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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-10454
UNIVERSAL HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2077891
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
UNIVERSAL CORPORATE CENTER
367 SOUTH GULPH ROAD P.O. BOX 61558
KING OF PRUSSIA, PENNSYLVANIA
(ADDRESS OF PRINCIPAL EXECUTIVE 19406-0958
OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 768-3300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
CLASS B COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
CLASS D COMMON STOCK, $.01 PAR VALUE
(TITLE OF EACH CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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. [X]
The number of shares of the registrant's Class A Common Stock, $.01 par value,
Class B Common Stock, $.01 par value, Class C Common Stock, $.01 par value,
and Class D Common Stock, $.01 par value, outstanding as of January 31, 1997,
was 2,060,929, 29,876,737, 207,230, and 36,678, respectively.
The aggregate market value of voting stock held by non-affiliates at January
31, 1997 was $865,824,029. (For purpose of this calculation, it was assumed
that Class A, Class C, and Class D Common Stock, which are not traded but are
convertible share-for-share into Class B Common Stock, have the same market
value as Class B Common Stock.)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for its 1997 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1996 (incorporated by reference
under Part III).
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PART I
ITEM 1. BUSINESS
The principal business of Universal Health Services, Inc. (together with its
subsidiaries, the "Company") is owning and operating acute care hospitals,
behavioral health centers, ambulatory surgery centers and radiation oncology
centers. Presently, the Company operates 35 hospitals, consisting of 14 acute
care hospitals, 20 behavioral health centers, and one women's center, in
Arkansas, California, Florida, Georgia, Illinois, Louisiana, Massachusetts,
Michigan, Missouri, Nevada, Oklahoma, Pennsylvania, South Carolina, Texas and
Washington. The Company, as part of its Ambulatory Treatment Centers Division,
owns outright, or in partnership with physicians, and operates or manages 27
surgery and radiation oncology centers located in 15 states.
Services provided by the Company's hospitals include general surgery,
internal medicine, obstetrics, emergency room care, radiology, oncology,
diagnostic care, coronary care, pediatric services and psychiatric services.
The Company provides capital resources as well as a variety of management
services to its facilities, including central purchasing, data processing,
finance and control systems, facilities planning, physician recruitment
services, administrative personnel management, marketing and public relations.
The Company selectively seeks opportunities to expand its base of operations
by acquiring, constructing or leasing additional hospital facilities. Such
expansion may provide the Company with access to new markets and new health
care delivery capabilities. The Company also seeks to increase the operating
revenues and profitability of owned hospitals by the introduction of new
services, improvement of existing services, physician recruitment and the
application of financial and operational controls. Pressures to contain health
care costs and technological developments allowing more procedures to be
performed on an outpatient basis have led payors to demand a shift to
ambulatory or outpatient care wherever possible. The Company is responding to
this trend by emphasizing the expansion of outpatient services. In addition,
in response to cost containment pressures, the Company intends to implement
programs designed to improve financial performance and efficiency while
continuing to provide quality care, including more efficient use of
professional and paraprofessional staff, monitoring and adjusting staffing
levels and equipment usage, improving patient management and reporting
procedures and implementing more efficient billing and collection procedures.
The Company also continues to examine its facilities and to dispose of those
facilities which it believes do not have the potential to contribute to the
Company's growth or operating strategy.
The Company is involved in continual development activities. Applications to
state health planning agencies to add new services in existing hospitals are
currently on file in several states which require certificates of need (e.g.,
Georgia and Illinois). Although the Company expects that some of these
applications will result in the addition of new facilities or services to the
Company's operations, no assurances can be made for ultimate success by the
Company in these efforts.
RECENT AND PROPOSED ACQUISITIONS AND DEVELOPMENT ACTIVITIES
In 1996, the Company proceeded with its development of new facilities and
consummated a number of acquisitions. In January 1996, the Company broke
ground on a new $24 million 130-bed acute care hospital, Edinburg Regional
Medical Center, in Edinburg, Texas, which is scheduled to open in July 1997.
The development of this new hospital will enable the Company to enhance its
presence in McAllen, where it currently operates the 490-bed McAllen Medical
Center.
During 1996, the Company, with the participation of Howard Hughes
Corporation, continued the construction of a medical complex located in
Summerlin, Nevada, in western Las Vegas. The medical complex consists of a
149-bed acute care facility which is scheduled to open during the fourth
quarter of 1997; and an outpatient surgery center, medical office building and
a radiation therapy center (all of which opened during the fourth quarter of
1996).
In March 1996, the Company opened the first of its Renaissance Centers for
Women, the Renaissance Women's Center of Edmond, in Edmond, Oklahoma. Both the
Renaissance Women's Center of Austin located
1
in Austin, Texas, and the Lakeside Women's Center located in Oklahoma City,
Oklahoma, are scheduled to open in September 1997. The Company owns various
equity interests in the limited liability companies and limited partnerships
which own and operate these facilities.
In May 1996, the Company acquired substantially all of the assets and
operations of the Northwest Texas Healthcare System, a 357-bed medical complex
located in Amarillo, Texas, for $126 million in cash.
In June 1996, the Company acquired from First Hospital Corporation, for $39
million, four behavioral health centers located in Pennsylvania: The Horsham
Clinic in Ambler; Clarion Psychiatric Center in Clarion; The Meadows
Psychiatric Center in Centre Hall; and Roxbury Treatment Center in
Shippensburg. This acquisition also included management contracts for seven
other behavioral health centers and 33 acres of land adjacent to the Company's
Wellington Regional Medical Center.
In August 1996, the Company acquired the Timberlawn Mental Health System, a
164-bed behavioral health facility located in Dallas, Texas, for $3 million.
The Company also selectively expanded its operations at certain of its
existing facilities: McAllen Medical Center in McAllen, Texas (1) completed a
major expansion to the OB/GYN department, including seven LDRP rooms and two
additional surgical suites and (2) completed an expansion of the cardiology
department with the addition of a third cardiac catheterization room; Valley
Hospital Medical Center in Las Vegas, Nevada opened a new addition to its
OB/GYN department, more than doubling the LDRP rooms and adding a new Level II
nursery.
2
BED UTILIZATION AND OCCUPANCY RATES
The following table shows the historical bed utilization and occupancy rates
for the hospitals operated by the Company for the years indicated.
Accordingly, information related to hospitals acquired during the five year
period has been included from the respective dates of acquisition, and
information related to hospitals divested during the five year period has been
included up to the respective dates of divestiture.
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Average Licensed Beds:
Acute Care Hospitals.... 3,018 2,638 2,398 2,548 2,438
Behavioral Health Cen-
ters................... 1,565 1,238 1,145 1,134 1,124
Average Available Beds(1):
Acute Care Hospitals.... 2,641 2,340 2,099 2,213 2,114
Behavioral Health Cen-
ters................... 1,540 1,223 1,142 1,132 1,115
Admissions:
Acute Care Hospitals.... 111,244 91,298 75,923 73,378 73,395
Behavioral Health Cen-
ters................... 22,295 15,329 13,033 11,627 9,929
Average Length of Stay
(Days):
Acute Care Hospitals.... 4.9 5.1 5.2 5.4 5.5
Behavioral Health Cen-
ters................... 12.4 12.8 13.8 15.8 20.0
Patient Days(2):
Acute Care Hospitals.... 546,237 462,054 394,490 396,135 405,786
Behavioral Health Cen-
ters................... 275,667 195,961 179,821 184,263 198,107
Occupancy Rate--Licensed
Beds(3):
Acute Care Hospitals.... 50% 48% 45% 43% 45%
Behavioral Health Cen-
ters................... 48% 43% 43% 45% 48%
Occupancy Rate--Available
Beds(3):
Acute Care Hospitals.... 57% 54% 51% 49% 52%
Behavioral Health Cen-
ters................... 49% 44% 43% 45% 49%
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(1) "Average Available Beds" is the number of beds which are actually in
service at any given time for immediate patient use with the necessary
equipment and staff available for patient care. A hospital may have
appropriate licenses for more beds than are in service for a number of
reasons, including lack of demand, incomplete construction, and
anticipation of future needs.
(2) "Patient Days" is the aggregate sum for all patients of the number of days
that hospital care is provided to each patient.
(3) "Occupancy Rate" is calculated by dividing average patient days (total
patient days divided by the total number of days in the period) by the
number of average beds, either available or licensed.
The number of patient days of a hospital is affected by a number of factors,
including the number of physicians using the hospital, changes in the number
of beds, the composition and size of the population of the community in which
the hospital is located, general and local economic conditions, variations in
local medical and surgical practices and the degree of outpatient use of the
hospital services. Current industry trends in utilization and occupancy have
been significantly affected by changes in reimbursement policies of third
party payors. A continuation of such industry trends could have a material
adverse impact upon the Company's future operating performance. The Company
has experienced growth in outpatient utilization over the past several
3
years. The Company is unable to predict the rate of growth and resulting
impact on the Company's future revenues because it is dependent upon
developments in medical technologies and physician practice patterns, both of
which are outside of the Company's control. The Company is also unable to
predict the extent to which other industry trends will continue or accelerate.
SOURCES OF REVENUE
The Company receives payment for services rendered from private insurers,
including managed care plans, the Federal government under the Medicare
program, state governments under their respective Medicaid programs and
directly from patients. All of the Company's acute care hospitals and most of
the Company's behavioral health centers are certified as providers of Medicare
and Medicaid services by the appropriate governmental authorities. The
requirements for certification are subject to change, and, in order to remain
qualified for such programs, it may be necessary for the Company to make
changes from time to time in its facilities, equipment, personnel and
services. Although the Company intends to continue in such programs, there is
no assurance that it will continue to qualify for participation.
The sources of the Company's hospital revenues are charges related to the
services provided by the hospitals and their staffs, such as radiology,
operating rooms, pharmacy, physiotherapy and laboratory procedures, and basic
charges for the hospital room and related services such as general nursing
care, meals, maintenance and housekeeping. Hospital revenues depend upon the
occupancy for inpatient routine services, the extent to which ancillary
services and therapy programs are ordered by physicians and provided to
patients, the volume of outpatient procedures and the charges or negotiated
payment rates for such services. Charges and reimbursement rates for inpatient
routine services vary depending on the type of bed occupied (e.g.,
medical/surgical, intensive care or psychiatric) and the geographic location
of the hospital.
McAllen Medical Center in McAllen, Texas contributed 16% in 1996, 20% in
1995 and 22% in 1994, of the Company's net revenues and 27% in 1996, 37% in
1995 and 38% in 1994, of the Company's operating income (net revenues less
operating expenses, salaries and wages, provision for doubtful accounts and
allocation of corporate overhead expenses) ("operating income"). Valley
Hospital Medical Center in Las Vegas, Nevada contributed 13% in 1996, 17% in
1995 and 19% in 1994, of the Company's net revenues and 17% in 1996, 25% in
1995 and 29% in 1994 of the Company's operating income. Manatee Memorial
Hospital in Bradenton, Florida, which was acquired by the Company in August,
1995, contributed 11% in 1996 and 5% in 1995 of the Company's net revenues and
10% in 1996 and 4% in 1995 of the Company's operating income.
The following table shows approximate percentages of net patient revenue
derived by the Company's hospitals owned as of December 31, 1996 since their
respective dates of acquisition by the Company from third party sources,
including the special Medicaid reimbursements received at three of the
Company's acute care facilities located in Texas and one in South Carolina
totaling $17.8 million in 1996, $12.6 million in 1995, $12.7 million in 1994,
$13.5 million in 1993 and $29.8 million in 1992, and from all other sources
during the five years ended December 31, 1996.
PERCENTAGE OF NET PATIENT REVENUES
--------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Third Party Payors:
Medicare............................ 35.1% 34.6% 32.2% 31.5% 30.9%
Medicaid............................ 15.1% 13.5% 13.2% 12.1% 11.0%
------ ------ ------ ------ ------
TOTAL............................... 50.2% 48.1% 45.4% 43.6% 41.9%
Other Sources (including patients and
private insurance carriers).......... 49.8% 51.9% 54.6% 56.4% 58.1%
------ ------ ------ ------ ------
100% 100% 100% 100% 100%
4
REGULATION AND OTHER FACTORS
Within the statutory framework of the Medicare and Medicaid programs, there
are substantial areas subject to administrative rulings, interpretations and
discretion which may affect payments made under either or both of such
programs and reimbursement is subject to audit and review by third party
payors. Management believes that adequate provision has been made for any
adjustments that might result therefrom.
The Federal government makes payments to participating hospitals under its
Medicare program based on various formulae. The Company's general acute care
hospitals are subject to a prospective payment system ("PPS"). PPS pays
hospitals a predetermined amount per diagnostic related group ("DRG") based
upon a hospital's location and the patient's diagnosis.
Psychiatric hospitals, which are exempt from PPS, are cost reimbursed by the
Medicare program, but are subject to a per discharge ceiling, calculated based
on an annual allowable rate of increase over the hospital's base year amount
under the Medicare law and regulations. Capital related costs are exempt from
this limitation.
On August 30, 1991, the Health Care Financing Administration issued final
Medicare regulations establishing a PPS for inpatient hospital capital-related
costs. These regulations apply to hospitals which are reimbursed based upon
the prospective payment system and took effect for cost years beginning on or
after October 1, 1991. For each of the Company's hospitals, the new
methodology began on January 1, 1992.
The regulations provide for the use of a 10-year transition period in which
a blend of the old and new capital payment provisions will be utilized. One of
two methodologies will apply during the 10-year transition period: if the
hospital's hospital-specific capital rate exceeds the federal capital rate,
the hospital will be paid on the basis of a "hold harmless" methodology, which
is a blend of a portion of old capital and an amount of new capital and a
prospectively determined national federal capital rate; or, with limited
exceptions, if the hospital-specific rate is below the federal capital rate,
the hospital will receive payments based upon a "fully prospective"
methodology, which is a blend of the hospital's hospital-specific capital rate
and a prospectively determined national federal capital rate. Each hospital's
hospital-specific rate was determined based upon allowable capital costs
incurred during the "base year", which, for all of the Company's hospitals, is
the year ended December 31, 1990. All of the Company's hospitals are paid
under the "'hold harmless" methodology except for one hospital, which is paid
under the "fully prospective" methodology.
Within certain limits, a hospital can manage its costs, and, to the extent
this is done effectively, a hospital may benefit from the DRG system. However,
many hospital operating costs are incurred in order to satisfy licensing laws,
standards of the Joint Commission on the Accreditation of Healthcare
Organizations and quality of care concerns. In addition, hospital costs are
affected by the level of patient acuity, occupancy rates and local physician
practice patterns, including length of stay judgments and number and type of
tests and procedures ordered. A hospital's ability to control or influence
these factors which affect costs is, in many cases, limited.
In addition to the trends described above that continue to have an impact on
operating results, there are a number of other more general factors affecting
the Company's business. In February 1997, the President submitted his fiscal
year 1998 budget plan which calls for a $100 billion reduction in the rate of
increase in Medicare spending over the next five years and a $138 billion
reduction over six years. Included in this proposal are reductions in the
future rate of increases to payments made to hospitals. Both Republicans and
Democrats appear to be working towards a balanced budget by the year 2002 and
it is likely that future budgets will contain certain further reductions in
the rate of increase of Medicare and Medicaid spending. The Company cannot
predict whether the above proposal or any other proposals will be adopted, and
if adopted, no assurance can be given that the implementation of such plans
will not have a material adverse effect on the Company's business. The Texas
Health & Human Services Commission and the Texas Department of Health are
currently seeking a waiver of federal Medicaid state plan requirements from
the federal Health Care Financing Administration ("HCFA") in order to
institute a statewide Medicaid managed care system. While the statewide waiver
request is pending, the Bureau of Managed Care is also establishing limited
managed care pilot programs in discrete geographic areas that include only a
few counties each. The Bureau of Managed Care is seeking from HCFA a
5
waiver of certain state plan requirements to implement the smaller pilot
programs. The Company is unable to predict whether Texas will be granted such
a waiver or the effect on the Company's business of such waiver. Upon meeting
certain conditions, and serving a disproportionately high share of Texas' and
South Carolina's low income patients, three of the Company's facilities
located in Texas and one facility located in South Carolina became eligible
and received additional reimbursement from each state's disproportionate share
hospital fund. Included in the Company's financial results was an aggregate of
$17.8 million in 1996, $12.6 million in 1995 and $12.7 million in 1994
received pursuant to the terms of these programs. These programs are scheduled
to terminate in the third quarter of 1997 and the Company cannot predict
whether these programs will continue beyond their scheduled termination date.
