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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number 0-23639

PROVINCE HEALTHCARE COMPANY

(615) 370-1377
(Registrant’s Telephone Number, Including Area Code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x   No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
Yes x   No o

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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ITEM 1. FINANCIAL STATEMENTS

PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

See accompanying notes

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

See accompanying notes

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Interim results are not necessarily indicative of results that may be expected for the full year. In the opinion of management, the accompanying interim financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of Province Healthcare Company (the “Company”).

     The balance sheet at December 31, 2002, has been derived from the audited consolidated financial statements at that date, but does not include all of the financial information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

     For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

2. USE OF ESTIMATES

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Actual results could differ from the estimates.

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) – (continued)

3. ACQUISITIONS

     Memorial Hospital of Martinsville and Henry County

     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.

     Los Alamos Medical Center

     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 is the Company’s first New Mexico hospital and is the only hospital in the community, serving a population of approximately 50,000.

     Other

     In May 2003, the Company acquired a radiology and laboratory business in Elko, Nevada, where the Company operates Northeastern Nevada Regional Hospital, for approximately $3.2 million. The purchase price is not yet allocated, pending the Company’s receipt of a final appraisal of the healthcare business.

     The operating results of the hospitals and healthcare business acquired in 2002 and 2003 have been included in the accompanying condensed consolidated statements of income from the respective dates of acquisition.

4. GOODWILL AND INTANGIBLE ASSETS

     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. The Company performed its annual impairment test on October 1, 2002. The results of the tests had no effect on the operations or financial position of the Company. The Company currently is not aware of any impairment indicators at September 30, 2003.

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) – (continued)

     The Company has other intangible assets, net of accumulated amortization, of $1.2 million as of September 30, 2003, which are included in “other assets” on the condensed consolidated balance sheet. The intangible assets relate primarily to non-compete agreements and are amortized over two (2) years.

5. LONG-TERM DEBT

     In May 2003, the Company completed its public offering of $200.0 million aggregate principal amount of 7 1/2% Senior Subordinated Notes due 2013 at par. Net proceeds of the offering totaling $194.2 million were used to repay $114.3 million in existing borrowings under our senior credit facility and to repurchase approximately $69.0 million of the Company’s 4 1/2% Convertible Subordinated Notes due 2005 through privately negotiated transactions. The Company recorded a $486,000 pretax loss associated with the early extinguishment of debt related to this repurchase. During May and June 2003, the Company amended its senior credit facility to (i) add additional hospitals as collateral security, (ii) obtain consent for various transactions, including the issuance of $200.0 million of Senior Subordinated Notes due 2013 and repurchase of a portion of the outstanding 4 1/2% Convertible Subordinated Notes due 2005, (iii) increase the flexibility of certain investment covenants, and (iv) increase the amount available on its revolving line of credit to $250.0 million from $209.7 million.

     In July, the Company repurchased an additional $5.0 million of the outstanding 4 1/2% Convertible Subordinated Notes due 2005, bringing total repurchases to $74.0 million and reducing the outstanding principal balance of such Notes to $76.0 million. An insignificant loss was recorded in the third quarter of 2003 related to this repurchase.

     During the second quarter of 2003, the Company terminated its previously existing interest rate swap contract at fair value, which was recorded as a liability on the balance sheet. The loss on the termination was not considered material. During the third quarter of 2003, the Company 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 its 7 1/2% Senior Subordinated Notes due 2013 to floating rate borrowings. This agreement exposes the Company to credit losses in the event of non-performance by the counterparty to the financial instrument. The Company anticipates that the counterparty will fully satisfy its obligations under the contract.

     The Company entered into an interest rate swap agreement in July 2003, which effectively converted for a ten-year period $100.0 million of the $200.0 million fixed-rate borrowings under the 7 1/2% Senior Subordinated Notes due 2013 to floating-rate borrowings. The Company secured a LIBOR plus 2.79% floating interest rate over the term of the interest

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) – (continued)

rate swap agreement. In accordance with the provisions of SFAS No. 133, the Company designated its interest rate swap agreement as a fair value hedge.

6. COMPREHENSIVE INCOME

     The following table presents the components of comprehensive income, net of related taxes (in thousands):

The net change in fair value of the interest rate swap is included in retained earnings on the condensed consolidated balance sheets.

7. EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) – (continued)

     The add-back of the interest and potential issuance of shares related to the convertible notes was not included in the computation for the three and nine months ended September 30, 2003, and the three months ended September 30, 2002, because the effect would have been anti-dilutive.

8. STOCK BASED COMPENSATION

     The Company, from time to time, grants stock options for a fixed number of common shares to employees and directors. 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.

