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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the Quarterly Period Ended December 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 For the transition period from _____________ to _____________. COMMISSION FILE NUMBER: 333-117362 IASIS HEALTHCARE LLC  DELAWARE
    
    20-1150104(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 DOVER CENTRE
117 SEABOARD LANE, BUILDING E
FRANKLIN, TENNESSEE 37067
(Address of Principal Executive Offices) (615) 844-2747
(Registrants Telephone Number, Including Area Code) Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report) Indicate by check 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 þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES o NO þ As
of February 10, 2005, 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.




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TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed Consolidated Balance Sheets  December 31, 2004 (Unaudited) and
September 30, 2004
    
    
    1Condensed Consolidated Statements of Operations (Unaudited)  Three Months Ended
December 31, 2004 and 2003 (Predecessor)
    
    
    2Condensed Consolidated Statements of Cash Flows (Unaudited)  Three Months Ended
December 31, 2004 and 2003 (Predecessor)
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    33PART II. OTHER INFORMATION
    
    
    33Item 6. Exhibits
    
    
    33EX-31.1  SECTION 302 CERTIFICATION OF THE CEOEX-31.2  SECTION 302 CERTIFICATION OF THE CFOEX-32.1  SECTION 906 CERTIFICATION OF THE CEO & CFO
  i




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PART I
FINANCIAL INFORMATION 
 Item 1. Financial Statements IASIS HEALTHCARE LLC 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)
 (Unaudited)December 31,
    
    
    September 30,2004
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    61,277
    
    
    $
    98,805Accounts receivable, net of allowance for doubtful accounts of
$105,270 and $94,139, respectively
    
    
    173,152
    
    
    
    165,280Inventories
    
    
    27,595
    
    
    
    26,253Prepaid expenses and other current assets
    
    
    25,405
    
    
    
    21,297Total current assets
    
    
    287,429
    
    
    
    311,635Property and equipment, net
    
    
    557,853
    
    
    
    532,459Goodwill
    
    
    252,204
    
    
    
    252,204Unallocated purchase price
    
    
    578,455
    
    
    
    585,013Other assets, net
    
    
    42,070
    
    
    
    42,850Total assets
    
    $
    1,718,011
    
    
    $
    1,724,161LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    55,722
    
    
    $
    61,295Salaries and benefits payable
    
    
    31,081
    
    
    
    36,463Accrued interest payable
    
    
    6,834
    
    
    
    13,821Medical claims payable
    
    
    56,490
    
    
    
    55,421Other accrued expenses and other current liabilities
    
    
    25,459
    
    
    
    26,142Current portion of long-term debt and capital lease obligations
    
    
    7,396
    
    
    
    10,728Total current liabilities
    
    
    182,982
    
    
    
    203,870Long-term debt and capital lease obligations
    
    
    902,350
    
    
    
    902,026Other long-term liabilities
    
    
    36,508
    
    
    
    31,596Minority interest
    
    
    12,506
    
    
    
    12,964Equity:Members equity
    
    
    583,665
    
    
    
    573,705Total liabilities and equity
    
    $
    1,718,011
    
    
    $
    1,724,161
 See accompanying notes. 1




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IASIS HEALTHCARE LLC 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (In
thousands)
 PredecessorThree Months
    
    
    Three MonthsEnded December
    
    
    Ended December31, 2004
    
    
    31, 2003Net revenue:Acute care revenue
    
    $
    283,774
    
    
    $
    249,390Premium revenue
    
    
    86,201
    
    
    
    68,714Total net revenue
    
    
    369,975
    
    
    
    318,104Costs and expenses:Salaries and benefits
    
    
    106,509
    
    
    
    99,416Supplies
    
    
    45,366
    
    
    
    40,279Medical claims
    
    
    73,335
    
    
    
    57,771Rents and leases
    
    
    7,859
    
    
    
    7,800Other operating expenses
    
    
    53,036
    
    
    
    48,028Provision for bad debts
    
    
    32,255
    
    
    
    25,098Interest expense, net
    
    
    14,670
    
    
    
    13,891Depreciation and amortization
    
    
    18,224
    
    
    
    16,731Management fees
    
    
    958
    
    
    
    Total costs and expenses
    
    
    352,212
    
    
    
    309,014Earnings before gain (loss) on
sale of assets, minority interests
and income taxes
    
    
    17,763
    
    
    
    9,090Gain (loss) on sale of assets, net
    
    
    (73
    )
    
    
    151Minority interests
    
    
    (1,133
    )
    
    
    (991
    )Earnings before income taxes
    
    
    16,557
    
    
    
    8,250Income tax expense
    
    
    6,597
    
    
    
    32Net earnings
    
    $
    9,960
    
    
    $
    8,218
 See accompanying notes. 2




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IASIS HEALTHCARE LLC 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 (In thousands)
 PredecessorThree Months
    
    
    Three MonthsEnded December
    
    
    Ended December31, 2004
    
    
    31, 2003Cash flows from operating activities:Net earnings
    
    $
    9,960
    
    
    $
    8,218Adjustments to reconcile net earnings to net
cash provided by operating activities:Depreciation and amortization
    
    
    18,224
    
    
    
    16,731Minority interests
    
    
    1,133
    
    
    
    991Deferred income taxes
    
    
    6,210
    
    
    
    Loss (gain) on sale of assets
    
    
    73
    
    
    
    (151
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,872
    )
    
    
    (8,330
    )Inventories, prepaid expenses and other
current assets
    
    
    (5,450
    )
    
    
    607Accounts payable and other accrued
liabilities
    
    
    (7,799
    )
    
    
    (5,138
    )Net cash provided by operating activities
    
    
    14,479
    
    
    
    12,928Cash flows from investing activities:Purchase of property and equipment
    
    
    (46,125
    )
    
    
    (17,362
    )Cash paid for acquisition
    
    
    (335
    )
    
    
    Proceeds from sale of assets
    
    
    
    
    
    
    151Change in other assets
    
    
    (509
    )
    
    
    (946
    )Net cash used in investing activities
    
    
    (46,969
    )
    
    
    (18,157
    )Cash flows from financing activities:Proceeds from debt borrowings
    
    
    2,274
    
    
    
    Payment of debt and capital leases
    
    
    (5,281
    )
    
    
    (1,504
    )Debt financing costs incurred
    
    
    (440
    )
    
    
    Distribution of minority interests
    
    
    (1,591
    )
    
    
    (1,343
    )Proceeds received from hospital syndication
    
    
    
    
    
    
    1,976Net cash used in financing activities
    
    
    (5,038
    )
    
    
    (871
    )Decrease in cash and cash equivalents
    
    
    (37,528
    )
    
    
    (6,100
    )Cash and cash equivalents at beginning of period
    
    
    98,805
    
    
    
    101,070Cash and cash equivalents at end of period
    
    $
    61,277
    
    
    $
    94,970Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    22,598
    
    
    $
    23,097Cash paid for income taxes, net
    
    $
    9
    
    
    $
    21Supplemental schedule of noncash investing
activities:Property and equipment in accounts payable
    
    $
    6,160
    
    
    $
    
 See accompanying notes. 3




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IASIS HEALTHCARE LLC 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED
 FINANCIAL STATEMENTS
  1.
    Organization and Basis of Presentation On
June 22, 2004, an investor group led
by Texas Pacific Group acquired IASIS Healthcare Corporation
(IAS or the Predecessor) through a merger (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 initial capital 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
unaudited condensed consolidated 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 unaudited condensed consolidated financial statements for the three months
ended December 31, 2003 reflect the results of operations and cash flows of the Predecessor. The
unaudited condensed consolidated financial statements as of and for the three months ended December
31, 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 of related net assets
upon the final allocation. IASIS LLC owns and operates medium-sized acute care hospitals in high-growth urban and
suburban markets. At December 31, 2004, the Company owned or leased 15 acute care hospitals and
one behavioral health hospital, with a total of 2,246 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 108,000 members at December 31,
2004. In addition, the Company has an ownership interest in three ambulatory surgery centers. The unaudited condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial reporting
and in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by accounting principles generally accepted in the United States for
complete financial statements. The condensed consolidated balance sheet of the Company at
September 30, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete financial
statements. For further information, refer to the consolidated financial statements and footnotes
thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended September
30, 2004. 4




