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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, 1999
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. 1-10765
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, 2000,
was 2,030,566, 28,399,685, 204,593, and 24,353, respectively.
The aggregate market value of voting stock held by non-affiliates at January
31, 2000 $1,254,241,247. (For the 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 2000 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission within 120 days after December 31, 1999 (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, radiation oncology
centers and women's centers. Presently, the Company operates 47 hospitals,
consisting of 21 acute care hospitals, 23 behavioral health centers, and two
women's centers, in Arkansas, California, the District of Columbia, Florida,
Georgia, Illinois, Indiana, Louisiana, Massachusetts, Michigan, Missouri,
Nevada, New Jersey, 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 23 surgery and radiation oncology centers located in 12 states and the
District of Columbia.
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 behavioral health
services. The Company provides capital resources as well as a variety of
management services to its facilities, including central purchasing,
information services, 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 1999, the Company proceeded with its development of new facilities and
consummated a number of acquisitions.
In April 1999 the Company acquired three behavioral health facilities: the
Hampton Hospital and Hampton Learning Center in Westhampton, New Jersey,
Hartgrove Hospital in Chicago, Illinois and The Midwest Center for Youth and
Families in Kouts, Indiana.
In June 1999 the Company acquired the assets and operations of Doctors'
Hospital of Laredo in exchange for the assets and operations of its Victoria
Regional Medical Center. In connection with this transaction, the Company also
purchased additional land in Laredo, Texas on which it expects to construct a
replacement hospital scheduled to be completed in 2001.
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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.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average Licensed Beds:
Acute Care Hospitals.... 4,806 4,696 3,389 3,018 2,638
Behavioral Health
Centers................ 1,976 1,782 1,777 1,565 1,238
Average Available Beds(1):
Acute Care Hospitals.... 4,099 3,985 2,951 2,641 2,340
Behavioral Health
Centers................ 1,961 1,767 1,762 1,540 1,223
Admissions:
Acute Care Hospitals.... 204,538 187,833 128,020 111,244 91,298
Behavioral Health
Centers................ 37,810 32,400 28,350 22,295 15,329
Average Length of Stay
(Days):
Acute Care Hospitals.... 4.7 4.7 4.8 4.9 5.1
Behavioral Health
Centers................ 11.8 11.3 11.9 12.4 12.8
Patient Days(2):
Acute Care Hospitals.... 963,842 884,966 616,965 546,237 462,054
Behavioral Health
Centers................ 444,632 365,935 336,850 275,667 195,961
Occupancy Rate--Licensed
Beds(3):
Acute Care Hospitals.... 55% 52% 50% 49% 48%
Behavioral Health
Centers................ 62% 56% 52% 48% 43%
Occupancy Rate--Available
Beds(3):
Acute Care Hospitals.... 64% 61% 57% 57% 54%
Behavioral Health
Centers................ 62% 57% 52% 49% 44%
</TABLE>
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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 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.
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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. The costs for recertification are not material as many of the
requirements for recertification are integrated with the Company's internal
quality control processes. If a facility loses certification, it will be
unable to receive payment for patients under the Medicare or Medicaid
programs. 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 located in McAllen, Texas and Edinburg Regional
Medical Center located in Edinburg, Texas operate within the same market. On a
combined basis, these two facilities contributed 13% in both 1999 and 1998 and
16% in 1997 of the Company's consolidated net revenues and 25% in 1999, 23% in
1998 and 25% in 1997 of the Company's consolidated earnings before
depreciation, amortization, interest, income taxes and nonrecurring charges
(after deducting an allocation of corporate overhead)("EBITDA"). During the
first quarter of 1998, the Company contributed substantially all of the
assets, liabilities and operations of Valley Hospital Medical Center and its
newly-constructed Summerlin Hospital Medical Center in exchange for a 72.5%
interest in a series of newly-formed limited liability corporations ("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 and $11 million
of net cash to the LLCs. All three acute care facilities operate within the
Las Vegas, Nevada market. On a combined basis, these three facilities
contributed 18% of the Company's consolidated net revenues in both 1999 and
1998 and 10% in 1999 and 15% in 1998 of the Company's consolidated EBITDA. The
decrease in the combined operating margins was primarily due to: (i) a
capitation arrangement which began during 1999 pursuant to the terms of which
the facilities assumed a greater share of risk, and; (ii) collection issues
resulting from continued delays in payments from managed care payors. The
capitation arrangement has been replaced by a standard per diem contract
commencing in January, 2000. Valley Hospital Medical Center and Summerlin
Hospital Medical Center (which opened during the fourth quarter of 1997)
contributed 13% of the Company's 1997 consolidated net revenues and 18% of the
Company's 1997 consolidated EBITDA.
The following table shows approximate percentages of net patient revenue
derived by the Company's hospitals owned as of December 31, 1999 since their
respective dates of acquisition by the Company from third party sources,
including the additional Medicaid reimbursements received at four of the
Company's acute care facilities located in Texas and one in South Carolina
totaling $37.0 million in 1999, $36.5 million in 1998, $33.4
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million in 1997, $17.8 million in 1996 and $12.6 million in 1995, and from all
other sources during the five years ended December 31, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF NET
PATIENT REVENUES
----------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Third Party Payors:
Medicare.......................................... 33.5% 34.3% 35.6% 35.6% 35.1%
Medicaid.......................................... 12.6% 11.3% 14.5% 15.3% 13.7%
Managed Care (a).................................. 31.5% 27.2% 19.1% N/A N/A
Other Sources..................................... 22.4% 27.2% 30.8% 49.1% 51.2%
---- ---- ---- ---- ----
Total............................................. 100% 100% 100% 100% 100%
</TABLE>
(a) Includes health maintenance organizations and preferred provider
organizations.
N/A-Not available
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 formulas. 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.
Behavioral health facilities, which are excluded 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. In the Balanced Budget Act of
1997, Congress significantly revised the Medicare payment provisions for PPS-
excluded hospitals, including psychiatric hospitals. Effective for Medicare
cost reporting periods beginning on or after October 1, 1997, different caps
are applied to psychiatric hospitals' target amounts depending whether a
hospital was excluded from PPS before or after that date. Congress also
revised the rate-of-increase percentages for PPS-excluded hospitals and
eliminated the new provider PPS-exemption for psychiatric hospitals. In
addition, the Health Care Financing Administration has implemented
requirements applicable to psychiatric hospitals that share a facility or
campus with another hospital.
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 report years beginning
on or after October 1, 1991. For most 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 most of the Company's hospitals,
is the year ended
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December 31, 1990. Most of the Company's hospitals are paid under the "hold
harmless" methodology except for five hospitals, which are 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 July 30, 1999. In fiscal 2000, hospitals receive an inpatient PPS inflation
update factor of market-basket minus 1.8 percent, as mandated by Congress in
the Balanced Budget Act (or 1.1 percent).
The Company can provide no assurances that the reductions in the PPS update,
and other changes required by the Balanced Budget Act, 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 called 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. It is possible that future budgets will
contain certain further reductions in the rate of increase of Medicare and
Medicaid spending.
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, a
pilot program in two areas of the state, to establish for Medicaid
beneficiaries a health care delivery system based on managed care principles.
The program is now known as the STAR Program, which is short for State of
Texas Access Reform. Since 1995, the Texas Health and Human Services
Commission, with the help of other Texas agencies such as the Texas Department
of Health, has rolled out STAR Medicaid managed care pilot programs in several
geographic areas of the state. Under the STAR program, the Texas Department of
Health either contracts with health maintenance organizations in each area to
arrange for covered services to Medicaid beneficiaries, or contracts directly
with health care providers and oversees the furnishing of care in the role of
the case manager. Two carve-out pilot programs are the STAR+PLUS program,
which provides long-term care to elderly and disabled Medicaid beneficiaries
in the Harris County service area, and the NorthSTAR program, which furnishes
behavioral health services to Medicaid beneficiaries in the Dallas County
service area. Effective fall 1999, however, the Texas legislature imposed a
moratorium on the implementation of additional pilot programs pending receipt
of a study of the effectiveness of Medicaid managed care. The study is due on
November 1, 2000, and the extent of further implementation of or changes to
Medicaid managed care will likely depend upon the legislature's response to
the study. The Company is unable to predict the effect on the Company's
business of such current or future pilot programs.
Upon meeting certain conditions, and serving a disproportionately high share
of Texas' and South Carolina's low income patients, four 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 $37.0 million in 1999, $36.5 million in 1998, and
$33.4 million in 1997, received pursuant to the terms of these programs.
5
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Failure to renew these programs, which are scheduled to terminate in the third
quarter of 2000, or further reduction in reimbursement, could have a material
adverse effect on the Company's future results of operation.
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. Penalties for violating Stark I and Stark II include denial
of payment for any services rendered by an entity in violation of the
prohibitions, civil money penalties of up to $15,000 for each offense, and
exclusion from the Medicare and Medicaid programs.
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 statute; if an arrangement or transaction meets
each of the standards established for a particular safe harbor, the
arrangement will not be subject to challenge by the Inspector General. If an
arrangement does not meet the safe harbor criteria, it will be subject to
scrutiny under its particular facts and circumstances to determine whether it
violates the federal anti-kickback statute which prohibits, in general,
fraudulent and abusive practices, and enforcement action may be taken by the
Inspector General. In addition to the investment interests safe harbor, other
safe harbors include space rental, equipment rental, personal
service/management contracts, sales of a physician practice, referral
services, warranties, employees, discounts and group purchasing arrangements,
among others. The criminal sanctions for a conviction under the anti-kickback
statute include imprisonment, fines, or both. Civil sanctions include
exclusion from federal and state health care programs.
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.
Regulations related to the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA") are expected to impact the Company and others in the
healthcare industry by:
(i) Establishing standardized code sets for financial and clinical electronic
data interchange ("EDI") transactions to enable more efficient flow of
information. Currently there is no common standard for the transfer of
information between the constituents in healthcare and therefore providers
have had to conform to each standard utilized by every party with which
they interact. The goal of HIPAA is to create one common national standard
for EDI and once the HIPAA regulation takes effect, payors will be
required to accept the national standard employed by providers.
(ii) Mandating the adoption of security standards to preserve the
confidentiality of health information that identifies individuals.
Currently there is no recognized healthcare standard that includes all
the necessary components to protect the data integrity and
confidentiality of a patient's personal health record. The Department of
Health and Human Services, with assistance from standards development
organizations and business interests, is currently developing the
standard.
6
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(iii) Creating unique identifiers for the four constituents in healthcare:
payors, providers, patients and employers. HIPAA will mandate the need
for the unique identifiers for healthcare providers in an effort to ease
the administrative challenge of maintaining and transmitting clinical
data across disparate episodes of patient care.
The Secretary of the Department of Health and Human Services is expected to
issue new HIPAA regulations (expected to be released in May, 2000) related to
administrative simplification with the requirement that these guidelines be
implemented within two years of their release. Non-compliance may result in
fines, loss of accreditation and/or threat of civil litigation. This HIPAA
assessment is based on information currently available to the Company and the
Company has begun preliminary planning for implementation of the necessary
changes required pursuant to the terms of HIPAA. However, the Company can not
currently estimate the implementation cost of the HIPAA related modifications
and consequently can give no assurances that issues related to HIPAA will not
have a material adverse effect on the Company's financial condition or results
of 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. Many states have laws and regulations which prohibit
payments for referral of patients and fee-splitting with physicians. The
Company does not make any such payments or have any such arrangements.
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 conditions of
participation and 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 ("JCAHO"). The JCAHO reviews each hospital's accreditation once
every three years. The review period for each state's licensing body varies,
but generally ranges from once a year to once every three years.
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.
7
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Federal regulations provide that admissions and utilization of facilities by
Medicare and Medicaid patients must be reviewed in order to insure efficient
utilization of facilities and services. The law and regulations require Peer
Review Organizations ("PROs") to review the appropriateness of Medicare and
Medicaid patient admissions and discharges, the quality of care provided, the
validity of DRG classifications and the appropriateness of cases of
extraordinary length of stay. PROs may deny payment for services provided,
assess fines and also have the authority to recommend to HHS that a provider
that is in substantial non-compliance with the standards of the PRO be
excluded from participating in the Medicare program. The Company has
contracted with PROs in each state where it does business as to the scope of
such functions.
The Company's healthcare operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. In 1988, Congress passed the Medical Waste Tracking
Act. Infectious waste generators, including hospitals, now face substantial
penalties for improper arrangements regarding disposal of medical waste,
including civil penalties of up to $25,000 per day of noncompliance, criminal
penalties of $150,000 per day, imprisonment, and remedial costs. The
comprehensive legislation establishes programs for medical waste treatment and
disposal in designated states. The legislation also provides for sweeping
inspection authority in the Environmental Protection Agency, including
monitoring and testing. The Company believes that its disposal of such wastes
is in compliance with all state and federal laws.
Medical Staff and Employees
The Company's hospitals are staffed by licensed physicians who have been
admitted to the medical staff of individual hospitals. With a few exceptions,
physicians are not employees of the Company's hospitals and members of the
medical staffs of the Company's hospitals also serve on the medical staffs of
hospitals not owned by the Company and may terminate their affiliation with
the Company's hospitals at any time. Each of the Company's hospitals is
managed on a day-to-day basis by a managing director employed by the Company.
In 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 19,350 employees at
December 31, 1999, of whom 13,562 were employed full-time.
Approximately 1,547 of the Company's employees at six of its hospitals are
unionized. At Valley Hospital, unionized employees belong to the Culinary
Workers and Bartenders Union, the International Union of Operating Engineers
and the Service Employees International Union. 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. At The George Washington
University Hospital, unionized employees are represented by the Service
Employees International Union and the Hospital Police Association. Nurses at
Desert Springs Hospital 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. Unionized employees
at Hospital San Fransisco in Puerto Rico are represented by the Labor Union of
Nurses and Health Employees. 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
8
<PAGE>
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's subsidiaries are 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 $6 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. From 1986 to 1995, these subsidiaries were self-insured for
professional and general liability claims up to $25 million and $5 million per
occurrence, respectively. Since 1993, certain of the Company's subsidiaries,
including one of its larger acute care facilities, have purchased general and
professional liability occurrence policies with commercial insurers. These
policies include coverage up to $25 million per occurrence for general and
professional liability risks.
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 hospital
facilities operated by the Company with terms expiring in 2000 through 2006.
These leases contain up to six 5-year renewal options. During 1999, the
Company sold the real property of a medical office building to the Trust for
cash proceeds of approximately $13 million. Tenants in the multi-tenant
building include subsidiaries of the Company as well as unrelated parties.
During 1998, the Company exercised five-year renewal options on four hospitals
leased from the Trust which were scheduled to expire in 1999 through 2001. The
leases on these facilities were renewed at the same lease rates and terms as
the initial leases. 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, 1999, 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:
<TABLE>
<CAPTION>
Name and Age Present Position with the Company
------------ ---------------------------------
<S> <C>
Alan B. Miller (62)................... Director, Chairman of the Board,
President and Chief Executive Officer
Kirk E. Gorman (49)................... Senior Vice President and Chief
Financial Officer
Thomas J. Bender (47)................. Senior Vice President
Steve G. Filton (42).................. Vice President, Controller and Secretary
Debra Osteen (44)..................... Vice President
Richard C. Wright (52)................ Vice President
</TABLE>
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.
9
<PAGE>
Mr. Gorman was elected Senior Vice President and Chief Financial Officer in
December 1992, and has served as Vice President and Treasurer of the Company
since April 1987. From 1984 until then, he served as Senior Vice President of
Mellon Bank, N.A. Prior thereto, he served as Vice President of Mellon Bank,
N.A.
Mr. Wright was elected Vice President of the Company in May 1986. He has
served in various capacities with the Company since 1978 and currently heads
the Development function.
Mr. Bender was elected Senior Vice President and head of the Acute Care
Hospital Division of the Company in January 2000. Since 1988 he served as Vice
President of the Company responsible for the Behavioral Health Division.
Mr. Filton has been Vice President and Controller of the Company since
November 1991. Prior thereto he had served as Director of Accounting and
Control. In September 1999, he was elected Secretary of the Company.
Ms. Osteen was elected Vice President of the Company in January 2000,
responsible for the Behavioral Health Division. She has served in various
capacities with the Company since 1984 including responsibility for
approximately one-half of the Behavioral Health Division's facilities.
