UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

or

For the transition period from                                        to                                       

Commission File Number: 0-29818

(615) 372-8500
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     As of October 21, 2004, the number of outstanding shares of Common Stock of LifePoint Hospitals, Inc. was 38,716,903.

Table of Contents

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

LIFEPOINT HOSPITALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes.

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LIFEPOINT HOSPITALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(1)

Derived from audited financial statements.

See accompanying notes.

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LIFEPOINT HOSPITALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

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LIFEPOINT HOSPITALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

     LifePoint Hospitals, Inc. is a holding company. Its subsidiaries own, lease and operate their respective facilities and other assets. The term “LifePoint” or the “Company” as used herein refers to LifePoint Hospitals, Inc. and its subsidiaries, unless otherwise stated or indicated by context. As of September 30, 2004, the Company operated 30 general, acute care hospitals with an aggregate of 2,793 licensed beds in non-urban communities. The Company’s hospitals are located in the states of Alabama, Florida, Kansas, Kentucky, Louisiana, Tennessee, Utah, West Virginia and Wyoming.

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures considered necessary for a fair presentation have been included. Operating results for the three months and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

     The majority of the Company’s expenses are “cost of revenue” items. Costs that could be classified as “general and administrative” by the Company would include the LifePoint corporate office costs, which were $5.3 million and $7.7 million for the three months ended September 30, 2003 and 2004, respectively, and $16.9 million and $21.5 million for the nine months ended September 30, 2003 and 2004, respectively.

     Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications, primarily for the discontinued operations as described in Note 4, have no impact on total assets, liabilities, stockholders’ equity, net income or cash flows.

NOTE 2 — EARNINGS (LOSS) PER SHARE

     The following table sets forth the computation of basic and diluted earnings (loss) per share (dollars in millions, except per share amounts, and shares in thousands):

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     For the third quarter of 2004, approximately 1.9 million of the Company’s stock options outstanding, which represents approximately 41% of the Company’s total options outstanding, (1.5 million for the nine months ended September 30, 2004) were excluded from the calculation of diluted earnings (loss) per share because the exercise prices of the stock options were greater than or equal to the average share price for the quarter and nine month period, and therefore their inclusion would have been anti-dilutive. These options could be dilutive in the future if the average share price increases and is greater than the exercise price of these options. For the third quarter of 2003, approximately 1.9 million of the Company’s stock options outstanding (2.1 million for the nine months ended September 30, 2003) were excluded from the calculation of diluted earnings (loss) per share.

NOTE 3 — ACQUISITION OF PROVINCE HEALTHCARE COMPANY

     LifePoint announced on August 16, 2004 that it entered into a definitive agreement to acquire Province Healthcare Company (“Province”) for approximately $1.7 billion in cash, stock and the assumption of debt. The transaction will create a leading hospital company focused on providing healthcare services in non-urban communities, with 51 hospitals, of which 48 are located in markets where the combined company will be the sole hospital provider in the community. The transaction is expected to close in the first quarter of 2005.

     Pursuant to the definitive agreement, if the proposed transaction is consummated, the businesses of LifePoint and Province will be combined under a newly formed company, which will be renamed “LifePoint Hospitals, Inc.” (“New LifePoint”). Each Province stockholder will receive a per share consideration comprised of $11.375 in cash and a number of shares of New LifePoint common stock equal to an exchange ratio of between 0.3447 and 0.2917, which will represent a value of $11.375, if the volume weighted average of the daily sale prices for shares of LifePoint common stock for the 20 consecutive trading day period ending at the close of business on the third trading day prior to closing, (the “LifePoint average share price”), is between $33.00 and $39.00. If the LifePoint average share price is $33.00 or less, the exchange ratio will be 0.3477, and if the LifePoint average share price is $39.00 or more, the exchange ratio will be 0.2917. Based on the closing price of a share of LifePoint common stock on October 18, 2004 of $30.87, each Province stockholder would have received a total per share consideration valued at approximately $22.016.

