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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 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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
incorporation or organization) Identification Number)
UNIVERSAL CORPORATE CENTER
367 South Gulph Road
King of Prussia, Pennsylvania 19406
(Address of principal executive 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. | |
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 February
15, 1995, was 1,090,527, 12,717,959, 109,622, and 22,487, respectively.
The aggregate market value of voting stock held by non-affiliates at February
15, 1995 was $318,865,646.20. (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 1995 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1994 (incorporated by reference
under Part III).
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PART I
ITEM 1. BUSINESS
Universal Health Services, Inc., (together with its subsidiaries, the
"Company" or "UHS"), formed in 1978, is engaged principally in owning and
operating acute care hospitals, behavioral health centers, ambulatory surgery
centers and radiation oncology centers. As of December 31, 1994, the Company
operates 29 hospitals with an aggregate of 3,667 licensed beds. Of these
facilities, 15 are general acute care hospitals and 14 are psychiatric care
facilities (two of which are substance abuse facilities). In addition, the
Company, as part of its Ambulatory Treatment Centers Division, owns, in
partnership with physicians, and operates or manages surgery and radiation
therapy centers located in various states.
UHS has also entered into other specialized medical service arrangements,
laboratory services, mobile Computerized Tomography (CT) and Magnetic
Resonance Imaging (MRI) services, preferred provider organization
arrangements, health maintenance organization contracts, medical office
building leasing, construction management services and real estate management
and administrative services.
UHS 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. Each of
the hospitals and ambulatory treatment centers currently owned by the Company
provides the medical and surgical, psychiatric, or ambulatory services
typically available in such facilities. The surgery centers provide a
cost-effective alternative to inpatient care for the performance of minor
surgeries. Each facility is managed on a day-to-day basis by a managing
director employed by the Company. In addition, a Board of Governors,
including members of the facility's medical staff, governs the medical,
professional and ethical practices at each facility.
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.
The Company serves as advisor to Universal Health Realty Income Trust
("UHT"), which leases to the Company the real property of 8 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 February
15, 1995, the Company owns 7.7% of UHT's outstanding shares and has an option
to purchase UHT shares in the future at fair market value to enable it to
maintain a 5% interest.
1
RECENT DEVELOPMENTS
After several years of following its strategy of consolidation to focus on
its core operations and selective expansion in areas in which it believed
there are opportunities for growth, the Company was positioned to take
advantage of several acquisition and growth opportunities in 1994. The
Company acquired Edinburg Hospital, a 112-bed facility in Edinburg, Texas,
which it will replace with a state of the art facility while converting the
existing facility to a skilled nursing and sub-acute care facility. The
Company entered into an agreement to exchange the operations and fixed assets
of Westlake Medical Center, a 126-bed acute care facility in Westlake,
California, and Dallas Family Hospital, a 104-bed hospital in Dallas, Texas,
in addition to a cash payment, for Aiken Regional Medical Centers, a 225-bed
medical center in Aiken, South Carolina. This transaction is expected to be
consummated in the second quarter of 1995. In addition, the Company agreed to
acquire Manatee Memorial Hospital, a 512-bed acute care hospital located in
Manatee, Florida. The closing is expected to occur in the third quarter of
1995. Pending closing, the Company is managing the facility for its current
owners.
In addition, the Company is developing, along with the participation of
the Howard Hughes Corporation, a medical complex including a 120-bed
hospital, ambulatory surgery center, medical office building and diagnostic
center in the western suburbs of Las Vegas, Nevada.
In 1994, the Company continued to add to its Ambulatory Treatment Centers
Division and acquired, in partnership with physicians, additional
free-standing ambulatory surgery centers located in Palm Springs, California
and Corona, California. Also, as part of this Division, the Company acquired,
or developed, radiation oncology centers in Danville, Kentucky; Frankfort,
Kentucky; Bowling Green, Kentucky; Glasgow, Kentucky; Jeffersonville,
Indiana; Madison, Indiana; and Auburn, Washington.
The Company also selectively expanded its operations at certain of its
existing facilities: McAllen Medical Center in McAllen, Texas, opened a
free-standing radiation treatment center; River Parishes Hospital in LaPlace,
Louisiana (1) completed renovation of its emergency room and its operating
rooms; and (2) began construction of a 30,000 square foot medical office
building which is scheduled for completion in mid-August 1995; Auburn General
Hospital in Auburn, Washington, opened its new medical office building and
parking garage.
BED UTILIZATION AND OCCUPANCY RATES
The following table shows the bed utilization and occupancy rates for the
hospitals operated by the Company for the years indicated, excluding
information relating to hospitals no longer owned by the Company as of
December 31, 1994 and including the information for a 112-bed acute care
hospital located in Edinburg, Texas which was acquired by the Company during
1994. Accordingly, the information is presented on a basis different from
that used in preparing the historical financial information included in this
Report.
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
Average Licensed Beds ............... 3,628 3,559 3,464 3,378 3,281
Average Available Beds (1) .......... 3,314 3,240 3,095 3,060 2,965
Hospital Admissions ................. 91,552 84,205 80,971 80,340 75,909
Average Length of Patient Stay (Days) 6.4 6.8 7.2 7.5 7.8
Patient Days (2) .................... 588,329 570,127 583,768 605,702 590,335
Occupancy Rate (3):
Licensed Beds ...................... 44% 44% 46% 49% 49%
Available Beds ..................... 49% 48% 52% 54% 55%
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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.
2
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 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 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. Most of the company's hospitals 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.
Valley Hospital Medical Center in Las Vegas, Nevada contributed 19%, 16%
and 16% of the Company's net revenues and 35%, 32% and 32% of the Company's
earnings before interest, income taxes, depreciation, amortization, lease and
rental expense and non-recurring transactions (EBITDAR), for the three years
ended December 31, 1994, 1993 and 1992, respectively, excluding the effect of
the special Medicaid reimbursements received at one of the Company's Texas
acute care hospitals of $12.4 million, $13.5 million and $29.8 million for
the years ended December 31, 1994, 1993 and 1992, respectively. McAllen
Medical Center in McAllen, Texas contributed 21%, 18% and 16% of the
Company's net revenues and 35%, 32% and 24% of the Company's EBITDAR, for the
years ended December 31, 1994, 1993 and 1992, respectively, excluding the
special Medicaid reimbursement increases mentioned above.
The following table shows approximate percentages of gross revenue derived
by the Company's hospitals owned as of December 31, 1994 since their
respective dates of acquisition by the Company from third party sources and
from all other sources during the five years ended December 31, 1994.
PERCENTAGE OF REVENUES
----------------------------------------------------------
1994 1993 1992 1991 1990
--------- --------- --------- --------- ---------
Third Party Payors: .................
Blue Cross ......................... 2.9% 1.9% 2.0% 2.7% 2.5%
Medicare ........................... 39.4% 40.7% 41.0% 40.7% 39.4%
Medicaid ........................... 13.7% 12.3% 10.1% 8.0% 7.3%
----- ----- ----- ----- -----
TOTAL .............................. 56.0% 54.9% 53.1% 51.4% 49.2%
Other Sources (including patients and
private insurance carriers) ........ 44.0% 45.1% 46.9% 48.6% 50.8%
----- ----- ----- ----- -----
100% 100% 100% 100% 100%
3
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.
The deficit-reduction legislation passed by Congress in 1987 limits the
increases in PPS reimbursement based on the rate of inflation and the
location of hospitals. Psychiatric hospitals, which are exempt from PPS, are
cost reimbursed by the Medicare program, but are subject to a per discharge
limitation, calculated based on the hospital's first full year in the
Medicare program. Capital related costs are exempt from this limitation.
On August 30, 1991, the Health Care Financing Administration issued final
Medicare regulations establishing a prospective payment methodology 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 actual cost reimbursement 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 actual base year 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.
There have been additional proposals either proposed by the Administration
or in Congress to reduce the funds available for the Medicare and Medicaid
programs and to change the method by which hospitals are reimbursed for
services provided to Medicare and Medicaid patients, including free indigent
care. In addition, state governments may, in the future, reduce funds
available under the Medicaid programs which they fund in part or impose
additional restrictions on the utilization of hospital services. A number of
legislative initiatives were proposed in 1994, and may be proposed again in
1995, which if enacted would result in major changes in the health care
system, nationally and/or at the state level. Several of these proposals
would impose price controls on hospitals, require that all businesses offer
health insurance to their employees, expand health insurance coverage to
those presently uninsured, and limit the rate of increase in spending for
Medicare and other health care costs as part of overall deficit reduction
measures. The Company is unable to predict which bill, if any, will be
adopted, or the ultimate impact its adoption would have on the Company;
however, new legislation, if passed, could have a material adverse effect on
the Company's future revenues.
In addition to federal health reform efforts, several states have adopted
or are considering health care 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. A number
of other states are considering the enactment of managed care initiatives
designed to provide low-cost coverage.
4
The Company currently operates two psychiatric hospitals with a total of
186 beds in Massachusetts, which has mandated hospital rate-setting. The
Company also operates three hospitals containing an aggregate of 378 beds,
and manages one hospital with 512 beds, in Florida that are subject to a
mandated form of rate-setting if increases in hospital revenues per admission
exceed certain target percentages. The Company does not believe that such
regulation has had a material adverse effect on its operations.