In addition to Federal health reform efforts, several states have adopted or
are considering healthcare reform legislation. Several states are planning to
consider wider use of managed care for their Medicaid populations and
providing coverage for some people who presently are uninsured. The enactment
of Medicaid managed care initiatives is designed to provide low-cost coverage.
The Company currently operates three behavioral health centers with a total of
268 beds in Massachusetts, which has mandated hospital rate-setting. The
Company also operates three hospitals containing an aggregate of 688 beds in
Florida that are subject to a mandated form of rate-setting if increases in
hospital revenues per admission exceed certain target percentages.
Pursuant to Federal legislation, in general, the Federal government is
required to match state funds applied to state Medicaid programs. Several
states had programs under which certain hospital providers were taxed to
generate Medicaid funds which must be matched by the Federal government. New
legislation passed by Congress on November 27, 1991, limited each state's use
of provider taxes after 1994. State programs involving provider taxes in which
UHS' hospitals are participants were in place in Texas, Louisiana, Missouri,
and Nevada. The Louisiana, Missouri and Nevada programs expired during 1994
and 1995, and the Texas program is scheduled to expire in August 1997.
Under the Omnibus Budget Reconciliation Act of 1993 ("OBRA"), enacted by
Congress in late 1993, and effective January 1, 1995, physicians are precluded
from referring Medicare and Medicaid patients for a wide range of services
where the physician has an ownership interest or investment interest in, or
compensation arrangement with, an entity that provides such services. The
legislation includes certain exceptions including, for example, where the
referring physician has an ownership interest in a hospital as a whole or an
ambulatory surgery center if the physician performs services at the center. In
addition, all Medicare providers and suppliers are subject to certain
reporting and disclosure requirements.
Starting in 1991, the Inspector General of the Department of Health and
Human Services ("HHS") issued regulations which provide for "safe harbors"
from the federal anti-kickback statutes; if an arrangement or transaction
meets each of the stipulations established for a particular safe harbor, the
arrangement will not be subject to challenge by the Inspector General. If an
arrangement does not meet the safe harbor criteria, it will be subject to
scrutiny under its particular facts and circumstances to determine whether it
violates the federal anti-kickback statute which prohibits, in general,
fraudulent and abusive practices, and enforcement action may be taken by the
Inspector General. In addition to the investment interests safe harbor, other
safe harbors include space rental, equipment rental, personal
service/management contracts, sales of a physician practice, referral
services, warranties, employees, discounts and group purchasing arrangements,
among others.
The Company does not anticipate that either the OBRA provisions or the safe
harbor regulations will have material adverse effects upon its operations.
Several states, including Florida and Nevada, have passed legislation which
limits physician ownership in medical facilities providing imaging services,
rehabilitation services, laboratory testing, physical therapy and other
services. This legislation is not expected to significantly affect the
Company's operations.
All hospitals are subject to compliance with various federal, state and
local statutes and regulations and receive periodic inspection by state
licensing agencies to review standards of medical care, equipment and
cleanliness. The Company's hospitals must comply with the licensing
requirements of federal, state and local
6
health agencies, as well as the requirements of municipal building codes,
health codes and local fire departments. In granting and renewing licenses, a
department of health considers, among other things, the physical buildings and
equipment, the qualifications of the administrative personnel and nursing
staff, the quality of care and continuing compliance with the laws and
regulations relating to the operation of the facilities. State licensing of
facilities is a prerequisite to certification under the Medicare and Medicaid
programs. Various other licenses and permits are also required in order to
dispense narcotics, operate pharmacies, handle radioactive materials and
operate certain equipment. All the Company's eligible hospitals have been
accredited by the Joint Commission on the Accreditation of Healthcare
Organizations.
The Social Security Act and regulations thereunder contain numerous
provisions which affect the scope of Medicare coverage and the basis for
reimbursement of Medicare providers. Among other things, this law provides
that in states which have executed an agreement with the Secretary of the
Department of Health and Human Services (the "Secretary"), Medicare
reimbursement may be denied with respect to depreciation, interest on borrowed
funds and other expenses in connection with capital expenditures which have
not received prior approval by a designated state health planning agency.
Additionally, many of the states in which the Company's hospitals are located
have enacted legislation requiring certificates of need ("CON") as a condition
prior to hospital capital expenditures, construction, expansion, modernization
or initiation of major new services. Failure to obtain necessary state
approval can result in the inability to complete an acquisition or change of
ownership, the imposition of civil or, in some cases, criminal sanctions, the
inability to receive Medicare or Medicaid reimbursement or the revocation of a
facility's license. The Company has not experienced and does not expect to
experience any material adverse effects from those requirements.
Health planning statutes and regulatory mechanisms are in place in many
states in which the Company operates. These provisions govern the distribution
of healthcare services, the number of new and replacement hospital beds,
administer required state CON laws, contain healthcare costs, and meet the
priorities established therein. Significant CON reforms have been proposed in
a number of states, including increases in the capital spending thresholds and
exemptions of various services from review requirements. The Company is unable
to predict the impact of these changes upon its operations.
Federal regulations provide that admissions and utilization of facilities by
Medicare and Medicaid patients must be reviewed in order to insure efficient
utilization of facilities and services. The law and regulations require Peer
Review Organizations ("PROs") to review the appropriateness of Medicare and
Medicaid patient admissions and discharges, the quality of care provided, the
validity of DRG classifications and the appropriateness of cases of
extraordinary length of stay. PROs may deny payment for services provided,
assess fines and also have the authority to recommend to HHS that a provider
that is in substantial non-compliance with the standards of the PRO be
excluded from participating in the Medicare program. The Company has
contracted with PROs in each state where it does business as to the scope of
such functions.
The Company's healthcare operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. In 1988, Congress passed the Medical Waste Tracking
Act. Infectious waste generators, including hospitals, now face substantial
penalties for improper arrangements regarding disposal of medical waste,
including civil penalties of up to $25,000 per day of noncompliance, criminal
penalties of $150,000 per day, imprisonment, and remedial costs. The
comprehensive legislation establishes programs for medical waste treatment and
disposal in designated states. The legislation also provides for sweeping
inspection authority in the Environmental Protection Agency, including
monitoring and testing. The Company believes that its disposal of such wastes
is in compliance with all state and federal laws.
MEDICAL STAFF AND EMPLOYEES
The Company's hospitals are staffed by licensed physicians who have been
admitted to the medical staff of individual hospitals. With a few exceptions,
physicians are not employees of the Company's hospitals and members of the
medical staffs of the Company's hospitals also serve on the medical staffs of
hospitals not owned by the Company and may terminate their affiliation with
the Company's hospitals at any time. Each of the Company's hospitals is
managed on a day-to-day basis by a managing director employed by the Company.
In
7
addition, a Board of Governors, including members of the hospital's medical
staff, governs the medical, professional and ethical practices at each
hospital. The Company's facilities had approximately 14,500 employees at
December 31, 1996, of whom 10,300 were employed full-time.
530 of the Company's employees at four of its hospitals are unionized. At
Valley Hospital, unionized employees belong to the Culinary Workers and
Bartenders Union and the International Union of Operating Engineers.
Registered nurses at Auburn Regional Medical Center located in Washington
State, are represented by the United Staff Nurses Union, the technical
employees are represented by the United Food and Commercial Workers, and the
service employees are represented by the Service Employees International
Union. The registered nurses, licensed practical nurses, certain technicians
and therapists, and housekeeping employees at HRI Hospital in Boston are
represented by the Service Employees International Union. All full-time and
regular part-time professional employees of La Amistad Residential Treatment
Center in Maitland, Florida are represented by the United Nurses of
Florida/United Health Care Employees Union. The Company believes that its
relations with its employees are satisfactory.
COMPETITION
In all geographical areas in which the Company operates, there are other
hospitals which provide services comparable to those offered by the Company's
hospitals, some of which are owned by governmental agencies and supported by
tax revenues, and others of which are owned by nonprofit corporations and may
be supported to a large extent by endowments and charitable contributions.
Such support is not available to the Company's hospitals. Certain of the
Company's competitors have greater financial resources, are better equipped
and offer a broader range of services than the Company. Outpatient treatment
and diagnostic facilities, outpatient surgical centers and freestanding
ambulatory surgical centers also impact the healthcare marketplace. In recent
years, competition among healthcare providers for patients has intensified as
hospital occupancy rates in the United States have declined due to, among
other things, regulatory and technological changes, increasing use of managed
care payment systems, cost containment pressures, a shift toward outpatient
treatment and an increasing supply of physicians. The Company's strategies are
designed, and management believes that its facilities are positioned, to be
competitive under these changing circumstances.
LIABILITY INSURANCE
Prior to January 1, 1996, most of the Company's subsidiaries were self-
insured for general liability risks for claims limited to $5 million per
occurrence and for professional liability risks for claims limited to $25
million per occurrence. Effective January 1, 1996, the Company's self-insured
subsidiaries purchased general and professional liability insurance coverage
for a three year term with a commercial insurer. These policies include
coverage for claims in excess of $5 million and limited to $25 million per
occurrence and have an unlimited aggregate. Coverage in excess of these limits
up to $100 million is maintained with major insurance carriers. Since 1993,
certain of the Company's subsidiaries, including one of its larger acute care
facilities, have purchased general and professional liability occurrence
policies with commercial insurers. These policies include coverage up to $25
million per occurrence for general and professional liability risks. The
Company has no assurance that it will be able to maintain such insurance in
the future on terms acceptable to the Company.
RELATIONS WITH UNIVERSAL HEALTH REALTY INCOME TRUST
The Company serves as advisor to Universal Health Realty Income Trust
("UHT"), which leases to the Company the real property of 7 facilities
operated by the Company. In addition, UHT holds interests in properties owned
by unrelated companies. The Company receives a fee for its advisory services
based on the value of UHT's assets. In addition, certain of the directors and
officers of the Company serve as trustees and officers of UHT. As of January
31, 1997, the Company owned 8% of UHT's outstanding shares and the Company
currently has an option to purchase UHT shares in the future at fair market
value to enable it to maintain a 5% interest.
8
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, whose terms will expire at such time
as their successors are elected, are as follows:
NAME AND AGE PRESENT POSITION WITH THE COMPANY
------------ ---------------------------------
Alan B. Miller (59)....................... Director, Chairman of the Board,
President and Chief Executive Officer
Kirk E. Gorman (46)....................... Senior Vice President and Chief
Financial Officer
Richard C. Wright (49).................... Vice President
Thomas J. Bender (44)..................... Vice President
Michael G. Servais (50)................... Senior Vice President
Steve G. Filton (39)...................... Vice President and Controller
Sidney Miller (70)........................ Director and Secretary
Mr. Alan B. Miller has been Chairman of the Board, President and Chief
Executive Officer of the Company since its inception. Prior thereto, he was
President, Chairman of the Board and Chief Executive Officer of American
Medicorp, Inc.
Mr. Gorman was elected Senior Vice President and Chief Financial Officer in
December 1992, and has served as Vice President and Treasurer of the Company
since April 1987. From 1984 until then, he served as Senior Vice President of
Mellon Bank, N.A. Prior thereto, he served as Vice President of Mellon Bank,
N.A.
Mr. Wright was elected Vice President of the Company in May 1986. He has
served in various capacities with the Company since 1978, including Senior
Vice President of its Acute Care Division since 1985.
Mr. Bender was elected Vice President of the Company in March 1988. He has
served in various capacities with the Company since 1982, including
responsibility for the Psychiatric Care Division since November 1985.
Mr. Filton was elected Vice President and Controller of the Company in
November 1991, and had served as Director of Accounting and Control since July
1985.
Mr. Servais was elected Senior Vice President of the Company in January
1996, and has served as Vice President of the Company since January 1994,
Assistant Vice President of the Company since January 1993, and Group Director
since December 1990. Prior thereto, he served as President of Jupiter Hospital
Corporation, and Vice President of Operations of American Health Group
International.
Mr. Sidney Miller has served as Secretary of the Company since 1990 and
Director of the Company since 1978. He served in various capacities with the
Company, until his retirement in 1994, including Executive Vice President,
Vice President, and Assistant to the President. Prior thereto, he was Vice
President-Financial Services and Control of American Medicorp, Inc.
9
ITEM 2. PROPERTIES
EXECUTIVE OFFICES
The Company owns an office building with 68,000 square feet available for
use located on 11 acres of land in King of Prussia, Pennsylvania. The Company
currently uses approximately 40,000 square feet of office space in the
building and the balance is leased to unrelated entities.
FACILITIES
The following tables set forth the name, location, type of facility and, for
acute care hospitals and behavioral health centers, the number of beds, for
each of the Company's facilities:
ACUTE CARE HOSPITALS
NUMBER OWNERSHIP
NAME OF FACILITY LOCATION OF BEDS INTEREST
- ---------------- -------- ------- ---------
Aiken Regional Medical
Centers................. Aiken, South Carolina 225 Owned
Auburn Regional Medical
Center.................. Auburn, Washington 149 Owned
Chalmette Medical
Center(1)............... Chalmette, Louisiana 118 Leased
Doctors' Hospital of
Shreveport(2)........... Shreveport, Louisiana 136 Leased
Edinburg Hospital........ Edinburg, Texas 112 Owned
Inland Valley Regional
Medical Center(1)....... Wildomar, California 80 Leased
Manatee Memorial
Hospital................ Bradenton, Florida 512 Owned
McAllen Medical
Center(1)............... McAllen, Texas 490 Leased
Northern Nevada Medical
Center(3)............... Sparks, Nevada 150 Owned
Northwest Texas
Healthcare System....... Amarillo, Texas 357 Owned
River Parishes
Hospitals(4)............ LaPlace and Chalmette, Louisiana 216 Leased/Owned
Valley Hospital Medical
Center.................. Las Vegas, Nevada 398 Owned
Victoria Regional Medical
Center.................. Victoria, Texas 147 Owned
Wellington Regional
Medical Center(1)....... West Palm Beach, Florida 120 Leased
BEHAVIORAL HEALTH CENTERS
NUMBER OWNERSHIP
NAME OF FACILITY LOCATION OF BEDS INTEREST
- ---------------- -------- ------- ---------
The Arbour Hospital...... Boston, Massachusetts 118 Owned
The BridgeWay(1)......... North Little Rock, Arkansas 70 Leased
Clarion Psychiatric
Center.................. Clarion, Pennsylvania 52 Owned
Del Amo Hospital......... Torrance, California 166 Owned
Forest View Hospital..... Grand Rapids, Michigan 62 Owned
Fuller Memorial
Hospital................ South Attleboro, Massachusetts 82 Owned
Glen Oaks Hospital....... Greenville, Texas 54 Owned
The Horsham Clinic....... Ambler, Pennsylvania 145 Owned
HRI Hospital............. Brookline, Massachusetts 68 Owned
KeyStone Center(5)....... Wallingford, Pennsylvania 100 Owned
La Amistad Residential
Treatment Center........ Maitland, Florida 56 Owned
The Meadows Psychiatric
Center.................. Centre Hall, Pennsylvania 101 Owned
Meridell Achievement
Center(1)............... Austin, Texas 114 Leased
The Pavilion............. Champaign, Illinois 46 Owned
River Crest Hospital..... San Angelo, Texas 80 Owned
River Oaks Hospital...... New Orleans, Louisiana 126 Owned
Roxbury(5)............... Shippensburg, Pennsylvania 75 Owned
Timberlawn Mental Health
System.................. Dallas, Texas 164 Owned
Turning Point Care
Center(5)............... Moultrie, Georgia 59 Owned
Two Rivers Psychiatric
Hospital................ Kansas City, Missouri 80 Owned
10
AMBULATORY SURGERY CENTERS
NAME OF FACILITY(6) LOCATION
------------------- --------
Arkansas Surgery Center of Fayetteville........... Fayetteville, Arkansas
Corona Outpatient Surgery Center.................. Corona, California
Goldring Surgical and Diagnostic Center........... Las Vegas, Nevada
M.D. Physicians Surgicenter of Midwest City....... Midwest City, Oklahoma
Outpatient Surgical Center of Ponca City.......... Ponca City, Oklahoma
St. George Surgical Center........................ St. George, Utah
Seacoast Outpatient Surgical Center............... Somersworth, New Hampshire
Surgery Centers of the Desert..................... Rancho Mirage, California
Palm Springs, California
The Surgery Center of Chalmette................... Chalmette, Louisiana
Surgery Center of Littleton....................... Littleton, Colorado
Surgery Center of Springfield..................... Springfield, Missouri
Surgery Center of Texas........................... Odessa, Texas
Surgical Center of New Albany..................... New Albany, Indiana
Surgery Center of Waltham......................... Waltham, Massachusetts
RADIATION ONCOLOGY CENTERS
NAME OF FACILITY LOCATION
---------------- --------
Auburn Regional Center for Cancer Care............ Auburn, Washington
Bluegrass Cancer Center(7)........................ Frankfort, Kentucky
Bowling Green Radiation Therapy(7)................ Bowling Green, Kentucky
Carolina Cancer Center............................ Aiken, South Carolina
Columbia Radiation Oncology Center................ Washington, D.C.