     Based on the closing price of LifePoint common stock and the number of outstanding shares of Province common stock, each as of October 18, 2004, LifePoint will pay approximately $566.3 million in cash and issue approximately 17.2 million shares of common stock to Province stockholders. Each LifePoint stockholder will receive one share of New LifePoint common stock for each share of LifePoint common stock.

     The agreement provides for alternative structures. While it is anticipated that shares received by Province stockholders will be received in a tax-free

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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 Province have unanimously approved the proposed transaction. Completion of the transaction is subject to approval by each company’s stockholders, receipt of necessary financing and certain other conditions. LifePoint has received a commitment from Citigroup Global Markets, Inc. (“Citigroup”) to finance the cash consideration for the acquisition, to refinance Province’s existing debt and to provide for the ongoing working capital and general corporate needs of New LifePoint. The commitment provides for up to $1.325 billion in term loans and up to $400 million in revolving loans on customary terms and conditions.

NOTE 4 — DISCONTINUED OPERATIONS

     During the third quarter of 2004, the Company committed to a divestiture plan of its 56-bed Bartow Memorial Hospital (“Bartow”) located in Bartow, Florida. Subsequently, the Company announced on October 7, 2004, that it had entered into an asset exchange agreement with Health Management Associates, Inc. (“HMA”) under which LifePoint will acquire 76-bed Williamson Memorial Hospital, located in Williamson, West Virginia, and, simultaneously, HMA will acquire Bartow Memorial Hospital. The transaction is expected to close in the fourth quarter of 2004 or in the first quarter of 2005. The asset exchange is subject to certain conditions, including completion of due diligence by both parties. The assets and operations of Bartow Memorial Hospital that are subject to the asset exchange have been reflected as discontinued operations in the Company’s financial statements for the third quarter of 2004.

     The Company has reflected Bartow as discontinued operations, consistent with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). The results of operations, net of taxes, and the carrying value of the assets of Bartow that are expected to be sold have been reflected in the accompanying condensed consolidated financial statements as discontinued operations/assets held for sale in accordance with SFAS No. 144. All prior periods have been reclassified to conform to this presentation for all periods presented. These required reclassifications to the prior period financial statements did not impact total assets, liabilities, stockholders’ equity, net income or cash flows.

     The revenues and loss before income taxes of Bartow reported in discontinued operations for the three months and nine months ended September 30, 2003 and 2004 are as follows (in millions):

     The following assets of Bartow to be sold are reported as assets held for sale in the accompanying condensed consolidated balance sheets (in millions):

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NOTE 5 — RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In December 2003, the Financial Accounting Standards Board (“FASB”) issued Revised Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46R”), which requires the consolidation of variable interest entities. FIN 46R, as revised, was applicable to financial statements of companies that had interests in “special purpose entities” during 2003. Effective as of the first quarter of 2004, FIN 46R is applicable to financial statements of companies that have interests in all other types of entities. Adoption of FIN 46R had no effect on the Company’s financial position, results of operations or cash flows.

     The Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”), on July 1, 2003. SFAS No. 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity, such as redeemable preferred stock and certain equity derivatives that frequently are used in connection with share repurchase programs. On October 29, 2003, the FASB voted to defer for an indefinite period the application of SFAS No. 150 to classification of noncontrolling interests of limited-life subsidiaries. Neither the adoption of SFAS No. 150 nor the deferral had a material impact on the Company’s results of operations or financial position.

NOTE 6 — STOCK BENEFIT PLANS

     The Company issues stock options and other stock-based awards to key employees and directors under stock-based compensation plans, which are described more fully in Note 6 (stockholders’ equity) to the consolidated financial statements in the Company’s 2003 Annual Report on Form 10-K. SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123” (“SFAS No. 148”). SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for companies making a voluntary change to fair value-based accounting for stock-based employee compensation. The Company continues to account for its stock-based compensation plans under the intrinsic value recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. SFAS No. 148 also requires disclosure of pro-forma results on a quarterly basis as if the Company had applied the fair value recognition provisions of SFAS No. 123.