Pursuant to Federal legislation, in general, the Federal government is
required to match state funds applied to state Medicaid programs. Several
states have initiated programs under which certain hospital providers are
taxed to generate Medicaid funds which must be matched by the Federal
government. New legislation passed by Congress on November 27, 1991, limits
each state's use of provider taxes in 1994. State programs involving provider
taxes in which UHS' hospitals are participants are in place in Texas,
Louisiana, Missouri, Nevada and Washington. Included in the Company's 1994
financial results is revenue attributable to these programs, some of which
expired in 1994. The Company cannot predict whether the remaining programs
will continue beyond the scheduled termination dates.
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.
In 1991, 1992 and 1993, the Inspector General of the Department of Health
and Human Services ("HHS") issued regulations. These regulations provide for
"safe harbors"; 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 analyzed under its particular
facts and circumstances to determine whether it violates the Medicare
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 new 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 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.
5
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 statues and regulatory mechanisms are in place in many
states in which the Company operates. These provisions govern the
distribution of health care services, the number of new and replacement
hospital beds, administer required state CON laws, contain health care 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 health care 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. The Company's facilities had
approximately 9,800 employees at December 31, 1994, of whom 7,400 were
employed full-time.
At Valley Hospital Medical Center in Las Vegas, unionized employees belong
to the Culinary Workers and Bartenders Union and the International Union of
Operating Engineers. Registered nurses at Auburn General Hospital located in
Washington State, are represented by the Washington State Nurses Association,
and the practical nurses at Auburn are represented by the United Food and
Commercial Workers. The Service Employees International Union, Local 6,
purports to have perfected an affiliation with the LPNA. That affiliation is
currently being challenged by Seattle area hospitals in Federal court. In
addition, at Auburn, 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 the Human Resource Institute in Boston are represented by the
Service Employees International Union. All full-time and regular part-time
professional employees of LaAmistad Residential Treatment Center in Maitland,
Florida are represented by the United Nurses of Florida/United Health Care
Employees Union.
6
The Company believes that its relations with its employees are
satisfactory.
COMPETITION
In most 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. In addition, certain
hospitals which are located in the areas served by the Company are special
service hospitals providing medical, surgical and psychiatric services that
are not available at the company's or other general hospitals. The
competitive position of a hospital is to a large degree dependent upon the
number and quality of staff physicians. Although a physician may at any time
terminate his or her affiliation with a hospital, the Company seeks to retain
doctors of varied specializations on its hospital staffs and to attract other
qualified doctors by improving facilities and maintaining high ethical and
professional standards. The competitive position of a hospital is also
affected by the presence of managed care organizations such as preferred
provider organizations and health maintenance organizations and indemnity
insurance programs in the hospital's service area. Such organizations
normally require a discount from a hospital's established charges. Outpatient
treatment and diagnostic facilities, outpatient surgical centers and
freestanding ambulatory surgical centers also impact the health care
marketplace. In recent years, competition among health care 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
The Company is self-insured for its general liability risks for claims
limited to $5 million per occurrence and for its professional liability risks
for claims limited to $25 million per occurrence. Coverage in excess of these
limits up to $100 million is maintained with major insurance carriers. During
1994 and 1993, the Company purchased a general and professional liability
occurrence policy with a commercial insurer for one of its larger acute care
facilities. This policy includes coverage up to $25 million per occurrence
for general and professional liability risks. Although the Company feels that
it currently has adequate insurance coverage, the commercial policies are
limited to one-year terms and require annual renegotiation or replacement.
The Company has no assurance that it will be able to maintain such insurance
in the future on terms acceptable to the Company.
7
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 (57) ....... Director, Chairman of the Board, President
and Chief Executive Officer
Kirk E. Gorman (44) ....... Senior Vice President and
Chief Financial Officer
Richard C. Wright (47) .... Vice President
Thomas J. Bender (42) ..... Vice President
Michael G. Servais (48) ... Vice President
Steve G. Filton (37) ...... Vice President and Controller
Sidney Miller (68) ........ 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 Vice President of the Company in January 1994, and
had served as 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 has served in various capacities with
the Company, including Executive Vice President since 1983, Vice President
since 1978, and Assistant to the President during 1993 and 1994. Prior
thereto, he was Vice President-Financial Services and Control of American
Medicorp, Inc.
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.
8
Hospitals and Centers
ACUTE CARE HOSPITALS
Auburn General Hospital McAllen Medical Center(1) Victoria Regional Medical
Auburn, Washington McAllen, Texas Center
149 Beds 428 Beds Victoria, Texas
Chalmette Medical Center(1) Northern Nevada Medical 154 Beds
Chalmette, Louisiana Center(3) Wellington Regional Medical
118 Beds Sparks, Nevada Center(1)
Doctors' Hospital of 150 Beds West Palm Beach, Florida
Shreveport(2) River Parishes Hospital(6) 120 Beds
Shreveport, Louisiana LaPlace and Chalmette, Aiken Regional Medical
180 Beds Louisiana Centers(9)
Edinburg Hospital 216 Beds Aiken, South Carolina
Edinburg, Texas Universal Medical Center 225 Beds
112 Beds Plantation, Florida Manatee Memorial
Inland Valley Regional 202 Beds Hospital(7)
Medical Center(1) Valley Hospital Medical Center Bradenton, Florida
Wildomar, California Las Vegas, Nevada 512 Beds
80 Beds 416 Beds
BEHAVIORAL HEALTH CENTERS
The Arbour Hospital HRI Hospital The Pavilion(8)
Boston, Massachusetts Brookline, Massachusetts Champaign, Illinois
118 Beds 68 Beds 48 Beds
The BridgeWay(1) KeyStone Center(4) River Crest Hospital
North Little Rock, Arkansas Wallingford, Pennsylvania San Angelo, Texas
70 Beds 84 Beds 80 Beds
Del Amo Hospital La Amistad Residential River Oaks Hospital
Torrance, California Treatment Center New Orleans, Louisiana
166 Beds Maitland, Florida 126 Beds
Forest View Hospital 56 Beds Turning Point Hospital(4)
Grand Rapids, Michigan Meridell Achievement Center(1) Moultrie, Georgia
62 Beds Austin, Texas 59 Beds
Glen Oaks Hospital 114 Beds Two Rivers Psychiatric Hospital
Greenville, Texas Kansas City, Missouri
53 Beds 80 Beds
AMBULATORY SURGERY CENTERS
Goldring Surgical and Outpatient Surgical Center of Surgery Center of Littleton(5)
Diagnostic Center Ponca City(5) Littleton, Colorado
Las Vegas, Nevada Ponca City, Oklahoma Surgery Center of Springfield(5)
Surgery Centers of the The Regional Cancer Center at Springfield, Missouri
Desert(5) Wellington Surgery Center of Texas(5)
Rancho Mirage, California West Palm Beach, Florida Odessa, Texas
Palm Springs, California St. George Surgical Center(5) Surgical Center of
M.D. Physicians Surgicenter St. George, Utah New Albany(5)
of Midwest City(5) The Surgery Center of New Albany, Indiana
Midwest City, Oklahoma Chalmette Surgery Center of Corona(5)
Chalmette, Louisiana Corona, California
9
RADIATION ONCOLOGY CENTERS
Auburn Regional Center for Cancer Care Glasgow Radiation Oncology Associates(8)
Auburn, Washington Glasgow, Kentucky
Bowling Green Radiation Oncology Associates(8) Madison Radiation Oncology Associates
Bowling Green, Kentucky Madison, Indiana
Capital Radiation Therapy Center(8) McAllen Medical Center Cancer Institute
Frankfort, Kentucky McAllen, Texas
Columbia Radiation Oncology Regional Cancer Center at Wellington
Washington, D.C. West Palm Beach, Florida
Danville Radiation Therapy Center(8) Southern Indiana Radiation Therapy
Danville, Kentucky Jeffersonville, Indiana
- ------
(1) Real property leased from UHT (see Item 1. Business).
(2) Real property leased with an option to purchase.
(3) General partnership interest in limited partnership.
(4) Addictive disease facility.
(5) General partnership and limited partnership interests in a limited
partnership. The real property is leased from third parties.
(6) Includes Chalmette Hospital, a 114-bed rehabilitation facility, the real
property of which is leased from UHT.
(7) Managed Hospital. The Company has agreed to acquire this facility.
(8) Managed Facility.
(9) The Company has entered into an agreement to exchange the operations and
fixed assets of Westlake Medical Center, a 126-bed acute care facility in
Westlake, California, and Dallas Family Hospital, a 104-bed hospital in
Dallas, Texas for Aiken Regional Medical Centers. The transaction is
expected to be consummated in the second quarter of 1995.
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, 1994 to a vote of security holders.