Danville Radiation Therapy Center(7).............. Danville, Kentucky
Glasgow Radiation Therapy(7)...................... Glasgow, Kentucky
Louisville Radiation Oncology Center(7)........... Louisville, Kentucky
Madison Radiation Therapy(8)...................... Madison, Indiana
McAllen Medical Center Cancer Institute........... McAllen, Texas
Nevada Radiation Oncology Center--West............ Las Vegas, Nevada
Regional Cancer Center at Wellington.............. West Palm Beach, Florida
Southern Indiana Radiation Therapy(8)............. Jeffersonville, Indiana
SPECIALIZED WOMEN'S HEALTH CENTERS
NAME OF FACILITY LOCATION
---------------- --------
Renaissance Women's Center of Edmond.............. Edmond, Oklahoma
- --------
(1) Real property leased from UHT.
(2) Real property leased with an option to purchase.
(3) General partnership interest in limited partnership.
(4) Includes Chalmette Hospital, a 118-bed rehabilitation facility. The
Company owns the LaPlace real property and leases the Chalmette real
property from UHT.
(5) Addictive disease facility.
(6) Each facility other than Goldring Surgical and Diagnostic Center and The
Surgery Center of Chalmette are owned in partnership form with the Company
owning general and limited partnership interests in a limited partnership.
The real property is leased from third parties.
(7) Managed Facility. A partnership, in which the Company is the general
partner, owns the real property.
(8) A partnership, in which the Company is the general partner, owns the real
property.
11
Some of these facilities are subject to mortgages, and substantially all the
equipment located at these facilities is pledged as collateral to secure long-
term debt. The Company owns or leases medical office buildings adjoining
certain of its hospitals.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's hospitals and is party to various other litigation. However,
management believes the ultimate resolution of these pending proceedings will
not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable. No matter was submitted during the fourth quarter of the
fiscal year ended December 31, 1996 to a vote of security holders.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See Item 6, Selected Financial Data
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ------------------ ------------------ ---------------- ----------------
SUMMARY OF OPERATIONS
Net revenues........... $ 1,190,210,000 $ 931,126,000 $ 782,199,000 $ 761,544,000 $ 731,227,000
Net income............. $ 50,671,000 $ 35,484,000 $ 28,720,000 $ 24,011,000 $ 20,020,000
Net margin............. 4.3% 3.8% 3.7% 3.2% 2.7%
Return on average
equity................ 13.0% 12.4% 11.8% 11.2% 10.3%
FINANCIAL DATA
Cash provided by
operating activities.. $ 145,256,000 $ 91,749,000 $ 60,624,000 $ 84,640,000 $ 81,731,000
Capital
expenditures(1)....... $ 107,630,000 $ 65,695,000 $ 48,652,000 $ 52,690,000 $ 40,554,000
Total assets........... $ 965,795,000 $ 748,051,000 $ 521,492,000 $ 460,422,000 $ 472,427,000
Long-term borrowings... $ 275,634,000 $ 237,086,000 $ 85,125,000 $ 75,081,000 $ 114,959,000
Common stockholders'
equity................ $ 452,980,000 $ 297,700,000 $ 260,629,000 $ 224,488,000 $ 202,903,000
Percentage of total
debt to total
capitalization........ 38% 45% 26% 26% 37%
OPERATING DATA
Average licensed beds.. 4,583 3,876 3,543 3,682 3,562
Average available
beds.................. 4,181 3,563 3,241 3,345 3,229
Hospital admissions.... 133,539 106,627 88,956 85,005 83,324
Average length of
patient stay.......... 6.2 6.2 6.5 6.8 7.2
Patient days........... 821,904 658,015 574,311 580,398 603,893
Occupancy rate for
licensed beds......... 49% 47% 44% 43% 46%
Occupancy rate for
available beds........ 54% 51% 49% 48% 51%
PER SHARE DATA
Net income(2).......... $ 1.64 $ 1.26 $ 1.01 $ 0.86 $ 0.72
OTHER INFORMATION
Weighted average number
of shares and share
equivalents
outstanding(2)........ 30,848,000 28,158,000 28,778,000 29,638,000 29,940,000
COMMON STOCK PERFORMANCE
Market price of common
stock
High-Low, by quarter(3)
1st.................... $26 7/8-$21 11/16 $ 13 -$11 3/8 $13 5/16-$ 9 5/8 $ 8 -$6 5/16 $ 7 3/4-$6 3/16
2nd.................... $30 1/8-$24 3/8 $14 13/16-$12 7/16 $13 7/16-$11 1/4 $ 8 1/8-$6 1/2 $6 15/16-$5 9/16
3rd.................... $27 1/4-$22 3/4 $17 11/16-$14 $ 14 3/4-$12 15/16 $ 8 1/2-$7 1/4 $6 11/16-$5 5/8
4th.................... $29 1/4-$24 1/2 $ 22 3/16-$16 1/8 $14 1/16-$10 11/16 $10 5/16-$8 5/16 $ 7 9/16-$5 7/8
- --------
(1) Amount includes non-cash capital lease obligations.
(2) In April 1996, the Company declared a two-for-one stock split in the form
of a 100% stock dividend which was paid in May 1996. All classes of common
stock participated on a pro rata basis. The weighted average number of
common shares and equivalents and earnings per common and common
equivalent share for all years presented have been adjusted to reflect the
two-for-one stock split. The 1994, 1993 and 1992 earnings per share and
average number of shares outstanding have been adjusted to reflect the
assumed conversion of the Company's convertible debentures. In April 1994,
the Company redeemed the debentures which reduced the fully diluted number
of shares outstanding by 902,466.
(3) These prices are the high and low closing sales prices of the Company's
Class B Common Stock as reported by the New York Stock Exchange (all
periods have been adjusted to reflect the two-for-one stock split in the
form of a 100% stock dividend paid in May 1996). Class A, C and D common
stock are convertible on a share-for-share basis into Class B Common
Stock.
13
NUMBER OF SHAREHOLDERS OF RECORD AS OF JANUARY 31, 1997, WERE AS FOLLOWS:
- -------------------
Class A Common 7
Class B Common 587
Class C Common 7
Class D Common 291
- -------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
GENERAL
The matters discussed in this report as well as the news releases issued
from time to time by the Company contain certain forward-looking statements
that involve risks and uncertainties, including, among other things, that the
majority of the Company's revenues are produced by a small number of its total
facilities, possible changes in levels and terms of reimbursement for the
Company's charges by government programs or other third party payors, the
ability of the Company to successfully integrate its recent acquisitions and
the ability to finance growth on favorable terms.
RESULTS OF OPERATIONS
Net revenues increased 28% to $1.2 billion in 1996 as compared to 1995 and
19% to $931 million in 1995 as compared to 1994. The $259 million increase in
net revenues during 1996 as compared to 1995 was due primarily to: (i) the
acquisitions of a 357-bed medical complex located in Amarillo, Texas during
the second quarter of 1996 and five behavioral health centers located in
Pennsylvania and Texas during the second and third quarters of 1996 ($136
million); (ii) a 225-bed acute care facility and a 512-bed acute care
facility, both of which were acquired during the third quarter of 1995, net of
the revenue effects of the three acute care facilities divested during the
year (net increase of $86 million), and; (iii) revenue growth at acute care
facilities owned during both years ($23 million). The $149 million increase in
net revenues during 1995 as compared to 1994 was primarily attributable to
revenues generated at two acute care facilities acquired by the Company during
1995 net of the revenue effects of the three acute care facilities divested
during the year (net increase of $58 million), revenue growth at acute care
facilities owned during both years ($44 million) and a full year of revenue
generated at an acute care facility acquired by the Company in November, 1994
($29 million).
Earnings before interest, income taxes, depreciation, amortization, lease
and rental expense and nonrecurring transactions (EBITDAR) increased to $215
million in 1996 from $163 million in 1995 and $139 million in 1994. Overall
operating margins were 18.0% in 1996, 17.5% in 1995 and 17.8% in 1994. The
improvement in the Company's overall operating margin in 1996 as compared to
1995 was due to improvement in operating margins at the acute care hospitals
and behavioral health centers owned during both years and due to the 1995
results including losses sustained at the three acute care facilities divested
during 1995. While operating margins at the Company's acute care and
behavioral health services facilities owned during both 1995 and 1994
increased, overall margins were lower in 1995 as compared to 1994 due to
losses sustained at the three acute care facilities divested during 1995.
ACUTE CARE SERVICES
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and women's center accounted for 85%, 86% and 85% of consolidated net
revenues in 1996, 1995 and 1994, respectively.
Admissions at the Company's acute care facilities owned during each of the
last three years increased 1% in 1996 over 1995 and 9% in 1995 over 1994. The
increase in admissions during 1995 as compared to 1994 was due primarily to
additional capacity and expansion of service lines at two of the Company's
larger facilities. The average length of stay at the acute care facilities
owned during the last three years decreased to 5.0 days in 1996
14
as compared to 5.1 days in 1995 and 5.3 days in 1994. The decrease in the
average length of stay at these facilities was due primarily to improvement in
case management of Medicare and Medicaid patients and an increasing shift of
patients into managed care plans which generally have lower average lengths of
stay. Despite the decline in the average length of stay at the Company's acute
care facilities owned during all three years, net revenues at these facilities
increased 3% in 1996 over 1995 and 8% in 1995 over 1994 due primarily to an
increase in outpatient activity. Outpatient activity at the Company's acute
care hospitals continues to increase as gross outpatient revenues at these
hospitals increased 12% in 1996 over 1995 and 17% in 1995 over 1994 and
comprised 23% of the Company's gross patient revenues in 1996 and 22% in both
1995 and 1994. The increase is primarily the result of advances in medical
technologies, which allow more services to be provided on an outpatient basis,
and increased pressure from Medicare, Medicaid, health maintenance
organizations (HMOs), preferred provider organizations (PPOs) and insurers to
reduce hospital stays and provide services, where possible, on a less
expensive outpatient basis. To accommodate the increased utilization of
outpatient services, the Company has expanded or redesigned several of its
outpatient facilities and services.
To further accommodate the trend toward increased outpatient services, the
Company has invested in the acquisition and development of outpatient surgery
and radiation therapy centers. As of December 31, 1996, the Company operated
or managed twenty-seven outpatient treatment centers which have contributed to
the increase in the Company's outpatient revenues. The Company's outpatient
surgery and radiation therapy center division generated net revenues of $27
million, $23 million and $17 million during 1996, 1995 and 1994, respectively.
The Company expects the growth in outpatient services to continue, although
the rate of growth may be moderated in the future.
The Company's acute care division generated operating margins (EBITDAR) of
22.5% in 1996, 21.4% in 1995 and 21.3% in 1994. The improvement in the acute
care division's operating margins in 1996 as compared to 1995 was primarily
the result of the divestiture of three low margin acute care facilities during
1995 and operating margin improvement at an acute care facility acquired
during 1994. Despite the improvement in the acute care division's operating
margin, most of the Company's facilities continue to experience a
deterioration in payor mix and unfavorable general industry trends which
include pressures to control healthcare costs resulting in an increase in
revenues attributable to managed care payors. In response to the increased
pressure on revenues, the Company continues to implement cost control programs
at its facilities including more efficient staffing standards and re-
engineering of services. On a same-store basis, operating margins at the
Company's acute care hospitals owned during all three years were 23.9% in 1996
and 1995 and 23.8% in 1994. The Company has implemented cost control measures
at its newly acquired facilities in an effort to improve operating margins at
these facilities from their pre-acquisition levels. Pressure on operating
margins is expected to continue due to the industry-wide trend away from
charge based payors which limits the Company's ability to increase its prices.
BEHAVIORAL HEALTH SERVICES
Net revenues from the Company's behavioral health services facilities
accounted for 14%, 13% and 14% of consolidated net revenues in 1996, 1995 and
1994, respectively. Net revenues at the Company's behavioral health facilities
owned during each of the last three years decreased 2% in 1996 as compared to
1995 and increased 1% in 1995 as compared to 1994. Admissions at the
facilities owned during the last three years increased 5% in 1996 over 1995
and 4% in 1995 as compared to 1994. The average length of stay at these
facilities decreased to 12.4 days in 1996 from 13.5 days in 1995 and 13.8 days
in 1994. The 2% decrease in net revenues during 1996, as compared to 1995,
resulted primarily from the reduction in the average length of stay as a large
portion of the Company's behavioral health services' revenues are reimbursed
on a per diem basis. The reduction in the average length of stay during the
last three years is a result of changing practices in the delivery of
behavioral health services and continued cost containment pressures from
payors which includes a greater emphasis on the utilization of outpatient
services. Management of the Company has responded to these trends by
developing and marketing new outpatient treatment programs. The shift to
outpatient care is reflected in higher revenues from outpatient services, as
gross outpatient revenues at the Company's behavioral health services
facilities owned during the last three years increased 14% in 1996 over 1995
and 10% in 1995 over
15
1994 and comprised 18% of the Company's behavioral health services' gross
patient revenues in 1996 as compared to 16% in 1995 and 15% in 1994.
The Company's behavioral health services division generated operating
margins (EBITDAR) of 18.1% in both 1996 and 1995 and 15.8% in 1994. On a same-
store basis, operating margins at the Company's behavioral health services
facilities owned during all three years were 19.5% in both 1996 and 1995 and
15.8% in 1994. Despite the decline in the average length of stay, the EBITDAR
margins within the Company's behavioral health services division remained
unchanged during 1996 as compared to 1995 due primarily to a slight increase
in prices and continued cost controls implemented in response to the managed
care environment. The increase in the profit margin in 1995 as compared to
1994 was caused primarily by an increase in patient days and the
implementation of cost controls.