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:
10
<PAGE>
Acute Care Hospitals
<TABLE>
<CAPTION>
Number Ownership
Name of Facility Location of Beds Interest
- ---------------- -------- ------- ---------
<S> <C> <C> <C>
Aiken Regional Medical
Centers................ Aiken, South Carolina 225 Owned
Auburn Regional Medical
Center................. Auburn, Washington 149 Owned
Chalmette Medical
Center(5).............. Chalmette, Louisiana 195 Leased
Desert Springs
Hospital(2)............ Las Vegas, Nevada 233 Owned
Doctors' Hospital of
Laredo................. Laredo, Texas 117 Owned
Doctors' Hospital of
Shreveport(3).......... Shreveport, Louisiana 136 Leased
Edinburg Regional
Medical Center......... Edinburg, Texas 169 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.............. LaPlace and Chalmette, Louisiana 106 Owned
Summerlin Hospital
Medical Center(2)...... Las Vegas, Nevada 166 Owned
Valley Hospital Medical
Center(2).............. Las Vegas, Nevada 417 Owned
Wellington Regional
Medical Center(1)...... West Palm Beach, Florida 120 Leased
Behavioral Health Centers
<CAPTION>
Number Ownership
Name of Facility Location of Beds Interest
- ---------------- -------- ------- ---------
<S> <C> <C> <C>
The Arbour Hospital..... Boston, Massachusetts 118 Owned
The BridgeWay(1)........ North Little Rock, Arkansas 70 Leased
Clarion Psychiatric
Center................. Clarion, Pennsylvania 70 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
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
Hampton Hospital........ Westhampton, New Jersey 100 Owned
Hartgrove Hospital...... Chicago, Illinois 119 Owned
The Midwest Center for
Youth and Families..... Kouts, Indiana 50 Owned
</TABLE>
11
<PAGE>
<TABLE>
Behavioral Health Centers, continued
<CAPTION>
Number Ownership
Name of Facility Location of Beds Interest
- ---------------- -------- ------- ---------
<S> <C> <C> <C>
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
</TABLE>
Ambulatory Surgery Centers
<TABLE>
<CAPTION>
Name of Facility(7) Location
------------------- --------
<S> <C>
Arkansas Surgery Center of Fayetteville.......... Fayetteville, Arkansas
Goldring Surgical and Diagnostic Center.......... Las Vegas, Nevada
Northwest Texas Surgery Center................... Amarillo, Texas
Outpatient Surgical Center of Ponca City......... Ponca City, Oklahoma
Plaza Surgery Center............................. Las Vegas, Nevada
St. George Surgical Center....................... St. George, Utah
Hope Square Surgery Center....................... Rancho Mirage, California
Surgery Center of Littleton...................... Littleton, Colorado
Surgery Center of Midwest City................... Midwest City, Oklahoma
Surgery Center of Springfield.................... Springfield, Missouri
Surgical Center of New Albany.................... New Albany, Indiana
Radiation Oncology Centers
<CAPTION>
Name of Facility Location
---------------- --------
<S> <C>
Auburn Regional Center for Cancer Care........... Auburn, Washington
Bluegrass Cancer Center(8)....................... Frankfort, Kentucky
Bowling Green Radiation Therapy(9)............... Bowling Green, Kentucky
Cancer Institute of Nevada(10)................... 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(9)..................... Glasgow, Kentucky
Louisville Radiation Oncology Center(8).......... Louisville, Kentucky
Madison Radiation Therapy(10).................... Madison, Indiana
Southern Indiana Radiation Therapy(10)........... Jeffersonville, Indiana
Radiation Therapy Medical Associates of
Bakersfield(11)................................. Bakersfield, California
Specialized Women's Health Centers
<CAPTION>
Name of Facility Location
---------------- --------
<S> <C>
Renaissance Women's Center of Edmond(10)......... Edmond, Oklahoma
Renaissance Women's Center of Austin(10)......... Austin, Texas
</TABLE>
- --------
(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.
(4) General partnership interest in limited partnership.
12
<PAGE>
(5) Includes Chalmette Medical Center, which is a 118-bed medical/surgical
facility and The Virtue Street Pavilion, a 77-bed facility consisting of
a physical rehabilitation unit, skilled nursing and inpatient behavioral
health services. The real property of both facilities is leased from UHT.
(6) Addictive disease facility.
(7) Each facility, other than Goldring Surgical and Diagnostic Center and
Northwest Texas Surgery 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) Majority interest in a limited liability partnership.
(9) Managed facility, not included in the Company's consolidated financial
statements. A partnership, in which the Company is the general partner,
owns the real property.
(10) Membership interest in limited liability company.
(11) Managed facility, not included in the Company's consolidated financial
statements. A limited liability company, in which the Company is the sole
member, owns the equipment, but the property is leased.
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.
The Company believes that the leases or liens on the facilities leased or
owned by the Company do not impose any material limitation on the Company's
operations.
The aggregate lease payments on facilities leased by the Company in 1999 and
1998 aggregated $24.0 million and $22.2 million, respectively.
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, 1999 to a vote of security holders.
13
<PAGE>
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
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
(in thousands)
Net revenues........... $ 2,042,380 $ 1,874,487 $ 1,442,677 $ 1,174,158 $ 919,193
Net income............. $ 77,775 $ 79,558 $ 67,276 $ 50,671 $ 35,484
Net margin............. 3.8% 4.2% 4.7% 4.3% 3.9%
Return on average
equity................ 12.1% 13.1% 13.5% 13.0% 12.4%
Financial Data (in
thousands)
Cash provided by
operating activities.. $ 175,557 $ 151,684 $ 174,170 $ 145,991 $ 91,749
Capital
expenditures(1)....... $ 68,695 $ 96,808 $ 132,258 $ 107,630 $ 65,695
Total assets........... $ 1,497,973 $ 1,448,095 $ 1,085,349 $ 965,795 $ 748,051
Long-term borrowings... $ 419,203 $ 418,188 $ 272,466 $ 275,634 $ 237,086
Common stockholders'
equity................ $ 641,611 $ 627,007 $ 526,607 $ 452,980 $ 297,700
Percentage of total
debt to total
capitalization........ 40% 40% 35% 38% 45%
Operating Data--Acute
Care Hospitals
Average licensed beds.. 4,806 4,696 3,389 3,018 2,638
Average available
beds.................. 4,099 3,985 2,951 2,641 2,340
Hospital admissions.... 204,538 187,833 128,020 111,244 91,298
Average length of
patient stay.......... 4.7 4.7 4.8 4.9 5.1
Patient days........... 963,842 884,966 616,965 546,237 462,054
Occupancy rate for
licensed beds......... 55% 52% 50% 49% 48%
Occupancy rate for
available beds........ 64% 61% 57% 57% 54%
Operating Data--
Behavioral Health
Facilities
Average licensed beds.. 1,976 1,782 1,777 1,565 1,238
Average available
beds.................. 1,961 1,767 1,762 1,540 1,223
Hospital admissions.... 37,810 32,400 28,350 22,295 15,329
Average length of
patient stay.......... 11.8 11.3 11.9 12.4 12.8
Patient days........... 444,632 365,935 336,850 275,667 195,961
Occupancy rate for
licensed beds......... 62% 56% 52% 48% 43%
Occupancy rate for
available beds........ 62% 57% 52% 49% 44%
Per Share Data
Net income--basic(2)... $ 2.48 $ 2.45 $ 2.08 $ 1.69 $ 1.28
Net income--
diluted(2)............ $ 2.43 $ 2.39 $ 2.03 $ 1.65 $ 1.26
Other Information (in
thousands)
Weighted average number
of shares
outstanding--
basic(2).............. 31,417 32,511 32,321 30,054 27,691
Weighted average number
of shares and share
equivalents
outstanding--
diluted(2)............ 31,990 33,293 33,098 30,798 28,103
Common Stock Performance
Market price of common
stock
High--Low, by
quarter(3)
1st.................... 53 -37 7/8 58 1/8 -47 1/16 34 5/8 -27 7/8 26 7/8-21 11/16 13 -11 3/8
2nd.................... 54 7/8-39 1/2 59 5/8 -53 40 1/2 -31 5/8 30 1/8-24 3/8 14 13/16-12 7/16
3rd.................... 47 3/8-23 11/16 58 1/2 -38 3/4 47 1/16-39 1/16 27 1/4-22 3/4 17 11/16-14
4th.................... 36 1/2-24 54 5/16-40 7/16 50 3/8 -40 11/16 29 1/4-24 1/2 22 3/16 -16 1/8
</TABLE>
- --------
(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.
(3) These prices are the high and low closing sales prices of the Company's
Class B Common Stock as reported by the New York Stock Exchange (all
periods have been adjusted to reflect the two-for-one stock split in the
form of a 100% stock dividend paid in May 1996). Class A, C and D common
stock are convertible on a share-for-share basis into Class B Common
Stock.
14
<PAGE>
Number of shareholders of record as of January 31, 2000, were as follows:
<TABLE>
- -------------------
<S> <C>
Class A Common 9
Class B Common 594
Class C Common 7
Class D Common 230
- -------------------
</TABLE>
ITEM 7. Management's Discussion and Analysis of Operations and Financial
Condition
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 or 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 by
government programs, including Medicare or Medicaid or other third party
payors; industry capacity; demographic changes; existing laws and government
regulations and changes in or failure to comply with laws and governmental
regulations; the ability to enter into managed care provider agreements on
acceptable terms; liability and other claims asserted against the Company;
competition; the loss of significant customers; technological and
pharmaceutical improvements that increase the cost of providing, or reduce the
demand for healthcare; the ability to attract and retain qualified personnel,
including physicians; the ability of the Company to successfully integrate its
recent acquisitions; the Company's ability to finance growth on favorable
terms; and, other factors referenced in the Company's 1999 Form 10-K or
herein. 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.
Results of Operations
Net revenues increased 9% to $2.0 billion in 1999 as compared to 1998 and
30% to $1.9 billion in 1998 as compared to 1997. The $168 million increase in
net revenues during 1999 as compared to 1998 was due primarily to: (i) revenue
growth at acute care and behavioral health care facilities owned during both
years ($75 million, excluding a favorable $3 million prior year net revenue
adjustment recorded in the second quarter of 1999 resulting from an adjustment
to contractual allowances recorded in a prior year), and; (ii) the acquisition
of three behavioral health facilities located in Illinois, Indiana and New
Jersey and an acute care facility located in Laredo, Texas which were acquired
during the second quarter of 1999 ($43 million, net of revenues generated at
facility exchanged for the Laredo facility). The $432 million increase in net
revenues during 1998 as compared to 1997 was due primarily to: (i) the
acquisition of three acute care facilities located in Puerto Rico (one of
which opened in April, 1998) and one acute care facility located in Las Vegas
which were acquired during the first quarter of 1998, the acquisition of an
80% interest in a 501-bed acute care facility during the third quarter of 1997
and a newly constructed 148-bed acute care facility which opened during the
fourth quarter of 1997 ($344 million), and; (ii) revenue growth at facilities
owned during both periods ($58 million).
Earnings before interest, income taxes, depreciation, amortization, lease
and rental expense, minority interests in earnings of consolidated entities
and a $5.3 million nonrecurring charge recorded in 1999 (see other Operating
Results) ("EBITDAR") increased to $319 million in 1999 from $311 million in
1998 and $245 million in 1997. Overall operating margins were 15.6% in 1999,
16.6% in 1998 and 17.0% in 1997. The factors causing the decrease in the
Company's overall operating margins during the last three years are discussed
below.
15
<PAGE>
Acute Care Services
Net revenues from the Company's acute care hospitals, ambulatory treatment
centers and specialized women's health centers accounted for 86%, 87% and 85%
of consolidated net revenues in 1999, 1998 and 1997, respectively. Net
revenues at the Company's acute care facilities owned in both 1999 and 1998
increased 4% in 1999 as compared to 1998 due primarily to a 5% increase in
admissions and a 6% increase in patient days. The average length of stay at
these facilities remained unchanged at 4.7 days in both 1999 and 1998. Net
revenues at the Company's acute care facilities owned in both 1998 and 1997
increased 4% in 1998 as compared to 1997 due primarily to a 4% increase in
admissions and a 1% increase in patient days. The average length of stay at
these facilities decreased 3% to 4.7 days in 1998 as compared to 4.8 days in
1997.
The Company's facilities have experienced an increase in inpatient acuity
and intensity of services as less intensive services shift from an inpatient
basis to an outpatient basis due to technological and pharmaceutical
improvements and continued pressures by payors, including Medicare, Medicaid
and managed care companies to reduce admissions and lengths of stay. To
accommodate the increased utilization of outpatient services, the Company has
expanded or redesigned several of its outpatient facilities and services.
Gross outpatient revenues at the Company's acute care facilities owned during
the last three years increased 11% in 1999 as compared to 1998 and 14% in 1998
as compared to 1997, and comprised 26% of the Company's acute care gross
patient revenue in each year. Despite the increase in patient volume at the
Company's facilities, 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. Additionally, 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. The
Company expects the increased competition, admission constraints and payor
pressures to continue.
The increase in net revenue as discussed above was partially offset by lower
payments from the government under the Medicare program as a result of the
Balanced Budget Act of 1997 ("BBA-97") and increased discounts to insurance
and managed care companies (see General Trends for additional disclosure). The
Company anticipates that the percentage of its revenue from managed care
business will continue to increase in the future. The Company generally
receives lower payments per patient from managed care payors than it does from
traditional indemnity insurers. Additionally, the Company assumed a greater
share of risk by entering into a capitated arrangement during 1999 with a
managed care payor for its three acute care facilities located in Las Vegas,
Nevada. The capitation contract, which contributed to the decline in the
Company's earnings and operating margins during 1999 as compared to 1998, has
been replaced by a standard per diem contract commencing in January, 2000.
At the Company's acute care facilities, operating expenses (operating
expenses, salaries and wages and provision for doubtful accounts) as a
percentage of net revenues were 81.6% in 1999, 79.9% in 1998 and 78.7% in
1997. Operating margins (EBITDAR) at these facilities were 18.4% in 1999,
20.1% in 1998 and 21.3% in 1997. During 1999, the Company's acute care
division experienced earnings pressure due to government reimbursement
reductions, continued increases in the provision for doubtful accounts and
weakened operating performance at facilities in Las Vegas, Nevada and
Amarillo, Texas. On a combined basis, the Company's three acute care
facilities in Las Vegas and the acute care facility in Amarillo contributed
32% of the Company's acute care net revenue in both 1999 and 1998 and had
operating margins of 15.7% in 1999 and 20.9% in 1998. Excluding the Las Vegas
and Amarillo facilities, on a combined basis, the Company's other acute care
facilities had operating margins of 19.6% in 1999 and 19.7% in 1998. The
decrease in the combined operating margins of the Las Vegas facilities in 1999
as compared to 1998 was due primarily to the capitation agreement with a
managed care provider, as mentioned above, and collection issues resulting
from continued delays in payments from managed care payors. The operating
margins at the Company's facility in Amarillo have been negatively impacted by
reductions in Medicaid disproportionate share payments stemming from BBA-97
and program redesigns by Texas, reduced levels of business in a few high
margin services and higher than anticipated indigent care costs.
The decrease in the operating margins in 1998 as compared to 1997 was due
primarily to: (i) lower operating margins experienced at three acute care
hospitals located in Puerto Rico (one of which opened in April 1998) and one
acute care hospital located in Las Vegas, Nevada which were acquired during
the first quarter of 1998; (ii) lower operating margins experienced at the
501-bed acute care facility of which the Company acquired an 80% interest in
during the third quarter of 1997; (iii) the opening of a newly constructed
129-bed acute care
16
<PAGE>
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; (iv) changes in
Medicare payments mandated by the Balanced Budget Act of 1997 which became
effective October 1, 1997, and; (v) $2.5 million of pre-tax adverse financial
effects of Hurricane Georges ($2.3 million of which affected acute care
facilities) which damaged property and curtailed business at three hospitals
in Puerto Rico and four hospitals in Louisiana (three of which were acute care
facilities) during the third quarter of 1998.
The Company's facilities continue to experience a shift in payor mix
resulting from an increase in the percentage of revenues attributable to
managed care payors and unfavorable general industry trends which include
pressures to control healthcare costs. Providers participating in managed care
programs agree to provide services to patients for a discount from established
rates which generally results in pricing concessions by the providers and
lower operating margins. Additionally, managed care companies generally
encourage alternatives to inpatient treatment settings and reduced utilization
of inpatient services. 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.
The Company's ability to increase its net revenues and operating margins, is
dependent upon its ability to successfully respond to these trends as well as
reductions in spending on governmental healthcare programs.
