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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K (Mark One) þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended December 31, 2004 oro
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from  to
 Commission File Number 001-31320 PROVINCE HEALTHCARE COMPANY  Delaware
    
    62-1710772(State or Other Jurisdiction of
Incorporation or Organization)
    
    (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) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, $.01 par value per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share
(Title of Class) 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 þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). Yes þ No o The aggregate market value of the shares of Common Stock of the registrant held by
nonaffiliates on June 30, 2004 (the last business day of the registrants second fiscal quarter)
was $839,009,573 (based upon the closing price of $17.15 per share as reported on the New York
Stock Exchange on such date). As of March 1, 2005, 50,285,014 shares of the registrants Common Stock were issued and
outstanding.




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DOCUMENTS INCORPORATED BY REFERENCE None. FORWARD-LOOKING STATEMENTS Proposed Merger with LifePoint Hospitals, Inc. 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. Our proposed merger with LifePoint
Hospitals, Inc., projected to close by April 15, 2005, will affect a number of the forward-looking
statements made in this report. Although we believe our management team and management of LifePoint
share many of the same goals and operating strategies, some of the forward-looking
statements contained in this report may become inapplicable once the operations of the two
companies are combined upon completion of the merger. The discussions contained in this report
apply only to Province Healthcare and do not give effect to the proposed merger, the operations of
LifePoint, or the combined operations of our company and LifePoint following the merger. 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; 2




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
    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 Forms 10-K, 10-Q and 8-K reports to
the Securities and Exchange Commission, as well as the discussion of risks and uncertainties
described in Item 1 of this Report under the caption Principal Risk Factors That May Affect Our
Business and Results of Operations and in the joint proxy statement/prospectus filed by our
company and LifePoint Holdings, Inc. on February 18, 2005. 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 are cautioned not to place undue reliance on such
forward-looking statements when evaluating the information presented in this report. This
discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995. 3




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PROVINCE HEALTHCARE COMPANY FORM 10-K ANNUAL REPORT TO
THE SECURITIES AND EXCHANGE COMMISSION
FOR THE YEAR ENDED DECEMBER 31, 2004 TABLE OF CONTENTS  
 Item
    
    PagePART I
    
    
    51. BUSINESS
    
    
    52. PROPERTIES
    
    
    263. LEGAL PROCEEDINGS
    
    
    264. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    27PART II
    
    
    285. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
    
    
    286. SELECTED CONSOLIDATED FINANCIAL DATA
    
    
    287. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
    
    
    297A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    448. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    449. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
    
    
    449A. CONTROLS AND PROCEDURES
    
    
    449B. OTHER INFORMATION
    
    
    45PART III
    
    
    4610. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    4611. EXECUTIVE COMPENSATION
    
    
    5212. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    5613. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    5814. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    58PART IV
    
    
    5915. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    59EXHIBIT INDEX
    
    
    59SIGNATURES
    
    
    65EX-10.39 5TH AMENDMENT TO CREDIT AGREEMENTEX-21.1 LIST OF SUBSIDIARIESEX-23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTING FIRMEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO
 4




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PART I 
 ITEM 1. BUSINESS Overview We own and operate acute care hospitals located in non-urban markets. We currently own or
lease 21 general acute care hospitals in 13 states with a total of 2,529 licensed beds. Our
objective is to be the primary provider of quality healthcare services in the selected non-urban
markets that we serve. We target hospitals for acquisition that are the sole or a primary provider
of healthcare in the non-urban communities that they serve. After acquiring a hospital, we
implement a number of strategies designed to improve financial performance. These strategies
include improving hospital operations, expanding the breadth of services and recruiting and
retaining physicians to increase market share. Merger with LifePoint Hospitals, Inc. On August 16, 2004, our company and LifePoint Hospitals, Inc. announced that we had entered
into a definitive merger agreement (the Merger Agreement) pursuant to which LifePoint will
acquire our company. Pursuant to the terms of the Merger Agreement, our Company and LifePoint
Hospitals, Inc. will each become wholly-owned subsidiaries of a newly formed holding company that
will be publicly traded. Each of our shareholders will receive a per share consideration comprised
of $11.375 of cash and a number of shares of common stock of the new company equal to an exchange
ratio of between 0.3447 and 0.2917, which shares will have a value of $11.375 to the extent that
LifePoints average share price is between $33.00 and $39.00. The exchange ratio will be 0.3447 if
the volume weighted average daily share price of a share of LifePoints common stock for the twenty
consecutive trading day period ending at close of business on the third trading day prior to the
closing (the LifePoint Average Share Price) is $33.00 or
less, and 0.2917 if LifePoints Average
Share Price is $39.00 or more. If LifePoints Average Share Price is between $33.00 and $39.00,
then the exchange ratio will be equal to $11.375 divided by the LifePoint Average Share Price. The proposed merger is projected to close by April 15, 2005, subject to approval by the
stockholders of our company and LifePoint and the satisfaction of other customary closing
conditions. Please see our statement regarding the effect of the proposed merger on the descriptions of
our business contained in this report under the heading Forward-Looking Statements on the second
page of this report. What We Do Our general acute care hospitals typically provide a full range of services commonly available
in acute care hospitals, such as internal medicine, general surgery, cardiology, oncology,
orthopedics, obstetrics, rehabilitation, subacute care, as well as diagnostic and emergency
services. Our hospitals also generally provide outpatient and ancillary healthcare services such as
outpatient surgery, laboratory, radiology, respiratory therapy, home healthcare and physical
therapy. In addition, certain of our general acute care hospitals have a limited number of licensed
psychiatric beds. We provide capital resources and make available a variety of management services
to our owned and leased hospitals. The Non-Urban Healthcare Market According to 2000 U.S. Census Bureau statistics, over one-third of the people in the United
States live in counties with a population of less than 150,000. In these non-urban areas, hospitals
are typically the primary resource for healthcare services, and in many cases the local hospital is
the only provider of acute hospital services. According to the American Hospital Association, as of
November 2004, there were approximately 2,200 non-urban hospitals in the country. Of those,
approximately 1,200 hospitals meet our acquisition criteria described below. We believe that non-urban areas are attractive markets in which to operate hospitals. Because
non-urban service areas have smaller populations, only one or two hospitals generally are located
in each market. We believe the size and demographic characteristics of non-urban markets and the
relative strength of the local hospital also make non-urban markets less attractive to health
maintenance organizations, other forms of managed care, and alternate site providers, such as full
service outpatient surgery centers, rehabilitation or diagnostic imaging providers. 5




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We believe that a significant opportunity for consolidation exists in the non-urban healthcare
market. Despite the attractive characteristics of these markets for healthcare service providers,
many not-for-profit and governmental operators of non-urban hospitals are under increasing pressure
due to capital constraints, limited management resources and the challenges of managing in a
complex healthcare regulatory environment. This combination of factors often causes these operators
to limit the range of services offered through their non-urban hospitals. As a result, patients, by
choice or physician direction, may obtain care outside of the community. This out-migration often
leads to deteriorating operating performance at the hospital, further limiting its ability to
address the issues that initially led to these pressures. As a result of these pressures,
not-for-profit and governmental hospitals increasingly are selling or leasing these hospitals to
companies, like us, that have greater financial and management resources, coupled with proven
operating strategies, to help serve the community better. Business Strategy The key elements of our business strategy are to: Acquire Hospitals in Attractive Non-Urban Markets. We seek to acquire hospitals that are the
sole or a primary provider of healthcare services in their markets and that present the opportunity
to increase profitability and local market share. We believe that approximately 1,200 non-urban
hospitals in the United States meet our acquisition criteria; however, we remain selective in our
acquisition decisions. Improve Hospital Operations. Following the acquisition of a hospital, we augment local
management with appropriate operational and financial managers and, where appropriate, install our
standardized information system. Using demonstrated best practices, the local management team
implements expense controls, manages staffing levels according to patient volumes, reduces supply
costs by requiring strict compliance with our supply arrangements and often renegotiates vendor
contracts. By implementing this strategy, we seek to improve operating performance at each of the
hospitals we acquire. Expand
Breadth of Services to Increase Market Share and Reduce Patient Out-Migration. We seek
to provide additional healthcare services and programs in response to community needs. These
services may include specialty inpatient, outpatient and rehabilitation services. We also may make
capital investments in technology and physical plant to improve both the quality of healthcare and
the reputation of the hospital in the community. By providing a broader range of services in a more
attractive setting, we encourage residents in our markets to seek care in our hospitals, thereby
reducing patient out-migration and increasing hospital revenues. Recruit and Retain Physicians. We believe that recruiting physicians into local communities
and retaining their services at our hospitals are key to increasing the quality of healthcare and
breadth of available services. We work with the local hospital board, management and medical staff
to determine the number and type of additional physicians needed in the community. Our Vice
President of Medical Staff Development and his staff then assist the local management team and
local hospital boards in identifying and recruiting specific physicians to the community to meet
those needs. We added 148, 106 and 82 new physicians to our medical staffs during 2004, 2003 and
2002, respectively. Approximately 32% of the physicians recruited during the last three years were
primary care physicians and approximately 68% were specialty-care physicians. We believe that
expansion of services in our hospitals should assist in future physician recruiting efforts. Acquisition Program We proactively identify acquisition targets and respond to requests for proposals from
entities that are seeking to sell or lease hospitals. We identify attractive markets and hospitals
and initiate meetings with hospital systems to discuss acquiring non-urban hospitals or operating
them through a joint venture. We believe that it generally takes six to twelve months from a hospital owners decision to
accept an offer until the consummation of a sale or lease of a hospital. After a potential
acquisition has been identified, we undertake a systematic approach to evaluate and close the
transaction. We begin the acquisition process with a thorough due diligence review of the
acquisition target and its community. We use our dedicated teams of experienced personnel to
conduct a formalized review of all aspects of the acquisition targets operations, including
Medicare reimbursement, purchasing, fraud and abuse compliance, litigation, capital requirements
and employment and environmental issues. During the course of our due diligence review, we prepare
an operating plan for the acquisition target, identify opportunities for operating efficiencies and
physician recruiting needs, and assess productivity and management information systems. Throughout
the process, we work closely with community leaders in order to enhance both the communitys
understanding of our philosophy and abilities and our knowledge of the needs of the community. 6




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From time to time, we enter into letters of intent with acquisition targets in connection with
our evaluation of a potential acquisition. Such letters of intent generally are executed prior to
the commencement of due diligence undertaken during the evaluation process. In addition to due
diligence, proposed transactions to acquire hospitals for which we have signed a letter of intent
are subject to numerous conditions and contingencies, including internal approvals of both our
company and the acquisition target, receipt of regulatory approvals, receipt of attorney general
approval, resolution of legal and equitable matters relating to continuation of labor agreements,
review of supply and service agreements, receipt of satisfactory surveys, title insurance
commitments and environmental and engineering surveys, and preparation and negotiation of
documentation. In addition, our letters of intent generally provide that they may be terminated by
either party without cause. Accordingly, we cannot assure you that any such proposed transaction
for which we have signed a letter of intent will occur, or if it occurs, we cannot predict the
values or condition of the assets that may be acquired, the purchase price of such assets or the
terms of their acquisition. The acquisition of non-urban hospitals is competitive, and we believe that the acquiror will
be selected for a variety of reasons, not exclusively on the basis of price. We believe that we are
well-positioned to compete for acquisitions for several reasons. First, our management team has
extensive experience in acquiring and operating previously under-performing non-urban hospitals.
Second, we benefit from access to capital, strong financial and operating systems, a national
purchasing organization and training programs focused on employee and patient satisfaction. Third,
we believe our strategy of increasing access to, and quality of, healthcare in the communities
served by our hospitals aligns our interests with those of the communities. Finally, we believe
that the alignment of interests with the community, our reputation for providing market-specific,
quality healthcare, and our focus on physician recruiting and retention enables us to compete
successfully for acquisitions. Hospital Operations Following the acquisition of a hospital, we implement our systematic policies and procedures
to improve the hospitals operating and financial performance. We implement an operating plan
designed to reduce costs by improving operating efficiency and increasing revenue through the
expansion of the breadth of services offered by the hospitals and the recruitment of physicians to
the community. We believe that the long-term growth potential of a hospital is dependent on that
hospitals ability to add appropriate healthcare services and effectively recruit and retain
physicians. Each hospital management team is comprised of a chief executive officer, chief financial
officer, chief nursing officer and in certain instances a chief operating officer. We believe that
the quality of the local management team at each hospital is critical to the hospitals success
because the management team is responsible for implementing the elements of our operating plan. The
operating plan is developed by the local management team in conjunction with our senior management
team and sets forth revenue enhancement strategies and specific expense benchmarks. We have
implemented a performance-based compensation program for each local management team based upon the
achievement of the goals set forth in the operating plan. The local management team is responsible for the day-to-day operations of the hospitals. Our
corporate staff provides support services to each hospital, including physician recruiting,
corporate compliance, reimbursement advice, standardized information systems, human resources,
accounting, cash management and other finance activities, as well as tax and risk management
support. Financial controls are maintained through utilization of standardized policies and
procedures. We promote communication among our hospitals so that local expertise and improvements
can be shared throughout our network. To achieve the operating efficiencies set forth in the operating plan, we do the following:  
    evaluate existing hospital management;
    adjust staffing levels according to patient volumes using best demonstrated practices by department;
    where appropriate, install a standardized management information system;
    capitalize on purchasing efficiencies and renegotiate certain vendor contracts; and
    improve billing and collection policies and procedures. We also enforce strict protocols for compliance with our supply contracts. All of our owned or
leased hospitals currently purchase supplies and certain equipment pursuant to an arrangement we
have with HealthTrust Purchasing Group, Inc., an affiliate of HCA Inc. We also evaluate the vendor
contracts, and based on cost comparisons, we may renegotiate or terminate such contracts. We
prepare 7




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for the transition of management information systems to our standardized system prior to the
completion of an acquisition, in order that the newly-acquired hospital may begin using our
management information systems following completion of the acquisition. Expansion of Services As part of our efforts to improve access to quality healthcare in the communities we serve, we
add services at our hospitals on an as-needed basis. Added services and care programs may include
specialty inpatient services, such as cardiology, rehabilitation and subacute care, and outpatient
services such as same-day surgery. We believe the establishment of quality emergency room
departments and obstetrics and gynecological services are particularly important because they are
often the most visible and needed services in the community. We also make capital investments in
technology and facilities to increase the quality and breadth of services available in the
communities. By increasing the services provided at our hospitals and upgrading the technology used
in providing such services, we believe that we improve each hospitals quality of care and
reputation in the community, which in turn may increase patient admissions and revenue. Physician Recruitment We work with local hospital boards, management and medical staff to determine the number and
specialty of additional physicians needed in the community. Our corporate staff then assists the
local management team in identifying and recruiting specific physicians to the community to meet
those needs. The majority of physicians who relocate their practices to the communities served by
our hospitals are identified by our Vice President of Medical Staff Development and his physician
recruiting staff, with assistance from independent recruiting firms at times. When recruiting a
physician to a community, we generally guarantee the physician a minimum level of cash collections
during a limited initial period and assist the physician with his or her transition to the
community. We require the physician to repay some or all of the amounts expended for such
assistance in the event the physician leaves the community prior to the end of the contract period.
We prefer not to employ physicians; therefore, recruited physicians generally do not become our
employees. Physician Retention We have implemented a number of procedures to help retain physicians at our hospitals. We have
designated a Vice President of Medical Staff Development to oversee all aspects of physician
recruiting and retention and to work with our hospital chief executive officers in recognizing and
addressing physician issues. Additionally, our company has instituted an early alert system in
every hospital to address physician concerns and to identify physicians that are at risk of
leaving. Owned and Leased Hospitals We currently own or lease 21 general acute care hospitals in 13 states, with a total of 2,529
licensed beds. Of our 21 hospitals, 19 are the only providers of acute hospital services in their
communities. On April 30, 2004, we sold Glades General Hospital in Belle Glade, Florida to the Health Care
District of Palm Beach County. On June 1, 2004, we purchased the 286-bed Memorial Medical Center
in Las Cruces, New Mexico from the City of Las Cruces, New Mexico and the County of Doña Ana, New
Mexico. We have recently completed construction of a new 41-bed acute care hospital in
Hardeeville, South Carolina, which opened November 29, 2004. We are currently constructing a new
60-bed acute care hospital in Fort Mohave, Arizona, which is expected to be completed in the third
quarter of 2005 and a new 52-bed replacement acute care hospital in Eunice, Louisiana, which is
expected to be completed in the second quarter of 2006. Our hospitals offer a wide range of inpatient medical services such as operating/recovery
rooms, intensive care units, diagnostic services and emergency room services, as well as outpatient
services such as same-day surgery, radiology, laboratory, pharmacy and physical therapy. Our
hospitals frequently provide specialty services that include rehabilitation and home healthcare.
Our hospitals currently do not provide highly specialized surgical services such as organ
transplants and open heart surgery and are not engaged in extensive medical research or educational
programs. 8




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The following table sets forth certain information with respect to each of our owned or leased
hospitals as of March 1, 2005. Licensed
    
    Owned/
    
    
    DateHospital
    
    Beds
    
    Leased
    
    
    Acquired/OpenedAshland Regional Medical Center
    
    
    123
    (1)
    
    Owned
    
    Aug. 2001Ashland, PennsylvaniaBolivar Medical Center
    
    
    165
    (2)
    
    Leased
    
    Apr. 2000Cleveland, MississippiCoastal Carolina Medical Center
    
    
    41
    
    
    Owned
    
    Nov. 2004Hardeeville, South CarolinaColorado Plains Medical Center
    
    
    50
    
    
    Leased(3)
    
    Dec. 1996Fort Morgan, ColoradoColorado River Medical Center
    
    
    49
    
    
    Leased(4)
    
    Aug. 1997Needles, CaliforniaDoctors Hospital of Opelousas
    
    
    171
    
    
    Owned
    
    Jun. 1999Opelousas, LouisianaEnnis Regional Medical Center
    
    
    45
    
    
    Leased(5)
    
    Feb. 2000Ennis, TexasEunice Community Medical Center
    
    
    72
    
    
    Leased(6)
    
    Feb. 1999Eunice, LouisianaHavasu Regional Medical Center
    
    
    138
    
    
    Owned
    
    May 1998Lake Havasu City, ArizonaLos Alamos Medical Center
    
    
    47
    
    
    Owned
    
    Jun. 2002Los Alamos, New MexicoMedical Center of Southern Indiana
    
    
    96
    
    
    Owned
    
    Oct. 2001Charlestown, IndianaMemorial Hospital of Martinsville and Henry County
    
    
    237
    
    
    Owned
    
    May 2002Martinsville, VirginiaMemorial Medical Center
    
    
    286
    
    
    Leased(7)
    
    June 2004Las Cruces, New MexicoMinden Medical Center
    
    
    159
    
    
    Owned
    
    Oct. 1999Minden, LouisianaNortheastern Nevada Regional Hospital (8)
    
    
    75
    
    
    Owned
    
    Jun. 1998Elko, NevadaPalestine Regional Medical Center (9)
    
    
    249
    
    
    Owned
    
    July 1996Palestine, TexasPalo Verde Hospital
    
    
    51
    
    
    Leased(10)
    
    Dec. 1996Blythe, CaliforniaParkview Regional Hospital
    
    
    59
    
    
    Leased(11)
    
    Dec. 1996Mexia, TexasStarke Memorial Hospital
    
    
    53
    
    
    Leased(12)
    
    Oct. 1996Knox, IndianaTeche Regional Medical Center
    
    
    149
    
    
    Leased(13)
    
    Dec. 2001Morgan City, LouisianaVaughan Regional Medical Center (14)
    
    
    214
    
    
    Owned
    
    Oct. 2001Selma, AlabamaTotal licensed beds
    
    
    2,529
   (1)
    
    Includes 40 dually licensed skilled nursing and long-term care beds.(2)
    
    Includes 24 skilled nursing beds but excludes 35 long-term care beds. The lease expires in April 2040.(3)
    
    On March 15, 2005, the existing lease, which was set to expire April 2014, was amended and is now a
prepaid lease which expires March 2035, and is subject to two five-year renewal terms. We have a
right of first refusal to purchase the hospital. 9




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(4)
    
    The lease expires in July 2012, and is subject to three five-year renewal terms. We have a right of
first refusal to purchase the hospital.(5)
    
    The lease expires in February 2030, and is subject to three 10-year renewal terms at our option.(6)
    
    The lease expires in February 2009, and is subject to a five-year renewal at our option.(7)
    
    The lease expires in May 2044.(8)
    
    This 75-bed, 125,000 square foot hospital replaced the 50-bed Elko General Hospital in September 2001.(9)
    
    The hospital is owned by a partnership in which a subsidiary of ours is the sole general partner,
with a 1.0% general partnership interest, and another subsidiary of ours has a limited partnership
interest of 96.35%, subject to an option by the other non-affiliated limited partner (which currently
owns a 2.65% interest) to acquire up to 10% of the total limited partnership interests.(10)
    
    The lease expires in December 2012. We have the option to purchase the hospital at any time prior to
termination of the lease, subject to regulatory approval.(11)
    
    The lease expires in January 2011, and is subject to two five-year renewal terms. We have a right of
first refusal to purchase the hospital.(12)
    
    The lease expires in September 2016, and is subject to two ten-year renewal terms at our option. We
have a right of first refusal to purchase the hospital.(13)
    
    The lease expires in December 2041.(14)
    
    We acquired Selma Regional Medical Center, formerly known as Selma Baptist Medical Center, located in
Selma, Alabama, in July 2001. In October 2001, we acquired Vaughan Regional Medical Center, which is
also located in Selma, Alabama, approximately four miles from Selma Baptist. In April 2002, we
consolidated the operations of Selma Regional Medical Center with Vaughan Regional Medical Center,
and formed one regional hospital with two campuses. Upon completion of the consolidation, we changed
the name of Selma Regional Medical Center to Vaughan Regional Medical Center  Parkway Campus, and we
changed the name of Vaughan Regional Medical Center to Vaughan Regional Medical Center  Dallas
Avenue Campus. The hospital is owned by a limited liability company in which a subsidiary of ours
owns a 99% Class A membership interest and a non-affiliated entity owns a 1% Class B membership
interest. Ashland Regional Medical Centeris a general acute care facility with 123 beds located in
Ashland, Pennsylvania, approximately 110 miles northwest of Philadelphia, Pennsylvania. Ashland,
Pennsylvania has a service area population of approximately 65,000. The nearest competitor of
Ashland Regional Medical Center is Regional Medical Center in Pottsville, Pennsylvania, located 20
miles from Ashland. Bolivar Medical Centeris a general acute care facility with 141 acute care beds, 24 skilled
nursing beds and 35 long-term care beds located in Cleveland, Mississippi. Established in 1962, the
hospital is owned by Bolivar County, Mississippi. Cleveland is a manufacturing-based community with
an estimated 16,000 residents and an estimated service area population of 55,000. The nearest
competitor is South Sunflower County Hospital in Indianola, Mississippi, located 32 miles from
Cleveland. Coastal Carolina Medical Centeris a 41-bed acute care facility located in Hardeeville, South
Carolina. Hardeeville is located in the low country of South Carolina, near Hilton Head, South
Carolina and Savannah, Georgia. The hospital serves two of the fastest growing counties in the
United States (Beaufort County and Jasper County). Its nearest competitor is Hilton Head Regional
Medical Center on Hilton Head Island, South Carolina, which is approximately 22 miles from
Hardeeville. Colorado Plains Medical Centeris a 50-bed general acute care facility located in Fort Morgan,
Colorado, approximately 70 miles from Denver. Fort Morgan is an agricultural-based community with
an estimated 12,000 residents and an estimated service area population of 43,000. The original
hospital was built in 1952. The hospital is the only rural-based Level III trauma center in
Colorado, and one of only 10 such rural centers in the United States. The hospitals major
competition comes from the 276-bed Northern Colorado Medical Center located in Greeley, Colorado,
which is approximately 45 miles west of Colorado Plains. East Morgan County Hospital, located nine
miles away in Brush, Colorado, is the closest hospital to Colorado Plains and offers only limited
services. Both of these competing hospitals are owned by the Lutheran Health System. 10




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Colorado River Medical Centeris a 49-bed general acute care facility located in Needles,
California, approximately 100 miles southwest of Las Vegas, Nevada. The hospital, established in
1974, previously was owned by the City of Needles. Colorado River Medical Center is the only
hospital serving a community base of approximately 20,000 people. The nearest competitor is
Bullhead Community Hospital, located 22 miles away, which serves the Laughlin, Nevada and Bullhead
City, Arizona areas. Doctors Hospital of Opelousasis a 171-bed general acute care facility, located in Opelousas,
Louisiana, approximately 21 miles east of Eunice, Louisiana, where we operate Eunice Community
Medical Center, a 72-bed healthcare facility and approximately 22 miles north of Lafayette,
Louisiana. Opelousas is the parish seat with a population of approximately 21,000 in the city of
Opelousas and approximately 100,000 residents of the St. Landry Parish. The primary competition for
Doctors Hospital of Opelousas is the 134-bed Opelousas General Hospital, a county-owned
not-for-profit facility located approximately five miles from Doctors Hospital of Opelousas. We
completed a $3.0 million 32-bed addition to the hospital in April 2000. Ennis Regional Medical Centeris a 45-bed general acute care facility located in Ennis, Texas,
approximately 35 miles southeast of Dallas. Established in the mid-1950s, the hospital is owned by
the City of Ennis. The acute care facility is the only hospital serving the Ennis community, which
has a total service area population of approximately 85,000 people. The nearest competitor is the
73-bed Baylor HealthCare System Waxahachie Hospital, located 17 miles from Ennis. Eunice Community Medical Centeris a 72-bed general acute care facility located in Eunice,
Louisiana. Eunice, Louisiana is a community of approximately 20,000 people, located approximately
50 miles northwest of Lafayette. The total service area consisting of St. Landry Parish has a
population of approximately 100,000. The hospital is located 21 miles from Opelousas General
Hospital, a 133-bed facility. We are currently constructing a 52-bed replacement hospital in
Eunice, which is scheduled for completion in mid-2006. The replacement hospital is being
constructed on property we will lease from the St. Landry Hospital Service District. The existing
lease will terminate at the time the replacement facility commences operations. Eunice Community
Medical Center competes with Savoy Medical Center located in Mamou, Louisiana, approximately 15
miles north of Eunice. Havasu Regional Medical Centeris a 138-bed general acute care facility providing healthcare
services for a population of over 41,000, primarily in the Lake Havasu City, Arizona area. Lake
Havasu City is on the shore of Lake Havasu on the Colorado River border of California and Arizona.
It is now the major population center of southern Mohave County, one of the fastest growing
counties in the United States. Lake Havasu City has a service area population of 127,000 residents
in the rapidly growing Colorado River basin. The nearest acute hospital competitor is Kingman
Regional Medical Center in Kingman, Arizona, which is approximately 60 miles from Havasu Regional
Medical Center. Los Alamos Medical Centeris a 47-bed acute care facility located in Los Alamos, New Mexico.
Los Alamos, New Mexico is located approximately 96 miles north of Albuquerque and 40 miles west of
Santa Fe, New Mexico, and has a service area population of approximately 50,000. Los Alamos Medical
Center is the only hospital in the community. The hospitals nearest competitor is Espanola
Hospital in Espanola, New Mexico, which is located approximately 35 miles from Los Alamos Medical
Center. Medical Center of Southern Indianais a 96-bed general acute care facility located in
Charlestown, Indiana. Charlestown, Indiana is located approximately 16 miles northwest of
Louisville, Kentucky, and has a service area population of approximately 48,000. Medical Center of
Southern Indiana is the only hospital in the community. The hospitals nearest competitor is Clark
Memorial in Jeffersonville, Indiana, which is located approximately 20 miles from Medical Center of
Southern Indiana. Memorial Hospital of Martinsville and Henry Countyis a 237-bed acute care facility located in
Martinsville, Virginia. Martinsville, Virginia is located approximately 50 miles south of Roanoke,
Virginia and has a service area population of approximately 100,000. Memorial Hospital is the only
hospital in the county. Its nearest competitor is Danville Regional Medical Center in Danville,
Virginia, which is located approximately 30 miles from Memorial Hospital of Martinsville and Henry
County. Memorial Medical Centeris a 286-bed acute care facility located in Las Cruces, New Mexico.
Las Cruces is in the southeastern corner of New Mexico and has a primary service area population of
approximately 150,000. The hospitals nearest competitor is Mountain View Regional Medical Center
in Las Cruces, which is located approximately four miles from Memorial Medical Center. Minden Medical Centeris a 159-bed general acute care facility located in Minden, Louisiana.
Minden, Louisiana is approximately 28 miles from Shreveport and has a service area population of
approximately 64,000. The hospitals nearest competitors are the Willis-Knight Medical Center and
Bossier Medical Center, which are both located in Shreveport. 11




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Northeastern Nevada Regional Hospital, which opened in September 2001 as a replacement to Elko
General Hospital, is a 75-bed general acute care facility located in Elko, Nevada. Elko, Nevada is
located 237 miles west of Salt Lake City, Utah, 295 miles northeast of Reno and 475 miles north of
Las Vegas. Elko Countys population is approximately 55,000, with the primary population base
residing in the City of Elko. The nearest acute care hospital competitors are in Salt Lake City,
Utah. Palestine Regional Medical Centeris a two-campus facility located in Palestine, Texas.
Palestine, a community of approximately 19,000 residents, is located 50 miles south of Tyler, Texas
and is roughly equidistant from Dallas and Houston. The total service area population for the
hospital, which includes Anderson and eight surrounding counties, is estimated at 104,000 people.
The facility is comprised of Palestine Regional Medical Center, the former Trinity Valley Medical
Center, a 172-bed acute care facility that we acquired in October 1999 from Tenet Healthcare
Corporation, and Palestine Regional Rehabilitation Hospital, the former Memorial Mother Frances
Hospital, a 77-bed inpatient rehabilitation facility also located in Palestine, which we have owned
since 1996. Palestine Regional Medical Center competes indirectly with two other hospitals, Trinity
Mother Frances Hospital and East Texas Medical Center, both in Tyler, Texas. Palo Verde Hospitalis a 51-bed general acute care facility located in Blythe, California,
which is in southeast California on the Arizona border. The hospital is located in a community with
a stable population of 20,000; however, the population increases significantly during the winter
months due to a seasonal influx of retirees. The nearest competitor is Parker Hospital in Parker,
California, which is approximately 45 miles from Palo Verde Hospital. Parkview Regional Hospitalis a 59-bed general acute care facility located in Mexia, Texas,
approximately 85 miles south of Dallas, Texas. Parkviews primary service area includes Mexia and
the surrounding Limestone County, as well as Freestone, Leon, and Hill counties. Mexia is the
areas largest city with a population of 7,000 people. The service area of the hospital includes
approximately 50,000 residents. Parkview Regional Hospital is the only hospital in the community,
but experiences competition from Waco hospitals, about 40 miles to the west. Starke Memorial Hospitalis a 53-bed general acute care facility in Knox, Indiana, a community
located approximately 50 miles from South Bend. The town of Knox has a population of approximately
8,000, and the population of Starke County is estimated to be 23,000. The hospitals total service
area, including the surrounding counties, is approximately 35,000. The nearest competing hospitals
are the 36-bed St. Joe Marshall County Hospital, which is located 18 miles east in Plymouth,
Indiana, and the 307-bed Porter Memorial Hospital, which is located 32 miles away in Valparaiso,
Indiana. Teche Regional Medical Centeris a general acute care facility with 149 beds located in Morgan
City, Louisiana, approximately 67 miles south of Baton Rouge, Louisiana. The hospital has a service
area of approximately 82,000 people. Teche Regional Medical Center is the only acute care hospital
in the community it serves. The hospitals nearest competitor is Thibodeaux Regional Medical
Center, located approximately 30 miles away in Thibodeaux, Louisiana. Vaughan Regional Medical Centerand Selma Regional Medical Center located in Selma, Alabama,
were consolidated in April 2002 into a two-campus, 214-bed general acute care facility. Selma,
Alabama, which has a service area population of approximately 90,000, is located approximately 50
miles west of Montgomery, Alabama and 97 miles south of Birmingham, Alabama. The Parkway Campus is
comprised of the former Selma Regional Medical Center that we acquired from Baptist Health of
Montgomery, Alabama in July 2001. The Dallas Avenue Campus is comprised of the former Vaughan
Regional Medical Center that we acquired from Vaughan Regional Medical Center, Inc. in October
2001. The two campuses are located approximately four miles from each other. The hospitals current
nearest competitor is Baptist Medical Center, located approximately 48 miles away in Montgomery,
Alabama. Operating Statistics The following table sets forth certain operating statistics for our owned or leased hospitals
classified as continuing operations for each of the periods presented.(1) 12




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Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Number of hospitals owned at end of period
    
    
    21
    
    
    
    19
    
    
    
    19
    
    
    
    18
    
    
    
    13Licensed beds at end of period (2)
    
    
    2,533
    
    
    
    2,189
    
    
    
    2,207
    
    
    
    2,063
    
    
    
    1,253Beds in service at end of period
    
    
    2,157
    
    
    
    1,933
    
    
    
    1,933
    
    
    
    1,839
    
    
    
    1,168Inpatient admissions (3)
    
    
    76,107
    
    
    
    72,630
    
    
    
    69,107
    
    
    
    52,053
    
    
    
    44,194Adjusted admissions (4)
    
    
    141,671
    
    
    
    131,557
    
    
    
    120,990
    
    
    
    86,198
    
    
    
    76,358Net patient revenue per adjusted admission
    
    $
    6,157
    
    
    $
    5,593
    
    
    $
    5,372
    
    
    $
    5,576
    
    
    $
    5,496Patient days (5)
    
    
    323,949
    
    
    
    307,195
    
    
    
    299,138
    
    
    
    227,596
    
    
    
    204,550Adjusted patient days (6)
    
    
    602,962
    
    
    
    556,331
    
    
    
