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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-10454
UNIVERSAL HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 23-2077891
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
UNIVERSAL CORPORATE CENTER
367 SOUTH GULPH ROAD P.O. BOX 61558
KING OF PRUSSIA, PENNSYLVANIA
(ADDRESS OF PRINCIPAL EXECUTIVE 19406-0958
OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 768-3300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
CLASS B COMMON STOCK, $.01 PAR VALUE REGISTERED
NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS D COMMON STOCK, $.01 PAR VALUE
(TITLE OF EACH CLASS)
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Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The number of shares of the registrant's Class A Common Stock, $.01 par value,
Class B Common Stock, $.01 par value, Class C Common Stock, $.01 par value,
and Class D Common Stock, $.01 par value, outstanding as of January 31, 1998,
was 2,059,929, 30,148,102, 207,230, and 31,925, respectively.
The aggregate market value of voting stock held by non-affiliates at January
31, 1998 was $1,400,828,682. (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 1998 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1997 (incorporated by reference
under Part III).
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PART I
ITEM 1. BUSINESS
The principal business of Universal Health Services, Inc. (together with its
subsidiaries, the "Company") is owning and operating acute care hospitals,
behavioral health centers, ambulatory surgery centers and radiation oncology
centers. Presently, the Company operates 43 hospitals, consisting of 20 acute
care hospitals, 20 behavioral health centers, and three women's centers, in
Arkansas, California, the District of Columbia, Florida, Georgia, Illinois,
Louisiana, Massachusetts, Michigan, Missouri, Nevada, Oklahoma, Pennsylvania,
Puerto Rico, South Carolina, Texas and Washington. The Company, as part of its
Ambulatory Treatment Centers Division, owns outright, or in partnership with
physicians, and operates or manages 22 surgery and radiation oncology centers
located in 13 states.
Services provided by the Company's hospitals include general surgery,
internal medicine, obstetrics, emergency room care, radiology, oncology,
diagnostic care, coronary care, pediatric services and psychiatric services.
The Company provides capital resources as well as a variety of management
services to its facilities, including central purchasing, data processing,
finance and control systems, facilities planning, physician recruitment
services, administrative personnel management, marketing and public relations.
The Company selectively seeks opportunities to expand its base of operations
by acquiring, constructing or leasing additional hospital facilities. Such
expansion may provide the Company with access to new markets and new health
care delivery capabilities. The Company also seeks to increase the operating
revenues and profitability of owned hospitals by the introduction of new
services, improvement of existing services, physician recruitment and the
application of financial and operational controls. Pressures to contain health
care costs and technological developments allowing more procedures to be
performed on an outpatient basis have led payors to demand a shift to
ambulatory or outpatient care wherever possible. The Company is responding to
this trend by emphasizing the expansion of outpatient services. In addition,
in response to cost containment pressures, the Company intends to implement
programs designed to improve financial performance and efficiency while
continuing to provide quality care, including more efficient use of
professional and paraprofessional staff, monitoring and adjusting staffing
levels and equipment usage, improving patient management and reporting
procedures and implementing more efficient billing and collection procedures.
The Company also continues to examine its facilities and to dispose of those
facilities which it believes do not have the potential to contribute to the
Company's growth or operating strategy.
The Company is involved in continual development activities. Applications to
state health planning agencies to add new services in existing hospitals are
currently on file in states which require certificates of need (e.g.,
Washington, D.C.). Although the Company expects that some of these
applications will result in the addition of new facilities or services to the
Company's operations, no assurances can be made for ultimate success by the
Company in these efforts.
RECENT AND PROPOSED ACQUISITIONS AND DEVELOPMENT ACTIVITIES
In 1997, the Company proceeded with its development of new facilities and
consummated a number of acquisitions.
In July 1997, the Company acquired an 80% interest in a partnership with
George Washington University, which owns and operates The George Washington
University Hospital, a 501 bed acute care teaching hospital located in
Washington, D.C. The Company has agreed to construct a 400 bed acute care
replacement facility which is scheduled to be completed in 2001.
During the third and fourth quarters of 1997, the Company spent a total of
$71 million for the construction of various new facilities. In August, the 129
bed Edinburg Regional Medical Center located in Edinburg, Texas opened. A
Centralized Administrative Services Building for both Edinburg Regional
Medical Center and McAllen Medical Center in McAllen, Texas also became
operational.
1
Two newly constructed specialized women's health centers, Renaissance
Women's Center of Austin located in Austin, Texas, and Lakeside Women's Center
located in Oklahoma City, Oklahoma were opened. The Company owns various
equity interests in the limited liability companies which own and operate
these facilities. A newly constructed medical complex located in Las Vegas,
Nevada, which includes the 148 bed acute care facility, Summerlin Hospital
Medical Center, was also opened.
The Company also selectively expanded its operations at certain of its
existing facilities: Valley Hospital Medical Center in Las Vegas, Nevada
opened its new 19 bed Neonatal Intensive Care Unit; a major expansion of the
ICU/CCU unit at Northwest Texas Healthcare System in Amarillo, Texas was
completed; McAllen Medical Center in McAllen, Texas opened a new outpatient
diagnostic unit; a new outpatient surgery facility was opened at Victoria
Regional Medical Center in Victoria, Texas; and the former Edinburg Hospital
building in Edinburg, Texas was renovated and opened as the 40 bed UHS
Rehabilitation Pavilion, and the 40 bed Lifecare long-term acute care
hospital.
In January 1998, the Company acquired three hospitals in Puerto Rico for an
aggregate purchase price of $186 million. The hospitals acquired are Hospital
San Pablo in Bayamon (430 beds), Hospital San Francisco in Rio Piedras (160
beds), and Hospital San Pablo del Este in Fajardo (180 beds).
Effective February 1, 1998, the Company finalized its joint venture with
Quorum Health Group, Inc., which created a regional healthcare system owned by
the Company and Quorum by combining the Company's Valley and Summerlin
hospitals with Quorum's 241 bed Desert Springs Hospital, all of which are now
managed by the Company.
2
BED UTILIZATION AND OCCUPANCY RATES
The following table shows the historical bed utilization and occupancy rates
for the hospitals operated by the Company for the years indicated.
Accordingly, information related to hospitals acquired during the five year
period has been included from the respective dates of acquisition, and
information related to hospitals divested during the five year period has been
included up to the respective dates of divestiture.
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Average Licensed Beds:
Acute Care Hospitals.... 3,389 3,018 2,638 2,398 2,548
Behavioral Health Cen-
ters................... 1,777 1,565 1,238 1,145 1,134
Average Available Beds(1):
Acute Care Hospitals.... 2,951 2,641 2,340 2,099 2,213
Behavioral Health Cen-
ters................... 1,762 1,540 1,223 1,142 1,132
Admissions:
Acute Care Hospitals.... 128,020 111,244 91,298 75,923 73,378
Behavioral Health Cen-
ters................... 28,350 22,295 15,329 13,033 11,627
Average Length of Stay
(Days):
Acute Care Hospitals.... 4.8 4.9 5.1 5.2 5.4
Behavioral Health Cen-
ters................... 11.9 12.4 12.8 13.8 15.8
Patient Days(2):
Acute Care Hospitals.... 618,613 546,237 462,054 394,490 396,135
Behavioral Health Cen-
ters................... 337,843 275,667 195,961 179,821 184,263
Occupancy Rate--Licensed
Beds(3):
Acute Care Hospitals.... 50% 50% 48% 45% 43%
Behavioral Health Cen-
ters................... 52% 48% 43% 43% 45%
Occupancy Rate--Available
Beds(3):
Acute Care Hospitals.... 57% 57% 54% 51% 49%
Behavioral Health Cen-
ters................... 53% 49% 44% 43% 45%
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(1) "Average Available Beds" is the number of beds which are actually in
service at any given time for immediate patient use with the necessary
equipment and staff available for patient care. A hospital may have
appropriate licenses for more beds than are in service for a number of
reasons, including lack of demand, incomplete construction, and
anticipation of future needs.
(2) "Patient Days" is the aggregate sum for all patients of the number of days
that hospital care is provided to each patient.
(3) "Occupancy Rate" is calculated by dividing average patient days (total
patient days divided by the total number of days in the period) by the
number of average beds, either available or licensed.
The number of patient days of a hospital is affected by a number of factors,
including the number of physicians using the hospital, changes in the number
of beds, the composition and size of the population of the community in which
the hospital is located, general and local economic conditions, variations in
local medical and surgical practices and the degree of outpatient use of the
hospital services. Current industry trends in utilization and occupancy have
been significantly affected by changes in reimbursement policies of third
party payors. A continuation of such industry trends could have a material
adverse impact upon the Company's future operating performance. The Company
has experienced growth in outpatient utilization over the past several
3
years. The Company is unable to predict the rate of growth and resulting
impact on the Company's future revenues because it is dependent upon
developments in medical technologies and physician practice patterns, both of
which are outside of the Company's control. The Company is also unable to
predict the extent to which other industry trends will continue or accelerate.
SOURCES OF REVENUE
The Company receives payment for services rendered from private insurers,
including managed care plans, the federal government under the Medicare
program, state governments under their respective Medicaid programs and
directly from patients. All of the Company's acute care hospitals and most of
the Company's behavioral health centers are certified as providers of Medicare
and Medicaid services by the appropriate governmental authorities. The
requirements for certification are subject to change, and, in order to remain
qualified for such programs, it may be necessary for the Company to make
changes from time to time in its facilities, equipment, personnel and
services. Although the Company intends to continue in such programs, there is
no assurance that it will continue to qualify for participation.
The sources of the Company's hospital revenues are charges related to the
services provided by the hospitals and their staffs, such as radiology,
operating rooms, pharmacy, physiotherapy and laboratory procedures, and basic
charges for the hospital room and related services such as general nursing
care, meals, maintenance and housekeeping. Hospital revenues depend upon the
occupancy for inpatient routine services, the extent to which ancillary
services and therapy programs are ordered by physicians and provided to
patients, the volume of outpatient procedures and the charges or negotiated
payment rates for such services. Charges and reimbursement rates for inpatient
routine services vary depending on the type of bed occupied (e.g.,
medical/surgical, intensive care or psychiatric) and the geographic location
of the hospital.
