##### Table of Contents



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 1934
 For the quarterly period ended September 30, 2004 or
 [ ]
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from
 to
 Commission File Number 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
(Registrants Telephone Number, Including Area Code) 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 November 1, 2004
49,784,106 shares




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PART I
FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets at September 30, 2004 and December 31, 2003
    
    
    1Condensed Consolidated Statements of Income for the Three Months Ended September 30, 2004 and 2003
    
    
    2Condensed Consolidated Statements of Income for the Nine Months Ended September 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition And Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II
OTHER INFORMATIONItem 6. Exhibits
    
    
    28Signatures
    
    
    29CertificationsEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATIONS OF THE CEO & CFO




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##### Table of Contents



PART I
FINANCIAL INFORMATION 
 Item 1. Financial Statements (Unaudited) PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts) September 30,
    
    December 31,2004
    
    2003(Unaudited)
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,607
    
    
    $
    46,117Accounts receivable, less allowance
for doubtful accounts of $81,175 in
2004 and $66,835 in 2003
    
    
    138,751
    
    
    
    110,335Inventories
    
    
    20,901
    
    
    
    18,424Prepaid expenses and other
    
    
    15,502
    
    
    
    14,614Assets of discontinued operations
    
    
    2,880
    
    
    
    14,995Total current assets
    
    
    189,641
    
    
    
    204,485Property and equipment, net
    
    
    562,782
    
    
    
    459,843Goodwill
    
    
    388,957
    
    
    
    309,191Other assets
    
    
    32,613
    
    
    
    36,874$
    1,173,993
    
    
    $
    1,010,393LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    33,956
    
    
    $
    16,083Accrued salaries and benefits
    
    
    31,660
    
    
    
    27,852Accrued expenses
    
    
    34,832
    
    
    
    14,241Current portion of long-term debt
    
    
    251
    
    
    
    743Liabilities of discontinued operations
    
    
    355
    
    
    
    5,156Total current liabilities
    
    
    101,054
    
    
    
    64,075Long-term debt, less current portion
    
    
    514,477
    
    
    
    447,956Other liabilities
    
    
    58,671
    
    
    
    49,579Minority interests
    
    
    2,171
    
    
    
    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;
49,764,999 shares and 48,841,157
shares issued and outstanding at
September 30, 2004 and December 31,
2003, respectively
    
    
    498
    
    
    
    488Additional paid-in-capital
    
    
    315,158
    
    
    
    306,091Retained earnings
    
    
    182,474
    
    
    
    141,186Accumulated other comprehensive loss
    
    
    (510
    )
    
    
    (892
    )Total stockholders equity
    
    
    497,620
    
    
    
    446,873$
    1,173,993
    
    
    $
    1,010,393
 1




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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts) Three Months Ended September 30,2004
    
    2003Revenues:Net patient revenue
    
    $
    232,572
    
    
    $
    182,229Other
    
    
    2,743
    
    
    
    2,560235,315
    
    
    
    184,789Expenses:Salaries, wages and benefits
    
    
    86,615
    
    
    
    67,262Purchased services
    
    
    23,011
    
    
    
    16,735Supplies
    
    
    30,530
    
    
    
    24,035Provision for doubtful accounts
    
    
    26,537
    
    
    
    18,773Other operating expenses
    
    
    26,174
    
    
    
    22,417Rentals and leases
    
    
    3,072
    
    
    
    2,198Depreciation and amortization
    
    
    12,561
    
    
    
    9,317Interest expense
    
    
    7,618
    
    
    
    6,989Minority interests
    
    
    201
    
    
    
    52(Gain) loss on sale of assets
    
    
    (32
    )
    
    
    75Loss on early extinguishment of debt
    
    
    
    
    
    
    10Total expenses
    
    
    216,287
    
    
    
    167,863Income from continuing operations before provision for income taxes
    
    
    19,028
    
    
    
    16,926Income taxes
    
    
    7,137
    
    
    
    6,725Income from continuing operations
    
    
    11,891
    
    
    
    10,201Discontinued operations, net of tax:Loss from operations
    
    
    (362
    )
    
    
    (394
    )Net gain on divestitures
    
    
    
    
    
    
    (362
    )
    
    
    (394
    )Net income
    
    $
    11,529
    
    
    $
    9,807Earnings (loss) per common share:Basic:Continuing operations
    
    $
    0.24
    
    
    $
    0.21Discontinued operations:Loss from operations
    
    
    (0.01
    )
    
    
    (0.01
    )Net gain on divestitures
    
    
    
    
    
    
    Net income
    
    $
    0.23
    
    
    $
    0.20Diluted:Continuing operations
    
    $
    0.23
    
    
    $
    0.21Discontinued operations:Loss from operations
    
    
    (0.01
    )
    
    
    (0.01
    )Net gain on divestitures
    
    
    
    
    
    
    Net income
    
    $
    0.22
    
    
    $
    0.20
 2




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts) Nine Months Ended September 30,2004
    
    2003Revenues:Net patient revenue
    
    $
    636,699
    
    
    $
    543,667Other
    
    
    7,727
    
    
    
    7,500644,426
    
    
    
    551,167Expenses:Salaries, wages and benefits
    
    
    236,192
    
    
    
    209,043Purchased services
    
    
    61,953
    
    
    
    50,876Supplies
    
    
    82,416
    
    
    
    71,071Provision for doubtful accounts
    
    
    68,481
    
    
    
    51,077Other operating expenses
    
    
    73,109
    
    
    
    65,221Rentals and leases
    
    
    8,328
    
    
    
    6,675Depreciation and amortization
    
    
    34,203
    
    
    
    27,231Interest expense
    
    
    21,954
    
    
    
    19,346Minority interests
    
    
    437
    
    
    
    201(Gain) loss on sale of assets
    
    
    (14
    )
    
    
    75Loss on early extinguishment of debt
    
    
    
    
    
    
    487Total expenses
    
    
    587,059
    
    
    
    501,303Income from continuing operations before provision for income taxes
    
    
    57,367
    
    
    
    49,864Income taxes
    
    
    21,439
    
    
    
    19,852Income from continuing operations
    
    
    35,928
    
    
    
    30,012Discontinued operations, net of tax:Loss from operations
    
    
    (1,302
    )
    
    
    (693
    )Net gain on divestitures
    
    
    6,663
    
    
    
    5,361
    
    
    
    (693
    )Net income
    
    $
    41,289
    
    
    $
    29,319Earnings (loss) per common share:Basic:Continuing operations
    
    $
    0.73
    
    
    $
    0.61Discontinued operations:Loss from operations
    
    
    (0.03
    )
    