    523,307
    
    
    
    376,539
    
    
    
    352,999Average length of stay(days) (7)
    
    
    4.3
    
    
    
    4.2
    
    
    
    4.3
    
    
    
    4.4
    
    
    
    4.6Net patient revenue (in thousands)
    
    $
    872,275
    
    
    $
    735,841
    
    
    $
    649,954
    
    
    $
    480,627
    
    
    $
    419,657Gross revenue (in thousands) (8):Inpatient
    
    $
    1,033,038
    
    
    $
    903,740
    
    
    $
    799,358
    
    
    $
    588,203
    
    
    $
    482,773Outpatient
    
    
    889,903
    
    
    
    732,844
    
    
    
    599,333
    
    
    
    387,195
    
    
    
    351,468Total gross patient revenue
    
    $
    1,922,941
    
    
    $
    1,636,584
    
    
    $
    1,398,691
    
    
    $
    975,398
    
    
    $
    834,241
   (1)
    
    All statistics have been restated to exclude the ownership and operations of Glades General
Hospital, which was sold on April 30, 2004. The statistics above have not been impacted by the
disposal of Brim Healthcare, Inc. on June 30, 2004.(2)
    
    Beds for which a hospital has been granted approval to operate from the applicable state
licensing agency.(3)
    
    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.(4)
    
    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.(5)
    
    Represents the total number of days the patients who are admitted stay in our hospitals.(6)
    
    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.(7)
    
    The average number of days admitted patients stay in our hospitals.(8)
    
    Represents revenues prior to reductions for discounts and contractual allowances. Sources of Revenue We receive payments for patient care from private insurance carriers, federal Medicare
programs for elderly and disabled patients, health maintenance organizations, preferred provider
organizations, state Medicaid programs, TriCare, and from employers and patients directly. SeeItem
7. Managements Discussion and Analysis of Financial Condition and Results of Operations. The
approximate percentages of net patient revenue of our facilities (excluding Glades General
Hospital) from these sources during the periods specified below were as follows: Year Ended December 31,Source
    
    2004
    
    
    2003
    
    
    2002Medicare
    
    
    37.7
    %
    
    
    38.5
    %
    
    
    45.4
    %Medicaid
    
    
    10.1
    
    
    
    10.3
    
    
    
    11.3Other
    
    
    52.2
    
    
    
    51.2
    
    
    
    43.3Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 13




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Management Information Systems Following the acquisition of a hospital, we implement our systematic procedures to improve the
hospitals operating and financial performance. In many cases, where appropriate, one of our first
steps is to convert the newly-acquired hospital to our broad-based management information system.
Our hospital management information system contains the primary software required to run an entire
hospital, bundled into one software package. This software generally includes features such as a
general ledger, patient accounting, billing, accounts receivable, payroll, accounts payable and
pharmacy. Quality Assurance Our hospitals implement quality assurance procedures to monitor the level of care. Each
hospital also has a medical executive committee, which reviews the professional credentials of
physicians applying for medical staff privileges at the hospital. Each facility monitors outcomes
along with procedures performed and the quality of the logistical, medical and technological
support provided to the physician. We survey our patients either during their stay at the hospital
or subsequently by mail to identify potential areas of improvement. All of our hospitals are
accredited by the Joint Commission on Accreditation of Healthcare Organizations, except Coastal
Carolina Medical Center, which is in process for its initial survey. Regulatory Compliance Program We currently operate a voluntary Corporate Compliance Program designed to help reduce the risk
and prevent the potential exposure for misconduct. It is an aid to the development of effective
internal controls that promote adherence to applicable Federal and state law, and the program
requirements of Federal, state and private health plans. The adoption and implementation of this
program significantly advances the prevention of fraud, abuse and waste in our health care efforts
while at the same time furthering the fundamental mission of our hospitals, which is to provide
quality care to patients. In practice our compliance program effectively articulates and
demonstrates our commitment to the compliance process. Our compliance program focuses on all areas
of regulatory compliance, including physician recruitment, reimbursement, cost reporting practices
and laboratory and home healthcare operations. Each of our hospitals designates a compliance
officer and undergoes an periodic (18 to 24 months) risk assessment to determine potential risk
issues and develop plans to correct problems should they arise. In addition, all of our employees
are given a thorough introduction to our ethical and compliance guidelines, as well as a guide to
the proper resources to address any concerns that may arise. We also conduct periodic training to
re-emphasize our established guidelines every 18 to 24 months. We regularly monitor our corporate
compliance programs to respond to developments in healthcare regulation and the industry. We also
maintain a toll-free hotline to permit employees to report compliance concerns on an anonymous
basis. In addition, the staff is available to answer questions of compliance encountered during the
day-to-day operation of a facility. Management and Professional Services On June 30, 2004, we sold the stock of Brim Healthcare, Inc., our wholly-owned subsidiary that
provided management services to primarily non-urban hospitals, to an unaffiliated investor group
for approximately $13.2 million in cash. Competition The primary bases of competition among hospitals in non-urban markets are the quality and
scope of medical services, strength of referral network, location, and, to a lesser extent, price.
With respect to the delivery of general acute hospital services, most of our hospitals face less
competition in their immediate patient service areas than would be expected in larger communities.
While our hospitals are generally the primary provider of healthcare services in their respective
communities, our hospitals face competition from larger tertiary care centers and, in some cases,
other non-urban hospitals and full service outpatient surgery centers. Some of the hospitals that
compete with us are owned by governmental agencies or not-for-profit entities supported by
endowments and charitable contributions, and can finance capital expenditures on a tax-exempt
basis. One of the most significant factors in the competitive position of a hospital is the number
and quality of physicians affiliated with the hospital. Although physicians may at any time
terminate their affiliation with a hospital that we operate, our hospitals seek to retain
physicians of varied specialties on the hospitals medical staffs and to recruit other qualified
physicians through our in-house recruiting department overseen by our Vice President of Medical
Staff Development and his staff. We believe the key reasons physicians refer patients to a hospital
are the quality of services it renders to patients and physicians, the quality of other physicians
on the medical staff, the location of the hospital and the quality of the hospitals facilities,
equipment and employees. Accordingly, we 14




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strive to maintain high ethical and professional standards and quality facilities, equipment,
employees and services for physicians and their patients. Another factor in the competitive position of a hospital is managements ability to negotiate
service contracts with purchasers of group healthcare services. Health maintenance organizations
and preferred provider organizations attempt to direct and control the use of hospital services
through managed care programs and to obtain discounts from hospitals established charges. In
addition, employers and traditional health insurers increasingly are interested in containing costs
through negotiations with hospitals for managed care programs and discounts from established
charges. Generally, hospitals compete on the basis of market reputation, geographic location,
quality and range of services, quality of the medical staff, convenience and price for service
contracts with group healthcare service purchasers. The importance of obtaining contracts with
managed care organizations varies from market to market, depending on the market strength of such
organizations. Managed care contracts generally are less important in the non-urban markets served
by us than they are in urban and suburban markets where there is typically a higher level of
managed care penetration. State certificate of need laws, which place limitations on a hospitals ability to expand
hospital services and add new equipment, also may have the effect of restricting competition. Five
states in which we operate, Alabama, South Carolina, Mississippi, Nevada and Virginia, currently
have certificate of need laws. The application process for approval of covered services,
facilities, changes in operations and capital expenditures is, therefore, highly competitive. In
those states that have no certificate of need laws or that set relatively high thresholds before
expenditures become reviewable by state authorities, competition in the form of new services,
facilities and capital spending may be more prevalent. We have not experienced, and do not expect
to experience, any material adverse effects from state certificate of need requirements or from the
imposition, elimination or relaxation of such requirements. SeeItem 1. Business - Healthcare
Regulation and Licensing. We, and the healthcare industry as a whole, face the challenge of continuing to provide
quality patient care while dealing with rising costs, strong competition for patients and a slow
growth in reimbursement rates by both private and government payors. As both private and government
payors reduce the scope of what may be reimbursed and reduce reimbursement levels for what is
covered, federal and state efforts to reform the healthcare system may further impact reimbursement
rates. Changes in medical technology, existing and future legislation, regulations and
interpretations and competitive contracting for provider services by private and government payors
may require changes in our facilities, equipment, personnel, rates and/or services in the future. The hospital industry and some of our hospitals continue to have significant unused capacity.
Inpatient utilization, average lengths of stay and average inpatient occupancy rates continue to be
affected by payor-required pre-admission authorization, utilization review, and payment mechanisms
to maximize outpatient and alternative healthcare delivery services for less acutely ill patients.
Admissions constraints, payor pressures and increased competition are expected to continue. We will
endeavor to meet these challenges by expanding our facilities outpatient services, offering
appropriate discounts to private payor groups, upgrading facilities and equipment, and offering new
programs and services. We also face competition for acquisitions primarily from for-profit hospital management
companies as well as not-for-profit entities. Some of our competitors have greater financial and
other resources than us. Increased competition for the acquisition of non-urban acute care
hospitals could have an adverse impact on our ability to acquire such hospitals on favorable terms. Properties In addition to real estate associated with our owned and leased hospitals, we lease
approximately 43,508 square feet of office space for our corporate headquarters in Brentwood,
Tennessee under a ten-year lease that expires on December 31, 2013 and contains customary terms and
conditions. SeeItem 1. Business - Owned and Leased Hospitals. Employees and Medical Staff As of March 1, 2005, we had approximately 8,400 employees. We consider relations with our
employees to be good. Approximately 3.8% of our employees are represented by unions. We typically do not employ physicians; however, as of March 1, 2005, we employed 34 practicing
physicians. Certain of our hospital services, including emergency room coverage, radiology,
pathology and anesthesiology services, are provided through independent contractor arrangements
with physicians. 15




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Environmental Matters We are subject to various federal, state and local statutes and ordinances regulating the
discharge of materials into the environment. Our healthcare operations generate medical waste, such
as pharmaceuticals, biological materials and disposable medical instruments, that must be disposed
of in compliance with federal, state and local environmental laws, rules and regulations. Our
operations, as well as our purchases and sales of facilities, also are subject to various other
environmental laws, rules and regulations. We do not expect that we will be required to expend any
material amounts in order to comply with these laws and regulations or that compliance will
materially affect our capital expenditures, earnings or competitive position. Environmental
regulations also may apply when we renovate or refurbish hospitals, particularly older facilities.
While these requirements may impose some additional costs for such improvements, we do not expect
these amounts to be material. Government Reimbursement Medicare/Medicaid Reimbursement For the year ended December 31, 2004, approximately 37.7% and 10.1% of our net patient revenue
from continuing operations resulted from Medicare and Medicaid payments, respectively. The Medicare
program pays hospitals on a prospective payment system for acute inpatient services. Under this
prospective payment system, a hospital receives a fixed amount for inpatient hospital services
based on the patients final diagnosis. These payments do not take into consideration a specific
hospitals actual costs, but instead are based upon set national rates adjusted for area wage differentials and
case-mix index. Certain sub-acute inpatient services, which historically were reimbursed on a
hospitals actual costs, are currently being converted by Medicare to a prospective payment system.
Rehabilitation sub-acute services were converted to a prospective payment system for cost report
periods beginning on or after January 1, 2002. This system is similar to the acute inpatient system
because it pays a rate based on the type of discharge. Skilled nursing sub-acute services are paid
based on a prospective per diem, which is also tied to the patients needs and condition.
Psychiatric sub-acute services are also transitioning to a prospective payment system. With respect
to implementation of the prospective payment system for psychiatric services, the Centers for
Medicare and Medicaid Services began implementing a three-year transition period starting with the
cost reporting periods beginning on or after January 2005. For these three years, CMS is proposing
a blended payment. The payment for the first year of the transition period (cost reporting periods
beginning after January 1, 2005 but on or before June 30, 2006) would consist of 75% based on the
current cost-based reimbursement system and 25% on the proposed federal prospective payment rate.
In the second year, the split will be 50% each and in the third year the split will be 25% based on
the current cost-based system and 75% prospective payment system. For cost reporting periods
beginning on or after July 1, 2008, the prospective payment federal rate percentage will be 100%.
The first update to rates under this methodology is anticipated to occur in July 2006, with annual
updates anticipated thereafter. For several years, the percentage increases to the prospective payment rates have been lower
than the percentage increases in the cost of goods and services purchased by general hospitals. The
index used to adjust payment rates is based on a price proxy, known as the hospital market basket
index, reduced by Congressionally-mandated reduction factors. For fiscal year 2003, the hospital
market basket index was rebased and revised based on 1997 data. Acute care hospitals received
Medicare payment rate increases for inpatient services based upon the full market basket increase
in federal fiscal year 2004. On December 8, 2003, President Bush signed into law the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Modernization Act). The
Medicare Modernization Act provides for changes in Medicare reimbursement for hospitals. For
example, the Medicare Modernization Act requires all acute care hospitals to participate in CMSs
quality-of-care National Voluntary Hospital Reporting Initiative in order to receive the full
market basket increase in fiscal year 2005 through 2007. Those acute care hospitals that fail to
participate in CMSs quality-of-care National Voluntary Reporting Initiative will receive a lesser
increase in Medicare reimbursement equal to the market basket update minus 0.4 percent. Many of our hospitals receive an add-on to the Medicare DRG payment for providing care to
indigent patients. This add-on is referred to as the disproportionate share adjustment. Section 402
of the Medicare Modernization Act increased the cap on the disproportionate share adjustment from
5.25% to 12% for rural hospitals. This increase in the cap was effective April 1, 2004. We
currently have seven hospitals that benefited from this change. Approximately 71% (labor share) of the Medicare DRG payment is adjusted by the hospitals wage
index. The wage index compares the cost of labor in the hospitals market compared to the national
average. For those hospitals with wage indices over 1.00, the labor share is increased and, for
those hospitals with wage indices under 1.00, the labor share is reduced. Section 403 of the
Medicare Modernization Act reduces the labor share to 62% of the DRG payment for those
hospitals with wage indices below 1.00. We currently have 11 hospitals that benefited from this
change. 16




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Most outpatient services provided by general hospitals are reimbursed by Medicare under the
outpatient prospective payment system. The Balanced Budget Act of 1997 mandated the implementation
of the prospective payment system for Medicare outpatient services. This outpatient prospective
payment system is based on a system of Ambulatory Payment Classifications. Each Ambulatory Payment
Classification represents a bundle of outpatient services, and each Ambulatory Payment
Classification has been assigned a fully prospective reimbursement rate. On November 15, 2004, the
Centers for Medicare and Medicaid Services published the final rule establishing the calendar year
2005 conversion factor and revisions to Ambulatory Payment Classifications for hospital outpatient
services. The 2005 conversion factor was increased by 3.3%, the full market basket for fiscal year
2005. The Medicare Modernization Act extends for two years (through December 31, 2005) special
payments to small rural hospitals with 100 or fewer beds to ensure that they are paid at least as
much under the outpatient prospective payment system as they had been paid under the prior
cost-based system. These special payments were first authorized by the Balanced Budget Refinement
Act of 1999, and were scheduled to end for services on or after January 1, 2004. Besides extending
the special payments for an additional two-year period, the Medicare Modernization Act also
makes Sole Community Hospitals (regardless of the number of beds) eligible for the special
payments. A Sole Community Hospital is generally the only hospital in at least a 35-mile radius or
a 45-minute driving time radius. Bolivar Medical Center, Colorado Plains Medical Center, Colorado
River Medical Center, Northeastern Nevada Regional Hospital, Havasu Regional Medical Center, Teche
Regional Medical Center, Palo Verde Hospital, Parkview Regional Hospital, Palestine Regional
Medical Center and Los Alamos Medical Center qualify as Sole Community Hospitals under Medicare
regulations. Medicare has other special payment provisions for Sole Community Hospitals. Special payment
provisions related to Sole Community Hospitals include the payment of a hospitals specific rate
which may be higher than the Federal DRG payment rate. Each state has its own Medicaid program that is funded jointly by such state and the federal
government. Federal law governs how each state manages its Medicaid program, but there is wide
latitude for states to customize Medicaid programs to fit local needs and resources. As a result,
each state Medicaid plan has its own payment formula and recipient eligibility criteria. Program Adjustments The Medicare, Medicaid and TRICARE programs are subject to statutory and regulatory changes,
administrative rulings, interpretations and determinations, requirements for utilization review and
new governmental funding restrictions, all of which may materially increase or decrease program
payments as well as affect the cost of providing services and the timing of payments to facilities.
The final determination of amounts earned under the programs often takes many years because of
audits by the program representatives, providers rights of appeal and the application of numerous
technical reimbursement provisions. Differences between original estimates and subsequent revisions
(including final settlements) are included in consolidated statements of income in the period in
which the revisions are made. Management believes that adequate provision has been made for such
adjustments. Until final adjustment, however, significant issues remain unresolved and previously
determined allowances could become either inadequate or more than ultimately required. Healthcare Regulation and Licensing Background Information Healthcare, as one of the largest industries in the United States, continues to attract much
legislative interest and public attention. Medicare, Medicaid, and other public and private
hospital cost-containment programs, proposals to limit healthcare spending, and proposals to limit
prices and industry competitive factors are among the many factors that are highly significant to
the healthcare industry. In addition, the healthcare industry is governed by a framework of federal
and state laws, rules and regulations that are extremely complex and for which the industry has the
benefit of only limited regulatory or judicial interpretation. There continue to be federal and state proposals that would, and actions that do, impose more
limitations on government and private payments to providers such as us. In addition, there are
proposals to increase co-payments and deductibles from program and private patients. Our facilities
also are affected by controls imposed by government and private payors designed to reduce
admissions and lengths of stay. Such controls, including what is commonly referred to as utilization
review, have resulted in a decrease in certain treatments and procedures being performed. Many states have enacted, or are considering enacting, measures that are designed to reduce
their Medicaid expenditures and to make changes to private healthcare insurance. Various states
have applied, or are considering applying, for a federal waiver from current Medicaid regulations
to allow them to serve some of their Medicaid participants through managed care providers. These 17




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proposals also may attempt to include coverage for some people who presently are uninsured,
and generally could have the effect of reducing payments to hospitals, physicians and other
providers for the same level of service provided under Medicaid. Certificate of Need Requirements Some states require approval for purchase, construction and expansion of healthcare
facilities, including findings of need for additional or expanded healthcare facilities or
services. Certificates of need, which are issued by governmental agencies with jurisdiction over
healthcare facilities, are at times required for capital expenditures exceeding a prescribed
amount, changes in bed capacity or services and certain other matters. Five states in which we
currently own hospitals, Alabama, South Carolina, Mississippi, Nevada and Virginia, have
certificate of need laws. We are unable to predict whether our hospitals will be able to obtain
any certificates of need that may be necessary to accomplish their business objectives in any
jurisdiction where such certificates of need are required. Anti-Kickback and Self-Referral Regulations Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act, commonly known as
the anti-kickback statute, prohibit certain business practices and relationships that might
influence the provision and cost of healthcare services reimbursable under Medicaid or Medicare or
other federal healthcare programs, including the payment or receipt of remuneration for the
referral of patients whose care will be paid for by Medicare or other government programs.
Sanctions for violating the anti-kickback statute include criminal penalties and civil sanctions,
including fines and possible exclusion from government programs, such as the Medicare and Medicaid
programs. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, the
U.S. Department of Health and Human Services issued regulations that create safe harbors under the
anti-kickback statute. A given business arrangement that does not fall within an enumerated safe
harbor is not per se illegal; however, business arrangements that fail to satisfy the applicable
safe harbor criteria risk increased scrutiny by enforcement authorities. The Health Insurance
Portability and Accountability Act of 1996 or HIPAA, which became effective January 1, 1997,
added several new fraud and abuse laws. These new laws cover all
health insurance programs 
private as well as governmental. In addition, HIPAA broadened the scope of certain fraud and abuse
laws, such as the anti-kickback statute, to include not just Medicare and Medicaid services, but
all healthcare services reimbursed under a federal or state healthcare program. There is increasing scrutiny by law enforcement authorities, the Office of Inspector General
of the Department of Health and Human Services, the courts and Congress of arrangements between
healthcare providers and potential referral sources to ensure that the arrangements are not
designed as a mechanism to exchange remuneration for patient care referrals and opportunities.
Investigators also have demonstrated a willingness to look behind the formalities of a business
transaction to determine the underlying purpose of payments between healthcare providers and
potential referral sources. Enforcement actions have increased, as evidenced by recent highly
publicized enforcement investigations of certain hospital activities. In addition, provisions of the Social Security Act prohibit physicians from referring Medicare
and Medicaid patients to providers of a broad range of designated health services with which the
physicians or their immediate family members have ownership or certain other financial
arrangements. Certain exceptions are available for employment agreements, leases, physician
recruitment and certain other physician arrangements. These provisions are known as the Stark law
and are named for the legislative sponsor, Rep. Fortney Pete Stark (R-CA). A person making a
referral, or seeking payment for services referred, in violation of the Stark law would be subject
to the following sanctions:  
    civil money penalties of up to $15,000 for each service;
    restitution of any amounts received for illegally billed claims; and/or
    exclusion from participation in the Medicare program, which can subject the person or
entity to exclusion from participation in state healthcare programs. Further, if any physician or entity enters into an arrangement or scheme that the physician or
entity knows or should know has the principal purpose of assuring referrals by the physician to a
particular entity, and the physician directly makes referrals to such entity, then such physician
or entity could be subject to a civil money penalty of up to $100,000. Many states have adopted or
are considering similar legislative proposals, some of which extend beyond the Medicaid program, to
prohibit the payment or receipt of remuneration for the referral of patients and physician
self-referrals regardless of the source of the payment for the care. 18




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Federal False Claims Act The government has shown an increasing willingness in recent years to bring lawsuits against
healthcare providers alleging violations of a variety of healthcare and non-healthcare laws,
including, among others, the federal false claims act (the False Claims Act) and mail fraud and
wire fraud. The False Claims Act, in particular, has been used with increasing frequency and
creativity. The False Claims Act has qui tam or whistleblower provisions that allow private
individuals to bring actions on behalf of the government alleging that the defendant has defrauded
the government. If the action is successful, the private individual may recover up to one-third of
the governments recovery. The False Claims Act provides for a penalty of up to three times the
amount of the false claim, plus up to $11,000 for each claim falsely submitted to the government. Healthcare Facility Licensing Requirements Our healthcare facilities are subject to extensive federal, state and local legislation and
regulation. In order to maintain their operating licenses, healthcare facilities must comply with
strict standards concerning medical care, fire and safety, equipment and hygiene. Various licenses
and permits also are required in order to dispense narcotics, operate pharmacies, handle
radioactive materials and operate certain equipment. Our healthcare facilities hold all required
material governmental approvals, licenses and permits. All licenses, provider numbers and other
permits or approvals required to perform our business operations are held by our subsidiaries. All
of our hospitals are fully accredited by the Joint Commission on Accreditation of Healthcare
Organizations, except Coastal Carolina Medical Center, which is in process for its initial survey. Utilization Review Compliance and Hospital Governance Our healthcare facilities are subject to and comply with various forms of utilization review.
In addition, under the Medicare prospective payment system, each state has a Quality Improvement
Organization to carry out federally mandated systems of review of Medicare patient admissions,
treatments and discharges in hospitals. Medical and surgical services and practices also are
supervised extensively by committees of staff doctors at each healthcare facility, are overseen by
each healthcare facilitys local governing board, the primary voting members of which are
physicians and community members, and are reviewed by our quality assurance personnel. The local
governing boards also:  
    help maintain standards for quality care;
    develop long-range plans;
    establish, review and enforce practices and procedures; and
    approve the credentials and disciplining of medical staff members. Governmental Developments Regarding Sales of Not-For-Profit Hospitals In recent years, the legislatures and attorneys general of several states have shown a
heightened level of interest in transactions involving the sale of non-profit hospitals. Although
the level of interest varies from state to state, the trend is to provide for increased
governmental review, and in some cases approval and ongoing oversight, of transactions in which
not-for-profit corporations sell a healthcare facility. Attorneys general in certain states,
including California, have been especially active in evaluating these transactions. Medical Records Privacy Laws There are currently numerous laws at the state and federal levels addressing patient privacy
concerns. Federal regulations issued pursuant to HIPAA contain, among other measures, provisions
that require many organizations, including us, to implement very significant and potentially
expensive new computer systems, employee training programs and business procedures. The federal
regulations are intended to encourage electronic commerce in the healthcare industry. On August 17, 2000 (with modifications in February 2003), the Department of Health and Human
Services finalized regulations requiring all healthcare providers, including our facilities, and
payors to use standard data formats and code sets established by the rule when electronically
transmitting information in connection with several types of transactions, including health claims and
equivalent encounter 19




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information, health care payment and remittance advice and health claim status. We have
implemented or upgraded computer systems, as appropriate, at our facilities and at our corporate
headquarters to comply with the new transaction and code set regulations. HIPAA requires the Department of Health and Human Services to issue regulations establishing
standard unique health identifiers for individuals, employers, health plans and health care
providers to be used in connection with the standard electronic transactions. All healthcare
providers, including our facilities, will be required to obtain a new National Provider Identifier
(NPI) to be used in standard transactions instead of other numerical identifiers beginning no
later than May 23, 2007; healthcare providers may begin applying for NPIs on May 23, 2005. We
cannot predict whether our facilities may experience payment delays during the transition to the
new identifier. Additionally, the Department of Health and Human Services issued a final rule that
calls for using the Employer Identification Number (the taxpayer identifying number for employers
that is assigned by the Internal Revenue Service) as the identifying number for employers that will
be used by all health plans, with compliance required by July 30, 2004. The Department of Health
and Human Services has not yet issued proposed rules that establish the standard for unique health
identifiers for health plans or individuals. Once these regulations are issued in final form, we
expect to have approximately two years to become fully compliant, but cannot predict the impact of
such changes at this time. On February 20, 2003, the Department of Health and Human Services finalized a rule that
establishes, in part, standards to protect the confidentiality, availability and integrity of
health information by health plans, health care clearinghouses and health care providers that
receive, store, maintain or transmit health and related financial information in electronic form,
regardless of format. These security standards require us to establish and maintain reasonable and
appropriate administrative, technical and physical safeguards to ensure the integrity,
confidentiality and the availability of electronic health and related financial information. The
security standards were designed to protect electronic information against reasonably anticipated
threats or hazards to the security or integrity of the information and to protect the information
against unauthorized use or disclosure. Although the security standards do not reference or
advocate a specific technology, and covered health care providers, plans and clearinghouses have
the flexibility to choose their own technical solutions, we expect that the security standards will
require us to implement significant new systems, business procedures and training programs. We must
comply with these security regulations by April 21, 2005. The Department of Health and Human Services has established standards for the privacy of
individually identifiable health information. These privacy standards apply to all health plans,
all health care clearinghouses and health care providers that transmit health information in an
electronic form in connection with the standard transactions. Our facilities are covered entities
under the final rule. The privacy standards apply to individually identifiable information held or
disclosed by a covered entity in any form, whether communicated electronically, on paper or orally.
These standards impose extensive new administrative requirements on us. They require our compliance
with rules governing the use and disclosure of this health information. They create new rights for
patients in their health information, such as the right to amend their health information, and they
require us to impose these rules, by contract, on any business associate to whom we disclose such
information in order to perform functions on our behalf. In addition, our facilities will continue
to remain subject to any state laws that are more restrictive than the privacy regulations issued
under HIPAA. These state laws vary by state and could impose additional penalties. A violation of the HIPAA regulations could result in civil money penalties of $100 per
incident, up to a maximum of $25,000 per person per year per standard. HIPAA also provides for
criminal penalties of up to $50,000 and one year in prison for knowingly and improperly obtaining
or disclosing protected health information, up to $100,000 and five years in prison for obtaining
protected health information under false pretenses, and up to $250,000 and ten years in prison for
obtaining or disclosing protected health information with the intent to sell, transfer or use such
information for commercial advantage, personal gain or malicious harm. Because there is no history
of enforcement efforts by the federal government at this time, it is not possible to ascertain the
likelihood of enforcement efforts in connection with the HIPAA regulations or the potential for fines and penalties
which may result from the violation of the regulations. We expect that compliance with these standards will require significant commitment and action
by us and our facilities. We have appointed members of our management team to direct our compliance
with these standards. Implementation will require us to engage in extensive preparation and make
significant expenditures. At this time we have appointed a privacy officer at each facility,
prepared privacy policies, trained our workforce on these policies and entered into business
associate agreements with the appropriate vendors. Because some of the regulations are proposed
regulations, we cannot predict the total financial impact of the regulations on our operations. 20




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Emergency Medical Treatment and Active Labor Act All of our facilities are subject to the Emergency Medical Treatment and Active Labor Act
(EMTALA). This federal law requires any hospital that participates in the Medicare program to
conduct an appropriate medical screening examination of every person who enters the hospitals
emergency department for treatment and, if the patient is suffering from an emergency medical
condition, to either stabilize that condition or make an appropriate transfer of the patient to a
facility that can handle the condition. The obligation to screen and stabilize emergency medical
conditions exists regardless of a patients ability to pay for treatment. There are severe
penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a
patient or if the hospital delays appropriate treatment in order to first inquire about the
patients ability to pay. Penalties for violations of EMTALA include civil monetary penalties and
exclusion from participation in the Medicare program. In addition, an injured patient, the
patients family or a medical facility that suffers a financial loss as a direct result of another
hospitals violation of the law can bring a civil suit against the hospital. In September of 2003, CMS released final regulations to clarify hospitals obligations under
EMTALA. The final regulations included a new definition of dedicated emergency department, and
clarified that EMTALA does not apply to inpatients. The final regulations also clarified a
hospitals EMTALA obligations with respect to hospital owned ambulances, outpatient departments,
off-campus provider-based entities, and other locations within the hospital other than the
dedicated emergency department. The final rule also addressed a hospitals physician on-call
responsibilities. Under the final rule, each hospital must maintain an on-call list that best meets
the needs of its patients, but only in accordance with the resources available to the hospital.
There is no set formula for on-call obligations in the final rules, and the final rules recognize
that not all hospitals will be able to have every specialist on call at all times. Hospitals must
maintain written procedures to be followed when a specialist is not on call or a physician is not
available due to circumstances beyond the physicians control. The hospitals written procedures
may also provide for situations in which the on-call physician is performing elective surgery or on
call simultaneously with other facilities. We believe that our facilities comply with EMTALA. California Seismic Standards Californias Alfred E. Alquist Hospital Facilities Seismic Safety Act (the Alquist Act)
requires that the California Building Standards Commission adopt earthquake performance categories,
seismic evaluation procedures, standards and timeframes for upgrading certain facilities, and
seismic retrofit building standards. These regulations require hospitals to meet seismic
performance standards to ensure that they are capable of providing medical services to the public
after an earthquake or other disaster. The Building Standards Commission completed its adoption of
evaluation criteria and retrofit standards in 1998. The Alquist Act requires that within three years after the Building Standards Commission has
adopted evaluation criteria and retrofit standards:  
    certain hospitals must conduct seismic evaluations and submit these evaluations to the
Office of Statewide Health Planning and Development, Facilities Development Division for its
review and approval;
    hospitals must identify the most critical nonstructural systems that represent the
greatest risk of failure during an earthquake and submit timetables for upgrading these
systems to the Office of Statewide Health Planning and Development, Facilities Development
Division for its review and approval; and
    regulated hospitals must prepare a plan and compliance schedule for each regulated
building demonstrating the steps a hospital will take to bring the hospital buildings into
substantial compliance with the regulations and standards. We are required to conduct engineering studies of our two California facilities (Palo Verde
Hospital and Colorado River Medical Center) to determine whether and to what extent modifications
to our facilities will be required. To date, we have conducted engineering studies and implemented
compliance plans for our California facilities which satisfy all current requirements and, through December 31, 2004, have cost us approximately $450,000. In addition
we are continuing to develop plans for compliance with 2008 California requirements. Any
facilities not currently in compliance with the applicable seismic regulations and standards must
be brought into compliance by 2008, or 2013 if the facility obtains an extension. We may be
required to make significant capital expenditures to comply with the seismic standards, which could
impact our earnings. 21




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Professional Liability As part of our business, we are subject to claims of liability for events occurring in the
ordinary course of hospital operations. To cover these claims, we maintain professional malpractice
liability insurance and general liability insurance coverage of approximately $50,000,000, although
some claims may exceed the scope of the coverage in effect. We have purchased a tail policy that
provides an unlimited claim reporting period for our professional liability for claims incurred in
2000 and prior years. We also maintain a claims-made policy and have provided an actuarial-based
accrual for incurred but not reported claims. Recently, the cost of malpractice and other liability
insurance has risen significantly. Therefore, adequate levels of insurance may not continue to be
available at a reasonable price. Available Information We make available free of charge through our Internet website
(http://www.provincehealthcare.com) our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and, if applicable, amendments to those reports filed or
furnished pursuant to Section 13(a) of the Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the Securities and Exchange
Commission. However, the information found on our website is not part of this or any other report. Principal Risk Factors That May Affect Our Business and Results of Operations If government programs reduce the payments we receive as reimbursement for our services, our
revenues may decline. The Medicare and Medicaid programs are highly regulated and subject to frequent and
substantial changes. The Federal Balanced Budget Act of 1997, which established a plan to balance
the federal budget by fiscal year 2002, included significant reductions in spending levels for the
Medicare and Medicaid programs, including:  
    payment reductions for inpatient and outpatient hospital services;
    establishment of a prospective payment system for hospital outpatient services, skilled
nursing facilities and home health agencies under Medicare; and
    repeal of the federal payment standard often referred to as the Boren Amendment for
hospitals and nursing facilities, which could result in lower Medicaid reimbursement rates. The financial impact of the Federal Balanced Budget Act of 1997, however, has been lessened
somewhat by the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, and
further lessened by the Medicare Modernization Act, which provided certain relief specifically
affecting rural hospitals. Significant revisions in how hospitals are paid for some services are
still proceeding. We cannot predict the impact of future legislative and regulatory actions which
might be taken to reduce Medicare and Medicaid payment levels. The Medicare Modernization Act provides a
broad range of provider payment benefits. Federal government spending in excess of federal
budgetary provisions contained in passage of the Medicare Modernization Act 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. In the future, Congress and state legislatures could introduce proposals to make major changes
in the healthcare system. If these proposals are enacted, we may see a decline in the Medicare and
Medicaid reimbursements we receive for our services; however, at
this time, we do not know what healthcare reform legislation will be enacted or whether any
changes in healthcare programs will occur. The healthcare cost containment initiatives and the financial condition of purchasers of healthcare
services may limit our revenue and profitability. During the past several years, major purchasers of healthcare, such as federal and state
governments, insurance companies and employers, have undertaken initiatives to revise payment
methodologies and monitor healthcare costs. As part of their efforts to contain healthcare costs,
purchasers increasingly are demanding discounted fee structures or the assumption by healthcare
providers of 22




