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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q
 (Mark One) [X]
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended June 30, 2004 or[  ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from  to
 Commission File Number 1-31320 PROVINCE HEALTHCARE COMPANY  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    62-1710772
(I.R.S. Employer
Identification No.)
 105 Westwood Place
Suite 400
Brentwood, Tennessee
(Address of Principal Executive Offices)
    
    37027
(Zip Code)
 (615) 370-1377
 Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past
90 days.   Yes  [X]   No
[   ] Indicate by check mark
whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)   Yes  [X]   No
[   ] Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date. Class
Common Stock, $.01 par value
    
    Outstanding at August 1, 200449,698,846 shares




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##### Table of Contents



PART I
FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income
Three Months Ended June 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Income
Six Months Ended June 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition
And Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    33PART IIOTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 6. Exhibits and Reports on Form 8-K
    
    
    35Signatures
    
    
    37CertificationsEX-10.1 STEVEN BRUMFIELD SEVERANCE AGREEMENTEX-10.2 LEASE AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts) June 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,987
    
    
    $
    46,117Accounts receivable, less allowance for doubtful accounts
of $81,591 in 2004 and $66,835 in 2003
    
    
    125,754
    
    
    
    110,335Inventories
    
    
    21,108
    
    
    
    18,424Prepaid expenses and other
    
    
    20,580
    
    
    
    14,844Assets of discontinued operations
    
    
    3,011
    
    
    
    15,362Total current assets
    
    
    172,440
    
    
    
    205,082Property and equipment, net
    
    
    551,535
    
    
    
    459,843Goodwill
    
    
    390,305
    
    
    
    309,191Other assets
    
    
    33,636
    
    
    
    36,874$
    1,147,916
    
    
    $
    1,010,990LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    28,925
    
    
    $
    16,083Accrued salaries and benefits
    
    
    29,901
    
    
    
    27,852Accrued expenses
    
    
    23,221
    
    
    
    13,586Current portion of long-term debt
    
    
    305
    
    
    
    743Liabilities of discontinued operations
    
    
    550
    
    
    
    5,386Total current liabilities
    
    
    82,902
    
    
    
    63,650Long-term debt, less current portion
    
    
    521,213
    
    
    
    447,956Other liabilities
    
    
    56,848
    
    
    
    50,601Minority interests
    
    
    2,089
    
    
    
    1,910Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock  $0.01 par value, 100,000 shares
authorized, none issued and outstanding
    
    
    
    
    
    
    Common stock  $0.01 par value; 150,000,000 shares
authorized; 49,804,885 shares and 48,841,157 shares
issued and outstanding at June 30, 2004
and December 31, 2003, respectively
    
    
    498
    
    
    
    488Additional paid-in-capital
    
    
    314,058
    
    
    
    306,091Retained earnings
    
    
    170,945
    
    
    
    141,186Accumulated other comprehensive loss
    
    
    (637
    )
    
    
    (892
    )Total stockholders equity
    
    
    484,864
    
    
    
    446,873$
    1,147,916
    
    
    $
    1,010,990
 1




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts) Three Months Ended June 30,2004
    
    2003Revenues:Net patient revenue
    
    $
    205,886
    
    
    $
    181,758Other
    
    
    2,648
    
    
    
    2,177208,534
    
    
    
    183,935Expenses:Salaries, wages and benefits
    
    
    75,221
    
    
    
    70,732Purchased services
    
    
    20,504
    
    
    
    17,578Supplies
    
    
    25,847
    
    
    
    23,040Provision for doubtful accounts
    
    
    21,711
    
    
    
    16,263Other operating expenses
    
    
    24,269
    
    
    
    21,341Rentals and leases
    
    
    2,961
    
    
    
    2,234Depreciation and amortization
    
    
    11,466
    
    
    
    9,079Interest expense
    
    
    7,416
    
    
    
    6,635Minority interest
    
    
    169
    
    
    
    82Loss on sale of assets
    
    
    18
    
    
    
    Loss on early extinguishment of debt
    
    
    
    
    
    
    477Total expenses
    
    
    189,582
    
    
    
    167,461Income from continuing operations before
provision for income taxes
    
    
    18,952
    
    
    
    16,474Income taxes
    
    
    7,122
    
    
    
    6,555Income from continuing operations
    
    
    11,830
    
    
    
    9,919Discontinued operations, net of tax:Loss from operations
    
    
    (464
    )
    
    
    (258
    )Net gain on divestitures
    
    
    6,833
    
    
    
    6,369
    
    
    
    (258
    )Net income
    
    $
    18,199
    
    
    $
    9,661Earnings (loss) per common share:Basic:Continuing operations
    
    $
    0.23
    
    
    $
    0.20Discontinued operations:Loss from operations
    
    
    (0.01
    )
    
    
    Net gain on divestitures
    
    
    0.14
    
    
    
    Net income
    
    $
    0.36
    
    
    $
    0.20Diluted:Continuing operations
    
    $
    0.23
    
    
    $
    0.20Discontinued operations:Loss from operations
    
    
    (0.01
    )
    
    
    Net gain on divestitures
    
    
    0.12
    
    
    
    Net income
    
    $
    0.34
    
    
    $
    0.20
 2




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts) Six Months Ended June 30,2004
    
    2003Revenues:Net patient revenue
    
    $
    404,127
    
    
    $
    361,438Other
    
    
    4,983
    
    
    
    4,940409,110
    
    
    
    366,378Expenses:Salaries, wages and benefits
    
    
    149,576
    
    
    
    141,781Purchased services
    
    
    38,942
    
    
    
    34,141Supplies
    
    
    51,886
    
    
    
    47,035Provision for doubtful accounts
    
    
    41,944
    
    
    
    32,303Other operating expenses
    
    
    46,935
    
    
    
    42,804Rentals and leases
    
    
    5,256
    
    
    
    4,478Depreciation and amortization
    
    
    21,642
    
    
    
    17,915Interest expense
    
    
    14,336
    
    
    
    12,357Minority interest
    
    
    236
    
    
    
    149Loss on sale of assets
    
    
    18
    
    
    
    Loss on early extinguishment of debt
    
    
    
    
    
    
    477Total expenses
    
    
    370,771
    
    
    
    333,440Income from continuing operations before
provision for income taxes
    
    
    38,339
    
    
    
    32,938Income taxes
    
    
    14,302
    
    
    
    13,127Income from continuing operations
    
    
    24,037
    
    
    
    19,811Discontinued operations, net of tax:Loss from operations
    
    
    (940
    )
    
    
    (299
    )Net gain on divestitures
    
    
    6,663
    
    
    
    5,723
    
    
    
    (299
    )Net income
    
    $
    29,760
    
    
    $
    19,512Earnings (loss) per common share:Basic:Continuing operations
    
    $
    0.49
    
    
    $
    0.41Discontinued operations:Loss from operations
    
    
    (0.02
    )
    
    
    (0.01
    )Net gain on divestitures
    
    
    0.13
    
    
    
    Net income
    
    $
    0.60
    
    
    $
    0.40Diluted:Continuing operations
    
    $
    0.47
    
    
    $
    0.41Discontinued operations:Loss from operations
    
    
    (0.02
    )
    
    
    (0.01
    )Net gain on divestitures
    
    
    0.11
    
    
    
    Net income
    
    $
    0.56
    
    
    $
    0.40
 3




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands) Six Months Ended June 30,2004
    
    2003Cash flows from operating activities:Income from continuing operations
    
    $
    24,037
    
    
    $
    19,811Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:Depreciation and amortization
    
    
    21,642
    
    
    
    17,915Deferred income taxes
    
    
    10,532
    
    
    
    3,155Provision for professional liability
    
    
    3,244
    
    
    
    3,383Loss on early extinguishment of debt
    
    
    
    
    
    
    477Loss on sale of assets
    
    
    18
    
    
    
    Changes in operating assets and liabilities, net of effects
from acquisitions and dispositions:Accounts receivable
    
    
    (3,298
    )
    
    
    (375
    )Inventories
    
    
    (199
    )
    
    
    429Prepaid expenses and other
    
    
    (10,591
    )
    
    
    (1,920
    )Accounts payable and accrued expenses
    
    
    5,146
    
    
    
    5,091Accrued salaries and benefit
    
    
    (3,273
    )
    
    
    1,942Other
    
    
    1,551
    
    
    
    4,026Net cash provided by operating activities
    
    
    48,809
    
    
    
    53,934Cash flows from investing activities:Purchase of property and equipment
    
    
    (37,712
    )
    
    
    (30,404
    )Escrow deposit on potential investment
    
    
    
    
    
    
    (3,798
    )Purchase of hospitals and healthcare entities
    
    
    (152,783
    )
    
    
    (3,153
    )Net cash used in investing activities
    
    
    (190,495
    )
    
    
    (37,355
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    110,000
    
    
    
    194,212Repayments of debt
    
    
    (35,125
    )
    
    
    (207,274
    )Issuance of common stock
    
    
    7,264
    
    
    
    1,235Net cash provided by (used in) financing activities
    
    
    82,139
    
    
    
    (11,827
    )Net cash (used in) provided by continuing operations
    
    
    (59,547
    )
    
    
    4,752Net cash provided by (used in)
discontinued operations
    
    
    15,417
    
    
    
    (238
    )(Decrease) increase in cash and cash equivalents
    
    
    (44,130
    )
    
    
    4,514Cash and cash equivalents at beginning of period
    
    
    46,117
    
    
    