10
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 1994 1993 1992 1991 1990
- --------------------------- -------------- -------------- -------------- -------------- --------------
Summary of Operations
Net revenues ............. $782,199,000 $761,544,000 $731,227,000 $691,619,000 $674,982,000
Net income ............... $ 28,720,000 $ 24,011,000 $ 20,020,000 $ 20,319,000 $ 11,607,000
Net margin ............... 3.7% 3.2% 2.7% 2.9% 1.7%
Return on average equity . 11.8% 11.2% 10.3% 11.6% 7.1%
Financial Data
Cash provided by
operating activities ... $ 60,624,000 $ 84,640,000 $ 81,731,000 $ 47,190,000 $ 47,552,000
Capital expenditures(1)... $ 48,652,000 $ 52,690,000 $ 40,554,000 $ 29,926,000 $ 29,125,000
Total assets ............. $521,492,000 $460,422,000 $472,427,000 $500,706,000 $535,041,000
Long-term borrowings ..... $ 85,125,000 $ 75,081,000 $114,959,000 $127,235,000 $205,646,000
Common stockholders'
equity ................ $260,629,000 $224,488,000 $202,903,000 $184,353,000 $167,419,000
Percentage of total debt
to capital ............ 26% 26% 37% 49% 56%
Operating Data
Average licensed beds .... 3,543 3,682 3,562 3,656 3,801
Average available beds ... 3,241 3,345 3,229 3,320 3,428
Hospital admissions ...... 88,956 85,005 83,324 84,857 88,116
Average length of patient
stay .................. 6.5 6.8 7.2 7.6 7.5
Patient days ............. 574,311 580,398 603,893 641,607 662,873
Occupancy rate for
licensed beds ......... 44% 43% 46% 48% 48%
Occupancy rate for
available beds ........ 49% 48% 51% 53% 53%
Per Share Data
Net income ............... $ 2.02 $ 1.71 $ 1.43 $ 1.45 $ 0.84
Book value ............... $ 18.87 $ 16.69 $ 14.88 $ 13.42 $ 12.21
Common Stock
Performance
Market price of common
stock
High Low, by quarter(2)
1st .................... 26 5/8-19 1/4 16-12 5/8 15 1/2-12 3/8 14 1/4-8 1/4 10-8 1/2
2nd .................... 26 7/8-22 1/2 16 1/4-13 13 7/8-11 1/8 15 7/8-13 1/8 9 1/2-7 5/8
3rd .................... 29 1/2-25 7/8 17-14 1/2 13 3/8-11 1/4 17 5/8-14 5/8 10-6 3/8
4th .................... 28 1/8-21 3/8 20 5/8-16 5/8 15 1/8-11 3/4 16-10 7/8 9 1/4-6 3/8
- ------
(1) Amount includes non-cash capital lease obligations.
(2) 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 since June
7, 1991 and NASDAQ for all periods prior to June 7, 1991. Class A, C and D
Common Stock are convertible on a share-for-share basis into Class B Common
Stock.
Other Information
Average number of
shares and share
equivalents
outstanding ......... 14,389,000 14,819,000 14,970,000 14,992,000 13,823,000
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
451,233. The common equivalent shares and the corresponding interest savings
on the assumed conversion of the convertible debentures were not included in
the 1991 or 1990 earnings per share computations because the effect was anti-
dilutive.
11
Number of shareholders of record as of January 31, 1995 were as follows:
- ---------------------------
Class A Common 7
Class B Common 608
Class C Common 7
Class D Common 345
- ---------------------------
ITEM 7. Management's Discussion and Analysis of Operations and Financial
Condition
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net revenues increased 3% ($21 million) to $782 million in 1994 and 4%
($30 million) to $762 million in 1993. Increases in both periods resulted
primarily from revenue growth at facilities owned during each of the last
three years, and the acquisition and development of ambulatory treatment
centers, net of the revenue effects of facilities sold during these periods.
Net revenues at hospital facilities owned during all three periods increased
by 6.7% ($46 million) in 1994 over 1993 and 7.2% ($47 million) in 1993 over
1992, excluding the additional revenues received from the special Medicaid
reimbursements received by one of the Company's acute care facilities which
participates in the Texas Medical Assistance Program. Upon meeting certain
conditions of participation and serving a disproportionately high share of
the state's low income patients, the hospital became eligible and received
additional reimbursements totalling $12.4 million in 1994, $13.5 million in
1993 and $29.8 million in 1992 from the state's disproportionate share
hospital fund. These programs are scheduled to terminate in August, 1995 and
the Company cannot predict whether these programs will continue beyond the
scheduled termination date. Net revenues at the Company's ambulatory
treatment centers increased to $17 million in 1994 from $11 million in 1993
and $2 million in 1992. The Company sold two hospitals in the fourth quarter
of 1993, which reported net revenues of $38 million in 1993 and $48 million
in 1992.
Excluding the revenue effects of the special Medicaid reimbursement
programs, earnings before interest, income taxes, depreciation, amortization,
lease and rental expense and non-recurring transactions (EBITDAR) increased
from $106 million in 1992 to $113 million in 1993 and to $127 million in
1994. Overall operating margins improved from approximately 15% in both 1992
and 1993 to 16.5% in 1994. The improvement in the Company's overall operating
margins in 1994 is due primarily to the divestiture of the two low margin
acute care facilities in 1993 and lower insurance expense in 1994 as compared
to the previous two years.
ACUTE CARE SERVICES
Net revenues from the Company's acute care hospitals and ambulatory
treatment centers accounted for 85%, 84% and 84% of consolidated net revenues
in 1994, 1993 and 1992, respectively.
Net revenues at the Company's acute care hospitals owned during each of
the last three years increased 9% in 1994 over 1993 and 7% in 1993 over 1992,
after excluding the revenues received from the special Medicaid
reimbursements described above. Despite the continued shift in the delivery
of healthcare services to outpatient care, the Company's acute care hospitals
experienced a 10% increase in inpatient admissions and a 7% increase in
patient days in 1994 due primarily to additional capacity and expansion of
service lines at two of the Company's larger facilities. Admissions and
patient days at these facilities remained relatively unchanged during 1993 as
compared to 1992. Outpatient activity at the Company's acute care hospitals
continues to increase as gross outpatient revenues at these hospitals
increased 16% in 1994 over 1993 and 18% in 1993 over 1992 and comprised 24%
of the Company's gross patient revenues in 1994 and 1993 and 23% in 1992. 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.
12
In addition, to take advantage of the trend toward increased outpatient
services, the Company has continued to invest in the acquisition and
development of outpatient surgery and radiation therapy centers. The Company
currently operates or manages twenty-two outpatient treatment centers,
including nine added during 1994, which have contributed to the increase in
the Company's outpatient revenues. The Company expects the growth in
outpatient services to continue, although the rate of growth may be moderated
in the future.
Excluding the revenues received from the special Medicaid reimbursements
described above, operating margins (EBITDAR) at the Company's Acute Care
hospitals owned during all three years were 19.9%, 19.5% and 21.3% in 1994,
1993 and 1992, respectively. The margin improvement in 1994 over 1993 was
primarily the result of lower insurance expense. The margin decline from 1992
to 1993 resulted primarily from deterioration in payer mix and general
industry trends. Pressure on operating margins is expected to continue due to
the industry-wide trend away from charge based payers which limits the
Company's ability to increase its prices.
BEHAVIORAL HEALTH SERVICES
Net revenues from the Company's behavioral health services accounted for
14%, 15% and 15% of consolidated net revenues in 1994, 1993 and 1992,
respectively. Net revenues at the Company's psychiatric hospitals owned
during each of the last three years decreased 7% in 1994 as compared to 1993
due primarily to a reduction in patient days. Despite a 12% increase in
admissions in 1994, patient days decreased 3% due to a reduction in the
average length of stay to 13.8 days in 1994 from 15.9 days in 1993. The
reduction in the average length of stay is a result of changing practices in
the delivery of psychiatric care and continued cost containment pressures
from payers 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. Net revenues
at these hospitals increased 6% in 1993 as compared to 1992 due to a 17%
increase in admissions offset by a reduction in the average length of stay to
15.9 days in 1993 from an average stay of 20.0 days in 1992. The shift to
outpatient care is reflected in higher revenues from outpatient services, as
gross outpatient revenues at the Company's psychiatric hospitals increased
17% in 1994 over 1993 and 39% in 1993 over 1992 and now comprises 15% of
psychiatric gross patient revenues as compared to 13% in 1993 and 10% in
1992. In spite of the current environment in which the Company's psychiatric
facilities are operating and the continually declining average length of
stay, management continues to believe that there is a great demand for mental
health services.
Operating margins (EBITDAR) at the facilities owned during all three years
were 15.8% in 1994, 21.5% in 1993 and 17.6% in 1992. The decrease in the
profit margin in 1994 as compared to 1993 was primarily caused by the
decrease in the facility's net revenues which declined due to an increase in
Medicaid denials, a decrease in days of care delivered and a decline in the
net revenue per day.
OTHER OPERATING RESULTS
During 1994, the Company recorded $9.8 million of nonrecurring charges
which includes a $4.3 million loss on the anticipated disposal of two acute
care facilities. The Company expects to exchange these facilities, along with
cash, for a 225 bed acute and psychiatric care hospital. This transaction is
expected to be completed during the second quarter of 1995. Also included in
nonrecurring charges is a $2.8 million write-down in the carrying value of a
psychiatric hospital owned by the Company and leased to an unaffiliated third
party which is currently in default under the terms of the lease agreement, a
$1.4 million write down recorded against the book value of the real property
of a psychiatric hospital, and $1.3 million of expenses related to the
disposition of a non-strategic business. Included in the $8.8 million of
nonrecurring charges recorded in 1993 is a $4.4 million loss on disposal of
two acute care facilities divested during the fourth quarter of 1993 and $4.4
million related to the winding down or disposition of non-strategic
businesses.