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all or a portion of the financial risk through prepaid capitation arrangements. We expect
efforts to impose reduced allowances, greater discounts and more stringent cost controls by
government and other payors to continue. In addition, we anticipate that organizations offering
prepaid and discounted medical services packages may represent an increasing portion of our patient
admissions. An increasing number of managed care organizations have experienced financial
difficulties in recent years, in some cases resulting in bankruptcy or insolvency. In some
instances, organizations with provider agreements with certain of our hospitals have become
insolvent, and the hospitals have been unable to collect the full amounts due from such
organizations. Other managed care organizations with whom we do business may encounter similar
difficulties in paying claims in the future. We believe that reductions in the payments we receive
for our services, coupled with the increased percentage of patient admissions from organizations
offering prepaid and discounted medical services and difficulty in collecting receivables from
managed care organizations, could reduce our overall revenue and profitability. If we fail to comply with regulations regarding licenses, ownership and operation, we could impair
our ability to operate or expand our operations in any state. All of the states in which we operate require hospitals and most healthcare facilities to
maintain a license. In addition, some states require prior approval for the purchase, construction
and expansion of healthcare facilities, based upon a states determination of need for additional
or expanded healthcare facilities or services. Such determinations, embodied in certificates of
need issued by governmental agencies with jurisdiction over healthcare facilities, may be required
for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and
other matters. Five states in which we currently own hospitals, Alabama, South Carolina,
Mississippi, Nevada and Virginia, have certificate of need laws. The failure to obtain any required
certificate of need or the failure to maintain a required license could impair our ability to
operate or expand operations in any state. We are subject to extensive governmental regulation regarding conduct of our operations and our
relationships with physicians. If we fail to comply with these regulations, we could suffer
penalties or be required to make significant changes to our operations. The healthcare industry must comply with many laws and regulations at federal, state and local
governmental levels. These laws and regulations are extremely complex and, in many instances, the
industry does not have the benefit of significant regulatory or judicial interpretation. In
particular, Medicare and Medicaid anti-fraud and abuse provisions, known as the anti-kickback
statute, prohibit some business practices and relationships related to items or services
reimbursable under Medicare, Medicaid and other federal healthcare programs. For instance, the
anti-kickback statute prohibits healthcare service providers from paying or receiving remuneration
to induce or arrange for the referral of patients or items or services covered by a federal or
state healthcare program. If regulatory authorities determine that any of our hospitals
arrangements violate the anti-kickback statute, we could be subject to liabilities under the Social
Security Act, including:  
    criminal penalties;
    civil monetary penalties; and/or
    exclusion from participation in Medicare, Medicaid or other federal healthcare programs, any of which could impair our ability to operate one or more of our hospitals or to operate
profitably. There are currently numerous legislative and regulatory initiatives at the federal and state
levels addressing patient privacy and security concerns. In particular, federal regulations issued
under the Health Insurance Portability and Accountability Act of 1996 contain provisions that have
required, and in the future may require us to implement costly new computer systems and to adopt
business procedures designed to protect the privacy and security of each of our patients
individually identifiable health and related financial information. In August 2000 (with
modifications in February 2003), the Department of Health and Human Services issued regulations
requiring most health care organizations, including us, to use standard data formats and code sets
when electronically transmitting information in connection with several types of transactions,
including health claims, health care payment and remittance advice and health claim status
transactions. As required by HIPAA, the Department of Health and Human Services has established
standards for the privacy of individually identifiable health information, which apply to all
health care providers, health plans and health care clearinghouses that transmit health information
in an electronic form in connection with the standard transactions. Compliance with the privacy
regulations has been required since April 2003 for most health care organizations, including us,
and continue to have a financial impact on the health care industry because they impose extensive
administrative requirements, restrictions on the use and disclosure of individually identifiable
patient health and related financial information, provide patients with rights with respect to
their health information and require us to enter into contracts extending many of the privacy
regulation requirements to third parties who perform functions on our behalf involving health
information. On February 20, 2003, the Department of Health and 23




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Human Services issued final security regulations , which required us to implement
administrative, physical and technical safeguards to protect the integrity, confidentiality and
availability of electronically received, maintained or transmitted patient individually
identifiable health and related financial information. Compliance with these security regulations
is required by April 21, 2005 for most health care organizations, including us. We cannot predict
the total financial or other impact of these regulations on our business over time. Compliance
with these regulations requires substantial expenditures, which could negatively impact our
financial results. In addition, our management has spent, and may spend in the future, substantial
time and effort on compliance measures. Violations of the privacy, security and transaction regulations could subject us to civil
penalties of up to $25,000 per person per calendar year for each provision contained in the privacy, security
and transaction regulations that is violated and criminal penalties of up to $250,000 per violation
for certain other violations. Because there is no significant history of enforcement efforts by the federal
government at this time, it is not possible to ascertain the likelihood of enforcement efforts in
connection with these regulations or the potential for fines and penalties which may result from
the violation of the regulations. In addition, the portion of the Social Security Act commonly known as the Stark law
prohibits physicians from referring Medicare or Medicaid patients to particular providers of
designated health services if the physician or a member of the physicians immediate family has an
ownership interest or compensation arrangement with that provider. Sanctions for violating the
Stark law include civil money penalties and possible exclusion from the Medicare program. Many
states have adopted or are considering similar anti-kickback and physician self-referral
legislation. Some of the state physician self-referral laws are more restrictive than the Stark
law, in that they apply to services reimbursed by all payors, not just by Medicaid or other
government payors. Moreover, the federal government has shown an increasing willingness to prosecute providers
under a variety of fraud laws, including laws that have not traditionally been used for healthcare
fraud, such as the federal civil false claims law and the federal mail and wire fraud laws. There are heightened coordinated civil and criminal enforcement efforts by federal and state
government agencies relating to the healthcare industry. We may become the subject of an
investigation in the future. In recent years, the media and public attention have focused on the hospital industry due to
ongoing investigations related to:  
    referral, cost reporting and billing practices;
    laboratory and home healthcare services; and
    physician ownership and joint ventures involving hospitals. Both federal and state government agencies have announced heightened and coordinated civil and
criminal enforcement efforts. In addition, the Office of the Inspector General of the U.S.
Department of Health and Human Services and the Department of Justice have established enforcement
initiatives that focus on specific billing practices or other suspected areas of abuse. Recent
initiatives include a focus on hospital billing for outpatient charges associated with inpatient
services, as well as hospital laboratory billing practices. We cannot predict with accuracy whether we or other hospital operators will be the subject of
future investigations or inquiries. In the event that we become the subject of an investigation, we
will be required to devote management and financial resources to defending our company in the
investigation. In addition, any negative publicity surrounding the investigation could affect
adversely the trading price of our securities. If we incur significant fines or penalties or are
forced to reimburse amounts as a result of the investigation, our profitability may decline. We have a concentration of revenue in New Mexico, Louisiana and Texas, which makes us particularly
sensitive to regulatory and economic changes in those states. Memorial Medical Center and Los Alamos Medical Center, each located in New Mexico,
collectively accounted for 15.2% of our net patient revenue for the year ended December 31, 2004.
This concentration makes us particularly sensitive to economic, competitive and regulatory
conditions in New Mexico. Any adverse change in these conditions could reduce significantly our
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Doctors Hospital of Opelousas, Eunice Community Medical, Minden Medical Center and Teche
Regional Medical Center in Louisiana collectively accounted for approximately 15.0% of our net
patient revenue from continuing operations for the year ended December 31, 2004. Similarly, this
concentration of revenue in Louisiana makes us particularly sensitive to economic, competitive and
regulatory conditions in Louisiana. Any adverse change in these conditions could reduce
significantly our revenues and profitability. Palestine Regional Medical Center, Ennis Regional Medical Center and Parkview Regional
Hospital, each located in Texas, collectively accounted for 15.0% of our net patient revenue for
the year ended December 31, 2004. Similarly, this concentration makes us particularly sensitive to
economic, competitive and regulatory conditions in Texas. Any adverse change in these conditions
could reduce significantly our revenues and profitability. Our California hospitals must comply with California seismic standards which may require us to make
significant capital expenditures. California has a statute and regulations that require hospitals to meet seismic performance
standards. Regulated hospitals that do not meet the standards may be required to retrofit
facilities. California law requires that owners of regulated hospitals evaluate their facilities
and develop a plan and schedule for complying with the standards. We are required to conduct
engineering studies of our two California facilities (Palo Verde Hospital and Colorado River
Medical Center) to determine whether and to what extent modifications to our facilities will be
required. To date, we have conducted engineering studies and implemented compliance plans for our two California facilities, which satisfy all current
requirements and, through December 31, 2004, have cost us approximately $450,000. In addition, we are continuing to develop plans for compliance with 2008 California requirements. Any facilities not
in compliance with the seismic regulations and standards must be brought into compliance
by 2008, or 2013 if the facility obtains an extension. In the event that our two California
facilities are found not to be in compliance with the seismic standards, we may be required to make
significant capital expenditures to bring the California facilities into compliance, which could
adversely impact our earnings and liquidity. Our performance depends on our ability to recruit and retain quality physicians, nurses and other
healthcare professionals at our hospitals. The success of our owned or leased hospitals depends on:  
    the number and quality of the physicians on the medical staff of our hospitals; and
    the maintenance of good relations between our company and such physicians. Our success has been dependent, in part, upon recruiting quality physicians and maintaining
good relations with and retaining our physicians because physicians direct admissions to our
hospitals and determine the services to be provided to patients at our hospitals. We generally do
not employ physicians, and many of our staff physicians have admitting privileges at other
hospitals. Only a portion of physicians are interested in practicing in the non-urban communities
in which our hospitals are located. The departure of physicians from these communities, such as we
experienced in 2002, or our inability to recruit physicians to these communities, could make it
more difficult to attract patients to our hospitals and could affect our profitability. Also, if we
are unable to maintain good relationships with physicians, our hospitals admissions may decrease
and our operating performance may decline. In addition, hospitals nationwide are experiencing a
shortage of nursing professionals, a trend which many industry observers expect to continue over
the next decade. If the supply of qualified nurses or other healthcare professionals declines in
the markets in which our hospitals operate, it may result in increased labor expenses and lower
operating margins at those hospitals. We depend heavily on key personnel, and loss of the services of one or more of our key executives
or a significant portion of our local management personnel could weaken our management team and our
ability to deliver healthcare services efficiently. Our success largely depends on the skills, experience and efforts of our senior management
team and on the efforts, ability and experience of key members of our local management staff. The
loss of services of one or more members of our senior management or of a significant portion of any
of our local management staff could weaken significantly our management expertise and our ability
to deliver healthcare services efficiently. We do not maintain key man life insurance policies on
any of our officers. Other hospitals and freestanding outpatient facilities provide services similar to those offered by
our hospitals, which may raise the level of competition faced by our hospitals. In all geographic areas in which we operate, there are other healthcare providers, including
hospitals, outpatient surgery centers and other outpatient facilities, that provide comparable
services to those offered by our hospitals. Some of the hospitals with which we 25




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compete are owned by governmental agencies and are supported by tax revenues, and others are owned by not-for-profit
corporations and may be supported to a large extent by endowments and charitable contributions.
Some of these competitors are larger, may be more established and may have more capital and other
resources than we do. Many of our hospitals attempt to attract patients from surrounding counties
and communities, including communities in which a competing facility exists. If our competitors are
able to finance capital improvements and expand services at their facilities, we may be unable to
attract patients away from these facilities. If we fail to improve the operations of acquired hospitals, we may be unable to achieve our growth
objectives. Some of the hospitals we have acquired or will acquire had or may have operating losses prior
to the time we acquired them. We may be unable to operate profitably any hospital or other facility
we acquire, effectively integrate the operations of any acquisitions, or otherwise achieve the
intended benefit of the acquisition. We may be subject to liabilities because of claims brought against our owned and leased hospitals.
In addition, if we acquire hospitals with unknown or contingent liabilities, we could become liable
for material obligations. In recent years, plaintiffs have brought actions against hospitals and other healthcare
providers, alleging malpractice, product liability or other legal theories. Many of these actions
involved large claims and significant defense costs. We maintain professional malpractice liability
and general liability insurance coverage of approximately $50,000,000 to cover claims arising out
of the operations of our owned and leased hospitals. Some of the claims, however, could exceed the
scope of the coverage in effect or coverage of particular claims could be denied. While our
professional and other liability insurance has been adequate in the past to provide for liability
claims, such insurance may not be available for us to maintain adequate levels of insurance.
Moreover, healthcare providers in our industry have experienced significant increase in the
premiums for malpractice insurance, and it is anticipated that such costs may continue to rise.
Malpractice insurance coverage may not continue to be available at a cost allowing us to maintain
adequate levels of insurance with acceptable deductible amounts. In addition, hospitals that we acquire may have unknown or contingent liabilities, including
liabilities for failure to comply with healthcare laws and regulations. Although we obtain
contractual indemnification from sellers covering these matters, such indemnification may be
insufficient to cover material claims or liabilities for past activities of acquired hospitals. Failure to complete the merger with LifePoint could negatively impact the share price and the
future business and financial results of our company. If the merger is not completed, the ongoing business of our company may be adversely affected
and we will be subject to several risks, including the following:  
    we may be required, under certain circumstances, to pay LifePoint a termination fee of
$50,000,000 under the merger agreement;
    we may be required to pay certain costs relating to the merger, such as legal, accounting,
financial advisor and printing fees; and
    our management may be focused on the merger instead of pursuing other opportunities that
could be beneficial to our company. If the merger is not completed, we cannot ensure that these risks will not materialize and
will not materially affect the business or financial results of our company or the trading price of
our shares. 
 ITEM 2. PROPERTIES Information with respect to our hospital facilities and other properties can be found in Item
1 of this report under the captions, Business  Owned and
Leased Hospitals, and Business 
Properties. 
 ITEM 3. LEGAL PROCEEDINGS Our 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, breach of management contracts or
for wrongful restriction of or interference with physicians staff privileges. In certain of these
actions, plaintiffs request punitive and other damages that may not be covered by insurance. We
currently are not a party to any proceeding which, in our opinion, would have a material adverse
effect on our business, financial condition or results of operations. 26




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our companys Board of Directors and the Board of Directors of LifePoint Hospitals, Inc. have
unanimously approved an agreement and plan of merger, dated as of August 15, 2004 (subsequently amended on January 25, 2005 and March 15, 2005), by and among our
company, LifePoint, Lakers Holding Corp., Lakers Acquisition Corp. and Pacers Acquisition Corp.,
pursuant to which LifePoint will combine with our company. On October 25, 2004, Lakers Holding
Corp. filed a registration statement on Form S-4 (subsequently amended on January 4, 2005, January
26, 2005 and February 18, 2005), which included a joint proxy statement of LifePoint and our
company. The special meeting of shareholders of our company relating to the merger will be held on
March 28, 2005. 27




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES Since June 5, 2002, our common stock has been listed on the New York Stock Exchange under the
symbol PRV. The following table sets forth the high and low sale prices for our common stock as
reported by the New York Stock Exchange for the periods indicated. High
    
    
    Low2004First Quarter
    
    $
    18.75
    
    
    $
    15.20Second Quarter
    
    
    17.50
    
    
    
    14.86Third Quarter
    
    
    21.15
    
    
    
    13.25Fourth Quarter
    
    
    22.74
    
    
    
    20.412003First Quarter
    
    $
    10.00
    
    
    $
    5.29Second Quarter
    
    
    11.16
    
    
    
    7.30Third Quarter
    
    
    14.82
    
    
    
    10.60Fourth Quarter
    
    
    16.14
    
    
    
    10.39
 As of March 1, 2005, there were approximately 50,285,014 shares of our common stock
outstanding, held by 719 record holders. We historically have retained and currently intend to retain all earnings to finance the
development and expansion of our operations and, therefore, do not anticipate paying cash dividends
or making any other distributions on our shares of common stock in the foreseeable future.
Furthermore, our senior credit facility and the indenture for our 7 1/2% Senior Subordinated Notes
contain restrictions on our ability to pay dividends. Our future dividend policy will be determined
by our Board of Directors on the basis of various factors, including our results of operations,
financial condition, business opportunities, capital requirements, restrictive covenants in our
financing documents and such other factors as the Board of Directors may deem relevant. 
 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data is qualified by, and should be read in conjunction
with, Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and related notes, appearing elsewhere in
this report. Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands, except per share data)Income Statement Data(1):Revenue from continuing operations
    
    $
    882,906
    
    
    $
    746,208
    
    
    $
    658,262
    
    
    $
    486,880
    
    
    $
    425,405Income from continuing operations, net of tax(2)
    
    
    50,056
    
    
    
    41,720
    
    
    
    34,838
    
    
    
    32,655
    
    
    
    21,028Discontinued operations, net of tax
    
    
    4,443
    
    
    
    (10,101
    )
    
    
    1,274
    
    
    
    253
    
    
    
    (1,090
    )Net income (2)
    
    
    54,499
    
    
    
    31,619
    
    
    
    36,112
    
    
    
    32,908
    
    
    
    19,938Per Common Share Data (1):Basic earnings per share:Income from continuing operations, net of tax
    
    $
    1.01
    
    
    $
    0.85
    
    
    $
    0.72
    
    
    $
    0.69
    
    
    $
    0.49Discontinued operations, net of tax
    
    
    0.09
    
    
    
    (0.20
    )
    
    
    0.03
    
    
    
    0.01
    
    
    
    (0.03
    )Net income
    
    $
    1.10
    
    
    $
    0.65
    
    
    $
    0.75
    
    
    $
    0.70
    
    
    $
    0.46Diluted earnings per share:Income from continuing operations, net of tax
    
    $
    0.96
    
    
    $
    0.84
    
    
    $
    0.70
    
    
    $
    0.67
    
    
    $
    0.47Discontinued operations, net of tax
    
    
    0.08
    
    
    
    (0.17
    )
    
    
    0.03
    
    
    
    
    
    
    
    (0.02
    )Net income
    
    $
    1.04
    
    
    $
    0.67
    
    
    $
    0.73
    
    
    $
    0.67
    
    
    $
    0.45Balance Sheet Data (at end of period)(1):Total assets
    
    $
    1,183,067
    
    
    $
    1,010,393
    
    
    $
    974,187
    
    
    $
    760,081
    
    
    $
    530,852Long-term debt, less current portion
    
    
    428,383
    
    
    
    447,956
    
    
    
    460,370
    
    
    
    328,898
    
    
    
    159,526Stockholders equity
    
    
    515,799
    
    
    
    446,873
    
    
    
    413,202
    
    
    
    362,005
    
    
    
    314,714
 28




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##### Table of Contents



(1)
    
    On April 30, 2004, we completed the sale of Glades General Hospital to the Palm Beach
Healthcare District. On June 30, 2004, we completed the sale of Brim Healthcare, Inc., our
hospital management subsidiary. As required by Statement of Financial Accounting Standards No.
144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets, we have
restated our historical consolidated financial statements to present the results of operations
of Glades General Hospital and Brim Healthcare, Inc. separately as discontinued operations.(2)
    
    The Company adopted Statement of Financial Accounting Standards No. 142 (SFAS No. 142),
Goodwill and Other Intangible Assets, 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. Had we been accounting for our goodwill under SFAS No. 142 for all
periods presented, our pro forma income from continuing operations would have been $36,991 and
$26,051 for the years ended December 31, 2001 and 2000, respectively, and pro forma net income
would have been $37,106 and $24,285 for the years ended December 31, 2001 and 2000,
respectively. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our consolidated financial
statements and related notes, appearing elsewhere in this report. Overview We are a healthcare services company focused on acquiring and operating hospitals in
attractive non-urban communities throughout the United States. As of December 31, 2004, we owned or
leased 21 general acute care hospitals in 13 states with a total of 2,533 licensed beds. On April 30, 2004, we completed the sale of Glades General Hospital in Belle Glade, Florida to
a wholly-owned subsidiary of the Health Care District of Palm Beach County. The District reacquired
the operating assets of the hospital for a purchase price of approximately $1.5 million in cash at
closing, net of assumed and contractual obligations. Under the purchase agreement, we retained the
hospitals accounts receivable, income tax receivable and deferred income taxes. We also retained
certain payroll-related liabilities and other accrued expenses. On June 30, 2004, we completed the
sale of the stock of Brim Healthcare, Inc., our hospital management subsidiary, to Brim Holding
Company, Inc., an independent investor-owned entity for approximately $13.2 million in cash. As
required by Statement of Financial Accounting Standards No. 144 (SFAS No. 144), Accounting for
the Impairment or Disposal of Long-Lived Assets, the operations and non-cash impairment of assets
charge related to Glades General Hospital and Brim Healthcare, Inc. are reported as discontinued
operations and the consolidated financial statements, statistics and all references to such
information contained in this Report have been adjusted to reflect this presentation for all
periods. Our remaining 21 hospitals continue to be reported as continuing operations. Effective June 1, 2004, we completed the acquisition, through a long-term lease, of the
286-bed Memorial Medical Center in Las Cruces, New Mexico (Memorial Medical Center) for
approximately $152.2 million, including direct and incremental costs of the acquisition. On August 16, 2004, our company and LifePoint Hospitals, Inc. (LifePoint) announced that we
had entered into a definitive merger agreement (the Merger Agreement) pursuant to which LifePoint
will acquire us. Pursuant to the terms of the Merger Agreement, our company and LifePoint will each
become wholly-owned subsidiaries of a newly formed holding company that will be publicly traded.
Each of our shareholders will receive a per share consideration comprised of $11.375 of cash and a
number of shares of common stock of the new company equal to an exchange ratio of between 0.3447
and 0.2917, which shares will have a value of $11.375 to the extent that LifePoints average share
price is between $33.00 and $39.00. The exchange ratio will be 0.3447 if the volume weighted
average daily share price of a share of LifePoints common stock for the twenty consecutive trading
day period ending at close of business on the third trading day prior to the closing (the
LifePoint average share price) is $33.00 or less, and 0.2917 if LifePoints average share price
is $39.00 or more. If LifePoints average share price is between $33.00 and $39.00, then the
exchange ratio will be equal to $11.375 divided by the LifePoint average share price. 29




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The proposed merger is subject to approval by the stockholders of our company and LifePoint.
The proposed merger is projected to close by April 15, 2005, subject to the satisfaction of
customary closing conditions. During the fourth quarter of 2004, we completed the construction of the 41-bed Coastal
Carolina Medical Center in Hardeeville, South Carolina and opened the hospital on November 29,
2004. Revenues from continuing operations for the year ended December 31, 2004 increased 18.3% to
$882.9 million, compared with $746.2 million for the year ended December 31, 2003, primarily as a
result of the acquisition of Memorial Medical Center and increases in same-store net patient
revenue per adjusted admission of 6.2% and outpatient revenue of 11.2%, as well as the recording of
cost report settlements. For the year ended December 31, 2004, income from continuing operations
was $50.1 million compared with $41.7 million for the year ended December 31, 2003. The increase in
income from continuing operations was primarily due to the acquisition of Memorial Medical Center
and improved operations at our same store hospitals. Cash flow from operations for the year ended
December 31, 2004 increased 21.0% to $126.3 million, compared with $104.3 million for the year
ended December 31, 2003. The increase was due primarily to an increase of $8.3 million in our
income from continuing operations, a $9.3 million increase in depreciation and amortization expense
(of which $5.0 million is attributable to the Memorial Medical Center acquisition), and an increase
of $15.2 million in our deferred income tax provision resulting from the Memorial Medical Center
acquisition and divestitures of Glades General Hospital and Brim Healthcare, Inc. The increase in
cash flow from operations is partially offset by an increase in net accounts receivable of
continuing operations of $12.6 million. The increase in net accounts receivable principally
relates to a $6.2 million loan to a third party for the construction of a medical office building
on one of our facilitys campuses and approximately $5.9 million from the lessor of Memorial
Medical Center for their obligations required under the facility lease agreement. For the year ended December 31, 2004, 19 of our 21 owned or leased hospitals are considered
same-store hospitals. Memorial Medical Center and Coastal Carolina Medical Center are excluded from
same-store results. On a same-store basis, net patient revenue for the year ended December 31, 2004
increased 5.9%, net patient revenue per adjusted admission increased 6.2% and surgeries increased
3.1% as compared to the year ended December 31, 2003. We continue to see the results of the
successful recruitment of primary care physicians and specialists in 2003 and 2004, strong
outpatient growth and an increase in acuity. Same-store outpatient revenue for the year ended
December 31, 2004 increased 11.2% and same-store acuity increased 2.2%. 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 of
the Ft. Mohave facility is anticipated to be completed in the third quarter of 2005. In the first
quarter of 2005, we announced plans to construct a 52-bed replacement facility for our existing
72-bed facility in Eunice, Louisiana. Construction of the Eunice replacement facility is
anticipated to be completed in the second quarter of 2006. 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: Year Ended December 31,2004
    
    
    2003
    
    
    2002Medicare
    
    
    37.7
    %
    
    
    38.5
    %
    
    
    45.4
    %Medicaid
    
    
    10.1
    
    
    
    10.3
    
    
    
    11.3Managed care and other payors
    
    
    41.2
    
    
    
    44.2
    
    
    
    38.2Self-pay
    
    
    11.0
    
    
    
    7.0
    
    
    
    5.1Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Net patient revenue is reported net of contractual adjustments and policy discounts. Net patient
revenue includes 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 from 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 revenue. 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 $9.9 million, of which $2.9 million related to facilities that 30




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had not previously qualified for disproportionate share payments in prior years, and $5.5
million for the years ended December 31, 2004 and 2003, respectively, and decreased net patient
revenue by $0.9 million for the year ended December 31, 2002. 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, the 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 to internally evaluate our revenues are adjusted admissions, which we
equate to volume, and revenues per adjusted admission, which we 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 148 physicians during the year
ended December 31, 2004, of which approximately two-thirds of these
physicians are specialists.
    Medicare Rate Increases. MMA provides a prescription drug benefit for
Medicare beneficiaries and also contains numerous provisions that
provide incremental funding to hospitals. Hospitals qualify for
Medicare disproportionate share hospital (DSH) payments when their
percentage of low-income patients exceeds 15%. A majority of our
hospitals qualify to receive DSH payments. Effective April 1, 2004,
MMA raised the cap on the DSH payment adjustment percentage from 5.25%
to 12.0% for rural and small urban hospitals and specified that
payments to all hospitals are based on the same conversion factor,
regardless of geographic location. A majority of our hospitals are
benefiting from these provisions.
    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: Year Ended December 31,2004
    
    
    2003
    
    
    2002Outpatient
    
    
    46.0
    %
    
    
    44.5
    %
    
    
    42.6
    %Inpatient
    
    
    53.4
    
    
    
    54.9
    
    
    
    56.8Other
    
    
    0.6
    
    
    
    0.6
    
    
    
    0.6Total
    
    
    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 31




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##### Table of Contents



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 each of the years in
the three-year period ending December 31, 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 year ended December 31, 2004 as a result of our
acquisition of Memorial Medical Center. Our provision for doubtful accounts relates primarily to
self-pay revenues. Self-pay revenues as a percentage of total net patient revenue were 11.0%, 7.0%
and 5.1% for the years ended December 31, 2004, 2003 and 2002, respectively. 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 $17.5 million, $23.5 million and $19.3
million for the years ended December 31, 2004, 2003 and 2002, respectively. Charity care and
provision for doubtful accounts was approximately $112.5 million, $96.1 million and $72.5 million
for the years ended December 31, 2004, 2003 and 2002, respectively. Results of Operations The following tables present, for the periods indicated,
the results of operations of our
company and its subsidiaries. Such information has been derived from our audited consolidated statements
of income for the years ended December 31, 2004, 2003 and 2002. The results of operations for the periods
presented include hospitals from their respective dates of acquisition. Year Ended December 31,2004
    
    
    2003(Dollars in Thousands, Except Per Share Data)% of
    
    
    
    
    
    
    % of
    
    
    % ChangeAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    From Prior YearRevenues:Net patient revenue
    
    $
    872,275
    
    
    
    
    
    
    $
    735,841Other
    
    
    10,631
    
    
    
    
    
    
    
    10,367882,906
    
    
    
    100.0
    %
    
    
    746,208
    
    
    
    100.0
    %
    
    
    18.3
    %Expenses:Salaries, wages and benefits
    
    
    323,565
    
    
    
    36.6
    
    
    
    282,794
    
    
    
    37.9Purchased services
    
    
    85,698
    
    
    
    9.7
    
    
    
    68,872
    
    
    
    9.2Supplies
    
    
    114,186
    
    
    
    12.9
    
    
    
    95,579
    
    
    
    12.8Provision for doubtful accounts
    
    
    95,015
    
    
    
    10.8
    
    
    
    72,583
    
    
    
    9.7Other operating expenses
    
    
    96,934
    
    
    
    11.0
    
    
    
    88,137
    
    
    
    11.8Rentals and leases
    
    
    11,250
    
    
    
    1.3
    
    
    
    9,007
    
    
    
    1.2Transaction costs
    
    
    851
    
    
    
    0.1
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    46,881
    
    
    
    5.3
    
    
    
    37,617
    
    
    
    5.1Interest expense
    
    
    29,652
    
    
    
    3.3
    
    
    
    26,262
    
    
    
    3.5Minority interests
    
    
    687
    
    
    
    0.1
    
    
    
    260
    
    
    
    Loss on sale of assets
    
    
    30
    
    
    
    
    
    
    
    75
    
    
    
    Loss on early extinguishment of debt

    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    0.1Total expenses
    
    
    804,749
    
    
    
    91.1
    
    
    
    681,672
    
    
    
    91.3
    
    
    
    18.1
    %Income from continuing operations
before provision for income taxes
    
    
    78,157
    
    
    
    8.9
    
    
    
    64,536
    
    
    
    8.7
    
    
    
    21.1
    %Income taxes
    
    
    28,101
    
    
    
    3.2
    
    
    
    22,816
    
    
    
    3.1Income from continuing operations
    
    
    50,056
    
    
    
    5.7
    
    
    
    41,720
    
    
    
    5.6
    
    
    
    20.0
    %
 32




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##### Table of Contents



Year Ended December 31,2004
    
    
    2003(Dollars in Thousands, Except Per Share Data)% of
    
    
    
    
    
    
    % of
    
    
    % ChangeAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    From Prior YearDiscontinued operations, net of tax:Loss from operations
    
    
    (2,220
    )
    
    
    
    
    
    
    (1,149
    )Net gain (loss) on divestitures
    
    
    6,663
    
    
    
    
    
    
    
    (8,952
    )Net income
    
    $
    54,499
    
    
    
    
    
    
    $
    31,619
    
    
    
    
    
    
    
    72.4
    %Diluted earnings per common share:Continuing operations
    
    $
    0.96
    
    
    
    
    
    
    $
    0.84Discontinued operations, net of tax:Loss from operations
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.02
    )Net gain (loss) on divestitures
    
    
    0.11
    
    
    
    
    
    
    
    (0.15
    )Net income
    
    $
    1.04
    
    
    
    
    
    
    $
    0.67
 Year Ended December 31,2003
    
    
    2002(Dollars in Thousands, Except Per Share Data)% of
    
    
    
    
    
    
    % of
    
    
    % ChangeAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    

From
Prior yearRevenues:Net patient revenue
    
    $
    735,841
    
    
    
    
    
    
    $
    649,954Other
    
    
    10,367
    
    
    
    
    
    
    
    8,308746,208
    
    
    
    100.0
    %
    
    
    658,262
    
    
    
    100.0
    %
    
    
    13.4
    %Expenses:Salaries, wages and benefits
    
    
    282,794
    
    
    
    37.9
    
    
    
    261,499
    
    
    
    39.7Purchased services
    
    
    68,872
    
    
    
    9.2
    
    
    
    69,934
    
    
    
    10.6Supplies
    
    
    95,579
    
    
    
    12.8
    
    
    
    84,408
    
    
    
    12.8Provision for doubtful accounts
    
    
    72,583
    
    
    
    9.7
    
    
    
    53,201
    
    
    
    8.1Other operating expenses
    
    
    88,137
    
    
    
    11.8
    
    
    
    69,447
    
    
    
    10.6Rentals and leases
    
    
    9,007
    
    
    
    1.2
    
    
    
    8,284
    
    
    
    1.3Depreciation and amortization
    
    
    37,617
    
    
    
    5.1
    
    
    
    32,169
    
    
    
    4.9Interest expense
    
    
    26,262
    
    
    
    3.5
    
    
    
    21,285
    
    
    
    3.2Minority interests
    
    
    260
    
    
    
    
    
    
    
    34
    
    
    
    Loss (gain) on sale of assets
    
    
    75
    
    
    
    
    
    
    
    (77
    )
    
    
    Loss on early extinguishment of debt
    
    
    486
    
    
    
    0.1
    
    
    
    
    
    
    
    Total expenses
    
    
    681,672
    
    
    
    91.3
    
    
    
    600,184
    
    
    
    91.2
    
    
    
    13.6
    %Income from continuing operations before
provision for income taxes
    
    
    64,536
    
    
    
    8.7
    
    
    
    58,078
    
    
    
    8.8
    
    
    
    11.1
    %Income taxes
    
    
    22,816
    
    
    