    14,625Cash and cash equivalents at end of period
    
    $
    1,987
    
    
    $
    19,139Interest payments
    
    $
    13,580
    
    
    $
    10,323Income taxes paid, net
    
    $
    11,189
    
    
    $
    4,510
 4




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 1. ORGANIZATION AND BASIS OF PRESENTATION Province Healthcare Company (the Company) was founded on February 2,
1996, and is engaged in the business of owning and leasing hospitals in
non-urban communities throughout the United States. At June 30, 2004, the
Company owned or leased 20 general acute care hospitals in 12 states. The
Company acquired the 286-bed Memorial Medical Center in Las Cruces, New Mexico
effective June 1, 2004, as discussed in Note 3. Effective April 30, 2004, the
Company sold Glades General Hospital in Belle Glade, Florida and, effective
June 30, 2004, sold Brim Healthcare, Inc., its hospital
management subsidiary. The operations of
Glades General Hospital and Brim Healthcare, Inc. are reported as discontinued
operations, as discussed in Note 4. The Companys remaining 20 hospitals and
operations are reported as continuing operations, with a total of 2,492
licensed beds at June 30, 2004. The condensed consolidated balance sheet as of December 31, 2003, as
restated to reflect Brim Healthcare, Inc. as a discontinued operation, has been
derived from the audited consolidated financial statements included in our 2003
Annual Report on Form 10-K. The interim condensed consolidated financial
statements at June 30, 2004, and for the three and six month periods ended June
30, 2004 and 2003 are unaudited; however, such interim statements reflect all
adjustments (consisting only of a normal recurring nature) which are, in the
opinion of management, necessary for a fair presentation of the Companys
financial position and results of operations for the interim periods presented.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year. The
accompanying unaudited interim condensed consolidated financial statements have
been prepared in accordance with the 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. Certain
information and disclosures normally included in the financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted. The interim condensed
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements included in our 2003 Annual Report on
Form 10-K. The interim condensed consolidated financial statements include all
assets, liabilities, revenues and expenses of certain entities which are
controlled by the Company but not wholly-owned. Accordingly, the Company has
recorded minority interests in the earnings and equity of such entities to
reflect the ownership interests of such minority shareholders in the respective
entities. 2. USE OF ESTIMATES The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management of the
Company to make estimates and 5




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) assumptions that affect the amounts reported in the condensed consolidated
financial statements. Actual results could differ from the estimates. 3. ACQUISITION OF HOSPITAL Effective June 1, 2004, the Company acquired Memorial Medical Center in
Las Cruces, New Mexico, through a long-term capital lease agreement, for
approximately $152.8 million, including direct and incremental costs of the
acquisition. The preliminary allocation of the purchase price has been
determined based upon currently available information and is subject to further
refinement pending final appraisal of property and equipment. The preliminary
estimated fair values of the assets acquired and liabilities assumed in the
acquisition are as follows (in thousands): Current assets
    
    $
    14,863Property and equipment
    
    
    75,391Goodwill
    
    
    81,114Other assets
    
    
    3Current liabilities
    
    
    (18,588
    )$
    152,783
 To finance this acquisition, the Company borrowed $110.0 million under its
senior bank credit facility and used approximately $42.8 million of available
cash. The operating results of the hospital have been included in the
accompanying condensed consolidated statements of income from the date of
acquisition. 4. DISCONTINUED OPERATIONS On April 30, 2004 the Company sold substantially all of the assets and
assigned certain liabilities of Glades General Hospital (Glades) in Belle
Glade, Florida, to a wholly-owned subsidiary of the Health Care District of
Palm Beach County for approximately $1.5 million, resulting in an immaterial
gain on divestiture. Effective June 30, 2004, the Company sold the stock of
Brim Healthcare, Inc. (Brim) to Brim Holding Company, Inc., an independent
investor-owned Delaware corporation, for approximately $13.2 million, resulting
in a pre-tax gain on divestiture of $11.3 million ($7.0 million gain net of
tax). The operations of Glades and Brim are reported as discontinued
operations and the consolidated financial statements for all prior periods have
been adjusted to reflect this presentation. Impairment of long-lived assets other than goodwill is governed by
Statement of Financial Accounting Standards No. 144, (SFAS No. 144)
Accounting for the Impairment or Disposal of Long-Lived Assets. The Company
adopted this statement effective January 1, 2002. In accordance with SFAS No.
144, in connection with the sale of Glades, the Company recorded a pre-tax 6




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) impairment
charge of $0.6 million ($0.4 million charge net of tax) during the six
months ended June 30, 2004 related to the write-down of other long-lived assets
of the hospital to their net realizable value. Operating results for discontinued operations for the three and six months
ended June 30, 2004 and 2003 are presented in the following table (in
thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    5,839
    
    
    $
    11,878
    
    
    $
    17,161
    
    
    $
    23,835Operating expenses
    
    
    6,766
    
    
    
    11,707
    
    
    
    18,428
    
    
    
    23,130Depreciation and amortization
    
    
    23
    
    
    
    420
    
    
    
    49
    
    
    
    862Interest expense
    
    
    34
    
    
    
    124
    
    
    
    143
    
    
    
    261Net gain on divestitures
    
    
    (11,261
    )
    
    
    
    
    
    
    (10,774
    )
    
    
    Total expenses
    
    
    (4,438
    )
    
    
    12,251
    
    
    
    7,846
    
    
    
    24,253Income (loss) before income taxes
    
    
    10,277
    
    
    
    (373
    )
    
    
    9,315
    
    
    
    (418
    )Income tax expense (benefit)
    
    
    3,908
    
    
    
    (115
    )
    
    
    3,592
    
    
    
    (119
    )Income (loss) from discontinued operations
    
    $
    6,369
    
    
    $
    (258
    )
    
    $
    5,723
    
    
    $
    (299
    )
 The major classes of assets and liabilities of discontinued operations in
the condensed consolidated balance sheets as of June 30, 2004 and December 31,
2003 are as follows (in thousands): June 30, 2004
    
    December 31, 2003Cash
    
    $
    27
    
    
    $
    17Accounts receivable, net
    
    
    1,631
    
    
    
    6,931Inventories
    
    
    
    
    
    
    529Prepaid expenses and other current assets
    
    
    20
    
    
    
    391Property and equipment, net
    
    
    
    
    
    
    3,157Deferred income taxes
    
    
    1,333
    
    
    
    4,224Goodwill
    
    
    
    
    
    
    80Other assets
    
    
    
    
    
    
    33Total assets of discontinued operations
    
    
    3,011
    
    
    
    15,362Accounts payable
    
    
    
    
    
    
    812Accrued salaries and benefits
    
    
    84
    
    
    
    1,603Accrued expenses
    
    
    466
    
    
    
    513Income taxes payable
    
    
    
    
    
    
    1,476Long-term debt
    
    
    
    
    
    
    982Total liabilities of discontinued operations
    
    
    550
    
    
    
    5,386Net assets of discontinued operations
    
    $
    2,461
    
    
    $
    9,976
 7




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) 5. GOODWILL AND INTANGIBLE ASSETS The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets(SFAS No. 142), effective January 1,
2002. Under SFAS No. 142, goodwill is no longer amortized, but is subject to
annual impairment tests, or more frequently if certain indicators arise. The
Company performs its annual impairment test of goodwill on
October 1. The Company currently is not aware of any impairment indicators at
June 30, 2004. 6. LONG-TERM DEBT On June 1, 2004, in connection with the acquisition of Memorial Medical
Center in Las Cruces, New Mexico, the Company borrowed $110.0 million under its
senior revolving bank credit facility to finance the acquisition. On June 30,
2004, the Company repaid $34.6 million of the revolver borrowing with the
proceeds from the sale of Brim and available cash on hand. At June
30, 2004, the Company had $75.4 million outstanding under its senior bank
credit facility. The amount outstanding at June 30, 2004 under the senior bank
credit facility bears interest at the adjusted LIBOR rate, which was 4.125% at
June 30, 2004. Effective April 30, 2004, the Company amended its senior bank credit
facility to, among other items, (i) obtain consent for a limited repurchase of
a portion of the Companys 41⁄2% Convertible Subordinated Notes due 2005
and/or the 41⁄4% Convertible Subordinated Notes due 2008, (ii) adjust the
timing of the step down of leverage covenants, and (iii) approve the
acquisition of Memorial Medical Center in Las Cruces, New Mexico as a Permitted
Acquisition. 7. COMPREHENSIVE INCOME The following table presents the components of comprehensive income, net
of related taxes (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    18,199
    
    
    $
    9,661
    
    
    $
    29,760
    
    
    $
    19,512Net amortization of fair value
of interest rate swap
    
    
    127
    
    
    
    
    
    
    
    255
    
    
    
    Net change
in fair value of interest rate swap
    
    
    
    
    
    
    (196
    )
    
    
    
    
    
    
    (196
    )Comprehensive income
    
    $
    18,326
    
    
    $
    9,465
    
    
    $
    30,015
    
    
    $
    19,316
 The net amortization of the fair value of the interest rate swap which was
terminated in May 2003 is included in accumulated other comprehensive loss on
the condensed consolidated balance sheets. The net change in fair
value of the interest rate swap is included in retained earnings on
the condensed consolidated balance sheets. 8




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) 8. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Earnings per common share:Income from continuing operations
    
    $
    11,830
    
    
    $
    9,919
    
    
    $
    24,037
    
    
    $
    19,811Add convertible notes interest, net of tax
    
    
    1,899
    
    
    
    
    
    
    
    3,797
    
    
    
    13,729
    
    
    
    9,919
    
    
    
    27,834
    
    
    
    19,811Discontinued operations
    
    
    6,369
    
    
    
    (258
    )
    
    
    5,723
    
    
    
    (299
    )Net income
    
    $
    20,098
    
    
    $
    9,661
    
    
    $
    33,557
    
    
    $
    19,512Weighted average shares:Weighted average shares  basic
    
    
    49,495
    
    
    
    48,585
    
    
    
    49,283
    
    
    
    48,633Dilution for employee stock options
    
    
    1,105
    
    
    
    447
    
    
    
    1,186
    
    
    
    262Dilution for convertible notes
    
    
    9,100
    
    
    
    
    
    
    
    9,100
    
    
    
    Weighted-average shares  diluted
    
    
    59,700
    
    
    
    49,032
    
    
    
    59,569
    
    
    
    48,895Basic earnings per common share:Income from continuing operations
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.49
    
    
    $
    0.41Discontinued operations
    
    
    0.13
    
    
    
    
    
    
    
    0.11
    
    
    
