a specified
percentage of its collective interest. Investor Rights Agreement After giving effect to the Transactions, IASIS Investment is the sole
stockholder of IAS, which owns 100% of the common interests of IASIS LLC. IASIS
Investment is party to an investor rights agreement with IAS. Pursuant to this
agreement, IASIS Investment can cause IAS to register its interests in IAS
under the Securities Act and to maintain a shelf registration statement
effective with respect to such interests. IASIS Investment is also entitled to
participate on a pro rata basis in any registration of our equity interests
under the Securities Act that IAS may undertake. The agreement also grants
IASIS Investment preemptive rights over certain additional issuances of equity
securities by IAS. Management Services Agreement Upon the consummation of the Transactions, we entered into a management
services agreement with TPG GenPar III, L.P., TPG GenPar IV, L.P., both
affiliates of Texas Pacific Group, JLL Partners Inc. and Trimaran Fund
Management, L.L.C. under which we paid those parties a transaction fee equal to
$15 million in the aggregate. The management services agreement provides that
in exchange for consulting and management advisory services that will be
provided to us by the investors, we will pay an aggregate monitoring fee of
0.25% of budgeted net revenue up to a maximum of $5 million per fiscal year to
these parties (or certain of their respective affiliates) on a quarterly basis
and reimburse them for their reasonable disbursements and out-of-pocket
expenses. This monitoring fee will 105




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be subordinated to the notes in the event of a bankruptcy of the company. For
the period from June 23, 2004 through September 30, 2004, we paid $746,000 in
monitoring fees under the management services agreement. Stockholders Agreement In connection with the 1999 recapitalization transaction with Paracelsus
Healthcare Corporation (currently known as Clarent Hospital Corporation) and
acquisition of hospitals and related facilities from Tenet Healthcare
Corporation, JLL Healthcare, LLC and the other investors in our company entered
into a stockholders agreement dated October 8, 1999, as amended, governing
their ownership of our company. We agreed to pay the administrative fees and
expenses of JLL Healthcare, LLC during the term of the stockholders agreement.
During the year ended September 30, 2004, we paid JLL Healthcare, LLC
approximately $165,000 for its administrative fees and expenses. The
stockholders agreement terminated on June 22, 2004. Tax Sharing Agreement and Other Tax Allocations Prior to the consummation of the Transactions, IAS and some of its
subsidiaries were included in JLL Healthcare, LLCs consolidated group for U.S.
federal income tax purposes as well as in some consolidated, combined or
unitary groups which included JLL Healthcare, LLC for state, local and foreign
income tax purposes. IAS and JLL Healthcare, LLC entered into a tax sharing
agreement in connection with the recapitalization that occurred in October
1999. The tax sharing agreement required IAS to make payments to JLL
Healthcare, LLC such that, with respect to tax returns for any taxable period
in which IAS or any of its subsidiaries were included in JLL Healthcare, LLCs
consolidated group or any combined group including JLL Healthcare, LLC, the
amount of taxes to be paid by IAS would be determined, subject to some
adjustments, as if it and each of its subsidiaries included in JLL Healthcare,
LLCs consolidated group or a combined group including JLL Healthcare, LLC
filed their own consolidated, combined or unitary tax returns. The tax sharing
agreement with JLL Healthcare, LLC terminated on June 22, 2004. IASIS LLC and some of its subsidiaries are included in IASs consolidated
group for U.S. federal income tax purposes as well as in some consolidated,
combined or unitary groups which include IAS for state, local and foreign
income tax purposes. With respect to tax returns for any taxable period in
which IASIS LLC or any of its subsidiaries are included in IASs consolidated
group or any combined group including IAS, the amount of taxes to be paid by
IASIS LLC is determined, subject to some adjustments, as if it and each of its
subsidiaries included in IASs consolidated group or a combined group including
IAS filed their own consolidated, combined or unitary tax returns. 
 Item 14. Principal Accountant Fees and Services The following table sets forth the aggregate fees for services related to
fiscal years 2004 and 2003 provided by Ernst and Young LLP, our principal
accountants: Fiscal
    
    Fiscal2004
    
    2003Audit Fees (a)
    
    $
    1,106,000
    
    
    $
    602,000Audit-Related Fees (b)
    
    
    154,000
    
    
    
    240,000Tax Fees
    
    
    89,000
    
    
    
    All Other Fees (c)
    
    
    
    
    
    
    34,000
  (a)
    