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IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all material adjustments (consisting of normal recurring items) necessary for a
fair presentation of results for the interim periods presented. The results of operations for any
interim period are not necessarily indicative of results for the full year. The preparation of the financial statements in conformity with generally accepted accounting
principles in the United States requires management to make estimates and assumptions that affect
the amounts reported in the accompanying unaudited condensed consolidated financial statements and
notes. Actual results could differ from those estimates. The unaudited condensed 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 include the IASIS LLC corporate
office costs, which were $8.8 million and $8.3 million for the three months ended December 31, 2004
and 2003, respectively.  2.
    Recently Issued Accounting Pronouncements On
December 16, 2004, the Financial Accounting Standards Board (the FASB) issued SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123(R)), which is a
revision of SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS 123). SFAS 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25),
and amends SFAS No. 95, Statement of Cash
Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123.
However, SFAS 123(R) requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. The Company expects to adopt
SFAS 123(R) on October 1,
2006. Management of the Company has not yet determined the impact of adopting the new standard.  3.
    Long-Term Debt and Capital Lease Obligations Long-term debt and capital lease obligations consist of the following (in thousands): December 31,
    
    
    September 30,2004
    
    
    2004Senior secured credit facilities
    
    $
    422,875
    
    
    $
    423,938Senior subordinated notes
    
    
    475,000
    
    
    
    478,500Capital lease obligations and other
    
    
    11,871
    
    
    
    10,316909,746
    
    
    
    912,754Less current maturities
    
    
    7,396
    
    
    
    10,728$
    902,350
    
    
    $
    902,026
 Senior Secured Credit
Facilities 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 IASs existing bank credit facility. 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). 5




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IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 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 the Companys 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 the Companys 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
December 31, 2004, $422.9 million was outstanding under the Term Facility loan and no
amounts were outstanding under the revolving credit facility. The Term Facility includes a $75.0
million sublimit for letters of credit that may be issued. At December 31, 2004, the Company had
issued $38.3 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 Term Facility was approximately 4.3% for the three months
ended December 31, 2004. 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). 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). 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 6




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IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 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 tendered their notes and
consented to the applicable proposed amendments. In October 2004, the remaining $3.5 million of
the 13% notes were retired. This amount is included in current liabilities on the Companys
condensed consolidated 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.  4.
    Acquisition of IASIS Healthcare Corporation As
previously discussed in Note 1, 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 purchase price for IAS, including
direct transaction costs, was $1.5 billion, of which $578.5 million remains in unallocated
purchase price on the Companys December 31, 2004 balance sheet. The final purchase price allocation is subject to the Company obtaining a
final valuation prepared by an independent appraiser. The Company expects to receive the
independent appraisers final valuation and complete the final purchase price allocation during the
second fiscal quarter of 2005. 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. Information regarding the change in the unallocated purchase price for the periods indicated
is summarized below (in thousands): Unallocated PurchasePriceBalance at September 30, 2004
    
    $
    585,013Change in deferred taxes
    
    
    (6,210
    )Other
    
    
    (348
    )Balance at December 31, 2004
    
    $
    578,455
 7




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IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  5.
    Stock Benefit Plans Although IASIS LLC has no stock option plan or outstanding stock options, the Company, through
its parent, IAS, grants stock options for a fixed number of common shares
to employees. SFAS 123 encourages, but does not
require, companies to record


 compensation cost for stock-based employee compensation plans at fair value. The Company has
chosen to account for employee stock option grants in accordance with APB 25 and, 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. See Note 2
 Recently Issued Accounting Pronouncements. If the Company had measured compensation cost for the stock options granted under the fair
value based method prescribed by SFAS 123, net
earnings would have been changed to the pro forma amounts set forth below (in thousands): Three Months Ended December 31,2004
    
    
    2003Net earnings as reported
    
    $
    9,960
    
    
    $
    8,218Deduct: Total stock based
employee compensation
determined under fair value
based method for all awards,
net of related tax effects
    
    
    (234
    )
    
    
    (375
    )Pro forma net earnings
    
    $
    9,726
    
    
    $
    7,843
 The effect of applying SFAS 123 for providing pro forma disclosure may not to be
representative of the effect on reported net earnings for future years.  6.
    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. However, some claims may exceed the scope of coverage in
effect. Plaintiffs in these matters may request punitive or other damages that may potentially 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 December 31 and September 30, 2004, the Companys professional and
general liability accrual for asserted and unasserted claims was approximately $33.9 million and
$28.8 million, respectively, which is included within other long-term liabilities in the
accompanying condensed consolidated balance sheets. 8




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IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS The Company is subject to claims and legal actions in the ordinary course of business relative
to workers compensation and other labor and employment matters. To cover these types of claims,
the Company maintains workers compensation insurance coverage with a self-insured retention. The
Company accrues costs of workers compensation claims based upon estimates derived from its claims
experience. Health Choice Health Choice has entered into a capitated contract whereby the Plan provides healthcare
services in exchange for fixed periodic and supplemental payments from the Arizona Health Care Cost
Containment System (AHCCCS). These services are provided regardless of the actual costs incurred
to provide these services. The Company receives reinsurance and other supplemental payments from
AHCCCS to cover certain costs of healthcare services that exceed certain thresholds. The Company
believes the capitated payments, together with reinsurance and other supplemental payments are
sufficient to pay for the services Health Choice is obligated to deliver. As of December 31, 2004,
the Company 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
is expanding and renovating
some of its existing facilities to permit additional patient volume and provide a greater
variety of services. The Company had incurred approximately $88.4 million in uncompleted projects
as of December 31, 2004, which is included in property and equipment in its accompanying unaudited
condensed consolidated balance sheet at that date. At December 31, 2004, the Company had various
construction and other projects in progress with an estimated additional cost to complete and equip
of approximately $62.4 million. 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
Healthcare Corporation (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 9




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IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 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, l998 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.  7.
    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: 10




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IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS For the Three Months Ended December 31, 2004Acute Care
    
    
    Health Choice
    
    
    Eliminations
    
    
    ConsolidatedNet acute care revenue
    
    $
    283,774
    
    
    $
    
    
    
    $
    
    
    
    $
    283,774Premium revenue
    
    
    
    
    
    
    86,201
    
    
    
    
    
    
    
    86,201Revenue between segments
    
    
    2,224
    
    
    
    
    
    
    
    (2,224
    )
    
    
    Net revenue
    
    
    285,998
    
    
    
    86,201
    
    
    
    (2,224
    )
    
    
    369,975Salaries and benefits
    
    
    103,789
    
    
    
    2,720
    
    
    
    
    
    
    
    106,509Supplies
    
    
    45,315
    
    
    
    51
    
    
    
    
    
    
    
    45,366Medical claims
    
    
    
    
    
    
    75,559
    
    
    
    (2,224
    )
    
    
    73,335Rents and Leases
    
    
    7,642
    
    
    
    217
    
    
    
    
    
    
    
    7,859Other operating expenses
    
    
    50,199
    
    
    
    2,837
    
    
    
    
    
    
    
    53,036Provision for bad debts
    
    
    32,255
    
    
    
    
    
    
    
    
    
    
    
    32,255Adjusted EBITDA(1)
    
    
    46,798
    
    
    
    4,817
    
    
    
    
    
    
    
    51,615Interest expense, net
    
    
    14,670
    
    
    
    
    
    
    
    
    
    
    
    14,670Depreciation and amortization
    
    
    17,484
    
    
    
    740
    
    
    
    
    
    
    
    18,224Management fees
    
    
    958
    
    
    
    
    
    
    
    
    
    
    
    958Earnings before loss on sale of
assets, minority interests and
income taxes
    
    $
    13,686
    
    
    $
    4,077
    
    
    $
    
    
    
    $
    17,763Loss on sale of assets, net
    
    
    (73
    )
    
    
    
    
    
    
    
    
    
    
    (73
    )Minority interests
    
    
    (1,133
    )
    
    
    
    
    
    
    
    
    
    
    (1,133
    )Earnings before income taxes
    
    $
    12,480
    
    
    $
    4,077
    
    
    $
    
    
    
    $
    16,557Segment assets
    
    $
    1,631,455
    
    
    $
    86,556
    
    
    