McAllen Medical Center in McAllen, Texas contributed 13% in 1997, 15% in
1996 and 20% in 1995, of the Company's net revenues and 22% in 1997, 27% in
1996 and 37% in 1995, of the Company's operating income (net revenues less
operating expenses, salaries and wages, provision for doubtful accounts and
allocation of corporate overhead expense) ("operating income"). Valley
Hospital Medical Center in Las Vegas, Nevada contributed 12% in 1997, 13% in
1996 and 18% in 1995, of the Company's net revenues and 17% in 1997, 17% in
1996 and 25% in 1995, of the Company's operating income. Northwest Texas
Healthcare System ("Northwest Texas") in Amarillo, Texas, which was acquired
by the Company in May, 1996, contributed 12% in 1997, and 8% in 1996, of the
Company's net revenues and 12% in 1997 and 7% in 1996, of the Company's
operating income.
The following table shows approximate percentages of net patient revenue
derived by the Company's hospitals owned as of December 31, 1997 since their
respective dates of acquisition by the Company from third party sources,
including the special Medicaid reimbursements received at three of the
Company's acute care facilities located in Texas and one in South Carolina
totaling $33.4 million in 1997, $17.8 million in 1996, $12.6 million in 1995,
$12.7 million in 1994, and $13.5 million in 1993, and from all other sources
during the five years ended December 31, 1997.
PERCENTAGE OF NET PATIENT REVENUES
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Third Party Payors:
Medicare............................ 35.6% 35.6% 35.1% 32.5% 31.8%
Medicaid............................ 14.5% 15.3% 13.7% 13.4% 12.2%
------ ------ ------ ------ ------
TOTAL............................... 50.1% 50.9% 48.8% 45.9% 44.0%
Other Sources (including patients and
private insurance carriers).......... 49.9% 49.1% 51.2% 54.1% 56.0%
------ ------ ------ ------ ------
100% 100% 100% 100% 100%
4
REGULATION AND OTHER FACTORS
Within the statutory framework of the Medicare and Medicaid programs, there
are substantial areas subject to administrative rulings, interpretations and
discretion which may affect payments made under either or both of such
programs and reimbursement is subject to audit and review by third party
payors. Management believes that adequate provision has been made for any
adjustments that might result therefrom.
The Federal government makes payments to participating hospitals under its
Medicare program based on various formulae. The Company's general acute care
hospitals are subject to a prospective payment system ("PPS"). PPS pays
hospitals a predetermined amount per diagnostic related group ("DRG") based
upon a hospital's location and the patient's diagnosis.
Psychiatric hospitals, which are exempt from PPS, are cost reimbursed by the
Medicare program, but are subject to a per discharge ceiling, calculated based
on an annual allowable rate of increase over the hospital's base year amount
under the Medicare law and regulations. Capital related costs are exempt from
this limitation.
On August 30, 1991, the Health Care Financing Administration issued final
Medicare regulations establishing a PPS for inpatient hospital capital-related
costs. These regulations apply to hospitals which are reimbursed based upon
the prospective payment system and took effect for cost years beginning on or
after October 1, 1991. For each of the Company's hospitals, the new
methodology began on January 1, 1992.
The regulations provide for the use of a 10-year transition period in which
a blend of the old and new capital payment provisions will be utilized. One of
two methodologies will apply during the 10-year transition period: if the
hospital's hospital-specific capital rate exceeds the federal capital rate,
the hospital will be paid on the basis of a "hold harmless" methodology, which
is a blend of a portion of old capital and an amount of new capital and a
prospectively determined national federal capital rate; or, with limited
exceptions, if the hospital-specific rate is below the federal capital rate,
the hospital will receive payments based upon a "fully prospective"
methodology, which is a blend of the hospital's hospital-specific capital rate
and a prospectively determined national federal capital rate. Each hospital's
hospital-specific rate was determined based upon allowable capital costs
incurred during the "base year", which, for all of the Company's hospitals, is
the year ended December 31, 1990. All of the Company's hospitals are paid
under the "'hold harmless" methodology except for one hospital, which is paid
under the "fully prospective" methodology. Updated amounts and factors
necessary to determine PPS rates for Medicare hospital inpatient services for
operating costs and capital related costs are published annually and were last
published on August 29, 1997. This latest update implemented changes mandated
by the Balanced Budget Act of 1997, which called for a zero percent cost of
living update factor for FY 1998.
The Company can provide no assurances that the reductions in the PPS update
will not adversely affect its operations. However, within certain limits, a
hospital can manage its costs, and, to the extent this is done effectively, a
hospital may benefit from the DRG system. However, many hospital operating
costs are incurred in order to satisfy licensing laws, standards of the Joint
Commission on the Accreditation of Healthcare Organizations and quality of
care concerns. In addition, hospital costs are affected by the level of
patient acuity, occupancy rates and local physician practice patterns,
including length of stay judgments and number and type of tests and procedures
ordered. A hospital's ability to control or influence these factors which
affect costs is, in many cases, limited.
In addition to the trends described above that continue to have an impact on
the operating results, there are a number of other more general factors
affecting the Company's business. The Balanced Budget Act of 1997, enacted on
August 5, 1997, calls for the government to trim the growth of federal
spending on Medicare by $115 billion and on Medicaid by $13 billion over the
next five years. The act also calls for reductions in the future rate of
increases to payments made to hospitals and reduces the amount of
reimbursement for outpatient services, bad debt expense and capital costs.
Both Republicans and Democrats appear to be working towards a balanced budget
by the year 2002, and it is likely that future budgets will contain certain
further reductions in the rate of increase of Medicare and Medicaid spending.
There can be no assurance that these and future reductions will not have a
material adverse effect on the Company's business.
5
In addition to Federal health reform efforts, several states have adopted or
are considering healthcare reform legislation. Several states are planning to
consider wider use of managed care for their Medicaid populations and
providing coverage for some people who presently are uninsured. The enactment
of Medicaid managed care initiatives is designed to provide low-cost coverage.
The Company currently operates three behavioral health centers with a total of
268 beds in Massachusetts, which has mandated hospital rate-setting. The
Company also operates three hospitals containing an aggregate of 688 beds in
Florida that are subject to a mandated form of rate-setting if increases in
hospital revenues per admission exceed certain target percentages.
In 1991, the Texas legislature authorized the LoneSTAR Health Initiative
(now known as the STAR program), a pilot program in two areas of the state to
establish a health care delivery system based on managed care principles. In
1995, the Texas Health and Human Services Commission ("HHSC") was authorized
to develop a statewide system to restructure the delivery of health care
services provided under the Medicaid program to incorporate managed care
delivery systems. Texas requested a waiver of many Medicaid program
requirements from HCFA, which denied the initial request. HHSC is seeking
approval of a revised waiver request. Meanwhile, HHSC continues to implement
managed care pilot programs in various geographic areas of Texas. The Company
is unable to predict whether Texas will be granted such waivers or the effect
on the Company's business of such waivers.
Upon meeting certain conditions, and serving a disproportionately high share
of Texas' and South Carolina's low income patients, three of the Company's
facilities located in Texas and one facility located in South Carolina became
eligible and received additional reimbursement from each state's
disproportionate share hospital fund. Included in the Company's financial
results was an aggregate of $33.4 million in 1997, $17.8 million in 1996, and
$12.6 million in 1995 received pursuant to the terms of these programs. These
programs are scheduled to terminate in the third quarter of 1998, and the
Company cannot predict whether these programs will continue beyond their
scheduled termination date. The termination of these programs or further
changes in the Medicare and Medicaid programs could have a material adverse
effect on the Company.
The federal self-referral and payment prohibitions (codified in 42 U.S.C.
Section 1395nn, Section 1877 of the Social Security Act) generally forbid,
absent qualifying for one of the exceptions, a physician from making referrals
for the furnishing of any "designated health services," for which payment may
be made under the Medicare or Medicaid programs, to any entity with which the
physician (or an immediate family member) has a "financial relationship." The
legislation was effective January 1, 1992 for clinical laboratory services
("Stark I") and January 1, 1995 for ten other designated health services
("Stark II"). A "financial relationship" under Stark I and II includes any
direct or indirect "compensation arrangement" with an entity for payment of
any remuneration, and any direct or indirect "ownership or investment
interest" in the entity. The legislation contains certain exceptions
including, for example, where the referring physician has an ownership
interest in a hospital as a whole or where the physician is an employee of an
entity to which he or she refers. The Stark I and II self-referral and payment
prohibitions include specific reporting requirements providing that each
entity providing covered items or services must provide the Secretary with
certain information concerning its ownership, investment, and compensation
arrangements. In August 1995, HCFA published a final rule regarding physician
self-referrals for clinical lab services. On January 9, 1998, HCFA published a
proposed rule regarding physician self referrals for the ten other designated
health services. A final rule for Stark II remains in the planning stages.
Starting in 1991, the Inspector General of the Department of Health and
Human Services ("HHS") issued regulations which provide for "safe harbors"
from the federal anti-kickback statutes; if an arrangement or transaction
meets each of the stipulations established for a particular safe harbor, the
arrangement will not be subject to challenge by the Inspector General. If an
arrangement does not meet the safe harbor criteria, it will be subject to
scrutiny under its particular facts and circumstances to determine whether it
violates the federal anti-kickback statute which prohibits, in general,
fraudulent and abusive practices, and enforcement action may be taken by the
Inspector General. In addition to the investment interests safe harbor, other
safe harbors include space rental, equipment rental, personal
service/management contracts, sales of a physician practice, referral
services, warranties, employees, discounts and group purchasing arrangements,
among others.
6
The Company does not anticipate that either the Stark provisions or the safe
harbor regulations to the federal anti-kickback statute will have material
adverse effects on its operations.
Several states, including Florida and Nevada, have passed legislation which
limits physician ownership in medical facilities providing imaging services,
rehabilitation services, laboratory testing, physical therapy and other
services. This legislation is not expected to significantly affect the
Company's operations.
All hospitals are subject to compliance with various federal, state and
local statutes and regulations and receive periodic inspection by state
licensing agencies to review standards of medical care, equipment and
cleanliness. The Company's hospitals must comply with the licensing
requirements of federal, state and local health agencies, as well as the
requirements of municipal building codes, health codes and local fire
departments. In granting and renewing licenses, a department of health
considers, among other things, the physical buildings and equipment, the
qualifications of the administrative personnel and nursing staff, the quality
of care and continuing compliance with the laws and regulations relating to
the operation of the facilities. State licensing of facilities is a
prerequisite to certification under the Medicare and Medicaid programs.
Various other licenses and permits are also required in order to dispense
narcotics, operate pharmacies, handle radioactive materials and operate
certain equipment. All the Company's eligible hospitals have been accredited
by the Joint Commission on the Accreditation of Healthcare Organizations.
The Social Security Act and regulations thereunder contain numerous
provisions which affect the scope of Medicare coverage and the basis for
reimbursement of Medicare providers. Among other things, this law provides
that in states which have executed an agreement with the Secretary of the
Department of Health and Human Services (the "Secretary"), Medicare
reimbursement may be denied with respect to depreciation, interest on borrowed
funds and other expenses in connection with capital expenditures which have
not received prior approval by a designated state health planning agency.