    3.1
    
    
    
    23,240
    
    
    
    3.5Income from continuing operations
    
    
    41,720
    
    
    
    5.6
    
    
    
    34,838
    
    
    
    5.3
    
    
    
    19.8
    %Discontinued operations, net of tax:(Loss) earnings from operations
    
    
    (1,149
    )
    
    
    
    
    
    
    1,274Net loss on divestitures
    
    
    (8,952
    )
    
    
    
    
    
    
    Net income
    
    $
    31,619
    
    
    
    
    
    
    $
    36,112
    
    
    
    
    
    
    
    (12.4
    )%Diluted earnings (loss) per common
share:Continuing operations
    
    $
    0.84
    
    
    
    
    
    
    $
    0.70Discontinued operations, net of tax:(Loss) earnings from operations
    
    
    (0.02
    )
    
    
    
    
    
    
    0.03Net loss on divestitures
    
    
    (0.15
    )
    
    
    
    
    
    
    Net income
    
    $
    0.67
    
    
    
    
    
    
    $
    0.73
 33




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##### Table of Contents



The following tables present key operating statistics for our owned and leased hospitals
(excluding discontinued operations) for the periods presented. (1) Year Ended December 31,2004
    
    
    2003
    
    
    % ChangeCONSOLIDATED HOSPITALS (CONTINUING OPERATIONS):Number of hospitals at end of period
    
    
    21
    
    
    
    19
    
    
    
    10.5
    %Licensed beds at end of period (2)
    
    
    2,533
    
    
    
    2,189
    
    
    
    15.7Beds in service at end of period
    
    
    2,157
    
    
    
    1,933
    
    
    
    11.6Inpatient admissions (3)
    
    
    76,107
    
    
    
    72,630
    
    
    
    4.8Adjusted admissions (4)
    
    
    141,671
    
    
    
    131,557
    
    
    
    7.7Net patient revenue per adjusted admission
    
    $
    6,157
    
    
    $
    5,593
    
    
    
    10.1Patient days (5)
    
    
    323,949
    
    
    
    307,195
    
    
    
    5.5Adjusted patient days (6)
    
    
    602,962
    
    
    
    556,331
    
    
    
    8.4Average length of stay (days) (7)
    
    
    4.3
    
    
    
    4.2
    
    
    
    2.4Net patient revenue (in thousands)
    
    $
    872,275
    
    
    $
    735,841
    
    
    
    18.5Gross patient revenue (in thousands) (8):Inpatient
    
    $
    1,033,038
    
    
    $
    903,740
    
    
    
    14.3
    %Outpatient
    
    
    889,903
    
    
    
    732,844
    
    
    
    21.4Total gross patient revenue
    
    $
    1,922,941
    
    
    $
    1,636,584
    
    
    
    17.5
    %SAME HOSPITALS (CONTINUING OPERATIONS)(9):Number of hospitals at end of period
    
    
    19
    
    
    
    19
    
    
    
    
    %Licensed beds at end of period (2)
    
    
    2,206
    
    
    
    2,189
    
    
    
    0.8Beds in service at end of period
    
    
    1,920
    
    
    
    1,933
    
    
    
    (0.7
    )Inpatient admissions (3)
    
    
    70,071
    
    
    
    72,630
    
    
    
    (3.5
    )Adjusted admissions (4)
    
    
    131,277
    
    
    
    131,557
    
    
    
    (0.2
    )Net patient revenue per adjusted admission
    
    $
    5,937
    
    
    $
    5,592
    
    
    
    6.2Patient days (5)
    
    
    297,083
    
    
    
    307,195
    
    
    
    (3.3
    )Adjusted patient days (6)
    
    
    556,459
    
    
    
    556,331
    
    
    
    Average length of stay (days) (7)
    
    
    4.2
    
    
    
    4.2
    
    
    
    Net patient revenue (in thousands)
    
    $
    779,419
    
    
    $
    735,727
    
    
    
    5.9Gross patient revenue (in thousands) (8):Inpatient
    
    $
    933,552
    
    
    $
    903,740
    
    
    
    3.3
    %Outpatient
    
    
    814,808
    
    
    
    732,844
    
    
    
    11.2Total gross patient revenue
    
    $
    1,748,360
    
    
    $
    1,636,584
    
    
    
    6.8
    %
   (1)
    
    All statistics have been restated to exclude the ownership and operations of Glades General
Hospital, which was sold on April 30, 2004. The statistics above have not been impacted by the
disposal of Brim Healthcare, Inc. on June 30, 2004.(2)
    
    Beds for which a hospital has been granted approval to operate from the applicable state
licensing agency.(3)
    
    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.(4)
    
    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.(5)
    
    Represents the total number of days the patients who are admitted stay in our hospitals.(6)
    
    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. 34




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(7)
    
    The average number of days admitted patients stay in our hospitals.(8)
    
    Represents revenues prior to reductions for discounts and contractual allowances.(9)
    
    Same hospital information includes the operations of only those hospitals which were owned or
leased during both entire periods presented and excludes the ownership and operations of
Glades General Hospital, which was sold on April 30, 2004. Year Ended December 31,2003
    
    
    2002
    
    
    % ChangeCONSOLIDATED HOSPITALS (CONTINUING OPERATIONS):Number of hospitals at end of period
    
    
    19
    
    
    
    19
    
    
    
    
    %Licensed beds at end of period (2)
    
    
    2,189
    
    
    
    2,207
    
    
    
    (0.8
    )Beds in service at end of period
    
    
    1,933
    
    
    
    1,933
    
    
    
    Inpatient admissions (3)
    
    
    72,630
    
    
    
    69,107
    
    
    
    5.1Adjusted admissions (4)
    
    
    131,557
    
    
    
    120,990
    
    
    
    8.7Net patient revenue per adjusted admission
    
    $
    5,593
    
    
    $
    5,372
    
    
    
    4.1Patient days (5)
    
    
    307,195
    
    
    
    299,138
    
    
    
    2.7Adjusted patient days (6)
    
    
    556,331
    
    
    
    523,307
    
    
    
    6.3Average length of stay (days) (7)
    
    
    4.2
    
    
    
    4.3
    
    
    
    (2.3
    )Net patient revenue (in thousands)
    
    $
    735,841
    
    
    $
    649,954
    
    
    
    13.2Gross patient revenue (in thousands) (8):Inpatient
    
    $
    903,740
    
    
    $
    799,358
    
    
    
    13.1
    %Outpatient
    
    
    732,844
    
    
    
    599,333
    
    
    
    22.3Total gross patient revenue
    
    $
    1,636,584
    
    
    $
    1,398,691
    
    
    
    17.0
    %SAME HOSPITALS (CONTINUING OPERATIONS)(9):Number of hospitals at end of period
    
    
    19
    
    
    
    19
    
    
    
    
    %Licensed beds at end of period (2)
    
    
    2,189
    
    
    
    2,207
    
    
    
    (0.8
    )Beds in service at end of period
    
    
    1,933
    
    
    
    1,933
    
    
    
    Inpatient admissions (3)
    
    
    68,205
    
    
    
    67,694
    
    
    
    0.8Adjusted admissions (4)
    
    
    121,707
    
    
    
    118,035
    
    
    
    3.1Net patient revenue per adjusted admission
    
    $
    5,521
    
    
    $
    5,363
    
    
    
    2.9Patient days (5)
    
    
    287,880
    
    
    
    293,248
    
    
    
    (1.8
    )Adjusted patient days (6)
    
    
    513,539
    
    
    
    510,906
    
    
    
    0.5Average length of stay (days) (7)
    
    
    4.2
    
    
    
    4.3
    
    
    
    (2.3
    )Net patient revenue (in thousands)
    
    $
    671,910
    
    
    $
    633,005
    
    
    
    6.1Gross patient revenue (in thousands) (8):Inpatient
    
    $
    857,340
    
    
    $
    787,050
    
    
    
    8.9
    %Outpatient
    
    
    672,018
    
    
    
    584,687
    
    
    
    14.9Total gross patient revenue
    
    $
    1,529,358
    
    
    $
    1,371,737
    
    
    
    11.5
    %
 See notes following preceding table. Hospital revenues are received primarily from Medicare, Medicaid and commercial insurance. The
revenues received from the Medicare program are expected to increase with the general aging of the
population. The payment rates under the Medicare program for inpatients are based on a prospective
payment system, based upon the diagnosis of a patient. While these rates are indexed for inflation
annually, the increases historically have been less than actual inflation. In addition, states,
insurance companies and employers are actively negotiating the amounts paid to hospitals as opposed
to paying standard hospital rates. The trend toward managed care, including health maintenance
organizations, preferred provider organizations and various other forms of managed care, may affect
our hospitals ability to maintain their current rate of net operating revenue growth. We
continually monitor the cost/benefit relationship of services provided at our hospitals,
and make decisions related to adding new services or discontinuing existing services. Net patient revenue is reported net of contractual adjustments and policy discounts. The
adjustments principally result from differences between our hospitals customary charges and
payment rates under the Medicare, Medicaid and other third-party payor programs. Customary charges
generally have increased at a faster rate than the rate of increase for Medicare and Medicaid
payments. 35




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We provide care without charge to patients who are financially unable to pay for the
healthcare services they receive. Because we do not pursue collection of amounts determined to
qualify as charity care, they are not reported in net patient revenue. Operating expenses of our
hospitals primarily consist of salaries, wages and benefits, purchased services, supplies,
provision for doubtful accounts, rentals and leases, and other operating expenses, principally
consisting of utilities, insurance, property taxes, travel, physician recruiting, telephone,
advertising, repairs and maintenance. Year Ended December 31, 2004 Compared to Year Ended December 31, 2003 Revenues increased 18.3% to $882.9 million in 2004 compared to $746.2 million in 2003. This
increase was primarily attributable to the acquisition of Memorial Medical Center in Las Cruces,
New Mexico (Memorial Medical Center) effective June 1, 2004 and an increase in same hospital
revenues. Same hospital net patient revenues increased 5.9% in 2004 from 2003 primarily due to
increases in net patient revenue per adjusted admission of 6.2% and outpatient revenue of 11.2%.
The increase in same-store net patient revenue per adjusted admission was due, in part, by acuity
as our same-store Medicare case mix index increased approximately 2.2% to 1.23 for the year ended
December 31, 2004 from 1.20 for the year ended December 31, 2003. Cost report settlements and the
filing of cost reports also increased revenues in 2004 by $9.9 million, of which $2.9 million
related to facilities that had not previously qualified for disproportionate share payments in
prior years, and $5.5 million in 2003, respectively. Under our agreement with the seller of
Memorial Medical Center, we are to receive payments from the seller through June 1, 2007 as
reimbursement for providing certain levels of charity services. For
the period from June 1, 2004 (date of acquisition)
through the end of 2004, we recorded $4.2 million in reimbursement for these services provided. The table below reflects the sources of our net patient revenue for the years ended December
31, 2004 and 2003, expressed as a percentage of total net patient revenue: Year Ended December 31,2004
    
    
    2003Medicare
    
    
    37.7
    %
    
    
    38.5
    %Medicaid
    
    
    10.1
    
    
    
    10.3Other (including self-pay)
    
    
    52.2
    
    
    
    51.2100.0
    %
    
    
    100.0
    %
 Salaries, wages and benefits as a percentage of revenues, decreased to 36.6% from 37.9% in
2003. The decrease is primarily due to improvements resulting from continued implementation of our
flexible staffing standards throughout our hospitals, which effectively matches labor with hospital
volume trends and continued cost containment of employee benefit expenses. Purchased services, as a percentage of revenues, increased to 9.7% in 2004 from 9.2% in 2003.
The increase is primarily due to an increase in legal fees of $1.6 million and a $4.0 million
increase in contract labor (primarily contract services for nursing, emergency room and physical
therapy at Memorial Medical Center and four of our same-store hospitals) for the year ended
December 31, 2004 compared to the year ended December 31, 2003. The increase in legal fees is
related to medical staff bylaws and physician contract matters. The provision for doubtful accounts, as a percentage of revenues, increased to 10.8% in 2004
from 9.7% in 2003 due primarily to the increase in bad debts resulting from the increase in
self-pay revenue and due to the purchase of Memorial Medical Center. During the year ended December
31, 2004, self-pay revenue as a percentage of gross revenues increased to 5.9% from 4.6% for 2003.
The increase in self-pay revenue is due to the current economic environment and slow employment
recovery, coupled with changes in benefit plan design toward increased co-pays and deductibles as
employers pass a greater percentage of healthcare costs to individual employees. 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, particularly in Texas. Net
patient revenue associated with self-pay patients are 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. Other operating expenses decreased as a percentage of revenues to 11.0% in 2004 from 11.8% in
2003 primarily due to a reduction of $1.2 million in insurance cost as we continued to realize
favorable experience in both professional and general liability and workers compensation
insurance, as determined by our independent third party actuary. 36




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Depreciation and amortization expense increased $9.3 million to $46.9 million in 2004 from
$37.6 million in 2003. Approximately $5.0 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 $29.7 million in 2004 from $26.3 million in 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 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 $28.1 million, or a 36.0% effective tax rate, in 2004
compared to $22.8 million, or a 35.4% effective tax rate, in 2003. The reduction in the effective
tax rate for both 2004 and 2003 from the statutory rate was primarily attributable to a reduction
in our tax liabilities due to the final and favorable resolution of examinations by taxing
authorities in 2004. In addition, the reduction in the federal tax rate for 2004 was attributable
to the realization of Empowerment Zone and Renewal Community Tax credits related to two of our
facilities and the impact of the disposition of Glades General Hospital and Brim Healthcare, Inc. In
2004, our companys discontinued operations incurred an after-tax gain on divestitures of
$6.7 million and a loss from operations totaling
$2.2 million. In 2003, our companys discontinued
operations incurred an after-tax impairment of assets charge of $9.0 million and a loss from
discontinued operations totaling $1.1 million. The gain on divestitures recorded in 2004 was
principally due to the gain on sale of Brim Healthcare, Inc., which resulted in an after-tax gain
of $7.0 million. The impairment of assets charge in 2003 was related to the write-off of goodwill
and physician recruiting costs and the write down of other assets of Glades General Hospital to
their net realizable value, less cost to sell. The decline in loss from operations resulted
primarily from the recording of an additional provision for doubtful accounts for Glades General
Hospital patient accounts receivable that we retained in the sale of that entity. Year Ended December 31, 2003 Compared to Year Ended December 31, 2002 Revenues increased 13.4% to $746.2 million in 2003 compared to $658.3 million in 2002. This
increase was primarily attributable to the hospitals acquired in 2002 and an increase in same
hospital revenues. During the second quarter of 2002, our company acquired Los Alamos Medical
Center in New Mexico and Memorial Hospital of Martinsville and Henry County in Virginia. Same
hospital net patient revenue increased 6.1% in 2003 from 2002 primarily due to increases in
adjusted admissions of 3.1% and net patient revenue per adjusted admission of 2.9%. The increase in
adjusted admissions was attributable, in part, to the addition of 106 new doctors, of which 17 were
hospital-based, in our communities in 2003. Cost report settlements and the filing of cost reports
also increased revenue in 2003 by $5.5 million compared to a reduction in revenue in 2002 of $0.9
million. The table below reflects the sources of our net patient revenue for the years ended December
31, 2003 and 2002, expressed as a percentage of total net patient revenue: Year Ended December 31,2003
    
    
    2002Medicare
    
    
    38.5
    %
    
    
    45.4
    %Medicaid
    
    
    10.3
    
    
    
    11.3Other (including self-pay)
    
    
    51.2
    
    
    
    43.3100.0
    %
    
    
    100.0
    %
 Salaries, wages and benefits as a percentage of revenues, decreased to 37.9% from 39.7% in
2002. The decrease is primarily due to improvements resulting from continued implementation of our
flexible staffing standards throughout our hospitals, which effectively matches labor with hospital
volume trends and continued cost containment of employee benefit expenses. Purchased services, as a percentage of revenues, decreased to 9.2% in 2003 from 10.6% in 2002.
The decrease is primarily attributable to an 18.5% reduction in contract labor and reductions in
collection agency fees as we were less reliant on outside collection consultants and staffing. 37




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Provision for doubtful accounts, as a percentage of revenues, increased to 9.7% in 2003 from
8.1% in 2002 due primarily to the increase in bad debts resulting from increases in self-pay
revenue. During 2003, self-pay revenue as a percentage of total gross revenues increased to 4.6%
from 3.8% in 2002. The most significant increase occurred in the second quarter of 2003 when
self-pay revenue as a percentage of gross revenues increased to 5.1% but then declined slightly in
the third quarter to 4.8% and continued to decline in the fourth quarter to 4.5%. The increase in
self-pay revenue is due to the current economic environment and slow employment recovery, coupled
with changes in benefit plan design toward increased co-pays and deductibles as employers pass a
greater percentage of healthcare costs to individual employees. Net patient revenue associated with
self-pay patients are 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. Other operating expenses increased as a percentage of revenues to 11.8% in 2003 from 10.6% in
2002 primarily due to increased medical malpractice, workers compensation and directors and
officers insurance cost of $7.2 million and increased physician recruitment expense of $3.1 million
based upon the significant number of physicians we recruited to our communities in 2003. Depreciation and amortization expense increased $5.4 million to $37.6 million in 2003 from
$32.2 million in 2002 primarily due to depreciation at the two hospitals acquired in 2002 and
capital expenditures. Interest
expense increased to $26.3 million in 2003 from
$21.3 million in 2002 primarily due to the issuance in May 2003 of $200.0 million aggregate principal
amount of 7 1/2% Senior Subordinated Notes due 2013, offset by repayments of outstanding borrowings on our senior bank credit facility,
repurchases of a portion of our 4 1/2% Convertible Subordinated Notes due 2005 and entering into a
$100.0 million fixed to floating interest rate swap agreement during the third quarter of 2003. The write-off of deferred loan costs and the gain resulting from repurchasing a portion of our
4 1/2% Convertible Subordinated Notes due 2005 at a discount resulted in a net pre-tax loss on extinguishment
of debt of $0.5 million during 2003. The provision for income taxes totaled $22.8 million, or a 35.4% effective tax rate, in 2003
compared to $23.2 million, or a 40.0% effective tax rate, in 2002. The reduction in the effective
tax rate during 2003 was primarily attributable to a $2.3 million 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
2003, our companys discontinued operations incurred an after-tax impairment of assets
charge of $9.0 million and a loss from operations totaling $1.1 million. In 2002, the discontinued
operations achieved earnings from operations of $1.3 million. The decline in operations resulted
primarily from a shift in the demographic make-up of the service area surrounding Glades General
Hospital and a significant increase in the proportion of indigent care provided by that facility. Liquidity and Capital Resources At December 31, 2004, we had working capital from continuing operations of $15.7 million,
including cash and cash equivalents of $9.8 million, compared to working capital from continuing
operations of $130.6 million, including $46.1 million in cash and cash equivalents at December 31,
2003. Net cash provided by operating activities was $126.3 million for the year ended December 31,
2004, compared to $104.3 million for the year ended December 31, 2003. The $22.0 million increase
in cash provided by operating activities is primarily due to an increase of $8.3 million in our
income from continuing operations, a $9.3 million increase in depreciation and amortization expense
(of which $5.0 million is attributable to the Memorial Medical Center acquisition), and an increase
of $15.2 million in our deferred income tax provision resulting from the Memorial Medical Center
acquisition and divestitures of Glades General Hospital and Brim Healthcare, Inc. The increase in
cash flow from operations is partially offset by an increase in net accounts receivable of
continuing operations of $12.6 million. The increase in net accounts receivable principally relates
to a $6.2 million loan to a third party for the construction of a medical office building on one of
our facilitys campuses and approximately $5.9 million from the lessor of Memorial Medical Center
for their obligations required under the facility lease agreement. Net cash used in investing activities increased to $228.1 million in 2004 from $56.9 million
in 2003. The $171.2 million increase is primarily due to the $152.2 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 year ended December 31, 2004 included $6.3
million for the purchase of land and building at Havasu Regional Medical Center, $25.4 million in
construction costs and equipment 38




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purchases for the new hospital in Hardeeville, South Carolina, $3.9 million for our MRI
project at Los Alamos Medical Center, $3.8 million for womens services at Teche Regional Medical
Center, $6.6 million in construction costs for the new hospital in Ft. Mohave, Arizona and $9.3
million for a company-wide information system upgrade. Net cash used in investing activities was
partially offset by approximately $14.7 million in cash proceeds from the sale of Glades General
Hospital and Brim Healthcare, Inc. in the second quarter of 2004. Net cash provided by financing activities totaled $66.4 million for 2004 primarily due to
borrowings of $110.4 million under our senior bank credit facility for the acquisition of Memorial
Medical Center, as primarily offset by $55.4 million in repayments of borrowings under our senior
bank credit facility and $0.8 million in payments under capital lease obligations. Net cash used in
financing activities of $16.3 million in 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 used 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
December 31, 2004, we had $186.7 million, net of outstanding revolver borrowings of $55.0 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 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 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. In November and December 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 39




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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 December 31, 2004, approximately $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. 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 $0.5 million pretax loss associated with the early extinguishment of debt
related to the repurchase of the 4 1/2% Notes. We did not repurchase any of the 4 1/2% Notes during
2004 and have not repurchased any of the 4 1/4% Notes. On March 18, 2005, in
connection with the pending acquisition by LifePoint, we commenced a
cash tender offer and consent solicitation for any and all of our 7 1/2%
Notes. In addition, Lakers Holding Corp., a subsidiary of LifePoint, commenced a
cash tender offer on that date for any and all of our 4 1/4% Notes. The tender offer consideration for each $1,000 principal amount of
7 1/2% Notes validly tendered and accepted for purchase will be based on a
fixed spread of 50 basis points over the yield on the price, as of April 12,
2005, of the 2.625% U.S. Treasury Note due May 15, 2008, plus accrued interest
minus a consent payment equal to $20 per $1,000 principal amount tendered and
accepted for purchase. The tender offer consideration for each $1,000 principal
amount of 4 1/4% Notes validly tendered and accepted for purchase will be
$1,060, plus accrued interest. The tender offer on the 7 1/2% Notes is
scheduled to expire on April 15, 2005 and the tender offer on the 4 1/4% Notes
is scheduled to expire on April 14, 2005, unless extended or terminated earlier. 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 the hospitals. We expect to make
total capital expenditures in 2005 of approximately $51.0 million, exclusive of new hospital
construction projects. Planned capital expenditures for 2005 consist principally of capital
improvements to owned and leased hospitals. In addition, we expect our new hospital construction
projects in Ft. Mohave, Arizona and Eunice, Louisiana will total $40.9 million in 2005. We
anticipate opening the Arizona hospital in the third quarter of 2005 and the Louisiana hospital in
the second quarter of 2006. 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 and other expected operating needs for the next
twelve months. The following tables reflect a summary of our obligations and commitments outstanding as of
December 31, 2004. Payments Due By PeriodLess than 1Year
    
    
    1-2 Years
    
    
    3-4 Years
    
    
    Thereafter
    
    
    Total(In Thousands)Contractual Cash Obligations:Long-term debt
    
    $
    75,970
    
    
    $
    55,000
    
    
    $
    172,500
    
    
    $
    198,337
    
    
    $
    501,807Capital lease obligations, with interest
    
    
    479
    
    
    
    940
    
    
    
    892
    
    
    
    2,311
    
    
    
    4,622Operating leases
    
    
    7,609
    
    
    
    12,127
    
    
    
    7,693
    
    
    
    15,538
    
    
    
    42,967Subtotal
    
    $
    84,058
    
    
    $
    68,067
    
    
    $
    181,085
    
    
    $
    216,186
    
    
    $
    549,396
 Amount of Commitment Expiration Per PeriodLess than 1Year
    
    
    1-2 Years
    
    
    3-4 Years
    
    
    Thereafter
    
    
    Total(In Thousands)Other Commitments:Letters of credit
    
    $
    
    
    
    $
    8,277
    
    
    $
    
    
    
    $
    
    
    
    $
    8,277Construction and improvement
commitments
    
    
    69,643
    
    
    
    12,394
    
    
    
    
    
    
    
    
    
    
    
    82,037Physician commitments(1)
    
    
    15,982
    
    
    
    5,607
    
    
    
    1,306
    
    
    
    
    
    
    
    22,895Subtotal
    
    $
    85,625
    
    
    $
    26,278
    
    
    $
    1,306
    
    
    $
    
    
    
    $
    113,209Total obligations and commitments
    
    $
    169,683
    
    
    $
    94,345
    
    
    $
    182,391
    
    
    $
    216,186
    
    
    $
    662,605
   (1)
    
    Represents the aggregate of our contractual obligations for advances to physicians as
reflected in physician recruiting agreements. Amounts shown are calculated based on the full
extent of the obligation set forth in the agreements, although the actual amount of such
advances often depends on the financial performance of the physicians practice during the
first year after relocating to the 40




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community and whether the physician remains in the community. In most cases, the amounts advanced
under the agreements are significantly less than the contractual commitment. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. In preparing our financial statements, we are
required to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. We
evaluate our estimates and judgments on an ongoing basis. We base our estimates and judgments on
historical experience and on various other factors that we believe 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. Our actual results may
differ from these estimates, and different assumptions or conditions may yield different estimates.
The following represent the estimates that we consider most critical to our operating performance
and involve the most complex assumptions and assessments. Allowance for Doubtful Accounts Substantially all of our accounts receivable are related to providing healthcare services to
our hospitals patients. Our ability to collect outstanding receivables from third-party payors and
others is critical to our operating performance and cash flows. The primary collection risk lies
with uninsured patient accounts or patient accounts for which a balance remains after primary
insurance has paid. Insurance coverage is verified prior to treatment for all procedures scheduled
in advance and walk-in patients. Insurance coverage is not verified in advance of procedures for
emergency 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.
For hospitals that we have owned in excess of one year, 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. For
hospitals that the Company has owned less than one year, the Company estimates the allowance for
doubtful accounts by applying a hospital-specific reserve percentage for each self-pay and non
self-pay aging category, beginning with the 0-30 day aging category, with all self-pay and non-self
pay accounts fully reserved at 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: December 31, 2004
    
    December 31, 2003
    
    December 31, 200254
    
    54
    
    62
 Our target for days revenue outstanding ranges from 53 to 58 days. 41




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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: December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 20020 to 60 days
    
    
    59.8
    %
    
    
    57.7
    %
    
    
    52.9
    %61 to 150 days
    
    
    18.7
    
    
    
    17.2
    
    
    
    17.3Over 150 days
    
    
    21.5
    
    
    
    25.1
    
    
    
    29.8Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 The approximate percentage of total gross accounts receivable summarized by payor is as
follows: December 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Medicare
    
    
    24.5
    %
    
    
    25.5
    %
    
    
    23.3
    %Medicaid
    
    
    11.1
    
    
    
    11.6
    
    
    
    12.5Managed Care and Other
    
    
    30.1
    
    
    
    25.4
    
    
    
    26.2Self-Pay
    
    
    34.3
    
    
    
    37.5
    
    
    
    38.0Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 We owned or leased three hospitals in Texas, which accounted for 16.1% and 16.6% of net
accounts receivable in 2004 and 2003, respectively. We owned or leased four hospitals in Louisiana,
which accounted for 9.5% and 13.2% of net accounts receivable in 2004 and 2003, respectively. We
owned or leased two hospitals in New Mexico, one of which was acquired in 2004, which accounted for
16.2% and 3.6% of net accounts receivable in 2004 and 2003, respectively. Same-store upfront cash collections for the year ended December 31, 2004 were approximately
$13.5 million compared to $11.5 million and $8.1 million for the years ended December 31, 2003 and
2002, respectively. 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 diagnosis related group (DRG) data to
individual patient accounts to calculate contractual allowances. For all inpatient and outpatient
non-Medicare and non-Medicaid 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. General and Professional Liability Reserves We purchased a professional liability claims-made reporting policy effective January 1, 2004.
This coverage is subject to a $5.0 million self-insured retention per occurrence for general and
professional liability and provides coverage up to $50.0 million for claims incurred during the
annual policy term. This retention amount increases our exposure for claims occurring prior to
December 31, 2002, and reported on or after January 1, 2004, due to the increased retention amount
as compared to prior years. In 2002, our company had a claims-made reporting policy subject to a
$750,000 deductible and a $2.0 million self-insured retention per 42




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occurrence, providing coverage up to $51.0 million for claims incurred during the annual
policy term in 2002. In 2001, we maintained insurance for individual malpractice claims exceeding
$50,000 per medical incident, subject to an annual maximum of $500,000 for claims occurring and
reported in 2001. We purchased a tail policy that provides an unlimited claim reporting period for
our professional liability for claims incurred in 2000 and prior years. We estimate our
self-insured retention portion of the malpractice risks using an outside actuary which uses
historical claims data, demographic factors, severity factors and other actuarial assumptions. The
estimated accrual for malpractice claims could be significantly affected should current and future
occurrences differ from historical claims trends. The estimation process is also complicated by the
relatively short period of time in which we have owned some of our healthcare facilities, as
occurrence data under previous ownership may not necessarily reflect occurrence data under our
ownership. While management monitors current claims closely and considers outcomes when estimating
our insurance accruals, the complexity of the claims and wide range of potential outcomes often
hampers timely adjustments to the assumptions used in the estimates. We maintain a reserve to cover
both reported claims and claims that have been incurred but not yet reported within our
self-insured retention. Workers Compensation Reserves Workers compensation claims are insured with a deductible with stop loss limits of $100,000
per accident and a $1.9 million and $2.2 million minimum cap on total losses for the 1999 and 2000
years, respectively, and $250,000 per accident and a $6.6 million and $3.0 million minimum cap on
total losses for the 2002 and 2001 years, respectively. We increased our deductible loss amount to
$500,000 per accident effective January 1, 2003. The minimum cap for total 2003 losses is $12.0
million. The minimum cap for total 2004 losses is $12.1 million. In 2002 and 2003 our arrangement
with the insurance provider allows us to prepay the expected amounts of annual workers
compensation claims, which is based upon claims experience. The claims processor tracks payments
for the policy year. At the end of the policy year, the claims processor compares the total amount
prepaid by us to the actual amount paid by the claims processor. This comparison ultimately will
result in a receivable from or a payable to the claims processor. For 2004, we elected not to
prepay our expected workers compensation losses. We estimate our deductible portion of the
workers compensation risk using an outside actuary which uses historical claims data, demographic
factors, severity factors and other actuarial assumptions. The estimated accrual for workers
compensation claims could be significantly affected should current and future occurrences differ
from historical claims trends. The estimation process also is complicated by the relatively short
period of time in which we have owned some of our healthcare facilities, as occurrence data under
previous ownership may not necessarily reflect occurrence data under our ownership. While
management monitors current claims closely and considers outcomes when estimating our insurance
accruals, the complexity of the claims and wide range of potential outcomes often hampers timely
adjustments to the assumptions used in the estimates. We maintain a reserve to cover both reported
claims and claims that have been incurred but not yet reported within our deductible levels. We are fully insured in the commercial marketplace for workers compensation claims prior to
January 1, 1999. We utilize loss run reports provided by the claims administrator to determine the
appropriate range of loss reserves for the 1999 and subsequent years. Our accruals are calculated
to cover the risk from both reported claims and claims that have been incurred but not yet
reported. Goodwill and Long-Lived Assets, Including Impairment Our consolidated financial statements primarily include the following types of long-lived
assets: property and equipment, goodwill and other intangible assets. Property and equipment
purchased in the normal course of business are recorded at the cost of the purchase and a useful
life is assigned based upon the nature of the asset in comparison to our policy. We also, in
connection with our acquisition of businesses, acquire property and equipment, goodwill and other
intangible assets. We use outside firms to perform a valuation of these acquired assets for the
purpose of allocating the purchase price of the acquisition. As a result of the adoption of
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(SFAS
No. 142), we have obtained valuation reports to identify property and equipment, as well as any
intangible assets purchased in our acquisitions. Based on the valuation reports completed to date,
the only identifiable intangible assets valued have been non-compete agreements and licenses and
accreditations, which have had minimal associated value; the remainder was goodwill. In accordance
with SFAS No. 142, goodwill resulting from acquisitions after June 30, 2001 has not been amortized. Impairment of goodwill is governed by SFAS No. 142. In accordance with the adoption of SFAS
No. 142, we completed our annual impairment test as of October 1, 2004. The results of our 2004
review indicated no impairment of our long-lived assets. Our annual impairment test is based upon a
combination of market capitalization and a projected run-rate for income from continuing operations
before provision for income taxes, depreciation and amortization, interest, minority interests,
loss on sale of assets and loss on extinguishment of debt (adjusted for a multiple of earnings) for
the consolidated company. 43




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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. We
adopted this statement effective January 1, 2002. In accordance with the standard, in connection
with the sale of Glades General Hospital, which was effective April 30, 2004, the Company recorded
an after tax impairment charge of $9.0 million related to the write-off of goodwill associated with
the hospital, the write-off of the net book value of physician recruiting costs and the write down
of other assets of the hospital to their net realizable value, less costs to sell. Inflation The healthcare industry is labor intensive. Wages and other expenses increase, especially
during periods of inflation and labor shortages. In addition, suppliers pass along to us rising
costs in the form of higher prices. We generally have been able to offset increases in operating
costs by increasing charges for services, expanding services, and implementing cost control
measures to curb increases in operating costs and expenses. In light of cost containment measures
imposed by government agencies and private insurance companies, we do not know whether we will be
able to offset or control future cost increases, or be able to pass on the increased costs
associated with providing healthcare services to patients with government or managed care payors,
unless such payors correspondingly increase reimbursement rates. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our policy is not to hold or issue derivatives for trading purposes and to avoid derivatives
with leverage features. Our primary market risk involves interest rate risk. 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 December 31, 2004,
approximately 70% 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. The carrying value of our 4 1/2% Notes, 4 1/4% Notes and 7 1/2% Notes was
$75,970,000, $172,500,000 and $200,000,000, respectively, at December 31, 2004. The fair value of
our 4 1/2% Notes, 4 1/4% Notes, and 7 1/2% Notes was $76,540,000, $174,656,000 and $209,962,000,
respectively, at December 31, 2004, based on the quoted market prices at December 31, 2004. At the
December 31, 2004 borrowing level, a hypothetical 1% increase in interest rates, considering the
effect of the interest rate hedge agreement and the Senior Credit Facility, would have a $1,550,000
impact on our net income and cash flows. A hypothetical 1% increase in interest rates on
fixed-rate debt would result in an approximate 1.5% decrease in the fair values at December 31,
2004. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements can be found beginning at page F-1 following this report. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our company 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 44




