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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, 1993
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
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
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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 11, 1994,
was 1,139,123, 12,179,161, 114,482, and 26,026, respectively.
The aggregate market value of voting stock held by non-affiliates at February
11, 1994 was $267,020,534. (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 1994 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1993 (incorporated by reference
under Part III).
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PART I
ITEM I. 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 and psychiatric hospitals and ambulatory treatment
centers. The Company currently operates 26 hospitals with an aggregate of
3,579 licensed beds. Of these facilities, 13 are general acute care hospitals
and 13 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 surgery
centers located in Springfield, Missouri; Midwest City, Oklahoma; Odessa,
Texas; St. George, Utah; Littleton, Colorado; New Albany, Indiana; Ponca City,
Oklahoma; and Rancho Mirage, California.
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 hospitals and ambulatory treatment centers, 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. Each hospital
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
hospital's medical staff, governs the medical, professional and ethical
practices at each hospital.
The Company selectively seeks opportunities to expand its base of
operations by acquiring, constructing or leasing additional hospital
facilities. In addition, it is the Company's objective to increase the
operating revenues and profitability of owned hospitals by the introduction of
new services, improvement of existing services including an emphasis on the
expansion of outpatient services, physician recruitment and the application of
financial and operational controls. 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 Florida). 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
11, 1994, 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.
RECENT DEVELOPMENTS
The Company continued its strategy of consolidation in 1993 to focus on
its core operations and selective expansion in areas in which it believes
there are opportunities for growth. The Company sold the operations and fixed
assets of Doctors' Hospital of Hollywood, a 124-bed acute care facility in
Hollywood, Florida in October 1993. In December 1993, the Company sold the
operations and certain fixed assets of Belmont Community Hospital, a 134-bed
acute care facility in Chicago, Illinois which had been leased from UHT. Con-
currently, the Company sold certain related real property to UHT which leased
the facility to an unaffiliated third party.
1
In 1993, the Company continued to add to its Ambulatory Treatment Centers
Division and acquired, in partnership with physicians, four additional free-
standing ambulatory surgery centers located in Littleton, Colorado; New
Albany, Indiana; Ponca City, Oklahoma; and Rancho Mirage, California. Also, as
part of this Division, the Company acquired Columbia Radiation Oncology, a
radiotherapy facility in Washington, D.C.
The Company also selectively expanded its operations at certain of its
existing facilities: Valley Hospital Medical Center in Las Vegas, Nevada, (1)
opened its 57,000 square foot two-story tower which accommodates 106 new
patient beds, nursing facilities and administrative offices; (2) opened its
new Cardiology Department and Catheterization Lab; and (3) opened its new
emergency room. McAllen Medical Center in McAllen, Texas opened its newly
constructed 7th and 8th floors which contain a 32-bed Sub-Acute Skilled Nursing
Center and 67 additional medical/surgical beds. Auburn General Hospital in
Auburn, Washington began construction on a medical office building which is
scheduled for completion in October 1994.
In addition, the Company opened a second medical office building on the
Regional Cancer Center Campus at its Wellington Regional Medical Center in
West Palm Beach, Florida, and opened the Comprehensive Cancer Center at
Westlake Medical Center in Westlake Village, California.
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, 1993 and, accordingly, the information is presented on a basis
different from that used in preparing the historical financial information
included in this Report.
1989 1990 1991 1992 1993
-------- -------- -------- -------- --------
Average Licensed Beds............... 3,145 3,169 3,266 3,352 3,447
Average Available Beds (1).......... 2,903 2,871 2,966 3,001 3,146
Hospital Admissions................. 70,961 72,037 76,544 77,415 80,140
Average Length of Patient
Stay (Days)....................... 8.1 7.9 7.7 7.3 6.9
Patient Days (2).................... 574,045 572,154 587,882 565,397 550,603
Occupancy Rate (3):
Licensed Beds..................... 50% 49% 49% 46% 44%
Available Beds.................... 54% 55% 54% 51% 48%
- ----------
(1) "Average Available Beds" is the number of beds which are actually in service at any given time for immediate patient use
with the necessary equipment and staff available for patient care. A hospital may have appropriate licenses for more beds
than are in service for a number of reasons, including lack of demand, incomplete construction, and anticipation of
future needs.
(2) "Patient Days" is the aggregate sum for all patients of the number of days that hospital care is provided to each patient.
(3) "Occupancy Rate" is calculated by dividing average patient days (total patient days divided by the total number of days
in the period) by the number of average beds, either available or licensed.
The number of patient days of a hospital is affected by a number of
factors, including the number of physicians using the hospital, changes in the
number of beds, the composition and size of the population of the community in
which the hospital is located, general and local economic conditions,
variations in local medical and surgical practices and the degree of
outpatient use of the hospital services. Current industry trends in
utilization and occupancy have been significantly affected by changes in
reimbursement policies of third party payors. A continuation of such industry
trends could have a material adverse impact upon the Company's future operating
performance. The Company has experienced growth in outpatient utilization over
the past several years. The Company is unable to predict the rate of growth
and resulting impact on the Company's future revenues because it is dependent
2
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,
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.
Valley Hospital in Las Vegas, Nevada contributed 16%, 16% and 16% of net
revenues from the Company's U.S. hospitals and 34%, 32% and 28% of operating
income from the Company's U.S. hospitals for the three years ended December
31, 1993, 1992 and 1991, respectively, excluding the effect of the $13.5
million and $29.8 million special Medicaid reimbursement increases for the
Company as a whole recorded in 1993 and 1992, respectively. McAllen Medical
Center in McAllen, Texas contributed 18%, 16% and 13% of net revenues from
the Company's U.S. hospitals and 35%, 24% and 20% of operating income from the
Company's U.S. hospitals for the three years ended December 31, 1993, 1992 and
1991, respectively, excluding the effect of the $13.5 million and $29.8
million special Medicaid reimbursement increases recorded in 1993 and 1992,
respectively.
The following table shows approximate percentages of gross revenue derived
by the Company's hospitals owned as of December 31, 1993 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, 1993.