     During the first quarter of 2004, the Company granted 175,000 shares of nonvested stock awards to certain key executives under the Company’s 1998 Long-Term Incentive Plan. The nonvested stock awards vest three years from the grant date and contain no vesting requirements other than continued employment of the executive. The fair market value at the date of grant of these nonvested stock awards was $33.17 per share and was recorded as unearned compensation as a component of stockholders’ equity. During the second quarter of 2004, the Company granted 21,000 shares of nonvested stock awards to its outside directors under the Company’s Outside Directors Stock and Incentive Plan. These nonvested stock awards also vest three years from the grant date and contain no vesting requirements other than continued service of the director. The fair market value at the date of grant of these nonvested stock awards was $37.86 and was recorded as unearned compensation as a component of stockholders’ equity. Unearned compensation is being amortized on a straight-line basis in the statements of income over the three-year vesting period of the awards.

     Since the exercise price of all options granted under the Company’s incentive plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation is recognized in net income related to stock options. The following table illustrates the effect on net income and earnings per share (in millions, except per share amounts) as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to options granted under the stock option plans. For purposes of this pro-forma disclosure, the value of the options is estimated using a Black-Scholes option pricing model and amortized ratably to expense over the options’ vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.

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

     The weighted average estimated value of stock options granted during the third quarter of 2004 was $11.40 ($10.41 for the third quarter of 2003) and for the nine months ended September 30, 2004 was $12.54 ($14.13 for the nine months ended September 30, 2003). These options were granted with an exercise price equal to the market price at the date of grant. These options become exercisable beginning in part from one year after the date of grant to three years after the date of grant and expire 10 years after the grant date. The above table includes the impact of these additional stock options for the period subsequent to their grant. The values were estimated at the date of grant using the following weighted average assumptions:

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     Additional information with respect to stock benefit plan activity in the Company’s 1998 Long-Term Incentive Plan and Outside Directors Stock and Incentive Plan is as follows:

NOTE 7 — COMMITMENTS AND CONTINGENCIES

Americans with Disabilities Act Claim

     On January 12, 2001, Access Now, Inc., a disability rights organization, filed a class action lawsuit against each of the Company’s hospitals alleging non-compliance with the accessibility guidelines under the Americans with Disabilities Act (the “ADA”). The lawsuit, filed in the United States District Court for the Eastern District of Tennessee, seeks injunctive relief requiring facility modification, where necessary, to meet the ADA guidelines, along with attorneys fees and costs. In January 2002, the District Court certified the class action and issued a scheduling order that requires the parties to complete discovery and inspection for approximately six facilities per year. The Company is vigorously defending the lawsuit, recognizing the Company’s obligation to correct any deficiencies in order to comply with the ADA. As of September 30, 2004, the plaintiffs have conducted inspections at 22 of the Company’s hospitals. On July 19, 2004, the United States District Court approved the settlement agreements between the parties relating to two of the Company’s facilities. These facilities have completed the litigation process and now will move forward in implementing facility modifications in accordance with the terms of the settlement.

Corporate Integrity Agreement

     In December 2000, the Company entered into a corporate integrity agreement with the Office of Inspector General (“OIG”) and agreed to maintain its compliance program in accordance with the corporate integrity agreement. This agreement has been amended since that time in April and October 2002, December 2003 and March 2004. Complying with the compliance measures and reporting and auditing requirements of the corporate integrity agreement requires additional efforts and costs. Failure to comply with the terms of the corporate integrity agreement could subject the Company to significant monetary penalties.

Legal Proceedings and General Liability Claims

     The Company is, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, medical malpractice, breach of management contracts, wrongful restriction of or interference with physicians’ staff privileges and employment related claims. In certain of these actions, plaintiffs request punitive or other damages against the Company which may not be covered by insurance. The Company is currently not a party to any proceeding which, in management’s opinion, would have a material adverse effect on the Company’s business, financial condition or results of operations.

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Physician Commitments

     The Company has committed to provide certain financial assistance pursuant to recruiting agreements with various physicians practicing in the communities it serves. In consideration for a physician relocating to one of its communities and agreeing to engage in private practice for the benefit of the respective community, the Company may loan certain amounts of money to a physician, normally over a period of one year, to assist in establishing his or her practice. The Company had committed to advance a maximum amount of approximately $26.6 million at September 30, 2004. The actual amount of such commitments to be subsequently advanced to physicians is estimated at $10.7 million and often depends upon the financial results of a physician’s private practice during the guaranteed period. Generally, amounts advanced under the recruiting agreements may be forgiven pro rata over a period of 48 months, contingent upon the physician continuing to practice in the respective community.