    
    
    
    $
    1,718,011Capital expenditures
    
    $
    46,088
    
    
    $
    37
    
    
    
    
    
    
    $
    46,125
 Predecessor
    
    For the Three Months Ended December 31, 2003Acute Care
    
    
    Health Choice
    
    
    Eliminations
    
    
    ConsolidatedNet acute care revenue
    
    $
    249,390
    
    
    $
    
    
    
    $
    
    
    
    $
    249,390Premium revenue
    
    
    
    
    
    
    68,714
    
    
    
    
    
    
    
    68,714Revenue between segments
    
    
    2,979
    
    
    
    
    
    
    
    (2,979
    )
    
    
    Net revenue
    
    
    252,369
    
    
    
    68,714
    
    
    
    (2,979
    )
    
    
    318,104Salaries and benefits
    
    
    97,243
    
    
    
    2,173
    
    
    
    
    
    
    
    99,416Supplies
    
    
    40,237
    
    
    
    42
    
    
    
    
    
    
    
    40,279Medical claims
    
    
    
    
    
    
    60,750
    
    
    
    (2,979
    )
    
    
    57,771Rents and Leases
    
    
    7,661
    
    
    
    139
    
    
    
    
    
    
    
    7,800Other operating expenses
    
    
    45,483
    
    
    
    2,545
    
    
    
    
    
    
    
    48,028Provision for bad debts
    
    
    25,098
    
    
    
    
    
    
    
    
    
    
    
    25,098Adjusted EBITDA(1)
    
    
    36,647
    
    
    
    3,065
    
    
    
    
    
    
    
    39,712Interest expense, net
    
    
    13,891
    
    
    
    
    
    
    
    
    

    
    
    13,891Depreciation and amortization
    
    
    16,690
    
    
    
    41
    
    
    
    
    
    
    
    16,731Earnings before gain on sale of
assets, minority interests and
income taxes
    
    $
    6,066
    
    
    $
    3,024
    
    
    $
    
    
    
    $
    9,090Gain on sale of assets, net
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    151Minority interests
    
    
    (991
    )
    
    
    
    
    
    
    
    
    
    
    (991
    )Earnings before income taxes
    
    $
    5,226
    
    
    $
    3,024
    
    
    $
    
    

    
    $
    8,250Segment assets
    
    $
    976,312
    
    
    $
    56,885
    
    
    
    
    
    
    $
    1,033,197Capital expenditures
    
    $
    17,333
    
    
    $
    29
    
    
    
    
    
    
    $
    17,362
   (1)
    Adjusted EBITDA represents net earnings before interest expense, income taxes, depreciation
and amortization, management fees, gain (loss) on sale of assets, and minority interests.
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. 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. 11




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  8.
    Supplemental Condensed Consolidating Financial Information The 8 3/4% notes described in Note 3 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 December 31, 2004 and September 31, 2004,
condensed consolidating statements of operations for the three months ended December 31, 2004 and
2003 and condensed consolidating statements of cash flows for the three months ended December 31,
2004 and 2003 for the Company, segregating the parent company issuer, the subsidiary guarantors,
the subsidiary non-guarantors and eliminations, are found below. 12




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IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Balance Sheet (unaudited)
December 31, 2004(in thousands) SubsidiarySubsidiary
    
    
    Non-
    
    
    
    
    
    
    CondensedParent Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    61,050
    
    
    $
    227
    
    
    $
    
    
    
    $
    61,277Accounts receivable, net
    
    
    
    
    
    
    127,394
    
    
    
    45,758
    
    
    
    
    
    
    
    173,152Inventories
    
    
    
    
    
    
    19,461
    
    
    
    8,134
    
    
    
    
    
    
    
    27,595Prepaid expenses and other current assets
    
    
    
    
    
    
    14,212
    
    
    
    11,193
    
    
    
    
    
    
    
    25,405Total current assets
    
    
    
    
    
    
    222,117
    
    
    
    65,312
    
    
    
    
    
    
    
    287,429Property and equipment, net
    
    
    
    
    
    
    353,274
    
    
    
    204,579
    
    
    
    
    
    
    
    557,853Intercompany
    
    
    
    
    
    
    (54,954
    )
    
    
    54,954
    
    
    
    
    
    
    
    Net investment in and advances to subsidiaries
    
    
    867,707
    
    
    

    
    
    
    
    
    
    
    
    (867,707
    )
    
    
    Goodwill
    
    
    
    
    
    
    208,150
    
    
    
    44,054
    
    
    
    
    
    
    
    252,204Unallocated purchase price
    
    
    578,455
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,455Other assets, net
    
    
    27,699
    
    
    
    10,609
    
    
    
    3,762
    
    
    
    
    
    
    
    42,070Total assets
    
    $
    1,473,861
    
    
    $
    739,196
    
    
    $
    372,661
    
    
    $
    (867,707
    )
    
    $
    1,718,011Liabilities and EquityCurrent liabilities:Accounts payable
    
    $
    
    
    
    $
    39,134
    
    
    $
    16,588
    
    
    $
    
    
    
    $
    55,722Salaries and benefits payable
    
    
    
    
    
    
    23,334
    
    
    
    7,747
    
    
    
    
    
    
    
    31,081Accrued interest payable
    
    
    6,834
    
    
    
    (902
    )
    
    
    902
    
    
    
    
    
    
    
    6,834Medical claims payable
    
    
    
    
    
    
    
    
    
    
    56,490
    
    
    
    
    
    
    
    56,490Other accrued expenses and other current liabilities
    
    
    
    
    
    
    23,636
    
    
    
    1,823
    
    
    
    
    
    
    
    25,459Current portion of long-term debt and capital lease
obligations
    
    
    4,402
    
    
    
    1,812
    
    
    
    4,268
    
    
    
    (3,086
    )
    
    
    7,396Total current liabilities
    
    
    11,236
    
    
    
    87,014
    
    
    
    87,818
    
    
    
    (3,086
    )
    
    
    182,982Long-term debt and capital lease obligations
    
    
    893,625
    
    
    
    6,469
    
    
    
    139,650
    
    
    
    (137,394
    )
    
    
    902,350Other long-term liabilities
    
    
    
    
    
    
    36,508
    
    
    
    
    
    
    
    
    
    
    
    36,508Minority interest
    
    
    
    
    
    
    12,506
    
    
    
    
    
    
    
    
    
    
    
    12,506Members equity
    
    
    569,000
    
    
    
    596,699
    
    
    
    145,193
    
    
    
    (727,227
    )
    
    
    583,665Total liabilities and equity
    
    $
    1,473,861
    
    
    $
    739,196
    
    
    $
    372,661
    
    
    $
    (867,707
    )
    
    $
    1,718,011
 13




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED 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
    
    
    
    
    
    
    
    
    
    
    
    12,964Member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
 14




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Three Months Ended December 31, 2004 (unaudited)(in thousands) Subsidiary
    
    
    Subsidiary Non-
    
    
    
    
    
    
    CondensedParent Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenue:Acute care revenue
    
    $
    
    
    
    $
    202,906
    
    
    $
    83,092
    
    
    $
    (2,224
    )
    
    $
    283,774Premium revenue
    
    
    
    
    
    
    
    
    
    
    86,201
    
    
    
    
    
    
    
    86,201Total net revenue
    
    
    
    
    
    
    202,906
    
    
    
    169,293
    
    
    
    (2,224
    )
    
    
    369,975Costs and expenses:
    
    
    Salaries and benefits
    
    
    
    
    
    
    77,065
    
    
    
    29,444
    
    
    
    
    
    
    
    106,509Supplies
    
    
    
    
    
    
    34,949
    
    
    
    10,417
    
    
    
    
    
    
    
    45,366Medical claims
    
    
    
    
    
    
    
    
    
    
    75,559
    
    
    
    (2,224
    )
    
    
    73,335Rents and leases
    
    
    
    
    
    
    5,473
    
    
    
    2,386
    
    
    
    
    
    
    
    7,859Other operating expenses
    
    
    
    
    
    
    38,129
    
    
    
    14,907
    
    
    
    
    
    
    
    53,036Provision for bad debts
    
    
    
    
    
    
    26,296
    
    
    
    5,959
    
    
    
    
    
    
    