PERCENTAGE OF REVENUES
------------------------------------------------------------
1989 1990 1991 1992 1993
-------- -------- -------- -------- --------
Third Party Payors:
Blue Cross............................................. 3.0% 2.5% 2.7% 2.0% 1.8%
Medicare............................................... 38.6% 39.4% 40.7% 41.0% 40.1%
Medicaid............................................... 6.4% 7.3% 8.0% 10.1% 11.8%
-------- -------- -------- -------- --------
TOTAL.................................................. 48.0% 49.2% 51.4% 53.1% 53.7%
Other Sources (including patients and private
insurance carriers)...................................... 52.0% 50.8% 48.6% 46.9% 46.3%
-------- -------- -------- -------- --------
100% 100% 100% 100% 100%
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 ("DRGs") 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
3
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 cost reimbursement and a prospectively determined national
federal capital rate; or, with limited exceptions, if the hospital-specific
rate is below the federal rate, the hospital will receive payments based upon
the fully prospective ("blended") 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 will be
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.
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.
HCFA implemented new regulations, effective January 1, 1992, which set
forth fee schedules for physicians providing services to Medicare patients. In
general, fees for "procedural" services (e.g., surgery and radiology) were
reduced, and fees for "cognitive" services (e.g., visits and consultations)
were increased. The system may reduce the economic incentive for physicians to
perform surgery, radiology and other hospital-based procedures while
encouraging preventative measures and office consultations.
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 or impose additional
restrictions on the utilization of hospital services. A number of legislative
initiatives have been proposed, which if enacted, would result in major
changes in the health care system, nationally and/or at the state level. Under
consideration are proposals which would impose price controls on hospitals,
require that all businesses offer health insurance to their employees and
expand health insurance coverage to those presently uninsured. In addition,
President Clinton has proposed a health care reform plan to Congress, which
among other things, includes a provision limiting the rate of increase in
spending for Medicare and other health care costs as part of his overall
deficit reduction proposals. Six other health care reform bills have been
proposed in Congress. The Company is unable to predict which bill, if any,
will be adopted, or the ultimate impact their adoption would have on the
Company; however, the new legislation, if passed, may have a material adverse
effect on the Company's future revenues.
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 378 beds in Florida which 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.
4
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 1993. 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 1993
financial results is revenue attributable to these programs, some of which
expired and some of which are scheduled to expire in mid-1994. The Company
cannot predict whether the remaining programs will continue beyond the
scheduled termination dates.
Under the Omnibus Budget Reconciliation Act of 1989 ("OBRA"), enacted by
Congress in late 1989, physicians are precluded from referring Medicare
patients for clinical laboratory services where the physician has an ownership
interest or investment interest in, or compensation arrangement with, an
entity that provides clinical laboratory services. Effective January 1, 1992,
these entities were prohibited from billing the Medicare program for such
services. The legislation includes exceptions for in-office and group practice
laboratories, and hospital laboratories where the referring physician has an
ownership interest in the hospital as a whole. In addition to the restrictions
related to clinical laboratories, all Medicare providers and suppliers became
subject to certain reporting and disclosure requirements beginning October 1,
1990. Under these requirements, providers and suppliers must disclose certain
information concerning their financial relationships with referring
physicians, including the names and Medicare provider numbers of referring
physician investors and their immediate relatives and the items and services
provided by referring investor physicians.
In 1991, 1992 and 1993, the Inspector General of the Department of Health
and Human Services ("HHS") issued regulations dealing in part with such
ownership arrangements. 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. All the Company's eligible hospitals have been accredited by the
Joint Commission on the Accreditation of Healthcare Organizations, with the
exception of Dallas Family Hospital which is accredited by the American
Osteopathic Association.
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
5
prior to hospital capital expenditures, construction, expansion, modernization
or initiation of major new services. The Company has not experienced and does
not expect to experience any material adverse effects from those requirements.
Health planning statutes and regulatory mechanisms are in place in many
states in which the Company operates. These provisions govern the distribution
of 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 need for
hospitalization and utilization of hospital services and to set standards for
patient care. The Company has contracted with PROs in each state where it does
business as to the scope of such functions.
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 hospitals had approximately
9,100 employees at December 31, 1993, of whom 6,330 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 maintenance employees are represented by
the International Union of Operating Engineers. 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.
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. In addition, certain
hospitals which are located in the areas served by the Company are special
6
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 alternative health care delivery systems such as preferred provider
organizations, health maintenance organizations and indemnity insurance
programs in the hospital's service area. Such systems 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.
LIABILITY INSURANCE
The Company insures its general and professional liability risks through
self-insurance and unrelated commercial insurance carriers. The Company is
self-insured for its general liability risks for claims limited to $5,000,000
per occurrence and for its professional liability risks for claims limited to
$25,000,000 per occurrence. Coverage in excess of these limits up to
$100,000,000 is maintained with commercial insurance carriers. In 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,
which is scheduled to terminate in July 1994, includes coverage up to $25
million per occurrence for general and professional liability risks. The cost
of such insurance has been increasing and the Company expects that this trend
will continue. 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.
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 (56)....................... Director, Chairman of the Board,
President and Chief Executive
Officer
Kirk E. Gorman (43)....................... Senior Vice President and
Chief Financial Officer
Richard C. Wright (46).................... Vice President
Thomas J. Bender (41)..................... Vice President
Michael G. Servais (47)................... Vice President
Steve G. Filton (36)...................... Vice President and Controller
Sidney Miller (67)........................ 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.
7
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 has served as Director of Accounting and Control since July
1985.
Mr. Servais was elected Vice President of the Company in January 1994, and
has 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. 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.