OTHER OPERATING RESULTS
Depreciation and amortization expense increased $20.6 million in 1996 over
1995 due primarily to the Company's 1996 and 1995 acquisitions mentioned
above. Depreciation and amortization expense increased $9.0 million in 1995
over 1994 due primarily to the Company's acquisition of the two acute care
hospitals during 1995, net of effects of three acute care facilities divested
during the year, a full year of depreciation expense on an acute care hospital
acquired in November of 1994 and the increased depreciation expense related to
capital expenditures and acquisition of outpatient treatment centers.
Interest expense increased $10.1 million in 1996 as compared to 1995 due
primarily to the increased borrowings related to the purchase of the 357-bed
medical complex acquired during the second quarter of 1996 and the five
behavioral health centers acquired during the second and third quarters of
1996 and a full year of interest expense on the increased borrowings used to
finance the acquisition of the two acute care hospitals acquired during the
third quarter of 1995. In June 1996, the Company issued four million shares of
its Class B Common Stock at a price of $26 per share. The total net proceeds
of $99.1 million generated from this stock issuance were used to partially
finance the 1996 purchase transactions mentioned above while the excess of the
purchase price over the net proceeds ($69 million) were financed with
operating cash flows and borrowings under the Company's commercial paper and
revolving credit facilities. Interest expense increased $4.9 million during
1995 over 1994 due primarily to increased borrowings related to the purchase
of two acute care hospitals during 1995. The Company issued $135 million of
Senior Notes during 1995 which have a coupon rate of 8.75% (9.2% effective
rate including amortization of interest rate swap termination fees and
amortization of bond discount). The $131 million of net proceeds generated
from the issuance of these notes were used to finance the cash purchase price
of the two acute care hospitals acquired during 1995 while the excess of the
purchase price over the net proceeds ($52 million) were financed with
operating cash flows and borrowings under the Company's commercial paper and
revolving credit facilities.
During 1996, the Company recorded $4.1 million of nonrecurring charges which
consisted of a $2.9 million loss recorded on the anticipated divestiture of an
ambulatory treatment center and a $1.2 million charge recorded to fully
reserve the carrying value of a behavioral health center owned by the Company
and leased to an unaffiliated third party, which is currently in default under
the terms of the lease agreement. During 1995, the Company recorded $11.6
million of nonrecurring charges which consisted of: (i) a $14.2 million pre-
tax charge due to impairment of long-lived assets; (ii) a $2.7 million loss on
disposal of two acute care facilities which were exchanged along with $44
million of cash for a 225-bed acute care hospital, and; (iii) a $5.3 million
pre-tax gain realized on the sale of a 202-bed acute care hospital which was
divested during the fourth quarter of 1995 for cash proceeds of $19.5 million.
During 1994, nonrecurring charges of $9.8 million were recorded consisting of
the following: (i) a $4.3 million estimated loss on the disposal of two acute
care facilities which were disposed of during 1995; (ii) a $2.8 million write-
down in the carrying value of a behavioral health center owned by the Company
and leased to an unaffiliated third party which is currently in default under
the terms of the lease agreement; (iii) a $1.4 million write-down recorded
against the book value of the real property of a behavioral health services
hospital, and; (iv) $1.3 million of expenses related to the disposition of a
non-strategic business.
16
During 1995, in conjunction with the development of the Company's operating
plan and 1996 budget, management assessed the competitive position of each
facility within the portfolio and estimated future cash flows expected from
each facility. As a result, the Company recorded a $14.2 million pre-tax
charge during 1995 to write-down the carrying value of certain intangible and
tangible assets at certain facilities. In measuring the impairment loss, the
Company estimated fair value by discounting expected future cash flows from
each facility using the Company's internal hurdle rate. The impairment loss
related primarily to four facilities in the Company's behavioral health
services division and three facilities in its ambulatory treatment center
division. Within the behavioral health services division, the impact of
managed care was most dramatically felt at the Company's two free standing
chemical dependency and two residential treatment centers. Due to increased
penetration of managed care payors, changes in CHAMPUS regulations and
decreases in admissions, patient days and length of stay at these four
facilities, management of the Company determined that profit margins had been
permanently impaired. Within the Company's ambulatory treatment center
division, three centers are located in highly competitive markets which have
become heavily penetrated with managed care. As a result, these ambulatory
treatment centers experienced decreases in net revenues per case and case
volumes which resulted in permanent impairment of carrying value. During the
fourth quarter of 1996, as a result of divestiture negotiations with a third
party related to one of these ambulatory treatment centers, the Company
recorded a $2.9 million charge to write-down the carrying value of the center
to its net realizable value. The Company expects this divestiture to be
completed during the first quarter of 1997.
The effective tax rate was 37%, 33% and 39% in 1996, 1995 and 1994,
respectively. The effective tax rate was lower in 1995 as compared to 1996 and
1994 due to 1995 including the deductibility of previously non-deductible
goodwill amortization resulting from the sale of three acute care hospitals in
1995.
GENERAL TRENDS
An increased proportion of the Company's revenue is derived from fixed
payment services, including Medicare and Medicaid which accounted for 50%, 48%
and 45% of the Company's net patient revenues during 1996, 1995 and 1994,
respectively. The Company expects the Medicare and Medicaid revenues to
continue to increase as a larger portion of the general population qualifies
for coverage as a result of the aging of the population and expansion of state
Medicaid programs. The Medicare program reimburses the Company's hospitals
primarily based on established rates by a diagnosis related group for acute
care hospitals and by cost based formula for behavioral health facilities.
In addition to the Medicare and Medicaid programs, other payors continue to
actively negotiate the amounts they will pay for services performed. In
general, the Company expects the percentage of its business from managed care
programs, including HMOs and PPOs to grow. The consequent growth in managed
care networks and the resulting impact of these networks on the operating
results of the Company's facilities vary among the markets in which the
Company operates.
HEALTHCARE REGULATION AND LEGISLATION
In addition to the trends described above that continue to have an impact on
operating results, there are a number of other more general factors affecting
the Company's business. In February 1997, the President submitted his fiscal
year 1998 budget plan which calls for a $100 billion reduction in the rate of
increase in Medicare spending over the next five years and a $138 billion
reduction over six years. Included in this proposal are reductions in the
future rate of increases to payments made to hospitals. Both Republicans and
Democrats are working towards a balanced budget by the year 2002 and it is
likely that future budgets will contain certain reductions in the rate of
increase of Medicare and Medicaid spending. The Company cannot predict whether
the above proposal or any other proposals will be adopted, and if adopted, no
assurance can be given that the implementation of such plans will not have a
material adverse effect on the Company's business. In Texas, a law has been
passed which mandates that the state senate apply for a waiver from current
Medicaid regulations to allow the state to require that certain Medicaid
participants be serviced through managed care providers. The Company is unable
to predict whether Texas will be granted such a waiver or the effect on the
Company's
17
business of such waiver. Upon meeting certain conditions, and serving a
disproportionately high share of Texas' and South Carolina's low income
patients, three of the Company's facilities located in Texas and one facility
located in South Carolina became eligible and received additional
reimbursement from each state's disproportionate share hospital fund. Included
in the Company's financial results was an aggregate of $17.8 million in 1996,
$12.6 million in 1995 and $12.7 million in 1994 received pursuant to the terms
of these programs. These programs are scheduled to terminate in the third
quarter of 1997 and the Company cannot predict whether these programs will
continue beyond their scheduled termination date.
INFLATION
The healthcare industry is very labor intensive and salaries and benefits
are subject to inflationary pressures as are supply costs which tend to
escalate as vendors pass on the rising costs through price increases. Although
the Company cannot predict its ability to continue to cover future costs
increases, management believes that through the adherence to cost containment
policies, labor management and reasonable price increases, the effects of
inflation, which has not had a material impact on the results of operations
during the last three years, on future operating margins should be manageable.
However, the Company's ability to pass on these increased costs associated
with providing healthcare to Medicare and Medicaid patients may be limited
since although these fixed payments rates are indexed for inflation annually,
the increases have historically lagged behind actual inflation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $145 million in 1996, $92
million in 1995 and $61 million in 1994. The $53 million increase in 1996 as
compared to 1995 was primarily attributable to a $30 million increase in the
net income plus the addback of the non-cash charges (depreciation,
amortization, provision for self-insurance reserves and other non-cash
charges) and a $25 million decrease in the payment of income taxes. The $31
million increase in 1995 as compared to 1994 was primarily attributable to:
(i) a $21 million increase in the net income plus the addback of the non-cash
charges (depreciation, amortization, provision for self-insurance reserves and
other non-cash charges); (ii) a $13 million increase in accrued liabilities as
of December 31, 1995 as compared to the 1994 year-end balance, and; (iii) a $6
million decrease in the payments made in settlement of self-insurance claims.
Partially offsetting these favorable increases in net cash provided by
operating activities in 1995 as compared to 1994 was a $10 million increase in
income tax payments made during 1995 as compared to 1994. During each of the
last three years, the net cash provided by operating activities substantially
exceeded the scheduled maturities of long-term debt.
During 1996 the Company acquired the following facilities for total
consideration of $168 million (excluding contingent payments, see Note 2 to
the consolidated financial statements): (i) substantially all the assets and
operations of a 357-bed medical complex located in Amarillo, Texas for $126
million in cash, (ii) substantially all the assets and operations of four
behavioral health centers located in Pennsylvania and management contracts to
seven other behavioral health centers for $39 million in cash, and; (iii)
substantially all the assets and operations of a 164-bed behavioral health
facility located in Texas for $3 million in cash. Also during 1996, the
Company continued the construction of a medical complex located in Summerlin,
Nevada and a new acute care facility located in Edinburg, Texas. The medical
complex in Summerlin, Nevada consists of a 149-bed acute care facility
(scheduled to open during the fourth quarter of 1997) and an outpatient
surgery center, medical office building and a radiation therapy center (all of
which opened during the fourth quarter of 1996). As of December 31, 1996, the
Company spent $45 million on this project which will cost a total of
approximately $60 million when completed. Pursuant to the terms of its
acquisition of a 112-bed acute care hospital located in Edinburg, Texas, the
Company continues the construction of a 130-bed replacement facility which is
expected to be completed during the second quarter of 1997. As of December 31,
1996, the Company spent $8 million on this project which will cost a total of
approximately $24 million when completed.
During 1995 the Company acquired the following facilities for two acute care
facilities and total cash consideration of $188 million and the assumption of
net liabilities of approximately $4 million: (i) a 512-bed
18
acute care hospital located in Bradenton, Florida for approximately $139
million in cash and the assumption of net liabilities of $4 million; (ii) a
225-bed acute care facility located in Aiken, South Carolina for approximately
$44 million in cash and a 104-bed acute care hospital and a 126-bed acute
hospital, and; (iii) a 82-bed behavioral health facility located in South
Attleboro, Massachusetts and a majority interest in two separate partnerships
which own and operate outpatient surgery centers located in Fayetteville,
Arkansas and Somersworth, New Hampshire for total cash consideration of
approximately $5 million. Also during 1995, the Company sold the operations
and substantially all the assets of a 202-bed acute care hospital located in
Plantation, Florida for cash proceeds of approximately $20 million. The sale
resulted in a $5.3 million pre-tax gain which has been included in
nonrecurring charges in the 1995 consolidated statement of income.
During 1994, the Company paid $25.8 million for acquisitions of businesses
and assets held for lease. Also during 1994, the Company invested in
additional ambulatory treatment centers and purchased a 112-bed acute care
hospital located in Edinburg, Texas.
Capital expenditures, excluding capital leases and property contributed by
minority partners, were $106 million in 1996, $61 million in 1995 and $44
million in 1994. Capital expenditures in 1997 are expected to be approximately
$45 million for capital equipment and renovations of existing facilities.
Additionally, capital expenditures for new projects at existing hospitals and
medical office buildings are expected to total approximately $27 million in
1997. The estimated cost to complete major construction projects in progress
at December 31, 1996 is approximately $61 million. The Company believes that
its capital expenditure program is adequate to expand, improve and equip its
existing hospitals.
Total debt as a percentage of total capitalization was 38% at December 31,
1996, 45% at December 31, 1995 and 26% at December 31, 1994. The decrease
during 1996 as compared to 1995 was due primarily to the issuance of
additional shares of the Company's Class B Common Stock used to partially
finance the 1996 purchase transactions mentioned above. During the second
quarter of 1996, the Company issued four million shares of its Class B Common
Stock at a price of $26 per share. The total net proceeds of $99.1 million
generated from this stock issuance were used to partially finance the 1996
purchase transactions mentioned above while the excess of the purchase price
over the net proceeds generated from the stock issuance ($69 million) were
financed from operating cash flows and borrowings under the Company's
commercial paper and revolving credit facilities. The increase in total debt
as a percentage of total capitalization during 1995 as compared to 1994 was
due primarily to the additional debt incurred to finance the 1995 purchase
transactions mentioned above. During 1995, the Company issued $135 million of
Senior Notes. The Senior Notes have an 8.75% coupon rate (9.2% effective rate
including amortization of interest rate swap termination fees and amortization
of bond discount) and will mature on August 15, 2005. The Notes can be
redeemed in whole or in part, at any time on or after August 15, 2000,
initially at a price of 102.265%, declining ratably to par on or after August
15, 2002. The interest on the bonds will be paid semiannually in arrears on
February 15 and August 15 of each year. The net proceeds generated from the
issuance were approximately $131 million and were used to finance the 1995
acquisitions mentioned above while the excess of the purchase price over the
net proceeds ($52 million) was financed from operating cash flows and
borrowings under the Company's commercial paper and revolving credit
facilities. In anticipation of the Senior Note issuance, the Company entered
into interest rate swaps having a total notional principal amount of $100
million to hedge the interest rate on the Senior Notes. These interest rate
swap agreements were terminated simultaneously with the issuance of the Senior
Notes at which time the Company paid a net termination fee of $5.4 million
which is being amortized ratably over the ten year term of the Senior Notes.
During 1996, the Company amended its unsecured non-amortizing revolving
credit agreement to enable it to complete the acquisition of the 357-bed
medical complex in Texas. The amended agreement, which expires on March 31,
2000, provides for $225 million of borrowing capacity, subject to certain
conditions, until March 31, 1998, $210 million until March 31, 1999 and $185
million until March 31, 2000. The agreement provides for interest, at the
Company's option, at various rates. At December 31, 1996, the Company had $164
million of unused borrowing capacity available under the revolving credit
agreement.
19
A large portion of the Company's accounts receivable are pledged as
collateral to secure its $50 million, daily valued commercial paper program.
The Company has sufficient patient receivables to support a larger program,
and upon the mutual consent of the Company and the participating lending
institutions, the commitment can be increased to $100 million. At December 31,
1996 there were $50 million of borrowings outstanding under this facility.
At December 31, 1996 the Company had no interest rate swap agreements
outstanding. The effective interest rate on the Company's revolving credit,
demand notes and commercial paper program, including the interest rate swap
expense, was 6.9%, 8.4% and 16.1% during 1996, 1995 and 1994, respectively.
Additional interest expense recorded as a result of the Company's hedging
activity was $47,000, $209,000 and $1,981,000 in 1996, 1995 and 1994,
respectively.
The Company expects to finance all capital expenditures and acquisitions
with internally generated funds and borrowed funds. Additional borrowed funds
may be obtained either through refinancing the existing revolving credit
agreement, the commercial paper facility or the issuance of long-term
securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Balance Sheets, Consolidated Statements of
Income, Consolidated Statements of Common Stockholders' Equity, and
Consolidated Statements of Cash Flows, together with the report of Arthur
Andersen LLP, independent public accountants, are included elsewhere herein.