Depreciation and amortization expense increased $2.8 million in 1994 over
1993 due primarily to $1.9 million in such expenses related to the Company's
acquisition of ambulatory treatment centers and the increased depreciation
expense related to capital expenditures and expansions made in the Company's
acute care division. Depreciation and amortization expense decreased
approximately $9.5 million in 1993 as compared to 1992, due primarily to a
$13.5 million amortization charge in 1992 resulting from the revaluation of
certain goodwill balances. Partially offsetting this decrease was a $2.4
million increase in depreciation and amortization expense related to the
Company's acquisitions of outpatient treatment centers.
13
Interest expense decreased 27% in 1994 as compared to 1993 and 24% in 1993
as compared to 1992 due to lower average outstanding borrowings.
The effective tax rate was 39%, 32% and 51%, in 1994, 1993 and 1992,
respectively. The increase in the effective tax rate for 1994 as compared to
1993 was due to the 1993 tax provision containing a reduction in the state
tax provision. The reduction in the effective tax rate in 1993 as compared to
1992, in addition to the reduction in the state tax provision mentioned
above, was attributable to the above mentioned $13.5 million goodwill
amortization recorded in the 1992 period, which was not deductible for income
tax purposes.
GENERAL TRENDS
An increased proportion of the Company's revenue is derived from fixed
payment services, including Medicare and Medicaid which accounted for 44%,
43% and 39% of the Company's net patient revenues during 1994, 1993 and 1992,
respectively, excluding the additional revenues from special Medicaid
reimbursement programs. 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 a cost based formula for
psychiatric hospitals.
In addition to the Medicare and Medicaid programs, other payers 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 REFORM
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. The Company and the healthcare industry as
a whole face increased uncertainty with respect to the level of payer
payments because of national and state efforts to reform healthcare. These
efforts include proposals at all levels of government to contain healthcare
costs while making quality, affordable health services available to more
Americans. The Company is unable to predict which proposals, if any, will be
adopted or the resulting implications for providers at this time. However,
the Company believes that the delivery of primary care, emergency care,
obstetrical and psychiatric services will be an integral component of any
strategy for controlling healthcare costs and it also believes it is well
positioned to provide these services.
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 $60.6 million, $84.6 million
and $81.7 million for 1994, 1993 and 1992, respectively. The $24.0 million
decrease in 1994 as compared to 1993 was primarily attributable to an
increase in the number of days of revenues in accounts receivable,
acceleration in the payment of income taxes and an increase in the payments
made in settlement of the Company's self-insurance reserves. The unfavorable
change in the outstanding accounts receivable was caused by a temporary
decline in cash collections due to information system conversions at the
Company's hospitals. During each of the past three years, the net cash
14
provided by operating activities substantially exceeded the scheduled
maturities of long-term debt. Acquisitions totalled $25.8 million for
businesses and assets held for lease in 1994 compared with $11.5 million for
businesses in 1993. During 1994, the Company invested in additional
outpatient treatment centers and a 112-bed acute care hospital located in
Edinburg, Texas. In connection with the acquisition of the Edinburg facility,
the Company committed to invest at least an additional $30 million to
renovate the existing facility and construct an additional facility over the
next three years. The Company expects to continue to invest in the
acquisition and development of outpatient surgery and radiation centers in
1995 at a level comparable to 1994. During the fourth quarter of 1994, the
Company signed letters of intent to acquire a 225-bed acute and psychiatric
care hospital in Aiken, South Carolina and a 512-bed acute care hospital in
Bradenton, Florida in exchange for approximately $200 million in cash and two
acute care facilities. The closing of these transactions are subject to a
number of conditions.
Operating results of the hospital located in Edinburg have been included
in the financial statements only from the date of acquisition. Assuming the
above Edinburg, Aiken and Bradenton 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 million, respectively. In addition, the
unaudited pro forma earnings per share would have been $2.25. 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 1994
and may not be indicative of future operating results. Capital expenditures,
excluding capital leases, were $44.0 million in 1994, $47.3 million in 1993
and $33.2 million in 1992. Capital expenditures in 1995 are expected to be
approximately $33.3 million for capital equipment and renovations of existing
facilities. Additionally, capital expenditures are expected for new projects
at existing hospitals and medical office buildings to total approximately
$36.0 million in 1995. The estimated cost to complete major construction
projects in progress at December 31, 1994 is approximately $12.3 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 26% at December 31, 1994 and 1993 down from 37% at
December 31, 1992. The 1994 and 1993 year-end ratios are the lowest since the
Company went public in 1981.
During 1994 the Company increased its commercial paper facility from $25
million to $50 million. The facility is a daily valued program which is
secured by patient accounts receivable. 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. At December 31, 1994 there were $38.5 million of borrowings
outstanding under this facility.
During 1994, the Company entered into an unsecured $125 million
non-amortizing revolving credit agreement which matures in August of 1999.
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. At December 31, 1994, the Company had $125 million of
unused borrowing capacity, and there were no borrowings outstanding under
this revolving credit agreement.
The Company has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate debt. At December
31, 1994, the Company had interest rate swap agreements with commercial banks
having a total notional principal amount of $30 million. These agreements
call for the payment of interest at a fixed rate by the Company in return for
the payment by the commercial banks of a variable rate interest, which
effectively fixes the Company's interest rate on a portion of its floating
rate debt at 11.9%. The interest rate swap agreements in the amounts of $20
million and $10 million expire in January, 1995 and March, 1996,
respectively. The effective interest rate on the Company's revolving credit
and demand notes and commercial paper program including interest rate swap
expense was 16.1%, 13.9% and 11.2% during 1994, 1993 and 1992, respectively.
The corresponding effective interest rates not including interest rate swap
expense were 7.9%, 4.6% and 5.5% including commitment fees during 1994, 1993
and 1992, respectively. Additional interest expense recorded as a result of
the Company's hedging activity was $1,981,000, $3,160,000 and $4,158,000 in
1994, 1993 and 1992, respectively. The Company is exposed to credit loss in
the event of non-performance by the other parties to the interest rate swap
agreements. These counterparties are major financial institutions and the
Company does not anticipate nonperformance by the counterparties, which are
rated AA or better by Moody's Investors Service. The cost to terminate the
net swap obligations at December 31, 1994 and 1993 was approximately
$2,133,000 and $4,870,000, respectively.
15
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. The Company is currently negotiating an increase to its revolving
credit agreement.
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, 1994. 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, 1994.
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, 1994.
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, 1994.
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
20.
(B) REPORTS ON FORM 8-K
None
16
(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.
9. Stockholders Agreement, dated September 26, 1985, among Alan B.
Miller, Thomas L. Kempner, Sidney Miller, Anthony Pantaleoni and George H.
Strong, previously filed as Exhibit 9 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1985, is incorporated herein by
reference.
9.1 Amendment No. 1, dated as of November 1, 1989, to Stockholders
Agreement, dated September 26, 1985, among Alan B. Miller, Thomas L.
Kempner, Sidney Miller, Anthony Pantaleoni and George H. Strong,
previously filed as Exhibit 9.1 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1989, is incorporated herein by reference.
10.1 Amended and Restated Credit Agreement, dated as of August 21, 1992
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 September 30, 1992, is incorporated herein by reference.
10.2 Restated Purchase Agreement, dated June 22, 1981, among
Registrant, its preferred stockholders and certain of its officers,
previously filed as Exhibit 10.10 to Registration Statement No. 2-72393 on
Form S-1, is incorporated herein by reference.
10.3 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.
10.4 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.
10.5 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.
10.6 Agreement, effective January 1, 1995, to renew Advisory Agreement,
dated as of December 24, 1986, between Universal Health Realty Income
Trust and UHS of Delaware, Inc.
10.7 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.
10.8 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.
10.9 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.
10.10 1989 Non-Employee Director Stock Option Plan, previously filed as
Exhibit 10.23 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1989, is incorporated herein by reference.
17
10.11 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.
10.12 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.
10.13 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.
10.14 1992 Stock Option Plan, previously filed as Exhibit 10.16 to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992, is incorporated herein by reference.
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 Amendment No. 1 to the 1989 Non-Employee Director Stock Option
Plan, previously filed as Exhibit 10.20 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993, is incorporated herein by
reference.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 Amended and Restated 1989 Non-Employee Director Stock Option Plan.
10.25 1992 Stock Option Plan, as Amended.
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.