HOSPITALS
ACUTE CARE HOSPITALS
--------------------
AUBURN GENERAL HOSPITAL MCALLEN MEDICAL CENTER(1) VALLEY HOSPITAL MEDICAL
Auburn, Washington McAllen, Texas CENTER
149 Beds 428 Beds Las Vegas, Nevada
416 Beds
CHALMETTE MEDICAL RIVER PARISHES HOSPITAL(6)
CENTER(1) LaPlace and Chalmette, VICTORIA REGIONAL MEDICAL
Chalmette, Louisiana Louisiana CENTER
118 Beds 216 Beds Victoria, Texas
154 Beds
DALLAS FAMILY HOSPITAL SPARKS FAMILY HOSPITAL(3)
Dallas, Texas Sparks, Nevada WELLINGTON REGIONAL
104 Beds 150 Beds MEDICAL CENTER(1)
West Palm Beach, Florida
DOCTORS' HOSPITAL OF UNIVERSAL MEDICAL CENTER 120 Beds
SHREVEPORT(2) Plantation, Florida
Shreveport, Louisiana 202 Beds WESTLAKE MEDICAL
180 Beds CENTER(1)
Westlake Village,
INLAND VALLEY REGIONAL California
MEDICAL CENTER(1) 126 Beds
Wildomar, California
80 Beds
8
PSYCHIATRIC HOSPITALS
---------------------
THE ARBOUR HOSPITAL HRI HOSPITAL RIVER CREST HOSPITAL
Boston, Massachusetts Brookline, Massachusetts San Angelo, Texas
118 Beds 68 Beds 80 Beds
THE BRIDGEWAY(1) KEYSTONE CENTER(4) RIVER OAKS HOSPITAL
North Little Rock, Wallingford, Pennsylvania New Orleans, Louisiana
Arkansas 84 Beds 126 Beds
70 Beds
DEL AMO HOSPITAL(2) LA AMISTAD RESIDENTIAL TURNING POINT HOSPITAL(4)
Torrance, California TREATMENT CENTER Moultrie, Georgia
166 Beds Maitland, Florida 59 Beds
56 Beds
TWO RIVERS PSYCHIATRIC
FOREST VIEW HOSPITAL MERIDELL ACHIEVEMENT HOSPITAL
Grand Rapids, Michigan CENTER(1) Kansas City, Missouri
62 Beds Austin, Texas 80 Beds
114 Beds
GLEN OAKS HOSPITAL
Greenville, Texas
53 Beds
AMBULATORY TREATMENT CENTERS
----------------------------
COLUMBIA RADIATION OUTPATIENT SURGICAL SURGERY CENTER OF
ONCOLOGY CENTER OF PONCA CITY(5) LITTLETON(5)
Washington, D.C. Ponca City, Oklahoma Littleton, Colorado
COMPREHENSIVE CANCER SURGERY CENTER OF
CENTER THE REGIONAL CANCER SPRINGFIELD(5)
Westlake, California CENTER AT Springfield, Missouri
WELLINGTON
GOLDRING SURGICAL AND West Palm Beach, Florida SURGERY CENTER OF
DIAGNOSTIC CENTER TEXAS(5)
Las Vegas, Nevada ST. GEORGE SURGICAL Odessa, Texas
CENTER(5)
HOPE SQUARE SURGICAL St. George, Utah SURGICAL CENTER OF
CENTER(5) NEW ALBANY(5)
Rancho Mirage, THE SURGERY CENTER OF New Albany, Indiana
California CHALMETTE
Chalmette, Louisiana
M.D. PHYSICIANS
SURGICENTER OF
MIDWEST CITY(5)
Midwest City, Oklahoma
- ----------
(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.
Some of these hospitals 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, 1993 to a vote of security holders.
9
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 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
Net revenues..................... $761,544,000 $731,227,000 $691,619,000 $674,982,000 $631,233,000
Net income....................... $ 24,011,000 $ 20,020,000 $ 20,319,000 $ 11,607,000 $ 9,043,000
Net margin....................... 3.2% 2.7% 2.9% 1.7% 1.4%
Return on average equity......... 11.2% 10.3% 11.6% 7.1% 5.7%
FINANCIAL DATA
Cash provided by
operating activities........... $ 84,640,000 $ 81,731,000 $ 47,190,000 $ 47,552,000 $ 52,207,000
Capital expenditures............. $ 52,690,000 $ 40,554,000 $ 29,926,000 $ 29,125,000 $ 34,781,000
Total assets..................... $460,422,000 $472,427,000 $500,706,000 $535,041,000 $526,109,000
Long-term borrowings............. $ 75,081,000 $114,959,000 $127,235,000 $205,646,000 $205,624,000
Common stockholders' equity...... $224,488,000 $202,903,000 $184,353,000 $167,419,000 $158,061,000
Percentage of total debt to 26% 37% 49% 56% 58%
capital........................
PER SHARE DATA
Net income....................... $ 1.71 $ 1.43 $ 1.45 $ 0.84 $ 0.62
Book value....................... $ 16.69 $ 14.88 $ 13.42 $ 12.21 $ 11.18
COMMON STOCK PERFORMANCE
Market price of common stock
High-Low, by quarter
1st.............................. 16 -12-5/8 15-1/2-12-3/8 14-1/4- 8-1/4 10 -8-1/2 9-3/8-6-3/8
2nd.............................. 16-1/4-13 13-7/8-11-1/8 15-7/8-13-1/8 9-1/2-7-5/8 10-1/4-8-7/8
3rd.............................. 17 -14-1/2 13-3/8-11-1/4 17-5/8-14-5/8 10 -6-3/8 11-5/8-9-3/4
4th.............................. 20-5/8-16-5/8 15-1/8-11-3/4 16 -10-7/8 9-1/4-6-3/8 11-3/8-7-3/8
- -------------------------------------------------------------------------------------------------------------------------------
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 outstanding............. 14,819,000 14,970,000 14,992,000 13,823,000 14,538,000
A special dividend of $.20 per share or approximately $2,900,000 in the
aggregate was declared and paid in 1989. No cash dividends were declared or
paid in any other years. The Company's ability to repurchase its shares,
redeem its convertible debentures, and pay dividends is limited by long-term
debt convenants to $7.5 million plus 25% of cumulative net income since
January 1992.
The 1993, 1992 and 1991 earnings per share and average number of shares
outstanding have been adjusted to reflect the assumed conversion of the
Company's convertible debentures. The common equivalent shares and the
corresponding interest savings on the assumed conversion of the convertible
debentures were not included in the 1990 or 1989 earnings per share
computations because the effect was anti-dilutive.
10
Number of shareholders of record as of January 31, 1994 were as follows:
- ------------------------
Class A Common 7
Class B Common 640
Class C Common 7
Class D Common 384
- ------------------------
ITEM 7. Management's Discussion and Analysis of Operations and Financial
Condition
YEAR ENDED DECEMBER 31, 1993 COMPARED TO 1992
During 1993, net revenue growth was experienced in each of the Company's
principal business groups: acute care hospitals, psychiatric hospitals and
ambulatory treatment centers. Net revenues in 1993 increased 7% over 1992 at
acute care hospitals owned during both years, after excluding the effects of
additional revenues received from special Medicaid reimbursement programs.
