##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2004 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___________________ to ___________________ Commission File Number: 0-29818 (LIFE POINT HOSPITALS, INC. LOGO)  Delaware
    
    52-2165845(State or other jurisdiction
    
    (I.R.S. Employer Identification No.)of incorporation or organization)103 Powell Court, Suite 200
    
    37027Brentwood, Tennessee
    
    (Zip Code)(Address of principal executive offices)
 (615) 372-8500
(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. x o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). x o
 As of July 21, 2004, the number of outstanding shares of Common Stock of
LifePoint Hospitals, Inc. was 38,703,332.




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TABLE OF CONTENTS  PART I-FINANCIAL INFORMATIONItem 1. Financial StatementsCONDENSED CONSOLIDATED STATEMENTS OF INCOMECONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures about Market RiskItem 4. Controls and ProceduresPART II-OTHER INFORMATIONItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 6. Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT INDEXEX-10.1 AMENDMENT TO SERVICES AGREEMENTEX-10.2 FOURTH AMENDMENT TO CREDIT AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO    Table of Contents  
 PART I-FINANCIAL INFORMATION 
 Item 1. Financial Statements. LIFEPOINT HOSPITALS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(Dollars in millions, except per share amounts) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Revenues
    
    $
    221.6
    
    
    $
    246.4
    
    
    $
    442.5
    
    
    $
    503.0Salaries and benefits
    
    
    90.8
    
    
    
    101.5
    
    
    
    181.1
    
    
    
    202.2Supplies
    
    
    28.7
    
    
    
    32.1
    
    
    
    57.2
    
    
    
    65.5Other operating expenses
    
    
    43.1
    
    
    
    40.6
    
    
    
    81.7
    
    
    
    83.2Provision for doubtful accounts
    
    
    16.9
    
    
    
    21.1
    
    
    
    34.4
    
    
    
    44.1Depreciation and amortization
    
    
    11.4
    
    
    
    12.0
    
    
    
    22.6
    
    
    
    23.6Interest expense, net
    
    
    3.3
    
    
    
    3.2
    
    
    
    6.6
    
    
    
    6.6Debt retirement costs
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1.5ESOP expense
    
    
    1.5
    
    
    
    2.5
    
    
    
    3.1
    
    
    
    4.8195.7
    
    
    
    214.5
    
    
    
    386.7
    
    
    
    431.5Income before minority interests and income taxes
    
    
    25.9
    
    
    
    31.9
    
    
    
    55.8
    
    
    
    71.5Minority interests in earnings of consolidated entities
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.6Income before income taxes
    
    
    25.7
    
    
    
    31.6
    
    
    
    55.6
    
    
    
    70.9Provision for income taxes
    
    
    10.4
    
    
    
    12.9
    
    
    
    22.6
    
    
    
    28.3Net income
    
    $
    15.3
    
    
    $
    18.7
    
    
    $
    33.0
    
    
    $
    42.6Basic earnings per share
    
    $
    0.41
    
    
    $
    0.51
    
    
    $
    0.88
    
    
    $
    1.16Diluted earnings per share
    
    $
    0.40
    
    
    $
    0.48
    
    
    $
    0.85
    
    
    $
    1.08Weighted average shares and dilutive securities
outstanding (in thousands):Basic
    
    
    37,402
    
    
    
    36,925
    
    
    
    37,639
    
    
    
    36,754Diluted
    
    
    43,345
    
    
    
    43,097
    
    
    
    43,628
    
    
    
    42,950
 See accompanying notes. 2




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LIFEPOINT HOSPITALS, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts) December 31,
    
    June 30,2003
    
    2004(1)
    
    (unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20.6
    
    
    $
    18.4Accounts receivable, less allowances for doubtful accounts of $111.7 at December
31, 2003 and $99.5 at June 30, 2004
    
    
    101.4
    
    
    
    104.9Inventories
    
    
    22.3
    
    
    
    22.5Income taxes receivable
    
    
    7.4
    
    
    
    12.5Deferred income taxes and other current assets
    
    
    19.5
    
    
    
    23.2171.2
    
    
    
    181.5Property and equipment:Land
    
    
    19.0
    
    
    
    20.2Buildings and improvements
    
    
    357.1
    
    
    
    368.8Equipment
    
    
    337.2
    
    
    
    346.0Construction in progress (estimated cost to complete and equip after June 30,
2004 is $79.6)
    
    
    28.3
    
    
    
    45.7741.6
    
    
    
    780.7Accumulated depreciation
    
    
    (277.4
    )
    
    
    (293.4
    )464.2
    
    
    
    487.3Deferred loan costs, net
    
    
    7.0
    
    
    
    5.6Unallocated purchase price
    
    
    16.4
    
    
    
    26.1Intangible assets, net
    
    
    3.6
    
    
    
    3.7Other
    
    
    
    
    
    
    0.2Goodwill
    
    
    136.6
    
    
    
    142.5$
    799.0
    
    
    $
    846.9LIABILITIES AND EQUITYCurrent liabilities:Accounts payable
    
    $
    30.9
    
    
    $
    25.3Accrued salaries
    
    
    25.7
    
    
    
    26.1Other current liabilities
    
    
    9.7
    
    
    
    22.3Estimated third-party payor settlements
    
    
    2.5
    
    
    
    1.368.8
    
    
    
    75.0Revolving credit facility
    
    
    20.0
    
    
    
    30.0Convertible notes
    
    
    250.0
    
    
    
    221.0Deferred income taxes
    
    
    35.9
    
    
    
    35.5Professional and general liability claims and other liabilities
    
    
    28.6
    
    
    
    29.0Minority interests in equity of consolidated entities
    
    
    1.4
    
    
    
    1.4Stockholders equity:Preferred stock, $0.01 par value; 10,000,000 shares authorized; no shares issued
    
    
    
    
    
    
    Common stock, $0.01 par value; 90,000,000 shares authorized; 39,084,396
shares and 39,864,502 shares issued at December 31, 2003
and June 30, 2004, respectively
    
    
    0.4
    
    
    
    0.4Capital in excess of par value
    
    
    301.7
    
    
    
    324.1Unearned ESOP compensation
    
    
    (16.1
    )
    
    
    (14.5
    )Unearned compensation on nonvested stock
    
    
    
    
    
    
    (5.9
    )Retained earnings
    
    
    137.2
    
    
    
    179.8Common stock in treasury, at cost, 1,198,800 shares at December 31, 2003
and June 30, 2004
    
    
    (28.9
    )
    
    
    (28.9
    )394.3
    
    
    
    455.0$
    799.0
    
    
    $
    846.9
  (1)
    
    Derived from audited financial statements. See accompanying notes. 3




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LIFEPOINT HOSPITALS, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In millions) Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Cash flows from operating activities:Net income
    
    $
    15.3
    
    
    $
    18.7
    
    
    $
    33.0
    
    
    $
    42.6Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    11.4
    
    
    
    12.0
    
    
    
    22.6
    
    
    
    23.6Debt retirement costs
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    1.5ESOP expense
    
    
    1.5
    
    
    
    2.5
    
    
    
    3.1
    
    
    
    4.8Minority interests in earnings of consolidated entities
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.6Deferred income taxes (benefit)
    
    
    2.2
    
    
    
    (0.4
    )
    
    
    2.1
    
    
    
    (0.9
    )Reserve for professional and general liability claims, net
    
    
    2.6
    
    
    
    (2.2
    )
    
    
    3.8
    
    
    
    0.5Tax benefit from employee stock plans
    
    
    0.2
    
    
    
    3.8
    
    
    
    0.2
    
    
    
    4.3Increase (decrease) in cash from operating assets and liabilities,
net of effects from acquisitions:Accounts receivable
    
    
    3.2
    
    
    
    5.3
    
    
    
    (7.9
    )
    
    
    (3.2
    )Inventories and other current assets
    
    
    (0.6
    )
    
    
    (3.2
    )
    
    
    (3.4
    )
    
    
    (3.3
    )Accounts payable and accrued expenses
    
    
    (0.4
    )
    
    
    1.6
    
    
    
    2.0
    
    
    
    6.5Income taxes payable
    
    
    (16.1
    )
    
    
    (19.7
    )
    
    
    (4.3
    )
    
    
    (5.1
    )Estimated third-party payor settlements
    
    
    (3.7
    )
    
    
    (1.1
    )
    
    
    (2.3
    )
    
    
    (1.2
    )Other
    
    
    0.1
    
    
    
    0.6
    
    
    
    1.0
    
    
    
    1.2Net cash provided by operating activities
    
    
    15.9
    
    
    
    19.7
    
    
    
    50.1
    
    
    
    71.9Cash flows from investing activities:Purchase of property and equipment
    
    
    (20.8
    )
    
    
    (20.3
    )
    
    
    (38.0
    )
    
    
    (35.4
    )Purchase of facilities, net of cash acquired
    
    
    
    
    
    
    (24.8
    )
    
    
    
    
    
    
    (26.5
    )Other
    
    
    0.6
    
    
    
    (0.3
    )
    
    
    0.4
    
    
    
    (0.6
    )Net cash used in investing activities
    
    
    (20.2
    )
    
    
    (45.4
    )
    
    
    (37.6
    )
    
    
    (62.5
    )Cash flows from financing activities:Repurchase of convertible notes
    
    
    
    
    
    
    (29.9
    )
    
    
    
    
    
    
    (29.9
    )Borrowing under revolving credit facility
    
    
    
    
    
    
    30.0
    
    
    
    
    
    
    
    30.0Repayment under revolving credit facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20.0
    )Repurchase of common stock
    
    
    (17.0
    )
    
    
    
    
    
    
    (17.0
    )
    
    
    Proceeds from exercise of stock options
    
    
    0.3
    
    
    
    5.9
    
    
    
    0.5
    
    
    
    7.5Other
    
    
    0.2
    
    
    
    
    
    
    
    0.5
    
    
    
    0.8Net cash (used in) provided by financing activities
    
    
    (16.5
    )
    
    
    6.0
    
    
    
    (16.0
    )
    
    
    (11.6
    )Change in cash and cash equivalents
    
    
    (20.8
    )
    
    
    (19.7
    )
    
    
    (3.5
    )
    
    
    (2.2
    )Cash and cash equivalents at beginning of period
    
    
    40.3
    
    
    
    38.1
    
    
    
    23.0
    
    
    
    20.6Cash and cash equivalents at end of period
    
    $
    19.5
    
    
    $
    18.4
    
    
    $
    19.5
    
    
    $
    18.4Interest payments
    
    $
    6.1
    
    
    $
    6.1
    
    
    $
    6.3
    
    
    $
    6.7Income taxes paid, net
    
    $
    24.3
    
    
    $
    29.1
    
    
    $
    24.7
    
    
    $
    30.0
 See accompanying notes. 4




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LIFEPOINT HOSPITALS, INC. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
UNAUDITED NOTE 1  ORGANIZATION AND BASIS OF PRESENTATION LifePoint Hospitals, Inc. is a holding company. Its subsidiaries own,
lease and operate their respective facilities and other assets. The term
LifePoint or the Company as used herein refers to LifePoint Hospitals, Inc.
and its subsidiaries, unless otherwise stated or indicated by context. As of
June 30, 2004, the Company operated 29 general, acute care hospitals with an
aggregate of 2,687 licensed beds in non-urban communities. The Company
acquired the 106-bed River Parishes Hospital in LaPlace, Louisiana effective
July 1, 2004, as discussed in Note 9. The Companys hospitals are located in
the states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah,
West Virginia and Wyoming. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) and disclosures considered necessary for a fair presentation have
been included. Operating results for the three months and six months ended June
30, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. 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 year ended December 31, 2003. The majority of the Companys expenses are cost of revenue items. Costs
that could be classified as general and administrative by the Company would
include the LifePoint corporate office costs, which were $6.7 million and $7.9
million for the three months ended June 30, 2003 and 2004, respectively, and
$11.5 million and $13.7 million for the six months ended June 30, 2003 and
2004, respectively. Certain prior year amounts have been reclassified to conform to the
current year presentation. These reclassifications have no impact on total
assets, liabilities, stockholders equity, net income or cash flows. NOTE 2 - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted
earnings per share (dollars in millions, except per share amounts, and shares
in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Numerator:Numerator for basic earnings per share  net income
    
    $
    15.3
    
    
    $
    18.7
    
    
    $
    33.0
    
    
    $
    42.6Interest on convertible notes, net of taxes
    
    
    2.0
    
    
    
    1.8
    
    
    
    3.9
    
    
    
    3.8Numerator for diluted earnings per share
    
    $
    17.3
    
    
    $
    20.5
    
    
    $
    36.9
    
    
    $
    46.4Denominator:Denominator for basic earnings per share  weighted
average shares outstanding
    
    
    37,402
    
    
    
    36,925
    
    
    
    37,639
    
    
    
    36,754Effect of dilutive securities:Employee stock benefit plans
    
    
    664
    
    
    
    955
    
    
    
    710
    
    
    
    948Convertible notes
    
    
    5,279
    
    
    
    5,217
    
    
    
    5,279
    
    
    
    5,248Denominator for diluted earnings per share  adjusted
weighted average shares
    
    
    43,345
    
    
    
    43,097
    
    
    
    43,628
    
    
    