Additionally, many of the states in which the Company's hospitals are located
have enacted legislation requiring certificates of need ("CON") as a condition
prior to hospital capital expenditures, construction, expansion, modernization
or initiation of major new services. Failure to obtain necessary state
approval can result in the inability to complete an acquisition or change of
ownership, the imposition of civil or, in some cases, criminal sanctions, the
inability to receive Medicare or Medicaid reimbursement or the revocation of a
facility's license. The Company has not experienced and does not expect to
experience any material adverse effects from those requirements.
Health planning statutes and regulatory mechanisms are in place in many
states in which the Company operates. These provisions govern the distribution
of healthcare services, the number of new and replacement hospital beds,
administer required state CON laws, contain healthcare costs, and meet the
priorities established therein. Significant CON reforms have been proposed in
a number of states, including increases in the capital spending thresholds and
exemptions of various services from review requirements. The Company is unable
to predict the impact of these changes upon its operations.
Federal regulations provide that admissions and utilization of facilities by
Medicare and Medicaid patients must be reviewed in order to insure efficient
utilization of facilities and services. The law and regulations require Peer
Review Organizations ("PROs") to review the appropriateness of Medicare and
Medicaid patient admissions and discharges, the quality of care provided, the
validity of DRG classifications and the appropriateness of cases of
extraordinary length of stay. PROs may deny payment for services provided,
assess fines and also have the authority to recommend to HHS that a provider
that is in substantial non-compliance with the standards of the PRO be
excluded from participating in the Medicare program. The Company has
contracted with PROs in each state where it does business as to the scope of
such functions.
The Company's healthcare operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. In 1988, Congress passed the Medical Waste Tracking
Act. Infectious waste generators, including hospitals, now face substantial
penalties for improper arrangements regarding disposal of medical waste,
including civil penalties of up to $25,000 per day of noncompliance, criminal
penalties of $150,000 per day, imprisonment, and remedial costs. The
comprehensive
7
legislation establishes programs for medical waste treatment and disposal in
designated states. The legislation also provides for sweeping inspection
authority in the Environmental Protection Agency, including monitoring and
testing. The Company believes that its disposal of such wastes is in
compliance with all state and federal laws.
MEDICAL STAFF AND EMPLOYEES
The Company's hospitals are staffed by licensed physicians who have been
admitted to the medical staff of individual hospitals. With a few exceptions,
physicians are not employees of the Company's hospitals and members of the
medical staffs of the Company's hospitals also serve on the medical staffs of
hospitals not owned by the Company and may terminate their affiliation with
the Company's hospitals at any time. Each of the Company's hospitals is
managed on a day-to-day basis by a managing director employed by the Company.
In addition, a Board of Governors, including members of the hospital's medical
staff, governs the medical, professional and ethical practices at each
hospital. The Company's facilities had approximately 17,800 employees at
December 31, 1997, of whom 12,694 were employed full-time.
Six Hundred Twenty-Two (622) of the Company's employees at four of its
hospitals are unionized. At Valley Hospital, unionized employees belong to the
Culinary Workers and Bartenders Union and the International Union of Operating
Engineers. Registered nurses at Auburn Regional Medical Center located in
Washington State, are represented by the United Staff Nurses Union, the
technical employees are represented by the United Food and Commercial Workers,
and the service employees are represented by the Service Employees
International Union. The registered nurses, licensed practical nurses, certain
technicians and therapists, and housekeeping employees at HRI Hospital in
Boston are represented by the Service Employees International Union. All full-
time and regular part-time professional employees of La Amistad Residential
Treatment Center in Maitland, Florida are represented by the United Nurses of
Florida/United Health Care Employees Union. The Company believes that its
relations with its employees are satisfactory.
COMPETITION
In all geographical areas in which the Company operates, there are other
hospitals which provide services comparable to those offered by the Company's
hospitals, some of which are owned by governmental agencies and supported by
tax revenues, and others of which are owned by nonprofit corporations and may
be supported to a large extent by endowments and charitable contributions.
Such support is not available to the Company's hospitals. Certain of the
Company's competitors have greater financial resources, are better equipped
and offer a broader range of services than the Company. Outpatient treatment
and diagnostic facilities, outpatient surgical centers and freestanding
ambulatory surgical centers also impact the healthcare marketplace. In recent
years, competition among healthcare providers for patients has intensified as
hospital occupancy rates in the United States have declined due to, among
other things, regulatory and technological changes, increasing use of managed
care payment systems, cost containment pressures, a shift toward outpatient
treatment and an increasing supply of physicians. The Company's strategies are
designed, and management believes that its facilities are positioned, to be
competitive under these changing circumstances.
LIABILITY INSURANCE
Effective January 1, 1998, the Company is covered under commercial insurance
policies which provide for a self-insured retention limit for professional and
general liability claims for most of its subsidiaries up to $1 million per
occurrence, with an average annual aggregate for covered subsidiaries of $4
million through 2001. These subsidiaries maintain excess coverage up to $100
million with major insurance carriers. The Company's remaining facilities are
fully insured under commercial policies with excess coverage up to $100
million maintained with major insurance carriers. During 1996 and 1997, most
of the Company's subsidiaries were self-insured for professional and general
liability claims up to $5 million per occurrence, with excess coverage
maintained up to $100 million with major insurance carriers.
8
RELATIONS WITH UNIVERSAL HEALTH REALTY INCOME TRUST
The Company serves as advisor to Universal Health Realty Income Trust
("UHT"), which leases to the Company the real property of 7 facilities
operated by the Company. In addition, UHT holds interests in properties owned
by unrelated companies. The Company receives a fee for its advisory services
based on the value of UHT's assets. In addition, certain of the directors and
officers of the Company serve as trustees and officers of UHT. As of January
31, 1998, the Company owned 8% of UHT's outstanding shares and the Company
currently has an option to purchase UHT shares in the future at fair market
value to enable it to maintain a 5% interest.
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 (60)....................... Director, Chairman of the Board,
President and Chief Executive Officer
Kirk E. Gorman (47)....................... Senior Vice President and Chief
Financial Officer
Michael G. Servais (51)................... Senior Vice President
Richard C. Wright (50).................... Vice President
Thomas J. Bender (45)..................... Vice President
Steve G. Filton (40)...................... Vice President and Controller
Sidney Miller (71)........................ Director and Secretary
Mr. Alan B. Miller has been Chairman of the Board, President and Chief
Executive Officer of the Company since its inception. Prior thereto, he was
President, Chairman of the Board and Chief Executive Officer of American
Medicorp, Inc.
Mr. Gorman was elected Senior Vice President and Chief Financial Officer in
December 1992, and has served as Vice President and Treasurer of the Company
since April 1987. From 1984 until then, he served as Senior Vice President of
Mellon Bank, N.A. Prior thereto, he served as Vice President of Mellon Bank,
N.A.
Mr. Servais was elected Senior Vice President of the Company in January
1996, and has served as Vice President of the Company since January 1994,
Assistant Vice President of the Company since January 1993, and Group Director
since December 1990. Prior thereto, he served as President of Jupiter Hospital
Corporation, and Vice President of Operations of American Health Group
International.
Mr. Wright was elected Vice President of the Company in May 1986. He has
served in various capacities with the Company since 1978, including Senior
Vice President of its Acute Care Division since 1985.
Mr. Bender was elected Vice President of the Company in March 1988. He has
served in various capacities with the Company since 1982, including
responsibility for the Psychiatric Care Division since November 1985.
Mr. Filton was elected Vice President and Controller of the Company in
November 1991, and had served as Director of Accounting and Control since July
1985.
Mr. Sidney Miller has served as Secretary of the Company since 1990 and
Director of the Company since 1978. He served in various capacities with the
Company, until his retirement in 1994, including Executive Vice President,
Vice President, and Assistant to the President. Prior thereto, he was Vice
President-Financial Services and Control of American Medicorp, Inc.
9
ITEM 2. PROPERTIES
EXECUTIVE OFFICES
The Company owns an office building with 68,000 square feet available for
use located on 11 acres of land in King of Prussia, Pennsylvania.
