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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

Commission file number 001-15925

COMMUNITY HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

        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, and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

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

        As of May 5, 2004, there were outstanding 98,771,284 shares of the Registrant's Common Stock, $.01 par value.

Community Health Systems, Inc.
Form 10-Q
For the Quarter Ended March 31, 2004

PART I FINANCIAL INFORMATION

Item 1.    Financial Statements

COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

See accompanying notes.

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)

See accompanying notes.

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See accompanying notes.

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COMMUNITY HEALTH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     ACCOUNTING FOR STOCK-BASED COMPENSATION

        The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No.25, "Accounting for Stock Issued to Employees" and related interpretations. Compensation cost, which the Company has substantially none, is measured as the excess of the fair value of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," established accounting and disclosure requirements using a fair value based method of accounting for stock-based employee compensation plans; however, it allows an entity to continue to measure compensation for those plans using the intrinsic value method of accounting prescribed by APB Opinion No. 25. The Company has elected to continue to measure compensation under the method of accounting as described above, and has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148.

        Had the fair value based method under SFAS No. 123 been used to value options granted and compensation expense recognized on a straight line basis over the vesting period of the grant, the Company's net income and income per share would have been reduced to the pro forma amounts indicated below (in thousands except per share data):

2.     BASIS OF PRESENTATION

        The unaudited condensed consolidated financial statements of Community Health Systems, Inc. and its subsidiaries (the "Company") as of and for the three months ended March 31, 2004 and March 31, 2003, have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, such information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such periods. All intercompany transactions and balances have been eliminated. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2004.

        Certain information and disclosures normally included in the notes to consolidated financial statements have been condensed or omitted as permitted by the rules and regulations of the Securities

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and Exchange Commission, although the Company believes the disclosure is adequate to make the information presented not misleading. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2003 contained in the Company's Annual Report on Form 10-K/A.

3.     COST OF REVENUE

        The majority of the Company's operating costs and expenses are "cost of revenue" items. Operating costs that could be classified as general and administrative by the Company would include the Company's corporate office costs which were $11.1 million and $9.9 million for the three month periods ended March 31, 2004 and 2003, respectively.

4.     USE OF ESTIMATES

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

5.     ALLOWANCE FOR DOUBTFUL ACCOUNTS

        Effective January 1, 2004, the Company changed its policy relative to the timing of the write-off of accounts receivable which are fully reserved. Previously, all amounts over 210 days from discharge were written-off and therefore excluded from the allowance for doubtful accounts and gross accounts receivable. The Company's new policy is to write-off gross accounts receivable when such amounts are subsequently placed with outside collection agencies. The Company believes this policy more accurately reflects the ongoing collection efforts within the Company and is more consistent with industry practices. This change in policy has no impact on the provision for bad debts and does not impact net accounts receivable as reflected on the accompanying condensed consolidated balance sheets.

        At December 31, 2003, there were approximately $90 million in accounts over 210 days from discharge that were fully reserved and were still being actively pursued by the Company's internal collection agency excluded from the allowance and gross accounts receivable. As a result of this change in policy, at March 31, 2004, the Company included in its allowance for doubtful accounts and gross accounts receivable approximately $95 million of uncollected accounts over 210 days from discharge that were fully reserved and were still being actively pursued by our internal collection agency.

6.     RECENT ACCOUNTING PRONOUNCEMENT

        In December 2003, the FASB issued Interpretation No. 46R, "Consolidation of Variable Interest Entities", or FIN No. 46. This interpretation clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to specified entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. As of December 31, 2003, the Company adopted the Provisions of FIN No. 46 which are effective as of December 31, 2003 and required to be applied to those entities that are considered to be special-purpose entities. The adoption of those effective provisions of FIN No. 46 did not have an impact on the Company's consolidated financial position or results of operations as the Company had not identified any relationship that would qualify as special-purpose entities. The adoption of the remaining provisions of FIN No. 46 which were effective for the Company on March 31, 2004, did not have any impact on the consolidated financial statements. As of March 31, 2004, the Company has no investments in variable interest entities.

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7.     ACQUISITIONS

        On March 15, 2004, the Company announced the execution of a definitive agreement to acquire Galesburg Cottage Hospital (170 beds) in Galesburg, Illinois. The hospital is being acquired from a local not-for-profit organization and is located approximately 45 miles west of Peoria, Illinois. The acquisition is subject to regulatory approvals and is expected to close by mid-year.

8.     GOODWILL AND OTHER INTANGIBLE ASSETS

        The changes in the carrying amount of goodwill for the three months ended March 31, 2004, are as follows (in thousands):

        The Company completed its annual goodwill impairment test as required by SFAS No. 142, using a measurement date of September 30, 2003. Based on the results of the impairment test, the Company was not required to recognize an impairment of goodwill.