    32,255Interest expense, net
    
    
    14,670
    
    
    
    
    
    
    
    2,435
    
    
    
    (2,435
    )
    
    
    14,670Depreciation and amortization
    
    
    1,718
    
    
    
    11,808
    
    
    
    4,698
    
    
    
    
    
    
    
    18,224Management fees
    
    
    (771
    )
    
    
    
    
    
    
    1,729
    
    
    
    
    
    
    
    958Equity in earnings of affiliates
    
    
    (29,739
    )
    
    
    
    
    
    
    
    
    
    
    29,739
    
    
    
    Total costs and expenses
    
    
    (14,122
    )
    
    
    193,720
    
    
    
    147,534
    
    
    
    25,080
    
    
    
    352,212Earnings before loss on sale of
assets, minority interests, and
income taxes
    
    
    14,122
    
    
    
    9,186
    
    
    
    21,759
    
    
    
    (27,304
    )
    
    
    17,763Loss on sale of assets, net
    
    
    
    
    
    
    (73
    )
    
    
    
    
    
    
    
    
    
    
    (73
    )Minority interests
    
    
    
    
    
    
    (1,133
    )
    
    
    
    
    
    
    
    
    
    
    (1,133
    )Earnings before income taxes
    
    
    14,122
    
    
    
    7,980
    
    
    
    21,759
    
    
    
    (27,304
    )
    
    
    16,557Income tax expense
    
    
    6,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,597Net earnings
    
    $
    7,525
    
    
    $
    7,980
    
    
    $
    21,759
    
    
    $
    (27,304
    )
    
    $
    9,960
 15




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Operations
For the Three Months Ended December 31, 2003 (unaudited)(in thousands) Subsidiary
    
    
    Subsidiary Non-
    
    
    
    
    
    
    CondensedPredecessor
    
    Parent Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedNet revenue:Acute care revenue
    
    $
    
    
    
    $
    172,376
    
    
    $
    79,993
    
    
    $
    (2,979
    )
    
    $
    249,390Premium revenue
    
    
    
    
    
    
    
    
    
    
    68,714
    
    
    
    
    
    
    
    68,714Total net revenue
    
    
    
    
    
    
    172,376
    
    
    
    148,707
    
    
    
    (2,979
    )
    
    
    318,104Costs and expenses:Salaries and benefits
    
    
    
    
    
    
    70,683
    
    
    
    28,733
    
    
    
    
    
    
    
    99,416Supplies
    
    
    
    
    
    
    30,012
    
    
    
    10,267
    
    
    
    
    
    
    
    40,279Medical claims
    
    
    
    
    
    
    
    
    
    
    60,750
    
    
    
    (2,979
    )
    
    
    57,771Rents and leases
    
    
    
    
    
    
    5,490
    
    
    
    2,310
    
    
    
    
    
    
    
    7,800Other operating expenses
    
    
    
    
    
    
    33,884
    
    
    
    14,144
    
    
    
    
    
    
    
    48,028Provision for bad debts
    
    
    
    
    
    
    18,653
    
    
    
    6,445
    
    
    
    
    
    
    
    25,098Interest expense, net
    
    
    14,578
    
    
    
    (687
    )
    
    
    2,949
    
    
    
    (2,949
    )
    
    
    13,891Depreciation and amortization
    
    
    973
    
    
    
    12,830
    
    
    
    2,928
    
    
    
    
    
    
    
    16,731Management fees
    
    
    (1,671
    )
    
    
    
    
    
    
    1,671
    
    
    
    
    
    
    
    Equity in earnings of affiliates
    
    
    (19,149
    )
    
    
    
    
    
    
    
    
    
    
    19,149
    
    
    
    Total costs and expenses
    
    
    (5,269
    )
    
    
    170,865
    
    
    
    130,197
    
    
    
    13,221
    
    
    
    309,014Earnings before loss on sale of
assets, minority interests, and
income taxes
    
    
    5,269
    
    
    
    1,511
    
    
    
    18,510
    
    
    
    (16,200
    )
    
    
    9,090Gain on sale of assets, net
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    151Minority interests
    
    
    
    
    
    
    (991
    )
    
    
    
    
    
    
    
    
    
    
    (991
    )Earnings before income taxes
    
    
    5,269
    
    
    
    671
    
    
    
    18,510
    
    
    
    (16,200
    )
    
    
    8,250Income tax expense
    
    
    32
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32Net earnings
    
    $
    5,237
    
    
    $
    671
    
    
    $
    18,510
    
    
    $
    (16,200
    )
    
    $
    8,218
 16




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##### Table of Contents



IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended December 31, 2004 (unaudited)(in thousands) SubsidiarySubsidiary
    
    
    Non-
    
    
    
    
    
    
    CondensedParent Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activitiesNet earnings
    
    $
    7,525
    
    
    $
    7,980
    
    
    $
    21,759
    
    
    $
    (27,304
    )
    
    $
    9,960Adjustments to reconcile net earnings to net cash provided
operating activities:Depreciation and amortization
    
    
    1,718
    
    
    
    11,808
    
    
    
    4,698
    
    
    
    
    
    
    
    18,224Minority interests
    
    
    
    
    
    
    1,133
    
    
    
    
    
    
    
    
    
    
    
    1,133Deferred income taxes
    
    
    6,210
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,210Loss on sale of property and equipment
    
    
    
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    73Equity in earnings of affiliates
    
    
    (29,739
    )
    
    
    
    
    
    
    
    
    
    
    29,739
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (6,458
    )
    
    
    (1,414
    )
    
    
    
    
    
    
    (7,872
    )Inventories, prepaid expenses and other current assets
    
    
    
    
    
    
    (5,643
    )
    
    
    193
    
    
    
    
    
    
    
    (5,450
    )Accounts payable and other accrued liabilities
    
    
    (6,987
    )
    
    
    (1,837
    )
    
    
    1,025
    
    
    
    
    
    
    
    (7,799
    )Net cash provided by (used in) operating activities
    
    
    (21,273
    )
    
    
    7,056
    
    
    
    26,261
    
    
    
    2,435
    
    
    
    14,479Cash flows from investing activitiesPurchases of property and equipment
    
    
    
    
    
    
    (26,568
    )
    
    
    (19,557
    )
    
    
    
    
    
    
    (46,125
    )Cash paid for acquisition
    
    
    (335
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (335
    )Change in other assets
    
    
    
    
    
    
    (240
    )
    
    
    (269
    )
    
    
    
    
    
    
    (509
    )Net cash used in investing activities
    
    
    (335
    )
    
    
    (26,808
    )
    
    
    (19,826
    )
    
    
    
    
    
    
    (46,969
    )Cash flows from financing activitiesProceeds from debt borrowings
    
    
    2,274
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,274Payment of debt and capital leases
    
    
    (4,583
    )
    
    
    (404
    )
    
    
    (294
    )
    
    
    
    
    
    
    (5,281
    )Debt financing costs incurred

    
    
    (440
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (440
    )Change in intercompany balances with affiliates, net
    
    
    24,357
    
    
    
    (16,257
    )
    
    
    (5,665
    )
    
    
    (2,435
    )
    
    
    Distribution of minority interests
    
    
    
    
    
    
    
    
    
    
    (1,591
    )
    
    
    
    
    
    
    (1,591
    )Net cash provided by (used in) financing activities
    
    
    21,608
    
    
    
    (16,661
    )
    
    
    (7,550
    )
    
    
    (2,435
    )
    
    
    (5,038
    )Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (36,413
    )
    
    
    (1,115
    )
    
    
    
    
    
    
    (37,528
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    97,463
    
    
    
    1,342
    
    
    
    
    
    
    
    98,805Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    61,050
    
    
    $
    227
    
    
    $
    
    
    
    $
    61,277
 17




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IASIS HEALTHCARE LLC
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS IASIS Healthcare LLC
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended December 31, 2003 (unaudited)(in thousands) SubsidiarySubsidiary
    
    
    Non-
    
    
    
    
    
    
    CondensedPredecessor
    
    Parent Issuer
    
    
    Guarantors
    
    
    Guarantors
    
    
    Eliminations
    
    
    ConsolidatedCash flows from operating activitiesNet earnings
    
    $
    5,237
    
    
    $
    671
    
    
    $
    18,510
    
    
    $
    (16,200
    )
    