FACILITIES
The following tables set forth the name, location, type of facility and, for
acute care hospitals and behavioral health centers, the number of beds, for
each of the Company's facilities:
ACUTE CARE HOSPITALS
NUMBER OWNERSHIP
NAME OF FACILITY LOCATION OF BEDS INTEREST
- - - ---------------- -------- ------- ---------
Aiken Regional Medical
Centers................. Aiken, South Carolina 225 Owned
Auburn Regional Medical
Center.................. Auburn, Washington 149 Owned
Chalmette Medical
Center(1)............... Chalmette, Louisiana 118 Leased
Desert Springs
Hospital(2)............. Las Vegas, Nevada 241 Owned
Doctors' Hospital of
Shreveport(3)........... Shreveport, Louisiana 136 Leased
Edinburg Regional Medical
Center.................. Edinburg, Texas 129 Owned
The George Washington
University Hospital(4).. Washington, D.C. 501 Owned
Hospital San Francisco... Rio Piedras, Puerto Rico 160 Owned
Hospital San Pablo....... Bayamon, Puerto Rico 430 Owned
Hospital San Pablo del
Este.................... Fajardo, Puerto Rico 180 Owned
Inland Valley Regional
Medical Center(1)....... Wildomar, California 80 Leased
Manatee Memorial
Hospital................ Bradenton, Florida 512 Owned
McAllen Medical
Center(1)............... McAllen, Texas 490 Leased
Northern Nevada Medical
Center(4)............... Sparks, Nevada 100 Owned
Northwest Texas
Healthcare System....... Amarillo, Texas 357 Owned
River Parishes
Hospitals(5)............ LaPlace and Chalmette, Louisiana 175 Leased/Owned
Summerlin Hospital
Medical Center(2)....... Las Vegas, Nevada 148 Owned
Valley Hospital Medical
Center(2)............... Las Vegas, Nevada 417 Owned
Victoria Regional Medical
Center.................. Victoria, Texas 147 Owned
Wellington Regional
Medical Center(1)....... West Palm Beach, Florida 120 Leased
BEHAVIORAL HEALTH CENTERS
NUMBER OWNERSHIP
NAME OF FACILITY LOCATION OF BEDS INTEREST
- - - ---------------- -------- ------- ---------
The Arbour Hospital...... Boston, Massachusetts 118 Owned
The BridgeWay(1)......... North Little Rock, Arkansas 70 Leased
Clarion Psychiatric
Center.................. Clarion, Pennsylvania 52 Owned
Del Amo Hospital......... Torrance, California 166 Owned
Forest View Hospital..... Grand Rapids, Michigan 62 Owned
Fuller Memorial
Hospital................ South Attleboro, Massachusetts 82 Owned
Glen Oaks Hospital....... Greenville, Texas 54 Owned
The Horsham Clinic....... Ambler, Pennsylvania 146 Owned
HRI Hospital............. Brookline, Massachusetts 68 Owned
KeyStone Center(6)....... Wallingford, Pennsylvania 100 Owned
La Amistad Residential
Treatment Center........ Maitland, Florida 56 Owned
The Meadows Psychiatric
Center.................. Centre Hall, Pennsylvania 101 Owned
10
BEHAVIORAL HEALTH CENTERS, CONTINUED
NUMBER OWNERSHIP
NAME OF FACILITY LOCATION OF BEDS INTEREST
- - - ---------------- -------- ------- ---------
Meridell Achievement Center(1).... Austin, Texas 114 Leased
The Pavilion...................... Champaign, Illinois 46 Owned
River Crest Hospital.............. San Angelo, Texas 80 Owned
River Oaks Hospital............... New Orleans, Louisiana 126 Owned
Roxbury(6)........................ Shippensburg, Pennsylvania 75 Owned
Timberlawn Mental Health System... Dallas, Texas 124 Owned
Turning Point Care Center(6)...... Moultrie, Georgia 59 Owned
Two Rivers Psychiatric Hospital... Kansas City, Missouri 80 Owned
AMBULATORY SURGERY CENTERS
NAME OF FACILITY(7) LOCATION
------------------- --------
Arkansas Surgery Center of Fayetteville............ Fayetteville, Arkansas
Corona Outpatient Surgery Center................... Corona, California
Goldring Surgical and Diagnostic Center............ Las Vegas, Nevada
M.D. Physicians Surgicenter of Midwest City........ Midwest City, Oklahoma
Outpatient Surgical Center of Ponca City........... Ponca City, Oklahoma
St. George Surgical Center......................... St. George, Utah
Hope Square Surgery Center......................... Rancho Mirage, California
Surgery Center of Littleton........................ Littleton, Colorado
Surgery Center of Springfield...................... Springfield, Missouri
Surgical Center of New Albany...................... New Albany, Indiana
Surgery Center of Waltham.......................... Waltham, Massachusetts
RADIATION ONCOLOGY CENTERS
NAME OF FACILITY LOCATION
---------------- --------
Auburn Regional Center for Cancer Care............. Auburn, Washington
Bluegrass Cancer Center(8)......................... Frankfort, Kentucky
Bowling Green Radiation Therapy(8)................. Bowling Green, Kentucky
Cancer Institute of Nevada......................... Las Vegas, Nevada
Carolina Cancer Center............................. Aiken, South Carolina
Columbia Radiation Oncology Center................. Washington, D.C.
Danville Radiation Therapy Center(8)............... Danville, Kentucky
Glasgow Radiation Therapy(8)....................... Glasgow, Kentucky
Louisville Radiation Oncology Center(8)............ Louisville, Kentucky
Madison Radiation Therapy(9)....................... Madison, Indiana
Southern Indiana Radiation Therapy(9).............. Jeffersonville, Indiana
SPECIALIZED WOMEN'S HEALTH CENTERS
NAME OF FACILITY LOCATION
---------------- --------
Renaissance Women's Center of Edmond(10)........... Edmond, Oklahoma
Renaissance Women's Center of Austin(10)........... Austin, Texas
Lakeside Women's Center(10)........................ Oklahoma City, Oklahoma
- - - --------
(1) Real property leased from UHT.
(2) Desert Springs Hospital, Summerlin Hospital Medical Center and Valley
Hospital Medical Center are owned by a limited liability company in which
the Company has a 72.5% interest and Quorum's subsidiary, NC-DSH, Inc.,
has a 27.5% interest. All hospitals are managed by the Company.
(3) Real property leased with an option to purchase.
11
(4) General partnership interest in limited partnership.
(5) Includes Chalmette Hospital, a 118-bed rehabilitation facility. The
Company owns the LaPlace real property and leases the Chalmette real
property from UHT.
(6) Addictive disease facility.
(7) Each facility other than Goldring Surgical and Diagnostic Center is owned
in partnership form with the Company owning general and limited
partnership interests in a limited partnership. The real property is
leased from third parties.
(8) Managed Facility. A partnership, in which the Company is the general
partner, owns the real property.
(9) A partnership, in which the Company is the general partner, owns the real
property.
(10) Membership interest in limited liability company.
Some of these facilities are subject to mortgages, and substantially all the
equipment located at these facilities is pledged as collateral to secure long-
term debt. The Company owns or leases medical office buildings adjoining
certain of its hospitals.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business, including those arising from care and treatment afforded at the
Company's hospitals and is party to various other litigation. However,
management believes the ultimate resolution of these pending proceedings will
not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable. No matter was submitted during the fourth quarter of the
fiscal year ended December 31, 1997 to a vote of security holders.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See Item 6, Selected Financial Data
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ----------------- ------------------ ------------------ ----------------
SUMMARY OF OPERATIONS
Net revenues........... $ 1,442,677,000 $ 1,174,158,000 $ 919,193,000 $ 773,475,000 $ 753,784,000
Net income............. $ 67,276,000 $ 50,671,000 $ 35,484,000 $ 28,720,000 $ 24,011,000
Net margin............. 4.7% 4.3% 3.9% 3.7% 3.2%
Return on average
equity................ 13.5% 13.0% 12.4% 11.8% 11.2%
FINANCIAL DATA
Cash provided by
operating activities.. $ 173,499,000 $ 145,256,000 $ 91,749,000 $ 60,624,000 $ 84,640,000
Capital
expenditures(1)....... $ 132,258,000 $ 107,630,000 $ 65,695,000 $ 48,652,000 $ 52,690,000
Total assets........... $ 1,085,349,000 $ 965,795,000 $ 748,051,000 $ 521,492,000 $ 460,422,000
Long-term borrowings... $ 272,466,000 $ 275,634,000 $ 237,086,000 $ 85,125,000 $ 75,081,000
Common stockholders'
equity................ $ 526,607,000 $ 452,980,000 $ 297,700,000 $ 260,629,000 $ 224,488,000
Percentage of total
debt to total
capitalization........ 35% 38% 45% 26% 26%
OPERATING DATA
Average licensed beds.. 5,166 4,583 3,876 3,543 3,682
Average available
beds.................. 4,713 4,181 3,563 3,241 3,345
Hospital admissions.... 156,370 133,539 106,627 88,956 85,005
Average length of
patient stay.......... 6.1 6.2 6.2 6.5 6.8
Patient days........... 956,456 821,904 658,015 574,311 580,398
Occupancy rate for
licensed beds......... 51% 49% 47% 44% 43%
Occupancy rate for
available beds........ 56% 54% 51% 49% 48%
PER SHARE DATA
Net income--basic(2)... $ 2.08 $ 1.69 $ 1.28 $ 1.03 $ 0.89
Net income--
diluted(2)............ $ 2.03 $ 1.65 $ 1.26 $ 1.01 $ 0.86
OTHER INFORMATION
Weighted average number
of shares
outstanding--
basic(2).............. 32,321,000 30,054,000 27,691,000 27,972,000 27,085,000
Weighted average number
of shares and share
equivalents
outstanding--
diluted(2)............ 33,098,000 30,798,000 28,103,000 28,775,000 29,628,000
COMMON STOCK PERFORMANCE
Market price of common
stock
High--Low, by
quarter(3)
1st.................... $34 5/8 -$27 7/8 $26 7/8-$21 11/16 $13 -$11 3/8 $13 5/16-$9 5/8 $8 -$6 5/16
2nd.................... $40 1/2 -$31 5/8 $30 1/8-$24 3/8 $14 13/16-$12 7/16 $13 7/16-$11 1/4 $8 1/8 -$6 1/2
3rd.................... $47 1/16-$39 1/16 $27 1/4-$22 3/4 $17 11/16-$14 $14 3/4 -$12 15/16 $8 1/2 -$7 1/4
4th.................... $50 3/8 -$40 11/16 $29 1/4-$24 1/2 $22 3/16 -$16 1/8 $14 1/16-$10 11/16 $10 5/16-$8 5/16
- - - --------
(1) Amount includes non-cash capital lease obligations.
(2) In April 1996, the Company declared a two-for-one stock split in the form
of a 100% stock dividend which was paid in May 1996. All classes of common
stock participated on a pro rata basis. The weighted average number of
common shares and equivalents and earnings per common and common
equivalent share for all years presented have been adjusted to reflect the
two-for-one stock split. The 1994 and 1993 diluted earnings per share and
diluted average number of shares outstanding have been adjusted to reflect
the assumed conversion of the Company's convertible debentures. In April
1994, the Company redeemed the debentures which reduced the diluted number
of shares outstanding by 902,466.
(3) These prices are the high and low closing sales prices of the Company's
Class B Common Stock as reported by the New Yok Stock Exchange (all
periods have been adjusted to reflect the two-for-one stock split in the
form of a 100% stock dividend paid in May 1996). Class A, C and D common
stock are convertible on a share-for-share basis into Class B Common
Stock.
13
NUMBER OF SHAREHOLDERS OF RECORD AS OF JANUARY 31, 1998, WERE AS FOLLOWS:
- - - -------------------
Class A Common 9
Class B Common 574
Class C Common 7
Class D Common 266
- - - -------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
Net revenues increased 23% to $1.4 billion in 1997 as compared to 1996 and
28% to $1.2 billion in 1996 as compared to 1995. The $269 million increase in
net revenues during 1997 as compared to 1996 was due primarily to: (i) revenue
growth at acute care facilities owned during both years ($100 million); (ii)
the acquisition during the third quarter of 1997 of an 80% interest in a
partnership which owns a 501-bed acute care hospital located in Washington, DC
($59 million), and; (iii) the acquisitions of a 357-bed medical complex
located in Amarillo, Texas during the second quarter of 1996 and five
behavioral health centers located in Pennsylvania and Texas during the second
and third quarters of 1996 ($82 million). The $255 million increase in net
revenues during 1996 as compared to 1995 was due primarily to the 1996
acquisitions mentioned above ($136 million), a 225-bed and a 512-bed acute
care facility, both of which were acquired during the third quarter of 1995,
net of the effects of three acute care facilities divested during 1995 (net
increase of $86 million) and revenue growth at acute care facilities owned
during both years ($23 million).