    42,950Basic earnings per share
    
    $
    0.41
    
    
    $
    0.51
    
    
    $
    0.88
    
    
    $
    1.16Diluted earnings per share
    
    $
    0.40
    
    
    $
    0.48
    
    
    $
    0.85
    
    
    $
    1.08
 5




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For the second quarter of 2004, approximately 0.9 million of the Companys
stock options outstanding (1.3 million for the first half of 2004) were
excluded from the calculation of diluted earnings per share because the
exercise prices of the stock options were greater than or equal to the average
share price for the quarter and six month period, and therefore their inclusion
would have been anti-dilutive. These options could be dilutive in the future if
the average share price increases and is greater than the exercise price of
these options. For the second quarter of 2003, approximately 2.3 million of the
Companys stock options outstanding (2.1 million for the first half of 2003)
were excluded from the calculation of dilutive earnings per share. NOTE 3  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board (FASB) issued
Revised Interpretation No. 46, Consolidation of Variable Interest Entities
(FIN 46R), which requires the consolidation of variable interest entities.
FIN 46R, as revised, was applicable to financial statements of companies that
had interests in special purpose entities during 2003. Effective as of the
first quarter of 2004, FIN 46R is applicable to financial statements of
companies that have interests in all other types of entities. Adoption of FIN
46R had no effect on the Companys financial position, results of operations or
cash flows. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity (SFAS No. 150), on July 1, 2003. SFAS No. 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity, such as redeemable preferred
stock and certain equity derivatives that frequently are used in connection
with share repurchase programs. On October 29, 2003, the FASB voted to defer
for an indefinite period the application of SFAS No. 150 to classification of
noncontrolling interests of limited-life subsidiaries. Neither the adoption of
SFAS No. 150 nor the deferral had a material impact on the Companys results of
operations or financial position. NOTE 4  STOCK BENEFIT PLANS The Company issues stock options and other stock-based awards to key
employees and directors under stock-based compensation plans, which are
described more fully in Note 6 (stockholders equity) to the consolidated
financial statements in the Companys 2003 Annual Report on Form 10-K. SFAS No.
123, Accounting for Stock-Based Compensation (SFAS No. 123), encourages,
but does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure, an Amendment of FASB Statement No. 123 (SFAS No. 148). SFAS No.
148 amends SFAS No. 123 to provide alternative methods of transition for
companies making a voluntary change to fair value-based accounting for
stock-based employee compensation. The Company continues to account for its
stock-based compensation plans under the intrinsic value recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. SFAS
No. 148 also requires disclosure of pro-forma results on a quarterly basis as
if the Company had applied the fair value recognition provisions of SFAS No.
123. The
Company granted 175,000 shares of nonvested stock awards to certain
key executives during the first quarter of 2004, under the
Companys 1998 Long-Term Incentive Plan. The nonvested stock awards
vest three years from the grant date and contain no vesting requirements other
than continued employment of the executive. The fair market value at the date
of grant of these nonvested stock awards was $33.17 per share and was recorded
as unearned compensation as a component of stockholders equity. In addition,
the Company granted 21,000 shares of nonvested stock awards to its outside
directors during the second quarter of 2004, under the Companys
Outside Directors Stock and Incentive Plan. These nonvested stock awards also
vest three years from the grant date and contain no vesting requirements other
than continued service of the director. The fair market value at the date of
grant of these nonvested stock awards was $37.86 and was recorded as unearned
compensation as a component of stockholders equity. Unearned compensation is
being amortized straight-line in the statements of income over the three-year
vesting period of the awards. Since the exercise price of all options granted under the Companys
incentive plans was equal to the market price of the underlying common stock on
the grant date, no stock-based employee compensation is recognized in net
income related to stock options. The following table illustrates the effect on
net income and earnings per share (in 6




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millions, except per share amounts) if the Company had applied the fair
value recognition provisions of SFAS No. 123, as amended, to options granted
under the stock option plans. For purposes of this pro-forma disclosure, the
value of the options is estimated using a Black-Scholes option pricing model
and amortized ratably to expense over the options vesting periods. Because the
estimated value is determined as of the date of grant, the actual value
ultimately realized by the employee may be significantly different. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Net income, as reported
    
    $
    15.3
    
    
    $
    18.7
    
    
    $
    33.0
    
    
    $
    42.6Add: Stock-based compensation expense included in
reported net income, net of related tax effects
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    0.5Less: Stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects
    
    
    (2.4
    )
    
    
    (2.4
    )
    
    
    (4.7
    )
    
    
    (4.7
    )Pro forma net income
    
    
    12.9
    
    
    
    16.6
    
    
    
    28.3
    
    
    
    38.4Interest on convertible notes, net of taxes
    
    
    2.0
    
    
    
    1.8
    
    
    
    3.9
    
    
    
    3.8Diluted pro forma net income
    
    $
    14.9
    
    
    $
    18.4
    
    
    $
    32.2
    
    
    $
    42.2Denominator for basic earnings per share  weighted average
shares
    
    
    37.4
    
    
    
    36.9
    
    
    
    37.6
    
    
    
    36.8Effect of dilutive securities:Employee stock benefit plans
    
    
    0.6
    
    
    
    1.0
    
    
    
    0.7
    
    
    
    0.9Convertible notes
    
    
    5.3
    
    
    
    5.2
    
    
    
    5.3
    
    
    
    5.2Denominator for diluted earnings per share  adjusted weighted
average shares
    
    
    43.3
    
    
    
    43.1
    
    
    
    43.6
    
    
    
    42.9Earnings per share:Basic  as reported
    
    $
    0.41
    
    
    $
    0.51
    
    
    $
    0.88
    
    
    $
    1.16Basic  pro forma
    
    $
    0.35
    
    
    $
    0.45
    
    
    $
    0.75
    
    
    $
    1.05Diluted  as reported
    
    $
    0.40
    
    
    $
    0.48
    
    
    $
    0.85
    
    
    $
    1.08Diluted  pro forma
    
    $
    0.34
    
    
    $
    0.43
    
    
    $
    0.74
    
    
    $
    0.98
 The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. Option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The
Companys employee stock options have characteristics significantly different
from those of traded options. Changes in the subjective input assumptions can
materially affect the fair value estimate. Other option valuation models may
produce significantly different fair values of the Companys employee stock
options. The weighted average estimated value of stock options granted during the
second quarter of 2004 was $14.47 ($7.82 for the second quarter of 2003) and
for the first half of 2004 was $12.56 ($7.82 for the first half of 2003).
These options were granted with an exercise price equal to the market price at
the date of grant. These options become exercisable beginning in part from one
year after the date of grant to three years after the date of grant and expire
10 years after the grant date. The above table includes the impact of these
additional stock options for the period subsequent to their grant. The values
were estimated at the date of grant using the following weighted average
assumptions: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Expected life (in years)
    
    
    3.0
    
    
    
    3.0
    
    
    
    3.0
    
    
    
    3.0Risk free interest rate
    
    
    1.67
    %
    
    
    3.17
    %
    
    
    1.85
    %
    
    
    2.19
    %Volatility
    
    
    53
    %
    
    
    53
    %
    
    
    53
    %
    
    
    53
    %Forfeiture rate
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    5.7
    %
    
    
    5.7
    %
 7




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##### Table of Contents



Additional information with respect to
stock benefit plan activity in the Companys 1998 Long-Term
Incentive Plan and Outside Directors Stock and Incentive Plan is as
follows: Outstanding OptionsShares
    
    
    
    
    
    WeightedAvailable for
    
    Number of
    
    AverageGrant
    
    Shares
    
    Exercise PriceDecember 31, 2002
    
    
    3,366,700
    
    
    
    4,016,400
    
    
    $
    23.81Stock Option Grants
    
    
    (1,066,800
    )
    
    
    1,066,800
    
    
    $
    21.60Stock Option Exercises
    
    
    
    
    
    
    (333,000
    )
    
    $
    11.20Stock Option Cancellations
    
    
    356,800
    
    
    
    (356,800
    )
    
    $
    27.75December 31, 2003
    
    
    2,656,700
    
    
    
    4,393,400
    
    
    $
    23.91Increase in Shares Available for
Grant(Approved by Stockholders)
    
    
    2,200,000
    
    
    
    
    
    
    
    N/AStock Option Grants
    
    
    (860,900
    )
    
    
    860,900
    
    
    $
    33.50Nonvested Stock Grants
    
    
    (196,000
    )
    
    
    
    
    
    $
    33.67Stock Option Exercises
    
    
    
    
    
    
    (542,500
    )
    
    $
    13.80Adjustments
    
    
    (16,200
    )
    
    
    
    
    
    
    N/AStock Option Cancellations
    
    
    76,400
    
    
    
    (76,400
    )
    
    $
    38.03June 30, 2004
    
    
    3,860,000
    
    
    
    4,635,400
    
    
    $
    26.64
 NOTE 5  COMMITMENTS AND CONTINGENCIES Americans with Disabilities Act Claim On January 12, 2001, Access Now, Inc., a disability rights organization,
filed a class action lawsuit against each of the Companys hospitals alleging
non-compliance with the accessibility guidelines under the Americans with
Disabilities Act (the ADA). The lawsuit, filed in the United States District
Court for the Eastern District of Tennessee, seeks injunctive relief requiring
facility modification, where necessary, to meet the ADA guidelines, along with
attorneys fees and costs. In January 2002, the District Court certified the
class action and issued a scheduling order that requires the parties to
complete discovery and inspection for approximately six facilities per year.
The Company intends to vigorously defend the lawsuit, recognizing the Companys
obligation to correct any deficiencies in order to comply with the ADA. As of
June 30, 2004, the plaintiffs have conducted inspections at 22 of the Companys
hospitals. On July 19, 2004, the United States District Court approved the
settlement agreements between the parties relating to two of the Companys
facilities. These facilities have completed the litigation process and now will
move forward in implementing facility modifications in accordance with the
terms of the settlement. HCA Investigations, Litigation and Indemnification Rights HCA Inc. (HCA) has been the subject of various federal and state
investigations, qui tamactions, shareholder derivative and class action suits,
patient/payor actions and general liability claims. These investigations,
actions and claims relate to HCA and its subsidiaries, including subsidiaries
that, before the Companys formation as an independent company, owned many of
the facilities that the Company now owns. In June 2003, HCA announced agreements with the Department of Justice
(DOJ) that settled all federal criminal and civil litigation brought by the
DOJ against HCA with respect to cost reports, physician relations and wound
care issues. The settlement of these issues does not affect qui tamactions in
which the DOJ has not intervened. Additionally, HCA has announced that it made
payments to the Centers for Medicare and Medicaid Services (CMS) in
accordance with an agreement to resolve all Medicare cost report, home office
cost statement and appeal issues. HCA has agreed to indemnify the Company for any losses, other than
consequential damages, arising from the governmental investigations of HCAs
business practices prior to the date of the distribution of the outstanding
shares of the Companys common stock to the stockholders of HCA and losses
arising from legal proceedings, present or future, related to the investigation
or actions engaged in before the distribution that relate to the investigation.
However, the Company could be held responsible for any claims that are not
covered by the agreements reached with the federal government or for which HCA
is not required to, or fails to, indemnify the Company. 8




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##### Table of Contents



Corporate Integrity Agreement In December 2000, the Company entered into a corporate integrity agreement
with the Office of Inspector General (OIG) and agreed to maintain its
compliance program in accordance with the corporate integrity agreement. This
agreement was amended in April 2002. Complying with the compliance measures
and reporting and auditing requirements of the corporate integrity agreement
requires additional efforts and costs. Failure to comply with the terms of the
corporate integrity agreement could subject the Company to significant monetary
penalties. Legal Proceedings and General Liability Claims The Company is, from time to time, subject to claims and suits arising in
the ordinary course of business, including claims for damages for personal
injuries, medical malpractice, breach of management contracts, wrongful
restriction of or interference with physicians staff privileges and employment
related claims. In certain of these actions, plaintiffs request punitive or
other damages against the Company which may not be covered by insurance. The
Company is currently not a party to any proceeding which, in managements
opinion, would have a material adverse effect on the Companys business,
financial condition or results of operations. Physician Commitments The Company has committed to provide certain financial assistance pursuant
to recruiting agreements with various physicians practicing in the communities
it serves. In consideration for a physician relocating to one of its
communities and agreeing to engage in private practice for the benefit of the
respective community, the Company may loan certain amounts of money to a
physician, normally over a period of one year, to assist in establishing his or
her practice. The Company had committed to advance a maximum amount of
approximately $24.1 million at June 30, 2004. The actual amount of such
commitments to be subsequently advanced to physicians is estimated at $9.6
million and often depends upon the financial results of a physicians private
practice during the guaranteed period. Generally, amounts advanced under the
recruiting agreements may be forgiven pro rata over a period of 48 months,
contingent upon the physician continuing to practice in the respective
community. Capital Expenditure Commitments The Company is reconfiguring some of its facilities to accommodate more
effectively patient services and restructuring existing surgical capacity in
some of its hospitals to permit additional patient volume and a greater variety
of services. The Company had incurred approximately $45.7 million in
uncompleted projects as of June 30, 2004, which is included in construction in
progress in the Companys accompanying condensed consolidated balance sheet.
At June 30, 2004, the Company had projects under construction with an estimated
additional cost to complete and equip of approximately $79.6 million. Pursuant to the asset purchase agreement for Ville Platte Medical Center,
the Company has agreed to make certain capital improvements, the cost of which,
together with the initial cash payment, defeasance of certain bonds and
liabilities assumed, is not required to exceed $25.0 million. The capital
improvements must be completed by December 1, 2004. The initial cash payment
and liabilities assumed totaled $15.1 million, which leaves $9.9 million
required for capital improvements. The Company had incurred approximately
$4.5 million of the required capital improvements as of June 30, 2004. Pursuant to the asset purchase agreement for Logan Regional Medical
Center, the Company has agreed to expend, regardless of the results of the
hospitals operations, at least $20.0 million in the aggregate for capital
expenditures and improvements during the ten-year period following the date of
acquisition of December 1, 2002. The Company had incurred
approximately $5.3 million of the required capital improvements as of June 30, 2004. 9