    
    (0.01
    )Net gain on divestitures
    
    
    0.14
    
    
    
    Net income
    
    $
    0.84
    
    
    $
    0.60Diluted:Continuing operations
    
    $
    0.70
    
    
    $
    0.61Discontinued operations:Loss from operations
    
    
    (0.02
    )
    
    
    (0.01
    )Net gain on divestitures
    
    
    0.11
    
    
    
    Net income
    
    $
    0.79
    
    
    $
    0.60
 3




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands) Nine Months Ended September 30,2004
    
    2003Cash flows from operating activities:Income from continuing operations
    
    $
    35,928
    
    
    $
    30,012Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:Depreciation and amortization
    
    
    34,203
    
    
    
    27,231Deferred income taxes
    
    
    14,139
    
    
    
    3,469Provision for professional liability
    
    
    5,329
    
    
    
    4,806Loss on early extinguishment of debt
    
    
    
    
    
    
    487(Gain) loss on sale of assets
    
    
    (14
    )
    
    
    75Changes in operating assets and liabilities, net
of effects from acquisitions and dispositions:Accounts receivable
    
    
    (12,907
    )
    
    
    3,279Inventories
    
    
    8
    
    
    
    677Prepaid expenses and other
    
    
    (5,395
    )
    
    
    813Accounts payable and accrued expenses
    
    
    20,682
    
    
    
    10,914Accrued salaries and benefits
    
    
    (1,514
    )
    
    
    1,372Other
    
    
    2,638
    
    
    
    5,549Net cash provided by operating activities
    
    
    93,097
    
    
    
    88,684Cash flows from investing activities:Purchase of property and equipment
    
    
    (61,313
    )
    
    
    (43,899
    )Purchase of hospitals and healthcare entities
    
    
    (153,317
    )
    
    
    (3,247
    )Net cash used in investing activities
    
    
    (214,630
    )
    
    
    (47,146
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    110,372
    
    
    
    194,212Repayments of debt
    
    
    (46,007
    )
    
    
    (212,664
    )Issuance of common stock
    
    
    8,307
    
    
    
    1,356Net cash provided by (used in) financing activities
    
    
    72,672
    
    
    
    (17,096
    )Net cash (used in) provided by continuing operations
    
    
    (48,861
    )
    
    
    24,442Net cash provided by (used in) discontinued operations
    
    
    14,351
    
    
    
    (11
    )(Decrease) increase in cash and cash equivalents
    
    
    (34,510
    )
    
    
    24,431Cash and cash equivalents at beginning of period
    
    
    46,117
    
    
    
    14,625Cash and cash equivalents at end of period
    
    $
    11,607
    
    
    $
    39,056Interest payments
    
    $
    14,800
    
    
    $
    10,603Income taxes paid, net
    
    $
    11,196
    
    
    $
    4,593
 4




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##### Table of Contents



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 September 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 4. 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 5. The Companys 20
hospitals and operations are reported as continuing operations, with a total of
2,492 licensed beds at September 30, 2004. The condensed consolidated balance sheet as of December 31, 2003 has been
derived from the audited consolidated financial statements included in our
Current Report on Form 8-K, which was filed on September 14, 2004. The interim condensed
consolidated financial statements at September 30, 2004, and for the three and
nine month periods ended September 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 Current Report on
Form 8-K, which was filed on September 14, 2004. 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 assumptions that affect the amounts reported in
the condensed consolidated financial statements. Actual results could differ
from the estimates. 3. ACQUISITION BY LIFEPOINT HOSPITALS, INC. The Company announced on August 16, 2004 that it had entered into a
definitive merger agreement with LifePoint Hospitals, Inc. (LifePoint) in
which LifePoint will acquire the Company for approximately $1.7 billion in
cash, stock and the assumption of the Companys debt. The transaction is
expected to close in the first quarter of 2005. Pursuant to the definitive agreement, if the proposed transaction is
consummated, the businesses of LifePoint and the Company will be combined under
a newly formed company, which will be renamed LifePoint Hospitals, Inc. (New
LifePoint). Each stockholder of the Company will receive a per share
consideration comprised of $11.375 in cash and a number of shares of New
LifePoint common stock equal to an exchange ratio of between 0.3447 and 0.2917
per common share of the Company, which will represent a value of $11.375, if
the volume weighted average of the daily sale prices for shares of LifePoint
common stock for the 20 consecutive trading day period ending at the close of
business on the third trading day prior to closing (the LifePoint average
share price), is between $33.00 and $39.00. If the LifePoint 5




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) average share price is $33.00 or less, the exchange ratio will be 0.3477, and
if the LifePoint average share price is $39.00 or more, the exchange ratio will
be 0.2917. The agreement provides for alternative structures. While it is anticipated
that shares received by the Companys stockholders will be received in a
tax-free exchange, the parties have agreed to a taxable alternative structure
at the same price if necessary to complete the acquisition. Each of the Boards of Directors of LifePoint and the Company have
unanimously approved the proposed transaction. Completion of the transaction is
subject to approval by the LifePoint stockholders and the Companys
stockholders, receipt of necessary financing by LifePoint and certain other
conditions. 4. 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 $153.3 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 the 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
    
    $
    16,863Property and equipment
    
    
    75,391Goodwill
    
    
    79,766Other assets
    
    
    3Current liabilities
    
    
    (18,706
    )$
    153,317
 To finance this acquisition, the Company borrowed $110.0 million under its
senior bank credit facility and used approximately $43.3 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. 5. 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,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). 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
impairment charge of $0.6 million ($0.4 million charge net of tax) during the
nine months ended September 30, 2004 related to the write-down of other
long-lived assets of the hospital to their net realizable value. 6




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) Operating results for discontinued operations for the three and nine
months ended September 30, 2004 and 2003 are presented in the following table
(in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    
    
    
    $
    10,640
    
    
    $
    17,161
    
    
    $
    34,475Operating expenses
    
    
    421
    
    
    
    10,692
    
    
    
    18,849
    
    
    
    33,822Depreciation and amortization
    
    
    
    
    
    
    421
    
    
    
    49
    
    
    
    1,283Interest expense
    
    
    
    
    
    
    108
    
    
    
    143
    
    
    
    369Net gain on divestitures
    
    
    
    
    
    
    
    
    
    
    (10,774
    )
    
    
    Total expenses
    
    
    421
    
    
    
    11,221
    
    
    
    8,267
    
    
    