18
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 22, 1995
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 Board, March 22, 1995
----------------------------------- President and Director
Alan B. Miller (Principal Executive
Officer)
/s/ SIDNEY MILLER Secretary and Director March 24, 1995
-----------------------------------
Sidney Miller
/s/ LEONARD W. CRONKHITE, JR., MD Director March 24, 1995
-----------------------------------
Leonard W. Cronkhite, Jr., MD
/s/ ANTHONY PANTALEONI Director March 24, 1995
-----------------------------------
Anthony Pantaleoni
/s/ MARTIN MEYERSON Director March 23, 1995
-----------------------------------
Martin Meyerson
/s/ ROBERT H. HOTZ Director March 24, 1995
-----------------------------------
Robert H. Hotz
/s/ JOHN H. HERRELL Director March 24, 1995
-----------------------------------
John H. Herrell
/s/ KIRK E. GORMAN Senior Vice President and March 21, 1995
----------------------------------- Chief Financial Officer
Kirk E. Gorman
19
UNIVERSAL HEALTH SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(ITEM 14(A))
Page
------
Consolidated Financial Statements:
Report of Independent Public Accountants on Financial Statements and Schedule ...... 21
Consolidated Statements of Income for the three years ended December 31, 1994 ...... 22
Consolidated Balance Sheets as of December 31, 1994 and 1993 ....................... 23
Consolidated Statements of Common Stockholders' Equity for the three years ended
December 31, 1994 ................................................................. 24
Consolidated Statements of Cash Flows for the three years ended December 31, 1994 .. 25
Notes to Consolidated Financial Statements ......................................... 26
Supplemental Financial Statement Schedule:
II Valuation and Qualifying Accounts ......................................... 36
20
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. (a Delaware corporation) and subsidiaries as of
December 31, 1994 and 1993, 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, 1994. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule 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 consolidated 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, 1994
and 1993, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1994 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, Pennsylvania
February 16, 1995
21
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1994 1993 1992
------------ ------------ ------------
Net revenues ................................. $782,199,000 $761,544,000 $731,227,000
Operating charges ............................
Operating expenses .......................... 298,108,000 299,645,000 285,922,000
Salaries and wages .......................... 286,297,000 280,041,000 265,017,000
Provision for doubtful accounts ............. 58,347,000 55,409,000 45,008,000
Depreciation & amortization ................. 42,383,000 39,599,000 49,059,000
Lease and rental expense .................... 34,097,000 34,281,000 33,854,000
Interest expense, net ....................... 6,275,000 8,645,000 11,414,000
Nonrecurring charges ........................ 9,763,000 8,828,000 --
------------ ------------ ------------
Total operating charges ..................... 735,270,000 726,448,000 690,274,000
------------ ------------ ------------
Income before income taxes .................. 46,929,000 35,096,000 40,953,000
Provision for income taxes .................. 18,209,000 11,085,000 20,933,000
------------ ------------ ------------
Net income .................................. $ 28,720,000 $ 24,011,000 $ 20,020,000
============ ============ ============
Earnings per common & common share
equivalents (fully diluted) ............... $ 2.02 $ 1.71 $ 1.43
============ ============ ============
Weighted average number of common shares and
equivalents ............................... 14,389,000 14,819,000 14,970,000
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
22
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets December 31
- ------- ------------------------------
1994 1993
-------------- -------------
Current Assets
Cash and cash equivalents ..................................... $ 780,000 $ 569,000
Accounts receivable, net of allowance of $34,957,000 in 1994
and $28,444,000 in 1993 for doubtful accounts ................ 84,818,000 78,605,000
Supplies ...................................................... 15,723,000 12,617,000
Deferred income taxes ......................................... 12,942,000 7,733,000
Other current assets .......................................... 4,126,000 2,475,000
-------------- -------------
Total current assets .......................................... 118,389,000 101,999,000
Property and Equipment
Land .......................................................... 34,159,000 29,026,000
Buildings and improvements .................................... 314,545,000 284,510,000
Equipment ..................................................... 218,844,000 191,483,000
Property under capital lease .................................. 24,782,000 18,937,000
-------------- -------------
592,330,000 523,956,000
Less accumulated depreciation ................................. 265,059,000 231,509,000
-------------- -------------
327,271,000 292,447,000
Construction in progress ...................................... 4,372,000 9,985,000
-------------- -------------
331,643,000 302,432,000
Other Assets
Excess of cost over fair value of net assets acquired ......... 38,762,000 38,089,000
Deferred income taxes ......................................... 2,742,000 --
Deferred charges .............................................. 1,527,000 1,697,000
Other ......................................................... 28,429,000 16,205,000
-------------- -------------
71,460,000 55,991,000
-------------- -------------
$521,492,000 $460,422,000
============== =============
Liabilities and Common Stockholders' Equity
- --------------------------------------------
Current Liabilities
Current maturities of long-term debt ......................... $ 7,236,000 $ 4,313,000
Accounts payable ............................................. 37,185,000 34,038,000
Accrued liabilities
Compensation and related benefits ........................... 20,208,000 16,565,000
Interest .................................................... 2,442,000 3,247,000
Other ....................................................... 32,294,000 25,789,000
Federal and state taxes ..................................... 4,417,000 2,547,000
-------------- -------------
Total current liabilities .................................... 103,782,000 86,499,000
Deferred Income Taxes ........................................ -- 3,863,000
Other Noncurrent Liabilities ................................. 71,956,000 70,491,000
Long-Term Debt ............................................... 85,125,000 75,081,000
Commitments and Contingencies
Common Stockholders' Equity
Class A Common Stock, voting, $.01 par value;
authorized 12,000,000 shares; issued and outstanding
1,090,527 shares in 1994 and 1,139,123 in 1993 .............. 11,000 11,000
Class B Common Stock, limited voting, $.01 par value;
authorized 50,000,000 shares; issued and outstanding
12,591,854 shares in 1994 and 12,171,454 in 1993 ............ 126,000 122,000
Class C Common Stock, voting, $.01 par value;
authorized 1,200,000 shares; issued and outstanding
109,622 shares in 1994 and 114,482 in 1993 .................. 1,000 1,000
Class D Common Stock, limited voting, $.01 par value;
authorized 5,000,000 shares; issued and outstanding
22,769 shares in 1994 and 26,223 in 1993 .................... -- --
Capital in excess of par value, net of deferred compensation of
$414,000 in 1994 and $291,000 in 1993 ....................... 88,295,000 80,878,000
Retained earnings ............................................ 172,196,000 143,476,000
-------------- -------------
260,629,000 224,488,000
-------------- -------------
$521,492,000 $460,422,000
============== =============
The accompanying notes are an integral part of these consolidated financial statements.
23
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Common Stockholders' Equity
For the Years Ended December 31, 1994 1993, and 1992
Capital in
Class A Class B Class C Class D Excess of Retained
Common Common Common Common Par Value Earnings Total
--------- ---------- --------- --------- -------------- -------------- --------------
Balance
January 1, 1992 .. $14,000 $121,000 $ 2,000 $ 1,000 $ 84,770,000 $ 99,445,000 $184,353,000
Common Stock
Issued .......... -- -- -- -- 1,134,000 -- 1,134,000
Converted ....... (2,000) 4,000 (1,000) (1,000) -- -- --
Repurchased ..... -- (2,000) -- -- (2,924,000) -- (2,926,000)
Amortization
of deferred
compensation .... -- -- -- -- 361,000 -- 361,000
Cancellation of
stock grant ..... -- -- -- -- (39,000) -- (39,000)
Net income ....... -- -- -- -- -- 20,020,000 20,020,000
------- -------- ------ -------- ------------ ------------- ------------
Balance
January 1, 1993 .. 12,000 123,000 1,000 -- 83,302,000 119,465,000 202,903,000
Common Stock
Issued .......... -- 1,000 -- -- 518,000 -- 519,000
Converted ....... (1,000) 1,000 -- -- -- -- --
Repurchased ..... -- (3,000) -- -- (3,233,000) -- (3,236,000)
Amortization of
deferred
compensation .... -- -- -- -- 333,000 -- 333,000
Cancellation of
stock grant ..... -- -- -- -- (42,000) -- (42,000)
Net income ....... -- -- -- -- -- 24,011,000 24,011,000
------- -------- ------ -------- ------------ ------------- ------------
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
December 31, 1994 $11,000 $126,000 $ 1,000 -- $ 88,295,000 $172,196,000 $260,629,000
======= ======== ======= ======== ============ ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
24
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1994 1993 1992
-------------- -------------- --------------
Cash Flows from Operating Activities:
Net income .............................................. $ 28,720,000 $ 24,011,000 $ 20,020,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ......................... 42,383,000 39,599,000 49,059,000
Provision for self-insurance reserves ................. 10,810,000 20,755,000 21,193,000
Other non-cash charges ................................ 9,763,000 8,828,000 --
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable ................................... (4,380,000) 12,928,000 7,608,000
Accrued interest ...................................... (805,000) (412,000) (256,000)
Accrued and deferred income taxes ..................... (9,944,000) (8,990,000) (9,955,000)
Other working capital accounts ........................ 1,710,000 4,858,000 3,960,000
Other assets and deferred charges ..................... (3,064,000) (5,804,000) (2,120,000)
Other ................................................. (42,000) 1,002,000 620,000
Payments made in settlement of self-insurance claims .. (14,527,000) (12,135,000) (8,398,000)
------------ ------------ ------------
Net cash provided by operating activities ............. 60,624,000 84,640,000 81,731,000
------------ ------------ ------------
Cash Flows from Investing Activities:
Property and equipment additions ........................ (43,998,000) (47,319,000) (33,244,000)
Disposition of assets ................................... 1,132,000 227,000 2,652,000
Acquisition of properties previously leased ............. (5,771,000) (3,218,000) --
Acquisition of businesses ............................... (16,794,000) (11,526,000) (7,188,000)
Acquisition of assets held for lease .................... (9,059,000) -- --
Disposition of businesses ............................... 3,791,000 18,492,000 12,355,000
Other investments ....................................... (1,079,000) -- --
------------ ------------ ------------
Net cash used in investing activities ................... (71,778,000) (43,344,000) (25,425,000)
------------ ------------ ------------
Cash Flows from Financing Activities:
Additional borrowings ................................... 45,469,000 1,800,000 15,375,000
Reduction of long-term debt ............................. (21,981,000) (46,496,000) (85,900,000)
Issuance of common stock ................................ 1,026,000 519,000 1,134,000
Repurchase of common shares ............................. (13,149,000) (3,236,000) (2,926,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities ..... 11,365,000 (47,413,000) (72,317,000)
------------ ------------ ------------
Increase (Decrease) in Cash and Cash Equivalents ......... 211,000 (6,117,000) (16,011,000)
Cash and Cash Equivalents, Beginning of Period ........... 569,000 6,686,000 22,697,000
------------ ------------ ------------
Cash and Cash Equivalents, End of Period ................. $ 780,000 $ 569,000 $ 6,686,000
============ ============ ============
Supplemental Disclosures of Cash Flow Information:
Interest paid ........................................... $ 7,080,000 $ 9,057,000 $ 11,670,000
Income taxes paid, net of refunds ....................... $ 28,153,000 $ 19,901,000 $ 31,086,000
Supplemental Disclosures of Noncash Investing and Financing Activities:
See Notes 2, 3 and 6
The accompanying notes are an integral part of these consolidated financial statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Universal Health Services, Inc. (the "Company") is primarily engaged in
owning and operating acute care and psychiatric hospitals and ambulatory
treatment centers. The consolidated financial statements include the
accounts of the Company, and 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:
Net Revenues: Net revenues are reported at the estimated net realizable
amounts from patients, third-party payers, and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements
with third-party payers. 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 44%, 43% and 39% of net patient revenues for the years
1994, 1993 and 1992, respectively, excluding the additional revenues from
special Medicaid reimbursement programs described in Note 9.