Despite the continued shift in the delivery of healthcare services to
outpatient care, the Company's acute care hospitals experienced a slight
increase in inpatient admissions in 1993 due to the expansion of service lines
at many of its hospitals. Outpatient activity also increased this year and
gross outpatient revenues now comprise 23% of the Company's gross revenues as
compared to 21% 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 take advantage of the trend toward increased outpatient services, the
Company has continued to invest in the acquisition and development of
ambulatory treatment centers. During 1993, the Company acquired a radiation
treatment center and majority interests in four partnerships which own and
operate ambulatory surgery facilities. The Company now operates twelve
ambulatory treatment centers, 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.
Net revenues in 1993 at the Company's psychiatric hospitals increased
approximately 6% over 1992. While admissions at these facilities increased
17%, patient days decreased 7% due to shorter average lengths of stay and
increased emphasis on outpatient treatment programs. The shift to outpatient
care was reflected in higher revenues from outpatient services, which now
comprise 13% of gross revenues in the psychiatric group as compared to 10% in
the prior year. The trend in outpatient treatment for psychiatric patients is
expected to continue as a result of advances in patient care and continued
cost containment pressures from payors.
The Company received $13.5 million and $29.8 million in 1993 and 1992,
respectively, from the special Medicaid reimbursement programs mentioned
above. These programs are scheduled to terminate in August 1994 and the
Company cannot predict whether these programs will continue beyond the
scheduled termination date.
An increased proportion of the Company's revenue is derived from fixed
payment services, including Medicare and Medicaid which accounted for 40%, 39%
and 35% of the Company's net patient revenues during 1993, 1992 and 1991,
respectively, excluding the additional revenues from special Medicaid
reimbursement programs. The Company expects Medicare and Medicaid revenues to
continue to increase due to the general aging of the population and the
expansion of state Medicaid programs. In addition to the Medicare and Medicaid
programs, other payors continue to actively negotiate the amounts they will
pay for services performed. In general, the Company expects the percentage of
its business from managed care programs, including HMOs and PPOs, to continue
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.
During 1993, continuing the consolidation strategy in which the Company
focuses its efforts on those markets where there is a maximum potential for
continued growth, the Company sold two acute care hospitals for total proceeds
11
of approximately $11.2 million. These dispositions resulted in a $4.4 million
pre-tax loss ($2.2 million after-tax) which is included in operating expenses
in the Company's 1993 consolidated statement of income. Since 1991, the
Company has closed or sold a total of eight hospitals as part of this
strategy. The Company also recorded a pre-tax charge of $4.4 million related to
the winding down or disposition of non-strategic businesses which is included
in operating expenses in the Company's 1993 consolidated statement of income.
Excluding the additional revenues received from special Medicaid
reimbursement programs mentioned above and the losses resulting from the
disposition of two acute care hospitals and other non-strategic businesses,
operating expenses as a percentage of net revenues for 1993 remained
relatively flat as compared to the prior year. Although the rate of inflation
has not had a significant impact on the results of operations, pressure on
operating margins is expected to continue because, while Medicare fixed
payment rates are indexed for inflation annually, the increases have
historically lagged behind actual inflation.
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 payor 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 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.
Interest expense decreased 24% in 1993 as compared to 1992 due to lower
average outstanding borrowings.
Depreciation and amortization expense decreased approximately $9.5 million
in 1993 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 ambulatory
treatment centers.
The effective tax rate was 32% in 1993 as compared to 51% in 1992. The
decrease in the effective rate for 1993 as compared to 1992 was due to the
above-mentioned $13.5 million goodwill amortization recorded in the 1992
period, which was not deductible for income tax purposes, and a reduction in
the 1993 state tax provision. The net effect of the impact of the 1993 tax law
changes on the current and deferred tax provisions was immaterial.
YEAR ENDED DECEMBER 31, 1992 COMPARED TO 1991
Net revenues in 1992 increased 6% over 1991 at hospitals owned during both
years after excluding $29.8 million of favorable Medicaid reimbursement
increases in 1992 and a $4.8 million pre-tax gain resulting from the sale of
the Company's U.K. operations in 1991. The increased revenue resulted from
higher utilization of outpatient and ancillary services, general price
increases and increased severity of illness of patients admitted. The increase
in outpatient services reflects the continuing advancements in medical
technologies and pressures from payors to direct less acutely ill patients
from inpatient services to outpatient care. The 1992 acquisitions of majority
interests in four partnerships which own and operate ambulatory surgery
facilites also contributed to an increase in the outpatient revenues.
In 1992, in accordance with its consolidation strategy, the Company closed
a 96-bed acute care hospital and a 48-bed psychiatric hospital. The closings
did not have a material impact on the consolidated financial statements. In
1991, the Company sold its U.K. operations and sold an 88-bed acute care
hospital. Admissions at the Company's hospitals which were owned during both
years increased 1% in 1992 as compared to 1991. Patient days at these
hospitals decreased 4% over 1991 due to a decrease in the average length of
stay, particularly at the psychiatric hospitals.
12
Excluding the nonrecurring revenue items described above, operating
expenses as a percentage of net revenues remained relatively flat in 1992
compared to 1991.
Excluding the $5 million reversal of an unneeded interest accrual in 1991,
interest expense decreased 13% in 1992 due to lower average outstanding
borrowings and lower average interest rates on floating rate debt.
Depreciation and amortization expense increased in 1992 compared to 1991
as a result of a $13.5 million amortization charge recorded in 1992 resulting
from the revaluation of certain goodwill balances.
The effective tax rate was 51% in 1992, as compared to 34% in 1991. The
higher 1992 tax resulted principally from the above-mentioned goodwill
amortization which is not deductible for income tax purposes, while the 1991
provision for income taxes was reduced due to the utilization of a capital
loss carryforward which offset all of the $4.8 million pre-tax gain resulting
from the sale of the Company's U.K. operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased to $84.6 million in
1993 from $81.7 million in 1992. The increase resulted primarily from improved
operating results at the Company's facilities during 1993 as compared to 1992.