Operating expenses (operating expenses, salaries and wages and provision for
doubtful accounts) at the Company's facilities owned in both 1999 and 1998
were 81.4% of net revenues in 1999 and 79.9% in 1998. Operating margins at the
Company's acute care facilities owned in both 1999 and 1998 were 18.6% in 1999
as compared to 20.1% in 1998. The decrease in the same facility operating
margins in 1999 as compared to 1998 was due primarily to the decreased
operating performance at the Company's acute care facilities in Las Vegas,
Nevada and Amarillo, Texas, as discussed above. Excluding the facilities in
Las Vegas and Amarillo, the operating margins at the Company's other acute
care facilities owned in both years increased to 20.1% in 1999 as compared to
19.7% in 1998. Operating expenses at the Company's acute care facilities owned
in both 1998 and 1997 were 77.4% of net revenues in 1998 as compared to 78.5%
in 1997. Operating margins at the Company's acute care facilities owned in
both 1998 and 1997 were 22.6% in 1998 as compared to 21.5% in 1997. Pressure
on operating margins may continue due to, among other things, the changes in
Medicare payments mandated by BBA-97 which became effective October 1, 1997,
reductions in Medicaid disproportionate share reimbursements and the industry-
wide trend towards managed care which limits the Company's ability to increase
its prices.
Behavioral Health Services
Net revenues from the Company's behavioral health services facilities
accounted for 13%, 12% and 14% of consolidated net revenues in 1999, 1998 and
1997, respectively. Net revenues at the Company's behavioral health facilities
owned in both 1999 and 1998 increased 3% in 1999 as compared to 1998.
Admissions and patient days at these facilities increased 5% and 7%,
respectively, in 1999 as compared to 1998 and the average length of stay
increased to 11.5 days in 1999 as compared to 11.3 days in 1998. Net revenues
at the Company's behavioral health services facilities owned in both 1998 and
1997 increased 7% in 1998 as compared to 1997 due to a 14% increase in
admissions and a 9% increase in patient days. The average length of stay at
these facilities decreased 5% to 11.3 days in 1998 as compared to 11.9 days in
1997.
The 2% increase in the average length of stay during 1999 as compared to
1998, was primarily due to an increase in child and adolescent patients, which
generally have longer lengths of stay than adults. Many of the Company's
behavioral health services facilities have begun or expanded child and
adolescent inpatient programs in an effort to meet increased demand for these
services. Despite the increase in the average length of stay during 1999 as
compared to 1998, there has been continued practice changes in the delivery of
behavioral health services and continued cost containment pressures from
payors, including managed care companies, which include a greater emphasis on
the utilization of outpatient services. Providers participating in managed
care
17
<PAGE>
programs agree to provide services to patients for a discount from established
rates which generally results in pricing concessions by the providers and
lower margins. Additionally, managed care companies generally encourage
alternatives to inpatient treatment. The Company expects the admission
constraints and payor pressure to continue.
Operating expenses (operating expenses, salaries and wages and provision for
doubtful accounts) as a percentage of net revenues at the Company's behavioral
health services facilities were 83.4% in 1999, 83.5% in 1998 and 82.8% in
1997. The Company's behavioral health services division generated operating
margins (EBITDAR) of 16.6% in 1999, 16.5% in 1998 and 17.2% in 1997. On a same
facility basis, operating expenses (operating expenses, salaries and wages and
provision for doubtful accounts) at the Company's behavioral health services
facilities owned in both 1999 and 1998 were 83.7% in 1999 and 83.5% in 1998.
Operating margins (EBITDAR) at the Company's behavioral health services
facilities owned in both 1999 and 1998 were 16.3% in 1999 and 16.5% in 1998.
On a same facility basis, operating expenses at the Company's behavioral
health services facilities owned in both 1998 and 1997 were 82.4% in 1998 and
82.2% in 1997. Operating margins at the Company's behavioral health services
facilities owned in both 1998 and 1997 were 17.6% in 1998 and 17.8% in 1997.
Management continues to implement cost controls in response to the managed
care environment, however, pressure on operating margins is expected to
continue in the future.
Other Operating Results
The Company recorded minority interest expense in the earnings of
consolidated entities amounting to $6 million in 1999, $9 million in 1998 and
$251,000 in 1997. The minority interest expense recorded during 1999 and 1998
consists primarily of the minority owners' share of the net income of four
acute care facilities, three of which are located in Las Vegas, Nevada and one
located in Washington, DC. The $3 million decrease in the minority interest
expense in 1999 as compared to 1998 was due primarily to the unfavorable
operating performance trends experienced at the Company's acute care
facilities located in Las Vegas, Nevada.
Depreciation and amortization expense increased $3 million to $108 million
in 1999 and increased $24 million to $105 million in 1998 as compared to $81
million in 1997. The increase during 1998 as compared to 1997 was due
primarily to the four acute care hospitals acquired/opened during the first
four months of 1998 (three in Puerto Rico and one in Las Vegas) and a full
year of depreciation expense on two acute care facilities opened during the
third and fourth quarters of 1997.
Interest expense remained unchanged at $27 million in 1999 and 1998.
Interest expense increased $8 million to $27 million in 1998 as compared to
$19 million in 1997 due primarily to increased borrowings used to finance the
1998 purchase of the three acute care hospitals located in Puerto Rico.
During the fourth quarter of 1999, the Company decided to close/sell one of
its specialized women's health centers and as a result, the Company recorded a
$5.3 million nonrecurring charge to reduce the carrying value of the facility
to its estimated realizable value of approximately $9 million, based on an
independent appraisal. The Company is involved in litigation with respect to
this facility and may incur additional charges in the event it is unable to
close or sell the facility for a significant period of time or suffers an
unfavorable outcome from this litigation.
The effective tax rate was 36.7% in 1999, 35.3% in 1998 and 36.5% in 1997.
The increase in the effective tax rate during 1999 as compared to 1998 was due
to a reduction in the tax benefits related to the financing of employee
benefit programs. The reduction in the effective tax rate during 1998 as
compared to 1997 was due to a reduction in the effective state income tax rate
and benefits related to wage tax credits.
The Company did not experience any significant Year 2000 computer related
issues as a result of the turn of the century.
18
<PAGE>
General Trends
A significant portion of the Company's revenue is derived from fixed payment
services, including Medicare and Medicaid which accounted for 46%, 46% and 50%
of the Company's net patient revenues during 1999, 1998 and 1997,
respectively. The Medicare program reimburses the Company's hospitals
primarily based on established rates by a diagnosis related group ("DRG") 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 BBA-97, there
were no increases in the rates paid to hospitals for inpatient care through
September 30, 1998 and reimbursement for bad debt expense and capital costs as
well as other items have been reduced. Inpatient operating payment rates
increased 0.5% for the period of October 1, 1998 through September 30, 1999,
however, the modest rate increase was less than inflation and was more than
offset by the negative impact of converting reimbursement on skilled nursing
facility patients from a cost based reimbursement to a prospective payment
system and from lower DRG payments on certain patient transfers mandated by
BBA-97. Inpatient operating payment rates were increased 1.1% for the period
of October 1, 1999 through September 30, 2000, however, the modest increase
was less than inflation and is expected to be more than offset by the negative
impact of increasing the qualification threshold for additional payments for
treating costly inpatient cases (outliers). Payments for Medicare outpatient
services historically have been paid based on costs, subject to certain
adjustments and limits. BBA-97 requires that payment for those services be
converted to prospective payment systems (PPS). The Health Care Financing
Administration's current plan is to implement PPS for outpatients by July 1,
2000, however, there is a possibility that outpatient PPS may be delayed until
January, 2001. Since final provisions of the outpatient Medicare PPS are not
yet available, the Company can not completely estimate the resulting impact on
its future results of operations.
The healthcare industry is subject to numerous laws and regulations which
include, among other things, matters such as government healthcare
participation requirements, various licensure and accreditations,
reimbursement for patient services, and Medicare and Medicaid fraud and abuse.
Government action has increased with respect to investigations and/or
allegations concerning possible violations of fraud and abuse and false claims
statutes and/or regulations by healthcare providers. Providers that are found
to have violated these laws and regulations may be excluded from participating
in government healthcare programs, subjected to fines or penalties or required
to repay amounts received from government for previously billed patient
services. While management of the Company believes its policies, procedures
and practices comply with governmental regulations, no assurance can be given
that the Company will not be subjected to governmental inquiries or actions.
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, four 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. Beginning in the third quarter of 1999, as a result of reductions
stemming from BBA-97 and program redesigns by the two states, the Company's
Medicaid disproportionate share reimbursements have been reduced by
approximately $11 million annually on a prospective basis. Included in the
Company's financial results was an aggregate of $37.0 million in 1999, $36.5
million in 1998 and $33.4 million in 1997 received pursuant to the terms of
these programs. Failure to renew these programs, which are scheduled to
terminate in the third quarter of 2000, or further reductions in
reimbursements, could have a material adverse effect on the Company's future
results of operations.
In addition to the Medicare and Medicaid programs, other payors, including
managed care companies, continue to actively negotiate the amounts they will
pay for services performed. Approximately 32% in 1999,
19
<PAGE>
27% in 1998 and 19% in 1997 of the Company's net patient revenues were
generated from managed care companies, which includes health maintenance
organizations and preferred provider organizations. In general, the Company
expects the percentage of its business from managed care programs to continue
to grow. The consequent growth in managed care networks and the resulting
impact of these networks on the operating results of the Company's facilities
vary among the markets in which the Company operates.
Health Insurance Portability and Accountability Act of 1996
Regulations related to the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA") are expected to impact the Company and others in the
healthcare industry by:
(i) Establishing standardized code sets for financial and clinical electronic
data interchange ("EDI") transactions to enable more efficient flow of
information. Currently there is no common standard for the transfer of
information between the constituents in healthcare and therefore providers
have had to conform to each standard utilized by every party with which
they interact. The goal of HIPAA is to create one common national standard
for EDI and once the HIPAA regulation takes effect, payors will be
required to accept the national standard employed by providers.
(ii) Mandating the adoption of security standards to preserve the
confidentiality of health information that identifies individuals.
Currently there is no recognized healthcare standard that includes all
the necessary components to protect the data integrity and
confidentiality of a patient's personal health record. The Department of
Health and Human Services, with assistance from standards development
organizations and business interests, is currently developing the
standard.
(iii) Creating unique identifiers for the four constituents in healthcare:
payors, providers, patients and employers. HIPAA will mandate the need
for the unique identifiers for healthcare providers in an effort to ease
the administrative challenge of maintaining and transmitting clinical
data across disparate episodes of patient care.
The Secretary of the Department of Health and Human Services is expected to
issue new HIPAA regulations (expected to be released in May, 2000) related to
administrative simplification with the requirement that these guidelines be
implemented within two years of their release. Non-compliance may result in
fines, loss of accreditation and/or threat of civil litigation. This HIPAA
assessment is based on information currently available to the Company and the
Company has begun preliminary planning for implementation of the necessary
changes required pursuant to the terms of HIPAA. However, the Company can not
currently estimate the implementation cost of the HIPAA related modifications
and consequently can give no assurances that issues related to HIPAA will not
have a material adverse effect on the Company's financial condition or results
of operations.
Market Risks Associated with Financial Instruments
The Company's interest expense is sensitive to changes in the general level
of domestic interest rates. To mitigate the impact of fluctuations in domestic
interest rates, a portion of the Company's debt is fixed rate accomplished by
either borrowing on a long-term basis at fixed rates or by entering into
interest rate swap transactions. The interest rate swap agreements are
contracts that require the Company to pay a fixed and receive a floating
interest rate over the life of the agreements. The floating-rates are based on
LIBOR and the fixed-rate is determined at the time the swap agreement was
consummated. The interest rate swap agreements do not constitute positions
independent of the underlying exposures. The Company does not hold or issue
derivative instruments for trading purposes and is not a party to any
instruments with leverage features. Certain swap agreements allow the
counterparty a one-time option to cancel the agreement one year prior to
maturity. The Company is exposed to credit losses in the event of
nonperformance by the counterparties to its financial instruments. The
counterparties are creditworthy financial institutions, rated AA or better by
Moody's Investor Services and the Company anticipates that the counterparties
will be able to fully satisfy their obligations under the contracts. For the
years ended December 31, 1999 and 1998, the Company received weighted average
rates of 5.5% and 5.7%, respectively, and paid a weighted average rate on its
interest rate swap agreements of 5.8% in both years. At December 31, 1997, the
Company had no active interest rate swap agreements.
20
<PAGE>
The table below presents information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including long-term debt and interest rate swaps as
of December 31, 1999. For debt obligations, the table presents principal cash
flows and related weighted-average interest rates by contractual maturity
dates. For interest rate swap agreements, the table presents notional amounts
by maturity date and weighted average interest rates based on rates in effect
at December 31, 1999. The fair values of long-term debt and interest rate
swaps were determined based on market prices quoted at December 31, 1999, for
the same or similar debt issues.
<TABLE>
<CAPTION>
Maturity Date, Fiscal Year Ending December 31
-------------------------------------------------------
There-
2000 2001 2002 2003 2004 after Total
------- ---- -------- ---- ---- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate--Fair
value................ $3,507 $658 $1,610 $187 $200 $132,244 $138,406
Fixed rate--Carrying
value................ $3,507 $658 $1,610 $187 $200 $134,458 $140,620
Average interest rates.. 7.59% 7.47% 9.15% 6.68% 6.68% 9.20%
Variable rate long-term
debt................... 0 0 $263,890 0 0 $ 18,200 $282,090
Interest rate swaps:
Pay fixed/receive
variable notional
amounts.............. $50,000 $ 75,000 $125,000
Average pay rate...... 5.78% 6.75%
Average receive rate.. 3 month 6 month
LIBOR LIBOR
</TABLE>
Effects of Inflation and Seasonality
The healthcare industry is very labor intensive and salaries and benefits
are subject to inflationary pressures as are rising 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 over the
last three years. Although the Company cannot predict its ability to continue
to cover future cost increases, management believes that through 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 BBA-
97, there were no price increases in the rates paid to hospitals through
September 30, 1998 and the modest price increases that were effective since
October 1, 1998 have been more than offset by the negative impact of other
BBA-97 related changes. In addition, as a result of increasing regulatory and
competitive pressures and a continuing industry wide shift of patients into
managed care plans, the Company's ability to maintain margins through price
increases to non-Medicare patients is limited.
The Company's business is seasonal, with higher patient volumes and net
patient service revenue in the first and fourth quarters of the Company's
year. This seasonality occurs because, generally, more people become ill
during the winter months, which results in significant increases in the number
of patients treated in the Company's hospitals during those months.
Liquidity and Capital Resources
Net cash provided by operating activities was $176 million in 1999, $152
million in 1998 and $174 million in 1997. The $24 million increase in 1999 as
compared to 1998 was primarily attributable to: (i) a $41 million favorable
change in other working capital accounts caused primarily by favorable timing
of accounts payable disbursements in 1999 as compared to 1998 and a $17
million decrease in the pre-funding of employee benefit programs, and; (ii) an
$18 million unfavorable change in accounts receivable, partially resulting
from delays in payments by managed care payors.
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<PAGE>
The $22 million net decrease in 1998 as compared to 1997 was primarily
attributable to: (i) a $37 million favorable increase in net income plus the
addback of depreciation and amortization expense; (ii) an unfavorable $18
million increase in income tax payments, net of refunds; (iii) an unfavorable
$14 million change in accrued insurance expense less commercial premiums paid
and payments made in settlement of self-insurance claims; (iv) an unfavorable
$22 million increase in other working capital accounts; (v) an $8 million
increase in payments made to the Company's non-contributory retirement plan,
and; (vi) $3 million of other net favorable changes. The unfavorable change in
accrued insurance less commercial premiums paid and payments made in
settlement of self-insurance claims was due to the January, 1998 purchase of
commercial insurance policies for general and professional liability coverage
at most of the Company's subsidiaries. These policies provide for coverage in
excess of $1 million per occurrence, with an average annual aggregate of $6
million through 2001. Prior to January 1998, 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. Other working capital accounts as of
December 31, 1998 (net of effects from acquisitions) increased $9 million as
compared to December 31, 1997 while other working capital accounts as of
December 31, 1997 decreased $13 million as compared to December 31, 1996.
These changes in other working capital accounts were caused primarily by the
timing of payments of accounts payable and other accrued expenses.