    Audit Fees represent fees billed for professional services rendered for
the audit of our annual financial statements and review of our quarterly
financial statements, and audit services provided in connection with other
statutory or regulatory filings, including services related to our 8 1/2%
senior subordinated notes issued in June 2003 and our 8 3/4% senior
subordinated notes issued in June 2004.  (b)
    
    Audit-Related Fees represent fees billed for assurance services related
to the audit of our financial statements. The amount shown for fiscal 2004
consists primarily of services rendered in connection with 106




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the Merger in June 2004. The amount shown for fiscal 2003 consists
primarily of services rendered for the separate audits of three of our
subsidiaries in conjunction with the private offering of limited
partnership units in the subsidiaries to third party investors.(c)
    
    All Other Fees represent fees for services provided to us not otherwise
included in the categories above. During fiscal 2003, we reviewed our existing practices regarding the use
of our independent auditors to provide non-audit and consulting services, to
ensure compliance with SEC proposals. Our audit committee adopted a
policy, which provides that our independent auditors may provide certain
non-audit services which do not impair the auditors independence. In that
regard, our audit committee must pre-approve all audit services provided to our
company, as well as all non-audit services provided by our companys
independent auditors. This policy is administered by our senior corporate
financial management, which reports throughout the year to our audit committee.
Our audit committee pre-approved all audit and non-audit services provided by
Ernst and Young LLP during fiscal 2004 and fiscal 2003. 
 Item 15. Exhibits and Financial Statement Schedules (a) 1. Financial Statements: See Item 8 2. Financial Statement Schedules: Not Applicable 3. Management Contracts and Compensatory Plans and Arrangements  
    
    Employment Agreement, dated as of May 4, 2004, by
and between IASIS Healthcare Corporation and David R. White
(8)
    
    Employment Agreement, dated as of May 4, 2004, by
and between IASIS Healthcare Corporation and Sandra K. McRee
(8)
    
    Employment Agreement, dated as of May 4, 2004, by
and between IASIS Healthcare Corporation and W. Carl Whitmer
(8)
    
    Form of Roll-over Option Letter Agreement (8)
    
    IASIS Healthcare Corporation 2004 Stock Option Plan (8)
    
    Form of Management Stockholders Agreement between
IAS and each of David R. White, Sandra K. McRee and W. Carl
Whitmer (8)
    
    Form of Management Stockholders Agreement under
IASIS Healthcare Corporation 2004 Stock Option Plan (8)
    
    Form of Stock Option Grant Agreement under IASIS
Healthcare Corporation 2004 Stock Option Plan (8)
    
    Form of Management Stockholders Agreement for Rollover Options (8)
    
    IASIS Corporate Incentive Plan (8)
    
    IASIS Market Executive Incentive Program (8) (c) Exhibits: Exhibit No.
    
    Description2.1
    
    
    Agreement and Plan of Merger, dated as of May 4, 2004, by and
among IASIS Investment LLC, Titan Merger Corporation and IASIS
Healthcare Corporation (8)2.2
    
    
    Indemnification Agreement dated as of May 4, 2004, by and among
IASIS Investment LLC, IASIS Healthcare Corporation, and the
stockholders and option holders of IASIS Healthcare Corporation
listed on the signature pages thereof (1)2.3
    
    
    Asset Sale Agreement dated as of January 16, 2004, by and between
NLVH, Inc. and IASIS Healthcare Corporation (2)
 107




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Exhibit No.
    
    Description2.4
    
    
    Assignment and Assumption of Asset Sale Agreement dated as of
January 16, 2004, by and between IASIS Healthcare Corporation and
Lake Mead Hospital, Inc. (2)2.5
    
    
    Guaranty of Payment and Performance dated as of January 16, 2004,
executed by IASIS Healthcare Corporation in favor of NLVH, Inc.
(2)3.1
    
    
    Certificate of Formation of IASIS Healthcare LLC, as filed with
the Secretary of State of the State of Delaware on May 11, 2004
(8)3.2
    
    
    Limited Liability Company Agreement of IASIS Healthcare LLC dated
as of May 11, 2004 (8)4.1
    
    
    Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC,
IASIS Capital Corporation, the Subsidiary Guarantors and The Bank
of New York Trust Company, N.A., as Trustee (8)4.2
    
