UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

Commission File Number 001-31320

PROVINCE HEALTHCARE COMPANY

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

Securities registered pursuant to Section 12(b) of the Act:

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.

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;

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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.

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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

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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.

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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.

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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

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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.

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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.

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     Ashland Regional Medical Center is 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 Center is 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 Center is 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 Center is 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.

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     Colorado River Medical Center is 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 Opelousas is 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 Center is 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 Center is 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 Center is 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 Center is 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 Indiana is 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 County is 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 Center is 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 Center is 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.

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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 Center is 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 Hospital is 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 Hospital is 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 Hospital is 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 Center is 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 Center and 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)

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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. See Item 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:

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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

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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.

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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.

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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

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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.

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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

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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.

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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.

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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

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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

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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 revenues and profitability.

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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

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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.

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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.

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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.

     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.

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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.

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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:

     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

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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:

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

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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.

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     The following tables present key operating statistics for our owned and leased hospitals (excluding discontinued operations) for the periods presented. (1)

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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.

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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:

     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.

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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:

     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.

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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

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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

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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.

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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:

     Our target for days revenue outstanding ranges from 53 to 58 days.

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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:

     The approximate percentage of total gross accounts receivable summarized by payor is as follows:

     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

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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.

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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

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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