During the second quarter of 1999, the Company acquired three behavioral
health facilities located in Illinois, Indiana and New Jersey, for a combined
purchase price of $27 million in cash plus contingent consideration of up to
$3 million. Also during the second quarter of 1999, the Company acquired the
operations of Doctor's Hospital of Laredo in exchange for the assets and
operations of its Victoria Regional Medical Center. In connection with this
transaction, the Company also spent approximately $5 million to purchase
additional land in Laredo, Texas on which it expects to construct a
replacement hospital scheduled to be completed in 2001.
During 1999, the Company received total cash proceeds of approximately $16
million generated primarily from the sale of the real property of two medical
office buildings ($14 million). The net gain/loss resulting from these
transactions did not have a material impact on the 1999 results of operations.
During the third quarter of 1998, the Company's Board of Directors approved
a stock repurchase program authorizing the Company to purchase up to two
million shares or approximately 6% of its outstanding Class B Common Stock.
This initial repurchase program was completed during the third quarter of
1999. During the third and fourth quarters of 1999, the Board of Directors
approved plans for the repurchase of up to an additional four million shares
of the Company's Class B Common Stock. Pursuant to the stock repurchase
programs, the Company, from time to time and as conditions allow, may purchase
a total of up to six million shares on the open market at prevailing market
prices or in negotiated transactions off the market. Pursuant to the terms of
these programs, the Company repurchased 580,500 shares at average repurchase
price of $42.90 per share ($24.9 million in the aggregate) during 1998 and
2,028,379 shares at an average repurchase price of $35.10 ($71.2 million in
the aggregate) during 1999. Since inception of the repurchase program in 1998
through December 31, 1999, the Company repurchased a total of 2,608,879 shares
at an average repurchase price of $36.85 per share ($96.1 million in the
aggregate).
In conjunction with the Company's stock repurchase program during 1998 and
1999, the Company sold European-style put options which entitle the holder to
sell shares of the Company's Class B Common Stock to the Company at a
specified price. The Company also purchased European-style call options which
entitles the Company to purchase shares of the Company's Class B Common Stock
at a specified price. As of December 31, 1999 put options totaling 1,458,500
shares, with an average strike price of $28.47, were outstanding with various
expiration dates in the second and third quarters of 2000. As of December 31,
1999 call options totaling 1,034,000 shares, with an average strike price of
$28.47 per share, were outstanding with various expiration dates in the second
and third quarters of 2000.
During the first quarter of 1998, the Company acquired three acute care
hospitals located in Puerto Rico for a combined purchase price of $187
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
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<PAGE>
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 $11 million of net
cash. The assets and liabilities contributed by the Company were recorded by
the LLCs at carryover value. The LLCs applied purchase accounting to the
assets and liabilities provided by Quorum and recorded them at fair market
value. As a result of this partial sale transaction, the Company recorded a
pre-tax gain of $55.1 million ($34.7 million after-tax) that was recorded as a
capital contribution to the Company. This merger did not have a material
impact on the 1998 results of operations. Also during 1998, the Company spent
$2 million to purchase the property of a radiation therapy center located in
California.
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
(balance of $41.5 million as of December 31, 1999) and a $40 million surety
bond. The Company and GWU are planning to build a newly constructed 371-bed
acute care facility which is scheduled to be completed in 2002. The total cost
of this new facility is estimated to be approximately $96 million, of which
the Company intends to provide a total of $83 million (including the $80
million commitment mentioned above) with the remainder being provided 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 subsidiaries of the Company owns interests in
limited liability companies ("LLCs") 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.
Capital expenditures, net of proceeds received from sale or disposition of
assets were $68 million in 1999 (excluding $16 million of cash proceeds
generated primarily from the sale of two medical office buildings as mentioned
above), $97 million in 1998 (excluding $11 million of net cash contributed by
Quorum as mentioned above) and $129 million in 1997 (including $71 million
spent on the newly constructed facilities mentioned above). Capital
expenditures for capital equipment, renovations and new projects at existing
hospitals and completion of major construction projects in progress at
December 31, 1999 are expected to total approximately $169 million in 2000.
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 40% at December 31,
1999 and 1998 and 35% at December 31, 1997. The increase during 1998 as
compared to 1997 was due primarily to the 1998 purchase transactions mentioned
above, which were financed with borrowings under the Company's revolving
credit facility.
As of December 31, 1999, the Company had $222 million of unused borrowing
capacity under the terms of its $400 million revolving credit agreement which
matures in July 2002 and 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
23
<PAGE>
money market rate. A facility fee ranging from 1/8% to 3/8% is required on the
total commitment. The margins over the certificate of deposit, the Euro-dollar
rates and the facility fee are based upon the Company's leverage ratio.
As of December 31, 1999, the Company had $10 million of unused borrowing
capacity under the terms of its $100 million, annually renewable, commercial
paper program. A large portion of the Company's accounts receivable are
pledged as collateral to secure this program. This annually renewable program,
which began in 1993, is scheduled to expire or be renewed on October 30th of
each year.
As of December 31, 1999 and 1998, the Company had two interest rate swap
agreements that fixed the rate of interest on a notional principal amount of
$50 million for a period of three years. These interest rate swaps expired on
January 4, 2000. The average fixed rate obtained through these interest rate
swaps was 6.20% including the Company's current borrowing spread of .425%. The
Company is also a party to three forward starting interest rate swaps to fix
the rate of interest on a total notional principal amount of $75 million. The
starting date on the interest rate swaps is August, 2000 and they mature in
August, 2010. The average fixed rate of the three forward starting interest
rate swaps, including the Company's current borrowing spread of .425% is 7.2%.
The effective interest rate on the Company's revolving credit, demand notes
and commercial paper program, including the interest rate swap expense
incurred on existing and now expired interest rate swaps, was 6.2%, 6.4% and
6.8% during 1999, 1998 and 1997, respectively. Additional interest expense
recorded as a result of the Company's hedging activity was $202,000, $75,000
and $0 in 1999, 1998 and 1997, respectively. 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 creditworthy financial
institutions rated AA or better by Moody's Investor Service and the Company
does not anticipate non-performance. The value of the interest rate swap
obligations at December 31, 1999 was approximately $2.9 million.
The Company expects to finance all capital expenditures and acquisitions
with internally generated funds and borrowed funds. Additional borrowed funds
may be obtained either through refinancing the existing revolving credit
agreement, the commercial paper facility or the issuance of long-term
securities.
ITEM 8. Financial Statements and Supplementary Data
The Company's Consolidated Balance Sheets, Consolidated Statements of
Income, Consolidated Statements of Common Stockholders' Equity, and
Consolidated Statements of Cash Flows, together with the report of Arthur
Andersen LLP, independent public accountants, are included elsewhere herein.
Reference is made to the "Index to Financial Statements and Financial
Statement Schedule."
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
There is hereby incorporated by reference the information to appear under
the caption "Election of Directors" in the Company's Proxy Statement, to be
filed with the Securities and Exchange Commission within 120 days after
December 31, 1999. 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, 1999.
24
<PAGE>
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, 1999.
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, 1999.
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
30.
(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, 2000, to renew Advisory Agreement,
dated as of December 24, 1986, between Universal Health Realty Income Trust
and UHS of Delaware, Inc.
25
<PAGE>
10.5 Form of Leases, including Form of Master Lease Document for Leases,
between certain subsidiaries of the Registrant and Universal Health Realty
Income Trust, filed as Exhibit 10.3 to Amendment No. 3 of the Registration
Statement on Form S-11 and Form S-2 of Registrant and Universal Health Realty
Income Trust (Registration No. 33-7872), is incorporated herein by reference.
10.6 Share Option Agreement, dated as of December 24, 1986, between
Universal Health Realty Income Trust and Registrant, previously filed as
Exhibit 10.4 to Registrant's Current Report on Form 8-K dated December 24,
1986, is incorporated herein by reference.
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 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.
10.10 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.
10.11 Amendment No. 2 dated as of August 31, 1998, to Sale and Servicing
Agreements dated as of various dates between each hospital company and UHS
Receivables Corp., previously filed as Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, 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 Form of Amendment No. 3, dated as of August 31, 1998, to Pooling
Agreement dated as of November 16, 1993, among UHS Receivables Corp.,
Sheffield Receivables Corporation and U.S. Bank National Association
(successor to First Bank National Association 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, 1998 is incorporated herein by
reference.
10.17 Agreement, dated as of August 31, 1998, by and among each hospital
company signatory hereto, UHS Receivables Corp., a Delaware Corporation,
Sheffield Receivables Corporation and U.S. Bank National
26
<PAGE>
Association, as Trustee, previously filed as Exhibit 10.2 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, is
incorporated herein by reference.
10.18 Guarantee dated as of November 16, 1993, by Universal Health Services,
Inc. in favor of UHS Receivables Corp., previously filed as Exhibit 10.19 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1993,
is incorporated herein by reference.
10.19 Amendment No. 1 to the 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.
10.20 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.
10.21 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.
10.22 Amendment No. 1, dated as of June 29, 1998, to the Credit Agreement
dated as of July 8, 1997, among Universal Health Services, Inc., the Banks
party thereto and Morgan Guaranty Trust Company of New York, as the Agent,
previously filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, is incorporated herein by reference.
10.23 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.
10.24 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.
10.25 1992 Stock Option Plan, As Amended, previously filed as Exhibit 10.32
to Registrant's Annual Report on Form 10-K for the year ended December 31,
1997, is incorporated herein by reference.
10.26 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.
10.27 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.
10.28 $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
27
<PAGE>
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.
10.29 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.
10.30 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.
10.31 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.
10.32 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., previously filed as Exhibit 10.29 to
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997,
is incorporated herein by reference.
10.33 Valley/Desert Contribution Agreement dated January 30, 1998, by and
among Valley Hospital Medical Center, Inc. and NC-DSH, Inc. previously filed
as Exhibit 10.30 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, is incorporated herein by reference.
10.34 Summerlin Contribution Agreement dated January 30, 1998, by and among
Summerlin Hospital Medical Center, L.P. and NC-DSH, Inc., previously filed as
Exhibit 10.31 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997, is incorporated herein by reference.
10.35 Supplemental Indenture Dated as of January 1, 1998 to Indenture Dated
as of July 15, 1995 between Universal Health Services, Inc. and PNC BANK,
National Association, Trustee, previously filed as Exhibit 10.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998, is incorporated herein by reference.
10.36 1992 Corporate Ownership Program, as Amended, previously filed as
Exhibit 10.9 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998, is incorporated herein by reference.
10.37 Amended and Restated 1992 Stock Option Plan.
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.
28
<PAGE>
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 10, 2000
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 10, 2000
- ------------------------------------- Board, President
Alan B. Miller and Director
(Principal
Executive Officer)
/s/Sidney Miller Director March 15, 2000
- -------------------------------------
Sidney Miller
/s/Anthony Pantaleoni Director March 15, 2000
- -------------------------------------
Anthony Pantaleoni
/s/Robert H. Hotz Director March 15, 2000
- -------------------------------------
Robert H. Hotz
/s/John H. Herrell Director March 15, 2000
- -------------------------------------
John H. Herrell
/s/John F. Williams, Jr., M.D. Director March 15, 2000
- -------------------------------------
John F. Williams, Jr., M.D.
/s/Leatrice Ducat Director March 15, 2000
- -------------------------------------
Leatrice Ducat
/s/Joseph Sebastianelli Director March 15, 2000
- -------------------------------------
Joseph Sebastianelli
/s/Kirk E. Gorman Senior Vice March 10, 2000
- ------------------------------------- President and Chief
Kirk E. Gorman Financial Officer
/s/Steve Filton Vice President, March 10, 2000
- ------------------------------------- Controller,
Steve Filton Principal
Accounting Officer
and Secretary
29
<PAGE>
UNIVERSAL HEALTH SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
(ITEM 14(a))
<TABLE>
<S> <C>
Consolidated Financial Statements:
Report of Independent Public Accountants on Consolidated Financial
Statements and Schedule................................................. 31
Consolidated Statements of Income for the three years ended December 31,
1999.................................................................... 32
Consolidated Balance Sheets as of December 31, 1999 and 1998............. 33
Consolidated Statements of Common Stockholders' Equity for the three
years ended December 31, 1999........................................... 34
Consolidated Statements of Cash Flows for the three years ended December
31, 1999................................................................ 35
Notes to Consolidated Financial Statements............................... 36
Supplemental Financial Statement Schedule II: Valuation and Qualifying
Accounts................................................................ 51
</TABLE>
30
<PAGE>
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, 1999 and 1998, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
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 11, 2000
31
<PAGE>
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands, except per share
data)
<S> <C> <C> <C>
Net revenues................................. $2,042,380 $1,874,487 $1,442,677
Operating charges
Operating expenses......................... 828,752 752,651 574,837
Salaries and wages......................... 728,921 671,140 514,407
Provision for doubtful accounts............ 166,139 139,526 108,790
Depreciation & amortization................ 108,333 105,442 80,686
Lease and rental expense................... 49,029 46,516 38,401
Interest expense, net...................... 26,872 27,117 19,382
Nonrecurring charges....................... 5,300 -- --
---------- ---------- ----------
Total operating charges.................. 1,913,346 1,742,392 1,336,503
---------- ---------- ----------
Income before minority interests and income
taxes....................................... 129,034 132,095 106,174
Minority interests in earnings of
consolidated entities....................... 6,251 9,083 251
---------- ---------- ----------
Income before income taxes................... 122,783 123,012 105,923
Provision for income taxes................... 45,008 43,454 38,647
---------- ---------- ----------
Net income................................... $ 77,775 $ 79,558 $ 67,276
========== ========== ==========
Earnings per common share--basic............. $ 2.48 $ 2.45 $ 2.08
========== ========== ==========
Earnings per common & common share
equivalents--diluted........................ $ 2.43 $ 2.39 $ 2.03
========== ========== ==========
Weighted average number of common shares--
basic....................................... 31,417 32,511 32,321
Weighted average number of common share
equivalents................................. 573 782 777
---------- ---------- ----------
Weighted average number of common shares and
equivalents--diluted........................ 31,990 33,293 33,098
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
(Dollar amounts
in thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................ $ 6,181 $ 1,260
Accounts receivable, net................................. 307,294 256,354
Supplies................................................. 41,173 38,842
Deferred income taxes.................................... 26,768 10,838
Other current assets..................................... 21,833 12,321
---------- ----------
Total current assets.................................... 403,249 319,615
Property and Equipment
Land..................................................... 94,891 96,331
Buildings and improvements............................... 637,822 647,108
Equipment................................................ 381,934 364,978
Property under capital lease............................. 25,605 25,579
---------- ----------
1,140,252 1,133,996
Less accumulated depreciation............................ 437,837 396,530
---------- ----------
702,415 737,466
Funds restricted for construction........................ 41,463 43,413
Construction-in-progress................................. 33,175 27,943
---------- ----------
777,053 808,822
Other assets
Excess of cost over fair value of net assets acquired.... 276,031 279,141
Deferred charges......................................... 10,870 13,533
Other.................................................... 30,770 26,984
---------- ----------
317,671 319,658
---------- ----------
$1,497,973 $1,448,095
========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt..................... $ 3,506 $ 4,082
Accounts payable......................................... 105,334 83,130
Accrued liabilities
Compensation and related benefits....................... 51,759 29,224
Interest................................................ 5,984 6,141
Taxes other than income................................. 11,015 9,858
Other................................................... 39,602 37,365
Federal and state taxes................................. -- 253
---------- ----------
Total current liabilities............................... 217,200 170,053
Other Noncurrent Liabilities............................. 73,705 80,172
Minority Interest........................................ 115,635 129,423
Long-Term Debt........................................... 419,203 418,188
Deferred Income Taxes.................................... 30,619 23,252
Commitments and Contingencies
Common Stockholders' Equity
Class A Common Stock, voting, $.01 par value; authorized
12,000,000 shares; issued and outstanding 2,030,566
shares in 1999 and 2,057,929 in 1998.................... 20 21
Class B Common Stock, limited voting, $.01 par value;