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procedures (as defined in Exchange Act Rule 13a-14(c)) as of the end of the period covered by
this report. Based on their evaluation of such controls and procedures, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by our company in the reports we file 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. Managements Report
on Internal Control Over Financial Reporting Managements
Report on Internal Control Over Financial Reporting appears on page
F-1 of this report. Changes in Internal Control Over Financial Reporting 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 fourth quarter of 2004 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. 
 ITEM 9B. OTHER INFORMATION None. 45




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Executive Officers The following table sets forth certain information concerning our directors and executive
officers as of March 1, 2005. Name
    
    Age
    
    PositionMartin S. Rash
    
    
    50
    
    
    Chief Executive Officer and Chairman of the BoardJoseph P. Nolan (2)(3)(4)
    
    
    40
    
    
    DirectorWinfield C. Dunn (1)(2)(3)(4)
    
    
    77
    
    
    DirectorPaul J. Feldstein Ph.D. (1)(3)(4)
    
    
    71
    
    
    DirectorDavid R. Klock Ph.D. (1)(2)(3)
    
    
    60
    
    
    DirectorMichael P. Haley (1)(2)(3)
    
    
    54
    
    
    DirectorDaniel S. Slipkovich
    
    
    47
    
    
    President and Chief Operating OfficerChristopher T. Hannon
    
    
    42
    
    
    Senior Vice President and Chief Financial OfficerJames Thomas Anderson
    
    
    51
    
    
    Senior Vice President of Acquisitions and DevelopmentHoward T. Wall, III
    
    
    46
    
    
    Senior Vice President, General Counsel and SecretarySamuel H. Moody
    
    
    56
    
    
    Senior Vice President of OperationsMark T. Brenzel
    
    
    50
    
    
    Regional Vice President, Western DivisionThomas A. Pemberton
    
    
    51
    
    
    Regional Vice President, Eastern DivisionCarl Wayne Gower
    
    
    57
    
    
    Regional Vice President, Central DivisionSteven R. Brumfield
    
    
    41
    
    
    Vice President and Controller
   (1)
    
    Member of the Audit Committee(2)
    
    Member of the Compensation Committee(3)
    
    Member of the Nominating and Governance Committee(4)
    
    Member of the Compliance Committee Mr. Rashhas been a director of our company since February 1996. He has served as Chief
Executive Officer of our company since December 1996 and Chairman of the Board since May 1998. He
served as President of our company from December 1996 until May 2001. He was Chief Executive
Officer and director of our predecessor, Principal Hospital Company, from February 1996 to December
1996. From February 1994 to February 1996, he was the Chief Operating Officer of Community Health
Systems, Inc., a provider of general hospital care services in non-urban areas. Mr. Rash has
served as a director of Odyssey Healthcare, Inc., a provider of hospice care, since July 2000. Mr. Nolanhas been a director of our company since February 1996. He has been a Senior
Principal of GTCR Golder Rauner, LLC and has been a Principal of Golder, Thoma, Cressey, Rauner,
Inc. (GTCR, Inc.), which is a general partner of Golder, Thoma, Cressey, Rauner Fund IV, L.P.
(GTCR), since July 1996. Mr. Nolan joined GTCR, Inc. in February 1994. Dr. Dunnhas been a director of our company since February 2000. Dr. Dunn is a former
Governor of the State of Tennessee. Dr. Dunn served as Vice Chairman of the Board of Directors of
Total eMed, Inc., a provider of web-based electronic medical transcription services, from June 1998
through September 2000. From 1993 to 1998, he served as Chairman of the Board of MedShares
Management Group, Incorporated, an owner and manager of home health care agencies. Dr. Dunn served
as a director of Aveta Health, Inc. (formerly known as PhyCor, Inc.), from 1988 until July 2002.
He earned his D.D.S. from the University of Tennessee Dental School. Professor Feldsteinhas been a director of our company since May 2001. Professor Feldstein
has held the Robert Gumbiner Chair at the Graduate School of Management, University of California,
Irvine, since 1987. He has written six books and over 60 articles on healthcare. His book
Health Care Economics, 6th edition, 2004, is one of the most widely used texts
on health economics. During several leaves from the University, Professor Feldstein has worked at
the U.S. Office of Management and Budget, Social Security Administration and the World Health
Organization. Prior to joining the University of California, he was professor in both the
Department of Economics and the School of Public Health at the University of Michigan. Professor
Feldstein earned his Ph.D. in 46




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Economics from the University of Chicago. Professor Feldstein has served as a director of
Odyssey Healthcare, Inc., a provider of hospice care, since May 2002. Dr. Klockhas been a director of our company since February 2002. He currently is Chairman of
the Board of CompBenefits Corporation, a prepaid dental and vision plan service. Dr. Klock has
served on the Board of Directors of CompBenefits since 1984 and was President of that company from
1991 to 1993 and Chief Executive Officer from 1993 to 2004. Dr. Klock is co-author of four books
on finance and insurance. He also has held several academic appointments, including Chairman of
the Finance Department at the University of Central Florida. He earned his Ph.D. in Finance from
the University of Illinois. Mr. Haleyhas been a director of our company since February 2004. He currently is Chairman of
MW Manufacturers Inc., a manufacturer of windows and doors, and Senior Vice President Sales and
Marketing of MWs parent company, Ply Gem Industries, Inc. Prior to his present position, Mr.
Haley served as MWs President and CEO from 2001 to 2004. From 1994 to 2001 and from 1980 to 1988,
Mr. Haley served in various capacities with American of Martinsville (AOM), a furniture
manufacturer and a part of the La-Z-Boy company. Mr. Haleys last position with AOM was as
Divisional President of AOM Contract and La-Z-Boy Group. From 1988 to 1994, Mr. Haley served as
President of Lowenstein Furniture Group. Mr. Haley is a member of the Boards of Directors of
American National Bank & Trust Company (Nasdaq: AMNB), Stanley Furniture Company (Nasdaq NM: STLY)
and Aero Products in Wauconda, Illinois. Mr. Haley earned his Bachelors Degree in Business
Administration from Roanoke College. Mr. Slipkovichhas served as President and Chief Operating Officer of our company since
February 1, 2004. Prior to joining our company, Mr. Slipkovich served as a Division President of
LifePoint Hospitals, Inc., a provider of hospital care services in non-urban areas, from May 1999
until September 2003. From October 1998 until May 1999, Mr. Slipkovich served as a Division
President of the America Group of HCA Inc., a company that owns and operates hospitals. From July
1996 through September 1998, Mr. Slipkovich served as Vice President and Chief Financial Officer of
the Florida Group of HCA Inc. Prior to October 1996, Mr. Slipkovich served in various financial
positions with HCA Inc. and its predecessor. Mr. Hannonhas served as Chief Financial Officer of our company since October 2002. Mr.
Hannon joined our company in 1996 as Vice President and Assistant Treasurer and served as interim
Chief Financial Officer of our company in 2001. Mr. Hannon has served as a director of Ventas,
Inc., a publicly-traded healthcare real estate investment trust, since September 2004. Mr. Andersonhas served as Senior Vice President of Acquisitions and Development of our
company since January 1998. From January 1994 to January 1998, Mr. Anderson served as a Vice
President and Regional Director of Community Health Systems, Inc., an operator of general acute
care hospitals. Mr. Wallhas served as Senior Vice President and General Counsel of our company since
September 1997 and has served as Secretary since March 1998 and as Corporate Governance Officer
since May 2004. From 1983 to September 1997, Mr. Wall was an attorney in private practice with
Waller Lansden Dortch & Davis, PLLC, in Nashville, Tennessee, where he chaired the firms
healthcare working group. Mr. Moodyhas served as Senior Vice President of Operations of our company since June 1999 and
oversees financial operations of our company-owned hospitals. Prior to joining the company in
1999, he held a variety of positions with HCA Inc., a company that owns and operates hospitals,
beginning as a reimbursement consultant and culminating as a Group Chief Financial Officer. Mr. Brenzelhas served as Regional Vice President of our companys Western Division since July
2004. Prior to joining the company, Mr. Brenzel served as Western Regional Vice President of
Vanguard Health Services, an owner and operator of hospitals and other healthcare facilities,
primarily in urban areas, from 1999 to 2002, and as a healthcare consultant focused on merging
physician groups in the Phoenix, Arizona area from 2002 to 2004. Mr. Pembertonhas served as Regional Vice President of our companys Eastern Division since
March 2003. Prior to joining the company, Mr. Pemberton served as President of the
Medical/Surgical Group at Ardent Health Services, a provider of inpatient and outpatient mental
health services, from May 2001 to March 2003. From October 1999 to October 2001, Mr. Pemberton
served as Vice President and Chief Operating Officer of NetCare Health Systems, Inc., an operator
of acute-care community hospitals in non-urban markets. Mr. Pemberton also served as President and
Chief Executive Officer of Tallahasee Community Hospital in Tallahasee, Florida from October 1997
to September 1999. Mr. Gowerhas served as Regional Vice President of our companys Central Division since
October 2002. Prior to joining our company, Mr. Gower was a founder of Iasis Healthcare, an
operator of general acute care hospitals, where he served as Chief 47




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Executive Officer from October
1998 through May 2001. From March 1994 to October 1998, Mr. Gower was a Division President of HCA
Inc. Mr. Brumfieldhas served as Vice President and Controller of our company since May 1, 2004,
and served as Assistant Vice President and Assistant Controller from December 8, 2003 until that
time. Prior to joining our company, Mr. Brumfield served as Director, Financial Audit of LifePoint
Hospitals, Inc., a provider of hospital care services in non-urban areas from January 2002 until
December 2003. From October 1996 until December 2001, Mr. Brumfield served as Vice President and
Controller of NetCare Health Systems, Inc., an operator of acute-care community hospitals in
non-urban markets. CORPORATE GOVERNANCE Our companys business and affairs are managed under the direction of our Board of Directors,
in accordance with our Certificate of Incorporation and Bylaws, the Delaware General Corporation
Law, the listing standards of the New York Stock Exchange and the rules and regulations of the
Securities and Exchange Commission. From our companys inception, our Board and management have
sought to create an environment in which the companys affairs are managed in accordance with the
highest ethical standards, while remaining true to our mission of delivering quality health care to
the communities we serve. As a healthcare company, many aspects of our business, including payment
for the services our hospitals provide, are heavily regulated by both the federal and state
governments. Our Board has established internal policies and systems of reporting designed to
ensure compliance with legal and regulatory requirements and to detect and deal with issues
effectively and efficiently. The following is a description of our Board structure and the key policies and procedures by
which we manage and conduct our business. Board of Directors Our Bylaws provide that the business and affairs of our company shall be managed by or under
the direction of the Board of Directors. The Board has the authority to establish the size of the
Board from time to time by resolution, and has currently set the size of the Board at six members.
The names of our directors and their backgrounds and qualifications are listed above. Corporate Governance Principles The Board of Directors has adopted a set of Corporate Governance Principles, which addresses
the practices of the Board and specifies the qualifications for members of the Board of Directors,
criteria for determining directors independence, the responsibilities of the Board and its
committees and the Boards role in evaluating the performance of our companys Chief Executive
Officer and planning for his/her succession. A copy of the Corporate Governance Principlesis
posted on the Companys website at www.provincehealthcare.com. Director Nomination Process Identifying and Evaluating Nominees for Directors The Nominating and Governance Committee of the Board of Directors utilizes a variety of
methods for identifying and evaluating nominees for director. The Nominating and Governance
Committee regularly assesses the appropriate size of the Board, and whether any vacancies on the
Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or
otherwise arise, the Nominating and Governance Committee considers potential candidates for
director. Candidates may come to the attention of the Nominating and Governance Committee through
current Board members, professional search firms, shareholders or other persons. These candidates
are evaluated at regular or special meetings of the Nominating and Governance Committee, and may be
considered at any point during the year. The Nominating and Governance Committee reviews all
materials provided by professional search firms or other parties in connection with any nominee. In
evaluating each nominee, the Nominating and Governance Committee seeks to achieve a balance of
knowledge, experience and ability on the Board. In addition, the Nominating and Governance
Committee considers the membership criteria set forth under Director Qualifications below. Although, to date, no Province shareholder has submitted a director nomination to the Nominating
and Governance Committee, the Nominating and Governance Committee would consider properly submitted
shareholder nominations as described below. Following verification of the shareholder status of
persons proposing candidates, recommendations would be aggregated and considered by the 48




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Nominating
and Governance Committee at one of its regularly scheduled meetings prior to the issuance of the
proxy statement for our annual meeting. If any materials are provided by a shareholder in
connection with the nomination of a director candidate, such materials would be forwarded to the
Nominating and Governance Committee. Shareholder Nominees The policy of the Nominating and Governance Committee as contained in the committees charter
is to consider properly submitted shareholder nominations of candidates for election to the Board
as described above. In evaluating such nominations, the Nominating and Governance Committee seeks
to achieve a balance of knowledge, experience and ability on the Board and to address the
membership criteria set forth under Director Qualifications. Any shareholder nominations proposed for consideration by the Nominating and Governance
Committee should include the nominees name and qualifications for Board membership and should be
addressed to: Corporate Secretary
Province Healthcare Company
105 Westwood Place, Suite 400
Brentwood, TN 37027 Our Bylaws also permit shareholders to propose their own nominees for election to the Board of
Directors at an annual meeting of shareholders. Director Qualifications Our Corporate Governance Principlescontain Board membership criteria that apply to Nominating and
Governance Committee-recommended nominees for a position on our Board. Under these criteria,
members of the Board should have the highest professional and personal ethics and values,
consistent with our companys existing values and standards. They should have broad experience at
the policy-making level in business, government, education, healthcare or public interest. They
should be committed to enhancing shareholder value and should have sufficient time to carry out
their duties and to provide insight and practical wisdom based on experience. Their service on
other boards of public companies should be limited to a number that permits them, given their
individual circumstances, to perform responsibly all director duties. Each director must represent
the interests of all shareholders. Director Independence Five of the six members of our Board of Directors qualify as independent directors pursuant
to the rules adopted by the Securities and Exchange Commission and the corporate governance
standards for companies listed on the New York Stock Exchange. Mr. Rash, as an executive officer
of the company, is not considered independent of management. Our Board committee structure
includes Audit, Compensation, Nominating and Governance and Compliance Committees consisting
entirely of independent directors. In determining independence, each year our Board of Directors affirmatively determines whether
directors have any material relationships with our company. Material relationships can include
current and past employment, consulting, legal, accounting, charitable, commercial, banking and
familial relationships. When assessing the materiality of a directors relationship with our
company, our Board considers all relevant facts and circumstances, not merely from the directors
standpoint, but from that of the persons or organizations with which the director has an
affiliation. In addition, under the listing standards of the New York Stock Exchange, no director
can be considered independent who (1) is a present or former employee of our company or has an
immediate family member who is a current or former executive officer of our company; (2) personally
receives or has an immediate family member who receives more than $100,000 per year in direct
compensation from us other than director and committee fees and pension or other forms of deferred
compensation; (3) is employed, or has an immediate family member employed as an executive officer
of another company where any of our current executive officers serves on that companys
compensation committee; (4) is currently employed by or affiliated with or has been employed by or
affiliated with a present or former internal or external auditor of our company within the three
previous years and personally worked on our companys audit within that time; (5) has an immediate
family member who is (i) currently a partner of our companys present internal or external auditor
or (ii) an employee of such firm and
who participates in the firms audit, assurance or tax compliance practice; or (6) is an
executive officer or employee, or has an immediate family member who is an executive officer of a
company that makes payments to, or receives payments from us for property or services in an amount
that exceeds the greater of $1 million, or 2% of such other companys consolidated gross revenues. 49




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Based on the Boards analysis and consideration of our Corporate Governance Principlesand the
New York Stock Exchange director independence standards, our Board of Directors has determined that
each of Messrs. Nolan, Dunn, Feldstein, Klock and Haley is independent of our company and its
management. Committees of the Board of Directors The Board of Directors has established the four standing committees described below. Audit Committee The primary purpose of the Audit Committee is to assist the Board of Directors in fulfilling
its oversight responsibilities with respect to:  
    the integrity of the financial reports and other financial information
provided by our company to any governmental body or the public;
    our overall compliance with legal and regulatory requirements;
    the independent auditors qualifications and independence;
    the performance of our companys systems of internal controls regarding
finance, accounting and legal compliance of our independent auditors; and
    the performance of our companys auditing, accounting and financial
reporting processes generally. The Audit Committee operates under a written charter adopted by our Board of Directors, the
full text of which is available on our website at www.provincehealthcare.com. In carrying out these responsibilities, the Audit Committee, among other things:  
    serves as an independent and objective party to monitor our companys financial reporting process;
    supervises the relationship between our company and its independent
auditors, including: (i) having direct responsibility for their appointment,
compensation and retention; (ii) reviewing the scope of their audit services;
(iii) approving significant non-audit services; and (iv) continuing the
independence of the independent auditors;
    oversees managements implementation and maintenance of effective systems
of internal and disclosure controls; and
    performs such other duties and responsibilities as may be delegated by the
Board of Directors from time to time. The Audit Committee is currently comprised of Messrs. Klock, Haley, Dunn and Feldstein, each
of whom the Board of Directors has determined to be independent as required by the listing
standards of the New York Stock Exchange and the rules and regulations of the Securities and
Exchange Commission. Each member of the Audit Committee is financially literate and possesses a
general understanding of basic finance and accounting practices. The Board of Directors also has
determined that Dr. Klock qualifies as an audit committee financial expert as that term is
defined in Item 401(h) of Regulation S-K under the Securities Exchange Act of 1934. Compensation Committee The Board of Directors has appointed a Compensation Committee to evaluate the performance of
our companys executive officers, review and approve executive officers compensation and bonuses
and administer awards under our companys stock plans. 50




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The Compensation Committee is also
responsible for setting the compensation of the Chief Executive Officer and annually reviews his
performance. The Compensation Committee is comprised of Messrs. Dunn, Haley, Nolan and Klock. The
Compensation Committee operates under a written charter adopted by our Board of Directors, the full
text of which is available on our website at www.provincehealthcare.com. Nominating and Governance Committee The Board of Directors has appointed a Nominating and Governance Committee to recommend
persons to act as directors, prepare for and recommend replacements for any vacancies in director
positions during the year, and to review policy issues regarding the size and composition of the
Board of Directors. The Nominating and Governance Committee also reviews and makes recommendations
to the Board of Directors with respect to candidates for directors proposed by shareholders. In
addition, the Nominating and Governance Committee is responsible for establishing and maintaining a
set of Corporate Governance Principlesfor the company meeting New York Stock Exchange
requirements. The Committee is responsible for establishing a code of ethics and conduct for the
directors, management and employees of the company, reviewing such programs and codes on a periodic
basis and recommending any proposed changes to the Board of Directors. The Nominating and
Governance Committee operates pursuant to a written charter adopted by our Board of Directors, a
copy of which is available on our website at www.provincehealthcare.com. The Nominating
and Governance Committee is comprised of Messrs. Haley, Nolan, Dunn, Feldstein and Klock, each of
whom the Board of Directors has determined to be independent as required by the listing standards
of the New York Stock Exchange. Compliance Committee Our Board of Directors has appointed a Compliance Committee to oversee our corporate
compliance program, which focuses primarily on healthcare, legal and regulatory compliance,
including physician recruitment, reimbursement, cost reporting practices and laboratory and home
health care operations. The Compliance Committee operates pursuant to a written charter adopted by
our Board of Directors, a copy of which is available on our website at
www.provincehealthcare.com. The Compliance Committee is comprised of Messrs. Feldstein,
Dunn and Nolan. Executive Sessions In order to promote open discussion among the non-management directors, we have scheduled
regular executive sessions in which those directors meet without management participation. Joseph
P. Nolan, as chair of the Nominating and Governance Committee, serves as the presiding director at
all executive sessions of the Board. Communications with Board of Directors The Board of Directors has implemented a process by which shareholders may send communications
to the Board of Directors. Shareholders and other parties interested in communicating directly
with the Board of Directors or with the non-management directors as a group may do so by writing to
Howard T. Wall, III, Senior Vice President and General Counsel, or by calling Provinces Compliance
Hotline at (800) 625-5578. Concerns relating to accounting, internal controls or auditing matters
are immediately brought to the attention of our companys internal audit department and handled in
accordance with the procedures established by the Audit Committee with respect to such matters. Code of Ethics Our Board of Directors has adopted a Code of Ethicsmeeting the requirements of Item 406 of
Regulation S-K, which is applicable to our Chief Executive Officer, Chief Financial Officer and
Controller. A copy of the Code of Ethicsis available on our companys website at
www.provincehealthcare.com. We intend to post amendments to, or waivers from, our Code of
Ethicson our website. The Board of Directors has also adopted revisions to our Integrity Compliance Programto meet
the standards established by the New York Stock Exchange. The Integrity Compliance Programis a
set of written guidelines applicable to all employees and
directors of our company and its subsidiaries, which addresses our companys standards for
ethical conduct and compliance with company policies and procedures and with applicable legal
requirements, including healthcare laws and regulations. A copy of the Integrity Compliance
Programis available on our website at www.provincehealthcare.com. We intend to post
amendments to, or waivers from, the Integrity Compliance Program(to the extent applicable to our
Chief Executive Officer, Chief Financial Officer or Controller) on our website. 51




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Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that our directors,
executive officers and persons who own more than 10% of our common stock file with the Securities
and Exchange Commission initial reports of ownership and reports of changes in beneficial ownership
of our common stock. The Securities and Exchange Commission rules also require these officers,
directors and shareholders to furnish us with copies of all Section 16(a) reports they file. In the
event that these reports are not filed timely, we are required to report the failure to file the
reports during 2004. Based solely upon a review of the reports furnished to us and written representations that no
other reports were required, we believe that all persons required to file Section 16 reports with
respect to our company complied with their reporting requirements during 2004. 
 ITEM 11. EXECUTIVE COMPENSATION Executive Compensation The following table summarizes the compensation paid by our company for each of the years
ended December 31, 2004, 2003 and 2002 to our Chief Executive Officer and our four other most
highly compensated executive officers. Summary Compensation Table Long-TermAnnual Compensation(1)
    
    
    CompensationSecurities
    
    
    All OtherName and Principal Position
    
    Year
    
    
    Salary
    
    
    Annual Bonus
    
    
    Underlying Options
    
    
    CompensationMartin S. Rash (2)
    
    
    2004
    
    
    $
    647,833
    
    
    $
    643,500
    
    
    
    218,500
    
    
    $
    29,622Chairman of the Board and
    
    
    2003
    
    
    
    624,000
    
    
    
    624,000
    
    
    
    236,000
    
    
    
    31,047Chief Executive Officer
    
    
    2002
    

    
    
    622,000
    
    
    
    0
    
    
    
    278,023
    
    
    
    29,603John M. Rutledge (3)
    
    
    2004
    
    
    $
    520,000
    
    
    $
    0
    
    
    
    0
    
    
    $
    25,325Former President,
    
    
    2003
    
    
    
    520,000
    
    
    
    520,000
    
    
    
    101,000
    
    
    
    21,908Chief Operating Officer
    
    
    2002
    
    
    
    518,333
    
    
    
    0
    
    
    
    443,062
    
    
    
    21,712and DirectorDaniel S. Slipkovich (4)
    
    
    2004
    
    
    $
    366,667
    
    
    $
    366,667
    
    
    
    330,000
    
    
    $
    225President andChief Operating OfficerJames T. Anderson (5)
    
    
    2004
    
    
    $
    328,831
    
    
    $
    246,623
    
    
    
    50,000
    
    
    $
    17,082Senior Vice President
    
    
    2003
    
    
    
    317,200
    
    
    
    237,900
    
    
    
    51,000
    
    
    
    15,944of Acquisitions and
    
    
    2002
    
    
    
    316,183
    
    
    
    0
    
    
    
    90,039
    
    
    
    16,031DevelopmentHoward T. Wall, III (6)
    
    
    2004
    
    
    $
    305,651
    
    
    $
    229,238
    
    
    
    40,000
    
    
    $
    15,867Senior Vice President,
    
    
    2003
    
    
    
    294,840
    
    
    
    221,130
    
    
    
    41,000
    
    
    
    14,934General Counsel and
    
    
    2002
    
    
    
    293,895
    
    
    
    0
    
    
    
    99,593
    
    
    
    14,673SecretaryChristopher T. Hannon (7)
    
    
    2004
    
    
    $
    300,875
    
    
    $
    225,656
    
    
    
    50,000
    
    
    $
    15,514Senior Vice President and
    
    
    2003
    
    
    
    290,000
    
    
    
    217,500
    
    
    
    51,000
    
    
    
    14,650Chief Financial Officer
    
    
    2002
    
    
    
    168,253
    
    
    
    0
    
    
    
    124,290
    
    
    
    8,328
   (1)
    
    The perquisites and personal benefits paid to each of the named executive officers were
less than $50,000 or 10% of the total salary and bonus reported for the named executive
officers, and, therefore, the amount of such other annual compensation is not reportable under
Securities Exchange Commission rules.(2)
    
    All other compensation for 2004 included contributions by our company of: $5,760 under a
401(k) plan; $19,435 under a supplemental deferred compensation plan; $3,977 for disability
insurance; and $450 for group life insurance in excess of $50,000. All other compensation for
2003 included contributions by our company of: $8,050 under a 401(k) plan; $18,720 under a
supplemental deferred compensation plan; $3,827 for 52




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disability insurance; and $450 for group
life insurance in excess of $50,000. All other compensation for 2002 included contributions
by our company of: $6,000 under a 401(k) plan; $19,176 under a supplemental deferred
compensation plan; $3,977 for disability insurance; and $450 for group life insurance in
excess of $50,000.(3)
    
    All other compensation for 2004 included contributions by our company of: $9,275 under a
401(k) plan; $15,600 under a supplemental deferred compensation plan; and $450 for group life
insurance in excess of $50,000. All other compensation for 2003 included contributions by our
company of $5,858 under a 401(k) plan; $15,600 under a supplemental deferred compensation
plan; and $450 for group life insurance in excess of $50,000. All other compensation for 2002
included contributions by our company of: $5,475 under a 401(k) plan; $15,787 under a
supplemental deferred compensation plan; and $450 for group life insurance in excess of
$50,000. Mr. Rutledge resigned as President and Chief Operating Officer of our company
effective February 1, 2004. Pursuant to SEC rules, Mr. Rutledge is required to be included
in the Summary Compensation Table even though he was not serving as an executive officer of
our company at December 31, 2004.(4)
    
    All other compensation for 2004 included contributions by our company of: $225 for group
life insurance in excess of $50,000. Mr. Slipkovich was appointed President and Chief
Operating Officer of our company in February 2004.(5)
    
    All other compensation for 2004 included contributions by our company of: $6,528 under a
401(k) plan; $9,865 under a supplemental deferred compensation plan; and $690 for group life
insurance in excess of $50,000. All other compensation for 2003 included contributions by our
company of: $5,738 under a 401(k) plan; $9,516 under a supplemental deferred compensation
plan; and $690 for group life insurance in excess of $50,000. All other compensation for 2002
included contributions by our company of: $5,978 under a 401(k) plan; $9,603 under a
supplemental deferred compensation plan; and $450 for group life insurance in excess of
$50,000.(6)
    
    All other compensation for 2004 included contributions by our company of: $6,248 under a
401(k) plan; $9,169 under a supplemental deferred compensation plan; and $450 for group life
insurance in excess of $50,000. All other compensation for 2003 included contributions by our
company of: $5,639 under a 401(k) plan; $8,845 under a supplemental deferred compensation
plan; and $450 for group life insurance in excess of $50,000. All other compensation for 2002
included contributions by our company of: $5,557 under a 401(k) plan; $8,817 under a
supplemental deferred compensation plan; and $300 for group life insurance in excess of
$50,000.(7)
    
    All other compensation for 2004 included contributions by our company of: $6,188 under a
401(k) plan; $9,026 under a supplemental deferred compensation plan; and $300 for group life
insurance in excess of $50,000. All other compensation for 2003 included contributions by our
company of $5,650 under a 401(k) plan; $8,700 under a supplemental deferred compensation
plan; and $300 for group life insurance in excess of $50,000. All other compensation for 2002
included contributions by our company of: $4,709 under a 401(k) plan; $3,365 under a
supplemental deferred compensation plan; and $254 for group life insurance in excess of
$50,000. Stock Option Grants in Last Fiscal Year The following table sets forth certain information regarding grants of stock options under our
1997 Long-Term Equity Incentive Plan made to the executive officers listed in the summary
compensation table during the year ended December 31, 2004. The 1997 Long-Term Equity Incentive
Plan does not provide for the grant of stock appreciation rights. Number of
    
    
    Percent of
    
    
    
    
    
    
    
    
    
    
    Potential Realizable Value atSecurities
    
    
    Total Options
    
    
    
    
    
    
    
    
    
    
    Assumed Annual Rates ofUnderlying
    
    
    Granted to
    
    
    Exercise
    
    
    
    
    
    
    Stock Price Appreciation forOptions
    
    
    Employees in
    
    
    Price Per
    
    
    
    
    
    
    Option Term (2)Name
    
    Granted
    
    
    Fiscal Year
    
    
    Share(1)
    
    
    Expiration Date
    
    
    5%
    
    
    10%Martin S. Rash
    
    
    218,500
    
    
    
    13.16
    %
    
    $
    15.75
    
    
    
    3/10/14
    
    
    $
    2,164,262
    
    
    $
    5,484,665John M. Rutledge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Daniel S. Slipkovich
    
    
    250,000
    
    
    
    15.06
    
    
    
    17.62
    
    
    
    2/2/14
    
    
    
    2,770,281
    
    
    
    7,020,43680,000
    
    
    
    4.80
    
    
    
    15.75
    
    
    
    3/10/14
    
    
    
    792,407
    
    
    
    2,008,116James T. Anderson
    
    
    50,000
    
    
    
    3.01
    
    
    
    15.75
    
    
    
    3/10/14
    
    
    
    495,255
    
    
    
    1,255,072Howard T. Wall, III
    
    
    40,000
    
    
    
    2.41
    
    
    
    15.75
    
    
    
    3/10/14
    
    
    
    396,204
    
    
    
    1,004,058Christopher T. Hannon
    
    
    50,000
    
    
    
    3.01
    
    
    
    15.75
    
    
    
    3/10/14
    
    
    
    495,255
    
    
    
    1,255,072
   (1)
    
    Based upon the fair market value of our common stock on the date of grant of options, as
determined by our Board of Directors.(2)
    
    The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by
rules of the Securities and Exchange Commission. There can be no assurance provided to any of
the executive officers set forth above or any other holder of our companys securities that
the actual stock price appreciation over the term will be at the assumed 5% and 10% levels or
at any other defined level. Unless the market 53




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##### Table of Contents



price of the common stock appreciates over the
option term, no value will be realized from the option grants made to the above executive
officers. Option Exercises and Year-End Values The following table provides certain information with respect to our executive officers named
in the Summary Compensation Table on page 52 concerning the exercise of options during 2004 and
with respect to unexercised options at December 31, 2004. Aggregated Option Exercises in Last Fiscal Year
And Fiscal Year-End Option Values Number of SecuritiesUnderlying Unexercised
    
    
    Value of UnexercisedShares
    
    
    
    
    
    
    Options at
    
    
    In-the-Money Options atAcquired
    
    
    
    
    
    
    December 31, 2004
    
    
    December 31, 2004(1)Name
    
    on Exercise
    
    
    Value Realized
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableMartin S. Rash
    
    
    
    
    
    
    
    
    
    
    650,039
    
    
    
    533,869
    
    
    $
    5,474,814
    
    
    $
    4,880,331John M. Rutledge
    
    
    217,909
    
    
    $
    1,738,351
    
    
    
    631,610
    
    
    
    162,404
    
    
    
    2,743,643
    
    
    
    1,638,734Daniel S. Slipkovich
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    330,000
    
    
    
    0
    
    
    
    1,710,500James T. Anderson
    
    
    38,168
    
    
    
    302,749
    
    
    
    216,605
    
    
    
    157,870
    
    
    
    934,159
    
    
    
    1,283,384Howard T. Wall, III
    
    
    28,451
    
    
    
    291,362
    
    
    
    240,865
    
    
    
    119,029
    
    
    
    1,557,634
    
    
    
    1,029,133Christopher T. Hannon
    
    
    
    
    
    
    
    
    
    
    104,907
    
    
    
    159,531
    
    
    
    935,970
    
    
    
    1,678,885
   (1)
    
    Based upon the closing price of our common stock of $22.35 per share as reported on the New
York Stock Exchange on December 31, 2004, less the exercise price of the options. Director Compensation Directors who are also employees of our company or its subsidiaries are not entitled to
receive any fees for serving on our Board of Directors. Non-employee directors of our company
receive an annual retainer of $35,000. In addition, each director receives a fee of $2,000 per
meeting for each special Board meeting held in addition to the four regular quarterly meetings.
Directors receive the fees shown in the table below for service on committees of the Board. We
also reimburse them for their out-of-pocket expenses incurred in their performance of services as
directors. Non-employee directors of our company also are eligible to participate in our 1997
Long-Term Equity Incentive Plan. Non-employee directors, however, are not eligible to participate
in our Employee Stock Purchase Plan. Committee
    