    $
    8,218Adjustments to reconcile net earnings to net cash provided
operating activities:Depreciation and amortization
    
    
    973
    
    
    
    12,830
    
    
    
    2,928
    
    
    
    
    
    
    
    16,731Minority interests
    
    
    
    
    
    
    991
    
    
    
    
    
    
    
    
    
    
    
    991Gain on sale of property and equipment
    
    
    
    
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    (151
    )Equity in earnings of affiliates
    
    
    (19,149
    )
    
    
    
    
    
    
    
    
    
    
    19,149
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    
    
    
    
    (4,299
    )
    
    
    (4,031
    )
    
    
    
    
    
    
    (8,330
    )Inventories, prepaid expenses and other current assets
    
    
    
    
    
    
    (465
    )
    
    
    1,072
    
    
    
    
    
    
    
    607Accounts payable and other accrued liabilities
    
    
    (8,361
    )
    
    
    (6,907
    )
    
    
    10,130
    
    
    
    
    
    
    
    (5,138
    )Net cash provided by (used in) operating activities
    
    
    (21,300
    )
    
    
    2,670
    
    
    
    28,609
    
    
    
    2,949
    
    
    
    12,928Cash flows from investing activitiesPurchases of property and equipment
    
    
    
    
    
    
    (9,020
    )
    
    
    (8,342
    )
    
    
    
    
    
    
    (17,362
    )Proceeds from sale of assets
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    151Change in other assets
    
    
    
    
    
    
    (1,937
    )
    
    
    991
    
    
    
    
    
    
    
    (946
    )Net cash used in investing activities
    
    
    
    
    
    
    (10,806
    )
    
    
    (7,351
    )
    
    
    

    
    
    
    (18,157
    )Cash flows from financing activitiesPayment of debt and capital leases
    
    
    
    
    
    
    (1,211
    )
    
    
    (293
    )
    
    
    
    
    
    
    (1,504
    )Proceeds received from hospital syndication
    
    
    
    
    
    
    1,976
    
    
    
    
    
    
    
    
    
    
    
    1,976Change in intercompany balances with affiliates, net
    
    
    21,300
    
    
    
    (903
    )
    
    
    (17,448
    )
    
    
    (2,949
    )
    
    
    Distribution of minority interests
    
    
    
    
    
    
    (48
    )
    
    
    (1,295
    )
    
    
    
    
    
    
    (1,343
    )Net cash provided by (used in) financing activities
    
    
    21,300
    
    
    
    (186
    )
    
    
    (19,036
    )
    
    
    (2,949
    )
    
    
    (871
    )Net increase (decrease) in cash and cash equivalents
    
    
    
    
    
    
    (8,322
    )
    
    
    2,222
    
    
    
    
    
    
    
    (6,100
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    100,862
    
    
    
    208
    
    
    
    
    
    
    
    101,070Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    92,540
    
    
    $
    2,430
    
    
    $
    
    
    
    $
    94,970
 18




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of financial condition and results of operations should
be read in conjunction with our unaudited condensed consolidated financial statements, the notes to
our unaudited condensed consolidated financial statements and the other financial information
appearing elsewhere in this report. Data for the three months ended December 31, 2004 and 2003 has
been derived from our unaudited condensed consolidated financial statements. Data for the three
months ended December 31, 2003 reflects the results of operations of IASIS Healthcare Corporation,
or IAS, as predecessor to IASIS Healthcare LLC, or IASIS LLC.
References herein to we, our and
us are to IASIS LLC and its subsidiaries and, unless
indicated otherwise or the context requires, include IAS. Forward Looking Statements Some of the statements we make in this report are forward-looking within the meaning of the
federal securities laws, which are intended to be covered by the safe harbors created thereby.
Those forward-looking statements include all statements that are not historical statements of fact
and those regarding our intent, belief or expectations including, but not limited to, the
discussions of our operating and growth strategy (including possible acquisitions and
dispositions), financing needs, projections of revenue, income or loss, capital expenditures and
future operations. Forward-looking statements involve known and unknown risks and uncertainties
that may cause actual results in future periods to differ materially from those anticipated in the
forward-looking statements. Those risks and uncertainties include, among others, the risks and
uncertainties related to our ability to generate sufficient cash to service our existing
indebtedness, our substantial level of indebtedness that could adversely affect our financial
condition, our ability to retain and negotiate favorable contracts with managed care plans, changes
in legislation that may significantly reduce government healthcare spending and our revenue, our
hospitals competition for patients from other hospitals and healthcare providers, our hospitals
facing a growth in bad debts resulting from increased self-pay volume and revenue, our ability to
recruit and retain quality physicians, our hospitals competition for staffing which may increase
our labor costs and reduce profitability, our failure to comply with extensive laws and government
regulations, the possibility that we may become subject to federal and state investigations in the
future, our ability to satisfy regulatory requirements with respect to our internal controls over
financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, a failure of our
information systems that would adversely affect our ability to properly manage our operations, an
economic downturn or other material change in any one of the regions in which we operate, potential
liabilities because of claims brought against our facilities, increasing insurance costs that may
reduce our revenue, our ability to control costs at Health Choice, the possibility of Health
Choices contract with the Arizona Health Care Cost Containment System being discontinued,
significant competition from other healthcare companies and state efforts to regulate the sale of
not-for-profit hospitals that may affect our ability to acquire hospitals, difficulties with the
integration of acquisitions that may disrupt our ongoing operations, difficulties with
consolidation or construction of our new hospital that may disrupt our ongoing operations and
require unanticipated capital expenditures, the significant capital expenditures that would be
involved in the construction of other new hospitals that could have an adverse effect on our liquidity,
state efforts to regulate the construction or expansion of hospitals that could impair our ability
to operate and expand our operations, and potential responsibilities and costs under environmental
laws that could lead to material expenditures or liability, and those risks, uncertainties and
other matters detailed in our Annual Report on Form 10-K for the fiscal year ended September 30,
2004, and in our subsequent filings with the Securities and Exchange Commission. Although we believe that the assumptions underlying the forward-looking statements contained
in this report are reasonable, any of these assumptions could prove to be inaccurate and,
therefore, there can be no assurance that the forward-looking statements included in this report
will prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included in this report, you should not regard the inclusion of such
information as a representation by us or any other person that our objectives and plans will be
achieved. We undertake no obligation to publicly release any revisions to any forward-looking
statements contained herein to reflect events and circumstances occurring after the date hereof or
to reflect the occurrence of unanticipated events. 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 19




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##### Table of Contents



services targeted to the needs of the markets we serve, promoting strong relationships with
physicians and working with local managed care plans. At December 31, 2004, we owned or leased 15
acute care hospitals and one behavioral health hospital, with a total of 2,246 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 108,000 members at December 31, 2004. In addition, we have ownership interests in
three ambulatory surgery centers. The Merger On June 22, 2004, an investor group led by Texas Pacific Group acquired IAS through a merger. The total transaction value, including tender premiums,
consent fees and other merger-related fees and expenses, was approximately $1.5 billion. See Note
1 to the unaudited condensed consolidated financial statements for additional information on the
merger and the related financing transactions. The merger, the related financing transactions and
the use of the proceeds from the financing transactions are referred to as the Transactions. 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 primarily to 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
the 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
three months ended December 31, 2004 and 2003. Three MonthsEnded December 312004
    
    
    2003Medicare
    
    
    25.6
    %
    
    
    25.8
    %Medicaid
    
    
    12.2
    
    
    
    13.0Managed care
    
    
    45.2
    
    
    
    45.4Self-pay and other
    
    
    17.0
    
    
    
    15.8Total
    
    
    100.0
    %
    
    
    100.0
    %
 North Vista Hospital, or North Vista, the results of which 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. 20