authorized 75,000,000 shares; issued and outstanding
28,392,100 shares in 1999 and 29,901,218 in 1998........ 284 299
Class C Common Stock, voting, $.01 par value; authorized
1,200,000 shares; issued and outstanding 204,593 shares
in 1999 and 207,230 in 1998............................. 2 2
Class D Common Stock, limited voting, $.01 par value;
authorized 5,000,000 shares; issued and outstanding
24,857 shares in 1999 and 28,788 in 1998................ -- --
Capital in excess of par value, net of deferred
compensation of $116 in 1999 and $185 in 1998........... 158,345 221,500
Retained earnings........................................ 482,960 405,185
---------- ----------
641,611 627,007
---------- ----------
$1,497,973 $1,448,095
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Capital in
Class A Class B Class C Class D Excess of Retained
Common Common Common Common Par Value Earnings Total
------- ------- ------- ------- ---------- -------- --------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1,
1997................... $21 $298 $2 -- $194,308 $258,351 $452,980
Common Stock
Issued................ -- 3 -- -- 6,141 -- 6,144
Amortization of deferred
compensation........... -- -- -- -- 286 -- 286
Cancellation of stock
grant.................. -- -- -- -- (79) -- (79)
Net income.............. -- -- -- -- -- 67,276 67,276
--- ---- --- --- -------- -------- --------
Balance January 1,
1998................... 21 301 2 -- 200,656 325,627 526,607
Common Stock
Issued................ -- 4 -- -- 10,791 -- 10,795
Repurchased........... -- (6) -- -- (24,900) -- (24,906)
Amortization of deferred
compensation........... -- -- -- -- 216 -- 216
After-tax gain on
partial sale of
subsidiary............. -- -- -- -- 34,737 -- 34,737
Net income.............. -- -- -- -- -- 79,558 79,558
--- ---- --- --- -------- -------- --------
Balance January 1,
1999................... 21 299 2 -- 221,500 405,185 627,007
Common Stock
Issued................ (1) 5 -- -- 7,956 -- 7,960
Repurchased........... -- (20) -- -- (71,205) -- (71,225)
Amortization of deferred
compensation........... -- -- -- -- 94 -- 94
Net income.............. -- -- -- -- -- 77,775 77,775
--- ---- --- --- -------- -------- --------
Balance December 31,
1999................... $20 $284 $2 -- $158,345 $482,960 $641,611
=== ==== === === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
UNIVERSAL HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1999 1998 1997
-------- --------- ---------
(Amounts in thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income............................................................. $ 77,775 $ 79,558 $ 67,276
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 108,333 105,442 80,686
Minority interests in earnings of consolidated entities............... 6,251 9,083 251
Other non-cash charges................................................ 5,300 -- --
Changes in assets and liabilities, net of effects from acquisitions
and dispositions:
Accounts receivable.................................................. (37,958) (20,060) (14,434)
Accrued interest..................................................... (157) 1,459 (217)
Accrued and deferred income taxes.................................... (3,370) 3,541 16,241
Other working capital accounts....................................... 32,371 (8,327) 13,315
Other assets and deferred charges.................................... (5,775) (6,220) 334
Other................................................................ 2,957 (2,837) 6,947
Accrued insurance expense, net of commercial premiums paid........... 7,485 8,933 20,003
Payments made in settlement of self-insurance claims................. (17,655) (18,888) (16,232)
-------- --------- ---------
Net cash provided by operating activities........................... 175,557 151,684 174,170
-------- --------- ---------
Cash Flows from Investing Activities:
Property and equipment additions....................................... (67,576) (96,808) (129,199)
Acquisition of businesses.............................................. (31,588) (189,332) (10,525)
Proceeds received from merger, sale or disposition of assets........... 16,358 16,404 15,230
Funds restricted for construction related to acquisition of business... -- -- (41,031)
-------- --------- ---------
Net cash used in investing activities............................... (82,806) (269,736) (165,525)
-------- --------- ---------
Cash Flows from Financing Activities:
Additional borrowings.................................................. 15,150 152,199 25,000
Reduction of long-term debt............................................ (15,830) (8,050) (34,510)
Distributions to minority partners..................................... (18,439) (1,751) (671)
Issuance of common stock............................................... 2,514 1,488 1,580
Repurchase of common shares............................................ (71,225) (24,906) --
-------- --------- ---------
Net cash provided by (used in) financing activities................. (87,830) 118,980 (8,601)
-------- --------- ---------
Increase in Cash and Cash Equivalents................................... 4,921 928 44
Cash and Cash Equivalents, Beginning of Period.......................... 1,260 332 288
-------- --------- ---------
Cash and Cash Equivalents, End of Period................................ $ 6,181 $ 1,260 $ 332
======== ========= =========
Supplemental Disclosures of Cash Flow Information:
Interest paid.......................................................... $ 27,029 $ 25,658 $ 19,599
Income taxes paid, net of refunds...................................... $ 48,833 $ 39,913 $ 22,265
Supplemental Disclosures of Non-cash Investing and Financing Activities:
See Notes 2 and 6
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Universal
Health Services, Inc. (the "Company"), its majority-owned subsidiaries and
partnerships controlled by the Company or its subsidiaries as the managing
general partner. All significant intercompany accounts and transactions have
been eliminated. The more significant accounting policies follow:
Nature of Operations: The principal business of the Company is owning and
operating, through its subsidiaries, acute care hospitals, behavioral health
centers, ambulatory surgery centers, radiation oncology centers and women's
centers. At December 31, 1999, the Company operated 21 acute care hospitals,
23 behavioral health centers and 3 specialized women's health centers, in 17
states, the District of Columbia and Puerto Rico. The Company, as part of its
Ambulatory Treatment Centers Division owns outright, or in partnership with
physicians, and operates or manages 23 surgery and radiation oncology centers
located in 12 states and the District of Columbia. As of December 31, 1999,
the Company held majority interests in three separate partnerships/limited
liability companies which own the property of, and manage, three radiation
therapy centers located in Kentucky and California. Since the Company does not
control the operations of these centers, the operating results of these
centers are not included in the Company's consolidated financial statements.
Services provided by the Company's hospitals include general surgery,
internal medicine, obstetrics, emergency room care, radiology, diagnostic
care, coronary care, pediatric services and behavioral health services. The
Company provides capital resources as well as a variety of management services
to its facilities, including central purchasing, information services, finance
and control systems, facilities planning, physician recruitment services,
administrative personnel management, marketing and public relations.
Net revenues from the Company's acute care hospitals, ambulatory and
outpatient treatment centers and women's center accounted for 86%, 87% and 85%
of consolidated net revenues in 1999, 1998 and 1997, respectively.
Net Revenues: Net revenues are reported at the estimated net realizable
amounts from patients, third-party payors, and others for services rendered,
including estimated retroactive adjustments under reimbursement agreements
with third-party payors. These net revenues are accrued on an estimated basis
in the period the related services are rendered and adjusted in future periods
as final settlements are determined. Medicare and Medicaid net revenues
represented 46%, 46% and 50% of net patient revenues for the years 1999, 1998
and 1997, respectively. In addition, approximately 32% in 1999, 27% in 1998
and 19% in 1997 of the Company's net patient revenues were generated from
managed care companies which includes health maintenance organizations and
preferred provider organizations.
Concentration of Revenues: McAllen Medical Center contributed 10% and the
three facilities operating in the Las Vegas market contributed on a combined
basis 18% of the Company's 1999 consolidated net revenues.
Accounts Receivable: Accounts receivable are recorded at the estimated net
realizable amounts from patients, third-party payors and others for services
rendered, net of contractual allowances and net of allowance for doubtful
accounts of $55.7 million and $60.5 million in 1999 and 1998, respectively.
Property and Equipment: Property and equipment are stated at cost.
Expenditures for renewals and improvements are charged to the property
accounts. Replacements, maintenance and repairs which do not improve or extend
the life of the respective asset are expensed as incurred. The Company removes
the cost and the related accumulated depreciation from the accounts for assets
sold or retired and the resulting gains or losses are included in the results
of operations. The Company capitalized $1.1 million of interest costs related
to construction in progress in 1997. No interest was capitalized in 1999 and
1998.
36
<PAGE>
Depreciation is provided on the straight-line method over the estimated
useful lives of buildings and improvements (twenty to forty years) and
equipment (three to fifteen years).
Other Assets: The excess of cost over fair value of net assets acquired in
purchase transactions, net of accumulated amortization of $91.4 million in
1999 and $72.2 million in 1998, is amortized using the straight-line method
over periods ranging from five to forty years. As of December 31, 1999, the
weighted average amortization period is approximately eighteen years.
During 1994, the Company established an employee life insurance program
covering approximately 2,200 employees. At December 31, 1999 and 1998, the
cash surrender value of the policies ($20 million and $103 million,
respectively) were recorded net of related loans ($20 million and $102
million, respectively) and is included in other assets.
Long-Lived Assets: It is the Company's policy to review the carrying value
of long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of such assets may not be
recoverable. Measurement of the impairment loss is based on the fair value of
the asset. Generally, fair value will be determined using valuation techniques
such as the present value of expected future cash flows.
During the fourth quarter of 1999, the Company made a decision to close/sell
one of its specialized women's centers and recorded a $5.3 million charge to
reduce the carrying value of the facility to its estimated realizable value of
approximately $9 million, based on an independent appraisal. The Company is
involved in litigation with respect to this facility and may incur additional
charges in the event it is unable to close or sell the facility for a
significant period of time or suffers an unfavorable outcome from this
litigation.
Income Taxes: The Company and its subsidiaries file consolidated federal tax
returns. Deferred taxes are recognized for the amount of taxes payable or
deductible in future years as a result of differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Other Noncurrent Liabilities: Other noncurrent liabilities include the long-
term portion of the Company's professional and general liability, workers'
compensation reserves and pension liability.
Minority Interest Liabilities: As of December 31, 1999 and 1998, the $115.6
million and $129.4 million minority interest balance consists primarily of a
27.5% outside ownership interest in three acute care facilities located in Las
Vegas, Nevada and a 20% outside ownership interest in an acute care facility
located in Washington, DC.
Earnings per Share: Basic earnings per share are based on the weighted
average number of common shares outstanding during the year. Diluted earnings
per share are based on the weighted average number of common shares
outstanding during the year adjusted to give effect to common stock
equivalents.
Stock-Based Compensation: SFAS No. 123 encourages a fair value based method
of accounting for employee stock options and similar equity instruments, which
generally would result in the recording of additional compensation expense in
the Company's financial statements. The Statement also allows the Company to
continue to account for stock-based employee compensation using the intrinsic
value for equity instruments using APB Opinion No. 25. The Company has adopted
the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation
cost has been recognized for the stock option plans in the accompanying
financial statements.
Statement of Cash Flows: For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents. Interest expense in
the consolidated statements of income is net of interest income of $2.6
million in 1999, $2.6 million in 1998, and $1.3 million in 1997.
37
<PAGE>
Interest Rate Swap Agreements: In managing interest rate exposure, the
Company at times enters into interest rate swap agreements. When interest
rates change, the differential to be paid or received is accrued as interest
expense and is recognized over the life of the agreements. Gains and losses on
terminated interest rate swap agreements are amortized into income over the
remaining life of the underlying debt obligation or the remaining life of the
original swap, if shorter.
Fair Value of Financial Instruments: The fair values of the Company's
registered debt, interest rate swap agreements and investments are based on
quoted market prices. The carrying amounts reported in the balance sheet for
cash, accrued liabilities, and short-term borrowings approximates their fair
values due to the short-term nature of these instruments. Accordingly, these
items have been excluded from the fair value disclosures included elsewhere in
these notes to consolidated financial statements.
Comprehensive Income: Net income as reported by the Company reflects total
comprehensive income for the years ended December 31, 1999, 1998 and 1997.
Equity Instruments Indexed to the Company's Common Stock: Proceeds received
upon the sale of equity instruments and amounts paid upon the purchase of
equity instruments are recorded as a component of stockholders' equity.
Subsequent changes in the fair value of the equity instrument contracts are
not recognized. If the contracts are ultimately settled in cash, the amount of
cash paid or received is recorded as a component of stockholders' equity.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounting Pronouncement Not Yet Adopted: In June 1999, the FASB issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of SFAS No. 133", which deferred the effective
date of SFAS No. 133 for one year. The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
The Company will be required to adopt SFAS No. 133 effective as of January
1, 2001 and has not yet quantified the impact of adopting this statement on
its financial statements. Further, the Company has not determined the method
of adoption of SFAS No. 133. However, SFAS No. 133 could increase the
volatility in earnings and other comprehensive income.
2) ACQUISITIONS AND DIVESTITURES
1999 -- During the second quarter of 1999, the Company acquired three
behavioral health care facilities located in Illinois, Indiana and New Jersey
for a combined purchase price of approximately $27 million, plus contingent
consideration of up to $3 million. Also during the second quarter of 1999, the
Company exchanged the operations and assets of a 147-bed acute care facility
located in Victoria, Texas for the assets and operations of a 117-bed acute
care facility located in Laredo, Texas. No gain or loss resulted from this
exchange transaction since the fair value of assets acquired was equal to the
book value of assets surrendered. In connection with this transaction, the
Company also spent $5 million to purchase additional land in Laredo, Texas on
which it expects to construct a replacement hospital scheduled to be completed
in 2001. During 1999, the Company received total proceeds of $16 million
generated primarily from the sale of the real property of two medical office
buildings
38
<PAGE>
($14 million). The net gain/loss resulting from these transactions was not
material. One of these medical office buildings was sold to Universal Health
Realty Income Trust for cash proceeds of $13 million. The aggregate net
purchase price of the facilities and land acquired, including the fair value
of exchanged facility, was allocated to assets and liabilities based on their
estimated fair values as follows:
<TABLE>
<CAPTION>
Amount
(000s)
-------
<S> <C>
Working capital, net.............................................. $11,000
Property, plant & equipment....................................... 6,000
Goodwill.......................................................... 15,000
-------
Total Cash Purchase Price....................................... $32,000
=======
</TABLE>
Assuming the acquisitions of the three behavioral health care facilities
occurred on January 1, 1999 the effect on the December 31, 1999 unaudited pro
forma net revenues, net income and basic and diluted earnings per share would
have been immaterial.
1998 -- During the first quarter of 1998, the Company acquired three
hospitals located in Puerto Rico for an aggregate purchase price of $187
million. The hospitals acquired were Hospital San Pablo located in Bayamon
(430-beds), Hospital San Francisco located in Rio Piedras (160-beds) and
Hospital San Pablo del Este located in Fajardo (180-beds). The Hospital San
Pablo del Este, which had been closed prior to acquisition, was reopened in
April, 1998 after completion of renovations.
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, a 148-bed acute care facility in exchange for a 72.5% interest in a
series of newly-formed limited liability corporations ("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 $11 million of net cash to the LLCs. The assets and liabilities
contributed by the Company were recorded by the LLCs at carryover value. The
LLCs applied purchase accounting to the assets and liabilities provided by
Quorum and recorded them at fair market value. As a result of this partial
sale transaction, the Company recorded a pre-tax gain of $55.1 million ($34.7
million after-tax) that was recorded as a capital contribution to the Company.
The Company elected the option of recording the gain to capital in excess of
par value in the consolidated balance sheet. The option must be consistently
applied to all future gains and losses arising from similar transactions and
is adopted as the Company's accounting policy. Also during 1998, the Company
spent $2 million to purchase the property of a radiation therapy center
located in California.
The aggregate net purchase price of the transactions mentioned above of $178
million ($189 million cash paid less $11 million of net cash received), was
allocated to assets and liabilities based on their estimated fair values as
follows:
<TABLE>
<CAPTION>
Amount
(000s)
--------
<S> <C>
Working capital, net............................................. $ 34,000
Land............................................................. 23,000
Buildings & equipment............................................ 110,000
Goodwill......................................................... 152,000
Minority interest liability...................................... (85,000)
Deferred income taxes............................................ (21,000)
Additional paid in capital....................................... (35,000)
--------
Total Purchase Price........................................... $178,000
========
</TABLE>
39
<PAGE>
Assuming the 1998 acquisition of Hospital San Pablo and Hospital San
Francisco had been completed as of January 1, 1998, the effect on the December
31, 1998 unaudited pro forma net revenues, net income and basic and diluted
earnings per share would have been immaterial, as the acquisitions occurred
early in 1998. Assuming the above mentioned 1998 acquisitions and the 1997
acquisition of The George Washington University Hospital ("GWUH") had been
completed as of January 1, 1997, the unaudited pro forma net revenues and net
income for the year ended December 31, 1997 would have been approximately $1.6
billion and $63.9 million, respectively. In addition, the unaudited pro forma
basic and diluted earnings per share would have been $1.98 and $1.93,
respectively.