     The following pro forma information is being presented in accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition & Disclosure (adopted by the Company on January 1, 2003). If the compensation cost for the Company’s stock-based compensation plans had 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, net income and earnings per share would have been reduced to the pro forma amounts indicated in the following table:

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) – (continued)

     The weighted average fair values of the Company’s stock options granted during the three months ended September 30, 2003 and 2002 and nine months ended September 30, 2003 and 2002 were $5.76, $9.85, $3.94 and $9.79, respectively. The fair values were estimated at the date of grant using a Black-Scholes option valuation model based on the following weighted-average assumptions:

     The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options. Changes in subjective input assumptions can materially affect the fair value estimate. Other option valuation models may produce significantly different fair values of the Company’s employee stock options.

9. COMMITMENTS AND CONTINGENCIES

     Management continually evaluates contingencies based on the best available evidence and believes that adequate provision for losses has been provided to the extent necessary. In the opinion of management, the ultimate resolution of the following contingencies will not have a material effect on the Company’s results of operations or financial position.

     Commitments

     Subsequent to quarter end, the Company began construction of a new 41-bed hospital facility in Bluffton, South Carolina, which is expected to be completed in the first quarter of 2005. The total cost of this facility is expected to approximate $32.0 million, with the majority funded during 2004.

     General and Professional Liability Risks

     Effective January 1, 2003, the Company increased its self-insurance retention related to general and professional liability risks to $5.0 million. The 2003 policy provides coverage up to $50.0 million for claims incurred during the annual policy term.

     The Company estimates its self-insured retention portion of the malpractice risks using historical claims data, demographic factors, severity factors and other actuarial assumptions. The Company maintains a reserve for the anticipated claims within its deductible and self-insured retentions. The reserve for general and professional liability risks is included in “other liabilities” on the condensed consolidated balance sheet.

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PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) – (continued)

     Workers Compensation Risks

     Effective January 1, 2003, the Company increased its deductible for workers compensation claims to $500,000 per accident. The Company has purchased a minimum cap of $12.0 million for total workers compensation losses within this deductible for 2003. The Company’s 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 will ultimately result in a receivable from or a payable to the claims processor.

     Litigation

     The Company currently is, and from time to time is expected to be, subject to claims and suits arising in the ordinary course of business. The Company is not aware of any such proceeding which, in management’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations.

     Net Patient Service Revenue

     Final determination of amounts earned under the Medicare and Medicaid programs often occurs in subsequent periods because of audits by the programs, rights of appeal and the application of numerous technical provisions. Differences between original estimates and subsequent revisions (including settlements) are included in the consolidated statements of income in the period in which revisions are made, and resulted in an increase in net patient service revenue of approximately $2.8 million and $1.2 million the three month periods ended September 30, 2003 and 2002, respectively; and $3.6 million and $1.3 million for the nine month periods ended September 30, 2003 and 2002, respectively.

10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46, as amended, must be applied for the first interim or annual period after December 15, 2003. The Company does not expect this new interpretation to have a material effect on its future results of operations or financial position.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     You should read the following along with the Condensed Consolidated Financial Statements and accompanying notes.

OVERVIEW

     We are a healthcare services company focused on acquiring and operating hospitals in attractive non-urban markets in the United States. As of September 30, 2003, we owned or leased 20 general acute care hospitals in 13 states with a total of 2,281 licensed beds, and managed 37 hospitals in 14 states, with a total of 3,043 licensed beds.

     Our owned and leased hospitals accounted for 98.0% and 98.1% of our net operating revenue in the three months ended September 30, 2003 and 2002, respectively.

IMPACT OF ACQUISITIONS

     An integral part of our strategy is to acquire non-urban acute care hospitals. Because of the relatively small number of owned and leased hospitals, each hospital acquisition can materially affect our overall operating performance. Upon the acquisition of a hospital, we typically take a number of steps to lower operating costs. The impact of such actions may be offset by cost increases to expand services, strengthen medical staff and improve market position. The benefits of these investments and of other activities to improve operating margins generally do not occur immediately. Consequently, the financial performance of a newly-acquired hospital may adversely affect overall operating margins in the near term. As we make additional hospital acquisitions, we expect that this effect will be mitigated by the expanded financial base of existing hospitals and the allocation of corporate overhead among a larger number of hospitals. We also may divest certain hospitals in the future, if we determine a hospital no longer fits within our strategy.

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RESULTS OF OPERATIONS

Operating Results Summary

     The following are comparative summaries of results from operations for the three months and nine months ended September 30, 2003 and 2002 (dollars in thousands):

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