    (0.01
    )Net income
    
    $
    0.36
    
    
    $
    0.20
    
    
    $
    0.60
    
    
    $
    0.40Diluted earnings per common share:Income from continuing operations
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.47
    
    
    $
    0.41Discontinued operations
    
    
    0.11
    
    
    
    
    
    
    
    0.09
    
    
    
    (0.01
    )Net income
    
    $
    0.34
    
    
    $
    0.20
    
    
    $
    0.56
    
    
    $
    0.40
 9




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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) The add-back of the interest and potential issuance of shares related to the
Companys 41⁄2% Convertible Subordinated Notes due 2005 and
41⁄4%
Convertible Subordinated Notes due 2008 was not included in the computation for
2003 because the effect would have been anti-dilutive. 9. STOCK BASED COMPENSATION The Company, from time to time, grants stock options for a fixed number of
common shares to employees and directors at a fixed exercise price. The
Company accounts for employee stock option grants using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations, and accordingly, recognizes no compensation expense for the
stock option grants when the exercise price of the options equals, or is
greater than, the market price of the underlying stock on the date of grant. The following pro forma information is being presented in accordance with
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure,which was adopted by
the Company effective January 1, 2003. Had compensation cost for the Companys
stock-based compensation plans been determined based on the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, net income and
earnings per share would have been reduced to the pro forma amounts indicated
in the following table (in thousands, except per share data): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income  as reported
    
    $
    18,199
    
    
    $
    9,661
    
    
    $
    29,760
    
    
    $
    19,512Less pro forma effect of stock option
grants, net of tax
    
    
    (1,180
    )
    
    
    (1,125
    )
    
    
    (2,334
    )
    
    
    (2,167
    )Pro forma net income
    
    $
    17,019
    
    
    $
    8,536
    
    
    $
    27,426
    
    
    $
    17,345Earnings per share-as reportedBasic
    
    $
    0.36
    
    
    $
    0.20
    
    
    $
    0.60
    
    
    $
    0.40Diluted
    
    $
    0.34
    
    
    $
    0.20
    
    
    $
    0.56
    
    
    $
    0.40Earnings per share- pro formaBasic
    
    $
    0.34
    
    
    $
    0.18
    
    
    $
    0.56
    
    
    $
    0.36Diluted
    
    $
    0.32
    
    
    $
    0.17
    
    
    $
    0.52
    
    
    $
    0.35
 10




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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) The fair values of stock options granted used to compute pro forma net
income were estimated at the date of grant using a Black-Scholes option
valuation model based on the following weighted-average assumptions: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    3.4
    %
    
    
    2.5
    %
    
    
    2.8
    %
    
    
    2.4
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    54.8
    %
    
    
    61.4
    %
    
    
    56.0
    %
    
    
    63.7
    %Expected life (in years)
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
    
    
    
    4.0
 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. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because changes in subjective input assumptions can materially
affect the fair value estimate, in managements opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options. 10. CONTINGENCIES Management continually evaluates contingencies based on the best available
evidence and believes that adequate provision for losses has been provided to
the extent necessary. In the opinion of management, the ultimate resolution of
the following contingencies will not have a material effect on the Companys
results of operations or financial position. 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. Net Patient Revenue Final determination of amounts earned under the Medicare and Medicaid
programs often occurs in subsequent periods because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Differences between original estimates and subsequent revisions (including
settlements) are included in the consolidated statements of income in the
period in which revisions are made, and result in adjustments in net patient
revenue. 11




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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) Cost report settlements and the filing of cost reports increased net patient
revenue by $2.7 million, $0.6 million, $4.3 million and $0.8 million for the
three months ended and six months ended June 30, 2004 and 2003 respectively. Financial Instruments The Company enters into interest rate swap agreements as a means of
managing its interest rate exposure. The Company maintains a $100.0 million
interest rate swap agreement under our 71⁄2% Senior Subordinated
Notes due 2013 with
a LIBOR plus 2.79% floating interest rate over the term of the agreement. This
agreement exposes the Company to credit losses in the event of non-performance
by the counterparty to the financial instrument. The Company anticipates that
the counterparty will fully satisfy its obligations under the contract. 11. 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. The adoption of FIN
46R had no effect on the Companys financial position, results of operations or
cash flows. In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity(SFAS No. 150). SFAS No. 150 represents the
first phase of the FASBs project to clarify the accounting treatment of
certain instruments that possess characteristics of both liabilities and
equity. SFAS No. 150 generally requires that freestanding financial instruments
that obligate the issuer to redeem the holders shares, or are indexed to such
an obligation, and are settled in cash or settled with shares meeting certain
conditions be treated as liabilities. The Company adopted SFAS No. 150 on July
1, 2003. In October 2003, the FASB voted to defer for an indefinite period of
time the application of the provisions of SFAS No. 150 relating to
non-controlling interests in limited-life subsidiaries. Neither the adoption
of SFAS No. 150 nor the deferral had a material impact on the Companys
financial position, results of operations or cash flows. 12




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS You should read the following discussion along with the Condensed
Consolidated Financial Statements and accompanying notes included in Item 1 of
this report. Executive Overview We are a healthcare services company focused on acquiring and operating
hospitals in attractive non-urban communities throughout the United States. As
of June 30, 2004, we owned or leased 20 general acute care hospitals in 12
states, with a total of 2,492 licensed beds. We sold Glades General Hospital in Belle Glade, Florida, on April 30,
2004, and sold Brim Healthcare, Inc. on June 30, 2004. The operating results
of both entities are reported as discontinued operations, and the
consolidated financial statements and statistics for all prior periods have
been adjusted to reflect this presentation. Revenues from continuing operations for the second quarter of 2004
increased 13.4% to $208.5 million, compared with $183.9 million for the same
period last year, primarily as a result of increases in adjusted admissions and
net patient revenue per adjusted admission, as well as cost report settlements
and the filing of cost report settlements. For the second quarter of 2004,
income from continuing operations was $11.8 million, compared with $9.9 million
in the prior years quarter. The increase in income from continuing operations
was primarily due to the acquisition of Memorial Medical Center in Las Cruces, New
Mexico. Cash flow from operations for the second quarter increased 38.1% to
$23.8 million, compared with $17.2 million in the same quarter for last year.
The increase was due primarily to an increase of $1.9 million in our income from
continuing operations and an increase of $5.8 million in our deferred income
tax provision resulting from the Las Cruces acquisition and divestitures of
Glades General Hospital and Brim Healthcare, Inc. The increase in cash flow
from operations is partially offset by $2.2 million in payments under
our supplemental deferred compensation plan to Brim Healthcare, Inc.
employees prior to the divestiture of the hospital management
subsidiary. For the second quarter of 2004, 19 of our 20 owned or leased hospitals are
considered same-store hospitals. Memorial Medical Center in Las Cruces, New
Mexico, acquired through a long-term lease effective June 1, 2004, is excluded
from same-store results. On a same-store basis, net patient revenue for the
quarter increased 6.4%, net patient revenue per adjusted admission increased
6.8% and surgeries increased 2.9%. We continue to see the results of the
successful recruitment of primarily specialist physicians in 2003 and 2004,
strong outpatient growth and an increase in acuity. Same-store adjusted
admissions were flat quarter over quarter, as a result of an increase in
same-store outpatient revenue and a decline in same-store admissions. Acquisitions and Divestitures On April 30, 2004, we completed the sale of Glades General Hospital in
Belle Glade, Florida to a wholly-owned subsidiary of the Health Care District
of Palm Beach County. The District reacquired the operating assets of the
hospital for a purchase price of approximately $1.5 million in cash at closing,
net of assumed and contractual obligations. Under the purchase 13




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##### Table of Contents



agreement, we retained the hospitals accounts receivable, income tax
receivable and deferred income taxes. We
also retained certain payroll-related liabilities and other accrued expenses. Effective June 1, 2004, we completed the acquisition, through a long-term
lease, of Memorial Medical Center in Las Cruces, New Mexico from The City of
Las Cruces, New Mexico and The County of Doña Ana, New Mexico for approximately
$152.8 million. On June 30, 2004, we completed the sale of the stock of Brim Healthcare,
Inc., our hospital management subsidiary, to Brim Holding Company, Inc., an
independent investor-owned entity for approximately $13.2 million in cash. New Facilities In the third quarter of 2003, we announced the construction of a new
41-bed acute care hospital in Hardeeville, South Carolina, which is scheduled
for completion by late 2004. In the fourth quarter of 2003, we announced the
construction of a new 60-bed acute care hospital in Ft. Mohave, Arizona, near
our existing hospital in Needles, California. Construction on the Ft. Mohave
facility is anticipated to be completed in the third quarter of 2005. Revenues The table below reflects the approximate percentages of net patient
revenue received from Medicare, Medicaid, managed care and other payors and
self-pay for the periods presented: Three Months EndedJune 30,
    
    Year EndedDecember 31,2004
    
    2003
    
    2003Medicare
    
    
    38.8
    %
    
    
    38.5
    %
    
    
    38.5
    %Medicaid
    
    
    8.7
    
    
    
    10.7
    
    
    
    10.3Managed care and other payors
    
    
    41.7
    
    
    
    42.9
    
    
    
    44.2Self-pay
    
    
    10.8
    
    
    
    7.9
    
    
    
    7.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Net patient revenue is reported net of contractual adjustments and policy
discounts. Net patient revenues include amounts estimated by management to be
reimbursable by Medicare and Medicaid under prospective payment systems and
provisions of cost-reimbursement and other payment methods. In addition, we
are reimbursed by non-governmental payors using a variety of payment
methodologies. Amounts we receive for treatment of patients covered by these
programs are generally less than the standard billing rates. We account for
the differences between the estimated program reimbursement rates and the
standard billing rates as contractual adjustments, which we deduct from gross
revenues to arrive at net patient revenues. Final settlements under some of
these programs are subject to adjustment based on administrative review and
audit by third parties. We account for adjustments to previous reimbursement
estimates as contractual adjustments and report them in the periods that such
adjustments become known. Cost report settlements and the filing of cost
reports increased net patient revenue by $2.7 million, $0.6 14