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##### Table of Contents



Tax Matters During 2003, the Internal Revenue Service (IRS) notified the Company
regarding its findings related to the examination of the
Companys federal income tax returns
for the years ended December 31, 1999, 2000 and 2001. The Company reached a
settlement with the IRS on all issues except for the Companys method
of determining its bad debt deduction for which the IRS has proposed an
additional assessment of $7.4 million. All of the adjustments proposed by the
IRS are temporary differences. The IRS has delayed final settlement of this
assessment until resolution of certain pending court proceedings related to the
use of this bad debt deduction method by HCA. HCA filed a petition with the
United States Supreme Court on May 17, 2004 to appeal the ruling of the lower
court on the bad debt deduction method. The Company applied its 2002 federal
income tax refund in the amount of $6.6 million as a deposit against any
potential settlement to forestall the tolling of interest on such settlement
beyond the March 15, 2003 deposit date. Management believes that adequate
provisions have been reflected in the consolidated financial statements to
satisfy final resolution of the remaining disputed issue based upon current
facts and circumstances and that final resolution of this dispute
will not have a material adverse impact on the Companys results
of operations or financial position. HCA and the Company entered into a tax
sharing and indemnification
agreement as part of the Companys 1999 spin-off from HCA. Under the agreement, HCA
maintains full control and absolute discretion with regard to any combined or
consolidated tax filings for periods prior to the 1999 spin-off transaction. In
addition, the agreement provides that HCA will generally be responsible for all
taxes that are allocable to periods prior to the 1999 spin-off transaction and
HCA and the Company will each be responsible for their  own tax liabilities for
periods after the 1999 spin-off transaction. The tax sharing and indemnification agreement does not have an impact on
the realization of deferred tax assets or the payment of deferred tax
liabilities of the Company, except to the extent that the temporary differences
give rise to such deferred tax assets and liabilities after the 1999 spin-off
transaction and are adjusted as a result of final tax settlements after the
1999 spin-off transaction. In the event of such adjustments, the tax sharing
and indemnification agreement provides for certain payments between HCA and the
Company, as appropriate. Acquisitions The Company has acquired and will continue to acquire businesses with
prior operating histories. Acquired 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 institutes policies designed to
conform practices to its standards following completion of acquisitions, there
can be no assurance that the Company will not become liable for past activities
that may later be asserted to be improper by private plaintiffs or government
agencies. Although the Company generally seeks to obtain indemnification from
prospective sellers covering such matters, there can be no assurance that any
such matter will be covered by indemnification, or if covered, that such
indemnification will be adequate to cover potential losses and fines. NOTE 6  LONG-TERM DEBT Long-term debt consists of the following (in millions): December 31, 2003
    
    June 30, 2004Revolving Credit Facility
    
    $
    20.0
    
    
    $
    30.0Convertible Notes
    
    
    250.0
    
    
    
    221.0$
    270.0
    
    
    $
    251.0
 During the second quarter of 2004, the Company repurchased $29.0 million
of its $250.0 million 4 1/2% Convertible Subordinated Notes due 2009 (the
Convertible Notes) and paid a $0.9 million premium on these repurchases. In
connection with these repurchases, the Company expensed $0.6 million of
deferred loan costs attributable to the $29.0 million Convertible Note
repurchases. The deferred loan cost charge and the $0.9 million premium paid
comprise the $1.5 million debt retirement costs in the Companys accompanying
condensed consolidated statements of income for the three and six months ended
June 30, 2004. The $1.5 million of debt retirement costs had a negative $0.02
per diluted share impact for the three and six months ended June 30, 2004. The Company borrowed $30.0 million under its $200.0 million, five-year
amended and restated credit agreement (Revolving Credit Facility) in June
2004 to fund the acquisition of River Parishes Hospital, as described in Note
9, 10




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##### Table of Contents



and for general corporate purposes. The interest rate related to borrowings
under the Revolving Credit Facility was 4.0% at June 30, 2004. In February
2004, the Company used available cash to repay the $20.0 million of
indebtedness outstanding at December 31, 2003 under the Revolving Credit
Facility. NOTE 7  PROFESSIONAL AND GENERAL LIABILITY RESERVES The Company is subject to medical malpractice lawsuits and other claims as
part of providing healthcare services. To mitigate a portion of this risk, the
Company maintains insurance for individual malpractice claims exceeding $10.0
million. The Companys reserves for professional and general liability claims
are based upon independent actuarial calculations, which consider historical
claims data, demographic considerations, severity factors and other actuarial
assumptions in determining reserve estimates. Reserve estimates are discounted
to present value using a 5.0% discount rate and are revised twice each year by
the Companys independent actuaries. The estimated reserve for professional and
general liability claims will be significantly affected if current and future
claims differ from historical trends. While management monitors reported claims
closely and considers potential outcomes as estimated by its actuaries when
determining its professional and general liability reserves, the complexity of
the claims, the extended period of time to settle the claims and the wide range
of potential outcomes complicates the estimation process. The Company implemented enhanced processes in monitoring claims and
managing losses in high risk areas during 2002 and 2003 to attempt to reduce
loss levels and appropriately manage risk. During the second quarter of 2004,
the Company received revised reserve estimates for professional and general
liability claims from its actuaries based upon more current loss
experience information.
In addition, the Company ceased receiving reserve estimates from one of the
three actuaries that had historically been used to calculate loss reserve
estimates. This change in the Companys estimation process reduced its reserve
levels and related professional and general liability insurance expense in the
second quarter of 2004 by $1.4 million on a pretax basis, or $0.02 per diluted
share. The Company continues to derive its estimates for financial reporting
purposes by using a mathematical average of the actuarial valuations from its
other two actuaries. The results of the updated actuarial valuations from
these two actuaries reduced the Companys reserve estimates for years prior to
2004 by $1.0 million on a pretax basis, or $0.01 per diluted share, which
reduced its professional and general liability expense in the second quarter of
2004. The reserve for professional and general liability claims was $27.5
million and $28.0 million at December 31, 2003 and June 30, 2004, respectively.
The total cost of professional and general liability coverage, including the
changes discussed above, for the three months ended June 30, 2003 and 2004 was
$3.8 million and $1.2 million, respectively. The total cost of professional
and general liability coverage, including the changes discussed above, for the
six months ended June 30, 2003 and 2004 was $7.5 million and $4.8 million,
respectively. The Company currently estimates that its professional and general
liability expense for the year ended December 31, 2004 will be approximately $9
million to $11 million based upon current loss experience information. The
Companys reserve levels are monitored throughout the year and will be
reassessed at year-end based upon updated actuarial estimates. NOTE 8  MEDICARE REIMBURSEMENT During the third quarter of 2003, the Company received correspondence from
one of its fiscal intermediaries questioning a particular Medicare
disproportionate share designation at one of its hospitals. This hospital has
had this designation since 2001 and was previously approved for this
designation by its fiscal intermediary. The Company and the fiscal intermediary
worked together and contacted CMS for resolution of the designation. The
Company reduced revenues by $3.0 million and $0.2 million during the third and
fourth quarters of 2003, respectively, representing the three-year difference
in reimbursement from this change in designation. The Company received
notification from CMS late in the first quarter of 2004 reconfirming the
original designation. Based upon the favorable resolution of this issue, the
Company increased revenues by $3.2 million in the first quarter of 2004. NOTE 9  ACQUISITION OF RIVER PARISHES HOSPITAL Effective July 1, 2004, the Company acquired the 106-bed River Parishes
Hospital in LaPlace, Louisiana from Universal Health Services, Inc. for
approximately $24.5 million in cash, including certain working capital, which
is 11




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##### Table of Contents



included in unallocated purchase price on the Companys accompanying condensed
consolidated balance sheet as of June 30, 2004. The Company borrowed from its
Revolving Credit Facility and paid the purchase price for this acquisition on
June 30, 2004. Revenues for this facility were approximately $36.0 million
during 2003, exclusive of physician revenues. The hospital is located
approximately 30 miles west of New Orleans, Louisiana and is the only
hospital located in St. John the Baptist Parish. 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. We recommend that you read this discussion together with our unaudited
condensed consolidated financial statements and related notes included
elsewhere in this report. This report, including the condensed consolidated financial statements and
related notes, contains forward-looking statements about the Company. Broadly
speaking, forward-looking statements include forecasts of future financial
results and conditions, expectations for future operations and business, and
any assumptions underlying those forecasts and expectations. You should not
unduly rely on forward-looking statements. Actual outcomes and results might
differ significantly from forecasts and expectations. Please refer to Factors
that May Affect Future Results later in this report for a discussion of some
of the factors that may cause results to differ. Executive Overview The first six months of 2004 were encouraging because of our solid
operating performance and increased patient volume levels, including strong
growth in inpatient surgeries. We continue to be guardedly optimistic
regarding our outlook for the remainder of 2004 as a result of the improved
reimbursement environment resulting from the passage of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (MMA) and
patient volumes more consistent with historical trends. During 2004, we are
continuing to focus on physician recruiting and retention, investing capital in
our hospitals and seeking additional hospital acquisitions that fit our
non-urban strategy. As part of that strategy, we acquired the 106-bed River
Parishes Hospital in LaPlace, Louisiana effective July 1, 2004, for
approximately $24.5 million. The following table reflects our summarized
operating results: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Number of hospitals at end of period
    
    
    28
    
    
    
    29
    
    
    
    28
    
    
    
    29Revenues (in millions)
    
    $
    221.6
    
    
    $
    246.4
    
    
    $
    442.5
    
    
    $
    503.0Net income (in millions)
    
    $
    15.3
    
    
    $
    18.7
    
    
    $
    33.0
    
    
    $
    42.6Diluted earnings per share
    
    $
    0.40
    
    
    $
    0.48
    
    
    $
    0.85
    
    
    $
    1.08
 Revenue/Volume Trends The key metrics we use internally to evaluate our revenues are equivalent
admissions, which equate to volume, and revenues per equivalent admission,
which relate to pricing and acuity. We anticipate our patient volumes and
related revenues will continue to be impacted by the following factors:  
    
    Physician Recruitment and Retention. Recruiting and retaining both
primary care physicians and specialists for our non-urban communities
is a key to increasing revenues and patient volumes. Continuing to add
specialists should help our hospitals increase volumes by offering new
services. We recruited 62 admitting physicians during the first six
months of 2004. Of these 62 physicians recruited, 28 started in the
first six months of 2004 and 34 are scheduled to start in the
remainder of 2004.  
    
    Medicare Rate Increases.MMA provides a prescription drug benefit for
Medicare beneficiaries and also contains numerous provisions that
provide incremental funding to hospitals. Hospitals qualify for
Medicare disproportionate share hospital (DSH) payments when their percentage
of low-income patients exceeds 15%. A majority of our hospitals
qualify to receive DSH payments. Effective April 1, 2004, MMA raised
the cap on the DSH payment adjustment percentage from 5.25% to 12.0%
for rural and small urban hospitals and specified that payments to all
hospitals are based on the same conversion factor, regardless of
geographic location. A majority of our hospitals are benefiting from
these provisions. 13




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##### Table of Contents



The following table lists our DSH payments from Medicare (in millions): Medicare DSH Payments2003
    
    2004First Quarter
    
    $
    2.4
    
    
    $
    3.2Second Quarter
    
    
    2.7
    
    
    
    5.6First Half
    
    $
    5.1
    
    
    $
    8.8
  Please refer to our 2003 Annual Report on Form 10-K for a discussion of
other MMA provisions that affect our reimbursement.
    
    Growth in Outpatient Services. A number of procedures once
performed only on an inpatient basis have been, and will continue to be,
converted to outpatient procedures. This conversion has occurred through
continuing advances in pharmaceutical and medical technologies, and as a
result of efforts made by payors to control costs. We anticipate that the long-term growth
trend in outpatient services will continue. Generally, the payments
we receive for outpatient procedures are less than those for similar
procedures performed in an inpatient setting. The following table shows
net outpatient, inpatient and other revenues as a percentage of our total
revenues: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2003
    
    2004
    
    2003
    
    2004Outpatient
    
    
    50.9
    %
    
    
    50.1
    %
    
    
    50.5
    %
    
    
    50.0
    %Inpatient
    
    
    48.1
    
    
    
    48.7
    
    
    
    48.3
    
    
    
    48.9Other
    
    
    1.0
    
    
    
    1.2
    
    
    
    1.2
    
    
    
    1.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Other Trends  
    
    Increases in Provision for Doubtful Accounts. We continued to experience
an increase in our provision for doubtful accounts during the first six
months of 2004. The increase was the result of a combination of broad
economic factors, including an increased number of uninsured patients and
plan design changes increasing copayments and deductibles. The provision
for doubtful accounts relates primarily to self-pay revenues. The
following table reflects our self-pay revenues, net of charity and
indigent care write-offs (in millions): Self-Pay Revenues2003
    
    2004First Quarter
    
    $
    18.8
    
    
    $
    23.1Second Quarter
    
    
    18.1
    
    
    
    23.3First Half
    
    $
    36.9
    
    
    $
    46.4
  Our revenues are reduced when we write-off patient accounts identified as
charity and indigent care. Our hospitals write-off a portion of a patients account upon the determination that the patient qualifies under a hospitals
charity and indigent care policy. The following table reflects our charity and
indigent care write-offs (in millions): Charity and Indigent Care Write-Offs2003
    
    2004First Quarter
    
    $
    1.0
    
    
    $
    1.9Second Quarter
    
    
    1.4
    
    
    
    2.4First Half
    
    $
    2.4
    
    
    $
    4.3
 14




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##### Table of Contents



The approximate percentages of billed hospital receivables (which is a
component of total receivables) is summarized as follows: December 31, 2003
    
    March 31, 2004
    
    June 30, 2004Insured receivables
    
    
    41.1
    %
    
    
    41.3
    %
    
    
    42.5
    %Uninsured receivables
(including
copayments
and deductibles)
    
    
    58.9
    
    
    
    58.7
    
    
    
    57.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  The approximate percentages of billed hospital receivables in summarized
aging categories is as follows: December 31, 2003
    
    March 31, 2004
    
    June 30, 20040 to 60 days
    
    
    47.5
    %
    
    
    51.6
    %
    
    
    51.8
    %61 to 150 days
    
    
    23.6
    
    
    
    17.5
    
    
    
    20.4Over 150 days
    
    
    28.9
    
    
    
    30.9
    
    
    
    27.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  For the next several quarters, we anticipate that our provision for doubtful
accounts will be approximately 9% to 10% of revenues. We are implementing a
number of operating strategies which should increase our cash collections of
self-pay revenues. If this trend of increasing self-pay revenues continues,
it could have a material adverse effect on our results of operations and
financial position in the future.  
    