Earnings before interest, income taxes, depreciation, amortization, lease
and rental expense and nonrecurring transactions (EBITDAR) increased to $244
million in 1997 from $215 million in 1996 and $163 million in 1995. Overall
operating margins were 16.9% in 1997, 18.3% in 1996 and 17.8% in 1995. The
decrease in the Company's overall operating margin in 1997 as compared to 1996
was due primarily to losses incurred at the 501-bed acute care facility of
which the Company acquired an 80% interest in during the third quarter of
1997, the opening of a newly constructed 129-bed acute care facility located
in Edinburg, Texas during the third quarter of 1997 and the opening of a newly
constructed 148-bed acute care facility in Summerlin, Nevada which opened
during the fourth quarter of 1997. The improvement in the Company's overall
operating margin in 1996 as compared to 1995 was due to improvement in
operating margins at acute care hospitals and behavioral health centers owned
during both years and due to the 1995 results including losses sustained at
three acute care facilities divested during 1995.
ACUTE CARE SERVICES
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and specialized women's health centers accounted for 85%, 85% and 86%
of consolidated net revenues in 1997, 1996 and 1995, respectively. Net
revenues at the Company's acute care facilities owned in both 1997 and 1996
increased 10% in 1997 as compared to 1996 due primarily to an increase in
admissions and patient days at these facilities. Each of the Company's acute
care facilities owned in both years experienced an increase in admissions in
1997 as compared to 1996 which amounted to a 5% increase in admissions for the
acute care division in 1997 as compared to 1996. Patient days at these
facilities increased 4% in 1997 as compared to 1996 while the average length
of stay at these facilities decreased to 4.8 days in 1997 compared to 4.9 days
in 1996. Net revenues at the
Company's acute care facilities owned in both 1996 and 1995 increased 4% in
1996 as compared to 1995. Admissions at the Company's acute care facilities
owned in both 1996 and 1995 increased 2% while patient days at these
facilities decreased 3% due to a decrease in the average length of stay to 4.9
days in 1996 as compared to 5.1 days in 1995.
The decrease in the average length of stay at the Company's facilities
during the past three years was due primarily to improvement in case
management of Medicare and Medicaid patients and an increasing shift of
14
patients into managed care plans which generally have lower lengths of stay.
The increase in net revenues at the Company's acute care facilities was caused
primarily by an increase in inpatient admissions and an increase in outpatient
activity. Outpatient activity continues to increase as gross outpatient
revenues at the Company's acute care facilities owned in both 1997 and 1996
increased 10% in 1997 as compared to 1996 and comprised 26% of the Company's
gross patient revenues in 1997 as compared to 25% in 1996. Gross outpatient
revenues at the Company's acute care facilities owned in both 1996 and 1995
increased 12% in 1996 as compared to 1995 and comprised 25% of gross patient
revenues in 1996 as compared to 23% in 1995.
The increase in outpatient revenues is primarily the result of advances in
medical technologies and pharmaceutical improvements, which allow more
services to be provided on an outpatient basis, and increased pressure from
Medicare, Medicaid, health maintenance organizations (HMOs), preferred
provided organizations (PPOs) and insurers to reduce hospital stays and
provide services, where possible, on a less expensive outpatient basis. The
hospital industry in the United States as well as the Company's acute care
facilities continue to have significant unused capacity which has created
substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required, pre-admission authorization and by
payor pressure to maximize outpatient and alternative healthcare delivery
services for less acutely ill patients. The Company expects the increased
competition, admission constraints and payor pressures to continue.
To accommodate the increased utilization of outpatient services, the Company
has expanded or redesigned several of its outpatient facilities and services.
Additionally, the Company has invested in the acquisition and development of
outpatient surgery centers, radiation therapy centers and specialized women's
health centers. As of December 31, 1997, the Company operated or managed
twenty-five outpatient surgery, radiation and specialized women's health
centers which generated net revenues of $38 million in 1997, $32 million in
1996 and $23 million in 1995. The Company expects the growth in outpatient
services to continue, although the rate of growth may be moderated in the
future.
The Company's acute care division generated operating margins (EBITDAR) of
21.3% in 1997, 22.8% in 1996 and 21.7% in 1995. The decrease in the Company's
acute care division's operating margin in 1997 as compared to 1996 was due
primarily to: (i) losses incurred at the 501-bed acute care facility of which
the Company acquired an 80% interest in during the third quarter of 1997; (ii)
the opening of a newly constructed 129-bed acute care facility located in
Edinburg, Texas during the third quarter of 1997, and; (iii) the opening of a
newly constructed 148-bed acute care facility in Summerlin, Nevada which
opened during the fourth quarter of 1997. The improvement in the acute care
division's operating margin in 1996 as compared to 1995 was primarily the
result of the divestiture of three low margin acute care facilities during
1995 and operating margin improvement at an acute care facility acquired
during 1994.
The Company's facilities continue to experience a shift in payor mix
resulting in an increase in revenues attributable to managed care payors and
unfavorable general industry trends which include pressures to control
healthcare costs. In response to increased pressure on revenues, the Company
continues to implement cost control programs at its facilities including more
efficient staffing standards and re-engineering of services. On a same store
basis, operating margins at the Company's acute care facilities owned in both
1997 and 1996 were 23.0% and 22.8%, respectively. Operating margins at the
Company's facilities owned in both 1996 and 1995 were 23.8% and 23.5%,
respectively. The Company has also implemented cost control measures at its
newly acquired facilities in an effort to improve operating margins at these
facilities from their pre-acquisition levels. Pressure on operating margins is
expected to continue due to the industry-wide trend away from charge based
payors which limits the Company's ability to increase its prices.
BEHAVIORAL HEALTH SERVICES
Net revenues from the Company's behavioral health facilities accounted for
14% of consolidated net revenues in 1997 and 1996 and 13% of consolidated net
revenues in 1995. Net revenues at the Company's behavioral health facilities
owned in both 1997 and 1996 increased 3% in 1997 as compared to 1996.
Admissions at these facilities increased 8% in 1997 as compared to 1996.
Patient days at the Company's behavioral health
15
facilities owned during both years increased 4% in 1997 as compared to 1996
and the average length of stay decreased 4% to 11.9 days in 1997 as compared
to 12.4 days in 1996. Net revenues at the Company's behavioral health
facilities owned in both 1996 and 1995 decreased 1% in 1996 as compared to
1995. Admissions at these facilities increased 6% in 1996 as compared to 1995
while patient days decreased 1% in 1996 as compared to 1995 due to a 6%
decrease in the average length of stay to 12.0 days in 1996 compared to 12.8
days in 1995.
The reduction in the average length of stay during the last three years is a
result of changing practices in the delivery of behavioral health services and
continued cost containment pressures from payors which includes a greater
emphasis on the utilization of outpatient services. Management of the Company
has responded to these trends by continuing to develop and market new
outpatient treatment programs. The shift to outpatient care is reflected in
higher revenues from outpatient services, as gross outpatient revenues at the
Company's behavioral health services facilities owned in both 1997 and 1996
increased 24% in 1997 as compared to 1996 and comprised 20% of gross patient
revenues in 1997 as compared to 18% in 1996. Gross outpatient revenues at the
Company's behavioral health services facilities owned in both 1996 and 1995
increased 20% in 1996 as compared to 1995 and comprised 18% of gross patient
revenues in 1996 as compared to 16% in 1995.
The Company's behavioral health services division generated operating
margins (EBITDAR) of 17.2% in 1997, 18.0% in 1996 and 18.1% in 1995. On a same
facility basis, operating margins at the Company's behavioral health services
facilities owned in both 1997 and 1996 were 18.9% and 19.3%, respectively. The
decline in operating margins in 1997 as compared to 1996 was caused primarily
by the continued reduction in the length of stay and pricing pressures caused
by the increasing shift toward managed care payors. Operating margins at the
Company's behavioral health facilities owned in both 1996 and 1995 were 19.4%
and 19.2%, respectively. Despite the decline in the average length of stay,
the EBITDAR margins within the Company's behavioral health services division
increased during 1996 as compared to 1995 due primarily to a slight increase
in prices and cost controls implemented in response to the managed care
environment.
OTHER OPERATING RESULTS
Depreciation and amortization expense increased $8.8 million to $80.7
million in 1997 as compared to $71.9 million in 1996. The increase was due
primarily to the opening of two newly constructed acute care facilities during
the third and fourth quarters of 1997 and the acquisitions of an acute care
facility and five behavioral health centers during the second and third
quarters of 1996. Depreciation and amortization expense increased $20.6
million to $71.9 million in 1996 as compared to $51.4 million in 1995 due
primarily to the Company's 1996 acquisitions mentioned above and the 1995
acquisitions of a 225-bed facility and a 512-bed acute care facility, both of
which were acquired during the third quarter of 1995.
Interest expense decreased $1.9 million to $19.4 million in 1997 as compared
to $21.3 million in 1996 due primarily to a slight reduction in the average
outstanding borrowings and the $1 million of interest income earned during
1997 on the $40 million investment of funds restricted for construction for a
new acute care facility in Washington, DC. Interest expense increased $10.1
million in 1996 as compared to 1995 due primarily to the increased borrowings
related to the purchase of the 357-bed medical complex acquired during the
second quarter of 1996, the five behavioral health centers acquired during the
second and third quarters of 1996 and a full year of interest expense on the
increased borrowings used to finance the acquisition of the two acute care
hospitals acquired during the third quarter of 1995. In June 1996, the Company
issued four million shares of its Class B Common Stock at a price of $26 per
share. The total net proceeds of $99.1 million generated from this
stock issuance were used to partially finance the 1996 purchase transactions
mentioned above while the excess of the purchase price over the net proceeds
($69 million) were financed with operating cash flows and borrowings under the
Company's commercial paper and revolving credit facilities.
During 1996, the Company recorded $4.1 million of nonrecurring charges which
consisted of a $2.9 million loss recorded on the anticipated divestiture of an
ambulatory treatment center and a $1.2 million charge recorded to fully
reserve the carrying value of a behavioral health center owned by the Company
and leased to an unaffiliated third party, which is currently in default under
the terms of the lease agreement. During 1995, the
16
Company recorded $11.6 million of nonrecurring charges which consisted of: (i)
a $14.2 million pre-tax charge due to impairment of long-lived assets; (ii) a
$2.7 million loss on a disposal of two acute care facilities which were
exchanged along with $44 million of cash for a 225-bed acute care hospital,
and; (iii) a $5.3 million pre-tax gain realized on the sale of a 202-bed acute
care hospital which was divested during the fourth quarter of 1995 for cash
proceeds of $19.5 million.