Capital Expenditure Commitments

     The Company is reconfiguring some of its facilities to accommodate more effectively patient services and restructuring existing surgical capacity in some of its hospitals to permit additional patient volume and a greater variety of services. The Company had incurred approximately $55.9 million in uncompleted projects as of September 30, 2004, which is included in construction in progress in the Company’s accompanying condensed consolidated balance sheet. At September 30, 2004, the Company had projects under construction with an estimated additional cost to complete and equip of approximately $91.0 million.

     Pursuant to the asset purchase agreement for Ville Platte Medical Center, the Company has agreed to make certain capital improvements, the cost of which, together with the initial cash payment, defeasance of certain bonds and liabilities assumed, is not required to exceed $25.0 million. The asset purchase agreement provides that the capital improvements must be committed by December 1, 2004. The initial cash payment and liabilities assumed totaled $15.1 million, which leaves $9.9 million required for capital improvements. The Company had incurred approximately $6.2 million of the required capital improvements as of September 30, 2004.

     Pursuant to the asset purchase agreement for Logan Regional Medical Center, the Company has agreed to expend, regardless of the results of the hospital’s operations, at least $20.0 million in the aggregate for capital expenditures and improvements during the ten-year period following the date of acquisition of December 1, 2002. The Company had incurred approximately $7.6 million of the required capital improvements as of September 30, 2004.

Tax Matters

     During 2003, the Internal Revenue Service (“IRS”) notified the Company regarding its findings related to the examination of the Company’s federal income tax returns for the years ended December 31, 1999, 2000 and 2001. The Company reached a settlement with the IRS on all issues except for the Company’s method of determining its bad debt deduction for which the IRS has proposed an additional assessment of $7.4 million. All of the adjustments proposed by the IRS are temporary differences. The IRS has delayed final settlement of this assessment until resolution of certain pending court proceedings related to the use of this bad debt deduction method by HCA. HCA filed a petition with the United States Supreme Court on May 17, 2004 to appeal the ruling of the lower court on the bad debt deduction method. The Company applied its 2002 federal income tax refund in the amount of $6.6 million as a deposit against any potential settlement to forestall the tolling of interest on such settlement beyond the March 15, 2003 deposit date. Management believes that adequate provisions have been reflected in the consolidated financial statements to satisfy final resolution of the remaining disputed issue based upon current facts and circumstances and that final resolution of this dispute will not have a material adverse impact on the Company’s results of operations or financial position.

     HCA and the Company entered into a tax sharing and indemnification agreement as part of the Company’s 1999 spin-off from HCA. Under the agreement, HCA maintains full control and absolute discretion with regard to any combined or consolidated tax filings for periods prior to the 1999 spin-off from HCA (the “Spin-off”). In addition, the agreement provides that HCA will generally be responsible for all taxes that are allocable to periods prior to the Spin-off and HCA and the Company will each be responsible for their own tax liabilities for periods after the Spin-off. The tax sharing and indemnification agreement does not have an impact on the realization of deferred tax assets

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or the payment of deferred tax liabilities of the Company, except to the extent that the temporary differences give rise to such deferred tax assets and liabilities after the Spin-off and are adjusted as a result of final tax settlements after the Spin-off. In the event of such adjustments, the tax sharing and indemnification agreement provides for certain payments between HCA and the Company, as appropriate.

Acquisitions

     The Company has acquired and will continue to acquire businesses with prior operating histories. Acquired companies may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company institutes policies designed to conform practices to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. Although the Company generally seeks to obtain indemnification from prospective sellers covering such matters, there can be no assurance that any such matter will be covered by indemnification, or if covered, that such indemnification will be adequate to cover potential losses and fines.