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##### Table of Contents



million, $4.3 million and $0.8 million for the three months ended and six
months ended June 30, 2004 and 2003 respectively. The payment rates under the Medicare program for inpatients are based on a
prospective payment system, depending upon the diagnosis of a patients
condition. While these rates are indexed for inflation annually, the increases
have historically been less than actual inflation. Reductions in the rate of
increase in Medicare reimbursement may have an adverse impact on our net
patient revenue growth. Effective April 1, 2002, Centers for Medicare and
Medicaid Services implemented changes to the Medicare outpatient prospective
system. Although these changes have resulted in reductions to Medicare
outpatient payments, these reductions, as well as changes to the Medicare
system caused by the Benefit Improvement and Protection Act of 2000, should not
materially affect our net patient revenue growth. While the Medicare
Prescription Drug, Improvement and Modernization Act of 20003 (MMA) provides
a broad range of provider payment benefits, federal government spending in
excess of federal budgetary provisions contained in passage of MMA could result
in future deficit spending for the Medicare system, which could cause future
payments under the Medicare system to grow at a slower rate or decline. We continually monitor the cost/benefit relationship of services provided
at our hospitals, and make decisions about adding new services or discontinuing
existing services. Revenue/Volume Trends The key metrics we use internally to evaluate our revenues are adjusted
admissions, which equate to volume, and revenues per adjusted 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. Adding
specialists and new services typically results in an increase in
volumes at a hospital. We recruited 71 physicians during the first
six months of 2004 of which approximately two-thirds of these
physicians are specialists. Of these 71 physicians recruited, 51
commenced practice during the first six months of 2004 and 20 are
scheduled to start by the end 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 exceed 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.  
    
    Growth in Outpatient Services. Many procedures once performed only
on an inpatient basis are now performed as outpatient procedures. This
shift is the result of continuing 15




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##### Table of Contents



advances in medical and pharmaceutical technologies, and of efforts by
payors to control costs. Reimbursement for inpatient services is
typically higher than that for the same procedures performed on an
outpatient basis. We anticipate that the long-term growth trend toward
outpatient services will continue. The following table reflects gross
outpatient, inpatient and other revenues as a percentage of our total
gross revenues: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Outpatient
    
    
    46.9
    %
    
    
    45.1
    %
    
    
    45.4
    %
    
    
    44.1
    %Inpatient
    
    
    52.5
    
    
    
    54.4
    
    
    
    54.1
    
    
    
    55.3Other
    
    
    0.6
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.6Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Other Trends Increase in Provision for Doubtful Accounts. Like many of the other
companies in our industry, we are experiencing an increase in our provision
for doubtful accounts relating to self-pay accounts receivable.
Self-pay revenue refers to payment for healthcare services received
directly from individual patients, either in the form of a deductible or
co-payment under a health insurance plan or as full or partial payment of
the amount charged by the provider or not covered by insurance. The current
soft economic environment, higher unemployment rates and increasing numbers
of uninsured patients, combined with higher co-payments and deductibles, are
placing a greater portion of the financial responsibility for healthcare
services on the patient rather than insurers. Additionally, many of these
patients are being admitted through the emergency room department and often
require more costly care, resulting in higher billings. Many of these
accounts remain uncollected for extended periods of time, requiring
providers to increase the amounts reserved as doubtful accounts and
ultimately written off as uncollectible. We experienced an increase in our provision for doubtful accounts
during the first six months of 2004. Although
the economies of a majority of the communities in which we operate
hospitals have stabilized, most of such hospitals are experiencing a
reduction in state Medicaid coverage. Our provision for doubtful accounts relates primarily to
self-pay revenues. The following table reflects our self-pay revenues
as a percentage of total net patient revenues: 2004
    
    2003First Quarter
    
    
    8.7
    %
    
    
    6.0
    %Second Quarter
    
    
    10.8
    %
    
    
    7.9
    %Six Months Ended June 30
    
    
    9.8
    %
    
    
    7.0
    %
 Our revenues are reduced when we write-off patient accounts identified as
uncollectible or as charity and indigent care. Our hospitals write-off a
patients account upon the determination that the patient
qualifies, or when it
is not paid and deemed uncollectible, under a hospitals charity 16




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##### Table of Contents



and indigent care policy.
Charity care (based on gross charges) was approximately $4.3 million for the
three months ended June 30, 2004 compared to approximately $6.1 million for
the three months ended June 30, 2003. Charity care (based on gross charges) for the six months ended
June 30, 2004 was approximately $7.7 million compared to $11.1 million for the
six months ended June 30, 2003. 17




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##### Table of Contents



Results of Operations Operating Results Summary The following are comparative summaries of results from operations for the
three and six months ended June 30, 2004 and 2003 (dollars in thousands, except
per share data): Three Months Ended June 30,2004
    
    2003% of
    
    
    
    
    
    % of
    
    % ChangeAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    From Prior YearRevenues:Net patient revenue
    
    $
    205,886
    
    
    
    
    
    
    $
    181,758Other
    
    
    2,648
    
    
    
    
    
    
    
    2,177208,534
    
    
    
    100.0
    %
    
    
    183,935
    
    
    
    100.0
    %
    
    
    13.4
    %Expenses:Salaries, wages and benefits
    
    
    75,221
    
    
    
    36.1
    
    
    
    70,732
    
    
    
    38.5Purchased services
    
    
    20,504
    
    
    
    9.8
    
    
    
    17,578
    
    
    
    9.6Supplies
    
    
    25,847
    
    
    
    12.4
    
    
    
    23,040
    
    
    
    12.5Provision for doubtful accounts
    
    
    21,711
    
    
    
    10.4
    
    
    
    16,263
    
    
    
    8.8Other operating expenses
    
    
    24,269
    
    
    
    11.6
    
    
    
    21,341
    
    
    
    11.6Rentals and leases
    
    
    2,961
    
    
    
    1.4
    
    
    
    2,234
    
    
    
    1.2Depreciation and amortization
    
    
    11,466
    
    
    
    5.5
    
    
    
    9,079
    
    
    
    4.9Interest expense
    
    
    7,416
    
    
    
    3.6
    
    
    
    6,635
    
    
    
    3.6Minority interest
    
    
    169
    
    
    
    0.1
    
    
    
    82
    
    
    
    Loss on sale of assets
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    477
    
    
    
    0.3Total expenses
    
    
    189,582
    
    
    
    90.9
    
    
    
    167,461
    
    
    
    91.0
    
    
    
    13.2Income from continuing operations
before provision for income taxes
    
    
    18,952
    
    
    
    9.1
    
    
    
    16,474
    
    
    
    9.0
    
    
    
    15.0Income taxes
    
    
    7,122
    
    
    
    3.4
    
    
    
    6,555
    
    
    
    3.6Income from continuing operations
    
    
    11,830
    
    
    
    5.7
    %
    
    
    9,919
    
    
    
    5.4
    %
    
    
    19.3Discontinued operations, net of tax:Loss from operations
    
    
    (464
    )
    
    
    
    
    
    
    (258
    )Net gain on divestitures
    
    
    6,833
    
    
    
    
    
    
    
    6,369
    
    
    
    
    
    
    
    (258
    )Net income
    
    $
    18,199
    
    
    
    
    
    
    $
    9,661
    
    
    
    
    
    
    
    88.4
    %Net income per common share:Basic
    
    $
    0.36
    
    
    
    
    
    
    $
    0.20Diluted
    
    $
    0.34
    
    
    
    
    
    
    $
    0.20
 18




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##### Table of Contents



Six Months Ended June 30,2004
    
    2003% of
    
    
    
    
    
    % of
    
    % ChangeAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    From Prior YearRevenues:Net patient revenue
    
    $
    404,127
    
    
    
    
    
    
    $
    361,438Other
    
    
    4,983
    
    
    
    
    
    
    
    4,940409,110
    
    
    
    100.0
    %
    
    
    366,378
    
    
    
    100.0
    %
    
    
    11.7
    %Expenses:Salaries, wages and benefits
    
    
    149,576
    
    
    
    36.6
    
    
    
    141,781
    
    
    
    38.7Purchased services
    
    
    38,942
    
    
    
    9.5
    
    
    
    34,141
    
    
    
    9.3Supplies
    
    
    51,886
    
    
    
    12.7
    
    
    
    47,035
    
    
    
    12.9Provision for doubtful accounts
    
    
    41,944
    
    
    
    10.2
    
    
    
    32,303
    
    
    
    8.8Other operating expenses
    
    
    46,935
    
    
    
    11.5
    
    
    
    42,804
    
    
    
    11.7Rentals and leases
    
    
    5,256
    
    
    
    1.3
    
    
    
    4,478
    
    
    
    1.2Depreciation and amortization
    
    
    21,642
    
    
    
    5.3
    
    
    
    17,915
    
    
    
    4.9Interest expense
    
    
    14,336
    
    
    
    3.5
    
    
    
    12,357
    
    
    
    3.4Minority interest
    
    
    236
    
    
    
    
    
    
    
    149
    
    
    
    Loss on sale of assets
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    477
    
    
    
    0.1Total expenses
    
    
    370,771
    
    
    
    90.6
    
    
    
    333,440
    
    
    
    91.0
    
    
    
    11.2Income from continuing operations
before provision for income taxes
    
    
    38,339
    
    
    
    9.4
    
    
    
    32,938
    
    
    
    9.0
    
    
    
    16.4Income taxes
    
    
    14,302
    
    
    
    3.5
    
    
    
    13,127
    
    
    
    3.6Income from continuing operations
    
    
    24,037
    
    
    
    5.9
    %
    
    
    19,811
    
    
    
    5.4
    %
    
    
    21.3Discontinued operations, net of tax:Loss from operations
    
    
    (940
    )
    
    
    
    
    
    
    (299
    )Net gain on divestitures
    
    
    6,663
    
    
    
    
    
    
    
    5,723
    
    
    
    
    
    
    
    (299
    )Net income
    
    $
    29,760
    
    
    
    
    
    
    $
    19,512
    
    
    
    
    
    
    