    Shortage of Clinical Personnel and Increased Contract Labor Usage.In
recent years, many hospitals, including the hospitals we own, have
encountered difficulty in recruiting and retaining nursing and other
clinical personnel. When we are unable to staff our nursing and clinical
positions, we are required to use contract labor to ensure adequate
patient care. Contract labor generally costs more per hour than employed
labor. We have adopted a number of human resources strategies in an
attempt to improve our ability to recruit and retain nursing and other
clinical personnel. We expect that the staffing shortage related to
nurses and other clinical personnel will continue in the near term. Critical Accounting Estimates The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect reported amounts and related disclosures.
We consider an accounting estimate to be critical if:  
    
    it requires assumptions to be made that were uncertain at the time the estimate was made; and
    
    changes in the estimate or different estimates that could have been made could have a material impact on our consolidated
results of operations or financial condition. Our critical accounting estimates are more fully described in our 2003
Annual Report on Form 10-K and continue to include the following areas:  
    
    Allowance for doubtful accounts and provision for doubtful accounts;
    
    Revenue recognition and allowance for contractual discounts;
    
    Professional and general liability claims; and
    
    Accounting for income taxes. 15




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##### Table of Contents



Update
of Critical Accounting Estimates. Please refer to Note 7 of our condensed consolidated financial statements
included elsewhere herein for a discussion of the impact of recent changes in
our reserve for professional and general liability claims. Results of Operations Operating Results Summary The following tables present summaries of results of operations for the
three and six months ended June 30, 2003 and 2004 (dollars in millions, except
for revenues per equivalent admission): Three Months Ended June 30,2003
    
    2004Amount
    
    % ofRevenues
    
    Amount
    
    % ofRevenuesRevenues
    
    $
    221.6
    
    
    
    100.0
    %
    
    $
    246.4
    
    
    
    100.0
    %Salaries and benefits (a)
    
    
    90.8
    
    
    
    41.0
    
    
    
    101.5
    
    
    
    41.2Supplies (b)
    
    
    28.7
    
    
    
    13.0
    
    
    
    32.1
    
    
    
    13.0Other operating expenses (c)
    
    
    43.1
    
    
    
    19.4
    
    
    
    40.6
    
    
    
    16.5Provision for doubtful accounts
    
    
    16.9
    
    
    
    7.6
    
    
    
    21.1
    
    
    
    8.6Depreciation and amortization
    
    
    11.4
    
    
    
    5.1
    
    
    
    12.0
    
    
    
    4.9Interest expense, net
    
    
    3.3
    
    
    
    1.5
    
    
    
    3.2
    
    
    
    1.3Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    0.6ESOP expense
    
    
    1.5
    
    
    
    0.7
    
    
    
    2.5
    
    
    
    1.0195.7
    
    
    
    88.3
    
    
    
    214.5
    
    
    
    87.1Income before minority interests and income taxes
    
    
    25.9
    
    
    
    11.7
    
    
    
    31.9
    
    
    
    12.9Minority interests in earnings of consolidated entities
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1Income before income taxes
    
    
    25.7
    
    
    
    11.6
    
    
    
    31.6
    
    
    
    12.8Provision for income taxes
    
    
    10.4
    
    
    
    4.7
    
    
    
    12.9
    
    
    
    5.2Net income
    
    $
    15.3
    
    
    
    6.9
    %
    
    $
    18.7
    
    
    
    7.6
    %
 Three Months Ended June 30,2003
    
    2004
    
    % ChangeAmount
    
    Amount
    
    From Prior YearConsolidated:Number of hospitals at end of period
    
    
    28
    
    
    
    29
    
    
    
    3.6
    %Admissions (d)
    
    
    22,337
    
    
    
    22,851
    
    
    
    2.3Equivalent admissions (e)
    
    
    44,654
    
    
    
    46,051
    
    
    
    3.1Revenues per equivalent admission
    
    $
    4,962
    
    
    $
    5,349
    
    
    
    7.8Outpatient factor (e)
    
    
    2.00
    
    
    
    2.02
    
    
    
    1.0Emergency room visits (f)
    
    
    106,305
    
    
    
    109,613
    
    
    
    3.1Inpatient surgeries (j)
    
    
    6,390
    
    
    
    7,049
    
    
    
    10.3Outpatient surgeries (g), (j)
    
    
    18,479
    
    
    
    19,113
    
    
    
    3.4Total surgeries (j)
    
    
    24,869
    
    
    
    26,162
    
    
    
    5.2Licensed beds at end of period
    
    
    2,624
    
    
    
    2,687
    
    
    
    2.4Weighted average licensed beds
    
    
    2,624
    
    
    
    2,692
    
    
    
    2.6Average daily census
    
    
    997
    
    
    
    1,006
    
    
    
    0.9Average length of stay (days)
    
    
    4.1
    
    
    
    4.0
    
    
    
    (2.4
    )Outpatient revenues as a percentage of total revenues
    
    
    50.9
    %
    
    
    50.1
    %
    
    
    N/MMedicare case mix index (i)
    
    
    1.18
    
    
    
    1.18
    
    
    
    
 16




---



##### Table of Contents



Three Months Ended June 30,2003
    
    2004
    
    % ChangeAmount
    
    Amount
    
    From Prior YearSame-Hospital (h):Revenues
    
    $
    221.6
    
    
    $
    240.1
    
    
    
    8.4
    %Number of hospitals at end of period
    
    
    28
    
    
    
    28
    
    
    
    Admissions (d)
    
    
    22,337
    
    
    
    22,375
    
    
    
    0.2Equivalent admissions (e)
    
    
    44,654
    
    
    
    44,703
    
    
    
    0.1Revenues per equivalent admission
    
    $
    4,962
    
    
    $
    5,370
    
    
    
    8.2Outpatient factor (e)
    
    
    2.00
    
    
    
    2.00
    
    
    
    Emergency room visits (f)
    
    
    106,305
    
    
    
    105,745
    
    
    
    (0.5
    )Inpatient surgeries (j)
    
    
    6,390
    
    
    
    6,888
    
    
    
    7.8Outpatient surgeries (g), (j)
    
    
    18,479
    
    
    
    18,422
    
    
    
    (0.3
    )Total surgeries (j)
    
    
    24,869
    
    
    
    25,310
    
    
    
    1.8Licensed beds at end of period
    
    
    2,624
    
    
    
    2,612
    
    
    
    (0.5
    )Weighted average licensed beds
    
    
    2,624
    
    
    
    2,617
    
    
    
    (0.3
    )Average daily census
    
    
    997
    
    
    
    988
    
    
    
    (0.9
    )Average length of stay (days)
    
    
    4.1
    
    
    
    4.0
    
    
    
    (2.4
    )Outpatient revenues as a percentage of total revenues
    
    
    50.9
    %
    
    
    49.7
    %
    
    
    N/MMedicare case mix index (i)
    
    
    1.18
    
    
    
    1.18
    
    
    
    
 17




---



##### Table of Contents



Six Months Ended June 30,2003
    
    2004% of
    
    
    
    
    
    % ofAmount
    
    Revenues
    
    Amount
    
    RevenuesRevenues
    
    $
    442.5
    
    
    
    100.0
    %
    
    $
    503.0
    
    
    
    100.0
    %Salaries and benefits (a)
    
    
    181.1
    
    
    
    40.9
    
    
    
    202.2
    
    
    
    40.2Supplies (b)
    
    
    57.2
    
    
    
    12.9
    
    
    
    65.5
    
    
    
    13.0Other operating expenses (c)
    
    
    81.7
    
    
    
    18.5
    
    
    
    83.2
    
    
    
    16.5Provision for doubtful accounts
    
    
    34.4
    
    
    
    7.8
    
    
    
    44.1
    
    
    
    8.8Depreciation and amortization
    
    
    22.6
    
    
    
    5.1
    
    
    
    23.6
    
    
    
    4.7Interest expense, net
    
    
    6.6
    
    
    
    1.5
    
    
    
    6.6
    
    
    
    1.3Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    1.5
    
    
    
    0.3ESOP expense
    
    
    3.1
    
    
    
    0.7
    
    
    
    4.8
    
    
    
    1.0386.7
    
    
    
    87.4
    
    
    
    431.5
    
    
    
    85.8Income before minority interests and income taxes
    
    
    55.8
    
    
    
    12.6
    
    
    
    71.5
    
    
    
    14.2Minority interests in earnings of consolidated entities
    
    
    0.2
    
    
    
    
    
    
    
    0.6
    
    
    
    0.1Income before income taxes
    
    
    55.6
    
    
    
    12.6
    
    
    
    70.9
    
    
    
    14.1Provision for income taxes
    
    
    22.6
    
    
    
    5.1
    
    
    
    28.3
    
    
    
    5.6Net income
    
    $
    33.0
    
    
    
    7.5
    %
    
    $
    42.6
    
    
    
    8.5
    %
 Six Months Ended June 30,2003
    
    2004
    
    % ChangeAmount
    
    Amount
    
    From Prior YearConsolidated:Number of hospitals at end of period
    
    
    28
    
    
    
    29
    
    
    
    3.6
    %Admissions (d)
    
    
    45,814
    
    
    
    48,316
    
    
    
    5.5Equivalent admissions (e)
    
    
    89,566
    
    
    
    94,893
    
    
    
    5.9Revenues per equivalent admission
    
    $
    4,940
    
    
    $
    5,300
    
    
    
    7.3Outpatient factor (e)
    
    
    1.96
    
    
    
    1.96
    
    
    
    Emergency room visits (f)
    
    
    206,043
    
    
    
    215,367
    
    
    
    4.5Inpatient surgeries (j)
    
    
    12,690
    
    
    
    14,121
    
    
    
    11.3Outpatient surgeries (g), (j)
    
    
    36,619
    
    
    
    38,455
    
    
    
    5.0Total surgeries (j)
    
    
    49,309
    
    
    
    52,576
    
    
    
    6.6Licensed beds at end of period
    
    
    2,624
    
    
    
    2,687
    
    
    
    2.4Weighted average licensed beds
    
    
    2,622
    
    
    
    2,711
    
    
    
    3.4Average daily census
    
    
    1,026
    
    
    
    1,081
    
    
    
    5.4Average length of stay (days)
    
    
    4.1
    
    
    
    4.1
    
    
    
    Outpatient revenues as a percentage of total revenues
    
    
    50.5
    %
    
    
    50.0
    %
    
    
    N/MMedicare case mix index (i)
    
    
    1.19
    
    
    
    1.17
    
    
    
    (1.7
    )
 18




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##### Table of Contents



Six Months Ended June 30,2003
    
    2004
    
    % Change FromAmount
    
    Amount
    
    Prior YearSame-Hospital (h):Revenues
    
    $
    442.5
    
    
    $
    490.1
    
    
    
    10.8
    %Number of hospitals at end of period
    
    
    28
    
    
    
    28
    
    
    
    Admissions (d)
    
    
    45,814
    
    
    
    47,238
    
    
    
    3.1Equivalent admissions (e)
    
    
    89,566
    
    
    
    92,067
    
    
    
    2.8Revenues per equivalent admission
    
    $
    4,940
    
    
    $
    5,324
    
    
    
    7.8Outpatient factor (e)
    
    
    1.96
    
    
    
    1.95
    
    
    
    (0.5
    )Emergency room visits (f)
    
    
    206,043
    
    
    
    208,273
    
    
    
    1.1Inpatient surgeries (j)
    
    
    12,690
    
    
    
    13,753
    
    
    
    8.4Outpatient surgeries (g), (j)
    
    
    36,619
    
    
    
    37,060
    
    
    
    1.2Total surgeries (j)
    
    
    49,309
    
    
    
    50,813
    
    
    
    3.1Licensed beds at end of period
    
    
    2,624
    
    
    
    2,612
    
    
    
    (0.5
    )Weighted average licensed beds
    
    
    2,622
    
    
    
    2,617
    
    
    
    (0.2
    )Average daily census
    
    
    1,026
    
    
    
    1,060
    
    
    
    3.3Average length of stay (days)
    
    
    4.1
    
    
    
    4.1
    
    
    
    Outpatient revenues as a percentage of total revenues
    
    
    50.5
    
    
    
    49.7
    
    
    
    N/MMedicare case mix index (i)
    
    
    1.19
    
    
    
    1.17
    
    
    
    (1.7
    )
   N/M
    
    - Not Meaningful  (a)
    
    Represents our cost of salaries and benefits, including employee health
benefits and workers compensation
insurance, for all hospital and corporate employees and contract labor.(b)
    
    Includes our hospitals costs for pharmaceuticals, blood, surgical
instruments and all general supply items, including the cost of freight.(c)
    
    Consists primarily of contract services, physician recruitment,
professional fees, repairs and maintenance, rents and leases, utilities,
insurance, information systems fees paid to HCA Information Technology and
Services, Inc. (HCA-IT), marketing and non-income taxes.(d)
    
    Represents the total number of patients admitted (in the facility for a
period in excess of 23 hours) to our hospitals and is used by management
and investors as a general measure of inpatient volume.(e)
    
    Management and investors use equivalent admissions as a general measure
of combined inpatient and outpatient volume. We compute equivalent
admissions by multiplying admissions (inpatient volume) by the outpatient
factor (the sum of gross inpatient revenue and gross outpatient revenue
and then dividing the resulting amount by gross inpatient revenue). The
equivalent admissions computation equates outpatient revenue to the
volume measure (admissions) used to measure inpatient volume resulting in
a general measure of combined inpatient and outpatient volume.(f)
    
    Represents the total number of hospital-based emergency room visits.(g)
    
    Outpatient surgeries are those surgeries that do not require admission to
our hospitals.(h)
    
    Same-hospital information excludes the operations of hospitals that we
acquired after January 1, 2003.(i)
    
    Refers to acuity or severity of illness of an average Medicare patient at
our hospitals.(j)
    