1997 -- During the third quarter of 1997 the Company acquired an 80%
interest in a partnership which owns and operates GWUH, 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 surety bond. The Company and GWU are planning to build a
newly constructed 371-bed acute care facility which is scheduled to be
completed in 2002. The total cost of this new facility is estimated to be
approximately $96 million, of which the Company intends to provide a total of
$83 million (including the $80 million immediate commitment mentioned above)
with the remainder being provided by GWU and the interest earnings on the $40
million of funds restricted for construction.
In addition, 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, through a subsidiary, owns
interests in limited liability companies ("LLCs") which own and operate the
facilities. The Company spent a total of $71 million during 1997 for
completion of these newly constructed facilities. Also during 1997, the
Company spent an additional $11 million to acquire various behavioral
healthcare related businesses.
Assuming the 1997 acquisition of GWUH had been completed as of January 1,
1997, the unaudited pro forma net revenues would have been $1.5 billion and
the effect on net income and basic and diluted earnings per share would have
been immaterial.
3) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
December 31
-----------------
1999 1998
-------- --------
(000s)
<S> <C> <C>
Long-term debt:
Notes payable and Mortages payable (including
obligations under capitalized leases of $2,866 in 1999
and $4,185 in 1998) with varying maturities through
2001; weighted average interest at 7.0% in 1999 and
6.8% in 1998 (see Note 6 regarding capitalized
leases)............................................... $ 6,240 $ 9,062
Revolving credit and demand notes...................... 173,890 175,740
Commercial paper....................................... 90,000 85,000
Revenue bonds:
Interest at floating rates ranging from 5.4% to 5.7%
at December 31, 1999 with varying maturities through
2015................................................ 18,200 18,200
8.75% Senior Notes due 2005, net of the unamortized
discount of $621 in 1999 and $732 in 1998............. 134,379 134,268
-------- --------
422,709 422,270
Less-Amounts due within one year......................... 3,506 4,082
-------- --------
$419,203 $418,188
======== ========
</TABLE>
40
<PAGE>
The Company has $135 million of Senior Notes which have an 8.75% coupon rate
and which mature on August 15, 2005. The Notes can be redeemed in whole or in
part, at any time on or after August 15, 2000, initially at a price of 102%,
declining ratably to par on or after August 15, 2002. The interest on the
bonds is paid semiannually in arrears on February 15 and August 15 of each
year. In anticipation of the Senior Note issuance, the Company entered into
interest rate swap agreements having a total notional principal amount of $100
million to hedge the interest rate on the Notes. These interest rate swaps
were terminated simultaneously with the issuance of the Notes at which time
the Company paid a net termination fee of $5.4 million which is being
amortized ratably over the ten year term of the Senior Notes. The effective
rate on the Notes including the amortization of swap termination fees and bond
discount is 9.2%.
The Company has a $400 million unsecured non-amortizing revolving credit
agreement, which expires on July 8, 2002. The agreement includes a $50 million
sublimit for letters of credit. The interest rate on borrowings is determined
at the Company's option at the prime rate, certificate of deposit rate plus
.375% to .625%, Euro-dollar plus .25% to .50% or a money market rate. A
facility fee ranging from .125% to .375% is required on the total commitment.
The margins over the certificate of deposit, the Euro-dollar rates and the
facility fee are based upon the Company's leverage ratio. At December 31, 1999
the applicable margins over the certificate of deposit and the Euro-dollar
rate were .55% and .425%, respectively, and the commitment fee was .20%. There
are no compensating balance requirements. At December 31, 1999, the Company
had $222 million of unused borrowing capacity available under the revolving
credit agreement.
The Company also has a $100 million commercial paper credit facility. A
large portion of the Company's acute care patient accounts receivable are
pledged as collateral to secure this commercial paper program. A commitment
fee of .40% is required on the used portion and .20% on the unused portion of
the commitment. This annually renewable program, which began in November 1993,
is scheduled to expire or be renewed on October 30th of each year. Outstanding
amounts of commercial paper which can be refinanced through available
borrowings under the Company's revolving credit agreement are classified as
long-term. As of December 31, 1999, the Company had $10 million unused
borrowing capacity under the terms of the commercial paper facility.
The average amounts outstanding during 1999, 1998 and 1997 under the
revolving credit and demand notes and commercial paper program were $246.1
million, $234.2 million and $100.3 million, respectively, with corresponding
effective interest rates of 6.2%, 6.4%, and 6.8% including commitment and
facility fees. The maximum amounts outstanding at any month-end were, $263.9
million in 1999, $289.6 million in 1998 and $124.2 million in 1997.
As of December 31, 1999 and 1998, the Company had two interest rate swap
agreements that fixed the rate of interest on a notional principal amount of
$50 million for a period of three years. These interest rate swaps expired on
January 4, 2000. The average fixed rate obtained through these interest rate
swaps was 6.20% including the Company's current borrowing spread of .425%. The
Company is also a party to three forward starting interest rate swaps to fix
the rate of interest on a total notional principal amount of $75 million. The
starting date on the interest rate swaps is August, 2000 and they mature in
August, 2010. The average fixed rate of the three forward starting interest
rate swaps, including the Company's current borrowing spread of .425%, is
7.2%. The effective interest rate on the Company's revolving credit, demand
notes and commercial paper program, including the interest rate swap expense
incurred on existing and now expired interest rate swaps, was 6.2%, 6.4%, and
6.8% during 1999, 1998 and 1997, respectively. Additional interest expense
recorded as a result of the Company's hedging activity was $202,000, $75,000
and $0 in 1999, 1998 and 1997, respectively. 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 creditworthy financial
institutions rated AA or better by Moody's Investor Service and the Company
does not anticipate non-performance. The estimated fair value of the interest
rate swap obligations at December 31, 1999 was approximately $2.9 million.
Covenants relating to long-term debt require maintenance of a minimum net
worth, specified debt to total capital and fixed charge coverage ratios. The
Company is in compliance with all required covenants as of December 31, 1999.
41
<PAGE>
The fair value of the Company's long-term debt at December 31, 1999 and 1998
was approximately $420.5 million and $429.0 million, respectively.
Aggregate maturities follow:
<TABLE>
<CAPTION>
(000s)
--------
<S> <C>
2000.............................................................. $ 3,506
2001.............................................................. 658
2002.............................................................. 265,500
2003.............................................................. 187
2004.............................................................. 200
Later............................................................. 152,658
--------
Total........................................................... $422,709
========
</TABLE>
4) COMMON STOCK
During the third quarter of 1998, the Company's Board of Directors approved
a stock repurchase program authorizing the Company to purchase up to two
million shares or approximately 6% of its outstanding Class B Common Stock.
This initial repurchase program was completed during the third quarter of
1999, at which time, the Board of Directors approved a plan for repurchase of
up to an additional two million shares of the Company's Class B Common Stock
and during the fourth quarter of 1999, the Board of Director's approved a plan
for an additional two million shares. Pursuant to the stock repurchase
programs, the Company, from time to time and as conditions allow, may purchase
a total of up to six million shares on the open market at prevailing market
prices or in negotiated transactions off the market. Pursuant to the terms of
these programs, the Company repurchased 580,500 shares at an average
repurchase price of $42.90 per share ($24.9 million in the aggregate) during
1998 and 2,028,379 shares at an average repurchase price of $35.10 ($71.2
million in the aggregate) during 1999. Since inception of the repurchase
program in 1998 through December 31, 1999, the Company repurchased a total of
2,608,879 shares at an average repurchase price of $36.85 per share ($96.1
million in the aggregate).
In conjunction with the Company's stock repurchase program, during 1998 and
1999, the Company sold European-style put options which entitle the holder to
sell shares of the Company's Class B Common Stock to the Company at a
specified price. The Company also purchased European-style call options which
entitle the Company to purchase shares of the Company's Class B Common Stock
at a specified price. As of December 31, 1999 put options totaling 1,458,500
shares, with an average strike price of $28.47, were outstanding with various
expiration dates in the second and third quarters of 2000. As of December 31,
1999 call options totaling 1,034,000 shares, with an average strike price of
$28.47 per share, were outstanding with various expiration dates in the second
and third quarters of 2000. As of December 31, 1999 the fair market value of
these instruments was approximately $8 million.
At December 31, 1999, 5,700,819 shares of Class B Common Stock were reserved
for issuance upon conversion of shares of Class A, C and D Common Stock
outstanding, for issuance upon exercise of options to purchase Class B Common
Stock, and for issuance of stock under other incentive plans. Class A, C and D
Common Stock are convertible on a share for share basis into Class B Common
Stock.
42
<PAGE>
SFAS No. 123 requires the Company to disclose pro-forma net income and pro-
forma earnings per share as if compensation expense were recognized for
options granted beginning in 1995. Using this approach, the Company's net
earnings and earnings per share would have been the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
(000s, except per share amounts)
<S> <C> <C> <C>
Net Income:
As Reported............................... $ 77,775 $ 79,558 $ 67,276
Pro Forma................................. $ 75,298 $ 78,362 $ 66,672
Earnings Per Share:
As Reported:
Basic................................... $ 2.48 $ 2.45 $ 2.08
Diluted................................. $ 2.43 $ 2.39 $ 2.03
Pro Forma:
Basic................................... $ 2.40 $ 2.41 $ 2.06
Diluted................................. $ 2.35 $ 2.35 $ 2.01
</TABLE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following range of assumptions
used for the thirteen option grants that occurred during 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 1998 1997
----------------------- ------- ------- -------
<S> <C> <C> <C>
Volatility.......................................... 31%-38% 21%-28% 21%-23%
Interest rate....................................... 5%-6% 5%-6% 6%-7%
Expected life (years)............................... 4.3 4.1 4.2
Forfeiture rate..................................... 3% 2% 2%
</TABLE>
Stock-based compensation costs on a pro forma basis would have reduced
pretax income by $4.0 million ($2.5 million after tax) in 1999, $1.9 million
($1.2 million after-tax) in 1998 and $1.0 million ($604,000 after-tax) in
1997. Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma disclosures
may not be representative of that to be expected in future years.
Stock options to purchase Class B Common Stock have been granted to
officers, key employees and directors of the Company under various plans.
Information with respect to these options is summarized as follows:
<TABLE>
<CAPTION>
Average
Number Option Range
Outstanding Options of Shares Price (High-Low)
------------------- --------- ------- -------------
<S> <C> <C> <C>
Balance, January 1, 1997................... 1,534,048 $13.43 $25.13-$ 5.69
Granted.................................. 243,250 $41.22 $44.56-$37.88
Exercised................................ (319,225) $11.30 $25.13-$ 5.69
Cancelled................................ (42,500) $12.54 $25.13-$ 9.81
-----------------------------------------------------------------------------
Balance, January 1, 1998................... 1,415,573 $18.71 $44.56-$ 7.44
Granted.................................. 448,000 $51.73 $56.56-$47.81
Exercised................................ (262,511) $14.46 $41.25-$ 7.44
Cancelled................................ (8,500) $37.89 $47.81-$23.25
-----------------------------------------------------------------------------
Balance, January 1, 1999................... 1,592,562 $28.60 $56.56-$ 9.81
Granted.................................. 641,330 $32.49 $51.12-$23.69
Exercised................................ (467,587) $11.52 $ 9.81-$41.25
Cancelled................................ (63,850) $41.40 $52.00-$16.56
-----------------------------------------------------------------------------
Balance, December 31, 1999................. 1,702,455 $34.28 $56.56-$14.63
-----------------------------------------------------------------------------
</TABLE>
43
<PAGE>
Outstanding Options at December 31, 1999:
<TABLE>
<CAPTION>
Average Option Range
Number of Shares Price (High-Low) Contractual Life
---------------- -------------- ------------- ----------------
<S> <C> <C> <C>
771,250 $20.28 $23.69-$14.63 2.5
931,205 $45.87 $ 56.56-37.88 3.7
---------
1,702,455
=========
</TABLE>
During 1999, subject to shareholder approval, the Board of Directors
approved a 1 million share increase in the reserve for Class B Common Stock
available for grant pursuant to the terms of the 1992 Stock Option Plan. All
stock options were granted with an exercise price equal to the fair market
value on the date of the grant. Options are exercisable ratably over a four-
year period beginning one year after the date of the grant. The options expire
five years after the date of the grant. The outstanding stock options at
December 31, 1999 have an average remaining contractual life of 2.9 years. At
December 31, 1999, options for 744,219 shares were available for grant. At
December 31, 1999, options for 634,808 shares of Class B Common Stock with an
aggregate purchase price of $16.9 million (average of $26.55 per share) were
exercisable. In connection with the stock option plan, the Company provides
the optionee with a three year loan to cover the tax liability incurred upon
exercise of the options. The loan is forgiven on the maturity date if the
optionee is employed by the Company on that date. The Company recorded
compensation expense over the service period and recognized compensation
expense of $7.6 million in 1999, $8.4 million in 1998 and $5.1 million in 1997
in connection with this loan program.
In addition to the stock option plan the Company has the following stock
incentive and purchase plans: (i) a Stock Compensation Plan which expires in
November, 2004 under which Class B Common Shares may be granted to key
employees, consultants and independent contractors (officers and directors are
ineligible); (ii) a Stock Ownership Plan whereby eligible employees may
purchase shares of Class B Common Stock directly from the Company at current
market value and the Company will loan each eligible employee 90% of the
purchase price for the shares, subject to certain limitations, (loans are
partially recourse to the employees); (iii) a Restricted Stock Purchase Plan
which allows eligible participants to purchase shares of Class B Common Stock
at par value, subject to certain restrictions, and; (iv) a Stock Purchase Plan
which allows eligible employees to purchase shares of Class B Common Stock at
a ten percent discount. The Company has reserved 2 million shares of Class B
Common Stock for issuance under these various plans and has issued 1,032,617
shares pursuant to the terms of these plans as of December 31, 1999, of which
57,680, 42,010 and 41,196 became fully vested during 1999, 1998 and 1997,
respectively. Compensation expense of $1.1million in 1999, $488,000 in 1998
and $5.2 million in 1997 was recognized in connection with these plans.
5) INCOME TAXES
Components of income tax expense are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1999 1998 1997
------- ------- -------
(000s)
<S> <C> <C> <C>
Currently payable
Federal......................................... $48,558 $18,731 $23,923
State........................................... 4,449 1,738 2,989
------- ------- -------
53,007 20,469 26,912
Deferred
Federal......................................... (7,350) 21,122 10,201
State........................................... (649) 1,863 1,534
------- ------- -------
(7,999) 22,985 11,735
------- ------- -------
Total......................................... $45,008 $43,454 $38,647
======= ======= =======
</TABLE>
44
<PAGE>
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," (SFAS
109). Under SFAS 109, deferred taxes are required to be classified based on
the financial statement classification of the related assets and liabilities
which give rise to temporary differences. Deferred taxes result from temporary
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1999 1998
-------- --------
(000s)
<S> <C> <C>
Self-insurance reserves.................................. $ 30,305 $ 31,984
Doubtful accounts and other reserves..................... 8,541 (1,699)
State income taxes....................................... (1,354) 766
Other deferred tax assets................................ 10,084 7,532
Depreciable and amortizable assets....................... (51,427) (50,997)
-------- --------
Total deferred taxes................................... $ (3,851) $(12,414)
======== ========
</TABLE>
A reconciliation between the federal statutory rate and the effective tax
rate is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate..................................... 35.0% 35.0% 35.0%
Deductible depreciation, amortization and other............ (0.2) (1.6) (1.3)
State taxes, net of federal income tax benefit............. 1.9 1.9 2.8
---- ---- ----
Effective tax rate....................................... 36.7% 35.3% 36.5%
==== ==== ====
</TABLE>
The net deferred tax assets and liabilities are comprised as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
----------- -----------
(000s)
<S> <C> <C>
Current deferred taxes
Assets........................................... $ 26,768 $ 12,315
Liabilities...................................... -- (1,477)
----------- -----------
Total deferred taxes--current.................. 26,768 10,838
Noncurrent deferred taxes
Assets........................................... 22,384 27,967
Liabilities...................................... (53,003) (51,219)
----------- -----------
Total deferred taxes--noncurrent............... (30,619) (23,252)
----------- -----------
Total deferred taxes............................... $ (3,851) $(12,414)
=========== ===========
</TABLE>
The assets and liabilities classified as current relate primarily to the
allowance for uncollectible patient accounts and the current portion of the
temporary differences related to self-insurance reserves. Under SFAS 109, a
valuation allowance is required when it is more likely than not that some
portion of the deferred tax assets will not be realized. Realization is
dependent on generating sufficient future taxable income. Although realization
is not assured, management believes it is more likely than not that all the
deferred tax assets will be realized. Accordingly, the Company has not
provided a valuation allowance. The amount of the deferred tax asset
considered realizable, however, could be reduced if estimates of future
taxable income during the carry forward period are reduced.
