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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

Commission file number 001-15925

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

155 Franklin Road, Suite 400
Brentwood, Tennessee
(Address of principal executive offices)

37027
(Zip Code)

615-373-9600
(Registrant's telephone number)

        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 July 31, 2004, there were outstanding 99,125,849 shares of the Registrant's Common Stock, $.01 par value.

Community Health Systems, Inc.

Form 10-Q

For the Three and Six Months Ended June 30, 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 intrinsic value method, and has adopted the disclosure requirements of SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosures."

        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 net 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 and six month periods ended June 30, 2004 and June 30, 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 six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2004.

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        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 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 $13.2 million and $10.7 million for the three month periods ended June 30, 2004 and 2003, respectively, and $24.3 million and $20.7 million for the six month periods ended June 30, 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 fully reserved accounts receivable. 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 receivable over 210 days from discharge that were fully reserved and were still being actively pursued by the Company's internal collection agency which were excluded from the allowance and gross accounts receivable. As a result of this change in policy, at June 30, 2004, the Company included in its allowance for doubtful accounts and gross accounts receivable approximately $100 million of uncollected accounts over 210 days from discharge that were fully reserved and were still being actively pursued by the Company's internal collection agency.

6.    RECENT ACCOUNTING PRONOUNCEMENT

        In December 2003, the Financial Accounting Standards Board 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

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FIN No. 46, which were effective as of December 31, 2003 and required to be applied to those entities that are considered to be variable interest 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 variable interest 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 June 30, 2004, the Company has no investments in variable interest entities.

7.    GOODWILL AND OTHER INTANGIBLE ASSETS

        The changes in the carrying amount of goodwill for the six months ended June 30, 2004, are as follows (in thousands):

        The Company completed its annual goodwill impairment test as required by SFAS No. 142, "Goodwill and Other Intangible Assets," 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 June 30, 2004 and December 31, 2003, and the net carrying amount was $7.3 million at June 30, 2004 and $7.8 million at December 31, 2003. Other intangible assets are included in other assets, net on the Company's condensed consolidated balance sheets.

        The weighted average amortization period for the intangible assets subject to amortization is approximately seven years. There are no expected residual values related to these intangible assets. Amortization expense on intangible assets during the three and six months ended June 30, 2004 was $0.3 million and $0.6 million, respectively, and during the three and six months ended June 30, 2003 was $0.1 million and $0.2 million, respectively. Amortization expense on intangible assets is estimated to be $0.5 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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8.    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 and six months ended June 30, 2004 and June 30, 2003, the convertible notes are dilutive and accordingly, must be included in the fully diluted calculation.

9.    STOCKHOLDERS' EQUITY

        On January 23, 2003, the Company announced an open market share repurchase program for a maximum of five million shares of its common stock or $100 million of aggregate repurchase price. The repurchase program commenced immediately and will conclude at the earlier of three years or when the maximum number of shares have been repurchased or the maximum dollar amount of purchases of shares has been reached. Through December 31, 2003, the Company has repurchased 790,000 shares at a weighted average price of $18.57 per share. There were no shares repurchased under this program during the six months ended June 30, 2004. The maximum number of shares that may yet be purchased under the open market share repurchase program is 4,210,000, or the maximum dollar amount of shares that may yet be purchased cannot exceed $85.3 million.

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10.    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.

11.    SUBSEQUENT EVENTS

        On July 27, 2004, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission relating to the offer from time to time of up to $1.0 billion of common stock and/or convertible debt securities. The shelf registration statement includes up to 23.1 million shares that may be sold from time to time by affiliates of Forstmann Little and Company ("FL & Co."), the principal stockholders since its 1996 acquisition of the Company's predecessor. The 23.1 million or approximately 23% of the Company's outstanding shares being offered by affiliates of FL & Co. represents all of their beneficial ownership in the Company. The Company will not receive proceeds from any sales of shares by FL & Co. The proceeds from any sale of shares or convertible debt securities by the Company will be used for general corporate purposes, including but not limited to, repayment or refinancing of borrowings, working capital, capital expenditures, acquisitions and the repurchase of Company stock.

        Effective July 1, 2004, the Company completed the acquisition of Galesburg Cottage Hospital (170 beds) in Galesburg, Illinois. Consideration for this hospital totaled approximately $31 million, of which approximately $25 million was paid in cash and $6 million was assumed in liabilities. The hospital was acquired from a local not-for-profit corporation.

        Effective August 1, 2004, the Company completed the acquisition of Phoenixville Hospital, (143 beds) in Phoenixville, Pennsylvania. The consideration for this hospital totaled approximately $104 million, of which approximately $98 million was paid in cash and $6 million was assumed in liabilities. The hospital was acquired from the University of Pennsylvania.

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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 June 30, 2004, we generated $813.7 million in net operating revenues, a growth of 23.8% over the second quarter of 2003, and $38.4 million in net income, a growth of 25.6% over the second quarter of 2003. For the six months ended June 30, 2004, we generated $1.6 billion in net operating revenues, a growth of 24.3% over the six months ended June 30, 2003, and $79.2 million of net income, a growth of 23.4% over the six months ended June 30, 2003.

        The 23.8% increase in net operating revenues in the quarter ended June 30, 2004, was primarily due to the execution of our acquisition strategy, with 16.8% of the net operating revenue growth coming from hospitals owned less than one year. The remaining 7.0% growth was from hospitals owned throughout both periods. Of the increase in net operating revenues from hospitals owned throughout both periods, we estimate that 2.4% was attributable to increases in rates, the acuity level of services provided and payor mix, 1.0% was attributable to net increases in governmental reimbursement and approximately 3.6% was attributable to volume increases. The volume portion of the increases is based on a calculation of adjusted admissions, which includes inpatient admissions and an estimate of outpatient volume. Likewise, the 24.3% increase in net operating revenues for the six months ended June 30, 2004, was primarily due to the execution of our acquisition strategy, with 16.7% of the net operating revenue growth coming from hospitals owned less than one year and the remaining 7.6% growth coming from hospitals owned throughout both periods. Of the increase in net operating revenues from hospitals owned throughout both periods, we estimate that 3.8% was attributable to increases in rates, the acuity level of services provided and payor mix, 1.0% was attributable to net increases in governmental reimbursement and approximately 2.8% was attributable to volume increases. Admissions at hospitals owned throughout both periods increased 3.3% in the three months ended June 30, 2004 as compared to the three months ended June 30, 2003, and 2.6% in the six month period ended June 30, 2004, as compared to the six months ended June 30, 2003 primarily reflecting the growth in cardiology related procedures and surgery cases at those hospitals.

        During the quarter ended June 30, 2004 as compared to the quarter ended June 30, 2003, salaries and