    Chair
    
    
    MemberAudit
    
    $
    6,250
    
    
    $
    5,000Compensation
    
    $
    5,000
    
    
    $
    4,000Nominating and Governance
    
    $
    3,750
    
    
    $
    3,000Compliance
    
    $
    3,750
    
    
    $
    3,000
 Employment Agreements Our company entered into a Senior Management Agreement with Mr. Rash effective as of December
17, 1996, as amended on July 14, 1997 and October 15, 1997. Mr. Rash is our companys Chief
Executive Officer and currently receives an annual base salary determined by our Board of
Directors, which is subject to adjustment by the Compensation Committee. Mr. Rashs annual base
salary may not be less than $250,000. He will be eligible to receive a bonus each year of up to
fifty percent (50%) of his annual base salary for such year, based on the achievement of certain
operational and financial objectives. His employment period continues until his resignation,
disability, or death, or until our Board of Directors determines that termination of his employment
is in our companys interests. In the event that our company terminates Mr. Rash without cause or
as a result of death or disability, we have agreed to pay him an amount equal to twice his annual
base salary; provided that such severance payments cease upon acceptance of employment with an
entity that owns and operates rural hospitals. Mr. Rash has agreed not to compete with our company
until the earlier of: (i) termination of his employment for a period of two years; or (ii) the
consummation of a sale of our company. In addition, Mr. Rash has agreed not to solicit our
employees following the termination of his employment for a period of two years. 54




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Mr. Rutledge resigned his position as President and Chief Operating Officer of our company
effective February 1, 2004 due to health concerns. Following his resignation, Mr. Rutledge entered
into an employment agreement with our company to serve in the position of Acquisition and
Construction Projects Specialist. The agreement provides for customary restrictions on the use of
confidential information about, his ability to compete with, and his ability to solicit employees
of, our company and its subsidiaries during the term of the agreement. In exchange for these
agreements, Mr. Rutledge is to receive a salary of $518,333 per year, as well as health insurance
and other employee benefits. He is not eligible for bonus compensation. The term of the agreement
is 28 months. Severance Agreements Our company has entered into executive severance agreements with Messrs. Rash, Slipkovich,
Anderson, Wall and Hannon. The agreements provide benefits to such executive officers upon:  
    termination by our company without cause;
    termination by the executive officer with cause; and
    termination following a change in control. In the event that we terminate any of these executive officers without cause, or he terminates
his employment with us for cause, he will receive an amount equal to 200% of his annual base
compensation determined by reference to his base salary in effect at the time of termination.
Should the executive officers employment be terminated within 24 months after a change in control,
he will receive:  
    an amount equal to 200% of his annual base compensation determined by reference to his
base salary in effect at the time of change in control;
    an amount equal to 200% of the highest annual bonus that he would be eligible to receive
during the fiscal year ending during which the change in control occurs; and
    continued insurance coverage and fringe benefits for 24 months following the change in
control. Certain of our executive officers will receive benefits under the terms of their severance
agreements upon completion of the merger with LifePoint Hospitals, Inc., as more fully described
in the Joint Proxy Statement/Prospectus filed on February 18, 2005. Retention Plan To foster the continued employment of corporate employees in connection with a possible change
in control of our company, the Board adopted a retention plan on July 30, 2004 for the benefit of
all corporate employees who are not parties to the executive severance agreements described above
and none of whom are executive officers of our company. Under the retention plan, lump-sum cash
retention bonuses will become payable to participants on the earlier to occur of (i) 90 days
following the effective time of the proposed transaction with LifePoint and (ii) the termination of
the participants employment following the effective time of the proposed transaction by us or our
successor without cause, by the participant for good reason, or as a result of the participants
death
or disability. The base retention payment will be equal to each participants annual base salary
as in effect immediately prior to the effective time of the proposed transaction. Approximately 15
participants will also receive an additional severance payment equal to six months base salary if
their employment is terminated prior to the first anniversary of the effective time of the proposed
transaction for one of the reasons specified above. In addition, if any participants employment
is terminated for one of the reasons specified above prior to the first anniversary of the
effective time of the proposed transaction, that participant will receive a severance payment in an
amount equal to the participants cost of maintaining his or her present coverage under our welfare
benefit plans for a period of twelve months. If all our employees covered by the retention plan
receive all of the benefits in accordance with the terms of the retention plan as described above,
the total amount payable would be approximately $5.9 million. Compensation Committee Interlocks and Insider Participation No executive officer of our company served as a member of the compensation committee or as a
director of any other entity whose executive officer serves as a director of our company. 55




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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS Equity Compensation Plan Information The following table provides information as of December 31, 2004 with respect to compensation
plans (including individual compensation arrangements) under which shares of our common stock are
authorized for issuance. Number of securitiesremaining available forNumber of securities to
    
    
    
    
    
    
    future issuance underbe issued upon exercise of
    
    
    Weighted-average
    
    
    equity compensation plansoutstanding options,
    
    
    exercise price of outstanding
    
    
    (excluding securitieswarrants and rights
    
    
    options, warrants and rights
    
    
    reflected in column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
(1)
    
    
    7,034,692
    
    
    $
    15.01
    
    
    
    1,162,680Equity compensation
plans not approved
by security holders
(2)
    
    
    0
    
    
    
    N/A
    
    
    
    0Total
    
    
    7,034,692
    
    
    $
    15.01
    
    
    
    1,162,680
   (1)
    
    Represents stock options granted or issuable under our 1997 Long-Term Equity Incentive Plan.(2)
    
    We have no equity compensation plans not approved by our shareholders. Our company also sponsors an Employee Stock Purchase Plan. We do not grant or issue any
shares of our common stock pursuant to such plan, but rather facilitate the purchase of shares of
our common stock by employees in a cost-efficient manner. Security Ownership Of Certain Beneficial Owners And Management The following table sets forth information with respect to ownership of our common stock as of March 1, 2005, by:  
    each person known by us to be the beneficial owner of more than 5% of our companys common stock;
    each of our directors;
    each of our executive officers named in the summary compensation table on page 52; and
    all of our directors and executive officers as a group. To our knowledge, unless otherwise indicated, each shareholder listed below has sole voting
and investment power with respect to the shares beneficially owned. We are unaware of any person,
other than those listed below, who beneficially owns more than 5% of the outstanding shares of our
common stock. Under Securities and Exchange Commission rules, the number of shares shown as
beneficially owned includes shares of common stock subject to options that currently are
exercisable or will be exercisable within 60 days of March 1, 2005. Shares of common stock subject
to options that are currently exercisable or will be exercisable within 60 days of March 1, 2005
are considered to be outstanding for the purpose of determining the percentage of the shares held
by a holder, but not for the purpose of computing the percentage held by others. The table below
assumes the completion of the proposed merger of LifePoint and our company. Upon the effective time
of the proposed merger, all options issued under the 1997 Long-Term Equity
Incentive Plan not previously vested will become fully vested and exercisable. The merger is
expected to become effective on or about March 31, 2005. 56




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##### Table of Contents



All computations are based on 50,285,014 shares of common stock outstanding on March 1, 2005. Name of
    
    Number of Shares
    
    
    Percent of Common StockBeneficial Owner, Executive Officer or Director
    
    Beneficially Owned
    
    
    Beneficially OwnedBarclays Bank Plc (1)45 Fremont St., 17th FloorSan Francisco, CA 94105
    
    
    3,743,654
    
    
    
    7.5
    %Paulson & Co., Inc. (2)590 Madison AvenueNew York, NY 10022
    
    
    2,832,000
    
    
    
    5.6Martin S. Rash (3)(14)
    
    
    1,823,486
    
    
    
    3.5John M. Rutledge (4) (14)
    
    
    794,014
    
    
    
    1.6Daniel S. Slipkovich (5)(14)
    
    
    330,000
    
    
    
    *Christopher T. Hannon (6)(14)
    
    
    289,714
    
    
    
    *Joseph P. Nolan (7)(14)
    
    
    119,634
    
    
    
    *James T. Anderson (8)(14)
    
    
    381,573
    
    
    
    *Howard T. Wall, III (9)(14)
    
    
    369,110
    
    
    
    *Winfield C. Dunn (10)(14)
    
    
    103,868
    
    
    
    *Paul J. Feldstein (11)(14)
    
    
    90,470
    
    
    
    *David R. Klock (12)(14)
    
    
    42,202
    
    
    
    *Michael P. Haley (13)(14)
    
    
    37,000
    
    
    
    *All executive officers and directors as a group(15 persons)(15)
    
    
    4,905,555
    
    
    
    9.0
   *
    
    Less than 1%(1)
    
    The number of shares listed as beneficially owned by Barclays Bank Plc includes shares held by
certain of its affiliates. Information is derived from a Schedule 13G filed by Barclays Bank Plc
on February 14, 2005.(2)
    
    The number of shares listed as beneficially owned by Paulson & Co., Inc. includes shares held
by certain of its affiliates. Information is derived from a Schedule 13G filed by Paulson &
Co., Inc. on February 18, 2005.(3)
    
    Includes 639,578 shares owned directly by Mr. Rash and options to purchase 1,183,908 shares
granted under the 1997 Long-Term Equity Incentive Plan.(4)
    
    Includes options to purchase 794,014 shares under the 1997 Long-Term Equity Incentive Plan.(5)
    
    Includes options to purchase 330,000 shares under the 1997 Long-Term Equity Incentive Plan.(6)
    
    Includes 25,276 shares owned directly by Mr. Hannon and options to purchase 264,438 shares
under the 1997 Long-Term Equity Incentive Plan.(7)
    
    Includes options to purchase 119,634 shares under the 1997 Long-Term Equity Incentive Plan.(8)
    
    Includes 7,098 shares owned directly by Mr. Anderson and options to purchase 374,475 shares
granted under the 1997 Long-Term Equity Incentive Plan.(9)
    
    Includes 9,216 shares owned directly by Mr. Wall and options to purchase 359,894 shares
granted under the 1997 Long-Term Equity Incentive Plan.(10)
    
    Includes 5,000 shares owned directly by Mr. Dunn and options to purchase 98,868 shares under
the 1997 Long-Term Equity Incentive Plan.(11)
    
    Includes 25,000 shares owned directly by Mr. Feldstein and options to purchase 65,470 shares
under the 1997 Long-Term Equity Incentive Plan.(12)
    
    Includes options to purchase 42,202 shares granted under the 1997 Long-Term Equity Incentive
Plan.(13)
    
    Includes 2,000 shares owned directly by Mr. Haley and options to purchase 35,000 shares
granted under the 1997 Long-Term Equity Incentive Plan.(14)
    
    The address of each of Messrs. Rash, Rutledge, Slipkovich, Hannon, Anderson, Dunn, Wall,
Nolan, Feldstein, Klock and Haley is 105 Westwood Place, Suite 400, Brentwood, TN 37027.(15)
    
    Includes options to purchase 4,186,708 shares granted under the 1997 Long-Term Equity
Incentive Plan. 57




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain Relationships And Related Transactions Employment Agreement with John M. Rutledge Mr. Rutledge resigned his position as President and Chief Operating Officer of our company
effective February 1, 2004 due to health concerns. Following his resignation, Mr. Rutledge entered
into an employment agreement with our company to serve in the position of Acquisition and
Construction Projects Specialist. The agreement provides for customary restrictions on the use of
confidential information about, his ability to compete with, and his ability to solicit employees
of, our company and its subsidiaries during the term of the agreement. In exchange for these
agreements, Mr. Rutledge is to receive a salary of $518,333 per year, as well as health insurance
and other employee benefits. He is not eligible for bonus compensation. The term of the agreement
is 28 months. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table presents fees billed by Ernst & Young LLP for professional audit services
and for other services rendered by Ernst & Young LLP for fiscal years 2004 and 2003: 2004
    
    
    2003Audit Fees (1)
    
    $
    2,701,065
    

    
    $
    857,000Audit-Related Fees (2)
    
    $
    176,118
    
    
    $
    30,000Tax Fees (3)
    
    $
    203,453
    
    
    $
    635,000All Other Fees (4)
    
    $
    32,828
    
    
    $
    86,000Total
    
    $
    3,113,464
    
    
    $
    1,608,000
   1.
    
    Audit fees include fees associated with the annual audit, the reviews of our companys
quarterly reports on Form 10-Q, statutory audits, and assistance with and review of documents
filed with the Securities and Exchange Commission.2.
    
    Audit-related services include fees for employee benefit plan audits.3.
    
    Tax fees include fees for preparation of federal and state tax returns, claims for refunds,
tax payment-planning services, assistance with tax audits and appeals, and tax advice related
to acquisitions, employee benefit plans, requests for rulings or technical advice from taxing
authorities.4.
    
    All other fees include permitted advisory services. All audit-related services, tax services and other services were pre-approved by the
Audit Committee, which concluded that the provision of such services is compatible with maintaining
Ernst & Youngs independence. The Audit Committees Outside Auditor Independence Policy provides
for pre-approval of audit, audit-related and tax services specifically described by the Committee
on an annual basis and, in addition, individual engagements anticipated to exceed pre-established
thresholds must be separately approved. The policy also requires specific approval by the
Committee if total fees for audit-related and tax services would exceed total fees for audit
services in any fiscal year. The policy authorizes the Committee to delegate to one or more of its
members pre-approval authority with respect to permitted services. 58




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##### Table of Contents



PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) and (a)(2) List of Financial Statements and Financial Statement Schedule The Consolidated Financial Statements of our company required to be included in Part II, Item
8 are indexed on Page F-1 and submitted as a separate section of this report. ExhibitNumber
    
    Description of Exhibit3.1
    
    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-3/A 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)4.1
    
    Form of Common Stock Certificate (incorporated by reference
to the exhibits filed with the Registrants Registration
Statement on Form S-3/A filed June 11, 2002, Registration
No. 333-86578)4.2
    
    Indenture, dated as of November 20, 2000 between Province
Healthcare Company and National City Bank, including the
forms of Province Healthcare Companys 41/2% Convertible
Subordinated Notes due 2005 (incorporated by reference to
the exhibits filed with the Registrants Registration
Statement on Form S-3, dated January 24, 2001, Registration
No. 333-54192)4.3
    
    Registration Rights Agreement, dated as of November 20,
2000, among Province Healthcare Company and Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Credit Suisse First Boston Corporation, UBS Warburg LLC,
First Union Securities, Inc. and Robertson Stephens, Inc.
as Initial Purchasers (incorporated by reference to the
exhibits filed with the Registrants Registration Statement
on Form S-3, dated January 24, 2001, Registration No.
333-54192)4.4
    
    Indenture, dated as of October 10, 2001, between Province
Healthcare Company and National City Bank, including the
forms of Province Healthcare Companys 4 1/4% Convertible
Subordinated Notes due 2008 (incorporated by reference to
the exhibits filed with the Registrants Registration
Statement on Form S-3, filed December 20, 2001,
Registration No. 333-75646)4.5
    
    Registration Rights Agreement, dated as of October 10,
2001, among Province Healthcare Company and Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
First Union Securities, Inc., UBS Warburg LLC and Banc of
America Securities LLC as Initial Purchasers (incorporated
by reference to the exhibits filed with the Registrants
Registration Statement on Form S-3, filed December 20,
2001, Registration No. 333-75646)4.6
    
    Rights Agreement, dated as of January 3, 2003, between
Province Healthcare Company and Wachovia Bank, N.A.
(incorporated by reference to the exhibits filed with the
Registrants Current Report on Form 8-K, dated January 3,
2003, Commission File No. 0-23639)4.7
    
    Subordinated Indenture, dated as of May 27, 2003, between
Province Healthcare Company and U.S. Bank Trust National
Association (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, 2003,
Commission File No. 0-23639)
 59




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit4.8
    
    First Supplemental Indenture to Subordinated Indenture,
dated as of May 27, 2003, between Province Healthcare
Company and U.S. Bank Trust National Association, as
Trustee, with respect to the issuance of 7 1/2% Senior
Subordinated Notes due 2013 (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,
2003, Commission File No. 0-23639)10.1
    
    Stockholders Agreement, dated as of December 17, 1996, by
and among Brim, Inc., GTCR Fund IV, L.P., Leeway & Co.,
First Union Corporation of Virginia, AmSouth
Bancorporation, Martin S. Rash, Richard D. Gore, Principal
Hospital Company and certain other stockholders
(incorporated by reference to the exhibits filed with the
Registrants Registration Statement on Form S-1, filed
August 27, 1997, Registration No. 333-34421)10.2
    
    First Amendment to Stockholders Agreement, dated as of July
14, 1997, by and among Province Healthcare Company, GTCR
Fund IV, L.P., Martin S. Rash, Richard D. Gore and certain
other stockholders (incorporated by reference to the
exhibits filed with the Registrants Registration Statement
on Form S-1/A filed November 13, 1997, Registration No.
333-34421)10.3
    
    Second Amendment to Stockholders Agreement, dated as of
September 30, 1997, between Province Healthcare Company,
GTCR Fund IV, L.P., Martin S. Rash, Richard D. Gore and
certain other stockholders (incorporated by reference to
the exhibits filed with the Registrants Registration
Statement on Form S-1/A filed November 13, 1997,
Registration No. 333-34421)10.4
    
    Registration Agreement, dated as of December 17, 1996, by
and among Brim, Inc., Principal Hospital Company, GTCR Fund
IV, L.P., Leeway & Co., First Union Corporation of
Virginia, AmSouth Bancorporation and certain other
stockholders (incorporated by reference to the exhibits
filed with the Registrants Registration Statement on Form
S-1, filed August 27, 1997, Registration No. 333-34421)10.5
    
    Senior Management Agreement, dated as of December 17, 1996,
between Brim, Inc., Martin S. Rash, GTCR Fund IV, L.P.,
Leeway & Co. and Principal Hospital Company (incorporated
by reference to the exhibits filed with the Registrants
Registration Statement on Form S-1, filed August 27, 1997,
Registration No. 333-34421)10.6
    
    First Amendment to Senior Management Agreement, dated as of
July 14, 1997, between Province Healthcare Company, Martin
S. Rash and GTCR Fund IV, L.P. (incorporated by reference
to the exhibits filed with the Registrants Registration
Statement on Form S-1/A filed November 13, 1997,
Registration No. 333-34421)10.7
    
    Second Amendment to Senior Management Agreement, dated as
of October 15, 1997, between Province Healthcare Company,
Martin S. Rash and GTCR Fund IV, L.P. (incorporated by
reference to the exhibits filed with the Registrants
Registration Statement on Form S-1/A filed November 13,
1997, Registration No. 333-34421)10.8
    
    Executive Severance Agreement by and between Province
Healthcare Company and Martin S. Rash, dated October 18,
1999 (incorporated by reference to the exhibits filed with
the Registrants Quarterly Report filed on Form 10-Q, for
the quarterly period ended March 31, 2000, Commission File
No. 0-23639)(B)10.9
    
    Executive Severance Agreement by and between Province
Healthcare Company and James Thomas Anderson, dated October
18, 1999 (incorporated by reference to the exhibits filed
with the Registrants Quarterly Report filed on Form 10-Q,
for the quarterly period ended March 31, 2000, Commission
File No. 0-23639)(B)10.10
    
    Executive Severance Agreement by and between Province
Healthcare Company and Daniel S. Slipkovich, dated February
1, 2004 (incorporated by reference to the exhibits filed
with the Registrants Annual Report on Form 10-K for the
fiscal period ended December 31, 2003, Commission File No.
001-31320) (B)10.11
    
    Executive Severance Agreement by and between Province
Healthcare Company and Howard T. Wall, III, dated October
18, 1999 (incorporated by reference to the exhibits filed
with the Registrants Quarterly Report filed on Form 10-Q,
for the quarterly period ended March 31, 2000, Commission
File No. 0-23639) (B)
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ExhibitNumber
    
    Description of Exhibit10.12
    
    Executive Severance Agreement by and between Province
Healthcare Company and Christopher T. Hannon, dated October
23, 2002 (incorporated by reference to the exhibits filed
with the Registrants Annual Report filed on Form 10-K for
the fiscal period ended December 31, 2002, Commission File
No. 001-31320) (B)10.13
    
    Province Healthcare Company Amended and Restated Employee
Stock Purchase Plan (incorporated by reference to the
exhibits filed with the Registrants Definitive Proxy
Statement on Schedule 14A, filed on April 26, 2002,
Commission File No. 0-23639)(B)10.14
    
    Province Healthcare Company Amended and Restated 1997
Long-Term Equity Incentive Plan (incorporated by reference
to the exhibits filed with the Registrants Definitive
Proxy Statement on Schedule 14A, filed on April 26, 2002,
Commission File No. 0-23639) (B)10.15
    
    Lease Agreement, dated October 1, 1996, by and between
County of Starke, State of Indiana, and Principal Knox
Company (incorporated by reference to the exhibits filed
with the Registrants Registration Statement on Form S-1,
filed August 27, 1997, Registration No. 333-34421)10.16
    
    Lease Agreement, dated December 1, 1993, by and between
Palo Verde Hospital Association and Brim Hospitals, Inc.
(incorporated by reference to the exhibits filed with the
Registrants Registration Statement on Form S-1/A filed
October 8, 1997, Registration No. 333-34421)10.17
    
    Lease Agreement, dated May 15, 1986, as amended, by and
between Fort Morgan Community Hospital Association and Brim
Hospitals, Inc. (incorporated by reference to the exhibits
filed with the Registrants Registration Statement on Form
S-1/A filed October 8, 1997, Registration No. 333-34421)10.18
    
    Lease Agreement, dated April 24, 1996, as amended, by and
between Parkview Regional Hospital, Inc. and Brim
Hospitals, Inc. (incorporated by reference to the exhibits
filed with the Registrants Registration Statement on Form
S-1/A filed October 8, 1997, Registration No. 333-34421)10.19
    
    Lease Agreement and Annex, dated June 30, 1997, by and
between The Board of Trustees of Needles Desert Communities
Hospital and Principal-Needles, Inc. (incorporated by
reference to the exhibits filed with the Registrants
Registration Statement on Form S-1, filed August 27, 1997,
Registration No. 333-34421)10.20
    
    Lease and Management Agreement and Annex, dated June 9,
1998, by and between St. Landry Parish Hospital Service
District No. 1 and PHC-Eunice, Inc. (incorporated by
reference to the exhibits filed with the Registrants
Annual Report filed on Form 10-K for the fiscal period
ended December 31, 2001, Commission File No. 0-23639)10.21
    
    Lease Agreement, dated February 15, 2000, by and between
The City of Ennis, Texas, PRHC-Ennis, L.P. and Province
Healthcare Company (incorporated by reference to the
exhibits filed with the Registrants Annual Report filed on
Form 10-K for the fiscal period ended December 31, 2001,
Commission File No. 0-23639)10.23
    
    Lease Agreement and Annex, dated as of December 7, 2001, by
and among Hospital Service District No. 2 of the Parish of
St. Mary, State of Louisiana, PHC-Morgan City, L.P. and
Province Healthcare Company. (incorporated by reference to
the exhibits filed with the Registrants Annual Report
filed on Form 10-K for the fiscal period ended December 31,
2001, Commission File No. 0-23639)10.24
    
    Lease Agreement, dated December 17, 1996, between Brim,
Inc. and Encore Senior Living, L.L.C. (incorporated by
reference to the exhibits filed with the Registrants
Registration Statement on Form S-1/A filed October 8, 1997,
Registration No. 333-34421)10.25
    
    Corporate Purchasing Agreement, dated April 21, 1997,
between Aligned Business Consortium Group and Principal
Hospital Company (incorporated by reference to the exhibits
filed with the Registrants Registration Statement on Form
S-1, filed August 27, 1997, Registration No. 333-34421)
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ExhibitNumber
    
    Description of Exhibit10.26
    
    First Amendment to Securities Purchase Agreement, dated as
of December 31, 1997, between Principal Hospital Company
and Leeway & Co. (incorporated by reference to the exhibits
filed with the Registrants Registration Statement on Form
S-1/A filed November 13, 1997, Registration No. 333-34421)10.27
    
    Amended and Restated Agreement of Limited Partnership,
dated June 30, 1997, between PHC of Delaware,
Palestine-Principal G.P., Inc., Palestine-Principal, Inc.
and Mother Frances Hospital Regional Healthcare Center
(incorporated by reference to the exhibits filed with the
Registrants Annual Report on Form 10-K, for the fiscal
period ended December 31, 2000, Commission File No.
0-23639)10.28
    
    Amended and Restated Participation Agreement, dated as of
November 13, 2001, among Province Healthcare Company, as
Construction Agent and Lessee, various parties as
Guarantors, Wells Fargo Bank Northwest, National
Association, as the Owner Trustee under the PHC Real Estate
Trust 1998-1, various banks and lending institutions as
Holders, various banks and lending institutions as Lenders,
Bank of America, N.A. as Syndicate Agent, UBS Warburg LLC,
as Co-Documentation Agent, Merrill Lynch, as
Co-Documentation Agent, First Union Securities, Inc., as
Sole Book-Runner and Co-Lead Arranger, Bank of America,
N.A., as Co-Lead Manager and First Union National Bank, as
Agent (incorporated by reference to the exhibits filed with
the Registrants Annual Report filed on Form 10-K for the
fiscal period ended December 31, 2001, Commission File No.
0-23639)10.29
    
    Amendment No. 1 to Certain Operative Agreements dated as of
March 29, 2002, among Province Healthcare Company, as the
Lessee and as the Construction Agent, the various parties
thereto from time to time, as guarantors, Wells Fargo Bank
Northwest, National Association (formerly known as First
Security Bank, National Association), as the Owner Trustee,
the various banks and other lending institutions which are
parties thereto from time to time, as holders, the various
banks and other lending institutions which are parties
thereto from time to time, as lenders and First Union
National Bank, as the agent for the lenders and respecting
the Security Documents, as the agent for the Lenders and
the Holders, to the extent of their interests (incorporated
by reference to the exhibits filed with the Registrants
Quarterly Report filed on Form 10-Q for the quarterly
period ended March 31, 2002, Commission File No. 0-23639)10.30
    
    Third Amended and Restated Senior Credit Agreement, dated
as of November 13, 2001, among Province Healthcare Company,
First Union National Bank, as Agent and Issuing Bank, and
various parties thereto (incorporated by reference to the
exhibits filed with the Registrants Annual Report filed on
Form 10-K for the fiscal period ended December 31, 2001,
Commission File No. 0-23639)10.31
    
    Asset Purchase Agreement, dated April 29, 1998, between
Province Healthcare Company, PHC-Lake Havasu, Inc. and
Samaritan Health System (incorporated by reference to the
exhibits filed with the Registrants Current Report on Form
8-K, dated May 14, 1998, Commission File No. 0-23639)10.32
    
    Asset Sale Agreement, dated July 23, 1999, between Tenet
Healthcare Corporation and Province Healthcare Company
(incorporated by reference to the exhibits filed with the
Registrants Current Report on Form 8-K, dated October 18,
1999, Commission File No. 0-23639)10.33
    
    Amendment No. 1 to Asset Sale Agreement, dated September
29, 1999, between Tenet Healthcare Corporation and Province
Healthcare Company (incorporated by reference to the
exhibits filed with the Registrants Current Report on Form
8-K, dated October 18, 1999, Commission File No. 0-23639)10.34
    
    Second Amendment to Credit Agreement and Consent, dated
March 28, 2003, among Province Healthcare Company, Wachovia
Bank, National Association, as Agent, and various parties
thereto (incorporated by reference to the exhibits filed
with the Registrants Quarterly Report filed on Form 10-Q,
for the quarterly period ended March 31, 2003 Commission
File No. 0-23639)
 62




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ExhibitNumber
    
    Description of Exhibit10.35
    
    Amendment No. 2 to Certain Operative Agreement, dated as of
March 28, 2003, among Province Healthcare Company, as the
Lessee and as the Construction Agent, the various parties
thereto from time to time, as guarantors, Wells Fargo Bank
Northwest National Association, as the Owner Trustee, the
various banks and other lending institutions which are
parties thereto from time to time, as holders, the various
banks and lending institutions which are parties thereto
from time to time, as lenders, and Wachovia Bank, National
Association, as the agent for the Lenders and respecting
the Security Documents, as the agent for the Lenders and
the Holders (incorporated by reference to the exhibits
filed with the Registrants Quarterly Report filed on Form
10-Q, for the quarterly period ended March 31, 2003
Commission File No. 0-23639)10.36
    
    Third Amendment to Credit Agreement and Consent, dated May
27, 2003, among Province Healthcare Company, Wachovia Bank,
National Association, as Agent, and various parties thereto
(incorporated by reference to the exhibits filed with the
Registrants Quarterly Report field on Form 10-Q, for the
quarterly period ended June 30, 2003, Commission File No.
0-23639)10.37
    
    Fourth Amendment to Credit Agreement and Consent, dated
June 30, 2003, among Province Healthcare Company, Wachovia
Bank, National Association, as Agent, and various parties
thereto (incorporated by reference to the exhibits filed
with the Registrants Quarterly Report field on Form 10-Q,
for the quarterly period ended June 30, 2003, Commission
File No. 0-23639)10.38
    
    Employment Agreement with John M. Rutledge, dated February
1, 2004 (incorporated by reference to the exhibits filed
with the Registrants Annual Report on Form 10-K for the
fiscal period ended December 31, 2003, Commission File No.
001-31320) (B)10.39
    
    Fifth Amendment to Credit Agreement and Consent, dated
April 30, 2004, among Province Healthcare Company, Wachovia
Bank, National Association, as Agent, and various parties
thereto (A)10.40
    
    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
to the exhibits filed with the Registrants Current Report
on Form 8-K filed on August 17, 2004, Commission File No.
001-31320)10.41
    
    Amendment No. 1 to Agreement and Plan of Merger, dated as
of January 25, 2005, by and among LifePoint Hospitals,
Inc., Lakers Holding Corp., Lakers Acquisition Corp.,
Pacers Acquisition Corp. and Province Healthcare Company
(incorporated by reference to the exhibits filed with the
Registrants Joint Proxy Statement on Schedule 14A included
in Amendment No. 3 to Form S-4 filed by Lakers Holding
Corp. on February 18, 2005, Commission File No. 333-119929
deemed filed by Registrant pursuant to Rule 14a-6(j)).10.42
    
    Amendment No. 2 to Agreement and Plan of Merger, dated as
of March 15, 2005, by and among LifePoint Hospitals, Inc.,
Lakers Holding Corp., Lakers Acquisition Corp., Pacers
Acquisition Corp. and Province Healthcare Company
(incorporated by reference to the exhibits filed with the
Registrants Current Report on Form 8-K, Commission File
No. 001-31320).21.1
    
    Subsidiaries of the Registrant (A)23.1
    
    Consent of Ernst & Young LLP (A)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
(A)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
(A)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 (C)
 63




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(A)
    
    Filed herewith(B)
    
    Management Compensatory Plan or Arrangement(C)
    
    Furnished herewith 64




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. Province Healthcare CompanyDate: March 24, 2005
    
    By: /s/ Steven R. BrumfieldSteven R. Brumfield
Vice President and Controller
 65




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##### Table of Contents



POWER OF ATTORNEY The undersigned directors of Province Healthcare Company, a Delaware corporation, do hereby
constitute and appoint Martin S. Rash their lawful attorney and agent with full power and authority
to do any and all acts and things and to execute any and all instruments which said attorney and
agent may determine to be necessary or advisable or required to enable said corporation to comply
with the Securities Exchange Act of 1934, as amended, and any rules or regulations or requirements
of the Securities and Exchange Commission in connection with this Annual Report on Form 10-K.
Without limiting the generality of the foregoing power and authority, the powers granted include
the power and authority to sign the names of the undersigned directors in the capacities indicated
below to this Annual Report on Form 10-K or amendments or supplements thereto, and each of the
undersigned hereby ratifies and confirms all that said attorney and agent shall do or cause to be
done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated. /s/ Martin S. Rash

Martin S. Rash
    
    Chairman of the Board and Chief Executive Officer
    
    March 22, 2005/s/ Winfield C. Dunn

Winfield C. Dunn
    
    Director
    
    March 22, 2005/s/ Paul J. Feldstein

Paul J. Feldstein
    
    Director
    
    March 22, 2005/s/ Michael P. Haley

Michael P. Haley
    
    Director
    
    March 22, 2005/s/ David R. Klock

David R. Klock
    
    Director
    
    March 22, 2005/s/ Joseph P. Nolan

Joseph P. Nolan
    
    Director
    
    March 22, 2005/s/ Christopher T. Hannon

Christopher T. Hannon
    
    Senior Vice President and Chief Financial Officer
    
    March 22, 2005
 66




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PROVINCE HEALTHCARE COMPANY
FORM 10-K - ITEM 8 AND ITEM 15(a)(1) INDEX TO FINANCIAL STATEMENTS The following consolidated financial statements are filed as a part of this report under Item
8-Financial Statements and Supplementary Data: PageAnnual Financial StatementsManagements Report on Internal Control Over Financial Reporting
    
    
    F-1Report of Independent Registered Public Accounting Firm On Internal Control Over Financial Reporting
    
    
    F-2Report of Ernst & Young LLP, Independent Registered Public Accounting Firm
    
    
    F-3Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    F-4Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Changes in Stockholders Equity for the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 Financial statement schedules are not required under the related instructions or are inapplicable
and therefore have been omitted. 67




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MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Province Healthcare Company (the Company) is responsible for establishing
and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Companys internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. The Companys internal control over financial
reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment and those criteria, management believes that
the Company maintained effective internal control over financial reporting as of December 31, 2004. On
June 1, 2004, the Company acquired Memorial Medical Center in Las
Cruces, New Mexico (Memorial Medical Center). The Company
has excluded from its assessment of and conclusion on the
effectiveness of internal control over financial reporting, Memorial
Medical Centers internal control over financial reporting. For
the year ended December 31, 2004, Memorial Medical Center accounted
for 10.5% of the Companys revenues. As of December 31, 2004,
Memorial Medical Center accounted for 8.2% of the Companys
total assets, excluding $79.5 million of goodwill that was recorded in
connection with the acquisition of Memorial Medical Center. The
Companys independent registered public accounting
firm has issued an attestation report on managements
assessment of the Companys internal control over financial reporting. That report appears on page
F-2 of this Report. F-1