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).
Other Assets: The excess of cost over fair value of net assets acquired in
purchase transactions, net of accumulated amortization of $52,261,000 in 1994
and $47,663,000 in 1993 is amortized using the straightine method over
periods ranging from five to forty years. During 1992 the Company recorded a
$13.5 million charge to amortization expense due to a revaluation of certain
goodwill balances.
During 1994, the Company established an employee life insurance program
covering approximately 2,500 employees. At December 31, 1994, the cash
surrender value of the policies ($41.3 million) was recorded net of related
loans ($41.0 million) 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. If such review indicates that the carrying value of the asset is
not recoverable, it is the Company's policy to reduce the carrying amount of
such assets to fair value.
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. The 1994, 1993 and
1992 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 451,233.
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 and minority interests in majority owned
subsidiaries and partnerships.
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
$266,000, $498,000 and $515,000 in 1994, 1993 and 1992, respectively.
26
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.
Reclassifications: Certain prior year amounts have been reclassified to
conform with the current year's presentation.
2) ACQUISITIONS, DISPOSITIONS AND CLOSURES
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, three 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 totalling $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 totalling $2.2 million. In connection with this
acquisition, the Company committed to invest at least an additional $30
million, over a four year period, to renovate the existing facility and
construct an additional facility.
During the fourth quarter of 1994, the Company signed a letter of intent
to acquire a 225-bed acute and psychiatric care hospital located in Aiken,
South Carolina in exchange for a 104-bed acute care hospital, a 126-bed
acute and psychiatric care hospital and cash. The majority of the real estate
assets of the 126-bed facility are currently being leased from Universal
Health Realty Income Trust (the "Trust") pursuant to the terms of an
operating lease which expires in 2000. The Company anticipates exchanging
additional real estate assets with the Trust as consideration for the
purchase of the real estate assets of this facility (See Note 8). The closing
of this transaction, which is expected to be completed during the second
quarter of 1995, is subject to a number of conditions including regulatory
approval. As a result of this transaction a $4.3 million charge is included
in the 1994 consolidated statement of income.
Also during the fourth quarter of 1994, the Company signed a letter of
intent to acquire a 512-bed acute care hospital located in Bradenton,
Florida. The closing of this transaction is subject to a number of
conditions. Although management does not expect to close this transaction
until the second quarter of 1995, the Company began to manage the hospital in
January, 1995 under a separate management contract. Total cash consideration
for the Aiken and Bradenton acquisitions is expected to approximate $200
million.
Operating results of the hospital located in Edinburg have been included
in the financial statements only from the date of acquisition. Assuming the
above Edinburg, Aiken and Bradenton 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 million, respectively. In addition, the
unaudited pro forma earnings per share would have been $2.25. 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 1994
and may not be indicative of future operating results.
1993 -- During 1993 the Company purchased a radiation therapy center and
majority interests in four separate partnerships which own and operate
ambulatory surgery facilities for $11.5 million in cash and the assumption of
liabilities totaling $300,000.
During the fourth quarter, the Company sold the operations and fixed
assets of a 124-bed acute care hospital for approximately $7.8 million in
cash. The Company also sold the operations and certain fixed assets of a
134-bed acute care hospital for cash of $1.5 million. Concurrently, the
Company sold certain related real property to Universal Health Realty Income
Trust (the "Trust"), an affiliate and the lessor of this 134-bed acute care
hospital, for $1 million in cash and a note receivable of $900,000 (see Note
8). In connection with this transaction, the Company's lease with the Trust
for this property was terminated. The disposition of these two facilities
resulted in a pre-tax loss of $4.4 million ($2.2 million after tax), which is
included in nonrecurring charges in the 1993 consolidated statement of
income.
27
Also during 1993, the Company recorded a pre-tax charge of $4.4 million
related to the winding down or disposition of other non-strategic businesses
which is included in nonrecurring charges in the 1993 consolidated statement
of income.
1992 -- During 1992 the Company purchased majority interests in four
separate partnerships which own and operate ambulatory surgery facilities for
$7.2 million in cash and the assumption of liabilities totaling $5.4 million.
Also during 1992, the Company discontinued operations at a 96-bed acute
care hospital and sold the fixed assets of this facility for $3.4 million.
The closing and sale of this hospital did not have a material impact on the
consolidated financial statements.
3) LONG-TERM DEBT
A summary of long-term debt follows:
December 31
------------------------------
1994 1993
------------- -------------
Long-term debt:
Notes payable (including obligations under capitalized leases of
$14,004,000 in 1994 and $12,132,000 in 1993) with varying
maturities through 2001; weighted average interest at 6.9% in 1994
and 7.0% in 1993 (see Note 6 regarding capitalized leases) ........ $19,442,000 $13,727,000
Mortgages payable, interest at 6.0% to 11.0% with varying maturities
through 2000 ...................................................... 3,745,000 3,811,000
Revolving credit and demand notes ................................... 8,950,000 4,600,000
Commercial paper .................................................... 38,500,000 --
Revenue bonds: ......................................................
interest at floating rates ranging from 5.5% to 6.9% and one at a
fixed ........................................................... 18,200,000 18,200,000
rate of 8.3% at December 31, 1994 with varying maturities through
2015 ............................................................ 3,524,000 9,151,000
Subordinated debt ................................................. -- 29,905,000
----------- -----------
92,361,000 79,394,000
Less-Amounts due within one year .................................. 7,236,000 4,313,000
----------- -----------
$85,125,000 $75,081,000
=========== ===========
During 1994, the Company increased its commercial paper facility from $25
million to $50 million. The facility is a daily valued program which is
secured by patient accounts receivable. 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. A fee of .76% is required on this $50 million commitment.
Outstanding amounts of commercial paper that can be refinanced through
available borrowings under the Company's revolving credit agreement are
classified as long-term.
The Company entered into an unsecured $125 million non-amortizing
revolving credit agreement in 1994 which matures in August of 1999 and
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 leverage and coverage ratios. At
December 31, 1994 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. At December 31, 1994, the Company had $125 million of unused
borrowing capacity, and there were no borrowings outstanding under this
revolving credit agreement.
The average amounts outstanding during 1994, 1993 and 1992 under the
revolving credit and demand notes and commercial paper program were
$16,324,000, $25,069,000 and $47,318,000, respectively, with corresponding
effective interest rates of 7.9%, 4.6% and 5.5% including commitment fees.
The maximum amounts outstanding at any month-end were $47,450,000,
$46,800,000 and $91,650,000 during 1994, 1993 and 1992 respectively.
28
The Company has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate revolving credit and
demand notes and commercial paper program. At December 31, 1994, the Company
had two interest rate swap agreements with commercial banks having a total
notional principal amount of $30 million. These agreements call for the
payment of interest at a fixed rate by the Company in return for the payment
by the commercial banks of a variable rate interest, which effectively fixes
the Company's interest rate on a portion of its floating rate debt at 11.9%.