Reference is made to the "Index to Financial Statements and Financial
Statement Schedule."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information to appear under
the caption "Election of Directors" in the Company's Proxy Statement, to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 1996. See also "Executive Officers of the Registrant" appearing
in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information to appear under
the caption "Executive Compensation" in the Company's Proxy Statement to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information to appear under
the caption "Security Ownership of Certain Beneficial Owners and Management"
in the Company's Proxy Statement, to be filed with the Securities and Exchange
Commission within 120 days after December 31, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information to appear under
the caption "Certain Relationships and Related Transactions" in the Company's
Proxy Statement, to be filed with the Securities and Exchange Commission
within 120 days after December 31, 1996.
20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE.
See Index to Financial Statements and Financial Statement Schedule on page
25.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
3.1 Restated Certificate of Incorporation, as amended, previously filed as
Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1983. Exhibit 3.2 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1985, and Exhibit 3.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1987, are
incorporated herein by reference.
3.2 Bylaws of Registrant as amended, previously filed as Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987,
is incorporated herein by reference.
4.1 Authorizing Resolution adopted by the Pricing Committee of Universal
Health Services, Inc. on August 1, 1995, related to $135 million principal
amount of 8 3/4% Senior Notes due 2005, previously filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, is incorporated herein by reference.
4.2 Indenture dated as of July 15, 1995, between Universal Health Services,
Inc. and PNC Bank, National Association, Trustee, previously filed as Exhibit
10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995, is incorporated herein by reference.
10.1 Restated Employment Agreement, dated as of July 14, 1992, by and
between Registrant and Alan B. Miller, previously filed as Exhibit 10.3 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
is incorporated herein by reference.
10.2 Form of Employee Stock Purchase Agreement for Restricted Stock Grants,
previously filed as Exhibit 10.12 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1985, is incorporated herein by reference.
10.3 Advisory Agreement, dated as of December 24, 1986, between Universal
Health Realty Income Trust and UHS of Delaware, Inc., previously filed as
Exhibit 10.2 to Registrant's Current Report on Form 8-K dated December 24,
1986, is incorporated herein by reference.
10.4 Agreement, effective January 1, 1997, to renew Advisory Agreement,
dated as of December 24, 1986, between Universal Health Realty Income Trust
and UHS of Delaware, Inc.
10.5 Form of Leases, including Form of Master Lease Document for Leases,
between certain subsidiaries of the Registrant and Universal Health Realty
Income Trust, filed as Exhibit 10.3 to Amendment No. 3 of the Registration
Statement on Form S-11 and Form S-2 of Registrant and Universal Health Realty
Income Trust (Registration No. 33-7872), is incorporated herein by reference.
10.6 Share Option Agreement, dated as of December 24, 1986, between
Universal Health Realty Income Trust and Registrant, previously filed as
Exhibit 10.4 to Registrant's Current Report on Form 8-K dated December 24,
1986, is incorporated herein by reference.
21
10.7 Corporate Guaranty of Obligations of Subsidiaries Pursuant to Leases
and Contract of Acquisition, dated December 24, 1986, issued by Registrant in
favor of Universal Health Realty Income Trust, previously filed as Exhibit
10.5 to Registrant's Current Report on Form 8-K dated December 24, 1986, is
incorporated herein by reference.
10.8 1990 Employees' Restricted Stock Purchase Plan, previously filed as
Exhibit 10.24 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990, is incorporated herein by reference.
10.9 1992 Corporate Ownership Program, previously filed as Exhibit 10.24 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991,
is incorporated herein by reference.
10.10 1992 Stock Bonus Plan, previously filed as Exhibit 10.25 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991,
is incorporated herein by reference.
10.11 Sale and Servicing Agreement dated as of November 16, 1993 between
Certain Hospitals and UHS Receivables Corp., previously filed as Exhibit 10.16
to Registrant's Annual Report on Form 10-K for the year ended December 31,
1993, is incorporated herein by reference.
10.12 Servicing Agreement dated as of November 16, 1993, among UHS
Receivables Corp., UHS of Delaware, Inc. and Continental Bank, National
Association, previously filed as Exhibit 10.17 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993, is incorporated herein by
reference.
10.13 Pooling Agreement dated as of November 16, 1993, among UHS Receivables
Corp., Sheffield Receivables Corporation and Continental Bank, National
Association, previously filed as Exhibit 10.18 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993, is incorporated herein by
reference.
10.14 Guarantee dated as of November 16, 1993, by Universal Health Services,
Inc. in favor of UHS Receivables Corp., previously filed as Exhibit 10.19 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
is incorporated herein by reference.
10.15 Amendment No. 1 to the 1992 Stock Bonus Plan, previously filed as
Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, is incorporated herein by reference.
10.16 1994 Executive Incentive Plan, previously filed as Exhibit 10.22 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
is incorporated herein by reference.
10.17 Credit Agreement, dated as of August 2, 1994, among Universal Health
Services, Inc., Certain Participating Banks, and Morgan Guaranty Trust Company
of New York, as Agent, previously filed as Exhibit 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994, is
incorporated herein by reference.
10.18 Amendment No. 1 to Credit Agreement, dated as of April 24, 1995, among
Universal Health Services, Inc., Certain Participating Banks and Morgan
Guaranty Trust Company of New York, as Agent, previously filed as Exhibit 10.1
to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995, is incorporated herein by reference.
10.19 Amendment No. 1 to the Pooling Agreement dated as of September 30,
1994, among UHS Receivables Corp., Sheffield Receivables Corporation and Bank
of America Illinois (as successor to Continental Bank N.A.) as Trustee,
previously filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, is incorporated herein by reference.
10.20 Amended and Restated 1989 Non-Employee Director Stock Option Plan,
previously filed as Exhibit 10.24 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994, is incorporated herein by reference.
22
10.21 Asset Purchase Agreement dated as of February 6, 1996, among Amarillo
Hospital District, UHS of Amarillo, Inc. and Universal Health Services, Inc.,
previously filed as Exhibit 10.28 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995, is incorporated herein by reference.
10.22 1992 Stock Option Plan, as Amended, previously filed as Exhibit 10.26
to Registrant's Annual Report on Form 10-K for the year ended December 31,
1995, is incorporated herein by reference.
10.23 Stock Purchase Plan, previously filed as Exhibit 10.27 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
10.24 Asset Purchase Agreement dated as of April 19, 1996 by and among UHS
of PENNSYLVANIA, INC., a Pennsylvania corporation, and subsidiary of UNIVERSAL
HEALTH SERVICES, INC., a Delaware corporation, UHS, UHS OF DELAWARE, INC., a
Delaware corporation and subsidiary of UHS, WELLINGTON REGIONAL MEDICAL
CENTER, INC., a Florida corporation and subsidiary of UHS, FIRST HOSPITAL
CORPORATION, a Virginia corporation, FHC MANAGEMENT SERVICES, INC., a Virginia
corporation, HEALTH SERVICES MANAGEMENT, INC., a Pennsylvania corporation,
HORSHAM CLINIC, INC., d/b/a THE HORSHAM CLINIC, a Pennsylvania corporation,
CENTRE VALLEY MANAGEMENT, INC. d/b/a THE MEADOWS PSYCHIATRIC CENTER, a
Pennsylvania corporation, CLARION FHC, INC. d/b/a CLARION PSYCHIATRIC CENTER,
a Pennsylvania corporation, WESTCARE, INC., d/b/a ROXBURY, a Virginia
corporation and FIRST HOSPITAL CORPORATION OF FLORIDA, a Florida corporation,
previously filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, is incorporated herein by reference.
10.25 $36.5 million Term Note dated May 3, 1996 between Universal Health
Services, Inc., a Delaware corporation, and First Hospital Corporation,
Horsham Clinic, Inc. d/b/a Horsham Clinic, Centre Valley Management, Inc.
d/b/a The Meadows Psychiatric Center, Clarion FHC, d/b/a/ Clarion Psychiatric
Center, Westcare, Inc. d/b/a Roxbury, FHC Management Services, Inc., Health
Services Management, Inc., First Hospital Corporation of Florida, previously
filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, is incorporated herein by reference.
10.26 $7 million Term Note dated May 3, 1996 between Universal Health
Services, Inc., a Delaware corporation and First Hospital Corporation, Horsham
Clinic, Inc. d/b/a Horsham Clinic, Centre Valley Management, Inc. d/b/a The
Meadows Psychiatric Center, Clarion FHC, d/b/a Clarion Psychiatric Center,
Westcare, Inc. d/b/a Roxbury, FHC Management Services, Inc., Health Services
Management, Inc., First Hospital Corporation of Florida, previously filed as
Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996, is incorporated herein by reference.
10.27 Amendment No. 2 to Credit Agreement, dated as of May 10, 1996, among
Universal Health Services, Inc., Certain Participating Banks and Morgan
Guaranty Trust Company of New York, as Agent.
11. Statement re: computation of per share earnings.
22. Subsidiaries of Registrant.
24. Consent of Independent Public Accountants.
27. Financial Data Schedule.
Exhibits, other than those incorporated by reference, have been included in
copies of this Report filed with the Securities and Exchange Commission.
Stockholders of the Company will be provided with copies of those exhibits
upon written request to the Company.
23
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Universal Health Services, Inc.
By: /s/ Alan B. Miller
---------------------------------
ALAN B. MILLER
PRESIDENT
March 3, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Alan B. Miller Chairman of the March 3, 1997
- ------------------------------------- Board, President
ALAN B. MILLER and Director
(Principal
Executive Officer)
/s/ Sidney Miller Secretary and March 5, 1997
- ------------------------------------- Director
SIDNEY MILLER
/s/ Anthony Pantaleoni Director March 5, 1997
- -------------------------------------
ANTHONY PANTALEONI
/s/ Martin Meyerson Director March 5, 1997
- -------------------------------------
MARTIN MEYERSON
/s/ Robert H. Hotz Director March 5, 1997
- -------------------------------------
ROBERT H. HOTZ
/s/ John H. Herrell Director March 5, 1997
- -------------------------------------
JOHN H. HERRELL
/s/ Paul R. Verkuil Director March 5, 1997
- -------------------------------------
PAUL R. VERKUIL
/s/ Kirk E. Gorman Senior Vice March 4, 1997
- ------------------------------------- President and Chief
KIRK E. GORMAN Financial Officer
/s/ Steve Filton Vice President, March 4, 1997
- ------------------------------------- Controller and
STEVE FILTON Principal
Accounting Officer
24
UNIVERSAL HEALTH SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(ITEM 14(A))
Consolidated Financial Statements:
Report of Independent Public Accountants on Consolidated Financial State-
ments and Schedule...................................................... 26
Consolidated Statements of Income for the three years ended December 31,
1996.................................................................... 27
Consolidated Balance Sheets as of December 31, 1996 and 1995.............. 28
Consolidated Statements of Cash Flows for the three years ended December
31, 1996................................................................ 29
Consolidated Statements of Common Stockholders' Equity for the three
years ended December 31, 1996........................................... 30
Notes to Consolidated Financial Statements................................ 31
Supplemental Financial Statement Schedule II: Valuation and Qualifying
Accounts................................................................ 46
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Universal Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of Universal
Health Services, Inc. (Delaware corporation) and subsidiaries as of December
31, 1996 and 1995, and the related consolidated statements of income, common
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Universal
Health Services, Inc. and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Financial Statements and Financial Statement Schedule is presented for the
purpose of complying with the Securities and Exchange Commission's rules and
is not a required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, PA
February 12, 1997
26
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
-------------- ------------ ------------
Net revenues......................... $1,190,210,000 $931,126,000 $782,199,000
Operating charges
Operating expenses................. 458,063,000 361,049,000 298,108,000
Salaries and wages................. 420,525,000 329,939,000 286,297,000
Provision for doubtful accounts.... 96,872,000 76,905,000 58,347,000
Depreciation & amortization........ 71,941,000 51,371,000 42,383,000
Lease and rental expense........... 37,484,000 36,068,000 34,097,000
Interest expense, net.............. 21,258,000 11,195,000 6,275,000
Nonrecurring charges............... 4,063,000 11,610,000 9,763,000
-------------- ------------ ------------
Total operating charges.......... 1,110,206,000 878,137,000 735,270,000
-------------- ------------ ------------
Income before income taxes........... 80,004,000 52,989,000 46,929,000
Provision for income taxes........... 29,333,000 17,505,000 18,209,000
-------------- ------------ ------------
Net income........................... $ 50,671,000 $ 35,484,000 $ 28,720,000
============== ============ ============
Earnings per common & common share
equivalents......................... $ 1.64 $ 1.26 $ 1.01
============== ============ ============
Weighted average number of common
shares and equivalents.............. 30,848,000 28,158,000 28,778,000
============== ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
27
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-------------------------
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................ $ 288,000 $ 34,000
Accounts receivable, net............................. 145,364,000 114,163,000
Supplies............................................. 22,019,000 18,207,000
Deferred income taxes................................ 12,313,000 18,989,000
Other current assets................................. 13,969,000 5,529,000
------------ ------------
Total current assets................................ 193,953,000 156,922,000
PROPERTY AND EQUIPMENT
Land................................................. 63,503,000 36,055,000
Buildings and improvements........................... 465,781,000 348,182,000
Equipment............................................ 257,170,000 206,193,000
Property under capital lease......................... 27,243,000 27,415,00
------------ ------------
813,697,000 617,845,000
Less accumulated depreciation........................ 271,936,000 248,540,000
------------ ------------
541,761,000 369,305,000
Construction in progress............................. 25,867,000 23,683,000
------------ ------------
567,628,00 392,988,000
OTHER ASSETS
Excess of cost over fair value of net assets
acquired............................................ 150,336,000 136,206,000
Deferred income taxes................................ 9,993,000 17,283,000
Deferred charges..................................... 11,237,000 11,466,000
Other................................................ 32,648,000 33,186,000
------------ ------------
204,214,000 198,141,000
------------ ------------
$965,795,000 $748,051,000
============ ============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt................. $ 6,866,000 $ 7,125,000
Accounts payable..................................... 57,117,000 52,855,000
Accrued liabilities
Compensation and related benefits................... 27,278,000 20,470,000
Interest............................................ 4,899,000 5,513,000
Other............................................... 43,147,000 47,180,000
Federal and state taxes............................. 772,000 1,874,000
------------ ------------
Total current liabilities........................... 140,079,000 135,017,000
OTHER NONCURRENT LIABILITIES......................... 97,102,000 78,248,000
LONG-TERM DEBT....................................... 275,634,000 237,086,000
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY
Class A Common Stock, voting, $.01 par value;
authorized 12,000,000 shares; issued and outstanding
2,060,929 shares in 1996 and 1,090,527 in 1995...... 21,000 11,000
Class B Common Stock, limited voting, $.01 par value;
authorized 50,000,000 shares; issued and outstanding
29,816,153 shares in 1996 and 12,658,818 in 1995.... 298,000 127,000
Class C Common Stock, voting, $.01 par value;
authorized 1,200,000 shares; issued and outstanding
207,230 shares in 1996 and 109,622 in 1995.......... 2,000 1,000
Class D Common Stock, limited voting, $.01 par value;
authorized 5,000,000 shares; issued and outstanding
36,805 shares in 1996 and 20,503 in 1995............ -- --
Capital in excess of par value, net of deferred
compensation of $377,000 in 1996 and $941,000 in
1995................................................ 194,308,000 89,881,000
Retained earnings.................................... 258,351,000 207,680,000
------------ ------------
452,980,000 297,700,000
------------ ------------
$965,795,000 $748,051,000
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
28
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------------
1996 1995 1994
--------------------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................... $ 50,671,000 $ 35,484,000 $ 28,720,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization...... 71,941,000 51,371,000 42,383,000
Provision for self-insurance
reserves.......................... 15,874,000 14,291,000 10,810,000
Other non-cash charges............. 4,063,000 11,610,000 9,763,000
Changes in assets and liabilities,
net of effects from acquisitions and
dispositions:
Accounts receivable................ (93,000) (5,125,000) (4,380,000)
Accrued interest................... (614,000) 3,071,000 (805,000)
Accrued and deferred income taxes.. 15,699,000 (20,826,000) (9,944,000)
Other working capital accounts..... 3,434,000 10,944,000 1,710,000
Other assets and deferred charges.. (5,125,000) (3,982,000) (3,064,000)
Other.............................. (2,722,000) 3,390,000 (42,000)
Payments made in settlement of
self-insurance claims............. (7,872,000) (8,479,000) (14,527,000)
------------- ------------ ------------
Net cash provided by operating
activities.......................... 145,256,000 91,749,000 60,624,000
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions..... (105,728,000) (60,734,000) (43,998,000)
Disposition of assets................ 1,765,000 2,321,000 1,132,000
Acquisition of properties previously
leased.............................. -- -- (5,771,000)
Acquisition of businesses............ (168,429,000) (187,865,000) (16,794,000)
Note receivable related to
acquisition......................... (7,000,000) -- --
Acquisition of assets held for
lease............................... -- (3,561,000) (9,059,000)
Disposition of businesses............ -- 19,495,000 3,791,000
Other investments.................... -- -- (1,079,000)
------------- ------------ ------------
Net cash used in investing
activities.......................... (279,392,000) (230,344,000) (71,778,000)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowings, net of
financings costs.................... 41,800,000 149,323,000 45,469,000
Reduction of long-term debt.......... (7,699,000) (12,009,000) (21,981,000)
Issuance of common stock............. 100,289,000 535,000 1,026,000
Repurchase of common shares.......... -- -- (13,149,000)
------------- ------------ ------------
Net cash provided by financing
activities.......................... 134,390,000 137,849,000 11,365,000
------------- ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................... 254,000 (746,000) 211,000
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD........................... 34,000 780,000 569,000
------------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.............................. $ 288,000 $ 34,000 $ 780,000
============= ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid........................ $ 21,872,000 $ 8,124,000 $ 7,080,000
Income taxes paid, net of refunds.... $ 13,634,000 $ 38,331,000 $ 28,153,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
See Notes 2 and 6
The accompanying notes are an integral part of these consolidated financial
statements.