    35,474Income (loss) before income taxes
    
    
    (421
    )
    
    
    (581
    )
    
    
    8,894
    
    
    
    (999
    )Income tax expense (benefit)
    
    
    (59
    )
    
    
    (187
    )
    
    
    3,533
    
    
    
    (306
    )Income (loss) from discontinued operations
    
    $
    (362
    )
    
    $
    (394
    )
    
    $
    5,361
    
    
    $
    (693
    )
 The major classes of assets and liabilities of discontinued operations in
the condensed consolidated balance sheets as of September 30, 2004 and December
31, 2003 are as follows (in thousands): September 30, 2004
    
    December 31, 2003Cash
    
    $
    177
    
    
    $
    17Accounts receivable, net
    
    
    1,930
    
    
    
    6,931Inventories
    
    
    
    
    
    
    529Prepaid expenses and other current assets
    
    
    21
    
    
    
    392Property and equipment, net
    
    
    
    
    
    
    3,157Deferred income taxes
    
    
    752
    
    
    
    3,856Goodwill
    
    
    
    
    
    
    80Other assets
    
    
    
    
    
    
    33Total assets of discontinued operations
    
    
    2,880
    
    
    
    14,995Accounts payable
    
    
    
    
    
    
    812Accrued salaries and benefits
    
    
    84
    
    
    
    1,603Accrued expenses
    
    
    271
    
    
    
    513Income taxes payable
    
    
    
    
    
    
    1,246Long-term debt
    
    
    
    
    
    
    982Total liabilities of discontinued operations
    
    
    355
    
    
    
    5,156Net assets of discontinued operations
    
    $
    2,525
    
    
    $
    9,838
 6. 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 is not aware of any impairment indicators at September 30, 2004. 7




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) 7. 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. During the third
quarter of 2004, the Company repaid an additional $10.7 million (including $0.3
million borrowed under the revolver in the quarter ended September 30, 2004) of
the revolver borrowings from its cash flow from operations. At September 30,
2004, the Company had $65.0 million outstanding under its senior bank credit
facility. The amount outstanding at September 30, 2004 under the senior bank
credit facility bears interest at the adjusted LIBOR rate, which was 4.438% at
September 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 4 1⁄2% Convertible Subordinated Notes due 2005
and/or the 4 1⁄4% 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. 8. COMPREHENSIVE INCOME The following table presents the components of comprehensive income, net
of related taxes (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    11,529
    
    
    $
    9,807
    
    
    $
    41,289
    
    
    $
    29,319Net amortization of fair value of interest rate swap
    
    
    127
    
    
    
    
    
    
    
    382
    
    
    
    Net change in fair value of interest rate swap
    
    
    
    
    
    
    130
    
    
    
    
    
    
    
    (65
    )Comprehensive income
    
    $
    11,656
    
    
    $
    9,937
    
    
    $
    41,671
    
    
    $
    29,254
 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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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) 9. 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Earnings per common share:Income from continuing operations
    
    $
    11,891
    
    
    $
    10,201
    
    
    $
    35,928
    
    
    $
    30,012Add convertible notes interest, net of tax
    
    
    1,901
    
    
    
    
    
    
    
    5,698
    
    
    
    13,792
    
    
    
    10,201
    
    
    
    41,626
    
    
    
    30,012Discontinued operations
    
    
    (362
    )
    
    
    (394
    )
    
    
    5,361
    
    
    
    (693
    )Net income
    
    $
    13,430
    
    
    $
    9,807
    
    
    $
    46,987
    
    
    $
    29,319Weighted average shares:Weighted average shares  basic
    
    
    49,726
    
    
    
    48,729
    
    
    
    49,431
    
    
    
    48,681Dilution for employee stock options
    
    
    1,276
    
    
    
    910
    
    
    
    1,216
    
    
    
    462Dilution for convertible notes
    
    
    9,100
    
    
    
    
    
    
    
    9,100
    
    
    
    Weighted-average shares  diluted
    
    
    60,102
    
    
    
    49,639
    
    
    
    59,747
    
    
    
    49,143Basic earnings per common share:Income from continuing operations
    
    $
    0.24
    
    
    $
    0.21
    
    
    $
    0.73
    
    
    $
    0.61Discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    0.11
    
    
    
    (0.01
    )Net income
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.84
    
    
    $
    0.60Diluted earnings per common share:Income from continuing operations
    
    $
    0.23
    
    
    $
    0.21
    
    
    $
    0.70
    
    
    $
    0.61Discontinued operations
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    0.09
    
    
    
    (0.01
    )Net income
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.79
    
    
    $
    0.60
 The add-back of the interest and potential issuance of shares related to
the Companys 4 1⁄2% Convertible Subordinated Notes due 2005
and 4 1⁄4%
Convertible Subordinated Notes due 2008 was not included in the computation for
2003 because the effect would have been anti-dilutive. 10. 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. 9




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income  as reported
    
    $
    11,529
    
    
    $
    9,807
    
    
    $
    41,289
    
    
    $
    29,319Less pro forma effect of stock option grants, net of tax
    
    
    (1,123
    )
    
    
    (1,161
    )
    
    
    (3,494
    )
    
    
    (3,328
    )Pro forma net income
    
    $
    10,406
    
    
    $
    8,646
    
    
    $
    37,795
    
    
    $
    25,991Earnings per share-as reportedBasic
    
    $
    0.23
    
    
    $
    0.20
    
    
    $
    0.84
    
    
    $
    0.60Diluted
    
    $
    0.22
    
    
    $
    0.20
    
    
    $
    0.79
    
    
    $
    0.60Earnings per share- pro formaBasic
    
    $
    0.21
    
    
    $
    0.18
    
    
    $
    0.76
    
    
    $
    0.53Diluted
    
    $
    0.20
    
    
    $
    0.17
    
    
    $
    0.73
    
    
    $
    0.53
 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Risk-free interest rate
    
    
    3.1
    %
    
    
    3.0
    %
    
    
    2.8
    %
    
    
    2.4
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Volatility
    
    
    57.0
    %
    
    
    59.4
    %
    
    
    56.0
    %
    
    
    63.6
    %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. 11. 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 10




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  (continued) 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 condensed consolidated statements of income in
the period in which revisions are made, and result in adjustments in net
patient revenue. Cost report settlements and the filing of cost reports increased net
patient revenue by $3.5 million, $2.8 million, $7.8 million and $3.6 million
for the three months ended and nine months ended September 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 7 1⁄2% 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. 12. 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. 11