The interest rate swap agreements in the amounts of $20 million and $10
million expire in January, 1995 and March, 1996, respectively. The effective
interest rate on the Company's revolving credit and demand notes and
commercial paper program including interest rate swap expense was 16.1%,
13.9% and 11.2% during 1994, 1993 and 1992, respectively. Additional interest
expense recorded as a result of the Company's hedging activity was
$1,981,000, $3,160,000 and $4,158,000 in 1994, 1993 and 1992, respectively.
The Company is exposed to credit loss in the event of non-performance by the
counterparties to the interest rate swap agreements. These counterparties are
major financial institutions and the Company does not anticipate
nonperformance by the counterparties which are rated AA or better by Moody's
Investors Service. The cost to terminate the swap obligations at December 31,
1994 and 1993, was approximately $2,133,000 and $4,870,000, 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.
During 1994, the Company called its 71/2% subordinated convertible
debentures due 2008. Approximately $11 million of the debentures were
redeemed in cash and $19 million were converted to the Company's class B
stock.
Substantially all of the Company's accounts receivable are pledged as
collateral to secure debt.
The fair value of the Company's long-term debt at December 31, 1994 was
approximately equal to its carrying value.
The Company is currently negotiating an increase to its revolving credit
agreement. In connection with this transaction and other potential debt
transactions to finance the acquisitions discussed in Note 2, the Company has
entered into two options for interest rate swap agreements to become
effective June, 1995, with a notional amount of $75 million and expiration
dates in 2005.
Aggregate maturities follow:
------- -------------
1995 $ 7,236,000
1996 5,721,000
1997 4,540,000
1998 2,647,000
1999 48,733,000
Later 23,484,000
------- -------------
Total $92,361,000
------- -------------
4) COMMON STOCK
During 1994 and 1993, the Company repurchased 509,800 and 224,800 shares
of Class B Common Stock respectively at an average purchase price of $25.79
and $14.39 per share, respectively, or an aggregate of approximately $13.2
million and $3.2 million, respectively. 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 $61.6 million of its Common Stock
as of December 31, 1994. The repurchased shares are treated as retired.
At December 31, 1994 2,598,439 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.
29
In 1994, the Company adopted a Stock Compensation Plan which was approved
by the Board of Directors. Under the terms of the Stock Compensation Plan,
shares may be granted to key employees of the Company and to consultants and
independent contractors. Shares may not be granted to officers or directors
of the Company. The Plan will terminate on November 16, 2004, unless
terminated sooner by the Board.
At December 31, 1994 the Company has reserved 50,000 shares of its Class B
Common Stock for the Stock Compensation Plan. In 1994, 1,800 shares were
issued.
In 1992, the Company adopted a Stock Bonus Plan and a Stock Ownership
Plan, both of which were approved by the stockholders at the 1992 annual
meeting. Under the terms of the Stock Bonus Plan, eligible employees may
elect to receive all or part of their annual bonuses in shares of restricted
stock (the "Bonus Shares"). Those electing to receive Bonus Shares also
receive additional restricted shares in an amount equal to 20% of their Bonus
Shares (the "Premium Shares"). Restrictions on one-half of the Bonus Shares
and one-half of the Premium Shares lapse after one year and the restrictions
on the remaining shares lapse after two years. The Company has reserved
150,000 shares of Class B Common Stock for this plan and has issued 58,178
shares at December 31, 1994.
Under the terms of the Stock Ownership Plan, eligible employees may
purchase shares of common stock, directly from the Company, at the market
price. The Company will loan each eligible employee an amount equal to 90% of
the purchase price for the shares. The loans, which are partially recourse to
the employee, bear interest at the applicable Federal rate and are due five
years from the purchase date. Shares purchased under this plan are restricted
from sale or transfer. Restrictions on one-half of the shares lapse after one
year and restrictions on the remaining shares lapse after two years. The
Company has reserved 100,000 shares of Class B Common Stock for this plan. As
of December 31, 1994, 31,234 shares were sold under the terms of this plan.
The Company also has a Restricted Stock Purchase Plan which allows
eligible participants to purchase shares of Class B Common Stock at par
value, subject to certain restrictions. Under the terms of this plan, 300,000
shares of Class B Common Stock have been reserved for purchase by officers,
key employees and consultants. The restrictions lapse as to one-third of the
shares on the third, fourth and fifth anniversary dates of the purchase. The
Company has issued 153,513 shares under this plan, of which 41,336 and 45,000
became fully vested during 1994 and 1993, respectively. Compensation expense,
based on the difference between the market price on the date of purchase and
par value, is being amortized over the restriction period and was $148,000 in
1994, $240,000 in 1993, $265,000 in 1992.
Stock options to purchase Class B Common Stock have been granted to
officers, key employees and directors of the Company under various plans.
During 1994, subject to shareholder approval, the Board of Directors approved
a 600,000 share increase in the reserve for Class B Common Stock available
for grant, pursuant to the terms of the 1992 Stock Option Plan. 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.
30
Information with respect to these options is summarized as follows:
Average
Number Option
Outstanding Options of Shares Price
- --------------------------- --------- --------
Balance, January 1, 1992 .. 148,002 $ 7.80
Granted .................. 135,000 $12.72
Exercised ................ (78,487) $ 6.82
Cancelled ................ (4,340) $12.67
-------- -------
Balance, January 1, 1993 .. 200,175 $11.40
Granted .................. 7,400 $14.88
Exercised ................ (40,238) $ 7.23
Cancelled ................ (3,000) $12.50
-------- -------
Balance, January 1, 1994 .. 164,337 $12.53
Granted .................. 560,750 $22.05
Exercised ................ (15,988) $10.98
Cancelled ................ (5,500) $16.64
-------- -------
Balance, December 31, 1994 703,599 $20.12
======== =======
Options for 299,350 shares, subject to shareholder approval as described
above, were available for grant at December 31, 1994. At December 31, 1994,
options for 71,801 shares of Class B Common Stock with an aggregate purchase
price of $893,445 (average of $12.44 per share) were exercisable.
5) INCOME TAXES
Components of income tax expense are as follows:
Year Ended December 31
------------------------------------------------
1994 1993 1992
-------------- ------------- --------------
Currently payable
Federal ........ $ 27,014,000 $17,315,000 $ 28,495,000
State .......... 3,009,000 1,136,000 3,949,000
------------ ----------- ------------
30,023,000 18,451,000 32,444,000
------------ ----------- ------------
Deferred ........
Federal ........ (10,412,000) (6,482,000) (10,110,000)
State .......... (1,402,000) (884,000) (1,401,000)
------------ ----------- ------------
(11,814,000) (7,366,000) (11,511,000)
------------ ----------- ------------
Total .......... $ 18,209,000 $11,085,000 $ 20,933,000
============ =========== ============
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. The net effect of the impact of the
1993 tax law changes on the 1993 current and deferred tax provisions was
immaterial.
31
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
--------------------------------
1994 1993
-------------- --------------
Self-insurance reserves ................................. $ 28,944,000 $ 29,134,000
Doubtful accounts and other reserves .................... 9,921,000 6,270,000
State income taxes ...................................... (126,000) (1,546,000)
Other deferred tax assets ............................... 382,000 491,000
Depreciable and amortizable assets ...................... (17,319,000) (22,434,000)
Conversion from cash basis to accrual basis of accounting (5,017,000) (7,634,000)
Other deferred tax liabilities .......................... (1,101,000) (411,000)
------------ ------------
Total deferred taxes ................................... $ 15,684,000 $ 3,870,000
============ ============
A reconciliation between the federal statutory rate and the effective tax
rate is as follows:
Year Ended December 31
----------------------------
1994 1993 1992
------- ------- -------
Federal statutory rate ....................................... 35.0% 35.0% 34.0%
Nondeductible (deductible) depreciation, amortization and
other ....................................................... 1.6 (3.9) 13.0
State taxes, net of Federal income tax benefit ............... 2.2 0.5 4.1
----- ----- -----
Effective tax rate ........................................... 38.8% 31.6% 51.1%
===== ===== =====
In 1994 and 1993, the Company reviewed its deferred state tax balances and
as a result reduced its tax provision by $390,000 and $780,000, respectively.
The net deferred tax assets and liabilities are comprised as follows:
Year Ended December 31
--------------------------------
1994 1993
-------------- --------------
Current deferred taxes
Assets ........................ $ 16,622,000 $ 10,723,000
Liabilities ................... (3,680,000) (2,990,000)
------------- -------------
Total deferred taxes-current .. 12,942,000 7,733,000
Noncurrent deferred taxes
Assets ........................ 22,625,000 25,172,000
Liabilities ................... (19,883,000) (29,035,000)
------------- -------------
Total deferred taxes-noncurrent 2,742,000 (3,863,000)
------------- -------------
Total deferred taxes ........... $ 15,684,000 $ 3,870,000
============= =============
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. The Company has not provided a valuation allowance since
management believes that all of the deferred tax assets will be realized
through the reversal of temporary differences that result in deferred tax
liabilities and through expected future taxable income.