The Company received $10.3 million of cash from the disposition of two acute
care hospitals in 1993 and also received $8.2 million of cash related to
facilities divested in prior years. During each of the past three years, the
net cash provided by operating activities substantially exceeded the scheduled
maturities of long-term debt. During 1993, the Company used $47.3 million of
its operating cash flow to finance capital expenditures, $11.5 million to
acquire a radiation therapy center and majority interests in partnerships
which own four ambulatory surgery centers, $3.2 million to acquire the real
estate assets of a facility previously leased, and $3.2 million to repurchase
shares of its outstanding common stock. During 1993, the Company reduced
outstanding debt by $44.7 million using funds generated from operations and
the proceeds from the disposition of hospitals. Total debt as a percentage of
total capitalization declined to 26% at December 31, 1993 from 37% at December
31, 1992. The year-end ratio is the lowest since the Company went public in
1981.
Expected capital expenditures for 1994 include approximately $21 million
for capital equipment and renovations of existing facilities, $38 million for
new projects and $10 million for acquisitions and development of ambulatory
treatment centers. The Company believes that its capital expenditures program
is adequate to expand, improve and equip its existing hospitals.
During 1993, the Company entered into a commercial paper program which
currently provides up to $25 million of renewable borrowings which are 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 to $65
million. At December 31, 1993, there were no borrowings outstanding under this
program.
The Company also has a $72.4 million non-amortizing revolving credit
agreement which matures in August of 1995. However, 50% of the net proceeds,
in excess of $15 million annually, from the sale of assets reduce available
borrowing commitments. At December 31, 1993, the Company had $72.4 million of
unused borrowing capacity, and there were no borrowings outstanding under this
revolving credit facility.
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,
1993, the Company had interest rate swap agreements with commercial banks
having a total notional principal amount of $40 million. These agreements call
for the payment of fixed rate interest by the Company in return for the
assumption by the commercial banks of the variable rate costs, which
effectively fixes the Company's interest rate on a portion of its floating
rate debt at 10.4%. The interest rate swap agreements in the amounts of $10
million, $20 million and $10 million mature in 1994, 1995 and 1996
respectively. Additionally, the Company is a party to a swap agreement with a
notional principal amount of $20 million expiring in 1994, from which it
receives interest from a commercial bank at a fixed rate of 5.4% and pays
13
interest at various rates to the bank. The Company is exposed to credit loss
in the event of non-performance by the other parties to the interest rate swap
agreements. However, the Company does not anticipate nonperformance by the
counterparties. The cost to terminate the net swap obligations at December 31,
1993 is approximately $4,922,000.
With internally generated funds and amounts available under its long-term
debt facilities, the Company expects to have sufficient funds to meet its
working capital and capital expenditure requirements.
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Balance Sheets, Consolidated Statements of
Income, Statements of Common Stockholders' Equity, and Consolidated Statements
of Cash Flows, together with the report of Arthur Andersen & Co., independent
public accountants, are included elsewhere herein. Reference is made to the
"Index to Financial Statements and Financial Statement Schedules."
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, 1993. 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, 1993.
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, 1993.
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, 1993.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. and 2. Financial Statements and Financial Statement Schedules.
See Index to Financial Statements and Financial Statement Schedules on
page 18.
(b) Reports on Form 8-K
None
14
(c) Exhibits
3.1 Restated Certificate of Incorporation, as amended, previously filed
as Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1983, Exhibit 3.2 to Registrant's Annual Report on
Form 10-K for the year ended December 31, 1985, and Exhibit 3.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1987, are incorporated herein by reference.
3.2 Bylaws of Registrant as amended, previously filed as Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1987, is incorporated herein by reference.
4.1 Indenture, dated as of April 1, 1983, of Registrant to
Manufacturers Hanover Trust Company, Trustee, previously filed as Exhibit
4.2 to Registration Statement No. 2-82718 on Form S-1, is incorporated
herein by reference.
4.2 Instrument of Resignation, Appointment and Acceptance, dated as of
March 23, 1988 among the Registrant, Manufacturers Hanover Trust Company
and the First National Bank of Boston, previously filed as Exhibit 1 to
Registrant's Report on Form 8-K dated March 23, 1988, 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.
10.4 Purchase and Sale Agreement, dated as of February 8, 1991, by and
among Registrant, London Independent Hospital, Inc., UHS International,
Inc., UHS Leasing Company, Inc., UHS International Limited, and Compass
Group plc, previously filed with Registrant's Current Report on Form 8-K
dated February 8, 1991, is incorporated herein by reference.
10.5 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.
10.6 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.
10.7 Agreement, effective January 1, 1994, to renew Advisory Agreement,
dated as of December 24, 1986, between Universal Health Realty Income Trust
and UHS of Delaware, Inc.
10.8 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
15
Universal Health Realty Income Trust (Registration No. 33-7872), is
incorporated herein by reference.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 Sale and Servicing Agreement dated as of November 16, 1993,
between Certain Hspitals and UHS Receivables Corp.
10.17 Servicing agreement dated as of November 16, 1993, among UHS
Receivables Corp., UHS oof Delaware, Inc. and Continental Bank, National
Association.
10.18 Pooling Agreement dated as of November 16, 1993, among UHS
Receivables Corp., Sheffield Receivables Corporation and Continental Bank,
National Association.
10.19 Guarantee dated as of November 16, 1993, by Universal Health
Services, Inc. in favor of UHS Receivables Corp.
10.20 Amendment No. 1 to the 1989 Non-Employee Director Stock
Option Plan.
10.21 Amendment No. 1 to the 1992 Stock Bonus Plan.
10.22 1994 Executive Incentive Plan.
11. Statement re: computation of per share earnings.
22. Subsidiaries of Registrant.
24. Consent of Independent Public Accountants.
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.