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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 September 30, 2004, we owned or leased 20 general acute care hospitals in 12
states, with a total of 2,492 licensed beds. We announced on August 16, 2004 that we entered into a definitive
agreement whereby LifePoint Hospitals, Inc. would acquire us for approximately
$1.7 billion in cash, stock and the assumption of our debt. The transaction is
expected to close in the first quarter of 2005. See Note 3 of our condensed
consolidated financial statements included elsewhere herein for a discussion of
the proposed transaction. 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. See Note 5 of our condensed consolidated financial
statements included elsewhere herein for a discussion of our discontinued
operations. Revenues from continuing operations for the third quarter of 2004
increased 27.3% to $235.3 million, compared with $184.8 million for the same
period last year, primarily as a result of the acquisition of
Memorial Medical Center in Las Cruces, New Mexico (Memorial
Medical Center) and increases in same-store adjusted admissions of
0.7% and a 4.8% increase in same-store net patient revenue per adjusted admission, as
well as the recording of cost report settlements. For the third quarter of
2004, income from continuing operations was $11.9 million, compared with $10.2
million in the prior years quarter. The increase in income from continuing
operations was primarily due to the acquisition of Memorial Medical Center. Cash flow from operations
for the third quarter increased 25.5% to $44.3 million, compared with $35.3
million in the same quarter for last year. The increase was due primarily to an
increase of $1.7 million in our income from continuing operations, a $3.2
million increase in depreciation and amortization expense (of which $1.8
million is attributable to the Memorial Medical Center acquisition), and an
increase of $3.3 million in our deferred income tax provision resulting from
the Memorial Medical Center acquisition and divestitures of Glades General
Hospital and Brim Healthcare, Inc. For the third quarter of 2004, 19 of our 20 owned or leased hospitals are
considered same-store hospitals. Memorial Medical Center, 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 5.5%, net
patient revenue per adjusted admission increased 4.8% and surgeries increased
4.1%. 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 increased 0.7% on a quarter
over quarter basis, as a result of an increase in same-store outpatient revenue
of 11.8% and a decline in same-store admissions of 3.0%. New Facilities In the third quarter of 2003, we announced plans to construct a new 41-bed
acute care hospital in Hardeeville, South Carolina, which is scheduled for
completion in the fourth quarter of this year. In the fourth quarter of 2003,
we announced plans to construct 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. 12




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##### Table of Contents



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 Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,
    
    Year EndedDecember 31,2004
    
    2003
    
    2004
    
    2003
    
    2003Medicare
    
    
    35.8
    %
    
    
    38.1
    %
    
    
    37.7
    %
    
    
    38.7
    %
    
    
    38.5
    %Medicaid
    
    
    9.8
    
    
    
    11.0
    
    
    
    9.7
    
    
    
    10.8
    
    
    
    10.3Managed care and other payors
    
    
    41.5
    
    
    
    43.5
    
    
    
    41.6
    
    
    
    43.4
    
    
    
    44.2Self-pay
    
    
    12.9
    
    
    
    7.4
    
    
    
    11.0
    
    
    
    7.1
    
    
    
    7.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    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 $3.5 million, $2.8 million, $7.8 million and $3.6
million for the three months ended and nine months ended September 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 2003 (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 104 physicians during the first nine months of 2004 of
which approximately two-thirds of these physicians are specialists. Of
these 104 physicians recruited, 79 commenced practice during the first
nine months of 2004 and 25 are scheduled to start by the end of 2004. 13




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##### Table of Contents




    
    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 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Outpatient
    
    
    47.1
    %
    
    
    45.8
    %
    
    
    46.0
    %
    
    
    44.7
    %Inpatient
    
    
    52.4
    
    
    
    53.6
    
    
    
    53.5
    
    
    
    54.7Other
    
    
    0.5
    
    
    
    0.6
    
    
    
    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 nine months of 2004. Although the economies of a majority of the
communities in which we operate hospitals have stabilized, some of our
hospitals are experiencing a reduction in state Medicaid coverage, primarily
in Texas. In addition, we realized an increase in our provision for doubtful
accounts during the quarter and nine months ended September 30, 2004 as a
result of our acquisition of Memorial Medical Center in Las Cruces, New
Mexico. 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
    %Third Quarter
    
    
    12.9
    %
    
    
    7.4
    %Nine Months Ended September 30
    
    
    11.0
    %
    
    
    7.1
    %
 14




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##### Table of Contents



Our gross revenues are reduced for patient accounts identified 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 and indigent care policy.
Charity care (based on gross charges) was approximately $3.3 million for the
three months ended September 30, 2004 compared to approximately $5.7 million
for the three months ended September 30, 2003. Charity care (based on gross
charges) for the nine months ended September 30, 2004 was approximately $11.1
million compared to $16.8 million for the nine months ended September 30,
2003. Results of Operations Operating Results Summary The following are comparative summaries of results from operations for the
three and nine months ended September 30, 2004 and 2003 (dollars in thousands,
except per share data): Three Months Ended September 30,2004
    
    2003% of
    
    
    
    
    
    % of
    
    % ChangeAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    From Prior YearRevenues:Net patient revenue
    
    $
    232,572
    
    
    
    
    
    
    $
    182,229Other
    
    
    2,743
    
    
    
    
    
    
    
    2,560235,315
    
    
    
    100.0
    %
    
    
    184,789
    
    
    
    100.0
    %
    
    
    27.3
    %Expenses:Salaries, wages and benefits
    
    
    86,615
    
    
    
    36.8
    
    
    
    67,262
    
    
    
    36.4Purchased services
    
    
    23,011
    
    
    
    9.8
    
    
    
    16,735
    
    
    
    9.1Supplies
    
    
    30,530
    
    
    
    13.0
    
    
    
    24,035
    
    
    
    13.0Provision for doubtful accounts
    
    
    26,537
    
    
    
    11.3
    
    
    
    18,773
    
    
    
    10.2Other operating expenses
    
    
    26,174
    
    
    
    11.1
    
    
    
    22,417
    
    
    
    12.1Rentals and leases
    
    
    3,072
    
    
    
    1.3
    
    
    
    2,198
    
    
    
    1.2Depreciation and amortization
    
    
    12,561
    
    
    
    5.3
    
    
    
    9,317
    
    
    
    5.0Interest expense
    
    
    7,618
    
    
    
    3.2
    
    
    
    6,989
    
    
    
    3.8Minority interest
    
    
    201
    
    
    
    0.1
    
    
    
    52
    
    
    
    (Gain) loss on sale of assets
    
    
    (32
    )
    
    
    