    
    Form of Notation of Subsidiary Guarantee (8)4.3
    
    
    Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (8)4.4
    
    
    Supplemental Indenture, dated as of June 30, 2004, by and between
IASIS Finance Texas Holdings, LLC, IASIS Healthcare LLC, IASIS
Capital Corporation, the existing Subsidiary Guarantors and The
Bank of New York Trust Company, N.A., as Trustee (8)4.5
    
    
    Supplemental Indenture, effective as of November 5, 2004, by and
between Mountain Vista Medical Center, LP, IASIS Healthcare LLC,
IASIS Capital Corporation, the existing Subsidiary Guarantors and
The Bank of New York Trust Company, N.A., as Trustee10.1
    
    
    Lease, dated as of July 29, 1977, by and between Sierra Equities,
Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (3)10.2
    
    
    Addendum to Lease entered into by and between Sierra Equities,
Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (3)10.3
    
    
    Conforming Amendment to Lease, dated as of June 10, 1991, by and
between Sierra Equities, Inc., as Landlord, and Mesa General
Hospital, Inc., as Tenant (3)10.4
    
    
    Amendment to Hospital Lease, dated as of October 31, 2000, by and
between Sierra Equities, Inc., as Landlord, and Mesa General
Hospital, L.P., as Tenant (3)10.5
    
    
    Amendment to Lease, dated April 30, 2003, by and between Sierra
Equities, Inc. and Mesa General Hospital, L.P. (4)10.6
    
    
    Amended and Restated Pioneer Hospital Lease, dated as of June 28,
2002, by and between Health Care Property Investors, Inc. and
Pioneer Valley Hospital, Inc. (5)10.7
    
    
    Lease Agreement, dated as of October 6, 2003, between The Dover
Centre, LLC and IASIS Healthcare Corporation (6)10.8
    
    
    Form of Indemnification Agreement (8)10.9
    
    
    Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona (including Amendment No. 1 thereto),
effective as of October 1, 2003 (4)
 108




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##### Table of Contents



Exhibit No.
    
    Description10.10
    
    
    Amendment No. 2 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.11
    
    
    Amendment No. 3 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.12
    
    
    Amendment No. 4 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.13
    
    
    Amendment No. 5 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.14
    
    
    Amendment No. 6 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.15
    
    
    Amendment No. 7 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
April 1, 2004 (8)10.16
    
    
    Amendment No. 8 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2004 (8)10.17
    
    
    Amendment No. 9 to Contact between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 200410.18
    
    
    Purchase and Sale Agreement dated as of December 15, 2003, by and
between Rocky Mountain Medical Center, Inc. and Board of
Education of the Granite School District (7)10.19
    
    
    Letter Agreement dated as of January 26, 2004 by and among Rocky
Mountain Medical Center, Inc., Board of Education of Granite
School District and Merrill Title Company (7)10.20
    
    
    Information System Agreement, dated February 23, 2000, between
McKesson Information Solutions LLC and IASIS Healthcare
Corporation, as amended (8)**10.21
    
    
    Amended and Restated Credit Agreement, dated June 22, 2004, by
and among IASIS Healthcare LLC, IASIS Healthcare Corporation, the
Subsidiary Guarantors, Bank of America, N.A., as Administrative
Agent, L/C Issuer and Swingline Lender and the other lenders
party thereto (8)10.22
    
    
    Joinder Agreement, dated as of June 30, 2004, by and between
IASIS Finance Texas Holdings, LLC and Bank of America, N.A., as
Administrative Agent (8)10.23
    
    
    Joinder Agreement, effective as of November 5, 2004, by and
between Mountain Vista Medical Center, LP and Bank of America,
N.A., as Administrative Agent10.24
    
    
    Employment Agreement, dated as of May 4, 2004, by and between
IASIS Healthcare Corporation and David R. White (8)10.25
    
    
    Employment Agreement, dated as of May 4, 2004, by and between
IASIS Healthcare Corporation and Sandra K. McRee (8)10.26
    
    
    Employment Agreement, dated as of May 4, 2004, by and between
IASIS Healthcare Corporation and W. Carl Whitmer (8)10.27
    
    
    Form of Roll-over Option Letter Agreement (8)
 109




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Exhibit No.
    