    Inpatient and outpatient surgeries for 2003 and the first quarter of 2004
were restated to reflect appropriate amounts during these periods. This
change produced no impact on our historical results of operations. 19




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##### Table of Contents



For the Quarters Ended June 30, 2003 and 2004 Revenues Our revenues for the quarter ended June 30, 2004 increased by $24.8
million, or 11.2%, to $246.4 million compared to the quarter ended June 30,
2003. This increase is attributable to a number of factors, including:  
    
    $18.5 million increase in our same-hospital revenues; and
    
    $6.3 million in revenues from our 2003 acquisition of Spring View Hospital. Adjustments to estimated reimbursement amounts increased our revenues by
$0.8 million for the quarter ended June 30, 2004 compared to $1.4 million for
the same period in 2003. Our DSH payments from Medicare for the quarter ended
June 30, 2004 were $5.6 million, an increase of $2.9 million over the same
period in 2003. This increase is primarily the result of the DSH
payment increases under MMA. Our same-hospital inpatient revenues for the quarter ended June 30, 2004
increased by $11.1 million, or 10.4%, to $117.8 million compared to the quarter
ended June 30, 2003. The primary factor causing this change was a 7.8%
increase in same-hospital inpatient surgeries, which involve higher
intensive procedures. The increase in higher intensive
procedures is the result of capital spending at our facilities and strong
physician recruitment in the past year. Our same-hospital outpatient revenues for the quarter ended June 30, 2004
increased by $6.6 million, or 5.9%, to $119.4 million compared to the quarter
ended June 30, 2003. This outpatient growth was largely driven by an increase
in radiology procedures such as CT-scans and MRIs, as well as cardiac
catheterization procedures. This increase was partially offset by a 0.3% decrease in
same-hospital outpatient surgeries and a 0.5% decrease in same-hospital
emergency room visits. After factoring all of the above, our equivalent admissions increased by
0.1% on a same-hospital basis for the quarter ended June 30, 2004 compared to
the same period in 2003. As it relates to pricing and acuity, our
same-hospital revenues per equivalent admission for the quarter ended June 30,
2004 increased 8.2%, or $408 per equivalent admission, over the same period in
2003, reflecting positive pricing trends and higher intensive procedures
as discussed above. The table below shows the sources of our revenues for the quarters ended
June 30, expressed as percentages of total revenues: Consolidated
    
    Same-hospital2003
    
    2004
    
    2003
    
    2004Medicare
    
    
    36.9
    %
    
    
    38.1
    %
    
    
    36.9
    %
    
    
    38.3
    %Medicaid
    
    
    11.0
    
    
    
    10.3
    
    
    
    11.0
    
    
    
    10.2HMOs, PPOs and
other private
insurers
    
    
    39.6
    
    
    
    38.3
    
    
    
    39.6
    
    
    
    38.2Self Pay
    
    
    8.2
    
    
    
    9.5
    
    
    
    8.2
    
    
    
    9.4Other
    
    
    4.3
    
    
    
    3.8
    
    
    
    4.3
    
    
    
    3.9Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Our historical sources of revenues table in our quarterly and annual
reports filed with the Securities and Exchange Commission (the SEC) prior to our
2003 Annual Report on Form 10-K required certain reclassifications.
Specifically, contractual discounts relating to certain Medicaid state managed
care programs were historically classified incorrectly as HMOs, PPOs and other
private insurers revenues, instead of as Medicaid revenues. This change
produced no impact on our historical results of operations. Generally, these
reclassifications reduced Medicaid as a percentage of total revenues and
increased HMOs, PPOs and other private insurers as a percentage of total
revenues. 20




---



##### Table of Contents



Expenses Salaries and benefits increased as a percentage of revenues to 41.2% for
the quarter ended June 30, 2004 from 41.0% for the quarter ended June 30, 2003,
primarily as a result of an increase in resource-intensive services provided.
Man-hours per equivalent admission increased 2.0% for the quarter ended June
30, 2004 over the same period last year. We had a 6.2% increase in salaries
and benefits per man-hour in the quarter ended June 30, 2004 compared to the
same period in 2003. However, our contract labor costs decreased by 9.2% to
$3.7 million in the quarter ended June 30, 2004 compared to $4.1 million in the
quarter ended June 30, 2003. Appropriate staffing and minimizing the use of
contract labor will continue to be a significant initiative for us. Supply costs as a percentage of revenues remained constant at 13.0% in the
quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003, on
both a consolidated and same-hospital basis. On a consolidated and
same-hospital basis, our cost of supplies per equivalent admission increased
8.3% and 8.8%, respectively, in the quarter ended June 30, 2004 as a result of
rising supply costs compared to the same period in 2003, particularly in the
pharmaceutical, cardiac and spine and joint implant areas. In addition, our
same-hospital surgeries, which generally incur higher supply costs per
equivalent admission, increased by 1.8% for the quarter ended June 30, 2004
over the same period last year. Other operating expenses decreased as a percentage of revenues to 16.5% in
the quarter ended June 30, 2004 from 19.4% in the quarter ended
June 30, 2003, primarily as a result of the 11.2% increase in our revenues and a
$2.6 million
decrease in our professional and general liability insurance expense. A
portion of our other operating expenses are fixed and not volume driven. Our
professional and general liability insurance expense was $1.2 million during
the quarter ended June 30, 2004 compared to $3.8 million in the quarter ended
June 30, 2003. This decrease relates to favorable loss experience as reflected
in our external actuarial reports and a change in actuaries used to estimate
projected losses under the self-insured portion of our insurance program, as
further discussed in Note 7 of our condensed consolidated financial statements
included elsewhere herein. In addition, our physician recruiting costs
decreased from $2.9 million in the quarter ended June 30, 2003 to $2.1 million
in the quarter ended June 30, 2004 as a result of a $0.7 million cash
collection from a departed physician. Provision for doubtful accounts increased as a percentage of revenues to
8.6% in the quarter ended June 30, 2004 from 7.6% in the quarter ended June 30,
2003. The provision for doubtful accounts related primarily to self-pay
amounts due from patients. Our self-pay revenues, net of charity and
indigent care write-offs, increased by 28.8% from $18.1
million for the quarter ended June 30, 2003 to $23.3 million for the quarter
ended June 30, 2004. The factors influencing this increase are primarily a
combination of broad economic factors, including the increased number of
uninsured patients and plan design changes increasing copayments and
deductibles. On a same-hospital basis, the provision for doubtful accounts
increased as a percentage of revenues to 8.5% in the quarter ended June 30,
2004 from 7.6% in the quarter ended June 30, 2003. Depreciation and amortization expense increased to $12.0 million in the
quarter ended June 30, 2004 from $11.4 million in the quarter ended June 30,
2003, primarily as a result of our acquisition of Spring View Hospital in the
fourth quarter of 2003 and depreciation associated with recently completed
capital improvements at our facilities. The provision for income taxes increased to $12.9 million in the quarter
ended June 30, 2004 from $10.4 million in the quarter ended June 30, 2003. The
income tax provisions reflected an effective income tax rate of 40.7% for the
quarter ended June 30, 2004 compared to 40.3% for the quarter ended June 30,
2003. The effective tax rate increased primarily as a result of the increase
in the nondeductible ESOP expense, which increased by $1.0 million in the
quarter ended June 30, 2004, as compared to the same period in 2003. 21




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##### Table of Contents



For the Six Months Ended June 30, 2003 and 2004 Revenues Our revenues for the six months ended June 30, 2004 increased by $60.5
million, or 13.7%, to $503.0 million compared to the six months ended June 30,
2003. This increase is attributable to a number of factors, including:  
    
    $47.6 million increase in our same-hospital revenues; and
    
    $12.9 million in revenues from our 2003 acquisition of Spring View Hospital. Adjustments to estimated reimbursement amounts increased our revenues by
$2.2 million for the six months ended June 30, 2004 compared to $4.3 million
for the same period in 2003. In addition, as discussed in Note 8 to our
condensed consolidated financial statements, we recognized $3.2 million in
additional revenues for the quarter ended March 31, 2004 following the
confirmation by CMS of a Medicare DSH designation at one of our hospitals. Our
DSH payments from Medicare for the six months ended June 30, 2004 were $8.8
million, an increase of $3.7 million over the same period in 2003.
This increase is primarily the result of the DSH
payment increases under MMA. Our same-hospital inpatient revenues for the six months ended June 30,
2004 increased by $27.2 million, or 12.7%, to $241.0 million compared to the
six months ended June 30, 2003. The primary factors causing this change were
increases in admissions and inpatient surgeries, which involve higher
intensive procedures. The increase in higher
intensive procedures is the result of capital spending at our facilities and
strong physician recruitment in the past year. Our same-hospital outpatient revenues for the six months ended June 30,
2004 increased by $19.8 million, or 8.8%, to $243.4 million compared to the six
months ended June 30, 2003. This outpatient growth was largely driven by a 1.2%
increase in same-hospital outpatient surgeries, a 1.1% increase in
same-hospital emergency room visits and an increase in radiology
procedures such as CT-scans and MRIs, as well as cardiac catheterization
procedures. In addition, the $19.8 million increase in revenues includes $3.2
million from the Medicare DSH designation described in Note 8 to our condensed
consolidated financial statements. After factoring all of the above, our equivalent admissions increased by
2.8% on a same-hospital basis for the six months ended June 30, 2004 compared
to the same period in 2003. As it relates to pricing and acuity, our
same-hospital revenues per equivalent admission for the six months ended June
30, 2004 increased 7.8%, or $384 per equivalent admission, over the same period
in 2003 reflecting positive pricing trends and higher intensive procedures
as discussed above. The table below shows the sources of our revenues for the six months ended
June 30, expressed as percentages of total revenues: Consolidated
    
    Same-hospital2003
    
    2004
    
    2003
    
    2004Medicare
    
    
    37.2
    %
    
    
    37.9
    %
    
    
    37.2
    %
    
    
    38.1
    %Medicaid
    
    
    10.9
    
    
    
    10.6
    
    
    
    10.9
    
    
    
    10.5HMOs, PPOs and
other private
insurers
    
    
    39.5
    
    
    
    38.6
    
    
    
    39.5
    
    
    
    38.5Self Pay
    
    
    8.3
    
    
    
    9.2
    
    
    
    8.3
    
    
    
    9.1Other
    
    
    4.1
    
    
    
    3.7
    
    
    
    4.1
    
    
    
    3.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Our historical sources of revenues table in our quarterly and annual
reports filed with the SEC prior to our 2003 Annual Report on Form 10-K
required certain reclassifications. Specifically, contractual discounts
relating to certain Medicaid state managed care programs were historically
classified incorrectly as HMOs, PPOs and other private insurers revenues,
instead of as Medicaid revenues. This change produced no impact on our
historical results of operations. Generally, these reclassifications reduced
Medicaid as a percentage of total revenues and increased HMOs, PPOs and other
private insurers as a percentage of total revenues. 22




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Expenses Salaries and benefits decreased as a percentage of revenues to 40.2% for
the six months ended June 30, 2004 from 40.9% for the six months ended June 30,
2003, primarily as a result of improvements in labor productivity and the 13.7%
increase in our revenues. Man-hours per equivalent admission decreased 0.6% for
the six months ended June 30, 2004 over the same period last year. However, we
had a 6.0% increase in salaries and benefits per man-hour in the six months
ended June 30, 2004 compared to the same period in 2003. Our contract labor
costs decreased by 1.9% to $8.0 million in the six months ended June 30, 2004
compared to $8.2 million in the six months ended June 30, 2003. Appropriate
staffing and minimizing the use of contract labor will continue to be a
significant initiative for us. Supply costs as a percentage of revenues increased slightly to 13.0% in
the six months ended June 30, 2004 from 12.9% in the six months ended June 30,
2003, on both a consolidated and same-hospital basis. On a consolidated and
same-hospital basis, our cost of supplies per equivalent admission increased
8.1% and 8.3%, respectively, in the six months ended June 30, 2004 as a result
of rising supply costs compared to the same period in 2003, particularly in the
pharmaceutical, cardiac and spine and joint implant areas. In addition, our
same-hospital surgeries, which generally incur higher supply costs per
equivalent admission, increased by 3.1% for the six months ended June 30, 2004
over the same period last year. Other operating expenses decreased as a percentage of revenues to 16.5% in
the six months ended June 30, 2004 from 18.5% in the six months ended June 30,
2003, primarily as a result of the 13.7% increase in our revenues and a $2.7
million decrease in our professional and general liability insurance expense.
A portion of our other operating expenses are fixed and not volume driven. Our
professional and general liability insurance expense was $4.8 million during
the six months ended June 30, 2004 compared to $7.5 million in the six months
ended June 30, 2003. This decrease relates to favorable loss experience as
reflected in our external actuarial reports and a change in actuaries to
estimate projected losses under the self-insured portion of our insurance
program, as further discussed in Note 7 of our condensed consolidated financial
statements included elsewhere herein. However, our physician recruiting costs
increased from $5.3 million in the six months ended June 30, 2003 to $5.6
million in the six months ended June 30, 2004 as a result of our increased
number of recruited physicians. Provision for doubtful accounts increased as a percentage of revenues to
8.8% in the six months ended June 30, 2004 from 7.8% in the six months ended
June 30, 2003. The provision for doubtful accounts related primarily to
self-pay amounts due from patients. Our self-pay revenues, net of
charity and indigent care write-offs, increased by 25.8%
from $36.9 million for the six months ended June 30, 2003 to $46.4 million for
the six months ended June 30, 2004. The factors influencing this increase are
primarily a combination of broad economic factors, including the increased
number of uninsured patients and plan design changes increasing copayments and
deductibles. On a same-hospital basis, the provision for doubtful accounts
increased as a percentage of revenues to 8.7% in the six months ended June 30,
2004 from 7.8% in the six months ended June 30, 2003. Depreciation and amortization expense increased to $23.6 million in the
six months ended June 30, 2004 from $22.6 million in the six months ended June
30, 2003, primarily as a result of our acquisition of Spring View Hospital in
the fourth quarter of 2003 and depreciation associated with recently completed
capital improvements at our facilities. The provision for income taxes increased to $28.3 million in the six
months ended June 30, 2004 from $22.6 million in the six months ended June 30,
2003. The income tax provisions reflected an effective income tax rate of 40.0%
for the six months ended June 30, 2004 compared to 40.6% for the six months
ended June 30, 2003. The effective tax rate decreased primarily as a result of
changes related to state net operating losses. 23