NOTE 8 — LONG-TERM DEBT

     Long-term debt consists of the following (in millions):

     During the second quarter of 2004, the Company repurchased $29.0 million of its $250.0 million 4½% Convertible Subordinated Notes due 2009 (the “Convertible Notes”) and paid a $0.9 million premium on these repurchases. In connection with these repurchases, the Company expensed $0.6 million of deferred loan costs attributable to the $29.0 million Convertible Note repurchases. The deferred loan cost charge and the $0.9 million premium paid comprise the $1.5 million debt retirement costs in the Company’s accompanying condensed consolidated statements of income for the nine months ended September 30, 2004. The $1.5 million of debt retirement costs had a negative $0.02 per diluted share impact for the nine months ended September 30, 2004.

     The Company borrowed $30.0 million under its $200.0 million, five-year amended and restated credit agreement (“Revolving Credit Facility”) in June 2004 to fund the acquisition of River Parishes Hospital, as described in Note 11, and for general corporate purposes. In the third quarter of 2004, the Company used available cash to repay the $30.0 million of indebtedness outstanding at June 30, 2004 under the Revolving Credit Facility. In February 2004, the Company used available cash to repay the $20.0 million of indebtedness outstanding at December 31, 2003 under the Revolving Credit Facility.

NOTE 9 — PROFESSIONAL AND GENERAL LIABILITY RESERVES

     The Company is subject to medical malpractice lawsuits and other claims as part of providing healthcare services. To mitigate a portion of this risk, the Company maintains insurance for individual malpractice claims exceeding $10.0 million. The Company’s reserves for professional and general liability claims are based upon independent actuarial calculations, which consider historical claims data, demographic considerations, severity factors and other actuarial assumptions in determining reserve estimates. Reserve estimates are discounted to present value using a 5.0% discount rate and are revised twice each year by the Company’s independent actuaries. The estimated reserve for professional and general liability claims will be significantly affected if current and future claims differ from historical trends. While management monitors reported claims closely and considers potential outcomes as estimated by its actuaries when determining its professional and general liability reserves, the complexity of the claims, the extended period of time to settle the claims and the wide range of potential outcomes complicates the estimation process.

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     The Company implemented enhanced processes in monitoring claims and managing losses in high risk areas during 2002 and 2003 to attempt to reduce loss levels and appropriately manage risk. During the second quarter of 2004, the Company received revised reserve estimates for professional and general liability claims from its actuaries based upon more current loss experience information. In addition, the Company ceased receiving reserve estimates from one of the three actuaries that had historically been used to calculate loss reserve estimates. This change in the Company’s estimation process reduced its reserve levels and related professional and general liability insurance expense in the third quarter of 2004 and nine months ended September 30, 2004 by $1.4 million and $2.8 million, respectively, on a pretax basis, or $0.02 and $0.04 per diluted share, respectively. The Company continues to derive its estimates for financial reporting purposes by using a mathematical average of the actuarial valuations from its other two actuaries. The results of the updated actuarial valuations from these two actuaries reduced the Company’s reserve estimates for years prior to 2004 by $1.0 million on a pretax basis, or $0.01 per diluted share, which reduced its professional and general liability expense in the second quarter of 2004.

     The reserve for professional and general liability claims was $27.5 million and $29.5 million at December 31, 2003 and September 30, 2004, respectively. The total cost of professional and general liability coverage for continuing operations, including the changes discussed above, for the three months ended September 30, 2003 and 2004 was $1.1 million and $2.1 million, respectively. The total cost of professional and general liability coverage for continuing operations, including the changes discussed above, for the nine months ended September 30, 2003 and 2004 was $7.5 million and $6.5 million, respectively.

NOTE 10 — MEDICARE REIMBURSEMENT

     During the third quarter of 2003, the Company received correspondence from one of its fiscal intermediaries questioning a particular Medicare disproportionate share designation at one of its hospitals. This hospital has had this designation since 2001 and was previously approved for this designation by its fiscal intermediary. The Company and the fiscal intermediary worked together and contacted the Centers for Medicare and Medicaid Services (“CMS”) for resolution of the designation. The Company reduced revenues by $3.0 million and $0.2 million during the third and fourth quarters of 2003, respectively, representing the three-year difference in reimbursement from this change in designation. The Company received notification from CMS late in the first quarter of 2004 reconfirming the original designation. Based upon the favorable resolution of this issue, the Company increased revenues by $3.2 million in the first quarter of 2004.