16
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 23, 1994
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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALAN B. MILLER Chairman of the Board, March 23, 1994
- --------------------------------------------------------- President and Director
ALAN B. MILLER (Principal Executive
Officer)
/s/ SIDNEY MILLER Secretary and Director March 23, 1994
- ---------------------------------------------------------
SIDNEY MILLER
/s/ LEONARD W. CRONKHITE, JR., MD Director March 23, 1994
- ---------------------------------------------------------
LEONARD W. CRONKHITE, JR., MD
/s/ ANTHONY PANTALEONI Director March 23, 1994
- ---------------------------------------------------------
ANTHONY PANTALEONI
/s/ MARTIN MEYERSON Director March 23, 1994
- ---------------------------------------------------------
MARTIN MEYERSON
/s/ ROBERT H. HOTZ Director March 23, 1994
- ---------------------------------------------------------
ROBERT H. HOTZ
/s/ JOHN H. HERRELL Director March 23, 1994
- ---------------------------------------------------------
JOHN H. HERRELL
/s/ KIRK E. GORMAN Senior Vice President and March 23, 1994
- --------------------------------------------------------- Treasurer (Chief Financial
KIRK E. GORMAN Officer)
17
UNIVERSAL HEALTH SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEM 14(A))
PAGE
---------
FORM
10-K
---
Consolidated Financial Statements:
Report of Independent Public Accountants on Financial Statements
and Schedules................................................... 19
Consolidated Statements of Income for the three years ended
December 31, 1993............................................... 20
Consolidated Balance Sheets as of December 31, 1993 and 1992....... 21
Consolidated Statements of Common Stockholders' Equity for the
three years ended December 31, 1993............................. 22
Consolidated Statements of Cash Flows for the three years ended
December 31, 1993............................................... 23
Notes to Consolidated Financial Statements......................... 24
Supplemental Financial Statement Schedules:
II Amounts Receivable from Related Parties, Underwriters,
Promoters and Employees Other Than Related Parties............ 33
V Property and Equipment........................................ 34
VI Accumulated Depreciation and Amortization of Property and
Equipment..................................................... 35
VIII Valuation and Qualifying Accounts............................. 35
X Supplementary Income Statement Information.................... 35
18
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, 1993 and 1992, 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, 1993. These consolidated financial statements and the
schedules referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedules 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, 1993 and
1992, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1993 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 schedules listed in the Index to
Financial Statements and Financial Statement Schedules are presented for the
purpose of complying with the Securities and Exchange Commission's rules and
are not a required part of the basic financial statements. These schedules have
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly state 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 & CO.
Philadelphia, Pennsylvania
February 15, 1994
19
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1993, 1992 and 1991
1993 1992 1991
--------------- --------------- ---------------
Net revenues................................................... $761,544,000 $731,227,000 $691,619,000
--------------- --------------- ---------------
Operating charges
Operating expenses........................................... 643,923,000 595,947,000 583,410,000
Depreciation & amortization.................................. 39,599,000 49,059,000 35,022,000
Lease and rental expense..................................... 34,281,000 33,854,000 34,479,000
Interest expense, net........................................ 8,645,000 11,414,000 8,150,000
--------------- --------------- ---------------
Total operating charges...................................... 726,448,000 690,274,000 661,061,000
--------------- --------------- ---------------
Income before income taxes..................................... 35,096,000 40,953,000 30,558,000
Provision for income taxes..................................... 11,085,000 20,933,000 10,239,000
--------------- --------------- ---------------
Net income..................................................... $ 24,011,000 $ 20,020,000 $ 20,319,000
=============== =============== ===============
Earnings per common & common share equivalent (fully diluted).. $1.71 $1.43 $1.45
=============== =============== ===============
Weighted average number of common shares and equivalents....... 14,819,000 14,970,000 14,992,000
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
20
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1993 and 1992
ASSETS 1993 1992
- ------ --------------- ---------------
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 569,000 $ 6,686,000
Accounts receivable, net of allowance of $28,444,000 in 1993 and
$27,257,000 in 1992 for doubtful accounts....................................... 78,605,000 92,716,000
Supplies.......................................................................... 12,617,000 12,360,000
Deferred income taxes............................................................. 7,733,000 5,189,000
Other current assets.............................................................. 2,475,000 1,859,000
--------------- ---------------
Total current assets.............................................................. 101,999,000 118,810,000
PROPERTY AND EQUIPMENT
Land.............................................................................. 29,026,000 23,154,000
Buildings and improvements........................................................ 284,510,000 274,214,000
Equipment......................................................................... 191,483,000 188,306,000
Property under capital lease...................................................... 18,937,000 13,227,000
--------------- ---------------
523,956,000 498,901,000
Less accumulated depreciation..................................................... 231,509,000 215,543,000
--------------- ---------------
292,447,000 283,358,000
Construction in progress.......................................................... 9,985,000 12,350,000
--------------- ---------------
302,432,000 295,708,000
OTHER ASSETS
Excess of cost over fair value of net assets acquired............................. 38,089,000 33,809,000
Deferred charges.................................................................. 1,697,000 1,454,000
Other............................................................................. 16,205,000 22,646,000
--------------- ---------------
55,991,000 57,909,000
--------------- ---------------
$460,422,000 $472,427,000
=============== ===============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
- -------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt.............................................. $ 4,313,000 $ 3,737,000
Accounts payable.................................................................. 34,038,000 34,542,000
Accrued liabilities
Compensation and related benefits............................................... 16,565,000 15,511,000
Interest........................................................................ 3,247,000 3,659,000
Other........................................................................... 25,789,000 19,774,000
Federal and state taxes......................................................... 2,547,000 7,871,000
--------------- ---------------
Total current liabilities......................................................... 86,499,000 85,094,000
DEFERRED INCOME TAXES............................................................. 3,863,000 8,685,000
OTHER NONCURRENT LIABILITIES...................................................... 70,491,000 60,786,000
LONG-TERM DEBT.................................................................... 75,081,000 114,959,000
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY
Class A Common Stock, voting, $.01 par value;
authorized 12,000,000 shares; issued and outstanding
1,139,123 shares in 1993 and 1,211,850 in 1992.................................. 11,000 12,000
Class B Common Stock, limited voting, $.01 par value;
authorized 50,000,000 shares; issued and outstanding
12,171,454 shares in 1993 and 12,276,146 in 1992................................ 122,000 123,000
Class C Common Stock, voting, $.01 par value;
authorized 1,200,000 shares; issued and outstanding
114,482 shares in 1993 and 121,755 in 1992...................................... 1,000 1,000
Class D Common Stock, limited voting, $.01 par value;
authorized 5,000,000 shares; issued and outstanding
26,223 shares in 1993 and 28,648 in 1992........................................ -- --
Capital in excess of par value, net of deferred compensation of
$291,000 in 1993 and $569,000 in 1992........................................... 80,878,000 83,302,000
Retained earnings................................................................. 143,476,000 119,465,000
--------------- ---------------
224,488,000 202,903,000
--------------- ---------------
$460,422,000 $472,427,000
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
21
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1993, 1992 and 1991
CAPITAL IN CUMULATIVE
CLASS A CLASS B CLASS C CLASS D EXCESS OF RETAINED TRANSLATION
COMMON COMMON COMMON COMMON PAR VALUE EARNINGS ADJUSTMENTS TOTAL
---------- ----------- --------- --------- -------------- -------------- -------------- ------------
Balance
January 1, 1991....... $ 26,000 $108,000 $ 3,000 $ 1,000 $84,165,000 $ 79,126,000 $ 3,990,000 $167,419,000
Common Stock
Issued.............. -- -- -- -- 168,000 -- -- 168,000
Converted........... (12,000) 13,000 (1,000) -- -- -- -- --
Amortization
of deferred
compensation........ -- -- -- -- 437,000 -- -- 437,000
Translation
adjustments......... -- -- -- -- -- -- (3,990,000) (3,990,000)
Net income............ -- -- -- -- -- 20,319,000 -- 20,319,000
----- ----- ----- ----- ------- -------- ------- ------------
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
December 31, 1993..... $ 11,000 $122,000 $ 1,000 -- $80,878,000 $143,476,000 -- $224,488,000
===== ===== ===== ===== ======= ======== ======= ============
The accompanying notes are an integral part of these consolidated financial statements.