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REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING The Board of Directors and Shareholders of Province Healthcare Company We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Province Healthcare Company (the Company) and
subsidiaries maintained effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Companys
management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. As indicated in the
accompanying Managements Report on Internal Control over
Financial Reporting, managements assessment of and conclusion
on the effectiveness of internal control over financial reporting did
not include the internal controls over financial reporting of
Memorial Medical Center in Las Cruces, New Mexico, a material
business acquired on June 1, 2004. Memorial Medical Center is included
in the December 31, 2004 consolidated financial statements of the
Company and accounted for 10.5% of the Companys revenues for
the year ended December 31, 2004. As of December 31, 2004, Memorial Medical
Center accounted for 8.2% of the Companys total assets,
excluding $79.5 million of goodwill that was recorded in connection
with the acquisition of Memorial Medical Center. Our audit of
internal control over financial reporting of the Company also did not
include an evaluation of the internal control over financial
reporting of Memorial Medical Center. In our opinion, managements assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on
the COSO criteria. Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004, based on the COSO
criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Province Healthcare Company and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income,
changes in stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2004, and our report dated March 22, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Nashville, Tennessee
March 22, 2005 F-2




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REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Province Healthcare Company We have audited the accompanying consolidated balance sheets of Province Healthcare Company and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income,
changes in stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Province Healthcare Company and subsidiaries at
December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed, in 2002, its
method of accounting for goodwill and other intangible assets. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 22, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP Nashville, Tennessee
March 22, 2005 F-3




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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
 December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,824
    
    
    $
    46,117Accounts receivable, less allowance for
doubtful accounts of $78,274 in 2004 and
$66,835 in 2003
    
    
    137,052
    
    
    
    110,335Inventories
    
    
    21,796
    
    
    
    18,424Prepaid expenses and other
    
    
    14,068
    
    
    
    14,614Assets of discontinued operations
    
    
    1,365
    
    
    
    14,995Total current assets
    
    
    184,105
    
    
    
    204,485Property and equipment, net
    
    
    578,587
    
    
    
    459,843Goodwill
    
    
    388,709
    
    
    
    309,191Other assets
    
    
    31,666
    
    
    
    36,874$
    1,183,067
    
    
    $
    1,010,393LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    32,235
    
    
    $
    16,083Accrued salaries and benefits
    
    
    32,653
    
    
    
    27,852Accrued expenses
    
    
    25,933
    
    
    
    14,241Current portion of long-term debt
    
    
    76,241
    
    
    
    743Liabilities of discontinued operations
    
    
    346
    
    
    
    5,156Total current liabilities
    
    
    167,408
    
    
    
    64,075Long-term debt, less current portion
    
    
    428,383
    
    
    
    447,956Other liabilities
    
    
    69,090
    
    
    
    49,579Minority interests
    
    
    2,387
    
    
    
    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, 50,030,550 shares and
48,841,157 shares issued and outstanding at
December 31, 2004 and 2003, respectively
    
    
    500
    
    
    
    488Additional paid-in-capital
    
    
    319,996
    
    
    
    306,091Retained earnings
    
    
    195,685
    
    
    
    141,186Accumulated other comprehensive loss
    
    
    (382
    )
    
    
    (892
    )Total stockholders equity
    
    
    515,799
    
    
    
    446,873$
    1,183,067
    
    
    $
    1,010,393
 See accompanying notes. F-4




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PROVINCE HEALTHCARE
COMPANY AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
 Year Ended December 31,2004
    
    
    2003
    
    
    2002Revenues:Net patient revenue
    
    $
    872,275
    
    
    $
    735,841
    
    
    $
    649,954Other
    
    
    10,631
    
    
    
    10,367
    
    
    
    8,308882,906
    
    
    
    746,208
    
    
    
    658,262Expenses:Salaries, wages and benefits
    
    
    323,565
    
    
    
    282,794
    
    
    
    261,499Purchased services
    
    
    85,698
    
    
    
    68,872
    
    
    
    69,934Supplies
    
    
    114,186
    
    
    
    95,579
    
    
    
    84,408Provision for doubtful accounts
    
    
    95,015
    
    
    
    72,583
    
    
    
    53,201Other operating expenses
    
    
    96,934
    
    
    
    88,137
    
    
    
    69,447Rentals and leases
    
    
    11,250
    
    
    
    9,007
    
    
    
    8,284Transaction costs
    
    
    851
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    46,881
    
    
    
    37,617
    
    
    
    32,169Interest expense
    
    
    29,652
    
    
    
    26,262
    
    
    
    21,285Minority interests
    
    
    687
    
    
    
    260
    
    
    
    34Loss (gain) on sale of assets
    
    
    30
    
    
    
    75
    
    
    
    (77
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    486
    
    
    
    Total expenses
    
    
    804,749
    
    
    
    681,672
    
    
    
    600,184Income from continuing operations
before provision for income taxes
    
    
    78,157
    
    
    
    64,536
    
    
    
    58,078Income taxes
    
    
    28,101
    
    
    
    22,816
    
    
    
    23,240Income from continuing operations
    
    
    50,056
    
    
    
    41,720
    
    
    
    34,838Discontinued operations, net of tax:(Loss) earnings from operations
    
    
    (2,220
    )
    
    
    (1,149
    )
    
    
    1,274Net gain (loss) on divestitures
    
    
    6,663
    
    
    
    (8,952
    )
    
    
    4,443
    
    
    
    (10,101
    )
    
    
    1,274Net income
    
    $
    54,499
    
    
    $
    31,619
    
    
    $
    36,112Earnings (loss) per common share:Basic:Continuing operations
    
    $
    1.01
    
    
    $
    0.85
    
    
    $
    0.72Discontinued operations:(Loss) earnings from
operations
    
    
    (0.04
    )
    
    
    (0.02
    )
    
    
    0.03Net gain (loss) on divestitures
    
    
    0.13
    
    
    
    (0.18
    )
    
    
    Net income
    
    $
    1.10
    
    
    $
    0.65
    
    
    $
    0.75Diluted:Continuing operations
    
    $
    0.96
    
    
    $
    0.84
    
    
    $
    0.70Discontinued operations:(Loss) earnings from
operations
    
    
    (0.03
    )
    
    
    (0.02
    )
    
    
    0.03Net gain (loss) on divestitures
    
    
    0.11
    
    
    
    (0.15
    )
    
    
    Net income
    
    $
    1.04
    
    
    $
    0.67
    
    
    $
    0.73
 See accompanying notes. F-5




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##### Table of Contents



PROVINCE HEALTHCARE
COMPANY AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands, except share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    TotalBalance at December 31, 2001
    
    
    47,488,984
    
    
    $
    475
    
    
    $
    288,948
    
    
    $
    73,455
    
    
    $
    (873
    )
    
    $
    362,005Exercise of stock options
and related income tax
benefit
    
    
    1,031,998
    
    
    
    10
    
    
    
    13,952
    
    
    
    
    
    
    
    
    

    
    
    13,962Treasury stock
    
    
    1,545
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    45Issuance of common stock
from employee stock
purchase plan
    
    
    59,022
    
    
    
    1
    
    
    
    1,032
    
    
    
    
    
    
    
    
    
    
    
    1,033Other
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    125Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,112
    
    
    
    
    
    
    
    36,112Change in fair value of
derivatives, net of tax
of $53
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    (80
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,032Balance at December 31, 2002
    
    
    48,581,549
    
    
    
    486
    
    
    
    304,102
    
    
    
    109,567
    
    
    
    (953
    )
    
    
    413,202Exercise of stock options
and related income tax
benefit
    
    
    143,882
    
    
    
    1
    
    
    
    828
    
    
    
    
    
    
    
    
    
    
    
    829Issuance of common stock
from employee stock
purchase plan and other
    
    
    115,726
    
    
    
    1
    
    
    
    1,161
    
    
    
    
    
    
    
    
    
    
    
    1,162Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,619
    
    
    
    
    
    
    
    31,619Change in fair value of
derivatives, net of tax
of $38
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    61Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    31,680Balance at December 31, 2003
    
    
    48,841,157
    
    
    
    488
    
    
    
    306,091
    
    
    
    141,186
    
    
    
    (892
    )
    
    
    446,873Exercise of stock options
and related income tax
benefit
    
    
    932,451
    
    
    
    9
    
    
    
    12,711
    
    
    
    
    
    
    
    
    
    
    
    12,720Issuance of common stock
from employee stock
purchase plan and other
    
    
    256,942
    
    
    
    3
    
    
    
    1,194
    
    
    
    
    
    
    
    
    
    
    
    1,197Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,499
    
    
    
    
    
    
    
    54,499Change in fair value of
derivatives, net of tax
of $318
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    510
    
    
    
    510Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,009Balance at December 31, 2004
    
    
    50,030,550
    
    
    $
    500
    
    
    $
    319,996
    
    
    $
    195,685
    
    
    $
    (382
    )
    
    $
    515,799
 See accompanying notes. F-6




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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Year Ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Income from continuing operations
    
    $
    50,056
    
    
    $
    41,720
    
    
    $
    34,838Adjustments to reconcile income
from continuing operations to
net cash provided by operating
activities:Depreciation and amortization
    
    
    46,881
    
    
    
    37,617
    
    
    
    32,169Deferred income taxes
    
    
    29,373
    
    
    
    14,215
    
    
    
    8,776Provision for professional liability
    
    
    4,300
    
    
    
    5,476
    
    
    
    7,209Loss on early extinguishment of debt
    
    
    
    
    
    
    486
    
    
    
    Loss (gain) of sale of assets
    
    
    30
    
    
    
    75
    
    
    
    (77
    )Changes in operating assets and liabilities,
net of effects from acquisitions and
disposals:Accounts receivable
    
    
    (12,596
    )
    
    
    (1,172
    )
    
    
    6,511Inventories
    
    
    (887
    )
    
    
    712
    
    
    
    (1,311
    )Prepaid expenses and other
    
    
    (2,726
    )
    
    
    (3,347
    )
    
    
    4,012Accounts payable and
accrued expenses
    
    
    9,184
    
    
    
    (4,107
    )
    
    
    (2,696
    )Accrued salaries and benefits
    
    
    (521
    )
    
    
    4,505
    
    
    
    (315
    )Other
    
    
    3,162
    
    
    
    8,165
    
    
    
    1,022Net cash provided by operating activities
    
    
    126,256
    
    
    
    104,345
    
    
    
    90,138Cash flows from investing activities:Purchase of property and equipment
    
    
    (90,557
    )
    
    
    (56,926
    )
    
    
    (45,469
    )Purchase of hospitals and
healthcare entities
    
    
    (152,215
    )
    
    
    
    
    
    
    (171,157
    )Sale of hospitals and healthcare entities
    
    
    14,667
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (228,105
    )
    
    
    (56,926
    )
    
    
    (216,626
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    110,372
    
    
    
    194,199
    
    
    
    134,321Repayments of debt
    
    
    (56,150
    )
    
    
    (213,049
    )
    
    
    (44,048
    )Issuance of common stock
    
    
    12,200
    
    
    
    2,574
    
    
    
    11,037Net cash provided by (used in)
financing activities
    
    
    66,422
    
    
    
    (16,276
    )
    
    
    101,310Net cash (used in) provided by
continuing operations
    
    
    (35,427
    )
    
    
    31,143
    
    
    
    (25,178
    )Net cash (used in) provided by
discontinued operations
    
    
    (866
    )
    
    
    349
    
    
    
    841(Decrease) increase in cash and
cash equivalents
    
    
    (36,293
    )
    
    
    31,492
    
    
    
    (24,337
    )Cash and cash equivalents at
beginning of period
    
    
    46,117
    
    
    
    14,625
    
    
    
    38,962Cash and cash equivalents at end
of period
    
    $
    9,824
    
    
    $
    46,117
    
    
    $
    14,625Supplemental cash flow information:Cash paid for interest
    
    $
    28,706
    
    
    $
    23,986
    
    
    $
    19,958Cash paid for income taxes, net
    
    $
    1,840
    
    
    $
    10,322
    
    
    $
    14,848Acquisitions:Assets acquired
    
    $
    170,921
    
    
    $
    
    
    
    $
    181,268Liabilities assumed
    
    
    (18,706
    )
    
    
    
    
    
    
    (10,111
    )Cash paid, net of cash acquired
    
    $
    152,215
    
    
    $
    
    
    
    $
    171,157
 See accompanying notes. F-7




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##### Table of Contents



PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1. ORGANIZATION AND ACCOUNTING POLICIES ORGANIZATION 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.
As of December 31, 2004, the Company owned or leased 21 general acute care hospitals in 13 states
with an aggregate of 2,533 licensed beds. 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 further discussed in Note 3. The Companys remaining
hospitals and operations are reported as continuing operations. BASIS OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, its
majority-owned subsidiaries and partnerships in which the Company or one of its subsidiaries is a
general partner and has a majority voting interest. All significant intercompany accounts and
transactions have been eliminated in consolidation. CRITICAL ACCOUNTING POLICIES AND ESTIMATES 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, the Company evaluates its estimates,
including those related to bad debts, contractual discounts, risk management reserves and
intangible assets. The Company bases its 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. The Company believes the following critical accounting
policies affect its more significant judgments and estimates used in the preparation of its
consolidated financial statements: Allowance for Doubtful Accounts Substantially all of the Companys accounts receivable are related to providing healthcare
services to the Companys hospitals patients. The Companys ability to collect outstanding
receivables from third-party payors and others is critical to its 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. The Companys standard
collection procedures are then followed until such time that management determines the account is
uncollectible, at which point the account is written off. For hospitals that the Company has owned
in excess of one year, the Companys policy with respect to estimating its 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. For hospitals that the Company
has owned less than one year, the Company estimates the allowance for doubtful accounts by applying
a hospital-specific reserve percentage for each self-pay and non self-pay accounts receivable 30
day aging category, beginning with the 0-30 day aging category, with all self-pay and non-self pay
accounts fully reserved at 150 days. Accordingly, substantially all of the Companys bad debt
expense is related to uninsured patient accounts and patient accounts for which a balance remains
after primary insurance has paid. The Company continually monitors its accounts receivable balances
and utilizes cash collections data and other analytical tools to support the basis for its
estimates of the provision for doubtful accounts. In addition, the Company performs hindsight
procedures on historical collection and write-off experience to determine the reasonableness of its
policy for estimating the allowance for doubtful F-8




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##### Table of Contents



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 the Companys 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 the Company.
    One year following the date of billing, any uncollected accounts are written off and the
accounts are turned over to a secondary collection agency. 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 Company owned or leased three hospitals in Texas, which accounted for 16.1% and 16.6% of
net accounts receivable in 2004 and 2003, respectively. The Company owned or leased four hospitals
in Louisiana, which accounted for 9.5% and 13.2% of net accounts receivable in 2004 and 2003,
respectively. The Company owned or leased two hospitals, one of which was acquired in 2004, in New
Mexico which accounted for 16.2% and 3.6% of net accounts receivable in 2004 and 2003,
respectively. Same-store upfront cash collections for the year ended December 31, 2004 were approximately
$13.5 million compared to $11.5 million and $8.1 million for the years ended December 31, 2003 and
2002, respectively. Allowance for Contractual Discounts The Company derives a significant portion of its revenues from Medicare, Medicaid and other
payors that receive discounts from its 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 the Companys estimates. Additionally, updated regulations and
contract negotiations occur frequently, necessitating the Companys continual review and assessment
of the estimation process. The Companys hospitals computerized billing systems do not
automatically calculate and record contractual allowances. Rather, the Company utilizes an
internally developed contractual model to estimate the allowance for contractual discounts on a
payor - specific basis, given its interpretation of the applicable regulations or contract terms.
The Companys 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 inpatient and outpatient non-Medicare and non-Medicaid services, the Companys 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 the Companys
contractual model and actual paid claims are adjusted when the individual claims are paid. The
Companys contractual model is updated each quarter. In addition to the contractual allowances
estimated and recorded by the Companys contractual model, the Company also records an allowance
equal to 100% of all Medicare, Medicaid, and other insurance payors accounts receivable that are
aged greater than 365 days. Risk Management Reserves The Company purchased a professional liability claims-made reporting policy effective January
1, 2004. This coverage is subject to a $5.0 million self-insured retention per occurrence for
general and professional liability and provides coverage up to $50.0 million for claims incurred
during the annual policy term. This retention amount increases our exposure for claims occurring
prior to December 31, 2002 and reported on or after January 1, 2004, due to the increased retention
amount as compared to prior years. In 2002, the Company had a claims-made reporting policy subject
to a $750,000 deductible and a $2.0 million self-insured retention per occurrence, providing
coverage up to $51.0 million for claims incurred during the annual policy term in 2002. In 2001,
the Company maintained insurance for individual malpractice claims exceeding $50,000 per medical
incident, subject to an annual maximum of F-9




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##### Table of Contents



$500,000 for claims occurring and reported in 2001. The Company purchased a tail policy that
provides an unlimited claim reporting period for its professional liability for claims incurred in
2000 and prior years. The Company estimates its self-insured retention portion of the malpractice
risks using an outside actuary which uses historical claims data, demographic factors, severity
factors and other actuarial assumptions. The Company maintains a reserve to cover both reported
claims and claims that have been incurred but not yet reported within its self-insured retention. Workers compensation claims are insured with a deductible with stop loss limits of $100,000
per accident and a $1.9 million and $2.2 million minimum cap on total losses for the 1999 and 2000
years, respectively, and $250,000 per accident and a $6.6 million and $3.0 million minimum cap on
total losses for the 2002 and 2001 years, respectively. The Company increased the deductible loss
amount to $500,000 per accident effective January 1, 2003. The minimum cap for total 2003 losses is
$12.0 million. The minimum cap for total 2004 losses is $12.1 million. In 2002 and 2003, the
Companys arrangement with the insurance provider allowed it to prepay the expected amounts of
annual workers compensation claims, which are based upon claims experience. The claims processor
tracks payments for the policy year. At the end of the policy year, the claims processor compares
the total amount prepaid by the Company to the actual amount paid by the claims processor. This
comparison will ultimately result in a receivable from or a payable to the claims processor. The
Company is fully insured in the commercial marketplace for workers compensation claims prior to
January 1, 1999. The Company utilized loss run reports provided by the claims administrator to
determine the appropriate range of loss reserves for the 1999 year and subsequent years. The
Companys accruals are calculated to cover the risk from both reported claims and claims that have
been incurred but not yet reported. Intangible Assets The Company adopted Statement of Financial Accounting Standards No. 141, Business
Combinations (SFAS No. 141), effective July 1, 2001 and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), effective January 1,
2002. Under SFAS No. 142, goodwill and indefinite lived intangible assets from acquisitions prior
to July 1, 2001 are no longer amortized effective January 1, 2002, but are subject to annual
impairment tests. The Company performed its annual impairment tests as of October 1, 2004, 2003 and
2002 and did not incur any impairment charge. In accordance with the new rules, goodwill resulting
from acquisitions after June 30, 2001 has not been amortized. Other intangible assets will continue
to be amortized over their useful lives. Management of the Company evaluates all acquisitions independently to determine the
appropriate amortization period for identified intangible assets. Each evaluation includes an
analysis of factors such as historic and projected financial performance, evaluation of the
estimated useful lives of buildings and fixed assets acquired, the indefinite lives of certificates
of need and licenses acquired, the competition within local markets, and lease terms where
applicable. Revenue Recognition The Company recognizes revenues in the period in which services are performed. Accounts
receivable, as reflected on the accompanying consolidated balance sheets, include amounts due from
third-party payors, patients, and others. The Company has agreements with third-party payors that
provide for payments to the Company at amounts different from its established rates. A summary of
the payment arrangements with major third-party payors follows:  
    MedicareInpatient acute hospital services rendered to Medicare program beneficiaries
are paid at prospectively determined rates per diagnosis related group (DRG). These DRG
rates vary according to a patient classification system that is based on clinical,
diagnostic, and other factors. Outpatient services are generally reimbursed under the
outpatient prospective payment system, which pays a fixed rate for a given bundle of
outpatient services. These bundles are known as Ambulatory Payment Classifications or
APCs. Inpatient nonacute services, related to Medicare beneficiaries are paid based on a
cost reimbursement methodology subject to various cost limits. The Company is reimbursed for
cost-based services at a tentative rate, with final settlement determined after submission
of annual cost reports by the Company and audits thereof by the Medicare fiscal
intermediary. The Companys classification of patients under the Medicare program and the
appropriateness of their admission are subject to an independent review. The majority of the
Companys Medicare cost reports have been audited by the Medicare fiscal intermediary
through December 31, 2001.
    MedicaidThe Medicaid programs in all states, other than California, in which the
Company owns or leases hospitals are prospective payment systems which generally do not have
retroactive cost report settlement procedures. Inpatient services rendered to the recipients
under the Medi-Cal program (Californias Medicaid program) are reimbursed either under
contracted rates or reimbursed for cost reimbursable items at a tentative rate with final
settlement determined after submission of annual F-10




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##### Table of Contents



cost reports by the Company and audits thereof by Medi-Cal. The Company leases two hospitals
in California, and its Medi-Cal cost reports have been audited by the Medi-Cal fiscal
intermediary through December 31, 2001.
    OtherThe Company also has entered into payment agreements with certain commercial
insurance carriers, health maintenance organizations and preferred provider organizations.
The basis for payment to the Company under these agreements includes prospectively
determined rates per discharge, discounts from established charges, and prospectively
determined daily rates. In 2004, 2003, and 2002, the Company owned or leased three hospitals in Texas, which accounted
for 15.0%, 16.6%, and 17.6% of net patient revenue, respectively. In 2004, 2003, and 2002 the
Company owned or leased four hospitals in Louisiana, which accounted for 15.0%, 17.6% and 17.6% of
net patient revenue, respectively. The Company owned or leased two hospitals in New Mexico, one of
which was acquired in 2004, which accounted for 15.2% of net patient revenue in 2004. Final determination of amounts earned under the Medicare and Medicaid programs often occur in
subsequent years because of audits by the programs, rights of appeal and the application of
numerous technical provisions. Differences between original estimates and subsequent revisions
(including final settlements) are included in the consolidated statements of income in the period
in which the revisions are made, and resulted in an increase in net patient revenue of $9,876,000,
of which $2,857,000 related to facilities that had not previously qualified for disproportionate
share payments in prior years, and $5,482,000 in 2004 and 2003, respectively, and a decrease in net
patient revenue of $908,000 in 2002. The Company provides care without charge to patients who are financially unable to pay for the
healthcare services they receive. Because the Company does not pursue collection of amounts
determined to qualify as charity care, they are not reported in net patient revenues. Discontinued Operations In accordance with the provisions of Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), which the
Company adopted effective January 1, 2002, the Company has presented the financial position,
operating results and cash flows of Glades General Hospital and Brim Healthcare, Inc. as
discontinued operations in the accompanying consolidated financial statements as of December 31,
2004 and 2003 and for each of the years in the three year period ending December 31, 2004.
Operating results for each of the years in the three year period ending December 31, 2004 and the
major classes of assets and liabilities for the years ended December 31, 2004 and 2003 for the
Companys discontinued operations are presented in Note 3. Cash Equivalents The Company considers all highly liquid investments with original maturities of three months
or less to be cash equivalents. The Company places its cash in financial institutions that are
federally insured and limits the amount of credit exposure with any one financial institution. Accounts Receivable The Company receives payment for services rendered from federal and state agencies (under the
Medicare, Medicaid and TRICARE programs), managed care health plans, commercial insurance
companies, employers and patients. During the years ended December 31, 2004, 2003, and 2002,
approximately 47.8%, 48.8%, and 56.7%, respectively, of the Companys net patient revenue from
continuing operations related to patients participating in the Medicare and Medicaid programs.
Management recognizes that revenues and receivables from government agencies are significant to its
operations, but it does not believe that there are significant credit risks associated with these
government agencies. Management does not believe that there are any other significant
concentrations of revenues from any particular payor that would subject it to any significant
credit risks in the collection of its accounts receivable. Inventories Inventories are stated at the lower of cost, determined by the first-in, first-out method, or
market. F-11




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Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization.
Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase
capacities or extend useful lives are capitalized. Depreciation expense, including amortization of
assets capitalized under capital leases, is computed using the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis
over the lesser of the terms of the respective leases or their estimated useful lives. Buildings
and improvements are depreciated over estimated useful lives ranging generally from 20 to 40 years.
Estimated useful lives of equipment vary generally from 3 to 20 years. Prior to January 1, 2002, the Company recognized impairments of long-lived assets in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. In accordance with SFAS No. 144, when events, circumstances
or operating results indicate that the carrying values of certain long-lived assets and related
identifiable intangible assets (excluding goodwill) that are expected to be held and used might be
impaired, the Company considers the recoverability of assets to be held and used by comparing the
carrying amount of the assets to the present value of future net cash flows expected to be
generated by the assets. If assets are identified as impaired, the impairment is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the assets as
determined by independent appraisals or estimates of discounted future cash flows. Other Assets Other assets consist primarily of costs associated with the issuance of debt which are
amortized on a straight-line basis, which approximates the interest method, over the life of the
related debt, and costs to recruit physicians to the Companys markets, which are deferred and
amortized over the term of the respective physician recruitment agreement, which is generally three
years. Amortization of deferred loan costs is included in interest expense. Deferred loan costs
totaled $11,739,000 (net of accumulated amortization of $15,569,000) and $15,305,000 (net of
accumulated amortization of $11,940,000) at December 31, 2004 and 2003, respectively. Amortization
of physician recruiting costs is included in other operating expenses. Net physician recruiting
costs included in the accompanying consolidated balance sheets at December 31, 2004 and 2003
totaled $16,395,000 and $17,107,000, respectively. Income Taxes The Company accounts for income taxes under the asset and liability method. This method
requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences attributable to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. The Company assesses the likelihood that deferred tax assets will be recovered from
future taxable income to determine whether a valuation allowance should be established. Other Noncurrent Liabilities Other noncurrent liabilities consist primarily of insurance liabilities, supplemental deferred
compensation liability, and deferred income taxes. Minority Interests The consolidated financial statements include all assets, liabilities, revenues and expenses
of less than 100% owned entities controlled by the Company. Accordingly, the Company has recorded
minority interests in the earnings and equity of such consolidated entities. 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 (Opinion 25), 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. F-12




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The following proforma 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 SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), 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): 2004
    
    
    2003
    
    
    2002Net income - as reported
    
    $
    54,499
    
    
    $
    31,619
    
    
    $
    36,112Less pro forma effect of stock option
grants
    
    
    (4,749
    )
    
    
    (4,744
    )
    
    
    (10,922
    )Pro forma net income
    
    $
    49,750
    
    
    $
    26,875
    
    
    $
    25,190Earnings per
share - as reportedBasic
    
    $
    1.10
    
    
    $
    0.65
    
    
    $
    0.75Diluted
    
    $
    1.04
    
    
    $
    0.67
    
    
    $
    0.73Earnings per
share - pro formaBasic
    
    $
    1.00
    
    
    $
    0.55
    
    
    $
    0.52Diluted
    
    $
    0.96
    
    
    $
    0.55
    
    
    $
    0.51
 Pro forma information regarding net income and earnings per share is required by SFAS No. 123,
Accounting for Stock Based Compensation, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 2004, 2003 and 2002, respectively: risk-free
interest rate of 2.80%, 2.47% and 4.11%; dividend yield of 0%; volatility factor of the expected
market price of the Companys common stock of .560, .634 and .594; and a weighted-average expected
life of the option of 4.0, 4.0 years and 3.9 years. The estimated weighted average fair values of
shares granted during 2004, 2003 and 2002, using the Black-Scholes option pricing model, were
$7.30, $4.04 and $9.46, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options which 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 the 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. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options vesting period. In accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS No. 128), the calculation of diluted earnings per share for the year ended December 31,
2003 using the if converted method includes the impact of the Companys convertible notes. Since
the Company reports discontinued operations, income from continuing operations has been utilized in
determining whether the convertible notes were dilutive or antidilutive to earnings per share. The
convertible notes were dilutive to earnings per share on income from continuing operations and were
antidilutive to net income for the year ended December 31, 2003. The convertible notes were
antidilutive to earnings per share on pro forma income from continuing operations and pro forma net
income for the year ended December 31, 2002. Interest Rate Swap Agreements The Company enters into interest rate swap agreements as a means of managing its interest rate
exposure. The differential to be paid or received is recognized over the life of the agreement as
an adjustment to interest expense. Effective January 2001, the Company adopted Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS No. 133).
SFAS No. 133 requires that all derivatives, whether designated in hedging relationships or not, be
recognized on the balance sheet at fair value and requires the recognition of the resulting gains
or losses as adjustments to earnings or other comprehensive income. In accordance with the
provisions of SFAS No. 133, the Company designated its outstanding interest rate swap agreement as
a fair value hedge and determined that this hedge qualifies for treatment under the short-cut
method of measuring effectiveness. Under the provisions of SFAS No. 133, this hedge is determined
to be F-13




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##### Table of Contents



perfectly effective and there is no requirement to periodically evaluate effectiveness. This
derivative and the related hedged debt amount has been recognized in the consolidated financial
statements at its respective fair value. 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, as defined, during 2003.
Effective as of the first quarter of 2004, FIN 46R was applicable to financial statements of
companies that have interests in all other types of entities. Adoption of FIN 46R had no effect on
the Companys financial position, results of operations or cash flows. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R,
Share-Based Payments (SFAS No. 123R), a revision of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, which addresses financial accounting and
reporting for costs associated with stock-based compensation. SFAS No. 123R addresses all forms of
share-based payment awards, including shares issued under employee stock purchase plans and stock
options. SFAS No. 123R will require the Company to recognize compensation expense beginning July
1, 2005, in an amount equal to the fair value of share-based payments related to unvested
share-based payment awards over the applicable vesting period. As permitted by SFAS No. 123, the
Company currently accounts for share-based payments to employees using Opinion 25s intrinsic value
method and, as such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of SFAS No. 123Rs fair value method will have a significant impact on
the Companys results of operations, although it will have no impact on the Companys overall
financial position. The impact of the adoption of SFAS No. 123R cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future. However, had the
Company adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated
the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per
share in Note 1 to the Companys consolidated financial statements. 2. PENDING 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 half 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 .3447 and .2917 per common share of
the Company, which will represent a value of $11.375 if the volume weighted average of the daily
sales prices for share 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 average share price is $33.00 or less, the
exchange ratio will be 0.3447, 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. 3. 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 F-14




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##### Table of Contents



reported as discontinued operations and the operating results for the years ended December 31,
2004, 2003 and 2002 are presented in the following table (in thousands): YEAR ENDED DECEMBER 31,2004
    
    
    2003
    
    
    2002Revenues
    
    $
    17,150
    
    
    $
    45,480
    
    
    $
    46,085Operating expenses
    
    
    20,096
    
    
    
    45,052
    
    
    
    41,242Depreciation and amortization
    
    
    49
    
    
    
    1,699
    
    
    
    2,062Interest expense
    
    
    143
    
    
    
    478
    
    
    
    672(Gain) loss on divestitures
    
    
    (10,774
    )
    
    
    11
    
    
    
    Impairment charge
    
    
    
    
    
    
    13,773
    
    
    
    Total expenses
    
    
    9,514
    
    
    
    61,013
    
    
    
    43,976Income (loss) before provision for income
taxes
    
    
    7,636
    
    
    
    (15,533
    )
    
    
    2,109Income taxes (benefit)
    
    
    3,193
    
    
    
    (5,432
    )
    
    
    835Earnings (loss) from discontinued operations
    
    $
    4,443
    
    
    $
    (10,101
    )
    
    $
    1,274
 In connection with the decision to sell Glades, the Company wrote off goodwill associated with
the hospital, wrote off the net book value of physician recruiting costs and wrote down the other
assets of Glades to their estimated net realizable value, less cost to sell. These charges are
included in the impairment charge recorded in 2003. The major classes of assets and liabilities of discontinued operations in the consolidated
balance sheets as of December 31, 2004 and 2003 are as follows (in thousands): Year Ended December 31,2004
    
    
    2003Cash
    
    $
    438
    
    
    $
    17Accounts receivable, net
    
    
    922
    
    
    
    6,931Inventories
    
    
    
    
    
    
    529Prepaid expenses and other current assets
    
    
    5
    
    
    
    392Property and equipment, net
    
    
    
    
    
    
    3,157Goodwill
    
    
    
    
    
    
    80Other assets
    
    
    
    
    
    
    33Deferred income taxes
    
    
    
    
    
    
    3,856Total assets of discontinued operations
    
    
    1,365
    
    
    
    14,995Accounts payable
    
    
    
    
    
    
    812Accrued salaries and benefits
    
    
    84
    
    
    
    1,603Accrued expenses
    
    
    217
    
    
    
    513Long-term debt
    
    
    
    
    
    
    982Income taxes payable
    
    
    
    
    
    
    1,246Deferred income taxes
    
    
    45
    
    
    
    Total liabilities of discontinued operations
    
    
    346
    
    
    
    5,156Net assets of discontinued operations
    
    $
    1,019
    
    
    $
    9,839
 The Company will continue to pursue collection of the remaining net accounts receivable under
its standard collection policies. 4. ACQUISITIONS 2004 Acquisition In June 2004, the Company acquired Memorial Medical Center in Las Cruces, New Mexico, through
a long-term capital lease agreement, for approximately $152.2 million, including working capital
and direct and incremental costs of the acquisition. To finance this acquisition, the Company
borrowed $110.0 million under its senior bank credit facility and used approximately $42.2 million
of available cash. This is the Companys second New Mexico hospital and is one of two hospitals in
the community, serving a population in excess of 150,000. F-15