During 1995, in conjunction with the development of the Company's operating
plan and 1996 budget, management assessed the competitive position of each
facility within the portfolio and estimated future cash flows expected from
each facility. As a result, the Company recorded a $14.2 million pre-tax
charge during 1995 to write-down the carrying value of certain intangible and
tangible assets at certain facilities. In measuring the impairment loss, the
Company estimated fair value by discounting expected future cash flows from
each facility using the Company's internal hurdle rate. The impairment loss
related primarily to four facilities in the Company's behavioral health
services division and three facilities in its ambulatory treatment center
division. Within the behavioral health services division, the impact of
managed care was most dramatically felt at the Company's two free standing
chemical dependency and two residential treatment centers. Due to increased
penetration of managed care payors, changes in CHAMPUS regulations and
decreases in admissions, patient days and length of stay at these four
facilities, management of the Company determined that profit margins had been
permanently impaired. Within the Company's ambulatory treatment center
division, three centers are located in highly competitive markets which have
become heavily penetrated with managed care. As a result, these ambulatory
treatment centers experienced decreases in net revenues per case and case
volumes which resulted in permanent impairment of carrying value. During the
fourth quarter of 1996, the Company recorded a $2.9 million charge to write-
down the carrying value of one of these ambulatory treatment centers which was
divested in 1997. This divestiture had no material impact on the 1997
financial statements.
The effective tax rate was 36.5%, 36.7% and 33.0% in 1997, 1996 and 1995,
respectively. The effective rate was lower in 1995 as compared to 1997 and
1996 due to 1995 including the deductibility of previously non-deductible
goodwill amortization resulting from the sale of three acute care hospitals in
1995.
GENERAL TRENDS
An increased proportion of the Company's revenue is derived from fixed
payment services, including Medicare and Medicaid which accounted for 50%, 51%
and 49% of the Company's net patient revenues during 1997, 1996 and 1995,
respectively. The Medicare program reimburses the Company's hospitals
primarily based on established rates by a diagnosis related group for acute
care hospitals and by cost based formula for behavioral health facilities.
Historically, rates paid under Medicare's prospective payment system ("PPS")
for inpatient services have increased, however, these increases have been less
than cost increases. Pursuant to the terms of The Balanced Budget Act of 1997
(the "1997 Act"), there will be no increases in the rates paid to hospitals
for inpatient care through September 30, 1998. Reimbursement for bad debt
expense and capital costs as well as other items have been reduced. The
Company does not expect the changes mandated by the 1997 Act to have a
material adverse effect on the results of operations. While the Company is
unable to predict what, if any, future health reform legislation may be
enacted at the federal or state level, the Company expects continuing pressure
to limit expenditures by governmental healthcare programs. Further changes in
the Medicare or Medicaid programs and other proposals to limit healthcare
spending could have a material adverse impact upon the Company's results of
operations and the healthcare industry.
In Texas, a law has been passed which mandates that the state senate apply
for a waiver from current Medicaid regulations to allow the state to require
that certain Medicaid participants be serviced through managed care providers.
The Company is unable to predict whether Texas will be granted such a waiver
or the effect on the Company's business of such a waiver. Upon meeting certain
conditions, and serving a disproportionately high share of Texas' and South
Carolina's low income patients, three of the Company's facilities located in
Texas and one facility located in South Carolina became eligible and received
additional reimbursements from each state's disproportionate share hospital
fund. Included in the Company's financial results was an aggregate of $33.4
million in 1997, $17.8 million in 1996 and $12.6 million in 1995 received
pursuant to the terms of
17
these programs. These programs are scheduled to terminate in the third quarter
of 1998 and the Company cannot predict whether these programs will continue
beyond their scheduled termination date. In addition to the Medicare and
Medicaid programs, other payors continue to actively negotiate the amounts
they will pay for services performed. In general, the Company expects the
percentage of its business from managed care programs, including HMOs and PPOs
to grow. The consequent growth in managed care networks and the resulting
impact of these networks on the operating results of the Company's facilities
vary among the markets in which the Company operates.
Effective January 1, 1998, the Company is covered under commercial insurance
policies which provide for a self-insured retention limit for professional and
general liability claims for most of its subsidiaries up to $1 million per
occurrence, with an average annual aggregate for covered subsidiaries of $4
million through 2001. These subsidiaries maintain excess coverage up to $100
million with major insurance carriers. The Company's remaining facilities are
fully insured under commercial policies with excess coverage up to $100
million maintained with major insurance carriers. During 1996 and 1997, most
of the Company's subsidiaries were self-insured for professional and general
liability claims up to $5 million per occurrence, with excess coverage
maintained up to $100 million with major insurance carriers.
The Company recognizes the need to ensure its operations will not be
adversely impacted by year 2000 software failures. In 1997, the Company began
establishing processes for evaluating and managing the risks and costs
associated with this issue. These processes include arrangements with the
Company's major outsourcing vendor to modify its computer system programming
to allow for year 2000 processing capability. Such modifications are expected
to be completed by the end of 1998. Anticipated spending for these
modifications has been and will be expensed as incurred and is not expected to
have a significant impact on the Company's ongoing results of operations. The
Company also expects that certain medical and related equipment that cannot be
made year 2000 compliant will need to be replaced, but does not expect the
cost of such replacement to be material.
EFFECTS OF INFLATION AND CHANGING PRICES
The healthcare industry is very labor intensive and salaries and benefits
are subject to inflationary pressures as are supply costs which tend to
escalate as vendors pass on the rising costs through price increases.
Inflation has not had a material impact on the results of operations during
the last three years. Although the Company cannot predict its ability to
continue to cover future cost increases, management believes that through the
adherence to cost containment policies, labor management and reasonable price
increases, the effects of inflation on future operating margins should be
manageable. However, the Company's ability to pass on these increased costs
associated with providing healthcare to Medicare and Medicaid patients is
limited due to various federal, state and local laws which have been enacted,
that, in certain cases, limit the Company's ability to increase prices. Under
the terms of the Balanced Budget Act of 1997, there will be no increases in
the rates paid to hospitals for inpatient care through September 30, 1998. In
addition, as a result of increasing regulatory and competitive pressures, the
Company's ability to maintain margins through price increases to non-Medicare
patients is limited.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $173 million in 1997, $145
million in 1996 and $92 million in 1995. The $28 million increase in 1997 as
compared to 1996 was primarily attributable to a $25 million increase in the
net income plus the addback of the non-cash charges (depreciation,
amortization, provision for
self-insurance reserves and other non-cash charges) and a $20 million increase
in other net working capital changes partially offset by a $9 million increase
in income tax payments and an $8 million increase in payments made in
settlement of self-insurance claims. The $53 million increase in 1996 as
compared to 1995 was primarily attributable to a $30 million increase in net
income plus the addback of non-cash charges (depreciation, amortization,
provision for self-insurance reserves and other non-cash charges) and a $25
million decrease in the payment of income taxes. During each of the last three
years, the net cash provided by operating activities substantially exceeded
the scheduled maturities of long-term debt.
18
During the first quarter of 1998, the Company completed its acquisition of
three acute care hospitals located in Puerto Rico for a combined purchase
price of $186 million. The hospitals acquired are located in Bayamon (430-
beds), Rio Piedras (160-beds) and Fajardo (180-beds). These acquisitions were
financed with funds borrowed under the Company's revolving credit facility.
Also during the first quarter of 1998, the Company contributed substantially
all of the assets, liabilities and operations of Valley Hospital Medical
Center, a 417-bed acute care facility, and its newly-constructed Summerlin
Hospital Medical Center, a 148-bed acute care facility in exchange for a 72.5%
interest in a series of newly-formed limited liability companies ("LLCs").
Quorum Health Group, Inc. ("Quorum") holds the remaining 27.5% interest in the
LLCs. Quorum obtained its interest by contributing substantially all of the
assets, liabilities and operations of Desert Springs Hospital, a 241-bed acute
care facility and $23 million of cash to the LLCs. As a result of this partial
sale transaction, the Company expects to record a pre-tax gain of
approximately $50 million to $55 million that will be recorded as a capital
contribution to the Company in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 51. The Company does not expect
this merger to have a material impact on its 1998 results of operations.
During 1997 the Company acquired an 80% interest in a partnership which owns
and operates The George Washington University Hospital, a 501-bed acute care
facility located in Washington, DC. The George Washington University ("GWU")
holds a 20% interest in the partnership. In connection with this acquisition,
the Company provided an immediate commitment of $80 million, consisting of $40
million in cash (which has been invested and is restricted for construction)
and a $40 million letter of credit. The Company and GWU are planning to build
a newly constructed 400-bed acute care facility which is scheduled to be
completed in 2001. The total cost of this new facility is estimated to be
approximately $96 million, of which the Company intends to finance a total of
$83 million (including the $80 million immediate commitment mentioned above)
with the remainder being financed by GWU and the interest earnings on the $40
million of funds restricted for construction. During the third and fourth
quarters of 1997, the Company completed construction and opened the following
facilities: (i) a 129-bed acute care facility located in Edinburg, Texas; (ii)
a medical complex located in Summerlin, Nevada including a 148-bed acute care
facility, and; (iii) two newly constructed specialized women's health centers
located in Austin, Texas and Lakeside, Oklahoma of which the Company owns
interests in limited liability companies ("LLC") which own and operate the
facilities. During 1997, the LLC which operates the specialized women's health
center in Lakeside, Oklahoma sold the real and personal property of this
facility which was then leased-back pursuant to the terms of a 20-year lease.
The Company spent $71 million during the year (net of $8 million of proceeds
received for sale-leaseback of the specialized women's health center located
in Oklahoma and $4 million received for sale of a minority interest in the
specialized women's health center located in Austin, Texas) for completion of
these newly constructed facilities. Also during the year, the Company spent an
additional $11 million to acquire various behavioral healthcare related
businesses.
During 1996 the Company acquired the following facilities for total
consideration of $168 million: (i) substantially all the assets and operations
of a 357-bed medical complex located in Amarillo, Texas for $126 million in
cash; (ii) substantially all the assets and operations of four behavioral
health centers located in Pennsylvania and management contracts to seven other
behavioral health centers for $39 million in cash, and; (iii) substantially
all the assets and operations of a 164-bed behavioral health facility located
in Texas for $3 million in cash. Also during 1996, the Company spent $53
million on the construction of the new acute care facilities located in
Edinburg, Texas and Summerlin, Nevada which opened during 1997 as mentioned
above.