22
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1993, 1992 and 1991
1993 1992 1991
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 24,011,000 $ 20,020,000 $ 20,319,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 39,599,000 49,059,000 35,022,000
Provision for self-insurance reserves........................ 20,755,000 21,193,000 24,949,000
Reserve for loss on closure of hospital...................... -- -- 3,000,000
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable.......................................... 12,928,000 7,608,000 (7,700,000)
Accrued interest............................................. (412,000) (256,000) (667,000)
Accrued and deferred income taxes............................ (8,990,000) (9,955,000) (10,607,000)
Other working capital accounts............................... 4,858,000 3,960,000 (5,212,000)
Other assets and deferred charges............................ (5,804,000) (2,120,000) 502,000
Other........................................................ 1,002,000 620,000 6,790,000
Payments made in settlement of self-insurance claims......... (12,135,000) (8,398,000) (13,664,000)
Loss (gain) on sales of businesses............................... 8,828,000 -- (5,542,000)
--------------- --------------- ---------------
Net cash provided by operating activities...................... 84,640,000 81,731,000 47,190,000
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions............................... (47,319,000) (33,244,000) (28,715,000)
Disposition of assets.......................................... 227,000 2,652,000 9,353,000
Acquisition of properties previously leased.................... (3,218,000) -- (13,014,000)
Acquisition of businesses...................................... (11,526,000) (7,188,000) --
Disposition of businesses...................................... 18,492,000 12,355,000 30,152,000
--------------- --------------- ---------------
Net cash used in investing activities.......................... (43,344,000) (25,425,000) (2,224,000)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additional borrowings.......................................... 1,800,000 15,375,000 29,349,000
Reduction of long-term debt.................................... (46,496,000) (85,900,000) (74,690,000)
Issuance of common stock....................................... 519,000 1,134,000 168,000
Repurchase of common shares.................................... (3,236,000) (2,926,000) --
--------------- --------------- ---------------
Net cash used in financing activities.......................... (47,413,000) (72,317,000) (45,173,000)
--------------- --------------- ---------------
DECREASE IN CASH AND CASH EQUIVALENTS............................ (6,117,000) (16,011,000) (207,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD............................................ 6,686,000 22,697,000 22,904,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................... $ 569,000 $ 6,686,000 $ 22,697,000
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid.................................................. $ 9,057,000 $ 11,670,000 $ 13,367,000
Income taxes paid, net of refunds.............................. $ 19,901,000 $ 31,086,000 $ 20,852,000
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
See Notes 2 and 6
The accompanying notes are an integral part of these consolidated financial statements.
23
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. 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 payors, and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements
with third-party payors. These net revenues are accrued on an estimated basis
in the period the related services are rendered and adjusted in future periods
as final settlements are determined. Medicare and Medicaid net revenues
represented 40%, 39% and 35% of net patient revenues for the years 1993, 1992
and 1991, 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 $47,663,000 in
1993 and $43,828,000 in 1992, is amortized 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.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: 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 1993, 1992 and
1991 earnings per share have been adjusted to reflect the assumed conversion
of the Company's convertible debentures.
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.
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
$498,000, $515,000 and $2,188,000 in 1993, 1992 and 1991, respectively.
INTEREST RATE SWAP AGREEMENTS: The differential to be paid or received is
accrued as interest expense as interest rates change and is recognized over
the life of the agreements.
2) ACQUISITIONS, DISPOSITIONS AND CLOSURES
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
24
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 operating expenses in the 1993 consolidated
statement of income.
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 operating expenses 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.
1991 -- During 1991 the Company sold its entire U.K. operations,
consisting of three acute care hospitals and certain other assets. This
transaction resulted in a pre-tax gain of approximately $4.8 million
(including $4.3 million transferred from cumulative translation adjustment)
which is included in net revenues in the 1991 financial statements. The
Company received $30.2 million in cash during 1991, an additional $9 million
in 1992 and $4.9 million in 1993. The Company is entitled to receive
additional consideration of approximately (pounds sterling)2.5 million as well
as additional amounts if certain earnings targets are achieved by one of these
hospitals. Based upon the year-end exchange rate, the Company expects to
receive approximately $3.6 million in 1994.
In 1991 the Company entered into a 15-year operating lease agreement for a
166-bed psychiatric hospital. The lease terms include three 5-year renewal
terms at the Company's option, annual base lease rentals of $1,620,000 and
additional rentals beginning in 1993 based upon revenues in excess of a base
year amount ($24,000 in 1993).