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##### Table of Contents



2002 Acquisitions In May 2002, the Company acquired Memorial Hospital of Martinsville and Henry County in
Martinsville, Virginia, for approximately $129.2 million, including working capital. To finance
this acquisition, the Company borrowed $86.0 million under its revolving credit facility and used
approximately $43.2 million of available cash. This is the Companys first Virginia hospital and is
the only hospital in the county, serving a population in excess of 100,000. In June 2002, the Company acquired Los Alamos Medical Center in Los Alamos, New Mexico, for
approximately $39.0 million, including working capital. To finance this acquisition, the Company
borrowed $37.0 million under its revolving credit facility and used $2.0 million from available
cash. This was the Companys first New Mexico hospital and is the only hospital in the community,
serving a population of approximately 50,000. The hospitals acquired by the Company in 2004 and 2002 are the primary providers of healthcare
services in their markets and, as previously underperforming hospitals, present the Company with
the opportunity, under its management, to increase profitability and garner local market share.
The Companys strategy with respect to these markets is to improve hospital operations, expand
healthcare services to increase market share by reducing patient out-migration, and recruit and
retain quality physicians to increase the quality of healthcare and the breadth of healthcare
services. The foregoing acquisitions were accounted for using the purchase method of accounting. The
operating results of the hospitals acquired in 2004 and 2002 have been included in the accompanying
consolidated statements of income from the respective dates of acquisition. The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition for the hospital acquisition completed in 2004 (in
thousands): Accounts receivable, net
    
    $
    14,121Inventories
    
    
    2,485Prepaid expenses and other
    
    
    257Total current assets acquired
    
    
    16,863Property and equipment
    
    
    74,537Goodwill
    
    
    79,518Other
    
    
    3Total assets acquired
    
    
    170,921Total liabilities assumed
    
    
    (18,706
    )Net assets acquired
    
    $
    152,215
 The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition for the hospital acquisitions completed in 2002 (in
thousands): Accounts receivable, net
    
    $
    12,913Inventories
    
    
    2,177Prepaid expenses and other
    
    
    119Total current assets acquired
    
    
    15,209Property and equipment
    
    
    63,457Goodwill
    
    
    101,815Other
    
    
    787Total assets acquired
    
    
    181,268Total liabilities assumed
    
    
    (10,111
    )Net assets acquired
    
    $
    171,157
 F-16




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##### Table of Contents



Pro Forma Acquisition Information The following pro forma information reflects the operations of the hospitals acquired in 2004
and 2002, as if the respective transactions had occurred as of the first day of the fiscal year
immediately preceding the year of the acquisitions (in thousands, except per share data): 2004
    
    
    2003
    
    
    2002Net revenue
    
    $
    945,542
    
    
    $
    883,335
    
    
    $
    701,850Net income
    
    $
    52,630
    
    
    $
    24,674
    
    
    $
    38,112Earnings per share:Basic
    
    $
    1.06
    
    
    $
    0.51
    
    
    $
    0.79Diluted
    
    $
    1.01
    
    
    $
    0.55
    
    
    $
    0.77
 The pro forma results of operations do not purport to represent what the Companys results
would have been had such transactions, in fact, occurred at the beginning of the periods presented
or to project the Companys results of operations in any future period. 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): DECEMBER 31,2004
    
    
    2003Land
    
    $
    40,263
    
    
    $
    23,344Land improvements
    
    
    6,602
    
    
    
    5,292Leasehold improvements
    
    
    20,036
    
    
    
    19,554Buildings and improvements
    
    
    408,878
    
    
    
    335,788Equipment
    
    
    243,632
    
    
    
    191,900719,411
    
    
    
    575,878Less accumulated depreciation and amortization
    
    
    (163,344
    )
    
    
    (121,835
    )556,067
    
    
    
    454,043Construction-in-progress (estimated cost to
complete at December 31, 2004 - $82,037)
    
    
    22,520
    
    
    
    5,800$
    578,587
    
    
    $
    459,843
 Depreciation expense totaled approximately $46,320,000, $37,120,000 and $32,059,000 in 2004,
2003 and 2002, respectively. Assets under capital leases were $4,614,000 and $6,206,000, net of
accumulated amortization of $7,927,000 and $5,631,000 at December 31, 2004 and 2003, respectively.
Interest is capitalized in connection with construction projects at the Companys facilities. The
capitalized interest is recorded as part of the asset to which it relates and is depreciated over
the assets estimated useful life. In 2004 and 2003, $1,357,000 and $712,000 of interest cost,
respectively, was capitalized. 6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt consists of the following (in thousands): December 31,2004
    
    
    2003Credit facility
    
    $
    55,000
    
    
    $
    Senior subordinated notes
    
    
    198,337
    
    
    
    196,634Convertible subordinated notes
    
    
    248,470
    
    
    
    248,470501,807
    
    
    
    445,104Obligations under capital leases (see Note 10)
    
    
    2,817
    
    
    
    3,595504,624
    
    
    
    448,699Less current portion
    
    
    (76,241
    )
    
    
    (743
    )$
    428,383
    
    
    $
    447,956
 F-17




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##### Table of Contents



CREDIT FACILITY The Company maintains a bank senior credit facility (Credit Facility) of $250,000,000. At
December 31, 2004, the Company had outstanding letters of credit of $8,277,000, reducing the amount
available under the Credit Facility to $186,723,000. 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. The Company subsequently repaid $55.4 million (including $0.4 million
borrowed under the revolver in the third quarter of 2004) of the revolver borrowing with the
proceeds from the sale of Brim Healthcare, Inc. and from cash flows from operations. The loans under the Credit Facility bear interest, at the Companys option, at the adjusted
base rate or at the adjusted LIBOR rate. The interest rate ranged from 3.875% to 5.125% during
2004. The Company pays a commitment fee, which varies from one-half to three-eighths of one percent
of the unused portion, depending on the Companys compliance with certain financial ratios. The
Company may prepay any principal amount outstanding under the Credit Facility at any time before
the maturity date of November 13, 2006. The Credit Facility contains limitations on the Companys ability to incur additional
indebtedness (including contingent obligations), sell material assets, retire, redeem or otherwise
reacquire its capital stock, acquire the capital stock or assets of another business, and pay
dividends. The Credit Facility also requires the Company to maintain a specified net worth and meet
or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness under the Credit
Facility is secured by substantially all assets of the Company. In April 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
as a Permitted Acquisition. 7 1/2% SENIOR SUBORDINATED NOTES In May 2003, the Company completed its public offering of $200,000,000 aggregate principal
amount of 7 1/2% Senior Subordinated Notes due June 1, 2013 (the 7 1/2% Senior Subordinated Notes).
Net proceeds of the offering totaling $194,212,000 were used to repay $114,300,000 in existing
borrowings under the Credit Facility and to repurchase $74,030,000 of the Companys 4 1/2%
Convertible Subordinated Notes. The 7 1/2% Senior Subordinated 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. The Company may redeem all or a portion of the 7 1/2% Senior Subordinated 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, the Company may redeem up to 35% of the aggregate principal
amount of the 7 1/2% Senior Subordinated 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 the Company 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% Senior Subordinated Notes are unsecured and
subordinated to the Companys existing and future senior indebtedness. The 7 1/2% Senior Subordinated
Notes rank equal in right of payment to the Companys 4 1/2% Convertible Subordinated Notes due 2005
and its 4 1/4% Convertible Subordinated Notes due 2008. The 7 1/2% Senior Subordinated Notes
effectively rank junior to the Companys subsidiary liabilities. The indenture contains limitations
on the Companys 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. 4 1/4% CONVERTIBLE SUBORDINATED NOTES In October 2001, the Company sold $172,500,000 of Convertible Subordinated Notes due October
10, 2008 (the 4 1/4% Notes). Net proceeds of approximately $166,400,000 were used to reduce the
outstanding balance on the revolving line of credit and for acquisitions. The 4 1/4% Notes bear
interest from October 10, 2001 at the rate of 4 1/4% per year, payable semi-annually on April 10 and
October 10, beginning on April 10, 2002. The 4 1/4% Notes are convertible at the option of the holder
at any time on or prior to maturity into shares of the Companys common stock at a conversion price
of $27.70 per share. The conversion price is subject to adjustment. The Company 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 the Company 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 F-18




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##### Table of Contents



unsecured and subordinated to the Companys existing and future senior indebtedness. The 4 1/4%
Notes are ranked equal in right of payment to the Companys 4 1/2% Notes due in 2005 and its 7 1/2%
Senior Subordinated Notes due 2013. The 4 1/4% Notes effectively rank junior to the Companys
subsidiary liabilities. The indenture does not contain any financial covenants. A total of
6,226,767 shares of common stock have been reserved for issuance upon conversion of the 4 1/4% Notes. 4 1/2% CONVERTIBLE SUBORDINATED NOTES In November and December 2000, the Company sold $150,000,000 aggregate principal amount of 4
1/2% Convertible Subordinated Notes due November 20, 2005 (the 4 1/2% Notes). The 4 1/2% Notes bear
interest from November 20, 2000 at the rate of 4 1/2% per year, payable semi-annually on May 20 and
November 20, beginning on May 20, 2001. The 4 1/2% Notes are convertible at the option of the holder
at any time on or prior to maturity into shares of the Companys common stock at a conversion price
of $26.45 per share. The conversion price is subject to adjustment. The Company 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 the Company 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. In 2003, the Company repurchased $74,030,000 of the 4 1/2% Notes from the proceeds from the sale
of the 7 1/2% Senior Subordinated Notes as discussed above. The Company recorded a $486,000 pretax
loss associated with the early extinguishment of debt related to the repurchase of the 4 1/2% Notes. The 4 1/2% Notes are unsecured obligations and rank junior in right of payment to all of the
Companys existing and future senior indebtedness. The 4 1/2% Notes rank equal in right of payment to
the Companys 4 1/4% Convertible Subordinated Notes due 2008 and its 7 1/2% Senior Subordinated Notes
due 2013. The 4 1/2% Notes effectively rank junior to the Companys subsidiary liabilities. The
indenture does not contain any financial covenants. A total of 2,872,760 shares of common stock
have been reserved for issuance upon conversion of the remaining 4 1/2% Notes. INTEREST RATE SWAP AGREEMENTS Interest rate swap agreements are used to manage the Companys interest rate exposure. In
1998, the Company entered into an interest rate swap agreement, which effectively converted for a
five-year period $45,000,000 of floating-rate borrowings to fixed-rate borrowings. In January 2001,
the Company terminated $16,500,000 of the $45,000,000 swap agreement, leaving a notional amount of
$28,500,000 converted to fixed-rate borrowings. The Company secured a 5.625% fixed interest rate on
the swap agreement, which was subsequently amended to a 4.45% fixed interest rate during 2002. In
May 2003, the Company terminated the remainder of the previously existing swap agreement. In July 2003, the Company entered into an interest rate swap agreement which effectively
converted for a ten-year period $100,000,000 of the $200,000,000 fixed rate borrowings under the 7
1/2% Senior Subordinated Notes to floating-rate borrowings. The Company secured a LIBOR plus 2.79%
floating interest rate over the term of the interest rate swap agreement. The Senior Subordinated
Notes are recorded net of the $1,663,000 fair value adjustment of the interest rate swap. The
interest rate swap agreement is a fair value hedge. The outstanding 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. AGGREGATE MATURITIES Aggregate maturities of long-term debt at December 31, 2004, excluding capital leases (see
Note 10), are as follows (in thousands): 2005
    
    $
    75,9702006
    
    
    55,0002007
    
    
    2008
    
    
    172,5002009
    
    
    Thereafter
    
    
    198,337$
    501,807
 F-19




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7. STOCKHOLDERS EQUITY COMMON STOCK On April 30, 2002, the Company effected a three-for-two stock split, in the form of a 50%
stock dividend, to stockholders of record on April 20, 2002. The stock split resulted in the
issuance of 15.9 million shares of common stock and a transfer between additional paid-in capital
and common stock of $159,000. All historical references to common share, earnings per share amounts and conversion rights
under debt instruments included in the consolidated financial statements and notes thereto have
been restated to reflect the three-for-two split. PREFERRED SHARE PURCHASE RIGHTS To establish a new shareholders rights plan, on December 30, 2002, the Board of Directors
declared a dividend distribution of one Preferred Share Purchase Right (Right) on each
outstanding share of the Companys common stock. The dividend distribution was payable to
shareholders of record on January 10, 2003. Under certain circumstances, each Right will entitle
shareholders to buy one ten-thousandth of a share of newly created Series A Junior Participating
Preferred Stock of the Company at an exercise price of $75.00. The Rights are redeemable at $.01
per Right at any time before a person has acquired 15% or more of the Companys outstanding common
stock. The Preferred Share Purchase Right Plan will expire on December 31, 2012. The Rights have certain anti-takeover effects. The rights will cause substantial dilution to a
person or group that attempts to acquire the Company on terms not determined by the Board of
Directors to be in the best interest of all shareholders. The Rights should not interfere with any
merger or other business combination approved by the Board of Directors. STOCK OPTIONS In March 1997, the Companys Board of Directors and shareholders approved the 1997 Long-Term
Equity Incentive Plan (the Plan). The Company has reserved 12,620,286 shares for issuance under
the Plan. Under the Plan, options to purchase shares may be granted to officers, employees, and
directors. The options have a maximum term of ten years and generally vest in five equal annual
installments. Options are generally granted at not less than market price on the date of grant. The following is a summary of option transactions during 2004, 2003 and 2002: Number of
    
    
    OptionOptions
    
    
    Price RangeBalance at December 31, 2001
    
    
    5,219,878
    
    
    $
    2.03 - $23.00Options granted
    
    
    2,492,327
    
    
    
    10.80 - 23.50Options exercised
    
    
    (1,031,997
    )
    
    
    2.03 - 23.50Options forfeited
    
    
    (1,009,375
    )
    
    
    2.03 - 23.50Balance at December 31, 2002
    
    
    5,670,833
    
    
    
    2.03 - 23.50Options granted
    
    
    1,454,150
    
    
    
    7.71 - 13.52Options exercised
    
    
    (143,882
    )
    
    
    2.03 - 11.50Options forfeited
    
    
    (214,212
    )
    
    
    6.72 - 23.50Balance at December 31, 2003
    
    
    6,766,889
    
    
    
    2.03 - 23.50Options granted
    
    
    1,660,000
    
    
    
    14.16 - 17.62Options exercised
    
    
    (927,951
    )
    
    
    2.03 - 21.08Options forfeited
    
    
    (464,246
    )
    
    
    7.17 - 23.50Balance at December 31, 2004
    
    
    7,034,692
    
    
    $
    2.03 - $23.50
 F-20




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##### Table of Contents



The following table summarizes information concerning outstanding and exercisable options at
December 31, 2004: OPTIONS OUTSTANDING
    
    
    OPTIONS EXERCISABLEWEIGHTEDAVERAGEREMAINING
    
    WEIGHTED
    
    
    
    
    
    
    WEIGHTEDCONTRACTUAL
    
    AVERAGE
    
    
    
    
    
    
    AVERAGENUMBER
    
    
    LIFE
    
    EXERCISE
    
    
    NUMBER
    
    
    EXERCISERANGE OF EXERCISE PRICES
    
    OUTSTANDING
    
    
    (YEARS)
    
    PRICE
    
    
    EXERCISABLE
    
    
    PRICE$2.03 - $7.17
    
    
    282,769
    
    
    4.3
    
    $
    6.81
    
    
    
    282,769
    
    
    $
    6.817.71 - 7.71
    
    
    1,028,856
    
    
    8.2
    
    
    7.71
    
    
    
    127,696
    
    
    
    7.718.95 - 11.50
    
    
    947,185
    
    
    5.9
    
    
    10.76
    
    
    
    653,685
    
    
    
    10.6511.56 - 15.75
    
    
    887,650
    
    
    9.2
    
    
    15.30
    
    
    
    21,950
    
    
    
    12.6515.83 - 16.40
    
    
    1,037,775
    
    
    7.9
    
    
    16.09
    
    
    
    307,539
    
    
    
    16.3516.67 - 16.71
    
    
    797,376
    
    
    6.5
    
    
    16.69
    
    
    
    797,376
    
    
    
    16.6917.62 - 18.20
    
    
    808,206
    
    
    8.1
    
    
    18.02
    
    
    
    226,541
    
    
    
    18.2018.67 - 21.08
    
    
    533,673
    
    
    6.9
    
    
    20.00
    
    
    
    392,736
    
    
    
    20.2523.00 - 23.00
    
    
    24,808
    
    
    6.6
    
    
    23.00
    
    
    
    20,164
    
    
    
    23.0023.50 - 23.50
    
    
    686,394
    
    
    7.4
    
    
    23.50
    
    
    
    667,050
    
    
    
    23.50$2.03 - $23.50
    
    
    7,034,692
    
    
    7.4
    
    
    15.01
    
    
    
    3,497,506
    
    
    
    16.21
 At December 31, 2003 and 2002, respectively, 3,356,852 and 2,636,954 options were
exercisable. At December 31, 2004, the Company had options representing 1,162,680 shares available
for future grant. EMPLOYEE STOCK PURCHASE PLAN In May 1998 the Companys Board adopted, and in June 1998 the stockholders approved, the
Province Healthcare Company Employee Stock Purchase Plan (the ESPP). Under the ESPP, employees
may purchase shares of common stock at 85% of market price on the first day of the year or 85% of
the market price on the last day of the year, whichever is lower. The shares are purchased each
year with funds withheld from employees through payroll deductions from January 1 through December
31. A total of 1,125,000 shares of Common Stock have been reserved for issuance under the ESPP.
Participation in the ESPP commenced June 1, 1998. Shares issued under the ESPP totaled 256,942,
126,874 and 59,022 in 2004, 2003 and 2002, respectively. 8. INCOME TAXES The provision for income taxes from continuing operations consists of the following amounts
(in thousands): 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    3,679
    
    
    $
    7,840
    
    
    $
    13,045State
    
    
    (243
    )
    
    
    761
    
    
    
    1,4193,436
    
    
    
    8,601
    
    
    
    14,464Deferred:Federal
    
    
    21,870
    
    
    
    13,312
    
    
    
    7,939State
    
    
    2,795
    
    
    
    903
    
    
    
    83724,665
    
    
    
    14,215
    
    
    
    8,776$
    28,101
    
    
    $
    22,816
    
    
    $
    23,240
 The differences between the Companys effective income tax rate and the statutory federal
income tax rate are as follows (in thousands): 2004
    
    
    2003
    
    
    2002Statutory federal rate
    
    $
    27,355
    
    
    
    35.0
    %
    
    $
    22,588
    
    
    
    35.0
    %
    
    $
    20,327
    
    
    
    35.0
    %State income taxes, net
of federal income tax
benefit
    
    
    1,659
    
    
    
    2.1
    
    
    
    1,081
    
    
    
    1.7
    
    
    
    1,467
    
    
    
    2.5Permanent differences
    
    
    387
    
    
    
    0.5
    
    
    
    271
    
    
    
    0.4
    
    
    
    232
    
    
    
    0.4Other
    
    
    (1,300
    )
    
    
    (1.6
    )
    
    
    (1,124
    )
    
    
    (1.7
    )
    
    
    1,214
    
    
    
    2.1$
    28,101
    
    
    
    36.0
    %
    
    $
    22,816
    
    
    
    35.4
    %
    
    $
    23,240
    
    
    
    40.0
    %
 F-21




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The components of the Companys deferred tax assets and (liabilities) for continuing
operations are as follows (in thousands): DECEMBER 31,2004
    
    
    2003Depreciation and amortization
    
    $
    (53,797
    )
    
    $
    (33,659
    )Accounts receivable
    
    
    (10,068
    )
    
    
    (4,215
    )Accruals and reserves
    
    
    1,201
    
    
    
    1,947Insurance reserves
    
    
    6,470
    
    
    
    4,789Third party settlements
    
    
    2,965
    
    
    
    2,224Operating leases
    
    
    (2,520
    )
    
    
    (2,201
    )Capital lease interest
    
    
    702
    
    
    
    683Other
    
    
    214
    
    
    
    582Net deferred tax liability
    
    $
    (54,833
    )
    
    $
    (29,850
    )
 In the accompanying consolidated balance sheets, net current deferred tax liabilities of
$8,118,000 and $2,015,000 are included in accrued expenses at December 31, 2004 and 2003,
respectively. Net noncurrent deferred tax liabilities of $46,715,000 and $27,835,000 are included
in other liabilities at December 31, 2004 and 2003, respectively. The Company recorded a deferred tax liability of $318,000 related to interest rate swap
agreements during 2004. The expense of the deferred taxes is recorded in comprehensive income. The Company has been examined by federal and various state tax authorities. The completed
examinations did not have a negative impact on the financial condition or results of operations of
the Company. In 2004, the Company recorded a reduction in its provision for income taxes of
approximately $800,000 due to final resolution of examinations on certain issues by taxing
authorities of audits that had been ongoing for over one year. 9. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share data): 2004
    
    
    2003
    
    
    2002Earnings per common share:Income from continuing operations
    
    $
    50,056
    
    
    $
    41,720
    
    
    $
    34,838Add convertible notes interest, net of tax
    
    
    7,781
    
    
    
    8,325
    
    
    
    Income from continuing operations
    
    
    57,837
    
    
    
    50,045
    
    
    
    34,838Discontinued operations
    
    
    4,443
    
    
    
    (10,101
    )
    
    
    1,274Net income
    
    $
    62,280
    
    
    $
    39,944
    
    
    $
    36,112Weighted average shares:Weighted
average shares - basic
    
    
    49,543
    
    
    
    48,692
    
    
    
    48,146Dilution for employee stock options
    
    
    1,395
    
    
    
    613
    
    
    
    1,307Dilution for convertible notes
    
    
    9,100
    
    
    
    10,243
    
    
    
    Weighted-average shares - diluted
    
    
    60,038
    
    
    
    59,548
    
    
    
    49,453Basic earnings per common share:Income from continuing operations
    
    $
    1.01
    
    
    $
    0.85
    
    
    $
    0.72Discontinued operations
    
    
    0.09
    
    
    
    (0.20
    )
    
    
    0.03Net income
    
    $
    1.10
    
    
    $
    0.65
    
    
    $
    0.75Diluted earnings per common share:Income from continuing operations
    
    $
    0.96
    
    
    $
    0.84
    
    
    $
    0.70Discontinued operations
    
    
    0.08
    
    
    
    (0.17
    )
    
    
    0.03Net income
    
    $
    1.04
    
    
    $
    0.67
    
    
    $
    0.73
 In accordance with SFAS No. 128, the calculation of diluted earnings per share for the year
ended December 31, 2004 using the if converted method includes the impact of the Companys
convertible notes. Since the Company reports discontinued operations, income from continuing
operations has been utilized in determining whether the convertible notes were dilutive or
antidilutive to earnings per share. The convertible notes were dilutive to earnings per share on
income from continuing operations and net income for the year ended December 31, 2004. The
convertible notes were dilutive to earnings per share on income from continuing operations and were
anti-dilutive to net income for the year ended December 31, 2003. The effect of the convertible
notes to purchase 5,672,160 F-22




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##### Table of Contents



shares of common stock, and related interest expense, were not included in the computation of
diluted earnings per share in 2002 because their effect would have been anti-dilutive. 10. LEASES The Company leases various buildings, office space and equipment. The leases expire at various
times and have various renewal options. These leases are classified as either capital leases or
operating leases based on the terms of the respective agreements. Future minimum payments at
December 31, 2004, by year and in the aggregate, under capital leases and noncancellable operating
leases with initial terms of one year or more consist of the following (in thousands): CAPITAL
    
    
    OPERATINGLEASES
    
    
    LEASES2005
    
    $
    479
    
    
    $
    7,6092006
    
    
    469
    
    
    
    6,8032007
    
    
    471
    
    
    
    5,3242008
    
    
    478
    
    
    
    4,6342009
    
    
    414
    
    
    
    3,059Thereafter
    
    
    2,311
    
    
    
    15,538Total minimum lease payments
    
    
    4,622
    
    
    $
    42,967Amount representing interest (at rates ranging from
3.94% to 9.74%)
    
    
    (1,805
    )Present value of net minimum lease payments
(including $271 classified as current)
    
    $
    2,817
 11. COMMITMENTS AND CONTINGENCIES LITIGATION SETTLEMENT In January 2005, the Company executed a confidential settlement agreement (the Settlement
Agreement) to resolve litigation and other disputes arising in 2002. Under the terms of the
Settlement Agreement, the Company paid $0.5 million in January 2005 for conditions satisfied under
the terms of the Settlement Agreement. This amount has been expensed and accrued in the December
31, 2004 financial statements. The Company also funded approximately $2.5 million in an escrow
account payable over a two year period upon the satisfaction of certain future events, including
non-competition. COMMITMENTS In 2004, the Company began construction of a new 60-bed acute care hospital in Ft. Mohave,
Arizona. This new hospital is currently estimated to cost approximately $31,000,000, of which
approximately $7,790,000 has been incurred at December 31, 2004. Construction of the Ft. Mohave
facility is anticipated to be completed in the third quarter of 2005. In 2004, the Company also
began construction of a 52-bed replacement facility for its existing 72-bed facility in Eunice,
Louisiana. The replacement facility is estimated to cost approximately $25,600,000, of which
approximately $1,095,000 has been incurred at December 31, 2004. Construction of the Eunice
replacement facility is anticipated to be completed in the second quarter of 2006. GENERAL LIABILITY CLAIMS The Company is subject to claims and suits arising in the ordinary course of business,
including claims for damages for personal injuries, employment-related claims, breach of management
contracts and for wrongful restriction of, or interference with, physicians staff privileges. In
certain of these actions, plaintiffs may seek punitive or other damages against the Company, which
are generally not covered by insurance. In managements opinion, the Company is currently not a
party to any proceeding that would have a material adverse effect on the Companys results of
operations or financial condition. ACQUISITIONS The Company has acquired hospitals with prior operating histories. The hospitals that the
Company acquires may have unknown or contingent liabilities, including liabilities for failure to
comply with healthcare laws and regulations. Although the Company obtains F-23




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contractual indemnification from sellers covering these matters, such indemnification may be
insufficient to cover material claims or liabilities for past activities of acquired hospitals. PHYSICIAN COMMITMENTS In order to recruit and retain physicians to the communities it serves, the Company has
committed to provide certain financial assistance in the form of recruiting agreements with various
physicians. In consideration for a physician relocating to one of its communities and agreeing to
engage in private practice for a specified period of time, the Company may loan certain amounts of
money to a physician, generally not to exceed a period of one year, to assist in establishing his
or her practice. The actual amount of such commitments to be subsequently advanced to physicians
often depends on the financial results of the physicians practice during the guarantee period.
Amounts advanced under the recruiting agreements are generally forgiven pro rata over a period of
three years contingent upon the physician continuing to practice in the respective community.
Estimated future commitment payments for physicians under recruiting agreements in effect at
December 31, 2004 are approximately $22,895,000. 12. RETIREMENT PLANS The Company sponsors defined contribution employee benefit plans which cover substantially all
employees. Employees may contribute a percentage of eligible compensation subject to Internal
Revenue Service limits. The plans call for the Company to make matching contributions, based on
either a percentage of employee contributions or a discretionary amount as determined by the
Company. Contributions by the Company to the plans totaled $3,281,000, $3,198,000 and $2,854,000
for the years ended December 31, 2004, 2003 and 2002, respectively. The Company sponsors a nonqualified supplemental deferred compensation plan for selected
management employees. As determined by the Board of Directors, the plan provides a benefit of 1% to
3% of the employees compensation. The participants amount is fully vested, except in those
instances where the participants employment terminates for any reason other than retirement, death
or disability, in which case the participant forfeits a portion of the employers contribution
depending on length of service. Plan expenses totaled $122,000, $148,000 and $226,000 for the years
ended December 31, 2004, 2003 and 2002, respectively. 13. FAIR VALUES OF FINANCIAL INSTRUMENTS Cash and Cash Equivalents-The carrying amount reported in the consolidated balance sheets for
cash and cash equivalents approximates fair value. Accounts Receivable and Accounts Payable-The carrying amount reported in the consolidated
balance sheets for accounts receivable and accounts payable approximates fair value. Long-Term Obligations-The carrying value of the Companys 4 1/2% Notes, 4 1/4% Notes, and 7 1/2%
Senior Subordinated Notes was $75,970,000, $172,500,000 and $200,000,000, respectively, at December
31, 2004. The fair value of the Companys 4 1/2% Notes, 4 1/4% Notes, and 7 1/2% Notes was $76,540,000,
$174,656,000 and $209,962,000, respectively, at December 31, 2004, based on the quoted market
prices at December 31, 2004. Interest Rate Swap Agreement-The fair value of the Companys interest rate swap agreement is
$1,663,000 at December 31, 2004, based on quoted market prices for similar debt issues. 14. ALLOWANCES FOR DOUBTFUL ACCOUNTS A summary of activity in the Companys allowance for doubtful accounts is as follows (in
thousands): AccountsBalance at
    
    
    Provision for
    
    
    Allowances
    
    
    Written Off
    
    
    Balance atBeginning of
    
    
    Doubtful
    
    
    Acquired in
    
    
    Net of
    
    
    End ofPeriod
    
    
    Accounts
    
    
    Acquisitions
    
    
    Recoveries
    
    
    PeriodYear ended December 31, 2002
    
    $
    44,476
    
    
    $
    53,201
    
    
    $
    10,729
    
    
    $
    (43,694
    )
    
    $
    64,712Year ended December 31, 2003
    
    $
    64,712
    
    
    $
    72,583
    
    
    $
    
    
    
    $
    (70,460
    )
    
    $
    66,835Year ended December 31, 2004
    
    $
    66,835
    
    
    $
    95,015
    
    
    $
    19,547
    
    
    $
    (103,123
    )
    
    $
    78,274
 F-24




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15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarterly financial information for the years ended December 31, 2004 and 2003 is summarized
below (in thousands, except per share data): QuarterFirst
    
    
    Second
    
    
    Third
    
    
    Fourth2004Net revenues
    
    $
    200,577
    
    
    $
    208,534
    
    
    $
    235,315
    
    
    $
    238,480Income from continuing operations
    
    $
    12,207
    
    
    $
    11,830
    
    
    $
    11,891
    
    
    $
    14,128Discontinued operations
    
    
    (646
    )
    
    
    6,369
    
    
    
    (362
    )
    
    
    (918
    )Net income
    
    $
    11,561
    
    
    $
    18,199
    
    
    $
    11,529
    
    
    $
    13,210Basic earnings (loss) per share:Income from continuing operations
    
    $
    0.25
    
    
    $
    0.24
    
    
    $
    0.24
    
    
    $
    0.28Discontinued operations
    
    
    (0.01
    )
    
    
    0.13
    
    
    
    (0.01
    )
    
    
    (0.02
    )Net income
    
    $
    0.24
    
    
    $
    0.37
    
    
    $
    0.23
    
    
    $
    0.26Diluted earnings (loss) per share:Income from continuing operations
    
    $
    0.24
    
    
    $
    0.23
    
    
    $
    0.23
    
    
    $
    0.27Discontinued operations
    
    
    (0.01
    )
    
    
    0.11
    
    
    
    (0.01
    )
    
    
    (0.02
    )Net income
    
    $
    0.23
    
    
    $
    0.34
    
    
    $
    0.22
    
    
    $
    0.252003Net revenues
    
    $
    182,443
    
    
    $
    183,935
    
    
    $
    184,789
    
    
    $
    195,041Income from continuing operations
    
    $
    9,892
    
    
    $
    9,919
    
    
    $
    10,201
    
    
    $
    11,708Discontinued operations
    
    
    (41
    )
    
    
    (258
    )
    
    
    (394
    )
    
    
    (9,408
    )Net income
    
    $
    9,851
    
    
    $
    9,661
    
    
    $
    9,807
    
    
    $
    2,300Basic earnings (loss) per share:Income from continuing operations
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.21
    
    
    $
    0.24Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.19
    )Net income
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.05Diluted earnings (loss) per share:Income from continuing operations
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.21
    
    
    $
    0.23Discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.16
    )Net income
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.20
    
    
    $
    0.07
 The amounts presented in the preceding table for the first quarter of 2004 and 2003 reflect
the restatement of Brim Healthcare, Inc. as a discontinued operation. The Form 10-Q for the
quarterly period ended March 31, 2004, as filed, reflected Brim Healthcare, Inc. in continuing
operations. The restatement of Brim Healthcare, Inc. as a discontinued operation resulted in a
decrease of $4,299,000 in net revenues, an increase in income from continuing operations of $63,000
and an increase in the loss from discontinued operations of $63,000 for the quarter ended March 31,
2004. The restatement of Brim Healthcare, Inc. as a discontinued operation resulted in a decrease
of $4,021,000 in net revenues, a decrease in income from continuing operations of $147,000 and a
decrease in the loss from discontinued operations of $147,000 for the quarter ended March 31, 2003.
The restatement of Brim Healthcare, Inc. as a discontinued operation did not have any effect on
net income for the quarters ended March 31, 2004 and 2003. 16. SUBSEQUENT EVENT On
March 18, 2005, in connection with the pending acquisition by LifePoint, the
Company commenced a cash tender offer and consent solicitation for any and all
of its 7 1/2% Senior Subordinated Notes. In addition, Lakers Holding Corp., a
subsidiary of LifePoint, commenced a cash tender offer on that date for any and
all of the Companys 4 1/4% Notes. The tender offer consideration for
each $1,000 principal amount of 7 1/2% Senior Subordinated Notes validly
tendered and accepted for purchase will be based on a fixed spread of 50 basis
points over the yield on the price, as of April 12, 2005, of the 2.625% U.S.
Treasury Note due May 15, 2008, plus accrued interest minus a consent payment
equal to $20 per $1,000 principal amount tendered and accepted for purchase. The
tender offer consideration for each $1,000 principal amount of 4 1/4% Notes
validly tendered and accepted for purchase will be $1,060, plus accrued
interest. The tender offer on the 7 1/2% Senior Subordinated Notes is
scheduled to expire on April 15, 2005 and the tender offer on the
4 1/4% Notes
is scheduled to expire on April 14, 2005, unless extended or terminated earlier. F-25