29
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
CAPITAL IN
CLASS A CLASS B CLASS C CLASS D EXCESS OF RETAINED
COMMON COMMON COMMON COMMON PAR VALUE EARNINGS TOTAL
------- -------- ------- ------- ------------ ------------ ------------
Balance January 1,
1994................... $11,000 $122,000 $1,000 $-- $ 80,878,000 $143,476,000 $224,488,000
Common Stock
Issued................ -- 9,000 -- -- 20,308,000 -- 20,317,000
Repurchased........... -- (5,000) -- -- (13,144,000) -- (13,149,000)
Amortization of deferred
compensation........... -- -- -- -- 277,000 -- 277,000
Cancellation of stock
grant.................. -- -- -- -- (24,000) -- (24,000)
Net income.............. -- -- -- -- -- 28,720,000 28,720,000
------- -------- ------ ---- ------------ ------------ ------------
Balance January 1,
1995................... 11,000 126,000 1,000 -- 88,295,000 172,196,000 260,629,000
Common Stock Issued..... -- 1,000 -- -- 1,117,000 -- 1,118,000
Amortization of deferred
compensation........... -- -- -- -- 469,000 -- 469,000
Net income.............. -- -- -- -- -- 35,484,000 35,484,000
------- -------- ------ ---- ------------ ------------ ------------
Balance January 1,
1996................... 11,000 127,000 1,000 -- 89,881,000 207,680,000 297,700,000
Common Stock
Issued................ -- 42,000 -- -- 103,871,000 -- 103,913,000
Converted............. (1,000) 1,000 -- -- -- -- --
Stock dividend........ 11,000 128,000 1,000 -- (140,000) -- --
Amortization of deferred
compensation........... -- -- -- -- 696,000 -- 696,000
Net income.............. -- -- -- -- -- 50,671,000 50,671,000
------- -------- ------ ---- ------------ ------------ ------------
Balance,
December 31, 1996...... $21,000 $298,000 $2,000 $-- $194,308,000 $258,351,000 $452,980,000
======= ======== ====== ==== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Universal
Health Services, Inc. (the "Company"), its majority-owned subsidiaries and
partnerships controlled by the Company as the managing general partner. All
significant intercompany accounts and transactions have been eliminated. The
more significant accounting policies follow:
NATURE OF OPERATIONS: The principal business of the Company is owning and
operating acute care hospitals, behavioral health centers, ambulatory surgery
centers and radiation oncology centers. At December 31, 1996, the Company
operated 35 hospitals, consisting of 14 acute care hospitals, 20 behavioral
health centers and one women's center, in Arkansas, California, Florida,
Georgia, Illinois, Louisiana, Massachusetts, Michigan, Missouri, Nevada,
Oklahoma, Pennsylvania, South Carolina, Texas and Washington. The Company, as
part of its Ambulatory Treatment Centers Division owns outright, or in
partnership with physicians, and operates or manages 27 surgery and radiation
oncology centers located in 15 states.
Services provided by the Company's hospitals include general surgery,
internal medicine, obstetrics, emergency room care, radiology, diagnostic
care, coronary care, pediatric services and behavioral health services. The
Company provides capital resources as well as a variety of management services
to its facilities, including central purchasing, data processing, finance and
control systems, facilities planning, physician recruitment services,
administrative personnel management, marketing and public relations.
Net revenues from the Company's acute care hospitals, ambulatory and
outpatient treatment centers and women's center accounted for 85%, 86% and 85%
of consolidated net revenues in 1996, 1995 and 1994, respectively.
NET REVENUES: Net revenues are reported at the estimated net realizable
amounts from patients, third-party payors, and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements
with third-party payors. These net revenues are accrued on an estimated basis
in the period the related services are rendered and adjusted in future periods
as final settlements are determined. Medicare and Medicaid net revenues
represented 50%, 48% and 45% of net patient revenues for the years 1996, 1995
and 1994, respectively.
CONCENTRATION OF REVENUES: Valley Hospital Medical Center, McAllen Medical
Center and Manatee Memorial Hospital contributed 13%, 16% and 11% of the
Company's net revenues in 1996, respectively. On a pro forma basis, assuming
the acquisitions described in Note 2 had been completed as of January 1, 1996,
Valley, McAllen and Manatee would have contributed 12%, 15% and 10%,
respectively, of the Company's net revenues in 1996.
ACCOUNTS RECEIVABLE: Accounts receivable are recorded at the estimated net
realizable amounts from patients, third-party payors and others for services
rendered, net of contractual allowances and net of allowance for doubtful
accounts of $30,398,000 and $49,016,000 in 1996 and 1995, respectively.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Expenditures for renewals and improvements are charged to the property
accounts. Replacements, maintenance and repairs which do not improve or extend
the life of the respective asset are expensed as incurred. The Company removes
the cost and the related accumulated depreciation from the accounts for assets
sold or retired and the resulting gains or losses are included in the results
of operations.
Depreciation is provided on the straight-line method over the estimated
useful lives of buildings and improvements (twenty to forty years) and
equipment (five to fifteen years).
31
OTHER ASSETS: The excess of cost over fair value of net assets acquired in
purchase transactions, net of accumulated amortization of $74,654,000 in 1996
and $59,957,000 in 1995, is amortized using the straight-line method over
periods ranging from five to forty years.
During 1994, the Company established an employee life insurance program
covering approximately 2,200 employees. At December 31, 1996 and 1995, the
cash surrender value of the policies ($103 million and $34 million,
respectively) were recorded net of related loans ($102 million and $34
million, respectively) and is included in other assets.
LONG-LIVED ASSETS: It is the Company's policy to review the carrying value
of long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable.
In 1995, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of." The Statement
requires the recognition of an impairment loss for an asset held for use when
the estimate of undiscounted future cash flows expected to be generated by the
asset is less than its carrying amount.
Measurement of the impairment loss is based on fair value of the asset.
Generally, fair value will be determined using valuation techniques such as
the present value of expected future cash flows.
INCOME TAXES: The Company and its subsidiaries file consolidated Federal tax
returns. Deferred taxes are recognized for the amount of taxes payable or
deductible in future years as a result of differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
OTHER NONCURRENT LIABILITIES: Other noncurrent liabilities include the long-
term portion of the Company's professional and general liability and workers'
compensation reserves, pension liability and minority interests in majority
owned subsidiaries and partnerships.
EARNINGS PER COMMON AND COMMON SHARE EQUIVALENTS: Earnings per share are
based on the weighted average number of common shares outstanding during the
year adjusted to give effect to common stock equivalents. In April 1996, the
Company declared a two-for-one stock split in the form of a 100% stock
dividend which was paid in May, 1996. All classes of common stock participated
on a pro rata basis. The weighted average number of common shares and
equivalents and earnings per common and common equivalent share for all years
presented have been adjusted to reflect the two-for-one stock split. The 1994
earnings per share have been adjusted to reflect the assumed conversion of the
Company's convertible debentures. In April 1994, the Company redeemed the
debentures which reduced the fully diluted number of shares outstanding by
902,466.
STATEMENT OF CASH FLOWS: For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents. Interest expense in
the consolidated statements of income is net of interest income of $173,000,
$567,000 and $266,000 in 1996, 1995 and 1994, respectively.
INTEREST RATE SWAP AGREEMENTS: In managing interest rate exposure, the
Company at times enters into interest rate swap agreements. When interest
rates change, the differential to be paid or received is accrued as interest
expense and is recognized over the life of the agreements. Gains and losses on
terminated interest rate swap agreements are amortized into income over the
remaining life of the underlying debt obligation or the remaining life of the
original swap, if shorter.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair values of the Company's
registered debt, interest rate swap agreements and investments are based on
quoted market prices. The carrying amounts reported in the balance sheet for
cash, accrued liabilities, and short-term borrowings approximates their fair
values due to the short-term nature of these instruments. Accordingly, these
items have been excluded from the fair value disclosures included elsewhere in
these notes to consolidated financial statements.
32
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
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. Actual results could differ from those estimates.
2) ACQUISITIONS AND DIVESTITURES
1996 -- During the second quarter, the Company completed the acquisition of
Northwest Texas Healthcare Systems, ("Northwest Texas") a 357-bed medical
complex located in Amarillo, Texas for $126 million in cash. The assets
acquired include the real and personal property, working capital and tangible
assets. The Company also will be required to pay additional consideration to
the seller equal to 15% of any amount of the hospital's earnings before
depreciation, interest and taxes in excess of $24 million in each year of the
seven year period ending March 31, 2003. In addition, under the terms of the
agreement, the seller will pay the Company $8 million per year for the first
four years and $6 million per year (subject to certain adjustments for
inflation) for up to an additional 36 years to help support the cost of
medical services to indigent patients.
During the second quarter, the Company acquired four behavioral health
centers located in Pennsylvania, management contracts for seven other
behavioral health centers and 33 acres of land adjacent to the Company's
Wellington Regional Medical Center, for $39 million. The Company will be
required to pay additional consideration of up to $8 million contingent upon
the facilities' combined earnings before interest, taxes, depreciation and
amortization, ("EBITDA") for the 12 month period commencing May 1, 1996. In
connection with this transaction, the Company loaned the seller $7 million
which is secured by the stock of a subsidiary of the seller. The loan is due
September 1997 and is included in other current assets.
During the third quarter of 1996 , the Company acquired a 164-bed behavioral
health center located in Texas for $3 million. Also during the fourth quarter
of 1996, as a result of divestiture negotiations with a third party regarding
one of the Company's ambulatory treatment centers, the Company recorded a $2.9
million charge to write-down the carrying value of the center to its net
realizable value. The Company expects this divestiture to be completed during
the first quarter of 1997.
The acquisitions mentioned above have been accounted for using the purchase
method of accounting. The excess of cost over fair value of net tangible
assets relating to these acquisitions are being amortized over a 15-year
period. Operating results of the acquired facilities have been included in the
financial statements from the date of acquisition. The aggregate purchase
price of $168 million has been allocated to assets and liabilities based on
their estimated fair values as follows:
AMOUNT
(000S)
--------
Working capital, net.............................................. $ 25,000
Land.............................................................. 9,000
Buildings & equipment............................................. 110,000
Goodwill.......................................................... 24,000
--------
Total Purchase Price.............................................. $168,000
========
Assuming the 1996 acquisitions had been completed as of January 1, 1996, the
unaudited pro forma net revenues and net income for the year ended December
31, 1996 would have been approximately $1.3 billion and $53.4 million,
respectively. In addition, the unaudited pro forma earnings per share would
have been $1.73. Assuming the 1996 acquisitions and the 1995 acquisitions of
Aiken Regional Medical Centers and Manatee Memorial Hospital had been
completed as of January 1, 1995, the unaudited pro forma net revenues and net
income for the year ended December 31, 1995 would have been approximately $1.2
billion and $46.5 million, respectively. In addition, the unaudited pro forma
earnings per share would have been $1.44. The unaudited pro forma financial
information may not be indicative of results that would have been reported if
the acquisitions
33
had occurred at the beginning of the earliest period presented and may not be
indicative of future operating results.
1995 -- During the second quarter, the Company acquired an 82-bed behavioral
health facility located in South Attleboro, Massachusetts for approximately $3
million. The Company also purchased for approximately $2 million, a majority
interest in two separate partnerships which own and operate outpatient surgery
centers located in Fayetteville, Arkansas and Somersworth, New Hampshire.
During the third quarter, the Company completed the acquisition of Aiken
Regional Medical Centers, ("Aiken") a 225-bed acute care facility located in
Aiken, South Carolina for approximately $44 million in cash, a 104-bed acute
care hospital and a 126-bed acute care hospital. The majority of the real
estate assets of the 126-bed facility were being leased from Universal Health
Realty Income Trust (the "Trust") pursuant to the terms of an operating lease
which was scheduled to expire in 2000. In exchange for the real estate assets
of the 126-bed acute care hospital, the Company exchanged substitute
properties consisting of additional real estate assets owned by the Company
but related to three acute care facilities owned by the Trust and operated by
the Company. As a result of the divestiture of the two acute care hospitals in
connection with the acquisition of Aiken Regional Medical Centers, the Company
recorded a $2.7 million and a $4.3 million pre-tax charge in the 1995 and 1994
consolidated statements of income, respectively.
During the third quarter, the Company completed the acquisition of Manatee
Memorial Hospital, ("Manatee") a 512-bed acute care hospital located in
Bradenton, Florida for approximately $139 million in cash and assumption of
net liabilities of approximately $4 million.
During the fourth quarter, the Company sold the operations and substantially
all the assets of Universal Medical Center, a 202-bed acute care hospital
located in Plantation, Florida for cash proceeds of approximately $20 million.
The sale resulted in a pre-tax gain of approximately $5 million which has been
included in nonrecurring charges in the 1995 consolidated statement of income.
Operating results of Aiken and Manatee have been included in the financial
statements from their respective dates of acquisition. Assuming the Aiken and
Manatee acquisitions had been completed as of January 1, 1995 the unaudited
pro forma net revenues and net income would have been approximately $1 billion
and $37.9 million, respectively. In addition, the unaudited pro forma earnings
per share would have been $1.35. Operating results for Edinburg Hospital, a
112-bed acute care facility located in Edinburg, Texas, have been included in
the financial statements from the date of acquisition (November 1994).
Assuming the Aiken, Manatee and Edinburg acquisitions had been completed as of
January 1, 1994 the unaudited pro forma net revenues and net income would have
been $952 million and $32.0 million, respectively. In addition, the unaudited
pro forma earnings per share would have been $1.13. The unaudited pro forma
financial information may not be indicative of results that would have been
reported if the acquisitions had occurred at the beginning of the earliest
period presented and may not be indicative of future operating results.