        The gross carrying amount of the Company's other intangible assets was $9.8 million at March 31, 2004 and December 31, 2003, and the net carrying amount was $7.5 million at March 31, 2004 and $7.8 million at December 31, 2003. Other intangible assets are included in other assets, net on the Company's balance sheet.

        The weighted average amortization period for the intangible assets subject to amortization is approximately 6 years. There are no expected residual values related to these intangible assets. Amortization expense on intangible assets during the three months ended March 31, 2004 and 2003 was $0.3 million and $0.1 million, respectively. Amortization expense on intangible assets is estimated to be $0.8 million for the remainder of 2004, $1.0 million in fiscal 2005, $0.8 million in fiscal 2006, $0.7 million in fiscal 2007, $0.6 million in fiscal 2008, and $0.5 million for fiscal 2009.

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9.     EARNINGS PER SHARE

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

        Since the net income per share impact of the conversion of the convertible notes is less than the basic net income per share for the three months ended March 31, 2004 and March 31, 2003, the convertible notes are dilutive and accordingly, must be included in the fully diluted calculation.

10.   STOCKHOLDERS' EQUITY

        On January 23, 2003, the Company announced an open market share repurchase program for up to five million shares of its common stock. The share repurchase program will conclude at the earlier of three years or when the maximum number of shares have been repurchased. Since the inception of the program the Company has repurchased 790,000 shares at an average cost of $18.57 per share. No shares were repurchased during the quarter ended March 31, 2004.

11.   COMPREHENSIVE INCOME

        The following table presents the components of comprehensive income, net of related taxes. The change in fair value of interest rate swap agreements is a function of the spread between the fixed interest rate of the swap and the underlying variable interest rate (in thousands):

        The net change in fair value of the interest rate swap is included in stockholders' equity on the condensed consolidated balance sheets.

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12.   SUBSEQUENT EVENTS

        On April 19, 2004, the Company entered into an underwriting agreement with CHS/Community Health Systems, Inc., a wholly owned subsidiary of the Company, the selling stockholders named therein, which included affiliates of Forstmann Little & Co., other shareholders and other members of management, and the various underwriters named therein. Pursuant to the underwriting agreement, the selling stockholders sold 23,400,870 shares of common stock at a public offering price of $24.50 per share. The offering reduced Forstmann Little's beneficial ownership interest in the Company to approximately 24%. The selling stockholders also granted the underwriters a 30-day option to purchase, at the public offering price, less the underwriting discount, up to an additional 3,510,130 shares of common stock to cover any over-allotments. This option expires on May 19, 2004. The Company did not receive any proceeds from the sale of shares by the selling stockholders and will not receive any proceeds if the over-allotment is exercised.

        The common stock was offered pursuant to a prospectus supplement and the accompanying base prospectus previously filed with the SEC pursuant to Rule 424(b)(3) of the Securities Act of 1933, as amended, in connection with a shelf takedown from the Company's shelf registration statement on Form S-3, as amended (Reg. No. 333-112084) and the registration statement on Form S-3 filed pursuant to Rule 462(b) of the Securities Act (Reg. No. 333-114418).

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

        You should read this discussion together with our unaudited Condensed Consolidated Financial Statements and accompanying notes included herein.

Executive Overview

        We are the largest non-urban provider of general hospital healthcare services in the United States in terms of number of facilities. For the quarter ended March 31, 2004, we generated $822 million in net operating revenues, a growth of 24.7% over the first quarter of 2003 and $40.7 million in net income, a growth of 21.4% over the first quarter of 2003.

        The 24.7% increase in net operating revenues in the quarter ended March 31, 2004, was primarily due to the execution of our acquisition strategy, with 16.5% of the net operating revenue growth coming from hospitals owned less than one year. The remaining 8.2% growth was from hospitals owned throughout both periods. Of the increase in net operating revenues from hospitals owned throughout both periods we estimate that 5.1% was attributable to increases in rates and the acuity level of services provided, 2.1% was attributable to volume increases and 1.0% was attributable to increases in governmental reimbursement.

        During the quarter ended March 31, 2004, we managed to reduce salaries and benefits as a percentage of net operating revenues at hospitals owned throughout both periods. The provision for bad debts as of March 31, 2004 increased as compared to March 31, 2003 due to the increase in uncollected self-pay accounts, primarily caused by an increase in self-pay gross revenue in the quarter. Admissions at hospitals owned throughout both periods increased 1.9% in the quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003, reflecting the growth in cardiology related procedures and surgery cases at those hospitals and one additional business day in the 2004 quarter as compared to the prior year. On a consolidated basis, total operating costs and expenses as a percentage of net operating revenues increased for the quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003 primarily as a result of our operating improvements being offset by those recently acquired hospitals where our strategies to improve profitability have not yet been implemented or where we have not yet fully recognized the benefits of these strategies and also as a result of an increase in bad debt expense.