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Liquidity and Capital Resources Liquidity Our primary sources of liquidity are cash flows provided by our operations
and our Revolving Credit Facility. Our liquidity for the six months ended June
30, 2003 and 2004 was derived primarily from net cash provided by operating
activities. Cash flows for the six months ended June 30 were as follows (in millions): Source (use) of cash flow
    
    2003
    
    2004Operating activities
    
    $
    50.1
    
    
    $
    71.9Investing activities
    
    
    (37.6
    )
    
    
    (62.5
    )Financing activities
    
    
    (16.0
    )
    
    
    (11.6
    )Net change in cash and cash equivalents
    
    $
    (3.5
    )
    
    $
    (2.2
    )Interest payments
    
    $
    6.3
    
    
    $
    6.7Income taxes paid
    
    $
    24.7
    
    
    $
    30.0Working capital as of June 30
    
    $
    82.0
    
    
    $
    106.5
 Operating activities The
$21.8 million increase in cash flows provided by operating activities in the
six months ended June 30, 2004 as compared to the same period in 2003 is
primarily a result of:  
    
    increased net income of $9.6 million in the six months ended June
30, 2004 as compared to the same period in 2003; and
    
    improved cash flows from operations related to changes in working
capital of $9.6 million provided primarily by increased cash
collections related to accounts receivable and increases in accrued
salaries and other current liabilities in the first six months of 2004
as compared to the same period in 2003. Our revenue days in patient
accounts receivable were 38.8 days at June 30, 2004 compared to
39.3 days at December 31, 2003. However, we paid
$5.3 million more in income taxes during the six months ended
June 30, 2004 as compared to the six months ended June 30,
2003 as a result of an increase in our net income. Investing activities Cash used in investing activities for the six months ended June 30, 2004
consisted primarily of purchases of equipment of $35.4 million, the purchase price of River Parishes Hospital of $24.5
million, the direct transaction costs and working capital settlement of Spring
View Hospital of $0.5 million, and $1.5 million related to our purchase of a
surgery center in Sulligent, Alabama. Our routine capital expenditures
decreased from $10.9 million in the six months ended
June 30, 2003 to $9.6 million in the six months ended
June 30, 2004 as a result of a higher number of
routine projects during the six months ended June 30, 2003. We
did not incur any acquisition costs for the six months ended June 30,
2003. Financing activities Cash used in financing activities for the six months ended June 30, 2004
consisted primarily of $29.9 million in repurchases of our Convertible Notes
during the second quarter of 2004, including $0.9 million in premium costs, and
a first quarter 2004 $20.0 million repayment under our Revolving Credit
Facility. These activities were partially offset by $30.0 million borrowed
under our Revolving Credit Facility and $7.5 million in proceeds from stock
option exercises and purchases of shares under our employee stock purchase
plans. We used approximately $24.5 million of the $30.0 Revolving Credit
Facility borrowing to acquire River Parishes Hospital on June 30, 2004. 24




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Cash used in financing activities for the six months ended June 30, 2003
primarily consisted of $17.0 million in repurchases of our
common stock, offset by proceeds from stock option exercises and
purchases of shares under our employee stock purchase plans. Capital Resources Revolving Credit Facility Our Revolving Credit Facility, which expires in June 2006, provides for
borrowings up to $200.0 million in the aggregate, is guaranteed by
substantially all of our current and future subsidiaries and is secured by
substantially all of our assets. The Revolving Credit Facility requires that
we comply with certain financial covenants, including: Requirement
    
    Level at June 30, 2004Maximum permitted consolidated leverage ratio
    
    <3.50 to 1.00
    
    
    1.34 to 1.00Maximum permitted consolidated senior leverage ratio
    
    <2.50 to 1.00
    
    
    0.23 to 1.00Minimum permitted consolidated interest coverage ratio
    
    >3.50 to 1.00
    
    
    13.88 to 1.00Minimum permitted consolidated net worth
    
    >$291.3 million
    
    $
    455.0 millionMaximum capital expenditures  last twelve months
    
    <$145.1 million
    
    $
    67.6 million
 The Revolving Credit Facility also contains various other covenants,
including, but not limited to, restrictions on new indebtedness, the ability to
merge or consolidate, asset sales, capital expenditures, acquisitions and
dividends. We were in compliance with these covenants as of
June 30, 2004. During the second quarter of 2004, we entered
into an amendment under the Revolving Credit Facility that allows us
to repurchase up to $150.0 million of our Convertible Notes. As
of June 30, 2004, we had $30.0 million of outstanding indebtedness under our
Revolving Credit Facility and letters of credit in the aggregate amount of
$16.5 million outstanding, leaving $153.5 million available under our Revolving
Credit Facility. We repaid the $20.0 million of indebtedness outstanding at
December 31, 2003 under our Revolving Credit Facility in February 2004 with our
available cash. The applicable interest rate under the Revolving Credit Facility is based
on a rate, at our option, equal to either (i) LIBOR plus a margin ranging from
1.25% to 2.25% or (ii) prime plus a margin ranging from 0% to 0.5%, both
depending on our consolidated total debt to consolidated EBITDA ratio, as
defined, for the most recent four quarters. As of June 30, 2004, the interest
rate related to borrowings under our Revolving Credit Facility was 4.0%. Our Revolving Credit Facility does not contain provisions that would
accelerate the maturity date of our debt upon a downgrade in our credit rating.
However, a downgrade in our credit rating could adversely affect our ability to
renew our existing credit facility or obtain access to new credit facilities or
other capital sources in the future and could increase the cost of such
facilities and other capital sources. Our credit ratings as of June 30, 2004
are as follows: Standard &
Poors
    
    MoodysCorporate Credit Rating/Senior Implied
    
    BB
    
    Ba3Senior Secured Bank Credit Facility
    
    BB+
    
    Ba2Senior Unsecured/Issuer
    
    
    
    
    
    
    B2Subordinated
    
    
    
    
    
    
    B3Outlook
    
    Stable
    
    Positive
 We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance, special
purpose or variable interest 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. Convertible Notes On May 22, 2002, we sold 4 1/2% Convertible Subordinated Notes due 2009
in the aggregate principal amount of $250 million (the Convertible Notes).
The net proceeds of approximately $242.5 million were used for 25




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acquisitions, capital improvements at our existing facilities, repurchase
of our 10 3/4% Senior Subordinated Notes, working capital and general
corporate purposes. The Convertible Notes bear interest at the rate of 4 1/2%
per year, payable semi-annually on June 1 and December 1. The Convertible Notes
are convertible at the option of the holder at any time on or prior to maturity
into shares of our common stock at a conversion price of $47.36 per share. The
conversion price is subject to adjustment in certain circumstances. We may
redeem all or a portion of the Convertible Notes on or after June 3, 2005, at
the then current redemption prices, plus accrued and unpaid interest. Holders
of the Convertible Notes may require us to repurchase all of the holders
Convertible Notes at 100% of their principal amount plus accrued and unpaid
interest in some circumstances involving a change of control. The Convertible
Notes are unsecured and subordinated to our existing and future senior
indebtedness and senior subordinated indebtedness. The Convertible Notes rank
junior to our other liabilities. The indenture governing the Convertible Notes
does not contain any financial covenants. We repurchased $29.0 million of our $250.0 million Convertible Notes
during the second quarter of 2004 and paid a premium of $0.9 million on these
repurchases. These repurchases reduced the number of shares of common stock
that were reserved for issuance upon conversion of the Convertible Notes from
5,278,825 shares to 4,666,481 shares. Liquidity and Capital Resources Outlook We expect the level of capital expenditures in 2004 to be approximately
$90.0 million, of which $35.4 million has been spent in the first six months.
We have large projects in process at a number of our facilities. We are
reconfiguring some of our hospitals to more effectively accommodate patient
services and restructuring existing surgical capacity in some of our hospitals
to permit additional patient volume and a greater variety of services. At June
30, 2004, we had projects under construction with an estimated additional cost
to complete and equip of approximately $79.6 million. We anticipate that these
projects will be completed over the next three years. We anticipate funding
these expenditures through cash provided by operating activities, available
cash and borrowings under our Revolving Credit Facility. Our business strategy contemplates the acquisition of additional
hospitals, and we regularly review potential acquisitions. These acquisitions
may, however, require additional financing. We regularly evaluate opportunities
to sell additional equity or debt securities, obtain credit facilities from
lenders or restructure our long-term debt or equity for strategic reasons or to
further strengthen our financial position. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. We have never declared or paid dividends on our common stock. We intend to
retain future earnings to finance the growth and development of our business
and, accordingly, do not currently intend to declare or pay any dividends on
our common stock. Our Board of Directors will evaluate our future earnings,
results of operations, financial condition and capital requirements in
determining whether to declare or pay cash dividends. Delaware law prohibits us
from paying any dividends unless we have capital surplus or net profits
available for this purpose. In addition, our Revolving Credit
Facility imposes
restrictions on our ability to pay dividends. We repurchased approximately 2.1
million shares of our common stock for an aggregate price of approximately
$45.7 million during 2003. Please refer to Part II,
Item 2. Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securitieselsewhere in this report for a discussion of
our share repurchase program. We believe that cash flows from operations, amounts available under our
Revolving Credit Facility and our anticipated access to capital markets are
sufficient to meet expected liquidity needs, planned capital expenditures,
potential acquisitions and other expected operating needs over the next three
years. Contractual Obligations During the six months ended June 30, 2004, there were no material changes
in our contractual obligations presented in our 2003 Annual Report on Form 10-K
except for our obligation under our contract with HCA-IT related to the
purchase of information technology services, which was recently extended
through December 31, 26




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2009. The following is an update of our contractual obligation to HCA-IT,
reflecting our amended agreement, which was signed during the second quarter of
2004 (in millions): Payments Due by PeriodPurchase Obligation
    
    Total
    
    7/04-12/04
    
    2005-2007
    
    2008-2009
    
    After 2009HCA-IT services
    
    $
    72.7
    
    
    $
    6.2
    
    
    $
    39.1
    
    
    $
    27.4
    
    
    $
    
 Off-Balance Sheet Arrangements We had standby letters of credit outstanding of approximately $16.5
million as of June 30, 2004. Of this amount, $16.3 million was related to the
self-insured retention levels of our professional and general liability
insurance programs as security for the payment of claims and $0.2 million was
related to obligations to certain utility companies. Impact of Recently Issued Accounting Pronouncements Please refer to Note 3 of our condensed consolidated financial statements
included in this report for a discussion of the impact of recently issued
accounting pronouncements. Contingencies Please refer to Note 5 of our condensed consolidated financial statements
included in this report for a discussion of our material financial
contingencies, including:  
    
    An Americans with Disabilities Act claim;
    
    HCA investigations, litigation and indemnification rights;
    
    Our Corporate Integrity Agreement;
    
    Legal proceedings and general liability claims;
    
    Physician commitments;
    
    Capital expenditure commitments;
    
    Tax matters; and
    
    Acquisitions. Factors That May Affect Future Results We make forward-looking statements in this report and in other reports and
proxy statements we file with the SEC. In addition, our senior management
makes forward-looking statements orally to analysts, investors, the media and
others. Broadly speaking, forward-looking statements include:  
    
    projections of our revenues, net income, earnings per share, capital
expenditures or other financial items;
    
    descriptions of plans or objectives of our management for future
operations or services, including pending acquisitions;
    
    forecasts of our future economic performance; and
    
    descriptions of assumptions underlying or relating to any of the foregoing. 27




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In this report, for example, we make forward-looking statements discussing our expectations about:  
    
    future financial performance;
    
    future liquidity;
    
    industry trends;
    
    patient volumes and related revenues;
    
    recruiting and retention of clinical personnel;
    
    future capital expenditures;
    
    the impact of new accounting standards; and
    
    physician recruiting. Forward-looking statements discuss matters that are not historical facts.
Because they discuss future events or conditions, forward-looking statements
often include words such as can, could, may, should, believe, will,
would, expect, project, estimate, anticipate, plan, intend,
target, continue or similar expressions. Do not unduly rely on
forward-looking statements. They give our expectations about the future and are
not guarantees. Forward-looking statements speak only as of the date they are
made, and we might not update them to reflect changes that occur after the date
they are made. There are several factors, many beyond our control that could cause
results to differ significantly from our expectations. Some of these factors
are described below under Risk Factors. Other factors, such as market,
operational, liquidity, interest rate and other risks, are described elsewhere
in this report or in our 2003 Annual Report on Form 10-K. Any factor described
in this report or in our 2003 Annual Report on Form 10-K could, by itself or
together with one or more factors, adversely affect our business, results of
operations and/or financial condition. There may be factors not described in
this report or in our 2003 Annual Report on Form 10-K that could cause results
to differ from our expectations. Risk Factors Our revenues may decline if federal or state programs reduce our Medicare or
Medicaid payments or managed care companies reduce our reimbursements. In recent years, federal and state governments made significant changes in
the Medicare and Medicaid programs. A number of states have incurred budget
deficits and adopted legislation designed to reduce their Medicaid expenditures
and to reduce Medicaid enrollees. In addition, insurance and managed care
companies and other third parties from whom we receive payment for our services
increasingly attempt to control healthcare costs by requiring that hospitals
discount their fees in exchange for exclusive or preferred participation in
their benefit plans. We believe that this trend may continue and may reduce the
payments we receive for our services. We may be subjected to allegations that we failed to comply with governmental
regulation, which could result in sanctions that reduce our revenue and
profitability. All participants in the healthcare industry are required to comply with
many laws and regulations at the federal, state and local government levels.
These laws and regulations require that hospitals meet various requirements,
including those relating to the adequacy of medical care, equipment, personnel,
operating policies and procedures, billing and cost reports, payment for
services and supplies, maintenance of adequate records, privacy, compliance
with building codes and environmental protection. These laws often contain safe
harbor provisions, which describe some of the conduct and business
relationships that are immune from prosecution. Not all of our business
arrangements fit wholly within safe harbors. This does not automatically render
our arrangements illegal. However, we may be subject to scrutiny by enforcement
authorities. If we fail to comply with applicable laws and regulations, 28