The excess of cost over fair value of net tangible assets acquired in the
1995 purchase transactions is amortized using the straight-line method over
fifteen years.
1994 -- During 1994 the Company purchased majority interests in two separate
partnerships which own and operate outpatient surgery facilities. One of these
partnerships was merged with an existing partnership in which the Company held
a majority ownership. The Company also agreed to manage the operations of, and
purchased a majority interest in, these separate partnerships which lease
fixed assets to four radiation therapy centers located in Kentucky. In
addition, the Company purchased one radiation center and majority interests in
two separate partnerships which own and operate radiation therapy centers.
Total consideration for these acquisitions was $14.5 million in cash, and the
assumption of liabilities totaling $3.0 million.
In November 1994, the Company acquired a 112-bed acute care hospital located
in Edinburg, Texas for net cash of approximately $11.3 million and the
assumption of liabilities totaling $2.2 million. In connection with
34
this acquisition, the Company committed to invest at least an additional $30
million, over a ten year period, to renovate the existing facility and
construct an additional facility. As of December 31, 1996, the Company spent
$8 million on the construction of a 130-bed replacement facility which will
cost a total of approximately $24 million when completed.
3) LONG-TERM DEBT
A summary of long-term debt follows:
DECEMBER 31
-------------------------
1996 1995
------------ ------------
Long-term debt:
Notes payable (including obligations under capi-
talized leases of $10,542,000 in 1996 and
$14,220,000 in 1995) with varying maturities
through 2001; weighted average interest at 6.8%
in 1996 and 6.9% in 1995 (see Note 6 regarding
capitalized leases) ............................. $17,887,000 $20,443,000
Mortgages payable, interest at 6.0% to 9.0% with
varying maturities through 2000.................. 1,618,000 2,184,000
Revolving credit and demand notes................. 60,750,000 21,450,000
Commercial paper.................................. 50,000,000 48,000,000
Revenue bonds:
interest at floating rates ranging from 3.1% to
3.2% at December 31, 1996 with varying maturi-
ties through 2015.............................. 18,200,000 18,200,000
8.75% Senior Notes due 2005, net of the unamor-
tized discount of $955,000 in 1996 and
$1,066,000 in 1994............................. 134,045,000 133,934,000
------------ ------------
282,500,000 244,211,000
Less--Amounts due within one year................. 6,866,000 7,125,000
------------ ------------
$275,634,000 $237,086,000
============ ============
The Company has $135 million of Senior Notes outstanding which have an 8.75%
coupon rate and which mature on August 15, 2005. The Notes can be redeemed in
whole or in part, at any time on or after August 15, 2000, initially at a
price of 102%, declining ratably to par on or after August 15, 2002. The
interest on the bonds will be paid semiannually in arrears on February 15 and
August 15 of each year. In anticipation of the Senior Note issuance, the
Company entered into interest rate swaps agreements having a total notional
principal amount of $100 million to hedge the interest rate on the Notes.
These interest rate swaps were terminated simultaneously with the issuance of
the Notes at which time the Company paid a net termination fee of $5.4 million
which is being amortized ratably over the ten year term of the Senior Notes.
The effective rate on the Notes including the amortization of swap termination
fees and bond discount is 9.2%.
The Company amended its unsecured non-amortizing revolving credit agreement
in 1996 to enable it to complete the acquisition of Northwest Texas Healthcare
Systems in Amarillo, Texas. The amended agreement, which expires on March 31,
2000, provides for $225 million of borrowing capacity, subject to certain
conditions, until March 31, 1998, $210 million until March 31, 1999 and $185
million until March 31, 2000. The agreement provides for interest, at the
Company's option at the prime rate, certificate of deposit rate plus 5/8% to 1
1/8% or Euro-dollar plus 1/2% to 1%. A fee ranging from 1/8% to 3/8% is
required on the unused portion of this commitment. The margins over the
certificate of deposit, the Euro-dollar rates and the commitment fee are based
upon specified leverage and coverage ratios. At December 31, 1996 the
applicable margins over the certificate of deposit and the Euro-dollar rate
were 7/8% and 3/4%, respectively, and the commitment fee was 1/4%. There are
no compensating balance requirements. The agreement contains a provision
whereby 50% of the net consideration, in excess of $25 million, from the
disposition of assets will be applied to reduce commitments unless such net
consideration is reinvested in newly acquired capital over a twelve month
period. At December 31, 1996, the Company had $164 million of unused borrowing
capacity available under the revolving credit agreement.
35
The average amounts outstanding during 1996, 1995 and 1994 under the
revolving credit and demand notes and commercial paper program were
$108,125,000, $46,984,000 and $16,324,000, respectively, with corresponding
effective interest rates of 6.9%, 8.0% and 7.9% including commitment fees. The
maximum amounts outstanding at any month-end were, $220,700,000, $79,450,000
and $47,450,000 during 1996, 1995 and 1994, respectively.
A large portion of the Company's accounts receivable are pledged as
collateral to secure its $50 million, daily valued commercial paper program.
The Company has sufficient patient receivables to support a larger program,
and upon the mutual consent of the Company and the participating lending
institutions, the commitment can be increased to $100 million. A commitment
fee of .76% is required on this $50 million commitment. This annually
renewable program is scheduled to expire on October 30, 1997. Outstanding
amounts of commercial paper that can be refinanced through available
borrowings under the Company's revolving credit agreement are classified as
long-term.
At December 31, 1996, the Company had no outstanding interest rate swap
agreements. As of December 31, 1995 the Company had one interest rate swap
agreement outstanding which fixed interest on $10 million notional principal
at 9.02%. The effective interest rate on the Company's revolving credit,
demand notes and commercial paper program including the interest rate swap
expense incurred on now expired interest rate swaps was 6.9%, 8.4% and 16.1%
during 1996, 1995 and 1994, respectively. Additional interest expense recorded
as a result of the Company's hedging activity was $47,000, $209,000 and
$1,981,000 in 1996, 1995 and 1994, respectively.
Covenants relating to long-term debt require maintenance of a minimum net
worth, specified debt to total capital, debt to EBITDA and fixed charge
coverage ratios. Covenants also limit the Company's ability to incur
additional senior debt and to pay cash dividends and repurchase its shares and
limit capital expenditures, among other restrictions. The Company is in
compliance with all required covenants as of December 31, 1996.
The fair value of the Company's long-term debt at December 31, 1996 and 1995
was approximately $282.5 million and $247.3 million, respectively.
Aggregate maturities follow:
---------------------------------------------
1997 $ 6,866,000
1998 4,494,000
1999 3,289,000
2000 115,252,000
2001 168,000
Later 152,431,000
---------------------------------------------
Total $282,500,000
---------------------------------------------
4) COMMON STOCK
In April, 1996 the Company declared a two-for-one stock split in the form of
a 100% stock dividend which was paid on May 17, 1996 to shareholders of record
as of May 6, 1996. All classes of common stock participated on a pro rata
basis. All references to share quantities and share prices shown below have
been adjusted to reflect the two-for-one stock split. In June 1996, the
Company issued four million shares of its Class B Common Stock at a price of
$26 per share. The total net proceeds of approximately $99.1 million generated
from this offering were used to partially finance the purchase transactions
mentioned in Note 2.
36
At December 31, 1996, 6,164,881 shares of Class B Common Stock were reserved
for issuance upon conversion of shares of Class A, C and D Common Stock
outstanding, for issuance upon exercise of options to purchase Class B Common
Stock, and for issuance of stock under other incentive plans. Class A, C and D
Common Stock are convertible on a share for share basis into Class B Common
Stock.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123
encourages a fair value based method of accounting for employee stock options
and similar equity instruments, which generally would result in the recording
of additional compensation expense in an entity's financial statements. The
Statement also allows an entity to continue to account for stock-based
employee compensation using the intrinsic value for equity instruments using
APB Opinion No. 25. The Company has adopted the disclosure-only provisions of
SFAS 123. Accordingly, no compensation cost has been recognized for the stock
option plans. Had compensation expense for the various stock option plans been
determined consistent with the provisions of SFAS 123, the Company's net
earnings and earnings per share would have been the pro forma amounts
indicated below:
YEAR ENDED DECEMBER 31
-----------------------
1996 1995
----------- -----------
Net Income:
As Reported........................................... $50,671,000 $35,484,000
Pro Forma............................................. $50,217,000 $35,382,000
Earnings Per Share:
As Reported........................................... $ 1.64 $ 1.26
Pro Forma............................................. $ 1.63 $ 1.26
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following range of assumptions
used for the nine option grants which occurred during 1996 and 1995:
YEAR ENDED DECEMBER 31
-----------------------
1996 1995
----------- -----------
Volatility.............................................. 26% - 30% 22% - 25%
Interest rate........................................... 6% - 7% 5% - 7%
Expected life (years)................................... 4.1 4.1
Forfeiture rate......................................... 3% 3%
Stock-based compensation costs on a pro forma basis would have reduced
pretax income by $735,000 ($454,000 after tax) and $165,000 ($102,000 after
tax) in 1996 and 1995, respectively. Because the SFAS 123 method of accounting
has not been applied to options granted prior to January 1, 1995, the
resulting pro forma disclosures may not be representative of that to be
expected in future years.
37
Stock options to purchase Class B Common Stock have been granted to
officers, key employees and directors of the Company under various plans.
Information with respect to these options is summarized as follows:
AVERAGE
NUMBER OPTION RANGE
OUTSTANDING OPTIONS OF SHARES PRICE (HIGH-LOW)
- ------------------- --------- ------- --------------
Balance, January 1, 1994...................... 328,674 $ 6.27 $ 7.50--$ 3.63
Granted..................................... 1,121,500 $11.03 $12.75--$ 9.81
Exercised................................... (31,976) $ 5.49 $ 7.50--$ 3.69
Cancelled................................... (11,000) $ 8.32 $ 9.81--$ 6.94
--------- ------ --------------
Balance, January 1, 1995...................... 1,407,198 $10.06 $12.75--$ 3.63
Granted..................................... 621,000 $16.48 $17.00--$13.06
Exercised................................... (48,926) $ 8.05 $11.13--$ 3.63
Cancelled................................... (9,750) $ 9.24 $11.13--$ 6.94
--------- ------ --------------
Balance, January 1, 1996...................... 1,969,522 $12.14 $17.00--$ 5.56
Granted..................................... 54,100 $24.40 $25.13--$22.94
Exercised................................... (467,974) $ 9.43 $16.56--$ 5.56
Cancelled................................... (21,600) $ 9.76 $11.13--$ 6.94
--------- ------ --------------
Balance, December 31, 1996.................... 1,534,048 $13.43 $25.13--$ 5.69
========= ====== ==============
All stock options were granted with an exercise price equal to the fair
market value on the date of the grant. Options are exercisable ratably over a
four year period beginning one year after the date of the grant. The options
expire five years after the date of the grant. The outstanding stock options
at December 31, 1996 have an average remaining contractual life of 3.2 years.
At December 31, 1996, options for 961,950 shares were available for grant. At
December 31, 1996, options for 465,350 shares of Class B Common Stock with an
aggregate purchase price of $5,556,478 (average of $11.94 per share) were
exercisable. In connection with the stock option plan, the Company provides
the optionee with a loan to cover the tax liability incurred upon exercise of
the options. The Company recorded compensation expense of $3.9 million in
1996, $118,000 in 1995 and $29,000 in 1994 in connection with this loan
program.
In addition to the stock option plan the Company has the following stock
incentive and purchase plans: (i) a Stock Compensation Plan which expires in
November, 2004 under which Class B Common Shares may be granted to key
employees, consultants and independent contractors (officers and directors are
ineligible); (ii) a Stock Bonus Plan pursuant to the terms of which eligible
employees may elect to receive all or part of their annual bonus in shares of
restricted stock and whereby the Company will provide a 20% match on the
portion of the bonus received in shares of restricted stock; (iii) a Stock
Ownership Plan whereby eligible employees may purchase shares of Class B
Common Stock directly from the Company at current market value and whereby the
Company will loan each eligible employee 90% of the purchase price for the
shares, subject to certain limitations, (loans are partially recourse to the
employees); (iv) a Restricted Stock Purchase Plan which allows eligible
participants to purchase shares of Class B Common Stock at par value, subject
to certain restrictions, and; (v) a Stock Purchase Plan which allows eligible
employees to purchase shares of Class B Common Stock at a ten percent
discount. The Company has reserved 2 million shares of Class B Common Stock
for issuance under these various plans and has issued 666,433 shares pursuant
to the terms of these plans as of December 31, 1996, of which 74,871, 93,348
and 82,672 became fully vested during 1996, 1995 and 1994, respectively.
Compensation expense of $2.8 million in 1996, $415,000 in 1995 and $148,000 in
1994 was recognized in connection with these plans.
During 1994, the Company repurchased 1,019,600 shares of Class B Common
Stock, at an average purchase price of $12.90 per share, or an aggregate of
approximately $13.2 million. All repurchases during 1994 were made subsequent
to March 1, 1994. The Company's ability to repurchase its shares is limited by
long-term debt covenants to $50 million plus 50% of cumulative net income
since March, 1994. Under the terms of these covenants, the Company had the
ability to repurchase an additional $104.7 million of its Common Stock as of
December 31, 1996. The repurchased shares are treated as retired.
38
5) INCOME TAXES
Components of income tax expense are as follows:
YEAR ENDED DECEMBER 31
------------------------------------
1996 1995 1994
----------- ----------- -----------
Currently payable
Federal................................. $13,888,000 $33,659,000 $27,014,000
State................................... 1,479,000 4,434,000 3,009,000
----------- ----------- -----------
15,367,000 38,093,000 30,023,000
----------- ----------- -----------
Deferred
Federal................................. 12,140,000 (17,912,000) (10,412,000)
State................................... 1,826,000 (2,676,000) (1,402,000)
----------- ----------- -----------
13,966,000 (20,588,000) (11,814,000)
----------- ----------- -----------
Total..................................... $29,333,000 $17,505,000 $18,209,000
=========== =========== ===========
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS
109). Under SFAS 109, deferred taxes are required to be classified based on
the financial statement classification of the related assets and liabilities
which give rise to temporary differences. Deferred taxes result from temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. The components of deferred taxes are as follows:
YEAR ENDED DECEMBER 31
-----------------------------
1996 1995
----------- -----------
Self-insurance reserves......................... $34,479,000 $30,401,000
Doubtful accounts and other reserves............ 2,611,000 14,185,000
State income taxes.............................. (733,000) 73,000
Other deferred tax assets....................... 2,681,000 --
Depreciable and amortizable assets.............. (16,732,000) (4,466,000)
Conversion from cash basis to accrual basis of
accounting..................................... -- (2,509,000)
Other deferred tax liabilities.................. -- (1,412,000)
----------- -----------
Total deferred taxes.......................... $22,306,000 $36,272,000
=========== =========== ===
A reconciliation between the federal statutory rate and the effective tax
rate is a follows:
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
Federal statutory rate............................. 35.0% 35.0% 35.0%
Nondeductible (deductible) depreciation,
amortization and other............................ (1.0) (4.1) 1.6
State taxes, net of Federal income tax benefit..... 2.7 2.1 2.2
------- ------- -------
Effective tax rate............................... 36.7% 33.0% 38.8%
======= ======= =======
39
In 1996 and 1995, the Company reviewed its deferred state tax balances and
as a result reduced its tax provision by $390,000 in each year. The net
deferred tax assets and liabilities are comprised as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995
------------ -----------
Current deferred taxes
Assets............................................. $ 12,474,000 $22,910,000
Liabilities........................................ (161,000) (3,921,000)
------------ -----------
Total deferred taxes-current..................... 12,313,000 18,989,000
------------ -----------
Noncurrent deferred taxes
Assets............................................. 27,297,000 21,749,000
Liabilities........................................ (17,304,000) (4,466,000)
------------ -----------
Total deferred taxes-noncurrent.................. 9,993,000 17,283,000
------------ -----------
Total deferred taxes................................. $ 22,306,000 $36,272,000
============ ===========
The assets and liabilities classified as current relate primarily to the
allowance for uncollectible patient accounts and the current portion of the
temporary differences related to self-insurance reserves and the change in
accounting method. Under SFAS 109, a valuation allowance is required when it
is more likely than not that some portion of the deferred tax assets will not
be realized. Realization is dependent on generating sufficient future taxable
income. Although realization in not assured, management believes it is more
likely than not that all the deferred tax assets will be realized.