    Description10.28
    
    
    IASIS Healthcare Corporation 2004 Stock Option Plan (8)10.29
    
    
    Management Services Agreement dated as of June 22, 2004 by and
among IASIS Healthcare LLC, Trimaran Fund II, L.L.C., Trimaran
Parallel Fund II, L.P., Trimaran Capital L.L.C., CIBC Employee
Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners
Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I
LLC and TPG IASIS Co-Invest II LLC (8)10.30
    
    
    Investor Rights Agreement dated as of June 22, 2004, by and
between IASIS Investment LLC and IASIS Healthcare Corporation (8)10.31
    
    
    Form of Management Stockholders Agreement between IAS and each of
David R. White, Sandra K. McRee and W. Carl Whitmer (8)10.32
    
    
    Form of Management Stockholders Agreement under IASIS Healthcare
Corporation 2004 Stock Option Plan (8)10.33
    
    
    Form of Stock Option Grant Agreement under IASIS Healthcare
Corporation 2004 Stock Option Plan (8)10.34
    
    
    Form of Management Stockholders Agreement for Rollover Options (8)10.35
    
    
    IASIS Corporate Incentive Plan (8)10.36
    
    
    IASIS Market Executive Incentive Program (8)14
    
    
    Code of Ethics (6)21
    
    
    Subsidiaries of IASIS Healthcare Corporation31.1
    
    
    Certification of Principal Executive Officer Pursuant to Rule
15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Principal Financial Officer Pursuant to Rule
15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  **
    
    Portions of this exhibit have been omitted and filed separately with the
Commission pursuant to a grant of confidential treatment pursuant to Rule
24(b)-2 promulgated under the Securities Exchange Act of 1934, as amended.(1)
    
    Incorporated by reference to IASIS Healthcare Corporations Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2004.(2)
    
    Incorporated by reference to IASIS Healthcare Corporations Current
Report on Form 8-K filed on February 2, 2004.(3)
    
    Incorporated by reference to IASIS Healthcare Corporations Annual Report
on Form 10-K for the fiscal year ended September 30, 2000.(4)
    
    Incorporated by reference to IASIS Healthcare Corporations Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2003.(5)
    
    Incorporated by reference to IASIS Healthcare Corporations Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2002.(6)
    
    Incorporated by reference to IASIS Healthcare Corporations Annual Report
on Form 10-K for the fiscal year ended September 30, 2003. 110




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(7)
    
    Incorporated by reference to IASIS Healthcare Corporations Quarterly
Report on Form 10-Q for the fiscal quarter ended December 31, 2003.(8)
    
    Incorporated by reference to the Companys Registration Statement on Form
S-4 (Registration No. 333-117362). 111




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. IASIS HEALTHCARE LLCDate: December 17, 2004
    
    By:
    
    /s/ David R. WhiteDavid R. WhiteChairman of the Board and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ David R. White
David R. White
    
    Chairman of the Board and Chief
Executive Officer (Principal
Executive Officer)
    
    December 17, 2004/s/ W. Carl Whitmer
W. Carl Whitmer
    
    Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    December 17, 2004/s/ David Bonderman
David Bonderman
    
    Director of IASIS Healthcare
Corporation (sole member of IASIS
Healthcare LLC)
    
    December 17, 2004/s/ Jonathan J. Coslet
Jonathan J. Coslet
    
    Director of IASIS Healthcare
Corporation (sole member of IASIS
Healthcare LLC)
    
    December 17, 2004/s/ Kirk E. Gorman
Kirk E. Gorman
    
    Director of IASIS Healthcare
Corporation (sole member of IASIS
Healthcare LLC)
    
    December 17, 2004/s/ Curtis Lane
Curtis Lane
    
    Director of IASIS Healthcare
Corporation (sole member of IASIS
Healthcare LLC)
    
    December 17, 2004/s/ Todd B. Sisitsky
Todd B. Sisitsky
    
    Director of IASIS Healthcare
Corporation (sole member of IASIS
Healthcare LLC)
    
    December 17, 2004
 112




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Signature
    
    Title
    
    Date/s/ Paul S. Levy
Paul S. Levy
    
    Director of IASIS Healthcare
Corporation (sole member of IASIS
Healthcare LLC)
    
    December 17, 2004/s/ Jeffrey C. Lightcap
Jeffrey C. Lightcap
    
    Director of IASIS Healthcare
Corporation (sole member of IASIS
Healthcare LLC)
    
    December 17, 2004
 113




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##### Table of Contents



SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT No annual report or proxy material has been sent to security holders. 114




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description2.1
    
    
    Agreement and Plan of Merger, dated as of May 4, 2004, by and
among IASIS Investment LLC, Titan Merger Corporation and IASIS
Healthcare Corporation (8)2.2
    