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we could suffer civil or criminal penalties, including the loss of our licenses
to operate our hospitals and our ability to participate in the Medicare,
Medicaid and other federal and state healthcare programs. Significant media and public attention recently has focused on the
hospital industry as a result of ongoing investigations related to referrals,
physician recruiting practices, cost reporting and billing practices,
laboratory and home healthcare services and physician ownership and joint
ventures involving hospitals. Both federal and state government agencies have
announced heightened and coordinated civil and criminal enforcement efforts. In
addition, the OIG and the DOJ periodically establish enforcement initiatives
that focus on specific billing practices or other suspected areas of abuse.
Recent initiatives include a focus on hospital billing practices,
rehabilitation and outpatient therapy. In public statements, governmental authorities have taken positions on
issues for which little official interpretation was previously available. Some
of these positions appear to be inconsistent with common practices within the
industry and which have not previously been challenged in this manner.
Moreover, some government investigations that have in the past been conducted
under the civil provisions of federal law are now being conducted as criminal
investigations under the Medicare fraud and abuse laws. The laws and regulations that we must comply with are complex and subject
to change. In the future, different interpretations or enforcement of these
laws and regulations could subject our current practices to allegations of
impropriety or illegality or could require us to make changes in our
facilities, equipment, personnel, services, capital expenditure programs and
operating expenses. We may be subjected to actions brought by individuals on the governments
behalf under the False Claims Acts qui tam or whistleblower provisions. Whistleblower provisions allow private individuals to bring actions on
behalf of the government alleging that the defendant has defrauded the federal
government. Defendants determined to be liable under the False Claims Act may
be required to pay three times the actual damages sustained by the government,
plus mandatory civil penalties ranging between $5,500 and $11,000 for each
separate false claim. There are many potential bases for liability under the False Claims Act.
Liability often arises when an entity knowingly submits a false claim for
reimbursement to the federal government. The False Claims Act defines the term
knowingly broadly. Although simple negligence will not give rise to
liability under the False Claims Act, submitting a claim with reckless
disregard to its truth or falsity constitutes a knowing submission under the
False Claims Act and, therefore, will qualify for liability. In some cases, whistleblowers or the federal government have taken the
position that providers who allegedly have violated other statutes, such as the
anti-kickback statute and the Stark Law, have thereby submitted false claims
under the False Claims Act. In addition, a number of states have adopted their
own false claims provisions as well as their own whistleblower provisions
whereby a private party may file a civil lawsuit in state court. If we become subject to malpractice and related legal claims, we could be
required to pay significant damages, which may not be covered by insurance. Given the nature of our operating environment, we are subject to medical
malpractice lawsuits and other claims. To mitigate a portion of this risk, we
maintain liability insurance in amounts that we believe are appropriate for our
operations. During 2003, we maintained professional and general liability
insurance that provided coverage on a claims-made basis for individual claims
in excess of $5.0 million. For 2004, the self-insured retention level amount
for individual claims is $10.0 million. It is possible that successful claims
against us that are within the self-insured retention level amounts, when
considered in the aggregate, could have an adverse effect on our financial
condition or liquidity. Insurance coverage may not continue to be available at
a cost allowing us to maintain adequate levels of insurance with acceptable
self-insured retention level amounts. In addition, physicians using our
hospitals may be unable to obtain insurance on acceptable terms. 29




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If we fail to effectively recruit and retain physicians, nurses and medical
technicians, our ability to deliver healthcare services efficiently will
suffer. Physicians generally direct the majority of hospital admissions. Our
success, in part, depends on the number and quality of physicians on our
hospitals medical staffs, the admissions practices of these physicians and the
maintenance of good relations with these physicians. Only a limited number of
physicians practice in the non-urban communities where our hospitals are
located. Our primary method of adding or expanding medical services is the
recruitment of new physicians into our communities. The success of our recruiting efforts depends on several factors. In
general, there is a shortage of specialty care physicians. We face intense
competition in the recruitment of specialists because of the difficulty
convincing these individuals of the benefits of practicing in a non-urban
community. Physicians are concerned with the patient volume in non-urban
hospitals and whether the volume will allow them to generate income comparable
to that which they would generate in an urban setting. If the growth rate in
the non-urban communities where our hospitals operate slows, then we could
experience difficulty attracting physicians to practice in our communities. There is generally a shortage of nurses and certain medical technicians in
the healthcare industry. Our hospitals may be forced to hire expensive contract
personnel if they are unable to recruit and retain full-time employees. The
shortage of nurses and medical technicians may affect our hospitals ability to
deliver healthcare services efficiently. Our revenue is heavily concentrated in Kentucky and Tennessee, which makes us
particularly sensitive to regulatory and economic changes in those states. Our revenue is particularly sensitive to regulatory and economic changes
in Kentucky and Tennessee. As of June 30, 2004, we operated 29 hospitals with
eight located in the commonwealth of Kentucky and seven located in the state of
Tennessee. We generated 36.0% and 34.3% of our revenues from our Kentucky
hospitals (including 3.3% and 3.8% from state-sponsored Medicaid programs) and
20.1% and 18.9% from our Tennessee hospitals (including 2.8% and 2.4% from the
state-sponsored TennCare program) for the six months ended June 30, 2003 and
2004, respectively. Certain managed care organizations that participate in the
Medicaid programs of Tennessee and Kentucky have been placed in receivership or
encountered other financial difficulties. Other managed care organizations in
the states in which we derive significant revenue may encounter similar
difficulties in paying claims in the future. We may have difficulty acquiring hospitals on favorable terms and, because of
regulatory scrutiny, acquiring nonprofit entities. One element of our business strategy is expansion through the acquisition
of acute care hospitals in growing, non-urban markets. We face significant
competition to acquire other attractive, non-urban hospitals. We may not find
suitable acquisitions on favorable terms. We also may incur or assume
additional indebtedness as a result of the consummation of acquisitions. Our
failure to acquire non-urban hospitals consistent with our growth plans could
prevent us from increasing our revenues. The cost of acquiring hospitals continues to increase. In some cases, the
cost of an acquisition could result in a dilutive effect on our results of
operations depending on various factors, including the acquired hospitals
results of operations, allocation of tangible and intangible assets, effects of
subsequent legislation changes and limitations on rate increases. In addition,
our acquisition activity requires transitions from, and the integration of,
various information systems that are used by hospitals we acquire. In recent years, the legislatures and attorneys general of several states
have become more interested in sales of hospitals by nonprofit entities. This
heightened scrutiny may increase the cost and difficulty, or prevent our
completion, of transactions with nonprofit organizations in the future. 30




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We may encounter numerous business risks in acquiring additional hospitals, and
may have difficulty operating and integrating those hospitals. We may not be able to timely and effectively integrate the hospitals that
we acquire with our ongoing operations. We may experience delays in
implementing operating procedures and systems in newly acquired hospitals.
Integrating a new hospital could be expensive and time consuming and could
disrupt our ongoing business and distract our management and other key
personnel. In addition, we rely heavily on HCA-IT for information systems
integration as part of our contractual arrangement for information technology
services. We also may acquire businesses with unknown or contingent liabilities,
including liabilities for failure to comply with healthcare laws and
regulations. We have policies to conform the practices of acquired facilities
to our standards and applicable law and generally will seek indemnification
from prospective sellers covering these matters. We may, however, incur
material liabilities for past activities of acquired businesses. Certificate of need laws and licensing regulations may prohibit or limit any
future expansion by us in some states. Some states require prior approval for the purchase, construction and
expansion of healthcare facilities, based on a states determination of need
for additional or expanded healthcare facilities or services. Five states in
which we currently own hospitals, Alabama, Florida, Kentucky, Tennessee and
West Virginia, require a certificate of need for capital expenditures exceeding
a prescribed amount, changes in bed capacity or services and certain other
matters. We may not be able to obtain certificates of need required for
expansion activities in the future. In addition, all of the states in which we
operate require hospitals and most healthcare providers to maintain one or more
licenses. If we fail to obtain any required certificate of need or licenses,
our ability to operate or expand operations in these states could be impaired. We may be unable to complete our construction projects on a required timetable
and within the original cost estimates. In certain states, where prior approval is required for the construction
and expansion of healthcare facilities, such approval is predicated on a
timetable and within a certain cost threshold. In addition, all projects are
evaluated internally based on certain rates of return. If costs of raw
materials and labor increase dramatically, the originally imputed rates of
returns may not materialize. In addition, projects could be delayed pending
state approval of cost overruns. Our ability to increase our indebtedness and become substantially leveraged may
limit our ability to successfully run our business. At June 30, 2004, our consolidated long-term debt was approximately $251.0
million. We also may draw on a revolving credit commitment of up to $200
million under our Revolving Credit Facility, of which $153.5 million was
available as of June 30, 2004. In addition, we have the ability to incur
additional debt, subject to limitations imposed by our Revolving Credit
Facility. Our leverage and debt service requirements could have important
consequences to our stockholders, including the following:  
    
    make us more vulnerable to economic downturns and to adverse
changes in business conditions, such as further limitations on
reimbursement under Medicare and Medicaid programs;
    
    limit our ability to obtain additional financing at favorable
interest rates in the future for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes;
    
    require us to dedicate a substantial portion of our cash flow from
operations to the payment of principal and interest on our
indebtedness, reducing the funds available for our operations and
capital improvements;
    
    make us vulnerable to increases in interest rates because our
Revolving Credit Facility is at a variable rate of interest; and 31




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
    
    require us to pay the indebtedness immediately if we default on any
of the numerous financial and other restrictive covenants in our
Revolving Credit Facility, including restrictions on our payments of
dividends, incurrence of indebtedness and sale of assets. Federal and state investigations of HCA could subject our hospitals and
operations to increased governmental scrutiny. HCA has been the subject of various federal and state investigations, qui
tamactions, shareholder derivative and class action suits, patient/payor
actions and general liability claims. These investigations, actions and claims
relate to HCA and its subsidiaries, including subsidiaries that, before our
formation as an independent company, owned some of the facilities we now own.
For additional information about these matters, please refer to
Part I, Note 5, Commitments and Contingencies included in
this report. We could be held responsible for any claims that are not covered by the
agreements HCA reached with the federal government or for which HCA is not
required to, or fails to, indemnify us. If indemnified matters were asserted
successfully against us or any of our facilities, and HCA failed to meet its
indemnification obligations, then such an event could have a material adverse
effect on our business, financial condition, results of operations, liquidity
or prospects. We cannot predict with accuracy the extent to which we may or may not
continue to be affected by the initiation of additional investigations of HCA,
if any. If these matters result in a successful claim against us, it could
have a material adverse effect on our business, financial condition, results of
operations, liquidity or prospects in future periods. We depend significantly on key personnel, and the loss of one or more senior or
local management personnel could limit our ability to execute our business
strategy. We depend on the continued services and management experience of Kenneth
C. Donahey and our other executive officers. If Mr. Donahey or any of our other
executive officers resign their positions or otherwise are unable to serve, our
management expertise and ability to deliver healthcare services efficiently
could be weakened. In addition, if we fail to attract and retain managers at
our hospitals and related facilities, our operations will suffer. Other hospitals provide similar services, which may raise the level of
competition faced by our hospitals. Competition among hospitals and other healthcare providers for patients
has intensified in recent years. All but one of our hospitals operate in
geographic areas where we are currently the sole provider of hospital services
in these communities. While our hospitals face less direct competition in our
immediate service areas, we do compete with other hospitals, including larger
tertiary care centers. Although these competing hospitals may be in excess of
30 to 50 miles away from our facilities, patients in these markets may migrate
to, may be referred by local physicians to, or may be lured by incentives from
managed care plans to travel to, these distant hospitals. Some of these
competing hospitals use equipment and services more specialized than those
available at our hospitals. In addition, some of the hospitals that compete
with us are owned by tax-supported governmental agencies or not-for-profit
entities supported by endowments and charitable contributions. These hospitals
can make capital expenditures without paying sales, property and income taxes.
We also face competition from other specialized care providers, including
outpatient surgery, orthopedic, oncology, physical therapy and diagnostic
centers, as well as competing services rendered in physician offices. To the
extent that other providers are successful in developing specialized outpatient
facilities, our market share for those specialized services will likely
decrease. Where necessary to prevent such competition, a few of our hospitals
have developed specialized outpatient facilities. If our access to HCAs information systems is restricted or we are not able to
integrate changes to our existing information systems or information systems of
acquired hospitals, our operations could suffer. Our business depends significantly on effective information systems to
process clinical and financial information. Information systems require an
ongoing commitment of significant resources to maintain and enhance existing
systems and develop new systems in order to keep pace with continuing changes
in information processing technology. We rely heavily on HCA-IT for information
systems. Under a contract that was recently amended 32