NOTE 11 — ACQUISITION OF RIVER PARISHES HOSPITAL

     Effective July 1, 2004, the Company acquired the 106-bed River Parishes Hospital in LaPlace, Louisiana from Universal Health Services, Inc. for approximately $24.8 million in cash, including certain working capital and direct transaction costs, which is included in unallocated purchase price on the Company’s accompanying condensed consolidated balance sheet as of September 30, 2004. The Company borrowed from its Revolving Credit Facility and paid the purchase price for this acquisition on June 30, 2004. Revenues for this facility were approximately $36.0 million during 2003, exclusive of physician revenues. The hospital is located approximately 30 miles west of New Orleans, Louisiana and is the only hospital located in St. John the Baptist Parish.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     We recommend that you read this discussion together with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report.

     This report, including the condensed consolidated financial statements and related notes, contains forward-looking statements about the Company. Broadly speaking, forward-looking statements include forecasts of future financial results and conditions, expectations for future operations and business, and any assumptions underlying those forecasts and expectations. You should not unduly rely on forward-looking statements. Actual outcomes and results might differ significantly from forecasts and expectations. Please refer to “Factors that May Affect Future Results” later in this report for a discussion of some of the factors that may cause results to differ.

Executive Overview

Acquisition of Province Healthcare Company

     We announced on August 16, 2004 that we entered into a definitive agreement to acquire Province Healthcare Company for approximately $1.7 billion in cash, stock and the assumption of debt. The transaction will create a leading hospital company focused on providing healthcare services in non-urban communities, with 51 hospitals, of which 48 are located in markets where the combined company will be the sole hospital in the community. The transaction is expected to close in the first quarter of 2005. Please refer to Note 3 of our condensed consolidated financial statements included elsewhere herein for a discussion of this proposed transaction.

Continuing Operations

     The first nine months of 2004 were encouraging because of our solid operating performance and increased patient volume levels. We continue to be guardedly optimistic regarding our outlook for the remainder of 2004 as a result of the improved reimbursement environment resulting from the passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”) and patient volumes more consistent with historical trends. During 2004, we are continuing to focus on physician recruiting and retention, investing capital in our hospitals and seeking additional hospital acquisitions that fit our non-urban strategy. As part of that strategy, we acquired the 106-bed River Parishes Hospital in LaPlace, Louisiana effective July 1, 2004, for approximately $24.8 million including certain working capital and direct transaction costs. The following table reflects our summarized operating results:

Discontinued Operations

     During the third quarter of 2004, we committed to a divestiture plan of our 56-bed Bartow Memorial Hospital, located in Bartow, Florida. Subsequently, we announced that we entered into an asset exchange agreement with HMA under which we will acquire 76-bed Williamson Memorial Hospital, located in Williamson, West Virginia, and, simultaneously HMA will acquire Bartow. Please refer to Note 4 of our condensed consolidated financial statements included elsewhere herein for a discussion of our discontinued operations of Bartow.

     Certain prior period amounts in this report have been reclassified to conform to the current period’s presentation of financial information. These reclassifications, primarily for discontinued operations as described in Note 4 of our condensed consolidated financial statements included elsewhere herein, have no impact on total assets, liabilities,

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stockholders’ equity, net income or cash flows. Unless otherwise indicated, all relevant financial and statistical information included herein relates to our continuing operations.

Revenue/Volume Trends

     The key metrics we use internally to evaluate our revenues are equivalent admissions, which equate to volume, and revenues per equivalent admission, which relate to pricing and acuity. We anticipate our patient volumes and related revenues will continue to be impacted by the following factors:

•

Physician Recruitment and Retention. Recruiting and retaining both primary care physicians and specialists for our non-urban communities is a key to increasing revenues and patient volumes. Continuing to add specialists should help our hospitals increase volumes by offering new services. We recruited 79 admitting physicians during the nine months ended September 30, 2004. Of these 79 physicians recruited, 70 started in the nine months ended September 30, 2004 and 9 are scheduled to start in the fourth quarter of 2004.