    
    Indemnification Agreement dated as of May 4, 2004, by and among
IASIS Investment LLC, IASIS Healthcare Corporation, and the
stockholders and option holders of IASIS Healthcare Corporation
listed on the signature pages thereof (1)2.3
    
    
    Asset Sale Agreement dated as of January 16, 2004, by and between
NLVH, Inc. and IASIS Healthcare Corporation (2)2.4
    
    
    Assignment and Assumption of Asset Sale Agreement dated as of
January 16, 2004, by and between IASIS Healthcare Corporation and
Lake Mead Hospital, Inc. (2)2.5
    
    
    Guaranty of Payment and Performance dated as of January 16, 2004,
executed by IASIS Healthcare Corporation in favor of NLVH, Inc.
(2)3.1
    
    
    Certificate of Formation of IASIS Healthcare LLC, as filed with
the Secretary of State of the State of Delaware on May 11, 2004
(8)3.2
    
    
    Limited Liability Company Agreement of IASIS Healthcare LLC dated
as of May 11, 2004 (8)4.1
    
    
    Indenture, dated as of June 22, 2004, among IASIS Healthcare LLC,
IASIS Capital Corporation, the Subsidiary Guarantors and The Bank
of New York Trust Company, N.A., as Trustee (8)4.2
    
    
    Form of Notation of Subsidiary Guarantee (8)4.3
    
    
    Form of 8 3/4% Senior Subordinated Exchange Note due 2014 (8)4.4
    
    
    Supplemental Indenture, dated as of June 30, 2004, by and between
IASIS Finance Texas Holdings, LLC, IASIS Healthcare LLC, IASIS
Capital Corporation, the existing Subsidiary Guarantors and The
Bank of New York Trust Company, N.A., as Trustee (8)4.5
    
    
    Supplemental Indenture, effective as of November 5, 2004, by and
between Mountain Vista Medical Center, LP, IASIS Healthcare LLC,
IASIS Capital Corporation, the existing Subsidiary Guarantors and
The Bank of New York Trust Company, N.A., as Trustee10.1
    
    
    Lease, dated as of July 29, 1977, by and between Sierra Equities,
Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (3)10.2
    
    
    Addendum to Lease entered into by and between Sierra Equities,
Inc., as Landlord, and Mesa General Hospital, Inc., as Tenant (3)10.3
    
    
    Conforming Amendment to Lease, dated as of June 10, 1991, by and
between Sierra Equities, Inc., as Landlord, and Mesa General
Hospital, Inc., as Tenant (3)10.4
    
    
    Amendment to Hospital Lease, dated as of October 31, 2000, by and
between Sierra Equities, Inc., as Landlord, and Mesa General
Hospital, L.P., as Tenant (3)10.5
    
    
    Amendment to Lease, dated April 30, 2003, by and between Sierra
Equities, Inc. and Mesa General Hospital, L.P. (4)
 115




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Exhibit No.
    
    Description10.6
    
    
    Amended and Restated Pioneer Hospital Lease, dated as of June 28,
2002, by and between Health Care Property Investors, Inc. and
Pioneer Valley Hospital, Inc. (5)10.7
    
    
    Lease Agreement, dated as of October 6, 2003, between The Dover
Centre, LLC and IASIS Healthcare Corporation (6)10.8
    
    
    Form of Indemnification Agreement (8)10.9
    
    
    Contract between Arizona Health Care Cost Containment System and
Health Choice Arizona (including Amendment No. 1 thereto),
effective as of October 1, 2003 (4)10.10
    
    
    Amendment No. 2 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.11
    
    
    Amendment No. 3 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.12
    
    
    Amendment No. 4 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.13
    
    
    Amendment No. 5 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.14
    
    
    Amendment No. 6 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2003 (6)10.15
    
    
    Amendment No. 7 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
April 1, 2004 (8)10.16
    
    
    Amendment No. 8 to Contract between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 2004 (8)10.17
    
    
    Amendment No. 9 to Contact between Arizona Health Care Cost
Containment System and Health Choice Arizona, effective as of
October 1, 200410.18
    
    
    Purchase and Sale Agreement dated as of December 15, 2003, by and
between Rocky Mountain Medical Center, Inc. and Board of
Education of the Granite School District (7)10.19
    