    52.5
    %Net income per common share:Basic
    
    $
    0.60
    
    
    
    
    
    
    $
    0.40Diluted
    
    $
    0.56
    
    
    
    
    
    
    $
    0.40
 19




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##### Table of Contents



Three Months EndedJune 30,2004
    
    2003
    
    % ChangeContinuing Operations (1):Number of hospitals at end of period
    
    
    20
    
    
    
    19
    
    
    
    5.3
    %Licensed beds at end of period (3)
    
    
    2,492
    
    
    
    2,208
    
    
    
    12.9Beds in service at end of period
    
    
    2,119
    
    
    
    1,933
    
    
    
    9.6Inpatient admissions (4)
    
    
    17,724
    
    
    
    17,579
    
    
    
    1.0Adjusted admissions (5)
    
    
    33,564
    
    
    
    32,143
    
    
    
    4.4Patient days (6)
    
    
    76,208
    
    
    
    74,713
    
    
    
    2.0Adjusted patient days (7)
    
    
    144,323
    
    
    
    136,619
    
    
    
    5.6Average length of stay (days) (8)
    
    
    4.3
    
    
    
    4.3
    
    
    
    Net patient revenue:Per inpatient admission
    
    $
    11,616
    
    
    $
    10,340
    
    
    
    12.3Per adjusted admission
    
    $
    6,134
    
    
    $
    5,655
    
    
    
    8.5Gross revenue (9):Inpatient
    
    $
    239,461
    
    
    $
    219,842
    
    
    
    8.9Outpatient
    
    
    214,010
    
    
    
    182,075
    
    
    
    17.5$
    453,471
    
    
    $
    401,917
    
    
    
    12.8Same Hospitals (2):Number of hospitals at end of period
    
    
    19
    
    
    
    19
    
    
    
    
    %Licensed beds at end of period (3)
    
    
    2,206
    
    
    
    2,208
    
    
    
    Beds in service at end of period
    
    
    1,920
    
    
    
    1,933
    
    
    
    (0.7
    )Inpatient admissions (4)
    
    
    16,883
    
    
    
    17,579
    
    
    
    (4.0
    )Adjusted admissions (5)
    
    
    32,026
    
    
    
    32,143
    
    
    
    (0.4
    )Patient days (6)
    
    
    72,580
    
    
    
    74,713
    
    
    
    (2.8
    )Adjusted patient days (7)
    
    
    137,678
    
    
    
    136,619
    
    
    
    0.8Average length of stay (days) (8)
    
    
    4.3
    
    
    
    4.3
    
    
    
    Net patient revenue:Per inpatient admission
    
    $
    11,456
    
    
    $
    10,340
    
    
    
    10.8Per adjusted admission
    
    $
    6,039
    
    
    $
    5,655
    
    
    
    6.8Gross revenue (9):Inpatient
    
    $
    225,931
    
    
    $
    219,842
    
    
    
    2.8Outpatient
    
    
    202,566
    
    
    
    182,075
    
    
    
    11.3$
    428,497
    
    
    $
    401,917
    
    
    
    6.6
   (1)
    
    All statistics at June 30, 2004 and 2003 have been restated to exclude
the ownership and operations of Glades General Hospital, which was sold
effective April 30, 2004.(2)
    
    Represents hospitals owned or leased during both periods.(3)
    
    Beds for which a hospital has been granted approval to operate from the
applicable state licensing agency.(4)
    
    Represents the total number of patients admitted (in a facility for a
period in excess of 23 hours) and used by management and investors as a
general measure of inpatient volume.(5)
    
    Used by management and investors as a general measure of combined
inpatient and outpatient volume. Adjusted admissions are computed by
multiplying admissions (inpatient volume) by the outpatient factor. The
outpatient factor is the sum of gross inpatient revenue and gross
outpatient revenue divided by gross inpatient revenue. The adjusted
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.(6)
    
    Represents the total number of days the patients who are admitted stay in
our hospitals.(7)
    
    Adjusted patient days are computed by multiplying patient days (inpatient
volume) by the outpatient factor. The outpatient factor is the sum of
gross inpatient revenue and gross outpatient revenue divided by gross
inpatient revenue. The adjusted patient days computation equates
outpatient revenue to the volume measure (patient days) used to measure
inpatient volume, resulting in a general measure of combined inpatient and
outpatient volume.(8)
    
    The average number of days admitted patients stay in our hospitals.(9)
    
    Represents revenues prior to reductions for discounts and contractual
allowances. 20




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##### Table of Contents



Six Months EndedJune 30,2003
    
    2002
    
    % ChangeContinuing Operations (1):Number of hospitals at end of period
    
    
    20
    
    
    
    19
    
    
    
    5.3
    %Licensed beds at end of period (3)
    
    
    2,492
    
    
    
    2,208
    
    
    
    12.9Beds in service at end of period
    
    
    2,119
    
    
    
    1,933
    
    
    
    9.6Inpatient admissions (4)
    
    
    36,717
    
    
    
    36,303
    
    
    
    1.1Adjusted admissions (5)
    
    
    67,548
    
    
    
    65,252
    
    
    
    3.5Patient days (6)
    
    
    157,455
    
    
    
    155,296
    
    
    
    1.4Adjusted patient days (7)
    
    
    289,643
    
    
    
    279,137
    
    
    
    3.8Average length of stay (days) (8)
    
    
    4.3
    
    
    
    4.3
    
    
    
    Net patient revenue:Per inpatient admission
    
    $
    11,007
    
    
    $
    9,956
    
    
    
    10.6Per adjusted admission
    
    $
    5,983
    
    
    $
    5,539
    
    
    
    8.0Gross revenue (9):Inpatient
    
    $
    493,404
    
    
    $
    447,607
    
    
    
    10.2Outpatient
    
    
    414,286
    
    
    
    357,079
    
    
    
    16.0$
    907,690
    
    
    $
    804,686
    
    
    
    12.8Same Hospitals (2):Number of hospitals at end of period
    
    
    19
    
    
    
    19
    
    
    
    
    %Licensed beds at end of period (3)
    
    
    2,206
    
    
    
    2,208
    
    
    
    Beds in service at end of period
    
    
    1,920
    
    
    
    1,933
    
    
    
    (0.7
    )Inpatient admissions (4)
    
    
    35,876
    
    
    
    36,303
    
    
    
    (1.2
    )Adjusted admissions (5)
    
    
    66,010
    
    
    
    65,252
    
    
    
    1.2Patient days (6)
    
    
    153,827
    
    
    
    155,296
    
    
    
    (1.0
    )Adjusted patient days (7)
    
    
    282,998
    
    
    
    279,137
    
    
    
    1.4Average length of stay (days) (8)
    
    
    4.3
    
    
    
    4.3
    
    
    
    Net patient revenue:Per inpatient admission
    
    $
    10,917
    
    
    $
    9,956
    
    
    
    9.7Per adjusted admission
    
    $
    5,933
    
    
    $
    5,539
    
    
    
    7.1Gross revenue (9):Inpatient
    
    $
    479,874
    
    
    $
    447,606
    
    
    
    7.2Outpatient
    
    
    402,842
    
    
    
    357,079
    
    
    
    12.8$
    882,716
    
    
    $
    804,685
    
    
    
    9.7
   21




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##### Table of Contents



For the Three Months Ended June 30, 2004 and 2003 Revenues increased 13.4% to $208.5 million for the quarter ended June 30,
2004, compared to $183.9 million for the three months ended June 30, 2003.
This increase is primarily due to increases in adjusted admissions of 4.4% and
net patient revenue per adjusted admission of 8.5%. The increase in adjusted
admissions was attributable, in part, to the addition of 19 new physicians in
our communities during the three months ended June 30, 2004 and the maturity of
the physician practices for the doctors we recruited in our communities in 2003
and the first quarter of 2004. The increase in net patient revenue per
adjusted admission was due, in part, by acuity as our Medicare case mix index
increased approximately 2.5% to 1.22 for the three months ended June 30, 2004
from 1.19 for the three months ended June 30, 2003. Cost report settlements
and the filing of cost reports also increased revenues by $2.7 million and $0.6
million for the three months ended June 30, 2004 and 2003, respectively. The table below reflects the sources of our net patient revenue for the
quarters ended June 30, expressed as a percentage of total net patient revenue: Three Months Ended June 30,2004
    
    2003Medicare
    
    
    38.8
    %
    
    
    38.5
    %Medicaid
    
    
    8.7
    
    
    
    10.7Other (including self-pay)
    
    
    52.5
    
    
    
    50.8100.0
    %
    
    
    100.0
    %
 Salaries, wages and benefits as a percentage of revenues decreased to
36.1% in the quarter ended June 30, 2004 from 38.5% for the quarter ended June
30, 2003. The decrease is primarily due to improvements resulting from
continued implementation of our flexible staffing standards throughout our
hospitals, which effectively matches labor with hospital volume trends. Purchased services, as a percentage of revenues, increased to 9.8% in the
quarter ended June 30, 2004 from 9.6% for the quarter ended June 30, 2003. The
increase is primarily due to an increase in legal fees of $0.3 million and a
$1.2 million increase in contract labor (primarily contract nursing at two of
our hospitals) for the quarter ended June 30, 2004 compared to the prior years
quarter. Provision for doubtful accounts, as a percentage of revenues, increased to
10.4% in the quarter ended June 30, 2004 from 8.8% for the quarter ended June
30, 2003, due primarily to the increase in bad debts resulting from the
increase in self-pay revenue. During the quarter ended June 30, 2004, self-pay
revenue as a percentage of gross revenues increased to 5.9% from 5.1% for the
quarter ended June 30, 2003. Net patient revenue associated with self-pay
patients is generally recorded at gross charges, which are higher than what
government programs and managed care plans pay. As a result, failure to
receive payment from self-pay and uninsured patients results in a higher
provision for doubtful accounts as a percentage of total net patient revenue.
We are monitoring the self-pay revenue category closely and expect the
provision for doubtful accounts expense to be in the 10% of revenues range for
2004. Although the economies of a majority of the communities in
which we operate hospitals have stabilized, most of such hospitals
are experiencing a reduction in state Medicaid coverage. 22