•

Medicare Rate Increases. MMA provides a prescription drug benefit for Medicare beneficiaries and also contains numerous provisions that provide incremental funding to hospitals. Hospitals qualify for Medicare disproportionate share hospital (“DSH”) payments when their percentage of low-income patients exceeds 15%. A majority of our hospitals qualify to receive DSH payments. Effective April 1, 2004, MMA raised the cap on the DSH payment adjustment percentage from 5.25% to 12.0% for rural and small urban hospitals and specified that payments to all hospitals are based on the same conversion factor, regardless of geographic location. A majority of our hospitals are benefiting from these provisions.

     The following table lists our DSH payments from Medicare (in millions):

     Please refer to our 2003 Annual Report on Form 10-K for a discussion of other MMA provisions that affect our reimbursement.

•

Growth in Outpatient Services. A number of procedures once performed only on an inpatient basis have been, and will continue to be, converted to outpatient procedures. This conversion has occurred through continuing advances in pharmaceutical and medical technologies, and as a result of efforts made by payors to control costs. We anticipate that the long-term growth trend in outpatient services will continue. Generally, the payments we receive for outpatient procedures are less than those for similar procedures performed in an inpatient setting. The following table shows net outpatient, inpatient and other revenues as a percentage of our total revenues:

Other Trends

•

Increases in Provision for Doubtful Accounts. We continued to experience an increase in our provision for doubtful accounts during the nine months ended September 30, 2004. The increase was the result of a combination of broad economic factors, including an increased number of uninsured patients and health care plan design changes that resulted in increased copayments and deductibles. The provision for doubtful accounts relates

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primarily to self-pay revenues. The following table reflects our self-pay revenues, net of charity and indigent care write-offs (in millions):

Our revenues are reduced when we write-off patient accounts identified as charity and indigent care. Our hospitals write-off a portion of a patient’s account upon the determination that the patient qualifies under a hospital’s charity/indigent care policy. The following table reflects our charity and indigent care write-offs (in millions):

The following table shows our revenue days in accounts receivable, including the discontinued operations of Bartow:

     The approximate percentages of billed hospital receivables (which is a component of total receivables) is summarized as follows:

The approximate percentages of billed hospital receivables in summarized aging categories is as follows:

		For the next several quarters, we anticipate that our provision for doubtful accounts will be approximately 9% to 10% of revenues. We are implementing a number of operating strategies which should increase our cash collections of self-pay revenues. If the trend of increasing self-pay revenues continues, it could have a material adverse effect on our results of operations and financial position in the future.
•		Shortage of Clinical Personnel and Increased Contract Labor Usage. In recent years, many hospitals, including the hospitals we own, have encountered difficulty in recruiting and retaining nursing and other clinical personnel. When we are unable to staff our nursing and clinical positions, we are required to use

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contract labor to ensure adequate patient care. Contract labor generally costs more per hour than employed labor. We have adopted a number of human resources strategies in an attempt to improve our ability to recruit and retain nursing and other clinical personnel. These strategies are working as we have an 8.3% decrease in contract labor costs in the nine months ended September 30, 2004 compared to the same period in 2003. However, we expect that the staffing shortages related to nurses and other clinical personnel will continue in the near term.

Critical Accounting Estimates

     The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:

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it requires assumptions to be made that were uncertain at the time the estimate was made; and

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changes in the estimate or different estimates that could have been made could have a material impact on our consolidated results of operations or financial condition.

     Our critical accounting estimates are more fully described in our 2003 Annual Report on Form 10-K and continue to include the following areas:

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Allowance for doubtful accounts and provision for doubtful accounts;

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Revenue recognition and allowance for contractual discounts;

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Professional and general liability claims; and

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Accounting for income taxes.

     Update of Critical Accounting Estimates. Please refer to Note 9 of our condensed consolidated financial statements included elsewhere herein for a discussion of the impact of recent changes in our reserve for professional and general liability claims.

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Results of Operations

Operating Results Summary

     The following tables present summaries of results of operations for our continuing operations for the three and nine months ended September 30, 2003 and 2004 (dollars in millions, except for revenues per equivalent admission):

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