    
    
    
    75
    
    
    
    Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    Total expenses
    
    
    216,287
    
    
    
    91.9
    
    
    
    167,863
    
    
    
    90.8
    
    
    
    28.8Income from continuing operations
before provision for income taxes
    
    
    19,028
    
    
    
    8.1
    
    
    
    16,926
    
    
    
    9.2
    
    
    
    12.4Income taxes
    
    
    7,137
    
    
    
    3.0
    
    
    
    6,725
    
    
    
    3.7Income from continuing operations
    
    
    11,891
    
    
    
    5.1
    %
    
    
    10,201
    
    
    
    5.5
    %
    
    
    16.6Discontinued operations, net of tax:Loss from operations
    
    
    (362
    )
    
    
    
    
    
    
    (394
    )Net gain on divestitures
    
    
    
    
    
    
    
    
    
    
    (362
    )
    
    
    
    
    
    
    (394
    )Net income
    
    $
    11,529
    
    
    
    
    
    
    $
    9,807
    
    
    
    
    
    
    
    17.6
    %Net income per common share:Basic
    
    $
    0.23
    
    
    
    
    
    
    $
    0.20Diluted
    
    $
    0.22
    
    
    
    
    
    
    $
    0.20
 15




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##### Table of Contents



Nine Months Ended September 30,2004
    
    2003% of
    
    
    
    
    
    % of
    
    % ChangeAmount
    
    Revenues
    
    Amount
    
    Revenues
    
    From Prior YearRevenues:Net patient revenue
    
    $
    636,699
    
    
    
    
    
    
    $
    543,667Other
    
    
    7,727
    
    
    
    
    
    
    
    7,500644,426
    
    
    
    100.0
    %
    
    
    551,167
    
    
    
    100.0
    %
    
    
    16.9
    %Expenses:Salaries, wages and benefits
    
    
    236,192
    
    
    
    36.7
    
    
    
    209,043
    
    
    
    37.9Purchased services
    
    
    61,953
    
    
    
    9.6
    
    
    
    50,876
    
    
    
    9.2Supplies
    
    
    82,416
    
    
    
    12.8
    
    
    
    71,071
    
    
    
    12.9Provision for doubtful accounts
    
    
    68,481
    
    
    
    10.6
    
    
    
    51,077
    
    
    
    9.3Other operating expenses
    
    
    73,109
    
    
    
    11.3
    
    
    
    65,221
    
    
    
    11.8Rentals and leases
    
    
    8,328
    
    
    
    1.3
    
    
    
    6,675
    
    
    
    1.2Depreciation and amortization
    
    
    34,203
    
    
    
    5.3
    
    
    
    27,231
    
    
    
    5.0Interest expense
    
    
    21,954
    
    
    
    3.4
    
    
    
    19,346
    
    
    
    3.5Minority interest
    
    
    437
    
    
    
    0.1
    
    
    
    201
    
    
    
    (Gain) loss on sale of assets
    
    
    (14
    )
    
    
    
    
    
    
    75
    
    
    
    Loss on early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    487
    
    
    
    0.1Total expenses
    
    
    587,059
    
    
    
    91.1
    
    
    
    501,303
    
    
    
    90.9
    
    
    
    17.1Income from continuing operations
before provision for income taxes
    
    
    57,367
    
    
    
    8.9
    
    
    
    49,864
    
    
    
    9.1
    
    
    
    15.0Income taxes
    
    
    21,439
    
    
    
    3.3
    
    
    
    19,852
    
    
    
    3.6Income from continuing operations
    
    
    35,928
    
    
    
    5.6
    %
    
    
    30,012
    
    
    
    5.5
    %
    
    
    19.7Discontinued operations, net of tax:Loss from operations
    
    
    (1,302
    )
    
    
    
    
    
    
    (693
    )Net gain on divestitures
    
    
    6,663
    
    
    
    
    
    
    
    5,361
    
    
    
    
    
    
    
    (693
    )Net income
    
    $
    41,289
    
    
    
    
    
    
    $
    29,319
    
    
    
    
    
    
    
    40.8
    %Net income per common share:Basic
    
    $
    0.84
    
    
    
    
    
    
    $
    0.60Diluted
    
    $
    0.79
    
    
    
    
    
    
    $
    0.60
 16




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##### Table of Contents



Three Months EndedSeptember 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
    
    
    2,116
    
    
    
    1,933
    
    
    
    9.5Inpatient admissions (4)
    
    
    19,752
    
    
    
    17,729
    
    
    
    11.4Adjusted admissions (5)
    
    
    37,527
    
    
    
    32,879
    
    
    
    14.1Patient days (6)
    
    
    83,167
    
    
    
    72,935
    
    
    
    14.0Adjusted patient days (7)
    
    
    158,019
    
    
    
    135,269
    
    
    
    16.8Average length of stay (days) (8)
    
    
    4.2
    
    
    
    4.1
    
    
    
    2.4Net patient revenue:Per inpatient admission
    
    $
    11,775
    
    
    $
    10,279
    
    
    
    14.6Per adjusted admission
    
    $
    6,197
    
    
    $
    5,542
    
    
    
    11.8Gross revenue (9):Inpatient
    
    $
    265,760
    
    
    $
    215,315
    
    
    
    23.4Outpatient
    
    
    239,142
    
    
    
    183,940
    
    
    
    30.0$
    504,902
    
    
    $
    399,255
    
    
    
    26.5Same 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)
    
    
    17,189
    
    
    
    17,729
    
    
    
    (3.0
    )Adjusted admissions (5)
    
    
    33,093
    
    
    
    32,879
    
    
    
    0.7Patient days (6)
    
    
    71,640
    
    
    
    72,935
    
    
    
    (1.8
    )Adjusted patient days (7)
    
    
    137,930
    
    
    
    135,269
    
    
    
    2.0Average length of stay
(days) (8)
    
    
    4.2
    
    
    
    4.1
    
    
    
    2.4Net patient revenue:Per inpatient admission
    
    $
    11,186
    
    
    $
    10,277
    
    
    
    8.8Per adjusted admission
    
    $
    5,810
    
    
    $
    5,542
    
    
    
    4.8Gross revenue (9):Inpatient
    
    $
    222,337
    
    
    $
    215,315
    
    
    
    3.3Outpatient
    
    
    205,651
    
    
    
    183,940
    
    
    
    11.8$
    427,988
    
    
    $
    399,255
    
    
    
    7.2
   (1)
    