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##### Table of Contents



Depreciation and amortization expense increased $2.4 million to $11.5
million in the quarter ended June 30, 2004 from $9.1 million in the quarter
ended June 30, 2003. Approximately $0.7 million of the increase results from
the additional expense associated with the Las Cruces acquisition, with the
remainder of the increase resulting from our capital expenditure program
focusing on revenue generating projects. Interest expense increased $0.8 million to $7.4 million in the quarter
ended June 30, 2004 from $6.6 million in the quarter ended June 30, 2003. The
increase is primarily driven by the additional debt associated with the Las
Cruces acquisition. and the issuance in May 2003 of $200.0 million aggregate
principal amount of 71⁄2% Senior Subordinated Notes due 2013, offset by
repayments during the second quarter of 2003 of outstanding borrowings on our
senior bank credit facility and repurchases of a portion of our 41⁄2%
Convertible Subordinated Notes due 2005. The interest related to the $200.0
million 71⁄2% Senior Subordinated Notes due 2013 was reduced by a $100.0
million fixed to floating interest rate swap agreement entered into in the
third quarter of 2003, which has rates currently lower than the underlying
debt. The provision for income taxes totaled $7.1 million, or a 37.6% effective
tax rate, in the quarter ended June 30, 2004 compared to $6.6 million, or a
39.8% effective tax rate, in the quarter ended June 30, 2003. The reduction in
the effective tax rate in the quarter ended June 30, 2004 was primarily
attributable to a reduction in our tax liabilities due to the final and
favorable resolution of examinations by taxing authorities as we recently
concluded audits that have been ongoing for over one year. In
the three months ended June 30, 2004, we incurred a loss of $0.5 million from
discontinued operations compared to a loss of $0.3 million for the
three months ended June 30, 2003. The increase in the loss is primarily due to
an increase in medical malpractice expense for Glades General
Hospital. A net gain on divestiture of $6.8 million was recognized during the three months ended June 30, 2004,
primarily due to the sale of Brim Healthcare, Inc. Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 Revenues increased 11.7% or $42.7 million to $409.1 million for the six
months ended June 30, 2004, compared to the same period last year. This
increase is primarily due to increases in adjusted admissions of 3.5% and net
patient revenue per adjusted admission of 8.0%. The increase in adjusted
admissions was attributable, in part, to the addition of 51 new doctors in our
communities during the six months ended June 30, 2004 and the maturity of the
physician practices for the doctors we recruited in our communities in 2003.
The increase in net patient revenue per adjusted admission was due, in part, by
acuity as our Medicare case mix index increased approximately 3.4% from 1.23
for the six months ended June 30, 2004 from 1.19 for the six months ended June
30, 2003. Cost report settlements and the filing of cost reports also
increased revenues by $4.3 million and $0.8 million for the six months ended
June 30, 2004 and 2003, respectively. 23




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##### Table of Contents



The table below reflects the sources of our net patient revenue for the
six months ended June 30, expressed as a percentage of total net patient
revenue: Six Months Ended June 30,2004
    
    2003Medicare
    
    
    39.6
    %
    
    
    39.0
    %Medicaid
    
    
    9.0
    
    
    
    10.7Other and self-pay
    
    
    51.4
    
    
    
    50.3100.0
    %
    
    
    100.0
    %
 Salaries and benefits as a percentage of revenues decreased to
36.6% for the six months ended June 30, 2004 from 38.7% for the six months
ended June 30, 2003. The improvement is primarily due to the continued
implementation of our flexible staffing standards throughout our hospitals,
which effectively matches labor with hospital volume trends. Our improvement
in productivity was partially offset by an overall increase in medical benefit
costs. Purchased services, as a percentage of revenues, increased to 9.5% for the
six months ended June 30, 2004, compared to 9.3% for the comparable period of
the prior year. The increase is primarily due to an increase in legal fees of
$1.1 million and a $1.8 million increase in contract labor (primarily for
contract nursing at two of our hospitals) for the six months ended June 30,
2004 compared to the same period of the prior year. The provision for doubtful accounts increased to 10.2% of revenues for the
six months ended June 30, 2004 compared to 8.8% for the comparable period of
the prior year, due primarily to the increase in bad debts resulting from the
increase in self-pay revenue. During the six months ended June 30, 2004,
self-pay revenue as a percentage of gross revenues increased to 5.2% from 4.5%
for the six months ended June 30, 2003. Although the economies
of a majority of the communities in which we operate hospitals have
stabilized, most of such hospitals are experiencing a reduction in
state Medicaid coverage. Other operating expenses decreased as a percentage of revenues to 11.5%
for the six months ended June 30, 2004 from 11.7% in the comparable period of
the prior year primarily due to decreases in physician recruitment expense,
travel expense, employee recruitment expenses and advertising expenses, offset
by increases in medical malpractice expense, repairs and maintenance and
property taxes. Depreciation and amortization expense was $21.6 million, or 5.3% of
revenues for the six months ended June 30, 2004, compared to $17.9 million, or
4.9% of revenues, for the comparable period of 2003. Approximately $0.7
million of this increase is the result of the additional expense associated
with the Las Cruces acquisition, with the remainder of the increase resulting
from our capital expenditure program focusing on revenue generating projects. Interest expense increased to $14.3 million for the six months ended June
30, 2004, compared to $12.4 million for the comparable period of 2003. The
increase is primarily driven by the additional debt associated with the Las
Cruces acquisition and the issuance in May 2003 of $200.0 million aggregate
principal amount of 71⁄2% Senior Subordinated Notes due 2013, offset by
repayments during the second quarter of 2003 of outstanding borrowings on our
senior bank credit facility and repurchases of a portion of our 41⁄2%
Convertible Subordinated Notes due 2005. The 24




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##### Table of Contents



interest related to the $200.0 million 71⁄2% Senior Subordinated Notes due
2013 was reduced by a $100.0 million fixed to floating interest rate swap
agreement entered into in the third quarter of 2003, which has rates currently
lower than the underlying debt. The provision for income taxes totaled $14.3 million, or a 37.3% effective
tax rate, for the six months ended June 30, 2004 compared to $13.1 million, or
a 39.9% effective tax rate, for the comparable period of the prior year. The
reduction in the effective tax rate for the six months ended June 30, 2004 was
primarily attributable to a reduction in our tax liabilities due to the final
and favorable resolution of examinations by taxing authorities as we recently
concluded audits that have been ongoing for over one year. In the six months ended June 30, 2004, our discontinued operations
incurred a loss from operations of $0.9 million compared to a $0.3 million loss
from operations for the same period in 2003. This increase in the loss from
operations results primarily from the recording of increased medical
malpractice expense in connection with the sale of Glades General Hospital. A
net gain on divestitures of $6.7 million was recognized during the six months
ended June 30, 2004 due primarily to the sale of Brim Healthcare, Inc., which
resulted in an after-tax gain of $7.0 million. Liquidity and Capital Resources At June 30, 2004, we had working capital from continuing operations of
$87.1 million, including cash and cash equivalents of $2.0 million, compared to
working capital from continuing operations of $103.4 million, including $19.1
million in cash and cash equivalents at June 30, 2003. Net cash provided by operating activities was $48.8 million for the six
months ended June 30, 2004, compared to $53.9 million for the six months ended
June 30, 2003. The $5.1 million reduction in net cash provided by operating
activities is primarily due to $4.9 million of 2003 incentive compensation
payments made in February 2004, an increase in net income taxes paid of $6.8
million for the comparable six-month periods, an increase in interest payments
of $3.3 million for the comparable six-month periods and approximately $2.2
million in payments made under our supplemental deferred compensation plan in
June 2004. The decrease in cash flow from operating activities is partially
offset by a $7.4 million increase in our deferred income tax provision
resulting from the Las Cruces acquisition and divestitures of Glades General
Hospital and Brim Healthcare, Inc., and an increase in our income from
continuing operations and depreciation and amortization expense. Net cash used in investing activities increased to $190.5 million for the
six months ended June 30, 2004 from $37.3 million for the six months ended June
30, 2003, primarily due to the $152.8 million Las Cruces acquisition and as a result of our capital
expenditure program focusing on revenue generating projects. Significant
capital expenditures for the six months ended June 30, 2004 included $6.3
million for the purchase of land at Havasu Regional Medical Center, $8.9
million in construction costs for the new hospital in Hardeeville, South
Carolina, $1.9 million for our MRI project at Los Alamos Medical Center, $1.7
million for womens services at Teche Regional Medical Center, and $1.1 million
in construction costs for the new hospital in Ft. Mohave, Arizona. 25