        Cash flows from operating activities were $61.7 million for the quarter ended March 31, 2004, compared to $8.5 million for the quarter ended March 31, 2003. The increase is due primarily to increases in net income, non-cash expenses and improved collections of accounts receivable at hospitals owned throughout both periods. The increase between periods would not have been as large had net cash provided by operating activities not been lowered by approximately $9.0 million in the quarter ended March 31, 2004 and by approximately $26.5 million for the quarter ended March 31, 2003, primarily as a result of the build-up of accounts receivable related to acquisitions.

        As a result of the Medicare Prescription Drug, Improvement and Modernization Act of 2003, the additional disproportionate share payment begins April 1, 2004 and is expected to increase reimbursement by at least $6.5 million for 2004, and reimbursement improvement from the wage index change provided for in this law is effective October 1, 2004 and is expected to have an impact of approximately $1.5 million for 2004.

Acquisitions

        On March 15, 2004, the Company announced the execution of a definitive agreement to acquire Galesburg Cottage Hospital located in Galesburg, Illinois, approximately 45 miles west of Peoria, Illinois. The hospital, which has a total of 170 beds, is being acquired from a local not-for-profit organization. The transaction is subject to routine regulatory approvals.

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Recent Development

        On April 19, 2004, the Company entered into an underwriting agreement with CHS/Community Health Systems, Inc., a wholly owned subsidiary of the Company, the selling stockholders named therein, which included affiliates of Forstmann Little & Co., other shareholders and other members of management, and the various underwriters named therein. Pursuant to the underwriting agreement, the selling stockholders sold 23,400,870 shares of common stock at a public offering price of $24.50 per share. The offering reduced Forstmann Little's beneficial ownership interest in the Company to approximately 24%. The selling stockholders also granted the underwriters a 30-day option to purchase, at the public offering price, less the underwriting discount, up to an additional 3,510,130 shares of common stock to cover any over-allotments. This option expires on May 19, 2004. The Company did not receive any proceeds from the sale of shares by the selling stockholders and will not receive any proceeds if the over-allotment is exercised.

        The common stock was offered pursuant to a prospectus supplement and the accompanying base prospectus previously filed with the SEC pursuant to Rule 424(b)(3) of the Securities Act of 1933, as amended, in connection with a shelf takedown from the Company's shelf registration statement on Form S-3, as amended (Reg. No. 333-112084) and the registration statement on Form S-3 filed pursuant to Rule 462(b) of the Securities Act (Reg. No. 333-114418).

Sources of Revenue

        Net operating revenues include amounts estimated by management to be reimbursable by Medicare and Medicaid under prospective payment systems and provisions of cost-reimbursement and other payment methods. In addition, we are reimbursed by non-governmental payors using a variety of payment methodologies. Amounts we receive for treatment of patients covered by these programs are generally less than the standard billing rates. We account for the differences between the estimated program reimbursement rates and the standard billing rates as contractual adjustments, which we deduct from gross revenues to arrive at net operating revenues. Final settlements under some of these programs are subject to adjustment based on administrative review and audit by third parties. We account for adjustments to previous program reimbursement estimates as contractual adjustments and report them in the periods that such adjustments become known. Adjustments related to final settlements or appeals that increased revenue were insignificant in each of the three month periods ended March 31, 2004 and 2003.

        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 operating revenue growth. Effective April 1, 2002, Centers for Medicare and Medicaid Services implemented changes to the Medicare outpatient prospective payment system. Although these changes have resulted in

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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 operating revenue growth. While the Medicare Prescription Drug, Improvement and Modernization Act of 2003 provides a broad range of provider payment benefits, federal government spending in excess of federal budgetary provisions contained in passage of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 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 addition, specified managed care programs, insurance companies, and employers are actively negotiating the amounts paid to hospitals. The trend toward increased enrollment in managed care may adversely affect our net operating revenue growth.

Results of Operations

        Our hospitals offer a variety of services involving a broad range of inpatient and outpatient medical and surgical services. These include orthopedics, cardiology, occupational medicine, diagnostic services, emergency services, rehabilitation treatment, home health, and skilled nursing. The strongest demand for hospital services generally occurs during January through April and the weakest demand for these services occurs during the summer months. Accordingly, eliminating the effect of new acquisitions, our net operating revenues and earnings are historically highest during the first quarter and lowest during the third quarter.

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        The following tables summarize, for the periods indicated, selected operating data.