    
    Letter Agreement dated as of January 26, 2004 by and among Rocky
Mountain Medical Center, Inc., Board of Education of Granite
School District and Merrill Title Company (7)10.20
    
    
    Information System Agreement, dated February 23, 2000, between
McKesson Information Solutions LLC and IASIS Healthcare
Corporation, as amended (8)**10.21
    
    
    Amended and Restated Credit Agreement, dated June 22, 2004, by
and among IASIS Healthcare LLC, IASIS Healthcare Corporation, the
Subsidiary Guarantors, Bank of America, N.A., as Administrative
Agent, L/C Issuer and Swingline Lender and the other lenders
party thereto (8)10.22
    
    
    Joinder Agreement, dated as of June 30, 2004, by and between
IASIS Finance Texas Holdings, LLC and Bank of America, N.A., as
Administrative Agent (8)10.23
    
    
    Joinder Agreement, effective as of November 5, 2004, by and
between Mountain Vista Medical Center, LP and Bank of America,
N.A., as Administrative Agent
 116




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##### Table of Contents



Exhibit No.
    
    Description10.24
    
    
    Employment Agreement, dated as of May 4, 2004, by and between
IASIS Healthcare Corporation and David R. White (8)10.25
    
    
    Employment Agreement, dated as of May 4, 2004, by and between
IASIS Healthcare Corporation and Sandra K. McRee (8)10.26
    
    
    Employment Agreement, dated as of May 4, 2004, by and between
IASIS Healthcare Corporation and W. Carl Whitmer (8)10.27
    
    
    Form of Roll-over Option Letter Agreement (8)10.28
    
    
    IASIS Healthcare Corporation 2004 Stock Option Plan (8)10.29
    
    
    Management Services Agreement dated as of June 22, 2004 by and
among IASIS Healthcare LLC, Trimaran Fund II, L.L.C., Trimaran
Parallel Fund II, L.P., Trimaran Capital L.L.C., CIBC Employee
Private Equity Partners (Trimaran), CIBC MB Inc., JLL Partners
Inc., TPG IASIS IV LLC, TPG IASIS III LLC, TPG IASIS Co-Invest I
LLC and TPG IASIS Co-Invest II LLC (8)10.30
    
    
    Investor Rights Agreement dated as of June 22, 2004, by and
between IASIS Investment LLC and IASIS Healthcare Corporation (8)10.31
    
    
    Form of Management Stockholders Agreement between IAS and each of
David R. White, Sandra K. McRee and W. Carl Whitmer (8)10.32
    
    
    Form of Management Stockholders Agreement under IASIS Healthcare
Corporation 2004 Stock Option Plan (8)10.33
    
    
    Form of Stock Option Grant Agreement under IASIS Healthcare
Corporation 2004 Stock Option Plan (8)10.34
    
    
    Form of Management Stockholders Agreement for Rollover Options (8)10.35
    
    
    IASIS Corporate Incentive Plan (8)10.36
    
    
    IASIS Market Executive Incentive Program (8)14
    
    
    Code of Ethics (6)21
    
    
    Subsidiaries of IASIS Healthcare Corporation31.1
    
    
    Certification of Principal Executive Officer Pursuant to Rule
15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Principal Financial Officer Pursuant to Rule
15d-14(a) under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
    
    
    Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  **
    
    Portions of this exhibit have been omitted and filed separately with the
Commission pursuant to a grant of confidential treatment pursuant to Rule
24(b)-2 promulgated under the Securities Exchange Act of 1934, as amended. 117




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(1)
    
    Incorporated by reference to IASIS Healthcare Corporations Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 2004.(2)
    
    Incorporated by reference to IASIS Healthcare Corporations Current
Report on Form 8-K filed on February 2, 2004.(3)
    
    Incorporated by reference to IASIS Healthcare Corporations Annual Report
on Form 10-K for the fiscal year ended September 30, 2000.(4)
    
    Incorporated by reference to IASIS Healthcare Corporations Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2003.(5)
    
    Incorporated by reference to IASIS Healthcare Corporations Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 2002.(6)
    
    Incorporated by reference to IASIS Healthcare Corporations Annual Report
on Form 10-K for the fiscal year ended September 30, 2003.(7)
    
    Incorporated by reference to IASIS Healthcare Corporations Quarterly
Report on Form 10-Q for the fiscal quarter ended December 31, 2003.(8)
    
    Incorporated by reference to the Companys Registration Statement on Form
S-4 (Registration No. 333-117362). 118