During 1995 the Company acquired the following facilities for two acute care
facilities and total cash consideration of $188 million and the assumption of
net liabilities of approximately $4 million: (i) a 512-bed acute care hospital
located in Bradenton, Florida for approximately $139 million in cash and the
assumption of net liabilities of $4 million; (ii) a 225-bed acute care
facility located in Aiken , South Carolina for approximately $44 million in
cash and a 104-bed acute care hospital and a 126-bed acute care hospital, and;
(iii) a 82-bed behavioral health facility located in South Attleboro,
Massachusetts and a majority interest in two separate partnerships which own
and operate two outpatient surgery centers for total cash consideration of
approximately $5 million. Also during 1995, the Company sold the operations
and substantially all the assets of a 202-bed acute
19
care hospital located in Plantation, Florida for cash proceeds of
approximately $20 million. The sale resulted in a $5.3 million pre-tax gain
which has been included in nonrecurring charges in the 1995 consolidated
statement of income.
Capital expenditures, net of proceeds received from sale or disposition of
assets, were $114 million in 1997, $106 million in 1996 and $61 million in
1995. Capital expenditures in 1998 are expected to be approximately $56
million for capital equipment and renovations at existing facilities.
Additionally, capital expenditures for new projects at existing hospitals and
medical office buildings are expected to total approximately $27 million in
1998. The estimated cost to complete major construction projects in progress
at December 31, 1997 is approximately $45 million. The Company believes that
its capital expenditure program is adequate to expand, improve and equip its
existing hospitals.
Total debt as a percentage of total capitalization was 35% at December 31,
1997, 38% at December 31, 1996 and 45% at December 31, 1995. The decrease
during 1996 as compared to 1995 was due primarily to the issuance of
additional shares of the Company's Class B Common Stock used to partially
finance the 1996 purchase transactions mentioned above. During the second
quarter of 1996, the Company issued four million shares of its Class B Common
Stock at a price of $26 per share. The total net proceeds of $99.1 million
generated from this stock issuance were used to partially finance the 1996
purchase transactions mentioned above while the excess of the purchase price
over the net proceeds generated from the stock issuance ($69 million) were
financed from operating cash flows and borrowings under the Company's
commercial paper and revolving credit facilities.
During 1997, the Company entered into a new revolving credit agreement. The
agreement, which matures in July 2002, provides for up to $300 million in
borrowing capacity. During the term of this agreement, the Company has the
option to petition the banks to increase the borrowing capacity to $400
million. The agreement provides for interest at the Company's option at the
prime rate, certificate of deposit plus 3/8% to 5/8%, Euro-dollar plus 1/4% to
1/2% or a money market. A facility fee ranging from 1/8% to 3/8% is required
on the total commitment. At December 31, 1997, the Company had $224 million of
unused borrowing capacity available under the revolving credit agreement.
Also during 1997, the Company amended its commercial paper credit facility
to increase the borrowing capacity to $75 million from $50 million and to
reduce the commitment fee. A large portion of the Company's accounts
receivable are pledged as collateral to secure this commercial paper program.
The Company has sufficient patient receivables to support a larger program and
upon mutual consent of the Company and the participating lending institutions,
the commitment can be increased to $100 million. At December 31, 1997, the
Company had no available unused borrowing capacity under the commercial paper
credit facility.
During 1997, the Company entered into interest rate protection to fix the
rate of interest on a notional principal amount of $50 million for a period of
three years beginning in January, 1998. The average fixed rate obtained
through these interest rate swaps is 6.125% including the Company's current
borrowing spread of .35%. The counterparty of these interest rate swaps has
the right to terminate the swap after the second year. The Company also
entered into $75 million of forward starting interest rate swaps starting in
August, 2000 locking in a fixed rate of 7.09% through August, 2010. At
December 31, 1997 and 1996, there were no active interest rate swap
agreements.
The effective interest rate on the Company's revolving credit, demand notes
and commercial paper program, including the interest rate swap expense
incurred on now expired interest rate swaps was 6.8% in 1997, 6.9% in 1996 and
8.4% in 1995. Additional interest expense recorded as a result of the
Company's hedging activity was $0 in 1997, $47,000 in 1996 and $209,000 in
1995. The Company is exposed to credit loss in the event of non-performance by
the counterparty to the interest rate swap agreements. All of the
counterparties are major financial institutions rated AA or better by Moody's
Investor Service and the Company does not anticipate non-performance. The cost
to terminate the swap obligations at December 31, 1997 was approximately $1.8
million.
20
The Company expects to finance all capital expenditures and acquisitions
with internally generated funds and borrowed funds. Additional borrowed funds
may be obtained either through refinancing the existing revolving credit
agreement, the commercial paper facility or the issuance of long-term
securities.
FORWARD-LOOKING STATEMENTS
The matters discussed in this report as well as the news releases issued
from time to time by the Company include certain statements containing the
words "believes", "anticipates", "intends", "expects" and words of similar
import, which constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance achievements of the Company or
industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, the following: that the
majority of the Company's revenues are produced by a small number of its total
facilities, possible changes in the levels and terms of reimbursement for the
Company's charges by government programs, including Medicare or Medicaid or
other third party payors, the ability to attract and retain qualified
personnel, including physicians, the ability of the Company to successfully
integrate its recent acquisitions and the Company's ability to finance growth
on favorable terms. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Balance Sheets, Consolidated Statements of
Income, Consolidated Statements of Common Stockholders' Equity, and
Consolidated Statements of Cash Flows, together with the report of Arthur
Andersen LLP, independent public accountants, are included elsewhere herein.
Reference is made to the "Index to Financial Statements and Financial
Statement Schedule."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
There is hereby incorporated by reference the information to appear under
the caption "Election of Directors" in the Company's Proxy Statement, to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 1997. 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, 1997.
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, 1997.
21
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, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE.
See Index to Financial Statements and Financial Statement Schedule on page
27.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
3.1 Company's Restated Certificate of Incorporation, and Amendments thereto,
previously filed as Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, are incorporated herein by reference.
3.2 Bylaws of Registrant as amended, previously filed as Exhibit 3.2 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1987,
is incorporated herein by reference.
4.1 Authorizing Resolution adopted by the Pricing Committee of Universal
Health Services, Inc. on August 1, 1995, related to $135 million principal
amount of 8 3/4% Senior Notes due 2005, previously filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1995, is incorporated herein by reference.
4.2 Indenture dated as of July 15, 1995, between Universal Health Services,
Inc. and PNC Bank, National Association, Trustee, previously filed as Exhibit
10.2 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995, is incorporated herein by reference.
10.1 Restated Employment Agreement, dated as of July 14, 1992, by and
between Registrant and Alan B. Miller, previously filed as Exhibit 10.3 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
is incorporated herein by reference.
10.2 Form of Employee Stock Purchase Agreement for Restricted Stock Grants,
previously filed as Exhibit 10.12 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1985, is incorporated herein by reference.
10.3 Advisory Agreement, dated as of December 24, 1986, between Universal
Health Realty Income Trust and UHS of Delaware, Inc., previously filed as
Exhibit 10.2 to Registrant's Current Report on Form 8-K dated December 24,
1986, is incorporated herein by reference.
10.4 Agreement, effective January 1, 1998, to renew Advisory Agreement,
dated as of December 24, 1986, between Universal Health Realty Income Trust
and UHS of Delaware, Inc.
10.5 Form of Leases, including Form of Master Lease Document for Leases,
between certain subsidiaries of the Registrant and Universal Health Realty
Income Trust, filed as Exhibit 10.3 to Amendment No. 3 of the Registration
Statement on Form S-11 and Form S-2 of Registrant and Universal Health Realty
Income Trust (Registration No. 33-7872), is incorporated herein by reference.
22
10.6 Share Option Agreement, dated as of December 24, 1986, between
Universal Health Realty Income Trust and Registrant, previously filed as
Exhibit 10.4 to Registrant's Current Report on Form 8-K dated December 24,
1986, is incorporated herein by reference.
10.7 Corporate Guaranty of Obligations of Subsidiaries Pursuant to Leases
and Contract of Acquisition, dated December 24, 1986, issued by Registrant in
favor of Universal Health Realty Income Trust, previously filed as Exhibit
10.5 to Registrant's Current Report on Form 8-K dated December 24, 1986, is
incorporated herein by reference.
10.8 1990 Employees' Restricted Stock Purchase Plan, previously filed as
Exhibit 10.24 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990, is incorporated herein by reference.
10.9 1992 Corporate Ownership Program, previously filed as Exhibit 10.24 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991,
is incorporated herein by reference.
10.10 1992 Stock Bonus Plan, previously filed as Exhibit 10.25 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1991,
is incorporated herein by reference.
10.11 Sale and Servicing Agreement dated as of November 16, 1993 between
Certain Hospitals and UHS Receivables Corp., previously filed as Exhibit 10.16
to Registrant's Annual Report on Form 10-K for the year ended December 31,
1993, is incorporated herein by reference.
10.12 Servicing Agreement dated as of November 16, 1993, among UHS
Receivables Corp., UHS of Delaware, Inc. and Continental Bank, National
Association, previously filed as Exhibit 10.17 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993, is incorporated herein by
reference.
10.13 Pooling Agreement dated as of November 16, 1993, among UHS Receivables
Corp., Sheffield Receivables Corporation and Continental Bank, National
Association, previously filed as Exhibit 10.18 to Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993, is incorporated herein by
reference.
10.14 Amendment No. 1 to the Pooling Agreement dated as of September 30,
1994, among UHS Receivables Corp., Sheffield Receivables Corporation and Bank
of America Illinois (as successor to Continental Bank N.A.) as Trustee,
previously filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994, is incorporated herein by reference.
10.15 Amendment No. 2, dated as of April 17, 1997 to Pooling Agreement dated
as of November 16, 1993, among UHS Receivables Corp., a Delaware corporation,
Sheffield Receivables Corporation, a Delaware corporation, and First Bank
National Association, a national banking association, as trustee, previously
filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 30, 1997, is incorporated herein by reference.
10.16 Guarantee dated as of November 16, 1993, by Universal Health Services,
Inc. in favor of UHS Receivables Corp., previously filed as Exhibit 10.19 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
is incorporated herein by reference.
10.17 Amendment No. 1 to the 1992 Stock Bonus Plan, previously filed as
Exhibit 10.21 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, is incorporated herein by reference.
10.18 1994 Executive Incentive Plan, previously filed as Exhibit 10.22 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
is incorporated herein by reference.
10.19 Credit Agreement, dated as of July 8, 1997 among Universal Health
Services, Inc., various banks and Morgan Guaranty Trust Company of New York,
as agent, previously filed as Exhibit 10.1 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997, is incorporated herein by
reference.
23
10.20 Amended and Restated 1989 Non-Employee Director Stock Option Plan,
previously filed as Exhibit 10.24 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994, is incorporated herein by reference.