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through December 31, 2009, HCA-IT provides financial, clinical, patient
accounting and network information services to us. If our access to these
systems is limited in the future or if HCA-IT develops systems more appropriate
for the urban healthcare market and not suited for our hospitals, our
operations could suffer. In addition, as new information systems are developed, we must integrate
them into our existing systems. Evolving industry and regulatory standards,
including the Health Insurance Portability and Accountability Act of 1996,
commonly known as HIPAA, may require changes to our information systems. We
may not be able to integrate new systems or changes required to our existing
systems or systems of acquired hospitals in the future effectively. Please
refer to Part I, Item 1. Business  Government Regulationin our 2003 Annual
Report on Form 10-K for a discussion of HIPAA. A key element of our business strategy is growth through the acquisition
of additional acute care hospitals. Our acquisition activity requires
transitions from, and the integration of, various information systems that are
used by the hospitals we acquire. If we experience difficulties with the
integration of the information systems of acquired hospitals, we could suffer,
among other things, operational disruptions and increases in administrative
expenses. If we fail to comply with our corporate integrity agreement, we could be
required to pay significant monetary penalties. In December 2000, we entered into a corporate integrity agreement with the
OIG. Under this agreement, we have an affirmative obligation to report
violations of applicable laws and regulations. This obligation could result in
greater scrutiny of us by regulatory authorities. Complying with our corporate
integrity agreement requires additional efforts and costs. Our failure to
comply with the terms of the corporate integrity agreement could subject us to
significant monetary penalties. Our anti-takeover provisions may discourage acquisitions of control even though
our stockholders may consider these proposals desirable. Provisions in our certificate of incorporation and bylaws may have the
effect of discouraging an acquisition of control not approved by our board of
directors. These provisions include:  
    
    the issuance of blank check preferred stock by the board of
directors without stockholder approval;
    
    higher stockholder voting requirements for some transactions,
including business combinations with related parties (i.e., a fair
price provision);
    
    a prohibition on taking actions by the written consent of stockholders;
    
    restrictions on the persons eligible to call a special meeting of stockholders;
    
    classification of the board of directors into three classes; and
    
    the removal of directors only for cause and by a vote of 80% of the outstanding voting power. These provisions may also have the effect of discouraging third parties
from making proposals involving our acquisition or change of control, although
a proposal, if made, might be considered desirable by a majority of our
stockholders. These provisions could further have the effect of making it more
difficult for third parties to cause the replacement of our board of directors. We have also adopted a stockholder rights plan. This stockholder rights
plan is designed to protect stockholders in the event of an unsolicited offer
and other takeover tactics, which, in the opinion of the board of directors,
could impair our ability to represent stockholder interests. The provisions of
this stockholder rights plan may render an unsolicited takeover more difficult
or might prevent a takeover. 33




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We are subject to provisions of Delaware corporate law, which may also
restrict some business combination transactions. Delaware law may further
discourage, delay or prevent someone from acquiring or merging with us. We have never paid and have no current plans to pay a dividend on our common
shares. We have never paid a cash dividend and we do not currently anticipate
paying any cash dividends. Our senior credit facility also restricts the
payment of cash dividends. If we incur any future indebtedness to refinance our
existing indebtedness or to fund our future growth, our ability to pay
dividends may be further restricted by the terms of this indebtedness. Our
board of directors will evaluate our future earnings, results of operations,
financial condition and capital requirements in determining whether to declare
or pay cash dividends. Our stock price has been and may continue to be volatile. The trading price of our common stock has been and may continue to be
subject to wide fluctuations. Our stock price may fluctuate in response to a
number of events and factors, including:  
    
    quarterly variations in operating results;
    
    changes in financial estimates and recommendations by securities analysts;
    
    changes in government regulations as it relates to reimbursement and
operational policies and procedures;
    
    the operating and stock price performance of other companies that investors may deem comparable; and
    
    news reports relating to trends in our markets. Broad market and industry fluctuations may adversely affect the price of
our common stock, regardless of our operating performance. 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk. During the six months ended June 30, 2004, there were no material changes
in the quantitative and qualitative disclosures about market risks presented in
our 2003 Annual Report on Form 10-K. 
 Item 4. Controls and Procedures. We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective in ensuring that information
required to be disclosed by us (including our consolidated subsidiaries) in
reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported on a timely basis.
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. 34




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##### Table of Contents



PART II-OTHER INFORMATION 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. The following table sets forth information regarding repurchases of
Convertible Notes by the Company during the second quarter of 2004: ISSUER PURCHASES OF EQUITY SECURITIES Total Principal
    
    Approximate DollarAmount of Convertible
    
    Value of ConvertibleTotal Principal
    
    
    
    Notes Purchased as
    
    Notes that May Yet BeAmount of Convertible
    
    
    
    Part of Publicly
    
    Purchased Under theNotes Purchased
    
    Average Price Paid
    
    Announced Plans or
    
    Plans orPeriod
    
    (in millions)
    
    Per Share
    
    Programs
    
    ProgramsApril 1, 2004 -April 30, 2004
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    May 1, 2004 -May 31, 2004
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    June 1, 2004 -June 30, 2004
    
    $
    29.0
    (1)
    
    $
    47.36
    (2)
    
    $
    
    
    
    $
    Total
    
    $
    29.0
    (1)
    
    $
    47.36
    (2)
    
    $
    
    
    
    $
    
  (1)
    
    The total principal amount of these Convertible Notes was convertible into 612,344 shares of the Companys common stock as of
the date of repurchase. These Convertible Notes were repurchased in the open market, and were not purchased through a
publicly announced plan or program.(2)
    
    On an as converted basis, the average purchase price paid per share of common stock issuable upon conversion of the
  Convertible Notes was $47.36, which does not reflect the premium
paid to repurchase the Convertible Notes. In April 2003, our Board of Directors authorized the repurchase of up to $100
million of our outstanding shares of common stock either in the open market or
through privately negotiated transactions, subject to market conditions,
regulatory constraints and other factors, to enable us to take advantage of
opportunistic market conditions. Our stock repurchase program was publicly
announced on April 28, 2003 and expires on October 28, 2004. As of December
31, 2003, we repurchased 2,062,400 shares for an aggregate of approximately
$45.7 million. Thus far in 2004, we have not purchased any shares of common
stock under the share repurchase program. We may execute share repurchases
from time to time in order to take advantage of attractive share price levels,
as determined by management. The timing and terms of the transactions depend
on market conditions, our liquidity and other considerations. 35




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders. We held our annual meeting of stockholders on June 15, 2004. At the annual
meeting, votes were cast as follows: VOTESIN
    
    
    
    
    
    VOTESFAVOR
    
    ABSTAINED
    
    AGAINST(a
    )
    
    Election of Class II Directors:DeWitt Ezell, Jr.
    
    
    33,720,951
    
    
    
    2,042,241
    
    
    
    William V. Lapham;
    
    
    33,721,212
    
    
    
    2,041,980
    
    
    
    (b
    )
    
    Approval of an amendment to
the LifePoint Hospitals, Inc.
1998 Long-Term Incentive Plan;
    
    
    24,948,187
    
    
    
    42,066
    
    
    
    7,677,468(c
    )
    
    Approval of an amendment to
the LifePoint Hospitals, Inc.
Outside Directors Stock and
Incentive Compensation Plan;
    
    
    26,674,468
    
    
    
    46,646
    
    
    
    5,946,607(d
    )
    
    Approval of the LifePoint
Hospitals, Inc. Executive
Performance Incentive Plan; and
    
    
    31,835,922
    
    
    
    45,704
    
    
    
    786,095(e
    )
    
    Ratification of the
appointment of Ernst & Young
LLP as the independent
registered public accounting
firm of our company for the
year ending December 31, 2004.
    
    
    35,453,773
    
    
    
    25,268
    
    
    
    284,151
 As indicated in the above table, DeWitt Ezell, Jr. and William V. Lapham
were elected as Class II directors. The terms of the Class II directors will
expire at the annual meeting of stockholders in 2007, but not before their
respective successors are elected and qualified. The terms of the following
Class III directors will continue until the annual meeting in 2005: Kenneth C.
Donahey and Richard H. Evans. The terms of the following Class I directors will
continue until the annual meeting in 2006: Ricki Tigert Helfer, John E. Maupin,
Jr., D.D.S. and Owen G. Shell, Jr. 
 Item 6. Exhibits and Reports on Form 8-K.  (a)
    
    List of Exhibits: EXHIBIT NUMBER
    
    DESCRIPTION3.1
    
    Certificate of Incorporation (a)3.2
    
    Bylaws (a)3.3
    
    First Amendment to the Bylaws (b)4.1
    
    Form of Specimen Stock Certificate (c)4.2
    
    Rights Agreement dated as of May 11, 1999 between LifePoint Hospitals, Inc. and
National City Bank as Rights Agent (a)4.3
    
    Indenture, dated as of May 22, 2002, between LifePoint Hospitals, Inc. and National
City Bank, as trustee, relating to the 4 1/2% Convertible Subordinated Notes due 2009
(d)4.4
    
    Registration Rights Agreement, dated as of May 22, 2002, among LifePoint Hospitals,
Inc., UBS Warburg LLC, Credit Suisse First Boston Corporation, Deutsche Bank
Securities, Inc., Lehman Brothers Inc., Salomon Smith Barney Inc., Banc of America
Securities LLC, and Fleet Securities, Inc. (d)
 36




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##### Table of Contents



EXHIBIT NUMBER
    
    DESCRIPTION4.5
    
    Form of 4 1/2% Convertible Subordinated Note due 2009 of LifePoint Hospitals, Inc. (d)10.1
    
    Amendment to Computer and Data
Processing Services Agreement, dated April 28, 2004, by and
between HCA-Information Technology and Services, Inc. and LifePoint
Hospitals, Inc.10.2
    
    Fourth Amendment to Credit
Agreement, dated as of June 18, 2004, by and among LifePoint
Hospitals Holdings, Inc., as borrower, Fleet National Bank as
administrative agent for the lenders, the financial institutions or
entities from time to time which are parties to the Credit Agreement
as lenders, Bank of America, N.A. and Deutsche Banc Alex. Brown Inc.,
as co-syndication agents, and Credit Lyonnais New York Branch and
SunTrust Bank, as co-documentation agents31.1
    
    Certification of the Chief Executive Officer of LifePoint Hospitals, Inc. Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer of LifePoint Hospitals, Inc. Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer of LifePoint Hospitals, Inc. Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2
    
    Certification of the Chief Financial Officer of LifePoint Hospitals, Inc. Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
   (a)
    
    Incorporated by reference from the LifePoint Hospitals, Inc. Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, File Number
0-29818.(b)
    
    Incorporated by reference from exhibits to the LifePoint Hospitals, Inc.
Annual Report on Form 10-K for the year ended December 31, 2003, File No.
000-29818.(c)
    
    Incorporated by reference from exhibits to the LifePoint Hospitals, Inc.
Registration Statement on Form 10 under the Securities Exchange Act of
1934, as amended, File Number 0-29818.(d)
    
    Incorporated by reference from the exhibits to the LifePoint Hospitals,
Inc. Registration Statement on Form S-3 under the Securities Act of 1933,
as amended, File Number 333-90536.  (b)
    
    Reports on Form 8-K filed during the three months ended June 30,
2004: On April 27, 2004, we furnished a Current Report on Form 8-K pursuant to
Item 12 announcing our first quarter 2004 earnings results. On April 29, 2004, we filed a Current Report on Form 8-K pursuant to Item
5 confirming our guidance for the remaining quarters of 2004 and announcing the
amendment of our Computer and Data Processing Services Agreement with HCA-IT,
extending these services through December 31, 2009. 
 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. Date: July 27, 2004
    LifePoint Hospitals, Inc.By:
    /s/  Michael J. CulottaMichael J. CulottaChief Financial Officer
(Principal Financial and Accounting Officer) 37




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EXHIBIT INDEX EXHIBIT NUMBER
    
    DESCRIPTION3.1
    
    Certificate of Incorporation (a)3.2
    
    Bylaws (a)3.3
    
    First Amendment to the Bylaws (b)4.1
    
    Form of Specimen Stock Certificate (c)4.2
    
    Rights Agreement dated as of May 11, 1999 between LifePoint Hospitals, Inc. and
National City Bank as Rights Agent (a)4.3
    
    Indenture, dated as of May 22, 2002, between LifePoint Hospitals, Inc. and National
City Bank, as trustee, relating to the 4 1/2% Convertible Subordinated Notes due 2009
(d)4.4
    
    Registration Rights Agreement, dated as of May 22, 2002, among LifePoint Hospitals,
Inc., UBS Warburg LLC, Credit Suisse First Boston Corporation, Deutsche Bank
Securities, Inc., Lehman Brothers Inc., Salomon Smith Barney Inc., Banc of America
Securities LLC, and Fleet Securities, Inc. (d)4.5
    
    Form of 4 1/2% Convertible Subordinated Note due 2009 of LifePoint Hospitals, Inc. (d)10.1
    
    Amendment to Computer and Data
Processing Services Agreement, dated April 28, 2004, by and
between HCA-Information Technology and Services, Inc. and LifePoint
Hospitals, Inc.10.2
    
    Fourth Amendment to Credit
Agreement, dated as of June 18, 2004, by and among LifePoint
Hospitals Holdings, Inc., as borrower, Fleet National Bank as
administrative agent for the lenders, the financial institutions or
entities from time to time which are parties to the Credit Agreement
as lenders, Bank of America, N.A. and Deutsche Banc Alex. Brown Inc.,
as co-syndication agents, and Credit Lyonnais New York Branch and
SunTrust Bank, as co-documentation agents31.1
    
    Certification of the Chief Executive Officer of LifePoint Hospitals, Inc. Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of the Chief Financial Officer of LifePoint Hospitals, Inc. Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of the Chief Executive Officer of LifePoint Hospitals, Inc. Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 200232.2
    
    Certification of the Chief Financial Officer of LifePoint Hospitals, Inc. Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
   (a)
    
    Incorporated by reference from the LifePoint Hospitals, Inc. Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, File Number
0-29818.(b)
    
    Incorporated by reference from exhibits to the LifePoint Hospitals, Inc.
Annual Report on Form 10-K for the year ended December 31, 2003, File No.
000-29818.(c)
    
    Incorporated by reference from exhibits to the LifePoint Hospitals, Inc.
Registration Statement on Form 10 under the Securities Exchange Act of
1934, as amended, File Number 0-29818.(d)
    
    Incorporated by reference from the exhibits to the LifePoint Hospitals,
Inc. Registration Statement on Form S-3 under the Securities Act of 1933,
as amended, File Number 333-90536.