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##### Table of Contents



Net cash provided by financing activities totaled $82.1 million for the
six months ended June 30, 2004, primarily due to borrowings of $110.0 million
under our senior bank credit facility for the Las Cruces acquisition, as
partially offset by $34.6 million in repayments of borrowings under our senior
bank credit facility from proceeds from the sale of Brim Healthcare, Inc.
($13.2 million) and available cash. Net cash used in financing activities of
$11.8 million for the six months ended June 30, 2003 resulted from $194.2
million in net proceeds from the issuance of our 71⁄2% Senior Subordinated
Notes due 2013, which were used to more than offset the cash paid to repay
$114.3 million outstanding on the senior bank credit facility and to repurchase
$74.0 million principal amount of our 41⁄2% Convertible Subordinated Notes due
2005. We maintain a senior bank credit facility with Wachovia Bank, National
Association, as agent and issuing bank for a syndicate of lenders with
aggregate commitments up to $250.0 million. At June 30, 2004, we had $166.3
million, net of outstanding revolver borrowings of $75.4 million and letters of
credit of $8.3 million, available for borrowing under the senior bank credit
facility. Loans under the senior bank credit facility bear interest, at our
option, at the adjusted base rate or at the adjusted LIBOR rate. We pay a
commitment fee, which varies from three-eighths to one-half of one percent of
the unused portion, depending on our compliance with certain financial ratios.
We may prepay any principal amount outstanding under the senior bank credit
facility at any time before the maturity date of November 13, 2006. In May 2003, we completed a public offering of $200.0 million aggregate
principal amount of 71⁄2% Senior Subordinated Notes due June 1, 2013. Net
proceeds of the offering totaling $194.2 million were used to repay $114.3
million in existing borrowings under the senior bank credit facility and to
repurchase $74.0 million of our 41⁄2% Convertible Subordinated Notes due 2005.
The 71⁄2% Notes bear interest from May 27, 2003 at the rate of 71⁄2% per
year, payable semi-annually on June 1 and December 1, beginning on December 1,
2003. We may redeem all or a portion of the 71⁄2% Notes on or after June 1,
2008, at the then current redemption prices, plus accrued and unpaid interest.
In addition, at any time prior to June 1, 2006, we may redeem up to 35% of the
aggregate principal amount of the 71⁄2% Notes within 60 days of one or more
common stock offerings with the net proceeds of such offerings at a redemption
price of 107.5% of the principal amount, plus accrued and unpaid interest.
Note holders may require us to repurchase all of the holders notes at 101% of
their principal amount plus accrued and unpaid interest in some circumstances
involving a change of control. The 71⁄2% Notes are unsecured and subordinated
to our existing and future senior indebtedness. The 71⁄2% Notes rank equal in
right of payment to our 41⁄2% Convertible Subordinated Notes due 2005 and our
41⁄4% Convertible Subordinated Notes due 2008. The 71⁄2% Notes effectively
rank junior to our subsidiary liabilities. The indenture contains limitations
on our ability to incur additional indebtedness, sell material assets, retire,
redeem or otherwise reacquire its capital stock, acquire the capital stock or
assets of another business, and pay dividends. In 2000, we sold $150.0 million aggregate principal amount of 41⁄2%
Convertible Subordinated Notes due November 20, 2005. The 41⁄2% Notes bear
interest at the rate of 41⁄2% per year, payable semi-annually on each May 20
and November 20. The 41⁄2% 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 $26.45 per share. The conversion price is subject to
adjustment. We may redeem all or a portion of the 41⁄2% Notes on or after
November 20, 2003, at the then current redemption prices, plus accrued and
unpaid interest. Note holders may require us to repurchase all 26




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##### Table of Contents



of the holders notes at 100% of their principal amount plus accrued and
unpaid interest in some circumstances involving a change of control. The
41⁄2% Notes are unsecured obligations and rank junior in right of payment to
all of our existing and future senior indebtedness. The 41⁄2% Notes rank equal
in right of payment to our 41⁄4% Convertible Subordinated Notes due 2008 and
our 71⁄2% Senior Subordinated Notes due 2013. The 41⁄2% Notes effectively
rank junior to our subsidiary liabilities. The indenture does not contain any
financial covenants. At June 30, 2004, $76.0 million principal amount of the
41⁄2% Notes remained outstanding, and a total of 2,872,760 shares of common
stock have been reserved for issuance upon conversion of the remaining 41⁄2%
Notes. In
October 2001, we sold $172.5 million of 41⁄4% Convertible Subordinated
Notes due October 10, 2008. Net proceeds of approximately $166.4 million were
used to reduce the outstanding balance on our senior bank credit facility and
for acquisitions. The 41⁄4% Notes bear interest at the rate of 41⁄4% per
year, payable semi-annually on each April 10 and
October 10. The 41⁄4% 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 $27.70 per share. The
conversion price is subject to adjustment. We may redeem all or a portion of
the 41⁄4% Notes on or after October 10, 2004, at the then current redemption
prices, plus accrued and unpaid interest. Note holders may require us to
repurchase all of the holders notes at 100% of their principal amount plus
accrued and unpaid interest in some circumstances involving a change of
control. The 41⁄4% Notes are unsecured and subordinated to our existing and
future senior indebtedness. The 41⁄4% Notes rank equal in right of payment to
our 41⁄2% Convertible Subordinated Notes due 2005 and our 71⁄2% Senior
Subordinated Notes due 2013. The 41⁄4% Notes effectively rank junior to our
subsidiary liabilities. The indenture does not contain any financial covenants.
A total of 6,226,767 shares of our common stock have been reserved for issuance
upon conversion of the 41⁄4% Notes. Our Board of Directors has authorized the repurchase from time to time and
subject to market conditions of our outstanding 41⁄2% Notes and
41⁄4% Notes
in the open market or in privately negotiated transactions. During 2003, we
repurchased $74.0 million principal amount of the 41⁄2% Notes. We recorded a
$486,000 pretax loss associated with the early extinguishment of debt related
to the repurchase of the 41⁄2% Notes. We have not repurchased any of the
41⁄4% Notes. Additional repurchases of either series of notes, if any, will
be made out of cash provided by operations, amounts available under our senior
bank credit facility, or from the proceeds of future financing activities. Our shelf registration statement, providing for the offer, from time to
time, of common stock and/or debt securities up to an aggregate of $300.0
million remains effective with the Securities and Exchange Commission.
Following the issuance of $200.0 million aggregate principal amount of our
71⁄2% Senior Subordinated Notes due 2013, the shelf registration statement
remains available for the issuance of up to $100.0 million of additional
securities, subject to market conditions and our capital needs. We intend to acquire additional acute care facilities and are actively
seeking out such acquisitions. There can be no assurance that we will not
require additional debt or equity financing for any particular acquisition.
Also, we continually review our capital needs and financing opportunities and
may seek additional equity or debt financing for our acquisition program or
other needs. 27




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Capital expenditures for our owned and leased hospitals may vary from year
to year depending on facility improvements and service enhancements undertaken
by our hospitals. We expect our total capital expenditures in 2004 to
approximate $50.0 million, exclusive of any acquisitions of businesses or new
hospital construction projects. Planned capital expenditures for 2004 consist
principally of capital improvements to owned and leased hospitals. In
addition, we expect our new hospital construction projects in Hardeeville,
South Carolina and Ft. Mohave, Arizona will total $46.0 million during 2004.
We anticipate opening the South Carolina hospital in the fourth quarter of 2004
and the Arizona hospital in the third quarter of 2005. We are obligated to
construct a replacement hospital for our existing Eunice, Louisiana facility
contingent upon the existing facility meeting specified operating targets. At
June 30, 2004, the specified operating targets had not been met. A replacement
facility at Eunice, if constructed, is estimated to cost approximately $26.5
million. We expect to fund these expenditures through cash provided by
operating activities and borrowings under our senior bank credit facility. Our management anticipates that cash flows from operations, amounts
available under our senior bank 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 12 months. 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. Critical Accounting Policies and Impact of Recently Issued Accounting Standards The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and judgments that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. On an ongoing basis, we evaluate
our estimates, including those related to bad debts, contractual discounts,
risk management reserves and intangible assets. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements. Our critical
accounting policies for risk management reserves and intangible assets are more
fully described in our 2003 Annual Report on Form 10-K. Allowance for Doubtful
Accounts. Substantially all of our accounts receivable are related to providing
healthcare services to our hospitals patients. Our ability to collect
outstanding receivables from third-party payors and others is critical to our
operating performance and cash flows. The primary collection risk lies with
uninsured patient accounts or patient accounts for which a balance remains
after primary insurance has paid. Insurance coverage is verified prior to
treatment for all procedures scheduled in advance and walk-in patients.
Insurance coverage is not verified in advance of procedures for emergency 28




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##### Table of Contents



room patients. Deductibles and co-payments are generally determined prior
to the patients discharge with emphasis on collection efforts before
discharge. Once these amounts are determined, any remaining patient balance is
identified and collection activity is initiated before the patient is
discharged. Our standard collection procedures are then followed until such
time that management determines the account is uncollectible, at which point
the account is written off. Our policy with respect to estimating our allowance
for doubtful accounts is to reserve 50% of all self-pay accounts receivable
aged between 121 and 150 days and 100% of all self-pay accounts that have aged
greater than 150 days. Accordingly, substantially all of our bad debt expense
is related to uninsured patient accounts and patient accounts for which a
balance remains after primary insurance has paid. We continually monitor our
accounts receivable balances and utilize cash collections data and other
analytical tools to support the basis for our estimates of the provision for
doubtful accounts. In addition, we perform quarterly hindsight procedures on
historical collection and write-off experience to determine the reasonableness
of our policy for estimating the allowance for doubtful accounts. Significant
changes in payor mix or business office operations, or deterioration in aging
accounts receivable could result in a significant increase in this allowance. In general, the standard collection cycle at our hospitals is as follows:  
    
    Upfront cash collection of deductibles, co-payments,
and self-pay accounts.  
    
    From the time the account is billed until the period
120 days after the billing, internal business office collections
and early out program collections are performed.  
    
    From the time the account is 121 days after billing
until the period one year after billing, uncollected accounts are
turned over to one of two primary collection agencies utilized by
our company.  
    