10.21 Asset Purchase Agreement dated as of February 6, 1996, among Amarillo
Hospital District, UHS of Amarillo, Inc. and Universal Health Services, Inc.,
previously filed as Exhibit 10.28 to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995, is incorporated herein by reference.
10.22 1992 Stock Option Plan, as Amended, previously filed as Exhibit 10.26
to Registrant's Annual Report on Form 10-K for the year ended December 31,
1995, is incorporated herein by reference.
10.23 Stock Purchase Plan, previously filed as Exhibit 10.27 to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995, is
incorporated herein by reference.
10.24 Asset Purchase Agreement dated as of April 19, 1996 by and among UHS
of PENNSYLVANIA, INC., a Pennsylvania corporation, and subsidiary of UNIVERSAL
HEALTH SERVICES, INC., a Delaware corporation, UHS, UHS OF DELAWARE, INC., a
Delaware corporation and subsidiary of UHS, WELLINGTON REGIONAL MEDICAL
CENTER, INC., a Florida corporation and subsidiary of UHS, FIRST HOSPITAL
CORPORATION, a Virginia corporation, FHC MANAGEMENT SERVICES, INC., a Virginia
corporation, HEALTH SERVICES MANAGEMENT, INC., a Pennsylvania corporation,
HORSHAM CLINIC, INC., d/b/a THE HORSHAM CLINIC, a Pennsylvania corporation,
CENTRE VALLEY MANAGEMENT, INC. d/b/a THE MEADOWS PSYCHIATRIC CENTER, a
Pennsylvania corporation, CLARION FHC, INC. d/b/a CLARION PSYCHIATRIC CENTER,
a Pennsylvania corporation, WESTCARE, INC., d/b/a ROXBURY, a Virginia
corporation and FIRST HOSPITAL CORPORATION OF FLORIDA, a Florida corporation,
previously filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996, is incorporated herein by reference.
10.25 $36.5 million Term Note dated May 3, 1996 between Universal Health
Services, Inc., a Delaware corporation, and First Hospital Corporation,
Horsham Clinic, Inc. d/b/a Horsham Clinic, Centre Valley Management, Inc.
d/b/a The Meadows Psychiatric Center, Clarion FHC, d/b/a/ Clarion Psychiatric
Center, Westcare, Inc. d/b/a Roxbury, FHC Management Services, Inc., Health
Services Management, Inc., First Hospital Corporation of Florida, previously
filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, is incorporated herein by reference.
10.26 Agreement of Limited Partnership of District Hospital Partners, L.P.
(a District of Columbia limited partnership) by and among UHS of D.C., Inc.
and The George Washington University, previously filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarters ended March 30,
1997, and June 30, 1997, is incorporated herein by reference.
10.27 Contribution Agreement between The George Washington University (a
congressionally chartered institution in the District of Columbia) and
District Hospital Partners, L.P. (a District of Columbia limited partnership),
previously filed as Exhibit 10.3 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, is incorporated herein by reference.
10.28 Deferred Compensation Plan for Universal Health Services Board of
Directors, previously filed as Exhibit 10.1 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein
by reference.
10.29 Stock Purchase Agreement dated as of December 15, 1997, by and among
the Stockholders of Hospital San Pablo, Inc. and Universal Health Services,
Inc., and UHS of Puerto Rico, Inc.
10.30 Valley/Desert Contribution Agreement dated January 30, 1998, by and
among Valley Hospital Medical Center, Inc. and NC-DSH, Inc.
24
10.31 Summerlin Contribution Agreement dated January 30, 1998, by and among
Summerlin Hospital Medical Center, L.P. and NC-DSH, Inc.
10.32 1992 Stock Option Plan, As Amended.
22. Subsidiaries of Registrant.
24. Consent of Independent Public Accountants.
27. Financial Data Schedule.
Exhibits, other than those incorporated by reference, have been included in
copies of this Report filed with the Securities and Exchange Commission.
Stockholders of the Company will be provided with copies of those exhibits
upon written request to the Company.
25
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.
/s/ Alan B. Miller
By: _________________________________
ALAN B. MILLER
PRESIDENT
March 5, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES TITLE DATE
/s/ Alan B. Miller Chairman of the March 5, 1998
- - - ------------------------------------- Board, President
ALAN B. MILLER and Director
(Principal
Executive Officer)
/s/ Sidney Miller Secretary and March 9, 1998
- - - ------------------------------------- Director
SIDNEY MILLER
/s/ Anthony Pantaleoni Director March 9, 1998
- - - -------------------------------------
ANTHONY PANTALEONI
/s/ Martin Meyerson Director March 9, 1998
- - - -------------------------------------
MARTIN MEYERSON
/s/ Robert H. Hotz Director March 9, 1998
- - - -------------------------------------
ROBERT H. HOTZ
/s/ John H. Herrell Director March 9, 1998
- - - -------------------------------------
JOHN H. HERRELL
/s/ Paul R. Verkuil Director March 9, 1998
- - - -------------------------------------
PAUL R. VERKUIL
/s/ Leatrice Ducat Director March 9, 1998
- - - -------------------------------------
LEATRICE DUCAT
/s/ Kirk E. Gorman Senior Vice March 5, 1998
- - - ------------------------------------- President and Chief
KIRK E. GORMAN Financial Officer
/s/ Steve Filton Vice President, March 5, 1998
- - - ------------------------------------- Controller and
STEVE FILTON Principal
Accounting Officer
26
UNIVERSAL HEALTH SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(ITEM 14(a))
Consolidated Financial Statements:
Report of Independent Public Accountants on Consolidated Financial State-
ments and Schedule...................................................... 28
Consolidated Statements of Income for the three years ended December 31,
1997.................................................................... 29
Consolidated Balance Sheets as of December 31, 1997 and 1996............. 30
Consolidated Statements of Cash Flows for the three years ended December
31, 1997................................................................ 31
Consolidated Statements of Common Stockholders' Equity for the three
years ended December 31, 1997........................................... 32
Notes to Consolidated Financial Statements............................... 33
Supplemental Financial Statement Schedule II: Valuation and Qualifying
Accounts................................................................ 47
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Universal Health Services, Inc.:
We have audited the accompanying consolidated balance sheets of Universal
Health Services, Inc. (Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, 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, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Universal
Health Services, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Financial Statements and Financial Statement Schedule is presented for the
purpose of complying with the Securities and Exchange Commission's rules and
is not a required part of the basic financial statements. This schedule has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, Pennsylvania
February 12, 1998
28
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
-------------- -------------- ------------
Net revenues....................... $1,442,677,000 $1,174,158,000 $919,193,000
Operating charges
Operating expenses............... 575,088,000 458,063,000 361,049,000
Salaries and wages............... 514,407,000 420,525,000 329,939,000
Provision for doubtful accounts.. 108,790,000 80,820,000 64,972,000
Depreciation & amortization...... 80,686,000 71,941,000 51,371,000
Lease and rental expense......... 38,401,000 37,484,000 36,068,000
Interest expense, net............ 19,382,000 21,258,000 11,195,000
Nonrecurring charges............. -- 4,063,000 11,610,000
-------------- -------------- ------------
Total operating charges........ 1,336,754,000 1,094,154,000 866,204,000
-------------- -------------- ------------
Income before income taxes......... 105,923,000 80,004,000 52,989,000
Provision for income taxes......... 38,647,000 29,333,000 17,505,000
-------------- -------------- ------------
Net income......................... $ 67,276,000 $ 50,671,000 $ 35,484,000
============== ============== ============
Earnings per common share--basic... $ 2.08 $ 1.69 $ 1.28
============== ============== ============
Earnings per common & common share
equivalents--diluted.............. $ 2.03 $ 1.65 $ 1.26
============== ============== ============
Weighted average number of common
shares--basic..................... 32,321,000 30,054,000 27,691,000
Weighted average number of common
share equivalents................. 777,000 744,000 412,000
-------------- -------------- ------------
Weighted average number of common
shares and equivalents--diluted... 33,098,000 30,798,000 28,103,000
============== ============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
29
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
---------------------------
1997 1996
-------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................... $ 332,000 $ 288,000
Accounts receivable, net........................... 180,252,000 145,364,000
Supplies........................................... 28,214,000 22,019,000
Deferred income taxes.............................. 11,105,000 12,313,000
Other current assets............................... 10,119,000 13,969,000
-------------- ------------
Total current assets.............................. 230,022,000 193,953,000
PROPERTY AND EQUIPMENT
Land............................................... 66,406,000 63,503,000
Buildings and improvements......................... 538,326,000 465,781,000
Equipment.......................................... 308,695,000 257,170,000
Property under capital lease....................... 27,712,000 27,243,000
-------------- ------------
941,139,000 813,697,000
Less accumulated depreciation...................... 328,881,000 271,936,000
-------------- ------------
612,258,000 541,761,000
Funds restricted for construction.................. 41,031,000 --
Construction-in-progress........................... 9,822,000 25,867,000
-------------- ------------
663,111,000 567,628,000
OTHER ASSETS
Excess of cost over fair value of net assets
acquired.......................................... 149,814,000 150,336,000
Deferred income taxes.............................. -- 9,993,000
Deferred charges................................... 10,852,000 11,237,000
Other.............................................. 31,550,000 32,648,000
-------------- ------------
192,216,000 204,214,000
-------------- ------------
$1,085,349,000 $965,795,000
============== ============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt............... $ 5,655,000 $ 6,866,000
Accounts payable................................... 70,807,000 57,117,000
Accrued liabilities
Compensation and related benefits................. 35,498,000 27,278,000
Interest.......................................... 4,682,000 4,899,000
Other............................................. 42,107,000 43,147,000
Federal and state taxes........................... 1,707,000 772,000
-------------- ------------
Total current liabilities......................... 160,456,000 140,079,000
OTHER NONCURRENT LIABILITIES....................... 125,286,000 97,102,000
LONG-TERM DEBT..................................... 272,466,000 275,634,000
DEFERRED INCOME TAXES.............................. 534,000 --
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY
Class A Common Stock, voting, $.01 par value;
authorized 12,000,000 shares; issued and
outstanding 2,059,929 shares in 1997 and 2,060,929
in 1996........................................... 21,000 21,000
Class B Common Stock, limited voting, $.01 par
value; authorized 75,000,000 shares; issued and
outstanding 30,122,479 shares in 1997 and
29,816,153 in 1996................................ 301,000 298,000
Class C Common Stock, voting, $.01 par value;
authorized 1,200,000 shares; issued and
outstanding 207,230 shares in 1997 and 207,230 in
1996.............................................. 2,000 2,000
Class D Common Stock, limited voting, $.01 par
value; authorized 5,000,000 shares; issued and
outstanding 32,063 shares in 1997 and 36,805