    All statistics at September 30, 2004 and 2003 have been restated to
exclude the ownership and operations of Glades General Hospital, which was
sold effective April 30, 2004. The statistics above have not been
impacted by the disposal of Brim Healthcare, Inc.(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. 17




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##### Table of Contents



Nine Months EndedSeptember 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
    
    
    2,116
    
    
    
    1,933
    
    
    
    9.5Inpatient admissions (4)
    
    
    56,469
    
    
    
    54,032
    
    
    
    4.5Adjusted admissions (5)
    
    
    105,075
    
    
    
    98,131
    
    
    
    7.1Patient days (6)
    
    
    240,622
    
    
    
    228,231
    
    
    
    5.4Adjusted patient days (7)
    
    
    447,662
    
    
    
    414,406
    
    
    
    8.0Average length of stay
(days) (8)
    
    
    4.3
    
    
    
    4.2
    
    
    
    2.4Net patient revenue:Per inpatient admission
    
    $
    11,275
    
    
    $
    10,062
    
    
    
    12.1Per adjusted admission
    
    $
    6,059
    
    
    $
    5,540
    
    
    
    9.4Gross revenue (9):Inpatient
    
    $
    759,165
    
    
    $
    662,921
    
    
    
    14.5Outpatient
    
    
    653,428
    
    
    
    541,020
    
    
    
    20.8$
    1,412,593
    
    
    $
    1,203,941
    
    
    
    17.3Same 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)
    
    
    53,065
    
    
    
    54,032
    
    
    
    (1.8
    )Adjusted admissions (5)
    
    
    99,103
    
    
    
    98,131
    
    
    
    1.0Patient days (6)
    
    
    225,467
    
    
    
    228,231
    
    
    
    (1.2
    )Adjusted patient days (7)
    
    
    420,928
    
    
    
    414,406
    
    
    
    1.6Average length of stay
(days) (8)
    
    
    4.3
    
    
    
    4.2
    
    
    
    2.4Net patient revenue:Per inpatient admission
    
    $
    11,004
    
    
    $
    10,062
    
    
    
    9.4Per adjusted admission
    
    $
    5,892
    
    
    $
    5,540
    
    
    
    6.4Gross revenue (9):Inpatient
    
    $
    702,211
    
    
    $
    662,921
    
    
    
    5.9Outpatient
    
    
    608,492
    
    
    
    541,020
    
    
    
    12.5$
    1,310,703
    
    
    $
    1,203,941
    
    
    
    8.9
   See accompanying footnotes on previous page. 18




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##### Table of Contents



Three Months Ended September 30, 2004 and 2003 Revenues increased 27.3% to $235.3 million for the quarter ended September
30, 2004, compared to $184.8 million for the three months ended September 30,
2003. This increase is primarily due to the acquisition of Memorial Medical
Center and increases in same-store adjusted admissions of 0.7% and same-store
net patient revenue per adjusted admission of 4.8%. The increase in adjusted
admissions was attributable, in part, to the addition of 28 new physicians in
our communities during the three months ended September 30, 2004 and the
maturity of the physician practices for the doctors we recruited in our
communities in 2003 and the first six months of 2004. The increase in net
patient revenue per adjusted admission was due, in part, by acuity as our
same-store Medicare case mix index increased approximately 1.7% to 1.22 for the
three months ended September 30, 2004 from 1.20 for the three months ended
September 30, 2003. Cost report settlements and the filing of cost reports also
increased revenues by $3.5 million and $2.8 million for the three months ended
September 30, 2004 and 2003, respectively. The table below reflects the sources of our net patient revenue for the
quarters ended September 30, expressed as a percentage of total net patient
revenue: Three Months Ended September 30,2004
    
    2003Medicare
    
    
    35.8
    %
    
    
    38.1
    %Medicaid
    
    
    9.8
    
    
    
    11.0Other (including self-pay)
    
    
    54.4
    
    
    
    50.9100.0
    %
    
    
    100.0
    %
 Salaries, wages and benefits as a percentage of revenues increased to
36.8% in the quarter ended September 30, 2004 from 36.4% for the quarter ended
September 30, 2003. The increase is primarily due to a 16.1% increase in
full-time equivalent employees and a 1.7% increase in man hours per adjusted
admission, resulting primarily from the acquisition of Memorial Medical Center.
On a same-store basis, salaries, wages and benefits as a percentage of
revenues was 35.2% for each of the quarters ended September 30, 2004 and 2003. Purchased services, as a percentage of revenues, increased to 9.8% in the
quarter ended September 30, 2004 from 9.1% for the quarter ended September 30,
2003. The increase is primarily due to an increase in contract labor of $1.0
million (primarily contract services for nursing, emergency room and physical
therapy at Memorial Medical Center and three of our same-store hospitals) for
the quarter ended September 30, 2004 compared to the prior years quarter and
due to approximately $1.3 million in costs for our information systems at
Memorial Medical Center. Provision for doubtful accounts, as a percentage of revenues, increased to
11.3% in the quarter ended September 30, 2004 from 10.2% for the quarter ended
September 30, 2003, due primarily to the increase in bad debts resulting from
the increase in self-pay revenue. During the quarter ended September 30, 2004,
consolidated self-pay revenue as a percentage of gross revenues increased to
6.7% from 4.8% for the quarter ended September 30, 2003. On a same-store basis,
during the quarter ended September 30, 2004 self-pay revenue as a percentage of
gross revenues increased to 5.2% from 4.8% for the quarter ended September 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% to 11% of revenues range for 2004. Although the
economies of a majority of the communities in which we operate hospitals have
stabilized, some of our hospitals are experiencing a reduction in state
Medicaid coverage, primarily in Texas. The reduction in Medicaid coverage has
shifted a greater portion of the cost of treatment to the patients in these
states. Other operating expenses, as a percentage of revenues, decreased from
12.1% in the quarter ended September 30, 2003 to 11.1% for the quarter ended
September 30, 2004. The decrease was driven primarily by a reduction in our
professional and general liability insurance expense of $1.5 million in the
quarter ended September 30, 2004. The insurance expense reduction was based
upon favorable loss experience as determined by our independent third party
actuary. 19