    One year following the date of billing,
any uncollected accounts are written off and the accounts are
turned over to our secondary collection agency. The
following table summarizes our days revenue outstanding on a
same-store basis as of the
dates indicated: June 30, 2004
    
    March 31, 2004
    
    December 31, 200354
    
    
    54
    
    
    
    54
 Our target for days revenue outstanding ranges from 53 to 58 days. Uncollected accounts are manually written off: (a) if the balance is less
than $10.00, (b) when turned over to an outside secondary collection agency at
365 days, or (c) earlier than 365 days if all collection efforts indicate an
account is uncollectible. Once accounts have been written off, they are not
included in our gross accounts receivable or allowance for doubtful accounts. 29




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The approximate percentage of total gross accounts receivable summarized
by aging categories is as follows: June 30, 2004
    
    March 31, 2004
    
    December 31, 20030 to 60 days
    
    
    57.5
    %
    
    
    58.6
    %
    
    
    57.7
    %61 to 150 days
    
    
    19.0
    
    
    
    16.8
    
    
    
    17.2Over 150 days
    
    
    23.5
    
    
    
    24.6
    
    
    
    25.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 The approximate percentage of total gross accounts receivable summarized
by payor is as follows: June 30, 2004
    
    March 31, 2004
    
    December 31, 2003Medicare
    
    
    24.6
    %
    
    
    25.9
    %
    
    
    25.5
    %Medicaid
    
    
    12.0
    
    
    
    11.9
    
    
    
    11.6Managed Care and Other
    
    
    26.5
    
    
    
    25.2
    
    
    
    25.4Self-Pay
    
    
    36.9
    
    
    
    37.0
    
    
    
    37.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Upfront cash collections for the quarter ended June 30, 2004 were
approximately $3.3 million compared to $2.7 million for the quarter ended June
30, 2003. For the six months ended June 30, 2004, upfront cash collections
were approximately $7.0 million compared to $5.3 million for the six months
ended June 30, 2003. Allowance for Contractual Discounts. We derive a significant portion of our revenues from Medicare, Medicaid
and other payors that receive discounts from our standard charges. The
Medicare and Medicaid regulations and various managed care contracts under
which these discounts must be calculated are often complex and subject to
interpretation and adjustment. In addition, the services authorized and
provided and resulting reimbursement, are often subject to interpretation.
These interpretations sometimes result in payments that differ from our
estimates. Additionally, updated regulations and contract negotiations occur
frequently, necessitating our continual review and assessment of the estimation
process. Our hospitals computerized billing systems do not automatically
calculate and record contractual allowances. Rather, we utilize an internally
developed contractual model to estimate the allowance for contractual discounts
on a payor  specific basis, given our interpretation of the applicable
regulations or contract terms. Our contractual model for Medicare and Medicaid
inpatient services utilizes the application of actual DRG data to individual
patient accounts to calculate contractual allowances. For all outpatient
services and non-Medicare and non-Medicaid inpatient services, our contractual
model utilizes six month historical paid claims data by payor for such services
to calculate the contractual allowances. Differences between the contractual
allowances estimated by our contractual model and actual paid claims are
adjusted when the individual claims are paid. Our contractual model is updated
each quarter. In addition to the contractual allowances estimated and recorded
by our contractual model, we also record an 30




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allowance equal to 100% of all Medicare, Medicaid, and other insurance
payors accounts receivable that are aged greater than 365 days. Market Risks Associated with Financial Instruments Our interest expense is sensitive to changes in the general level of
interest rates. To mitigate the impact of fluctuations in interest rates, we
generally maintain 50%  80% of our debt at a fixed rate, either by borrowing
on a long-term basis or entering into an interest rate swap. At June 30, 2004,
approximately 67% of our outstanding debt was effectively at a fixed rate. We entered into an interest rate swap agreement which effectively
converted, for a ten-year period, $100.0 million of the $200.0 million
fixed-rate borrowings under our 71⁄2% Senior Subordinated Notes due 2013 to
floating rate borrowings. Floating rate borrowings are based on LIBOR plus
2.79% over the term of the agreement. Our interest rate swap is a fair value
hedge. We are exposed to credit losses in the event of nonperformance by the
counterparty to the financial instrument. We anticipate that the counterparty
will fully satisfy its obligations under the contract. General The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the amounts reported in our financial
statements. Resolution of matters, for example, final settlements with third
party payors, may result in changes from those estimates. The timing and amount
of such changes in estimates may cause fluctuations in our quarterly or annual
operating results. Forward-Looking Statements Our disclosure and analysis in this report contain some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. Such statements may
include words such as anticipate, estimate, expect, project, intend,
plan, believe and other words and terms of similar meaning in connection
with any discussion of future operating or financial performance. Any or all
of our forward-looking statements in this report may turn out to be wrong. They
can be affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Many factors mentioned in our discussion in this
report will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially. Factors that may cause our plans, expectations, future financial
condition and results to change include, but are not limited to:  
    
    the highly competitive nature of the healthcare business;  
    
    the efforts of insurers, healthcare providers and others to contain healthcare costs;  
    
    the financial condition of managed care organizations that
pay us for healthcare services; 31




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
    
    possible changes in the levels and terms of reimbursement for
our charges by government programs, including Medicare and Medicaid
or other third-party payors;  
    
    changes in or failure to comply with federal, state or local
laws and regulations affecting the healthcare industry;  
    
    the possible enactment of federal or state healthcare reform;  
    
    the departure of key members of our management;  
    
    claims and legal actions relating to professional liability;  
    
    our ability to implement successfully our acquisition and development strategy;  
    
    our ability to recruit and retain qualified personnel and physicians;  
    
    potential federal or state investigations;  
    
    fluctuations in the market value of our common stock or notes;  
    
    changes in accounting principles generally accepted in the
United States or in our critical accounting policies;  
    
    changes in demographic, general economic and business
conditions, both nationally and in the regions in which we operate;  
    
    changes in the availability, cost and terms of insurance
coverage for our hospitals and physicians who practice at our
hospitals; and  
    
    other risks described in this report. Except as required by law, we undertake no obligation to publicly update
any forward-looking statements, whether as a result of new information, future
events or otherwise. You are advised, however, to consult any additional
disclosures we make in our Form 10-K, 10-Q and 8-K reports to the Securities
and Exchange Commission. These are factors that we think could cause our
actual results to differ materially from expected results. Other factors
besides those listed here also could affect us adversely. You should not rely
on such forward-looking statements contained in this report, as we cannot
predict or control many of the factors that may cause future events or results
to differ from those forecasted. This discussion is provided as permitted by
the Private Securities Litigation Reform Act of 1995. 
 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 Annual Report on Form 10-K for the year ended December 31,
2003. Our only derivative instrument relates to an 32




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interest rate swap agreement. SeeItem 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations  Market Risks
Associated with Financial Instruments. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We carried out an evaluation, under the supervision and with the
participation of our 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 their
evaluation of such controls and procedures, our 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 in
reports we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required
disclosure. 33




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##### Table of Contents



Changes in Internal Controls We continue to evaluate our internal controls and procedures and implement
additional procedures to ensure accurate and consistent reporting of financial
results from period to period. There have been no significant changes in our
internal controls over financial reporting that occurred during the three or
six month period ended June 30, 2004 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting. 
 PART II OTHER INFORMATION 
 ITEM 4. Submission of Matters to a Vote of Security Holders On Thursday, May 18, 2004, we held our 2004 annual meeting of
shareholders. At such meeting, the shareholders voted on the following two
proposals: Election of Directors The shareholders voted on the election of six nominees to the Board of
Directors. The Board of Directors determined that the size of the Board
of Directors be reduced to and set at six members. The Board of Directors then
nominated Martin S. Rash, Joseph P. Nolan, Winfield C. Dunn, Paul J.
Feldstein, David R. Klock, and Michael P. Haley for election at the annual
meeting to serve until the 2005 annual meeting of shareholders. Each of
the nominated directors were elected by the following vote: Name
    
    For
    
    Withheld AuthorityMartin S. Rash
    
    
    41,694,203
    
    
    
    2,180,200Joseph P. Nolan
    
    
    42,414,779
    
    
    
    1,459,624Winfield C. Dunn
    
    
    42,206,918
    
    
    
    1,667,485Paul J. Feldstein
    
    
    42,226,918
    
    
    
    1,647,485David R. Klock
    
    
    42,226,918
    
    
    
    1,647,485Michael P. Haley
    
    
    42,465,659
    
    
    
    1,408,744
 Ratification of Independent Registered Public Accounting Firm Second, the shareholders voted to approve the appointment of Ernst & Young
LLP as the independent registered public accounting firm of our company and its
subsidiaries for the fiscal year ending December 31, 2004. At the annual
meeting, the shareholders voted to ratify the appointment of Ernst & Young LLP,
with 37,671,438 votes for, 6,191,242 votes against and 11,723 abstentions. 34




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits ExhibitNumber
    
    Description of Exhibits3.1
    
    Amended and Restated Certificate of Incorporation of Province
Healthcare Company, as filed with the Delaware Secretary of State on
June 16, 2000 (incorporated by reference to the exhibits filed with
the Registrants Quarterly Report filed on Form 10-Q, for the
quarterly period ended June 30, 2000, Commission File
No. 0-23639).3.2
    
    Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Province Healthcare Company, as
filed with the Delaware Secretary of State on May 22, 2002
(incorporated by reference to the exhibits filed with the
Registrants Registration Statement on Form S-3A, filed June 11,
2002, Registration No. 333-86578).3.3
    
    Amended and Restated Bylaws of Province Healthcare Company
(incorporated by reference to the exhibits filed with the
Registrants Current Report on Form 8-K, dated December 12, 2002,
Commission File No. 0-23639).10.1
    
    Executive Severance Agreement by and between Province
Healthcare Company and Steven Brumfield, dated as of July 7,
2004.*10.2
    
    Lease Agreement by and among the
County of Doña Ana, New Mexico, the City of Las Cruces, New Mexico and
PHC-Las Cruces, Inc., dated as of May 19, 2004.*31.1
    
    Certification pursuant to Rule 13a  14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification pursuant to Rule 13a  14(a) under the
Securities Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certifications pursuant to Rule 13a  14(b) of the Securities
Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.**
   *
    
    filed herewith**
    
    furnished herewith 35




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(b)
    
    Reports on Form 8-KDuring the three months ended June 30, 2004, we filed or
furnished the following
current reports on
Form 8-K:  (i)
    
    Form 8-K, furnished on April 29, 2004, with
respect to the announcement of our financial results for the
first quarter ended March 31, 2004.(ii)
    
    Form 8-K, filed on May 5, 2004, with respect to
the announcement of the completion of the sale of Glades
General Hospital in Belle Glade, Florida.(iii)
    
    Form 8-K, filed on May 24, 2004, announcing that
the Company signed a definitive agreement to acquire
substantially all of the assets of Memorial Medical Center in
Las Cruces, New Mexico.(iv)
    
    Form 8-K, filed on June 3, 2004, announcing that
the Company completed the acquisition, through a long-term
lease, of Memorial Medical Center in Las Cruces, New Mexico. 36




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Province Healthcare CompanyDate: August 9, 2004
    
    By: /s/Steven R. BrumfieldSteven R. BrumfieldVice President and Controller
 37