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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 three months ended December 31, 2004.
Our consolidated net revenue increased 16.3% for the three months ended December 31, 2004 over the
same period in the prior year. Contributing to the growth in net revenue was an increase in net acute
care revenue of $45.1 million for the three-month period ended December 31, 2004, which includes
net revenue from North Vista of $23.7 million. In addition, an increase in net revenue from Health
Choice of $17.5 million for the three-month period ended December 31, 2004 contributed to the
increase in consolidated net revenue. We have experienced an increase in net patient revenue from our hospital operations due to the
continued expansion of services at our hospitals, the acquisition of North Vista and favorable
pricing trends. On a same facility basis, the growth in net revenue from our hospital operations
has been driven primarily by increases in rates paid by managed care
organizations and further supplemented by increases in acuity. Although
patient volumes declined during the first quarter of fiscal 2005 compared to the same prior year
period, volume in certain profitable product lines such as psychiatric and rehabilitation services
increased during the quarter compared to the same period in the prior year. Contributing to the
decline in patient volumes was a lighter flu season as evidenced by a decrease in flu and
respiratory related admissions of approximately 30% for the first quarter of fiscal 2005 compared
to the same quarter in the prior year. Our same facility net patient revenue per adjusted admission
increased 8.6% for the three months ended December 31, 2004 compared to the three months ended
December 31, 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. Our membership at Health Choice has increased from approximately 90,000 enrollees as of
December 31, 2003 to over 108,000 enrollees as of December 31, 2004. Health Choices current
contract expires September 30, 2006 and provides the Arizona Health Care Cost Containment System
with two one-year renewal options following the initial term. Should our contract be discontinued,
our net revenue would be reduced and our cash flows would be adversely affected. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or 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 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. In addition, for federal fiscal years 2005, 2006 and 2007, the Medicare Modernization 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 the Centers for Medicare and Medicaid
Services, or 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 impact the Medicare Modernization 21




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##### Table of Contents



Act will have on our results of operations and financial condition, 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 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 plays a vital role in our
current and future success. In many cases, we are unable to predict what impact, if any, these
trends will have on us. 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. However,
uninsured patient volume declined in the current quarter as compared to the same quarter in the
prior year and compared to each of the other quarters during fiscal 2004. In our efforts to control
exposure to 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 fiscal year 2004 compared to the prior year and
increased 17.0% for the quarter ended December 31, 2004 compared to the comparable period ended
December 31, 2003. However, we anticipate that if we experience future growth in self-pay volume
and revenue, our provision for bad debts will 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 are 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. Contract labor for nursing services on a same facility basis decreased 0.7% as a
percent of net revenue for the quarter ended December 31, 2004 as compared to the same quarter in
the prior year. Should we be 22




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##### Table of Contents



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 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 in which 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 quarter ended December 31,
2004, our insurance expense on a same facility basis increased 7.3% compared to the comparable
period ended December 31, 2003. 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 A summary of significant accounting policies is disclosed in Note 2 to the consolidated
financial statements included in our Annual Report on Form 10-K for the year ended September 30,
2004. Our critical accounting policies are further described under the caption Critical Accounting
Policies in Managements Discussion and Analysis of Financial Condition and Results of Operations
in our Annual Report on Form 10-K for the year ended September 30, 2004. There have been no changes
in the nature of our critical accounting policies or the application of those policies since
September 30, 2004. Selected Operating Data The following table sets forth certain unaudited operating data for each of the periods
presented. Three Months EndedDecember 31,2004
    
    
    2003Acute Care (1):Number of acute care hospitals at end of period (2)
    
    
    15
    
    
    
    14Beds in service at end of Period
    
    
    2,246
    
    
    
    2,024Average length of stay (days) (3)
    
    
    4.34
    
    
    
    4.30Occupancy rates (average beds in service)
    
    
    46.0
    %
    
    
    48.7
    %Admissions (4)
    
    
    21,906
    
    
    
    21,069Adjusted admissions (5)
    
    
    35,480
    
    
    
    34,727Patient days (6)
    
    
    95,140
    
    
    
    90,611Adjusted patient days (5)
    
    
    148,485
    
    
    
    143,592Net patient revenue per adjusted admission
    
    $
    7,895
    
    
    $
    7,095Acute Care (Same-Facility) (7)Number of acute care hospitals at end of period (2)
    
    
    14
    
    
    
    14Beds in service at end of period
    
    
    2,060
    
    
    
    2,024Average length of stay (days) (3)
    
    
    4.28
    
    
    
    4.30Occupancy rates (average beds in service)
    
    
    45.6
    %
    
    
    48.7
    %Admissions (4)
    
    
    20,201
    
    
    
    21,069Adjusted admissions (5)
    
    
    33,289
    
    
    
    34,727Patient days (6)
    
    
    86,466
    
    
    
    90,611
 23




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##### Table of Contents



Three Months EndedDecember 31,2004
    
    
    2003Adjusted patient days (5)
    
    
    137,338
    
    
    
    143,592Net patient revenue per adjusted admission
    
    $
    7,708
    
    
    $
    7,095Health Choice:Covered lives
    
    
    108,970
    
    
    
    91,451Medical loss ratio (8)
    
    
    87.7
    %
    
    
    88.4
    %
   (1)
    Includes North Vista, which we acquired effective February 1, 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, which we acquired effective February 1, 2004.(8)
    Represents medical claims expense as a percentage of premium revenue, including
claims paid to our hospitals. 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. Three Months Ended
    
    
    Three Months EndedDecember 31, 2004
    
    
    December 31, 2003Consolidated (in thousands):
    
    Amount
    Percentage
    
    
    Amount
    PercentageNet Revenue:Acute care revenue
    
    $
    283,774
    
    
    
    76.7
    %
    
    $
    249,390
    
    
    
    78.4
    %Premium revenue
    
    
    86,201
    
    
    
    23.3
    %
    
    
    68,714
    
    
    
    21.6
    %Total net revenue
    
    
    369,975
    
    
    
    100.0
    %
    
    
    318,104
    
    
    
    100.00
    %Costs and expenses:Salaries and benefits
    
    
    106,509
    
    
    
    28.8
    %
    
    
    99,416
    
    
    
    31.2
    %Supplies
    
    
    45,366
    
    
    
    12.3
    %
    
    
    40,279
    
    
    
    12.7
    %Medical claims
    
    
    73,335
    
    
    
    19.8
    %
    
    
    57,771
    
    
    
    18.2
    %Rents and leases
    
    
    7,859
    
    
    
    2.1
    %
    
    
    7,800
    
    
    
    2.4
    %Other operating expenses
    
    
    53,036
    
    
    
    14.3
    %
    
    
    48,028
    
    
    
    15.1
    %Provision for bad debts
    
    
    32,255
    
    
    
    8.7
    %
    
    
    25,098
    
    
    
    7.9
    %Interest, net
    
    
    14,670
    
    
    
    4.0
    %
    
    
    13,891
    
    
    
    4.4
    %Depreciation and amortization
    
    
    18,224
    
    
    
    4.9
    %
    
    
    16,731
    
    
    
    5.2
    %Management fees
    
    
    958
    
    
    
    0.3
    %
    
    
    
    
    
    
    Total costs and expenses
    
    
    352,212
    
    
    
    95.2
    %
    
    
    309,014
    
    
    
    97.1
    %Earnings before gain (loss) on sale of
assets, minority interests,
And income taxes
    
    
    17,763
    
    
    
    4.8
    %
    
    
    9,090
    
    
    
    2.9
    %Gain (loss) on sale of assets, net
    
    
    (73
    )
    
    
    
    
    
    
    151
    
    
    
    Minority interests
    
    
    (1,133
    )
    
    
    (0.3
    )%
    
    
    (991
    )
    
    
    (0.3
    )%Earnings before income taxes
    
    
    16,557
    
    
    
    4.5
    %
    
    
    8,250
    
    
    
    2.6
    %Income tax expense
    
    
    6,597
    
    
    
    1.8
    %
    
    
    32
    
    
    
    Net earnings
    
    $
    9,960
    
    
    
    2.7
    %
    
    $
    8,218
    
    
    
    2.6
    %
 24




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##### Table of Contents



Three Months Ended
    
    
    Three Months EndedDecember 31, 2004
    
    
    December 31, 2003Acute Care (in thousands):
    
    Amount
    Percentage
    
    
    Amount
    PercentageNet Revenue:Acute care revenue
    
    $
    283,774
    
    
    
    99.2
    %
    
    $
    249,390
    
    
    
    98.8
    %Revenue between segments
    
    
    2,224
    
    
    
    0.8
    %
    
    
    2,979
    
    
    
    1.2
    %Total net revenue (1)
    