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##### Table of Contents



Depreciation and amortization expense increased $3.3 million to $12.6
million in the quarter ended September 30, 2004 from $9.3 million in the
quarter ended September 30, 2003. Approximately $1.8 million of the increase
results from the additional expense associated with the acquisition of Memorial
Medical Center, with the remainder of the increase resulting from our capital
expenditure program focusing on revenue generating projects. Interest expense increased $0.6 million to $7.6 million in the quarter
ended September 30, 2004 from $7.0 million in the quarter ended September 30,
2003. The increase is driven by the interest expense on our bank credit
facility borrowings associated with the acquisition of Memorial Medical Center. The provision for income taxes totaled $7.1 million, or a 37.5% effective
tax rate, in the quarter ended September 30, 2004 compared to $6.7 million, or
a 39.7% effective tax rate, in the quarter ended September 30, 2003. The
reduction in the effective tax rate in the quarter ended September 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. Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003 Revenues increased 16.9% or $93.2 million to $644.4 million for the nine
months ended September 30, 2004, compared to the same period last year. This
increase is primarily due to the acquisition of Memorial Medical Center and
increases in same-store adjusted admissions of 1.0% and same-store net patient
revenue per adjusted admission of 6.4%. The increase in adjusted admissions was
attributable, in part, to the addition of 79 new doctors in our communities
during the nine months ended September 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 same-store Medicare case mix index increased approximately 1.7%
to 1.22 for the nine months ended September 30, 2004 from 1.20 for the nine
months ended September 30, 2003. Cost report settlements and the filing of cost
reports also increased revenues by $7.8 million and $3.6 million for the nine
months ended September 30, 2004 and 2003, respectively. The table below reflects the sources of our net patient revenue for the
nine months ended September 30, expressed as a percentage of total net patient
revenue: Nine Months Ended September 30,2004
    
    2003Medicare
    
    
    37.7
    %
    
    
    38.7
    %Medicaid
    
    
    9.7
    
    
    
    10.8Other and self-pay
    
    
    52.6
    
    
    
    50.5100.0
    %
    
    
    100.0
    %
 Salaries and benefits as a percentage of revenues decreased to 36.7% for
the nine months ended September 30, 2004 from 37.9% for the nine months ended
September 30, 2003. The improvement is primarily due to the 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 9.6% for the
nine months ended September 30, 2004, compared to 9.2% for the comparable
period of the prior year. The increase is primarily due to an increase in legal
fees of $1.2 million and a $2.9 million increase in contract labor (primarily
contract services for nursing, emergency room and physical therapy at Memorial
Medical Center and three of our same-store hospitals) for the nine months ended
September 30, 2004 compared to the same period of the prior year. The increase
in legal fees are related to medical staff bylaws and physician contract
matters. The provision for doubtful accounts increased to 10.6% of revenues for the
nine months ended September 30, 2004 compared to 9.3% 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 nine months ended September 30,
2004, self-pay revenue as a percentage of gross revenues increased to 5.7% from
4.6% for the nine months ended September 30, 2003. Although the economies of a
majority of the communities in which we operate hospitals have stabilized, some
of our hospitals are experiencing a reduction in state Medicaid coverage,
primarily in Texas. 20




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##### Table of Contents



Other operating expenses decreased as a percentage of revenues to 11.3%
for the nine months ended September 30, 2004 from 11.8% in the comparable
period of the prior year primarily due to a reduction in our professional and
general liability insurance expense of $1.5 million, based upon favorable loss
experience as determined by our independent third party actuary. Depreciation and amortization expense was $34.2 million, or 5.3% of
revenues for the nine months ended September 30, 2004, compared to $27.2
million, or 5.0% of revenues, for the comparable period of 2003. Approximately
$2.5 million of this increase is the result of the additional expense
associated with the acquisition of Memorial Medical Center, with the remainder
of the increase resulting from our capital expenditure program focusing on
revenue generating projects. Interest expense increased to $22.0 million for the nine months ended
September 30, 2004, compared to $19.3 million for the comparable period of
2003. The increase is primarily driven by the additional debt associated with
the acquisition of Memorial Medical Center and the issuance in May 2003 of
$200.0 million aggregate principal amount of 7 1⁄2% 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 4 1⁄2% Convertible Subordinated Notes due 2005. The interest related to
the $200.0 million 7 1⁄2% 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 $21.4 million, or a 37.4% effective
tax rate, for the nine months ended September 30, 2004 compared to $19.9
million, or a 39.8% effective tax rate, for the comparable period of the prior
year. The reduction in the effective tax rate for the nine months ended
September 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 nine months ended September 30, 2004, our discontinued operations
incurred a loss from operations of $1.3 million compared to a $0.7 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 nine months
ended September 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 September 30, 2004, we had working capital from continuing operations
of $86.1 million, including cash and cash equivalents of $11.6 million,
compared to working capital from continuing operations of $113.0 million,
including $39.1 million in cash and cash equivalents at September 30, 2003. Net cash provided by operating activities was $93.1 million for the nine
months ended September 30, 2004, compared to $88.7 million for the nine months
ended September 30, 2003. The $4.4 million increase in net cash provided by
operating activities is primarily due to a $5.9 million increase in our income
from continuing operations, a $7.0 million increase in depreciation and
amortization expense (of which $2.5 million is attributable to the acquisition
of Memorial Medical Center), and a $10.7 million increase in our deferred
income tax provision resulting from the acquisition of Memorial Medical Center
and divestitures of Glades General Hospital and Brim Healthcare, Inc. The
increase in cash flow from operating activities is partially offset by a $16.2
million increase in accounts receivable, primarily due to a receivable of
approximately $8.1 million from the City of Las Cruces and County of Dona Ana
for the reimbursement for expanded care services as provided for in the
transaction documents for the acquisition of Memorial Medical Center and due to
an overall net increase in patient receivables. During the nine months ended
September 30, 2004, we also paid approximately $2.2 million under our
supplemental deferred compensation plan to former Brim Healthcare, Inc.
employees that reduced our cash flow from operations. Net cash used in investing activities increased to $214.6 million for the
nine months ended September 30, 2004 from $47.1 million for the nine months
ended September 30, 2003, primarily due to the $153.3 million acquisition of
Memorial Medical Center, and as a result of our capital expenditure program
focusing on revenue generating projects. Significant capital expenditures for
the nine months ended September 30, 2004 included $6.3 million for the purchase
of land at Havasu Regional Medical Center, $16.3 million in construction costs
for the new hospital in 21