Accordingly, the Company has not provided a valuation allowance. The amount of
the deferred tax asset considered realizable, however, could be reduced if
estimates of future taxable income during the carryforward period are reduced.
6) LEASE COMMITMENTS
Certain of the Company's hospital and medical office facilities and
equipment are held under operating or capital leases which expire through 2013
(See Note 8). Certain of these leases also contain provisions allowing the
Company to purchase the leased assets during the term or at the expiration of
the lease at fair market value.
A summary of property under capital lease follows:
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
Land, buildings and equipment.......................... $27,243,000 $27,415,000
Less: accumulated amortization......................... 17,371,000 12,867,000
----------- -----------
$ 9,872,000 $14,548,000
=========== ===========
40
Future minimum rental payments under lease commitments with a term of more
than one year as of December 31, 1996, are as follows:
CAPITAL OPERATING
YEAR LEASES LEASES
- ---- ----------- -----------
1997................................................... $ 5,216,000 $23,145,000
1998................................................... 3,094,000 20,266,000
1999................................................... 1,934,000 18,668,000
2000................................................... 1,248,000 15,131,000
2001................................................... 130,000 13,373,000
Later Years............................................ -- 7,587,000
----------- -----------
Total minimum rental................................. $11,622,000 $98,170,000
===========
Less: Amount representing interest..................... 1,080,000
-----------
Present value of minimum rental commitments............ 10,542,000
Less: Current portion of capital lease obligations..... 4,643,000
-----------
Long-term portion of capital lease obligations......... $ 5,899,000
===========
Capital lease obligations of $1,902,000, $4,961,000 and $4,654,000 in 1996,
1995 and 1994, respectively, were incurred when the Company entered into
capital leases for new equipment.
7) COMMITMENTS AND CONTINGENCIES
Most of the Company's subsidiaries are self-insured for general and
professional liability risks for claims limited to $5 million per occurrence.
Effective January 1, 1996, the Company's self-insured subsidiaries purchased
general and professional liability insurance coverage for a three year term
with a commercial insurer. These policies include coverage for claims in
excess of $5 million and limited to $25 million per occurrence and have an
unlimited aggregate. Coverage in excess of these limits up to $100 million is
maintained with other major insurance carriers. Since 1993, certain of the
Company's subsidiaries, including one of its larger acute care facilities,
have purchased general and professional liability occurrence policies with
commercial insurers. These policies include coverage up to $25 million per
occurrence for general and professional liability risks.
As of December 1996 and 1995, the reserve for professional and general
liability claims was $72.6 million and $67.2 million, respectively, of which
$13.0 million and $22.8 million in 1996 and 1995, respectively, is included in
current liabilities. Self-insurance reserves are based upon actuarially
determined estimates. These estimates are based on historical information
along with certain assumptions about future events. Changes in assumptions for
such things as medical costs as well as changes in actual experience could
cause these estimates to change in the near term.
The Company has outstanding letters of credit totalling $15.8 million
related to the Company's self-insurance programs ($8.7 million), as support
for various debt instruments ($1.3 million) and as support for a loan
guarantee for an unaffiliated party ($5.8 million). The Company has also
guaranteed approximately $500,000 of loans.
Pursuant to the terms of its 1994 acquisition of a 112-bed acute care
hospital located in Edinburg, Texas, the Company continues the construction of
a 130-bed replacement facility which is expected to be completed during the
second quarter of 1997. As of December 31, 1996, the Company spent $8 million
on this project which will cost a total of approximately $24 million when
completed. The Company has also agreed to construct a medical complex,
including a 149-bed acute care facility, in Summerlin, Nevada for a total cost
of approximately $60 million. The Company estimates the cost to complete major
construction projects in progress at December 31, 1996 will approximate $61
million.
41
The Company has entered into a long-term contract with a third party to
provide certain data processing services for its acute care and behavioral
health facilities. This contract expires in 2002.
Various suits and claims arising in the ordinary course of business are
pending against the Company. In the opinion of management, the outcome of such
claims and litigation will not materially affect the Company's consolidated
financial position or results of operations.
8) RELATED PARTY TRANSACTIONS
At December 31, 1996, the Company held approximately 8% of the outstanding
shares of Universal Health Realty Income Trust (the "Trust"). Certain officers
and directors of the Company are also officers and/or Directors of the Trust.
The Company accounts for its investment in the Trust using the equity method
of accounting. The Company's pre-tax share of income from the Trust was
$1,107,000, $1,052,000 and $1,095,000 in 1996, 1995 and 1994 respectively, and
is included in net revenues in the accompanying consolidated statements of
income. The carrying value of this investment at December 31, 1996 and 1995
was $8,391,000 and $8,468,000, respectively, and is included in other assets
in the accompanying consolidated balance sheets. The market value of this
investment at December 31, 1996 and 1995 was $14,323,000 and $12,489,000,
respectively.
As of December 31, 1996, the Company leased seven hospital facilities from
the Trust with initial terms expiring in 1999 through 2003. These leases
contain up to six 5-year renewal options. Future minimum lease payments to the
Trust are included in Note 6. The terms of the lease provide that in the event
the Company discontinues operations at the leased facility for more than one
year, the Company is obligated to offer a substitute property. If the Trust
does not accept the substitute property offered, the Company is obligated to
purchase the leased facility back from the Trust at a price equal to the
greater of its then fair market value or the original purchase price paid by
the Trust. During 1995, in exchange for the real estate assets of a 126-bed
acute care hospital divested by the Company during the year, the Company
exchanged with the Trust substitute properties consisting of additional real
estate assets owned by the Company but related to three acute care facilities
owned by the Trust and operated by the Company (See Note 2). Total rent
expense under these operating leases was $16,900,000 in 1996, $16,000,000 in
1995 and $15,700,000 in 1994. The Company received an advisory fee of
$1,044,000 in 1996, $953,000 in 1995 and $909,000 in 1994, from the Trust for
investment and administrative services provided under a contractual agreement
which is included in net revenues in the accompanying consolidated statement
of income.
A member of the Company's Board of Directors is a partner in the law firm
used by the Company as its principal outside counsel. Another member of the
Company's Board of Directors is a managing director of one of the underwriters
who performed investment banking services related to the Common Stock and
Senior Notes issued during 1996 and 1995, respectively.
9) OTHER NONRECURRING CHARGES
During the fourth quarter of 1996, as a result of divestiture negotiations
with a third party regarding one of the Company's ambulatory treatment
centers, the Company recorded a $2.9 million charge to write-down the carrying
value of the center to its net realizable value. The Company expects this
divestiture to be completed during the first quarter of 1997.
Also during the fourth quarter of 1996, the Company recorded a $1.2 million
charge to fully reserve the carrying value of one of its behavioral health
center properties which is leased to an unaffiliated third party. The lessee
is currently in default under the terms of the lease agreement. The Company
has concluded that there has been a permanent impairment in the carrying value
of this facility based on estimated future cash flows.
During 1995, the Company recorded $11.6 million of nonrecurring charges
which consisted of: (i) a $14.2 million pre-tax charge due to impairment of
long-lived assets; (ii) a $2.7 million loss on disposal of two acute
42
care facilities which were exchanged along with $44 million of cash for a 225-
bed acute care hospital, and; (iii) a $5.3 million pre-tax gain realized on
the sale of a 202-bed acute care hospital which was divested during the fourth
quarter of 1995 for cash proceeds of $19.5 million.
During 1995, the Company reviewed the impact changes in third party payment
methods, advances in medical technologies, legislative and regulatory
initiatives at the Federal and state levels along with increased competition
from other providers have had on operating margins at the Company's facilities
in recent years. These industry conditions have adversely impacted certain of
the Company's specialized facilities and certain of the Company's smaller
facilities in more competitive markets.
The increased penetration of managed care into the chemical dependency
segment of the behavioral health services market, increased competition from
acute care providers seeking to expand their service lines and the continuing
shift to partial hospitalization and outpatient treatment programs have
resulted in significant reduction in admissions and patient days at the
Company's two chemical dependency facilities. Changes in CHAMPUS regulations
and the increasing influence of managed care have led to shorter lengths of
stay for patients at the Company's two residential treatment centers. These
factors have led management to conclude that there has been a permanent
impairment in the carrying value of these four facilities in the behavioral
health services division.
Increased competition and penetration of managed care in the geographic
market where the Company ambulatory treatment centers are located have led the
management to conclude that there has been a permanent impairment in the
carrying value of these facilities. In conjunction with the development of the
Company's operating plan and 1996 budget, management assessed the current
competitive position of these facilities and estimated future cash flows
expected from these facilities. As a result, the Company recorded a $14.2
million pre-tax nonrecurring charge in the 1995 consolidated statement of
income related primarily to the write-down of the carrying value of certain
intangible and tangible assets at these facilities. In measuring the
impairment loss, the Company estimated fair value by discounting expected
future cash flows from each facility using the Company's internal hurdle rate
During 1994, nonrecurring charges of $9.8 million were recorded consisting
of the following: (i) a $4.3 million estimated loss on the disposal of two
acute care facilities which were disposed of during 1995; (ii) a $2.8 million
write-down in the carrying value of a behavioral health center owned by the
Company and leased to an unaffiliated third party which is currently in
default under the terms of the lease agreement; (iii) a $1.4 million write-
down recorded against the book value of the real property of a behavioral
health services hospital, and; (iv) $1.3 million of expenses related to the
disposition of a non-strategic business.
43
10) PENSION PLAN
The Company maintains a contributory and non-contributory retirement plan
for eligible employees. The non-contributory plan is a defined benefit pension
plan which covers employees of one of the Company's subsidiaries. Effective
December 31, 1995 accrued benefits were frozen for employees hired after July
25, 1984. A partial curtailment was recognized in the 1995 actuarial
valuation, which was not material to the consolidated financial statements.
The benefits are based on years of service and the employee's highest
compensation for any five years of employment. The Company's funding policy is
to contribute annually at least the minimum amount that should be funded in
accordance with the provisions of ERISA. The plan's funded status and amounts
recognized in the Company's balance sheet as of December 31, 1996 and 1995 are
as follows:
1996 1995
------------ ------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $32,264,000 in 1996 and $29,890,000
in 1995......................................... $ 34,811,000 $ 32,197,000
============ ============
Projected benefit obligation for service rendered
to date........................................... $(37,709,000) $(37,211,000)
Plan assets at fair value, primarily listed stock
and U.S. obligations.............................. 26,220,000 20,008,000
------------ ------------
Projected benefit obligation in excess of plan
assets............................................ (11,489,000) (17,203,000)
Unrecognized net (gain) loss from past experience
different from that assumed and effects of changes
in assumptions.................................... (1,473,000) 2,480,000
------------ ------------
Accrued pension cost............................... $(12,962,000) $(14,723,000)
============ ============
Significant actuarial assumptions used in measuring benefit obligations and
the expected return on plan assets at December 31, 1996 and 1995 are as
follows:
1996 1995
---- ----
Weighted-average discount rate................................... 7.50% 7.00%
Weighted-average rate of compensation increase................... 4.00% 4.00%
Expected rate of return on assets................................ 9.00% 9.00%
Pension expense related to this plan of $1,766,000 was recorded in 1996.
11) QUARTERLY RESULTS (UNAUDITED)
The following tables summarize the Company's quarterly financial data for
the two years ended December 31, 1996.
FIRST SECOND THIRD FOURTH
1996 QUARTER QUARTER QUARTER QUARTER
- ---- ------------ ------------ ------------ ------------
Net revenues.............. $271,616,000 $286,994,000 $303,479,000 $328,121,000
Income before income
taxes.................... $ 24,178,000 $ 19,151,000 $ 17,499,000 $ 19,176,000
Net income................ $ 15,501,000 $ 12,216,000 $ 11,285,000 $ 11,669,000
Earning per share (fully
diluted)................. $ 0.54 $ 0.42 $ 0.34 $ 0.35
Net revenues in 1996 include $17.8 million of additional revenues received
from special Medicaid reimbursement programs. Of this amount, $1.8 million was
recorded in the first quarter, $3.6 million in the second quarter, $4.7
million in the third quarter and $7.7 million in the fourth quarter. These
programs are scheduled to terminate in 1997. These amounts were recorded in
the periods that the Company met all of the requirements to be entitled to
these reimbursements. The fourth quarter results include a $1.2 million write-
down recorded against the book value of the real property of a behavioral
health facility owned by the Company and leased to an unaffiliated third
party, which is currently in default under the terms of the lease and a $2.9
million charge related to the anticipated disposition of an ambulatory
treatment center (See Note 2).
44
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
- ---- ------------ ------------ ------------ ------------
Net revenues.............. $220,715,000 $214,165,000 $234,144,000 $262,102,000
Income before income
taxes.................... $ 19,344,000 $ 14,448,000 $ 11,299,000 $ 7,898,000
Net income................ $ 11,841,000 $ 9,555,000 $ 7,229,000 $ 6,859,000
Earnings per share (fully
diluted)................. $ 0.42 $ 0.34 $ 0.26 $ 0.24
Net revenues in 1995 include $12.6 million of additional revenues received
from special Medicaid reimbursement programs. Of this amount, $3.8 million was
recorded in each of the first and second quarters, $3.1 million in the third
quarter and $1.9 million in the fourth quarter. The second quarter operating
results include a $2.7 million pre-tax charge related to the Company's
divestiture of two acute care hospitals in connection with the acquisition of
the acute care hospital located in Aiken, South Carolina (See Note 2). The
fourth quarter results include a $5.3 million gain related to the Company's
divestiture of an acute care hospital. The fourth quarter results also include
a $14.2 million pre-tax charge for an impairment loss at certain facilities
(see Note 9).
45
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
-------------------------
BALANCE AT CHARGED TO WRITE-OFF OF BALANCE
BEGINNING COSTS AND ACQUISITIONS UNCOLLECTIBLE AT END
DESCRIPTION OF PERIOD EXPENSES OF BUSINESSES ACCOUNTS OF PERIOD
----------- ----------- ----------- ------------- ------------- -----------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS RECEIVABLE:
Year ended December
31, 1996............. $49,016,000 $96,872,000 $10,324,000 $(125,814,000) $30,398,000
=========== =========== =========== ============= ===========
Year ended December
31, 1995............. $34,957,000 $76,905,000 $ 4,797,000 $ (67,643,000) $49,016,000
=========== =========== =========== ============= ===========
Year ended December
31, 1994............. $28,444,000 $58,347,000 $ -- $ (51,834,000) $34,957,000
=========== =========== =========== ============= ===========
46
INDEX TO EXHIBITS
10.4 Agreement effective January 1, 1997, to renew Advisory Agreement, dated
as of December 24, 1986, between Universal Health Realty Income Trust
and UHS of Delaware, Inc.
10.27 Amendment No. 2 to Credit Agreement, dated as of May 10, 1996, among
Universal Health Services, Inc., Certain Participating Banks and Morgan
Guaranty Trust Company of New York, as Agent.
11. Statement re: computation of per share earnings.
22. Subsidiaries of Registrant.
24. Consent of Independent Public Accountants.
27. Financial Data Schedule.
47