    
    285,998
    
    
    
    100.0
    %
    
    
    252,369
    
    
    
    100.0
    %Costs and expenses:Salaries and benefits
    
    
    103,789
    
    
    
    36.3
    %
    
    
    97,243
    
    
    
    38.5
    %Supplies
    
    
    45,315
    
    
    
    15.8
    %
    
    
    40,237
    
    
    
    16.0
    %Rents and leases
    
    
    7,642
    
    
    
    2.7
    %
    
    
    7,661
    
    
    
    3.0
    %Other operating expenses
    
    
    50,199
    
    
    
    17.6
    %
    
    
    45,483
    
    
    
    18.0
    %Provision for bad debts
    
    
    32,255
    
    
    
    11.3
    %
    
    
    25,098
    
    
    
    9.9
    %Interest, net
    
    
    14,670
    
    
    
    5.1
    %
    
    
    13,891
    
    
    
    5.5
    %Depreciation and amortization
    
    
    17,484
    
    
    
    6.1
    %
    
    
    16,690
    
    
    
    6.6
    %Management fees
    
    
    958
    
    
    
    0.3
    %
    
    
    
    
    
    
    Total costs and expenses
    
    
    272,312
    
    
    
    95.2
    %
    
    
    246,303
    
    
    
    97.5
    %Earnings before gain (loss) on sale of
assets and minority interests
    
    
    13,686
    
    
    
    4.8
    %
    
    
    6,066
    
    
    
    2.5
    %Gain (loss) on sale of assets, net
    
    
    (73
    )
    
    
    
    
    
    
    151
    
    
    
    Minority interests
    
    
    (1,133
    )
    
    
    (0.4
    )%
    
    
    (991
    )
    
    
    (0.4
    )%Earnings before income taxes
    
    $
    12,480
    
    
    
    4.4
    %
    
    $
    5,226
    
    
    
    2.1
    %
   (1)
    Revenue between segments is eliminated in our consolidated results. 25




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##### Table of Contents



Three Months Ended
    
    
    Three Months EndedDecember 31, 2004
    
    
    December 31, 2003Health Choice (in thousands):
    
    Amount
    
    Percentage
    
    
    Amount
    
    PercentagePremium revenue
    
    $
    86,201
    
    
    
    100.0
    %
    
    $
    68,714
    
    
    
    100.0
    %Costs and expenses:Salaries and benefits
    
    
    2,720
    
    
    
    3.1
    %
    
    
    2,173
    
    
    
    3.2
    %Supplies
    
    
    51
    
    
    
    0.1
    %
    
    
    42
    
    
    
    0.1
    %Medical claims (1)
    
    
    75,559
    
    
    
    87.7
    %
    
    
    60,750
    
    
    
    88.4
    %Rents and leases
    
    
    217
    
    
    
    0.2
    %
    
    
    139
    
    
    
    0.2
    %Other operating expenses
    
    
    2,837
    
    
    
    3.3
    %
    
    
    2,545
    
    
    
    3.7
    %Interest, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    740
    
    
    
    0.9
    %
    
    
    41
    
    
    
    Total costs and expenses
    
    
    82,124
    
    
    
    95.3
    %
    
    
    65,690
    
    
    
    95.6
    %Earnings before income taxes
    
    $
    4,077
    
    
    
    4.7
    %
    
    $
    3,024
    
    
    
    4.4
    %
   (1)
    Medical claims paid to our hospitals of $2.22 million and $2.98 million for the three
months ended December 31, 2004 and 2003, respectively, is eliminated in our consolidated
results. 26




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##### Table of Contents



Three Months Ended December 31, 2004 Compared to Three Months Ended December 31, 2003 Net revenue- Net revenue for the three months ended December 31, 2004 was $370.0 million, an
increase of $51.9 million, or 16.3%, from $318.1 million for same period in fiscal 2004. The
increase in net revenue was due to a combination of an increase of $34.4 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 $17.5 million in net revenue from Health Choice. Before eliminations, net revenue from our hospital operations for the three months ended
December 31, 2004 was $286.0 million, up $33.6 million, or 13.3%, from $252.4 million for the same
period in fiscal 2004. For the three months ended December 31, 2004 and 2003, approximately $2.2
million and $3.0 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 $9.9
million, or 3.9%, which was primarily driven by an 8.6% increase in net patient revenue per adjusted
admission, offset by a decrease in adjusted admissions. Net patient revenue per adjusted admission
on a consolidated basis increased 11.3% for the three months ended December 31, 2004, compared to
the same period in fiscal 2004, due primarily to increases in managed care and Medicare rates,
supplemented with slight increases in acuity. Net revenue from Health Choice was $86.2 million for the three months ended December 31, 2004,
an increase of $17.5 million, or 25.5%, from $68.7 million for the same period in fiscal 2004.
Covered lives under this prepaid Medicaid plan have increased 19% to approximately 108,000 at
December 31, 2004 from 91,000 at December 31, 2003. The increase in covered lives has positively
impacted Health Choices net revenue for the three months ended December 31, 2004 compared to the
same period in fiscal 2004. We expect the rate of growth in enrollment to moderate over the
remainder of fiscal 2005. Salaries and benefits- Salaries and benefits expense from our hospital operations for the
quarter ended December 31, 2004 was $103.8 million, or 36.3% of acute care revenue, compared to
$97.3 million, or 38.5%, for the quarter ended December 31, 2003. On a same facility basis, which
excludes North Vista, salaries and benefits expense was 36.4% of acute care revenue for the quarter
ended December 31, 2004. The 2.1% decrease as a percentage of acute care revenue on a same facility
basis resulted from the leveraging of growth in net revenue achieved through rate increases during
the current period, coupled with declining volumes requiring less labor utilization. Additionally,
contract labor, a component of salaries and benefits expense, decreased 0.5% as a percentage of
acute care revenue, for the quarter ended December 31, 2004 compared to the prior year period as a
result of decreases in patient volume and our operational focus on managing the utilization of
contract nursing services. Nevertheless, we continue to experience a high level of contract labor
utilization in our Arizona market as a result of a shortage of nurses. Benefits expense from our
hospital operations decreased by approximately $1.5 million, or
0.8% as a percentage of acute care
revenue, for the quarter ended December 31, 2004 compared to the same period in fiscal 2004 due
primarily to changes to our employee healthcare benefit program effective January 1, 2004 in
response to the increase in the cost of healthcare benefits in fiscal 2003. Supplies- Supplies expense from our hospital operations for the quarter ended December 31,
2004 was $45.3 million, or 15.8% of acute care revenue, compared to $40.2 million, or 16.0%, for
the quarter ended December 31, 2003. On a same facility basis, supplies expense was 15.9% of acute
care revenue. We continue to experience significant increases well ahead of the rate of inflation
in the costs of medical devices and implants. Despite these increases, supplies expense as a
percentage of acute care revenue was materially unchanged due in part to leveraging the growth in
net revenue and continuing our focus on compliance with our group purchasing contract. Medical
claims- Medical claims expense before eliminations for Health Choice increased $14.8 million
to $75.6 million for the quarter ended December 31, 2004 compared to $60.8 million for the quarter
ended December 31, 2003. Medical claims expense as a percentage of premium revenue was 87.7% for the three
months ended December 31, 2004 and 88.4% for the same period last year. The increase in medical
claims expense is the result of an increase in enrollment from 91,000 members at December 31, 2003
to 108,000 members at December 31, 2004. As discussed above, the enrollment increase is primarily
the result of a new three-year contract between Health Choice and the Arizona Health Care Cost
Containment System effective October 1, 2003. For the quarters ended December 31, 27