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##### Table of Contents



Hardeeville, South Carolina, $3.9 million for our MRI project at Los
Alamos Medical Center, $3.1 million for womens services at Teche Regional
Medical Center, and $2.6 million in construction costs for the new hospital in
Ft. Mohave, Arizona. Net cash provided by financing activities totaled $72.7 million for the
nine months ended September 30, 2004, primarily due to borrowings of $110.4
million under our senior bank credit facility for the acquisition of Memorial
Medical Center, as partially offset by $45.4 million in repayments of
borrowings under our senior bank credit facility from $13.2 million in proceeds
from the sale of Brim Healthcare, Inc. and available cash. Net cash used in
financing activities of $17.1 million for the nine months ended September 30,
2003 resulted from $194.2 million in net proceeds from the issuance of our
7 1⁄2% 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 4 1⁄2%
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 September 30, 2004, we had
$176.7 million, net of outstanding revolver borrowings of $65.0 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 7 1⁄2% 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 4 1⁄2% Convertible Subordinated Notes due
2005. The 7 1⁄2% Notes bear interest from May 27, 2003 at the rate of 7 1⁄2%
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 7 1⁄2% 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 7 1⁄2% 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 7 1⁄2% Notes are unsecured
and subordinated to our existing and future senior indebtedness. The 7 1⁄2%
Notes rank equal in right of payment to our 4 1⁄2% Convertible Subordinated
Notes due 2005 and our 4 1⁄4% Convertible Subordinated Notes due 2008. The
7 1⁄2% 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 4 1⁄2%
Convertible Subordinated Notes due November 20, 2005. The 4 1⁄2% Notes bear
interest at the rate of 4 1⁄2% per year, payable semi-annually on each May 20
and November 20. The 4 1⁄2% 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 4 1⁄2% 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 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 4 1⁄2% Notes are
unsecured obligations and rank junior in right of payment to all of our
existing and future senior indebtedness. The 4 1⁄2% Notes rank equal in right
of payment to our 4 1⁄4% Convertible Subordinated Notes due 2008 and our
7 1⁄2% Senior Subordinated Notes due 2013. The 4 1⁄2% Notes effectively rank
junior to our subsidiary liabilities. The indenture does not contain any
financial covenants. At September 30, 2004, $76.0 million principal amount of
the 4 1⁄2% Notes remained outstanding, and a total of 2,872,760 shares of
common stock have been reserved for issuance upon conversion of the remaining
4 1⁄2% Notes. In
October 2001, we sold $172.5 million of 4 1⁄4% 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 4 1⁄4% Notes bear interest at the rate of
4 1⁄4% per year, payable semi-annually on each April 10 and October 10. The
4 1⁄4% 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 22




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##### Table of Contents



to adjustment. We may redeem all or a portion of the 4 1⁄4% 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 4 1⁄4% Notes are
unsecured and subordinated to our existing and future senior indebtedness. The
4 1⁄4% Notes rank equal in right of payment to our 4 1⁄2% Convertible
Subordinated Notes due 2005 and our 7 1⁄2% Senior Subordinated Notes due 2013.
The 4 1⁄4% 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
4 1⁄4% Notes. Our Board of Directors has authorized the repurchase from time to time and
subject to market conditions of our outstanding 4 1⁄2% Notes and 4 1⁄4% Notes
in the open market or in privately negotiated transactions. During 2003, we
repurchased $74.0 million principal amount of the 4 1⁄2% Notes. We recorded a
$487,000 pretax loss associated with the early extinguishment of debt related
to the repurchase of the 4 1⁄2% Notes. We have not repurchased any of the
4 1⁄4% 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
7 1⁄2% 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. 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. In October 2004, we began
construction of a new 60-bed hospital in Eunice, Louisiana to replace the
aging facility we began leasing in 1999. The replacement facility is estimated
to cost approximately $27.2 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 nine months ended September 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 Current Report on Form 8-K, which we filed on September 14, 2004. Allowance for Doubtful Accounts Substantially all of our accounts receivable are related to providing
healthcare services to our hospitals patients. 23




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##### Table of Contents



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 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 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: September 30, 2004
    
    June 30, 2004
    
    March 31, 2003
    
    December 31, 200355
    
    54
    
    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. The approximate percentage of total gross accounts receivable summarized
by aging categories is as follows: September 30, 2004
    
    June 30, 2004
    
    March 31, 2004
    
    December 31, 20030 to 60 days
    
    
    58.1
    %
    
    
    57.5
    %
    
    
    58.6
    %
    
    
    57.7
    %61 to 150 days
    
    
    18.6
    
    
    
    19.0
    
    
    
    16.8
    
    
    
    17.2Over 150 days
    
    
    23.3
    
    
    
    23.5
    
    
    
    24.6
    
    
    
    25.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 24




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The approximate percentage of total gross accounts receivable summarized
by payor is as follows: September 30, 2004
    
    June 30, 2004
    
    March 31, 2004
    
    December 31, 2003Medicare
    
    
    23.5
    %
    
    
    24.6
    %
    
    
    25.9
    %
    
    
    25.5
    %Medicaid
    
    
    12.6
    
    
    
    12.0
    
    
    
    11.9
    
    
    
    11.6Managed Care and Other
    
    
    27.2
    
    
    
    26.5
    
    
    
    25.2
    
    
    
    25.4Self-Pay
    
    
    36.7
    
    
    
    36.9
    
    
    
    37.0
    
    
    
    37.5Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Upfront cash collections for the quarter ended September 30, 2004 were
approximately $3.6 million compared to $3.0 million for the quarter ended
September 30, 2003. For the nine months ended September 30, 2004, upfront cash
collections were approximately $10.6 million compared to $8.3 million for the
nine months ended September 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 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 September 30,
2004, approximately 68% 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 7 1⁄2% 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. 25




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##### Table of Contents



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;
    
    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. 26




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK During the nine months ended September 30, 2004, there were no material
changes in the quantitative and qualitative disclosures about market risks
presented in our Current Report on Form 8-K, which we filed on September 14, 2004, for the
year ended December 31, 2003. Our only derivative instrument relates to an
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. 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
nine month period ended September 30, 2004 that have materially affected, or
are reasonably likely to materially affect, our internal controls over
financial reporting. 27




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##### Table of Contents



PART II
OTHER INFORMATION 
 Item 6. Exhibits (a) Exhibits ExhibitNumber
    
    Description of Exhibits2.1
    
    Agreement and Plan of Merger, dated as of August 15, 2004, by and among
LifePoint Hospitals, Inc., Lakers Holding Corp., Lakers Acquisition
Corp., Pacers Acquisition Corp., and Province Healthcare Company
(incorporated by reference from the exhibits to LifePoint Hospitals,
Inc.s Current Report on Form 8-K filed on August 16, 2004, File No.
000-29818).3.1
    
    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).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 28




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##### Table of Contents



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: November 9, 2004
    
    By:
    
    /s/ Steven R. BrumfieldSteven R. BrumfieldVice President and Controller
 29