3) LONG-TERM DEBT
A summary of long-term debt follows:
DECEMBER 31
---------------------------------
1993 1992
-------------- ---------------
LONG-TERM DEBT:
Notes payable (including obligations under capitalized leases of
$12,132,000 in 1993 and $9,581,000 in 1992) with varying maturities through 2000;
weighted average interest at 7% in 1993 and 7.8% in 1992 (see Note 6 regarding
capitalized leases).............................................................. $13,727,000 $ 11,795,000
Mortgages payable, interest at 6.0% to 11.0% with varying maturities through 2000.. 3,811,000 2,734,000
Revolving credit and demand notes.................................................. 4,600,000 46,850,000
Commercial paper................................................................... -- --
Revenue bonds, interest at floating rates ranging from 2.4% to 2.8% at December 31,
1993............................................................................. 18,200,000 18,200,000
and fixed rates ranging from 7.5% to 8.3% with varying maturities
through 2015..................................................................... 9,151,000 9,212,000
Subordinated debt:
Debentures at 7-1/2%, convertible at $23.52 per share, due in 2008............... 29,905,000 29,905,000
-------------- ---------------
79,394,000 118,696,000
Less -- Amounts due within one year................................................ 4,313,000 3,737,000
-------------- ---------------
$75,081,000 $114,959,000
============== ===============
25
During 1993, the Company commenced a commercial paper program which
provides up to $25 million of renewable borrowings which are 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 to $65
million. A fee of .76% is required on this $25 million commitment.
The Company has a $72.4 million non-amortizing revolving credit agreement
which matures in August of 1995 and provides for interest, at the Company's
option, at the prime rate, certificate of deposit rate plus 11/8% or LIBOR
plus 1%. A fee of 3/8% is required on the unused portion of this commitment.
There are no compensating balance requirements. The agreement contains a
provision whereby 50% of the net consideration, in excess of $15 million
annually, from the disposition of assets will be applied to reduce
commitments. At December 31, 1993, the Company had $72.4 million of unused
borrowing capacity, and there were no borrowings outstanding under this
revolving credit agreement.
The average amounts outstanding during 1993, 1992 and 1991 under the
revolving credit notes and commercial paper program were $25,069,000,
$47,318,000 and $91,770,000, respectively, with corresponding effective
interest rates of 13.9%, 11.2% and 10.0% including commitment fee and interest
rate swaps. The maximum amounts outstanding at any month-end were $46,800,000,
$91,650,000 and $114,416,000 during 1993, 1992 and 1991 respectively.
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,
1993, the Company had interest rate swap agreements with commercial banks
having a total notional principal amount of $40 million. These agreements call
for the payment of fixed rate interest by the Company in return for the
assumption by the commercial banks of the variable rate costs, which
effectively fixes the Company's interest rate on a portion of its floating
rate debt at 10.4%. The interest rate swap agreements in the amounts of $10
million, $20 million and $10 million mature in 1994, 1995 and 1996
respectively. Additionally, the Company is a party to a swap agreement with a
notional principal amount of $20 million expiring in 1994, from which it
receives interest from a bank at a fixed rate of 5.4% and pays interest at
various rates to the bank. The Company is exposed to credit loss in the event
of non-performance by the other parties to the interest rate swap agreements.
However, the Company does not anticipate nonperformance by the counterparties.
The cost to terminate the net swap obligations at December 31, 1993 is
approximately $4,922,000.
Covenants relating to long-term debt require maintenance of a minimum net
worth and cash flows, specified debt to net worth and fixed charge coverage
ratios. Covenants also limit the Company's ability to incur additional senior
debt and to pay cash dividends, repurchase its shares and retire convertible
debenture debt and limit capital expenditures, among other restrictions.
The fair value of the Company's subordinated debentures at December 31,
1993 was approximately $31,101,000 based on quoted market prices. The Company
has the option to redeem these debentures at Par value at any time upon 30
days notice. The fair value of the Company's remaining long-term debt at
December 31, 1993 was approximately equal to its carrying value.
Substantially all accounts receivable and the stock of subsidiary
companies are pledged as collateral to secure long-term debt.
Aggregate maturities follow:
----------------------------
1994 $ 4,313,000
1995 9,671,000
1996 3,815,000
1997 2,284,000
1998 805,000
Later 58,506,000
----------------------------
Total $79,394,000
----------------------------
26
4) COMMON STOCK
During 1993, the Company repurchased 224,800 shares of its Class B Common
Stock at an average purchase price of $14.39 per share or an aggregate of
approximately $3.2 million. Since January 1, 1992 the Company has repurchased
454,700 shares at an aggregate purchase price of approximately $6.2 million or
$13.55 per share. The Company's ability to repurchase its shares is limited by
long-term debt covenants to $7.5 million plus 25% of cumulative net income
since January, 1992. Under the terms of these covenants, the Company had the
ability to repurchase an additional $12.3 million of its Common Stock as of
December 31, 1993. The repurchased shares are treated as retired.
At December 31, 1993, 3,340,350 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, for issuance upon conversion of the Company's Convertible
Subordinated Debentures and for issuance of stock under other incentive plans.
Class A, C and D Common Stock are convertible on a share for share basis into
Class B Common Stock.
In 1992, the Company adopted a Stock Bonus Plan and a Corporate Ownership
Program, 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 46,313 shares at
December 31, 1993.
Under the terms of the Corporate Ownership Program, 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, 1993, 19,803 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 143,000 shares under this plan, of which 45,000 became
fully vested during 1993 and 5,333 were cancelled. 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 $240,000 in
1993, $265,000 in 1992 and $278,000 in 1991.
Stock options to purchase Class B Common Stock have been granted to
officers, key employees and directors of the Company under various plans. 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.
27
Information with respect to these options is summarized as follows:
AVERAGE
NUMBER OPTION
OUTSTANDING OPTIONS OF SHARES PRICE
- ------------------- ---------- --------
Balance, January 1, 1991.................................................... 177,316 $ 6.62
Granted................................................................... 17,500 $13.67
Exercised................................................................. (39,814) $ 4.97
Cancelled................................................................. (7,000) $ 8.55
---------- --------
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, December 31, 1993.................................................. 164,337 $12.53
========== ========
Options for 259,100 shares were available for grant at December 31, 1993.
At December 31, 1993, options for 49,313 shares of Class B Common Stock with
an aggregate purchase price of $581,273 (average of $11.79 per share) were
exercisable.
5) INCOME TAXES
Components of income tax expense are as follows:
Year Ended December 31
--------------------------------------------------
1993 1992 1991
-------------- -------------- --------------
Currently payable
Federal.......................................................... $17,315,000 $28,495,000 $20,447,000
State...........................