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##### Table of Contents



2004 and 2003, approximately $2.2 million and $3.0 million, respectively, of medical claims
paid to our hospitals was eliminated in consolidation. Medical claims
expense represents the amounts paid
by Health Choice for healthcare services provided to its members. Rents
and leases- Rents and leases expense for our hospital operations for the quarter ended
December 31, 2004 was $7.6 million, or 2.7% of acute care revenue, compared to $7.7 million, or
3.0%, for the same quarter in the prior year. On a same facility basis, rents and leases expense
was 2.8% of acute care revenue for the quarter ended December 31, 2004. Other operating expenses- Other operating expenses from our hospital operations for the
quarter ended December 31, 2004 were $50.1 million, or 17.6% of acute care revenue, compared to
$45.5 million, or 18.0%, for the quarter ended December 31, 2003. On a same facility basis, other
operating expenses were 18.0% of acute care revenue for the quarter ended December 31, 2004. During
the current quarter, we experienced increases in purchased services offset by decreases in legal
expenses as a percentage of acute care revenue on a same facility
basis. During the quarter ended December 31, 2003, we
incurred $1.8 million in legal expenses associated
with the Rocky Mountain Medical Center lawsuit, which we settled in June 2004. Provision for bad debts- Provision for bad debts for our hospital operations for the quarter
ended December 31, 2004 was $32.3 million, or 11.3% of acute care revenue, compared to $25.1
million, or 9.9%, for the quarter ended December 31, 2003. On a same facility basis, the provision
for bad debts was $25.8 million, or 9.8% of acute care revenue for the quarter ended December 31, 2004.
The 0.1% decrease as a percentage of acute care revenue on a same facility basis was due primarily
to a decline in self-pay and uninsured volume through our emergency rooms. Emergency room volume
was down, in part, as the result of a decline in flu and respiratory related volumes in the first
quarter of fiscal 2005 as compared to the same quarter in the prior year. Flu and respiratory
related admissions for the first quarter of fiscal 2005 were approximately 30% less than the same
quarter in the prior year. Conversely, flu admissions for the quarter ended December 31, 2003 were
up approximately 22% over the quarter ended December 31, 2002. Our operating results also benefited
from our focus on point-of-service collections (which increased 17.0% on a same facility basis),
along with our focus on process improvements in our emergency rooms and in determining Medicaid
eligibility for certain patients. Depreciation and amortization- The $1.5 million increase in depreciation and amortization
expense from $16.7 million for the quarter ended December 31, 2003 to $18.2 million for the same
period in 2004 was primarily the result of incremental depreciation expense on additions to
property and equipment during fiscal 2004. These additions are the result of the implementation of
our operating strategy, pursuant to which we have made substantial investments in our existing
facilities. Depreciation expense for the quarter ended December 31, 2003 includes $3.2 million of
additional depreciation as a result of accelerating the depreciation on two of our facilities in
anticipation of consolidating these hospitals operations into a new hospital in Port Arthur,
Texas. Beginning October 1, 2004, depreciation expense reflects a change in estimate to the value
of and the estimated useful lives of the Companys property and equipment. This change in estimate
is the result of applying the purchase method of accounting to account for the acquisition of IAS. Interest, net- The $800,000 increase in interest expense, net of interest income, from $13.9
million for the quarter ended December 31, 2003 to $14.7 million for the same period in 2004 was
due to an increase in average debt outstanding offset by a decline in interest rates. Borrowings
under both our current and former senior secured credit facilities were subject to interest at
variable rates. The weighted average interest rate of outstanding borrowings under our current
senior secured credit facilities was approximately 4.3% for the quarter ended December 31, 2004
compared to a weighted average interest rate of outstanding
borrowings under our former senior secured credit facilities of
approximately 5.4% for the quarter ended December 31, 2003. Income tax expense- We recorded a provision for income taxes for the quarters ended December
31, 2004 and 2003 of $6.6 million and $32,000, respectively. As a result of the Merger, in the
application of the purchase method of accounting, the Company records income tax expense upon the
reduction of the deferred tax valuation allowance. For the periods prior to the Merger, the
deferred portion of the provision for income taxes was offset by the use of deferred tax assets
that were previously reserved with a valuation allowance. 28




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##### Table of Contents



Net earnings- Net earnings increased from $8.2 million for the quarter ended December 31,
2003 to $10.0 million for the quarter ended December 31, 2004. 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 December 31, 2004, we had $104.4 million in net working
capital, compared to $107.8 million at September 30, 2004. We generated cash from operating
activities of $14.5 million during the three months ended December 31, 2004, compared to $12.9
million during the three months ended December 31, 2003. Net accounts receivable increased $7.9
million from $165.3 million at September 30, 2004 to $173.2 million at December 31, 2004. Excluding
third-party settlement receivables, our days of net revenue
outstanding at
December 31, 2004 were 54 as compared to 50 at
September 30, 2004. On a same facility basis, our days of net
revenue outstanding excluding third-party settlement receivables were
52 at December 31, 2004 as compared to 49 at September 30, 2004. Investing Activities Investing activities used $47.0 million during the three months ended December 31, 2004.
Capital expenditures, including $6.2 million of amounts accrued in accounts payable for the three
months ended December 31, 2004, were approximately $52.3 million. Our growth strategy requires
significant capital expenditures during the year ended September 30, 2005 and future years. We
currently 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 of The Medical Center
of Southeast Texas, our new hospital in Port Arthur, Texas. During the quarter ended December 31,
2004, we had capital expenditures for the construction of the new hospital totaling $14.9 million.
We plan to open the new facility in Port Arthur in April 2005.
Additionally, we plan to spend $45.0 to $55.0 million for growth
and new business projects and $30.0 million for replacement or maintenance related projects at our hospitals. Our plan for fiscal 2005 also
includes $8.0 million of capital expenditures for North Vista. At December 31, 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 $62.4 million. In November 2004, we paid $8.5 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 planning for the construction of a new hospital on this property.
In February 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 towards our total commitment of approximately $30.0 million in connection with the
implementation of this advanced clinical system. Capital expenditures for this system were $1.7
million for the quarter ended December 31, 2004. We plan to finance our proposed capital
expenditures with borrowings under our new senior secured credit facilities, as well as with cash
generated from operations, cash on hand and other capital sources that may become available. Financing Activities Financing activities used $5.0 million during the three months ended December 31, 2004. During
the three months ended December 31, 2004, we paid $3.5 million to retire our remaining 13% notes
that were outstanding. In addition, we repaid $1.1 million pursuant to the terms of our new senior
secured credit facilities and repaid $720,000 in capital lease obligations. 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. 29




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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 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
senior 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 December
31, 2004, include the following ratios: December 31,2004Actual Total Leverage Ratio
    
    
    4.36Maximum Total Leverage Ratio
    
    
    6.25Actual Interest Coverage Ratio
    
    
    3.35Minimum Interest Coverage Ratio
    
    
    2.00
 Consolidated EBITDA is defined by the senior secured credit facilities as earnings (loss)
before interest expense, income taxes, depreciation and amortization, loss on early extinguishment
of debt, management fees, gain (loss) on sale of assets and minority interests. 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. 30




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At December 31, 2004, $422.9 million was outstanding under the Term Facility, no amounts were
outstanding under the Revolving Facility and we had $38.3 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 $3.1 million under capital lease and other 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. 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. 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 December 31, 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 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 our contractual
obligations, 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 31




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business, service our indebtedness, including the new senior secured credit facilities and the
8 3/4% notes, or make anticipated capital expenditures. 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. 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. 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 On
December 16, 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based
Payment, or SFAS 123(R), which is a revision of Statement of Financial Accounting
Standards No. 123, Accounting for
Stock-Based Compensation, or SFAS 123. SFAS 123(R) supersedes
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and amends Statement of Financial Accounting Standards No. 95, Statement of Cash
Flows. Generally, the approach in SFAS 123(R)
is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an alternative. We expect
to adopt SFAS 123(R) on October 1, 2006. We have not yet determined the impact of adopting the new
standard. 
 Item 3. 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
December 31, 2004, we had variable rate debt of approximately $425.1 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
$531,000. We have not taken any action to cover interest rate risk and are not a party to any
interest rate market risk management activities. 32




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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 December 31, 2004. At
December 31, 2004, the fair market value of the outstanding 8
3/4% notes was $517.8 million, based
upon quoted market prices as of that date. 
 Item 4. 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 December 31, 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 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. 
 PART II OTHER INFORMATION
 
 Item 6. Exhibits  (a)
    List of Exhibits:  31.1
    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 200232.1
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 33




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IASIS HEALTHCARE LLCDate:
February 10, 2005
    
    By:
    
    /s/ W. Carl WhitmerW. Carl Whitmer, Chief Financial Officer(Principal Financial and Accounting Officer)
 34




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EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    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
200232.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 35