45
<PAGE>
6) LEASE COMMITMENTS
Certain of the Company's hospital and medical office facilities and
equipment are held under operating or capital leases which expire through 2006
(See Note 8). Certain of these leases also contain provisions allowing the
Company to purchase the leased assets during the term or at the expiration of
the lease at fair market value.
A summary of property under capital lease follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
----------- -----------
(000s)
<S> <C> <C>
Land, buildings and equipment...................... $ 25,605 $ 25,579
Less: accumulated amortization..................... (22,902) (22,084)
----------- -----------
$ 2,703 $ 3,495
=========== ===========
</TABLE>
Future minimum rental payments under lease commitments with a term of more
than one year as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year Leases Leases
---- ------- ---------
(000s)
<S> <C> <C>
2000....................................................... $1,596 $21,208
2001....................................................... 565 18,040
2002....................................................... 444 11,771
2003....................................................... 211 10,093
2004....................................................... 211 8,826
Later Years................................................ 53 21,558
------ -------
Total minimum rental..................................... $3,080 $91,496
=======
Less: Amount representing interest......................... 214
------
Present value of minimum rental commitments................ 2,866
Less: Current portion of capital lease obligations......... 1,546
------
Long-term portion of capital lease obligations............. $1,320
======
</TABLE>
Capital lease obligations of $1.1 million in 1999, $160,000 in 1998 and $3.1
million in 1997, were incurred when the Company entered into capital leases
for new equipment.
7) COMMITMENTS AND CONTINGENCIES
Effective January 1, 1998, the Company's subsidiaries are 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 $6 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. From 1986 to 1995, these subsidiaries were self-insured for
professional and general liability claims up to $25 million and $5 million per
occurrence, respectively. Since 1993, certain of the Company's subsidiaries,
including one of its larger acute care facilities, have purchased general and
professional liability occurrence policies with commercial insurers. These
policies include coverage up to $25 million per occurrence for general and
professional liability risks.
46
<PAGE>
As of December 1999 and 1998, the reserve for professional and general
liability claims was $58.0 million and $65.0 million, respectively, of which
$6.8 million and $5.5 million in 1999 and 1998, respectively, is included in
current liabilities. Self-insurance reserves are based upon actuarially
determined estimates. These estimates are based on historical information
along with certain assumptions about future events. Changes in assumptions for
such things as medical costs as well as changes in actual experience could
cause these estimates to change in the near term.
The Company has outstanding letters of credit totaling $54.5 million
consisting of: (i) a $40 million surety bond related to the Company's 1997
acquisition of an 80% interest in the George Washington University Hospital;
(ii) $8.0 million related to the Company's self insurance programs; (iii) $5.8
million as support for a loan guarantee for an unaffiliated party, and; (iv)
$700,000 as support for various debt instruments.
The Company has entered into a long-term contract with a third party to
provide certain data processing services for its acute care and behavioral
health facilities. The term of this contract, which was extended during 1999,
expires in 2007.
During the fourth quarter of 1999, the Company made a decision to close/sell
one of its specialized women's centers and recorded a $5.3 million charge to
reduce the carrying value of the facility to its estimated realizable value of
approximately $9 million, based on an independent appraisal. The Company is
involved in litigation with respect to this facility and may incur additional
charges in the event it is unable to close or sell the facility for a
significant period of time or suffers an unfavorable outcome from this
litigation. In addition, various suits and claims arising in the ordinary
course of business are pending against the Company. In the opinion of
management, the outcome of such claims and litigation will not materially
affect the Company's consolidated financial position or results of operations.
8) RELATED PARTY TRANSACTIONS
At December 31, 1999, the Company held approximately 8% of the outstanding
shares of Universal Health Realty Income Trust (the "Trust"). Certain officers
and directors of the Company are also officers and/or directors of the Trust.
The Company accounts for its investment in the Trust using the equity method
of accounting. The Company's pre-tax share of income from the Trust was $1.1
million in each year ended December 31, 1999, 1998 and 1997, and is included
in net revenues in the accompanying consolidated statements of income. The
carrying value of this investment at December 31, 1999 and 1998 was $8.3
million and $8.2 million, respectively, and is included in other assets in the
accompanying consolidated balance sheets. The market value of this investment
at December 31, 1999 and 1998 was $10.5 million and $13.7 million,
respectively.
As of December 31, 1999, the Company leased seven hospital facilities from
the Trust with terms expiring in 2000 through 2006. These leases contain up to
six 5-year renewal options. During 1998, the Company exercised five-year
renewal options on four hospitals leased from the Trust which were scheduled
to expire in 1999 through 2001. The leases on these facilities were renewed at
the same lease rates and terms as the initial leases. Future minimum lease
payments to the Trust are included in Note 6. Total rent expense under these
operating leases was $16.6 million in 1999, $16.5 million in 1998 and $16.3
million in 1997. The terms of the lease provide that in the event the Company
discontinues operations at the leased facility for more than one year, the
Company is obligated to offer a substitute property. If the Trust does not
accept the substitute property offered, the Company is obligated to purchase
the leased facility back from the Trust at a price equal to the greater of its
then fair market value or the original purchase price paid by the Trust. The
Company received an advisory fee of $1.2 million in 1999 and 1998 and $1.1
million in 1997 from the Trust for investment and administrative services
provided under a contractual agreement which is included in net revenues in
the accompanying consolidated statement of income. During 1999, the Company
sold the real property of a medical office building to the Trust for cash
proceeds of approximately $13 million. Tenants in the multi-tenant building
include subsidiaries of the Company as well as unrelated parties.
47
<PAGE>
A member of the Company's Board of Directors is a partner in the law firm
used by the Company as its principal outside counsel.
9) PENSION PLAN
The Company maintains contributory and non-contributory retirement plans for
eligible employees. The Company's contributions to the contributory plan
amounted to $4.2 million, $4.6 million and $3.6 million in 1999, 1998 and
1997, respectively. The non-contributory plan is a defined benefit pension
plan which covers employees of one of the Company's subsidiaries. The benefits
are based on years of service and the employee's highest compensation for any
five years of employment. The Company's funding policy is to contribute
annually at least the minimum amount that should be funded in accordance with
the provisions of ERISA.
The following table shows reconciliations of the defined benefit pension
plan for the Company as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
(000s)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year................. $49,285 $43,573
Service cost............................................ 1,041 904
Interest cost........................................... 3,280 3,001
Benefits paid........................................... (1,629) (1,381)
Actuarial (gain) loss................................... (5,522) 3,188
------- -------
Benefit obligation at end of year..................... 46,455 49,285
Change in plan assets:
Fair value of plan assets at beginning of year.......... $50,702 $33,974
Actual return on plan assets............................ 4,096 7,998
Company contributions................................... 0 10,203
Benefits paid........................................... (1,629) (1,381)
Administrative expenses................................. (202) (92)
------- -------
Fair value of plan assets at end of year.............. $52,967 $50,702
Funded status of the plan............................... $ 6,512 $ 1,417
Unrecognized actuarial gain............................. (8,446) (3,559)
------- -------
Net amount recognized................................. (1,934) (2,142)
Total amounts recognized in the balance sheet consist of:
Accrued benefit liability............................... $(1,934) $(2,142)
Weighted average assumptions as of December 31
Discount rate........................................... 7.50% 6.75%
Expected long-term rate of return on plan assets........ 9.00% 9.00%
Rate of compensation increase........................... 4.00% 4.00%
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(000s)
<S> <C> <C> <C>
Components of net periodic benefit cost
Service cost.................................... $ 1,041 $ 905 $ 854
Interest cost................................... 3,280 3,001 2,783
Expected return on plan assets.................. (4,530) (3,316) (2,446)
------- ------- -------
Net periodic (benefit) cost................... $ (209) $ 590 $ 1,191
======= ======= =======
</TABLE>
The fair value of plan assets exceeded the benefit obligations of the plan,
as of December 31, 1999 and 1998, respectively.
48
<PAGE>
10) SEGMENT REPORTING
The Company's reportable operating segments consist of acute care services
and behavioral health care services. The "Other" segment column below includes
centralized services including information services, purchasing,
reimbursement, accounting, taxation, legal, advertising, design and
construction, and patient accounting. Also included are the operating results
of the Company's other operating entities including the outpatient surgery and
radiation therapy centers and specialized women's health centers. The chief
operating decision making group for the Company's acute care services and
behavioral health care services is comprised of the Company's President and
Chief Executive Officer, and the lead executives of each of the Company's two
primary operating segments. The lead executive for each operating segment also
manages the profitability of each respective segment's various hospitals. The
operating segments are managed separately because each operating segment
represents a business unit that offers different types of healthcare services.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.
<TABLE>
<CAPTION>
Acute Care Behavioral Total
1999 Services Health Services Other Consolidated
---- ---------- --------------- -------- ------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Gross inpatient
revenues................ $2,766,295 $414,468 $ 26,675 $3,207,438
Gross outpatient
revenues................ $ 960,338 $ 97,056 $108,502 $1,165,896
Total net revenues....... $1,691,329 $270,638 $ 80,413 $2,042,380
EBITDAR(a)............... $ 310,445 $ 44,866 $(36,743) $ 318,568
Total assets............. $1,233,652 $154,792 $109,529 $1,497,973
Licensed beds............ 4,806 1,976 -- 6,782
Available beds........... 4,099 1,961 -- 6,060
Patient days............. 963,842 444,632 -- 1,408,474
Admissions............... 204,538 37,810 -- 242,348
Average length of stay... 4.7 11.8 -- 5.8
<CAPTION>
Acute Care Behavioral Total
1998 Services Health Services Other Consolidated
---- ---------- --------------- -------- ------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Gross inpatient
revenues................ $2,440,526 $341,592 $ 21,774 $2,803,892
Gross outpatient
revenues................ $ 846,698 $ 91,465 $ 80,621 $1,018,784
Total net revenues....... $1,576,107 $233,010 $ 65,370 $1,874,487
EBITDAR(a)............... $ 316,263 $ 38,556 $(43,649) $ 311,170
Total assets............. $1,217,363 $127,500 $103,232 $1,448,095
Licensed beds............ 4,696 1,782 -- 6,478
Available beds........... 3,985 1,767 -- 5,752
Patient days............. 884,966 365,935 -- 1,250,901
Admissions............... 187,833 32,400 -- 220,233
Average length of stay... 4.7 11.3 -- 5.7
<CAPTION>
Acute Care Behavioral Total
1997 Services Health Services Other Consolidated
---- ---------- --------------- -------- ------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Gross inpatient
revenues................ $1,737,092 $312,663 $ 7,011 $2,056,766
Gross outpatient
revenues................ $ 608,470 $ 78,118 $ 57,791 $ 744,379
Total net revenues....... $1,189,043 $205,640 $ 47,994 $1,442,677
EBITDAR(a)............... $ 252,839 $ 35,333 $(43,529) $ 244,643
Total assets............. $ 847,854 $128,662 $108,833 $1,085,349
Licensed beds............ 3,389 1,777 -- 5,166
Available beds........... 2,951 1,762 -- 4,713
Patient days............. 616,965 336,850 -- 953,815
Admissions............... 128,020 28,350 -- 156,370
Average length of stay... 4.8 11.9 -- 6.1
</TABLE>
- --------
(a) EBITDAR--Earnings before interest, income taxes, depreciation,
amortization, lease & rental, minority interest expense and nonrecurring
changes.
49
<PAGE>
EXHIBIT 10.37
UNIVERSAL HEALTH SERVICES, INC.
AMENDED AND RESTATED
1992 STOCK OPTION PLAN
-------------------------------
1. Purpose. The purpose of the Universal Health Services, Inc. 1992 Stock
-------
Option Plan (the "Plan") is to enable Universal Health Services, Inc. (the
"Company") and its stockholders to secure the benefits of common stock ownership
by personnel of the Company and its subsidiaries. The Board of Directors of
the Company (the "Board") believes that the granting of options under the Plan
will foster the Company's ability to attract, retain and motivate those
individuals who will be largely responsible for the continued profitability and
long-term future growth of the Company.
2. Stock Subject to the Plan. The Company may issue and sell a total of
-------------------------
4,000,000 shares of its Class B Common Stock, $.01 par value (the "Common
Stock"), pursuant to the Plan. Such shares may be either authorized and
unissued or held by the Company in its treasury. New options may be granted
under the Plan with respect to shares of Common Stock which are covered by the
unexercised portion of an option which has terminated or expired by its terms,
by cancellation or otherwise.
3. Administration. The Plan will be administered by the Board of
--------------
Directors of the Company (the "Board"). Subject to the provisions of the Plan,
the Board, acting in its sole and absolute discretion, will have full power and
authority to grant options under the Plan, to interpret the provisions of the
Plan and option agreements made under the Plan, to supervise the administration
of the Plan, and to take such other action as may be necessary or desirable in
order to carry out the provisions of the Plan. The Board may act by the vote of
a majority of it members present at a meeting at which there is a quorum or by
unanimous written consent. The decision of the Board as to any disputed
question, including questions of construction, interpretation and
administration, will be final and conclusive on all persons. The Board will keep
a record of its proceedings and acts and will keep or caused to be kept such
books and records as may be necessary in connection with the proper
administration of the Plan. Notwithstanding the foregoing, the Board shall have
the authority to appoint a committee (the "Committee") of the Board whose
members shall satisfy the requirements of Section 162(m) of the Internal
Revenue Code of 1986 (the "Code"), and the requirements of Rule 16b-3(b)(3)(i)
under the Securities Exchange Act of 1934, as amended (or any successor laws or
regulations), to grant options to executive officers of the Company and, all
references to "the Board" hereunder with respect to the grant of such options
shall be deemed to refer to such Committee.
4. Eligibility. Options may be granted under the Plan to present or
-----------
future employees of the Company or a subsidiary of the Company (a "Subsidiary")
within the meaning of Section 424(f) of the Code, consultants to the Company or
a Subsidiary who are not employees, and to directors of the Company or a
Subsidiary whether or not they are employees of or consultants to the Company
and/or a Subsidiary. Subject to the provisions of the Plan, the Board may from
time to time select the persons to whom options will be granted, and will fix
the number of
<PAGE>
shares covered by each such option and establish the terms and conditions
thereof (including, without limitation, exercise price, which in the case of
grants by the Committee shall not be less than fair market value of the Common
Stock on the date of grant, and restrictions on exercisability of the option or
on the shares of Common Stock issued upon exercise thereof). Notwithstanding
anything to the contrary contained herein no person may receive grants of
options to purchase more than 200,000 shares in any one calendar year.
5. Terms and Conditions of Options. Each option granted under the Plan
-------------------------------
will be evidenced by a written agreement in a form approved by the Board. Each
such option will be subject to the terms and conditions set forth in this
paragraph and such additional terms and conditions not inconsistent with the
Plan as the Board deems appropriate.
(a) Option Period. The period during which an option may be exercised will
-------------
be fixed by the Board and will not exceed 10 years from the date the
option is granted.
(b) Exercise of Options. An option may be exercised by transmitting to the
-------------------
Company (1) a written notice specifying the number of shares to be
purchased, and (2) payment of the exercise price (or, if applicable,
delivery of a secured obligation therefor), together with the amount, if
any, deemed necessary by the Company to enable it to satisfy its income tax
withholding obligations with respect to such exercise (unless other
arrangements acceptable to the Company are made with respect to the
satisfaction of such withholding obligations).
(c) Payment of Exercise Price. The purchase price of shares of Common
-------------------------
Stock acquired pursuant to the exercise of an option granted under the Plan
may be paid in cash and/or such other form of payment as may be permitted
under the option agreement, including, without limitation, previously-owned
shares of Common Stock. The Board may permit the payment of all or a
portion of the purchase price in installments (together with interest) over
a period of not more than 5 years. The Board may permit the Company to lend
money to employees for purposes of exercising options and paying any
income tax due upon exercise. The Board may, in its sole discretion,
forgive any amounts due under the loans made hereunder under such
conditions as it deems appropriate.
(d) Rights as a Stockholder. No shares of Common Stock will be issued in
-----------------------
respect of the exercise of an option granted under the Plan until full
payment therefor has been made (and/or provided for where all or a portion
of the purchase price is being paid in installments). The holder of an
option will have no rights as a stockholder with respect to any shares
covered by an option until the date a stock certificate for such shares is
issued to him or her. Except as otherwise provided herein, no adjustments
shall be made for dividends or distributions of other rights for which the
record date is prior to the date such stock certificate is issued.