32
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
----------------------------
1994 1993
------------- ------------
Land, buildings and equipment . $23,697,000 $18,937,000
Less: accumulated amortization 10,426,000 6,400,000
------------- ------------
$13,271,000 $12,537,000
============ ============
Future minimum rental payments under lease commitments with a term of more
than one year as of December 31, 1994 are as follows:
Capital Operating
Year Leases Leases
- ---- ----------- ------------
1995 ................................. $ 5,581,000 $ 23,693,000
1996 ................................. 4,716,000 21,011,000
1997 ................................. 3,363,000 18,371,000
1998 ................................. 1,618,000 17,012,000
1999 ................................. 381,000 16,405,000
Later Years .......................... -- 36,536,000
----------- ------------
Total minimum rental ................. $15,659,000 $133,028,000
============
Less: Amount representing interest ... 1,655,000
-----------
Present value of minimum rental
commitments ........................ 14,004,000
Less: Current portion of capital lease
obligations ......................... 4,729,000
-----------
Long-term portion of capital lease
obligations ........................ $ 9,275,000
===========
Capital lease obligations of $4,654,000, $5,371,000, $7,310,000 in 1994,
1993 and 1992 respectively, were incurred when the Company entered into
capital leases for new equipment.
7) COMMITMENTS AND CONTINGENCIES
The Company is self-insured for its general liability risks for claims
limited to $5 million per occurrence and for its professional liability risks
for claims limited to $25 million per occurrence. Coverage in excess of these
limits up to $100 million is maintained with major insurance carriers. During
1994 and 1993, the Company purchased a general and professional liability
occurrence policy with a commercial insurer for one of its larger acute care
facilities. This policy includes coverage up to $25 million per occurrence
for general and professional liability risks.
As of December 1994 and 1993, the reserve for professional and general
liability risks was $62.4 million and $65.2 million, respectively, of which
$11.0 million in 1994 and $8.3 million in 1993 is included in current
liabilities. Self-insurance reserves are based upon actuarially determined
estimates.
The Company has outstanding letters of credit totalling $20 million
related to the Company's self-insurance programs ($11.0 million), as support
for various debt instruments ($.4 million) and as support for a loan
guarantee for an unaffiliated party ($8.6 million). The Company has also
guaranteed approximately $2 million of loans.
During 1994, the Company signed letters of intent to acquire a 512-bed
acute care hospital located in Bra- denten, Flordia and a 225-bed acute and
psychiatric care facility located in Aiken, South Carolina. These transactions,
which are subject to a number of conditions, are expected to be completed
during the second quarter of 1995. In addition to the exchange of certain real
estate assets, the total cash consideration for these acquisitions
33
is expected to approximate $200 million. Additionally, the Company is
committed to invest at least an additional $30 million, over a four year
period, to renovate the existing facility and construct an additional
facility related to its 1994 acquisition of a 112-bed acute care hospital
located in Edinburg, Texas. (See Note 2).
The Company estimates the cost to complete major construction projects in
progress at December 31, 1994 will approximate $12.3 million.
The Company has entered into a long-term contract with a third party to
provide certain data processing services for its acute care and psychiatric
hospitals. This contract expires in 1999.
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, 1994, 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/(loss)
from the Trust was $1,095,000, $757,000 and ($110,000) in 1994, 1993 and 1992
respectively, and is included in net revenues in the accompanying
consolidated statements of income. The carrying value of this investment at
December 31, 1994 and 1993 was $8,404,000 and $7,375,000, respectively and is
included in other assets in the accompanying consolidated balance sheets. The
market value of this investment at December 31, 1994 and 1993 was $11,261,000
and $10,352,000, respectively.
During 1993, pursuant to the terms of its lease with the Trust, the
Company purchased the real property of a 48-bed psychiatric hospital located
in Texas for $3.2 million. The real property of this hospital was previously
leased by the Company and base rental payments continued under the existing
lease until the date of sale. Operations at this hospital were discontinued
during the first quarter of 1992, however, the facility is currently being
utilized for outpatient services at one of the Company's acute care
hospitals. Also during 1993, the Company sold to the Trust certain real
estate assets of a 134-bed hospital located in Illinois for approximately
$1.9 million. These assets consisted of additions and improvements made to
the facility by the Company since the sale of the major portion of the real
estate assets to the Trust in 1986. The operations of this facility were sold
during 1993 to an operator unaffiliated with the Company.
As of December 31, 1994, the Company leased eight 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 (See Note 2). Total rent expense under these
operating leases was $15,700,000 in 1994, $16,600,000 in 1993 and $17,000,000
in 1992. The Company received an advisory fee of $909,000 in 1994, $880,000
in 1993 and $913,000 in 1992 from the Trust for investment and administrative
services provided under a contractual agreement which is included in net
revenues in the accompanying consolidated statements of income.
In connection with various stock based compensation plans, $118,000 and
$405,000 of loans made to cer tain officers and key employees were forgiven
in 1994 and 1992, respectively, and charged to compensation expense.
At January 1, 1992, the Company had a non-interest bearing demand note
from a principal officer which was fully forgiven during 1992. Compensation
expense charged to operations related to this note was $393,000 in 1992.
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.
34
9) QUARTERLY RESULTS (UNAUDITED)
The following tables summarize the Company's quarterly financial data for
the two years ended December 31, 1994.
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
- ---- ------------ ------------ ------------ ------------
Net revenues ...................... $194,432,000 $192,199,000 $191,512,000 $204,056,000
Income before income taxes ........ $ 16,794,000 $ 13,357,000 $ 9,622,000 $ 7,156,000
Net income ........................ $ 10,287,000 $ 8,153,000 $ 5,835,000 $ 4,445,000
Earnings per share (fully diluted) $ 0.72 $ 0.57 $ 0.41 $ 0.32
============ ============ ============ ============
Net revenues in 1994 include $12.4 million of additional revenues received
from special Medicaid reimbursement programs. Of this amount, $3.0 million
was recorded in each of the first and second quarters, $3.1 million in the
third quarter and $3.3 million in the fourth quarter. These programs are
scheduled to terminate in August, 1995. These amounts were recorded in the
periods that the Company met all of the requirements to be entitled to these
reimbursements. Net revenues in the fourth quarter also include $3.0 million
of proceeds related to the Company's previously disposed UK operations. The
first quarter operating results also include approximately $1.3 million of
expenses related to the disposition of a non-strategic business. The second
quarter results include a $2.8 million write-down recorded against the book
value of the real property of a psychiatric hospital owned by the Company and
leased to an unaffiliated third party, which is currently in default under
the terms of the lease. Also included in operating expenses during the second
quarter is a $1.1 million favorable adjustment made to reduce the Company's
workers compensation reserves. The fourth quarter results include a $1.3
million write-down recorded against the book value of the real property of a
psychiatric hospital owned by the Company and for which its lease was
terminated by an unaffiliated third party and a $4.3 million charge related
to the anticipated disposition of two acute care hospitals. (See Note 2).
First Second Third Fourth
1993 Quarter Quarter Quarter Quarter
- ---- ------------ ------------ ------------ ------------
Net revenues ...................... $195,305,000 $187,453,000 $186,332,000 $192,454,000
Income before income taxes ........ $ 13,120,000 $ 9,735,000 $ 7,503,000 $ 4,738,000
Net income ........................ $ 8,611,000 $ 6,478,000 $ 5,157,000 $ 3,765,000
Earnings per share (fully diluted) $ 0.60 $ 0.46 $ 0.37 $ 0.28
============ ============ ============ ============
Net revenues in 1993 include $13.5 million of additional revenues received
from special Medicaid reim- bursement programs. Of the amount received, $4.6
million was recorded in each of the first and second quarters, $1.0 million
was recorded in the third quarter and $3.3 million was recorded in the fourth
quarter. These amounts were recorded in the periods that the Company met all
of the requirements to be entitled to these reimbursements. The first quarter
operating results also include approximately $4.1 million of expenses related
to the disposition of ancillary businesses and the second quarter operating
results include a $3.2 million increase in the reserves for the Company's
self-insurance programs. Net revenues in the third quarter include $3.0
million of unfavorable adjustments related to prior year reimbursement issues
and the fourth quarter operating results includes a $4.7 million pre-tax loss
on disposal of two acute care hospitals and the winding down or disposition
of non-strategic businesses. The Company's effective tax rate in the fourth
quarter was significantly lower than other quarters due to the disposition of
two acute care hospitals resulting in the recoupment of previously non-
deductible charges.
35
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,
1994 .................. $28,444,000 $58,347,000 $ -- $(51,834,000) $34,957,000
=========== =========== ==== ============ ===========
Year ended December 31,
1993 .................. $27,257,000 $55,409,000 $ -- $(54,222,000) $28,444,000
=========== =========== ==== ============ ===========
Year ended December 31,
1992 .................. $25,166,000 $45,008,000 $ -- $(42,917,000) $27,257,000
=========== =========== ==== ============ ===========
36
INDEX TO EXHIBITS
10.6 Agreement, effective January 1, 1995, to renew Advisory Agreement, dated
as of December 24, 1986, between Universal Health Realty Income Trust
and UHS of Delaware, Inc.
10.24 Amended and Restated 1989 Non-Employee Director Stock Option Plan.
10.25 1992 Stock Option Plan, As Amended.
11. Statement re: computation of per share earnings.
22. Subsidiaries of Registrant.
24. Consent of Independent Public Accountants.
27. Financial Data Schedule.