-2-
<PAGE>
(e) Nontransferability of Options. Options granted under the Plan may be
------------------------------
assigned or transferred to members of the immediate family of optionee or
trusts for the benefit of immediate family members, unless otherwise
prohibited by the Option Agreement, by will or by the applicable laws of
descent and distribution or dissemination: and each such option may be
exercised during the optionee's lifetime only by the optionee.
(f) Termination of Employment or Other Service. Unless otherwise provided
-------------------------------------------
by the Board in its sole discretion, if an optionee ceases to be
employed by or to perform services for the Company and any Subsidiary for
any reason other than death or disability (defined below), then each
outstanding option granted to him or her under the Plan will terminate on
the date of termination of employment or service (or, if earlier, the date
specified in the option agreement). Unless otherwise provided by the
Board in its sole discretion, if an optionee's employment or service is
terminated by reason of the optionee's death or disability (or if the
optionee's employment or service is terminated by reason of his or her
disability and the optionee dies within one year after such termination of
employment or service), then each outstanding option granted to the
optionee under the Plan will terminate on the date one year after the date
of such termination of employment or service (or one year after the later
death of a disabled optionee) or, if earlier, the date specified in the
option agreement. For purposes hereof, the term "disability" means the
inability of an optionee to perform the customary duties of his or her
employment or other service for the Company or a Subsidiary by reason of a
physical or mental incapacity which is expected to result in death or be of
indefinite duration.
(g) Other Provisions. The Board may impose such other conditions with
-----------------
respect to the exercise of options, including, without limitation, any
conditions relating to the application of federal or state securities laws,
as it may deem necessary or advisable.
6. Capital Changes, Reorganization, Sale.
--------------------------------------
(a) Adjustments Upon Changes in Capitalization. The aggregate number and
-------------------------------------------
class of shares for which options may be granted under the Plan, the
maximum number of shares for which options may be granted to any person in
any one calendar year, the number and class of shares covered by each
outstanding option and the exercise price per share shall all be adjusted
proportionately for any increase or decrease in the number of issued shares
of Common Stock resulting from a split-up or consolidation of shares or any
like capital adjustment, or the payment of any stock dividend.
(b) Cash, Stock or Other Property for Stock. Except as provided in
----------------------------------------
subparagraph (c) below, upon a merger (other than a merger of the Company
in which the holders of Common Stock immediately prior to the merger have
the same proportionate ownership of Common Stock in the surviving
corporation immediately after the merger), consolidation, acquisition of
property or stock, separation, reorganization (other than a mere
reincorporation or the creation of a
-3-
<PAGE>
holding company) or liquidation of the Company, as a result of which the
Stockholders of the Company receive cash, stock or other property in
exchange for or in connection with their shares of Common Stock, any option
granted hereunder shall terminate, but the optionee shall have the right
immediately prior to any such merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation to exercise
his or her option in whole or in part to the extent permitted by the option
agreement, and, if the Board in its sole discretion shall determine, at the
time of grant or otherwise, may exercise the option whether or not the
vesting requirements set forth in the option agreement have been satisfied.
(c) Conversion of Options on Stock for Stock Exchange. If the Stockholders
--------------------------------------------------
of the Company receive capital stock of another corporation ("Exchange
Stock") in exchange for their shares of Common Stock in any transaction
involving a merger (other than a merger of the Company in which the holders
of Common Stock immediately prior to the merger have the same proportionate
ownership of Common Stock in the surviving corporation immediately after
the merger), consolidation, acquisition of property or stock, separation or
reorganization (other than a mere reincorporation or the creation of a
holding company), all options granted hereunder shall be converted into
options to purchase shares of Exchange Stock unless the Company and the
corporation issuing the Exchange Stock, in their sole discretion, determine
that any or all such options granted hereunder shall not be converted into
options to purchase shares of Exchange Stock but instead shall terminate in
accordance with the provisions of subparagraph (b) above. The amount and
price of converted options shall be determined by adjusting the amount and
price of the options granted hereunder in the same proportion as used for
determining the number of shares of Exchange Stock the holders of the
Common Stock receive in such merger, consolidation, acquisition of property
or stock, separation or reorganization. The Board shall determine in its
sole discretion if the converted options shall be fully vested whether or
not the vesting requirements set forth in the option agreement have been
satisfied.
(d) Fractional Shares. In the event of any adjustment in the number of
------------------
shares covered by any option pursuant to the provisions hereof, any
fractional shares resulting from such adjustment will be disregarded and
each such option will cover only the number of full shares resulting from
the adjustment.
(e) Determination of Board to be Final. All adjustments under this
-----------------------------------
paragraph 6 shall be made by the Board, and its determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding
and conclusive.
7. Amendment and Termination of the Plan. The Board may amend or
--------------------------------------
terminate the Plan at any time. No amendment or termination may affect
adversely any outstanding option without the written consent of the optionee.
8. No Rights Conferred. Nothing contained herein will be deemed to give
-------------------
any individual any right to receive an option under the Plan or to be retained
in the employ or service of the Company or any Subsidiary.
9. Governing Law. The Plan and each option agreement shall be governed
-------------
by the laws of the State of Delaware.
10. Stockholder Approval; Term of the Plan. The Plan was adopted by the
--------------------------------------
Board on July 15, 1992 and amended on September 28, 1999, subject to the
approval of the Amendment by the Stockholders of the Company at the next Annual
Meeting of Stockholders. The Plan will terminate on July 15, 2002, unless sooner
terminated by the Board. The rights of optionees under options outstanding at
the time of the termination of the Plan shall not be affected solely by reason
of the termination and shall continue in accordance with the terms of the option
(as then in effect or thereafter amended).
-4-
<PAGE>
[LETTERHEAD OF UNIVERSAL HEALTH]
January 7, 2000
Mr. Alan B. Miller
President
UHS of Delaware, Inc.
367 South Gulph Road
King of Prussia, PA 19406
Dear Alan:
The Board of Trustees of Universal Health Realty Income Trust at their
December 1, 1999, meeting authorized the renewal of the current Advisory
Agreement between the Trust and UHS of Delaware, Inc. ("Agreement") upon the
same terms and conditions.
This letter constitutes the Trust's offer to renew the Agreement until
December 31, 2000, upon the same terms and conditions. Please acknowledge UHS of
Delaware, Inc.'s acceptance of this offer by signing in the space provided below
and returning one copy of this letter to me.
Sincerely yours,
/s/ Kirk E. Gorman
President and Secretary
cc: Warren J. Nimetz, Esquire
Charles Boyle
Agreed to and Accepted:
UHS OF DELAWARE, INC.
By: /s/ Alan B. Miller
----------------------
Alan B. Miller, President
<PAGE>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
- ------------------ -----------------------------
ASC OF CORONA, INC. CALIFORNIA
ASC OF LAS VEGAS, INC. NEVADA
ASC OF LITTLETON, INC. COLORADO
ASC OF MIDWEST CITY, INC. OKLAHOMA
ASC OF NEW ALBANY, INC. INDIANA
ASC OF PALM SPRINGS, INC. CALIFORNIA
ASC OF PONCA CITY, INC. OKLAHOMA
ASC OF SPRINGFIELD, INC. MISSOURI
ASC OF ST. GEORGE, INC. UTAH
AIKEN REGIONAL MEDICAL CENTERS, INC. SOUTH CAROLINA
ARBOUR ELDER SERVICES, INC. MASSACHUSETTS
ARKANSAS SURGERY CENTER OF FAYETTEVILLE, L.P. ARKANSAS
AUBURN REGIONAL MEDICAL CENTER, INC. WASHINGTON
BLUEGRASS REGIONAL CANCER CENTER, L.L.P. KENTUCKY
CAPITOL RADIATION THERAPY, L.L.P. KENTUCKY
CHALMETTE MEDICAL CENTER, INC. LOUISIANA
CHILDREN'S REACH, L.L.C. PENNSYLVANIA
CHOATE HEALTH MANAGEMENT, INC. MASSACHUSETTS
<PAGE>
COMPREHENSIVE OCCUPATIONAL AND CLINICAL DELAWARE
HEALTH, INC.
DANVILLE RADIATION THERAPY, L.L.P. KENTUCKY
DEL AMO HOSPITAL, INC. CALIFORNIA
DISTRICT HOSPITAL PARTNERS, L.P. DISTRICT OF COLUMBIA
DOCTORS' HOSPITAL OF SHREVEPORT, INC. LOUISIANA
EYE WEST LASER VISION, L.P. DELAWARE
FOREST VIEW PSYCHIATRIC HOSPITAL, INC. MICHIGAN
GLEN OAKS HOSPITAL, INC. TEXAS
HRI CLINICS, INC. MASSACHUSETTS
HRI HOSPITAL, INC. MASSACHUSETTS
HEALTH CARE FINANCE & CONSTRUCTION CORP. DELAWARE
HOPE SQUARE SURGICAL CENTER, L.P. DELAWARE
INLAND VALLEY REGIONAL MEDICAL CENTER, INC. CALIFORNIA
INTERNAL MEDICINE ASSOCIATES OF DOCTORS' LOUISIANA
HOSPITAL, INC.
LA AMISTAD RESIDENTIAL TREATMENT CENTER, INC. FLORIDA
LAREDO HOLDINGS, INC. DELAWARE
LAREDO REGIONAL MEDICAL CENTER, L.P. DELAWARE
LAREDO REGIONAL, INC. DELAWARE
MADISON RADIATION ONCOLOGY ASSOCIATES, L.L.C. INDIANA
MANATEE MEMORIAL HOSPITAL, L.P. DELAWARE
MCALLEN HOLDINGS, INC. DELAWARE
<PAGE>
MCALLEN MEDICAL CENTER PHYSICIANS TEXAS
GROUP, INC.
MCALLEN MEDICAL CENTER, INC. TEXAS
MCALLEN MEDICAL CENTER, L.P. DELAWARE
MERIDELL ACHIEVEMENT CENTER, INC. TEXAS
MERION BUILDING MANAGEMENT, INC. DELAWARE
NEVADA RADIATION ONCOLOGY CENTER-WEST, L.L.C. NEVADA
NEW ALBANY OUTPATIENT SURGERY, L.P. DELAWARE
NORTHERN NEVADA MEDICAL CENTER, L.P. DELAWARE
NORTHWEST TEXAS HEALTHCARE SYSTEM, INC. TEXAS
NORTHWEST TEXAS SURGICAL HOSPITAL, L.L.C. TEXAS
OASIS HEALTH SYSTEMS, L.L.C. NEVADA
PROFESSIONAL PROBATION SERVICES, INC. GEORGIA
PROFESSIONAL SURGERY CORPORATION OF ARKANSAS ARKANSAS
PUEBLO MEDICAL CENTER, INC. NEVADA
RCW OF EDMOND, INC. OKLAHOMA
RADIATION THERAPY ASSOCIATES OF CALIFORNIA
CALIFORNIA, L.L.C.
RELATIONAL THERAPY CLINIC, INC. LOUISIANA
RENAISSANCE WOMEN'S CENTER OF AUSTIN, L.L.C. TEXAS
RENAISSANCE WOMEN'S CENTER OF EDMOND, L.L.C. OKLAHOMA
RIVER CREST HOSPITAL, INC. TEXAS
RIVER OAKS, INC. LOUISIANA
RIVER PARISHES INTERNAL MEDICINE, INC. LOUISIANA
SOSC, INC. NEW HAMPSHIRE
SOUTHERN INDIANA RADIATION ONCOLOGY INDIANA
ASSOCIATES, L.L.C.
<PAGE>
SPARKS FAMILY HOSPITAL, INC. NEVADA
ST. GEORGE SURGICAL CENTER, L.P. DELAWARE
ST. LOUIS BEHAVIORAL MEDICINE INSTITUTE, INC. MISSOURI
SUMMERLIN HOSPITAL MEDICAL CENTER, L.L.C. DELAWARE
SUMMERLIN HOSPITAL MEDICAL CENTER, L.P. DELAWARE
SURGERY CENTER OF LITTLETON, L.P. DELAWARE
SURGERY CENTER OF MIDWEST CITY, L.P. DELAWARE
SURGERY CENTER OF PONCA CITY, L.P. DELAWARE
SURGERY CENTER OF SPRINGFIELD, L.P. DELAWARE
SURGERY CENTER OF WALTHAM, MASSACHUSETTS
LIMITED PARTNERSHIP
THE ALLIANCE FOR CREATIVE DEVELOPMENT, INC. PENNSYLVANIA
THE ARBOUR, INC. MASSACHUSETTS
THE BRIDGEWAY, INC. ARKANSAS
THE PAVILION FOUNDATION ILLINOIS
TONOPAH HEALTH SERVICES, INC. NEVADA
TRENTON STREET CORPORATION TEXAS
TURNING POINT CARE CENTER, INC. GEORGIA
TWO RIVERS PSYCHIATRIC HOSPITAL, INC. DELAWARE
UHS ADVISORY, INC. DELAWARE
UHS HOLDING COMPANY, INC. NEVADA
UHS LAS VEGAS PROPERTIES, INC. NEVADA
UHS MANAGED CARE OPERATIONS, L.L.C. PENNSYLVANIA
<PAGE>
UHS MIDWEST CENTER FOR YOUTH AND INDIANA
FAMILIES, INC.
UHS RECEIVABLES CORP. DELAWARE
UHS RECOVERY FOUNDATION, INC. PENNSYLVANIA
UHS OF BELMONT, INC. DELAWARE
UHS OF BETHESDA, INC. DELAWARE
UHS OF D.C., INC. DELAWARE
UHS OF DELAWARE, INC. DELAWARE
UHS OF FAYETTEVILLE, INC. ARKANSAS
UHS OF FLORIDA, INC. FLORIDA
UHS OF FULLER, INC. MASSACHUSETTS
UHS OF HAMPTON LEARNING CENTER, INC. NEW JERSEY
UHS OF HAMPTON, INC. NEW JERSEY
UHS OF HARTGROVE, INC. ILLINOIS
UHS OF MANATEE, INC. FLORIDA
UHS OF NEW ORLEANS, INC. LOUISIANA
UHS OF ODESSA, INC. TEXAS
UHS OF PENNSYLVANIA, INC. PENNSYLVANIA
UHS OF PUERTO RICO, INC. DELAWARE
UHS OF RIVER PARISHES, INC. LOUISIANA
UHS OF TIMBERLAWN, INC. TEXAS
UHS OF WALTHAM, INC. MASSACHUSETTS
UHSMS, INC. DELAWARE
UHSR CORPORATION DELAWARE
<PAGE>
UNIVERSAL COMMUNITY BEHAVIORAL HEALTH, INC. PENNSYLVANIA
UNIVERSAL HMO, INC. NEVADA
UNIVERSAL HEALTH NETWORK, INC. NEVADA
UNIVERSAL HEALTH PENNSYLVANIA PROPERTIES, INC. PENNSYLVANIA
UNIVERSAL HEALTH RECOVERY CENTERS, INC. PENNSYLVANIA
UNIVERSAL HEALTH SERVICES OF CEDAR HILL, INC. TEXAS
UNIVERSAL HEALTH SERVICES OF CONCORD, INC. CALIFORNIA
UNIVERSAL HEALTH SERVICES, INC. DELAWARE
UNIVERSAL PROBATION SERVICES, INC. GEORGIA
UNIVERSAL TREATMENT CENTERS, INC. DELAWARE
VALLEY HEALTH SYSTEM, L.L.C. DELAWARE
VALLEY HOSPITAL MEDICAL CENTER, INC. NEVADA
VALLEY SURGERY CENTER, L.P. DELAWARE
VICTORIA REGIONAL MEDICAL CENTER, INC. TEXAS
WELLINGTON PHYSICIAN ALLIANCES, INC. FLORIDA
WELLINGTON REGIONAL MEDICAL CENTER FLORIDA
INCORPORATED
WESTLAKE MEDICAL CENTER, INC. CALIFORNIA
<PAGE>
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statements on Forms S-8 (File No. 33-43276), (File No. 33-49426),
(File No. 33-49428), (File No. 33-51671), (File No. 33-56575), (File No. 33-
63291), and (File No. 333-13453),and Form S-3 (File No. 333-85781).
ARTHUR ANDERSEN LLP
Philadelphia, PA
March 29, 2000
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<PERIOD-START> Jan-01-1999
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<RECEIVABLES> 307,294
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0
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